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Computer Task Group Inc. (NASDAQ:CTG)

Q1 2014 Earnings Conference Call

April 22, 2014, 08:30 AM ET

Executives

James Boldt - Chairman, President and CEO

Brendan Harrington - SVP and CFO

James Culligan - Director, IR

Analysts

Brian Kinstlinger - Sidoti & Company

Kevin Liu - B. Riley & Company

Vincent Colicchio - Noble Financial Capital Markets

William Sutherland - Emerging Growth Equity

Operator

Ladies and gentlemen, thank you very much for standing by, and welcome to the CTG First Quarter 2014 Earnings Call. For the conference, all the participants are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. (Operator Instructions). And as a reminder, today's call conference is being recorded.

I'll now turn the conference over to Mr. James Culligan, Director of Investor Relations at CTG. Please go ahead, sir.

James Culligan

Thank you, John, and good morning everyone. We certainly appreciate your time and your interest in CTG.

On the call today we have CTG's Chief Executive Officer, Jim Boldt; and Brendan Harrington, Senior Vice President and Chief Financial Officer. Jim and Brendan are going to review the results of the first quarter of 2014, and then update you on the company's strategies and outlook. We'll follow with an opportunity for Q&A. If you don't have the news release discussing our financial results, you can access it at the company's website ctg.com.

Before we begin, I want to mention that statements in the course of this conference call that state the company's or management's intentions, hopes, beliefs, expectations and predictions for the future are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected. Additional information concerning factors that could cause actual results to differ from those in the forward-looking statements is contained in our earnings release as well as in the company's SEC filings.

You can find these at our website or the SEC's website at sec.gov. Please review our forward-looking statements in conjunction with these precautionary factors.

With that, I'd like to turn it over to Jim to begin the discussion.

James Boldt

Thanks, Jim, and good morning everyone. This is Jim Boldt. I want to thank you for joining us this morning for our first quarter earnings conference call. As you saw in our news release, revenue for the quarter was slightly below the low end of our guidance and EPS was at the midpoint of our guidance. The shortfall from the midpoint of our revenue guidance occurred in our Staffing business. Revenue from our fraud, waste and abuse project or a small payer (indiscernible) performed in late 2013 (indiscernible) to reach the midpoint of our EPS guidance.

I'm going to talk more about our results and what we see for the 2014 second quarter and the full year, but first I'm going to ask Brendan to start us off with the review of our financial results. Brendan?

Brendan Harrington

Thanks, Jim. Good morning, everyone. For the first quarter of 2014, CTG's revenue was 97.9 million, a decrease of 10.6 million compared with the first quarter of 2013. First quarter 2014 had 62 billing days, one less than the first quarter of 2013.

Solutions revenue in the first quarter of 2014 totaled 38.6 million, a decrease of 4.1 million or 9.5% compared with the first quarter of 2013, primarily due to lower revenue from electronic medical record project. As a percentage of total revenue, Solutions revenue was 39%, the same as a year ago.

Staffing revenue in the quarter decreased 6.5 million or 9.9% to 59.3 million, reflecting reductions in staffing requirement from a large client that began in the second quarter of 2013. These reductions were slightly offset in the quarter by higher demand for technical resources from several other clients.

In the vertical markets on which we primarily focus, revenue as a percentage of total company revenue in the first quarter was as follows. Healthcare decreased to 30.2% from 31.8%, technology service providers decreased to 24.9% from 30.1%, financial services increased to 8.1% from 6.6%, energy was relatively flat at 6.2% compared with 6% while general markets increased to 30.6% from 25.5%.

First quarter revenue from IBM, our largest customer, was 21.5 million compared with 28.9 million in first quarter 2013. As a percent of total revenue, revenue from IBM decreased to 22% in the 2014 first quarter compared with 26.7% of total revenue in the 2013 first quarter.

Revenue from our European operations was 20.8 million, a 7% increase from the 19.4 million recorded in last year's first quarter. The effect of foreign currency fluctuations during the first quarter of 2014 increased consolidated revenue by approximately 0.8 million.

On a local currency basis, our European revenue increased by 3.1% compared with the 2013 first quarter. Direct costs as a percentage of revenue were 78.6% in the first quarter compared with 79.2% in the first quarter of 2013.

SG&A expenses decreased approximately 960,000 from the first quarter of 2013, primarily as a result of fewer non-billable personnel and lower incentive compensation expenses.

The billable travel expenses included in the first quarter 2014 revenue and direct costs were 2.5 million. The billable travel expenses for the first quarter of 2013 totaled 3.1 million.

First quarter operating income was 5.5 million, a decrease of approximately 700,000 or 11.4% year-over-year. Operating margin in the first quarter was 5.6% of revenue, 10 basis points lower than the first quarter 2013. The year-over-year decrease in operating income was due primarily to decreases in our health solutions revenue, offset by lower SG&A expenses.

Net income in the first quarter was 3.2 million, a decrease of 891,000 or 22% compared to the first quarter of 2013. On a per diluted share basis, net income was $0.19 for the quarter, a $0.05 decrease compared to the first quarter of 2013. The decrease in earnings per share is due to lower operating income and a much higher income tax rate in the first quarter 2014.

The tax rate for the 2014 first quarter was 41.1% compared with 33.2% in the 2013 first quarter. This lower rate in the first quarter of 2013 was primarily the result of the recognition of research and development tax credit for both 2012 and for one quarter of 2013 in the first quarter of 2013. These credits were not recognized in the first quarter of 2014 since the legislation to extend these tax credits for 2014 is not yet passed.

We expect the tax rate for the second quarter 2014 to be between 39% and 41%. We expect the tax rate for the full year 2014 to be between 38% and 40% compared to 35.6% for 2013. Both the 2014 and 2013 first quarter results include equity compensation expense of approximately $0.02 per diluted share, net of tax.

Our headcount at the end of the first quarter was 3,700, the same as the end of the fourth quarter of 2013, and 300 fewer than at the end of the first quarter of 2013. Of the 3,700 employees at the end of the first quarter 2014, 91% were billable resources.

At the end of the first quarter 2014 we had no debt and 32.3 million of cash on the balance sheet compared to no debt and 30.7 million of cash at the end of the first quarter 2013. Both the first quarter of 2014 and 2013 ended on U.S. by weekly payroll basis.

Our days sales outstanding was 65 days at the end of the first quarter 2014 compared with 61 days at the end of the first quarter 2013. The increase in DSO was due to timing of cash proceeds received at the end of the comparative quarters.

Our cash used in operations in the first quarter of 2014 was approximately 9.3 million as compared with cash used in operations of approximately 7.1 million in the first quarter of 2013 with the difference primarily attributable to lower net income and changes in working capital. In the quarter we had 801,000 in capital expenditures and recorded a depreciation expense of 837,000.

We repurchased 211,000 shares of CTG common stock during the first quarter of 2014 and no shares in the first quarter of 2013. We also repurchased 50,000 shares in the second quarter of 2014 in the time period leading up to today. Our current repurchased authorization is for approximately 0.9 million shares. As it remains accretive to our earnings, we intend to continue our repurchase program during the remainder of 2014. Jim?

James Boldt

Thanks, Brendan. In aggregate, revenue declined by 10% in the 2014 first quarter. Revenue from our Solutions business which represents 39% of our total revenue also decreased 10%. The decline in our Solutions business came from our healthcare vertical, where our hospital clients continue to delay or reduce spending in response to a reduction in income and cash flows due to the sequester cuts to Medicare, reductions in other government reimbursement and the resulting reduction in in-patient days of care.

On our last conference call, we mentioned we've received two RFPs for electronic medical record projects for which the hospital had not decided what IT services firms would be awarded those projects. Reflecting the slowdown in spending on new EMR projects, we received one new RFP for an EMR project in the last month. We won one of these three projects and one RFP [belonged] (ph) to the hospital. We're still waiting the decision on one RFP as to what IT services firm will be chosen for that project.

When we started the first quarter 2014, we had 15 active EMR projects. During the first quarter, there were two projects that started and four projects that ended. Therefore, at the end of the first quarter 2014, we had 13 active EMR projects.

In the short-term we believe that our EMR business growth will be constrained due to hospitals having to deal with the reimbursement cuts that have occurred. In the long-term there is still significant opportunities for growth in our EMR business. There are many hospitals who currently do not have the EMR applications and others that have applications but will not meet the more stringent standards that are about to be imposed on our meaningful use stage 2. The health information exchanges will have to be built to facilitate the exchange of our efforts and were positioned in Europe to participate in their adoption of EMRs when it occurs. Given the work that needs to be done, we'll remain optimistic in the long term about growth prospects for our EMR business.

Fortunately, for CTG, EMRs are not only healthcare offering. We have recently seen an increase in the number of RFPs we were receiving for healthcare outsourcing engagement. In the current tight provider spending market, we see an excellent opportunity for us in application outsourcing as it creates significant immediate savings for hospitals without them making a large financial investment.

CTG also has an outstanding reputation in this area and these engagements are typically for multiple years, providing annuity like revenue stream. Our data analytics offerings added approximately $0.01 to our earnings per share in the first quarter of 2014. We did not forecast any revenue or profit in the first quarter from our data analytics offering. As reported in our last call, we've done fraud, waste and abuse work in late 2013 for a small payer but the time of our last conference call was concerned about what impact assume these claims (indiscernible) relationship with their provider network and did not process any of the FWA claims that we presented to them. Later in the first quarter, the payer decided how they were going to proceed and paid us with a portion of the FWA claim that we had identified.

Having covered healthcare, I'd also like to talk about the other three vertical markets on which we focus. Our technology service provider market, which is all lower margin staffing business declined in the first quarter 2014 based upon a reduction in a significant customers need for external IT resources. Our financial services vertical had another excellent quarter with most of the revenue gain coming from our European operations. Our energy business revenue was flat when compared to the first quarter 2013.

Turning to our Staffing business, its revenue declined by 10% compared with the first quarter of 2013. The decline in Staffing business from the significant customer I just mentioned was modestly offset by an increase in demand from other clients.

Looking to the second quarter of 2014, we're forecasting total revenue to be in the range of $101 million to $103 million. We're forecasting earnings per share in the second quarter of 2013 to be in the range of $0.21 to $0.23 per diluted share. For the 2014 full year, we currently expect a revenue range of $393 million to $407 million or a 5% decrease in the midpoint of our guidance when compared to 2013. Based upon our revenue forecast and the anticipated mix of business, we expect our 2014 net income per diluted share to be in the range of $0.83 to $0.91 or a 5% increase from 2013 at the midpoint of our guidance.

I would like to take a couple of minutes to talk about the change in our guidance. We mentioned in our last call that we expect that our healthcare revenue will decline this year as we would have $30 million less of electronic medical record work offsetting that decline would be $15 million of new business related to outsourcing ICD-10 and other consulting work. We still believe that our EMR business will decline by $30 million this year with the estimate of the new business.

For several quarters now our ICD-10 business has been growing. When we set our previous guidance, we anticipated that the ICD-10 business would continue to grow as the October 1, 2014 conversion deadline approach made after the conversion date, we would be engaged in revenue cycle management engagements related to the code conversion. When Congress a couple of weeks ago unexpectedly postponed the date of the ICD-10 conversion by a year, our clients postponed their projects, we literally had clients calling up and cancelling (indiscernible) primarily because of the postponement in the ICD-10 date we have lowered our Solutions revenue guidance for the year by $5 million, also the reduction in our EPS estimate for the year is related to the reduction in revenue guidance for our healthcare solutions business.

We had also expected by now to see a pickup in demand from the staffing customer that has reduced performance for the last three quarters as we've not seen any pickup in demand, we lowered our guidance for our revenue in the staffing business for 2014 by $10 million. Consistent with what we said on the last conference call for our staffing business and our traditional IT solutions business, we set the guidance in the same way that we have in the past by estimated engagement that we're currently working on as well as engagements that we anticipate will be signed later in the year. As a technology is similar, we have grouped three of our newer solutions offerings together as our data analytics product suite.

The three data analytics offerings are a big data offering and our two SaaS offerings, which are the clinical decision support system for chronic kidney disease in our fraud, waste and abuse software. For these data analytics offerings, we've only included two engagements in our guidance for the year, so the client has given us a verbal commitment that they want to proceed with the project. In addition, we have included the revenue that we received in the first quarter for the fraud, waste and abuse project I mentioned at the start of the call.

Our forecast for 2014 for data analytics revenue remains at $6 million and the forecast for earnings per share contributions from these projects is increased by $0.18 per share. We do believe that we will sell more than $6 million in data analytic services in 2014 but cannot precisely forecast this business because these offerings are still in the introductory stage of the product lifecycle, and we don't have enough history to project with reasonable certainty which opportunities will be closed.

In addition, because there are high margins, a small amount of revenue from these offerings has a large impact on our EPS. We've included in our guidance that our new big data engagement that we previously discussed will begin in the second quarter of 2014. As the year progresses, we will adjust our guidance accordingly for additional wins.

Looking at our revenue guidance for the year, we probably think our healthcare business will decline by approximately 15% in 2014. That assumes that government's reduction in reimbursements for hospitals will continue throughout 2014 limiting EMR starts. Offsetting some of the decline in EMR revenue are expected increases in our revenue from other offerings such as outsourcing and consulting services tied to healthcare reform. For our non-healthcare solutions business, we're projecting a revenue increase of approximately 3% in 2014. We're forecasting a 1% decrease in our staffing business in 2014.

Although we're projecting revenue and earnings to decline by approximately 5% this year, we continue to remain optimistic about CTG's long-term growth potential. Our healthcare business is going through a transition period at this time. Longer term, we expect it to return to growth as spending for large mission-critical work tied to reimbursement work and regulatory compliance resume. In the short term we expect to see growth in our outsourcing and healthcare IT consulting work.

In addition, we positioned CTG to participate in the adoption of U.S. packaged software by European hospitals. We're pleased we've already been able to line up $6 million in data analytic sales for 2014 and will adjust our guidance for further wins as the year progresses. Clearly, future sales of our high margin data analytics products will contribute significantly to CTG's earnings growth going forward.

When we look at how well CTG's positioned in healthcare, one of the fastest growing U.S. industry, we can see why we remain optimistic about our long-term growth opportunities.

With that, I'd like to open the call for questions, if there are any. Operator, would you please manage our question-and-answer period?

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). We'll go to Brian Kinstlinger with Sidoti. Please go ahead.

Brian Kinstlinger - Sidoti & Company

Hi. Thanks. Hi, how are you?

James Boldt

Good.

Brian Kinstlinger - Sidoti & Company

A question on EMR. I'm wondering given some of the past calls out there had systems in place that probably don't need, as you said, a stringent requirement. What's your thought on given the cost is so great (indiscernible) to upgrade several versions of the software instead to maybe – maybe they'll use a systems integrator, done some kind of reporting application and other software programs to help them meet this mandate?

James Boldt

Well, I think if you were to do that, it would probably cost about the same as if you switched to another EMR system that would work, because the EMR system captures the documentation while the physician is actually doing it and flows it through the system. It also stores the data and allows you to share data which is a part of the meaningful use that most of these applications that are out there are having a hard time. So, I mean given the choice I think – I honestly believe it's a keeper within an existing EMR system than trying to figure out yourself how to create an EMR system. Now the software that does that, the larger people (indiscernible) et cetera, they spent hundreds of millions of dollars on this software getting it to the standards that it needs to be and I really don't see a hospital being able to kind jury-rig the system to be able to do that. And not that somebody may not try doing that but it would be very complicated.

Brian Kinstlinger - Sidoti & Company

And maybe talk about your expectations on the (indiscernible) business I guess in terms of the forward look of new business, is there any change in terms of the push backs you're getting? Obviously there has been some push backs from fraud, waste and abuse, from the local IT management. Do you think you're making progress at these clients or do you think you're sort of stuck in a stalemate trying to convince people to use it or there is maybe interesting using it to (indiscernible) clients? Just take us through, was there any change in the last three to six months in terms of their desire to take these applications?

James Boldt

I think what's changed really is we've added some additional options to the fraud, waste and abuse application. So, one of the additional options – it hasn't (indiscernible) the small players there, so everybody knows is that they have a provider network and if they go back a year or two years, then kind of hit them with (indiscernible), they're afraid that the provider network is going to get upset with them and leave their network. For a larger payer, it's not as much of a concern because they're dependent on any one typical provider network. Now what we've done is we've come up with an offering that is prospective instead of looking back. So instead of going to the payer and saying, okay, we're going to run these claims and get the payers the percentage of what you collect in the past, we'll run our application and we'll tell you what to change in your processing so that prospectively you can adjust. And from the payers that I've talked to and I've talked to some of them personally, they are all kind of adamant that they have a lot better chance of changing a payment at the time of adjudication that it's more difficult than (indiscernible) provider a lot more if they go back into history. Now the two payers, small payers (indiscernible) actually did pay us money. I mean they did find value with what we did. It's just that there are hesitant to put all the claims themselves. For fraud, waste and abuse, we're kind of optimistic that as long as they're looking forward they would be willing to go to a provider and basically telling them, you're abusing the system or you're outright committing fraud here and we got to stop you from doing that and then asking them their money back. On the IT medical management model, I think that we're moving forward at the pace that we thought that we would. It's a brand new technology. I mean it involves getting chief medical officers comfortable with it and also getting the finance department comfortable with they can establish trends and then (indiscernible). So that one's probably moving at a pace that I would have expected and we're kind of going back to fraud, waste and abuse a lot of smaller players, particularly in offering this new offer.

Brian Kinstlinger - Sidoti & Company

Let's step off into small payers and the one that you recently collected money on, just want to be clear, did they actually pay you for your service or did they actually pay you because they went after the money that was fraudulent or at least reduced? And then in the future when you look at it, will it be more real-time payment as far as the (indiscernible) where they realized they will deny a client (indiscernible) will get paid?

James Boldt

Yes. I believe that they went back and actually collected the money but only from certain providers. That's what we had been told they were going to do, so that the (indiscernible) I don't think this will ever be a smooth annuity type business. It's always going to be…

Brian Kinstlinger - Sidoti & Company

All right. And then the last question I have and I'll get back in the queue is last quarter you talked about I think there was some large payers who maybe one, maybe two, I can't remember, who decided not to move forth the application. I'm wondering if you've had any feedback since it's been a little bit of time now to understand why the large payers didn't accept the application.

James Boldt

Yes, those were either large payers or state and they didn't actually tell us, they just said they didn't want to pursuit it now. I think one of them came back and said, I wanted to check sometime in the future.

Brian Kinstlinger - Sidoti & Company

All right. Thank you.

James Boldt

Thanks, Brian.

Operator

Next go to Kevin Liu with B. Riley & Company. Please go ahead.

Kevin Liu - B. Riley & Company

Hi. Good morning.

James Boldt

Good morning, Kevin.

Kevin Liu - B. Riley & Company

For your guidance, what's inferred in terms of when your large customers starts to bottom out on the staffing side of things?

James Boldt

Well, we think that we have some – kind of hard to predict, but as far as we can tell, our reduction is more than the reduction in revenue. So we're assuming that we wouldn't get very much of the entity back on that. So for the year really and I think it's pretty obvious that the customer is IBM. If you take IBM's revenue for the first quarter and annualize that on a daily basis as the first quarter has less days, for the year it would end up at about $88.4 million as I recall. And that's really what we have in our projections for the year for them. But I mean last year they were 100.9 million, so they'd be down $12.5 million. We think that our other customers, our non-IBM staffing customers will be up about 6.5% to $2 million and if you net those out that's the $2.5 million roughly that is taking business to clients.

Kevin Liu - B. Riley & Company

Understood. And on the solutions side, you talked about some of the ICD-10 related work and roughly cycle management stuff that would come after – being pushed out. Would you expect all of those opportunities to be there for you in fiscal '15 with kind of the new deadline? And also just in terms of how you manage the staffing on that side of things, are there kind of reductions or furloughs you could take as you wait for that work to come back?

James Boldt

Yes. First, we were kind of – we didn't see this one coming quite frankly. Even the American Medical Association had signed off on a date (indiscernible) changed the date at one point and it was really Congress who kind of forced the administration. AMS never changed the opinion. The House passed it by taking it down to a law and surprisingly the Senate passed it 65/35 and then Obama signed it a day or two later. The date hasn't actually been established, but there's October 1, 2015. The congressional law basically says that that code can't be used before that day. We assume that AMS is going to establish it as the date but I don't think that's actually been done yet. I would assume that that business is going to come back in about a year and we probably (indiscernible) per year sitting on a bench. Fortunately, a lot of the people involved in that are high-end project managers and we hope to be able to place some of them in other…

Kevin Liu - B. Riley & Company

And as it relates to the revenue cycle management piece, that's not necessarily contingent on winning ICD-10. Are you guys able to build any sort of business around that in the near term?

James Boldt

We are starting to build some revenue cycle management but after the code changes, because the number of codes that's 10 times more than firmly exists, we think almost every hospital is going to have to do some revenue cycle management just to get back to where they were. So, we were expecting to see a pretty significant increase in revenue cycle management, but we are doing revenue cycle management. We just don't expect to see the work related to the ICD-10 full change happen this year.

Kevin Liu - B. Riley & Company

Okay. And just one last one on the analytic side of things, how much of the $6 million do you get with the Q2 engagement? And then any sense on the timing of when the other big engagement you have would start?

James Boldt

In our forecast for the second quarter, there is $0.04 per share for the data analytics. The other engagement is probably – I don't think we're going to forecast until the fourth quarter actually.

Kevin Liu - B. Riley & Company

All right. Thank you.

James Boldt

Okay. Thanks, Kevin.

Operator

Our next question is from Vincent Colicchio with Noble Financial. Please go ahead.

Vincent Colicchio - Noble Financial Capital Markets

Jim, I'm curious have you been actively looking at tuck-in acquisitions on the healthcare side and if so, can you remind us all areas that were involved?

James Boldt

We've been looking for quite some time actually for smaller acquisitions as you referred doing tuck-in type acquisitions. The two areas that we're looking at are data analytic because I think that the growth area going forward and also revenue cycle management. We do have some people that do revenue cycle management, particularly after the ICD-10 code conversion, there is still a lot more…

Vincent Colicchio - Noble Financial Capital Markets

And in terms of potential fix to the hospital situation, is there any people whispering that something is in the works or just sort of who knows?

James Boldt

Unfortunately it's more of who knows. This happened with the Balanced Budget Act really to voters complaining to Congress that they were bankrupting the hospital to get (indiscernible), so there's not any talk right now about whispering of reimbursement. It's not just the quest for reimbursement but CMS will – they won't pay for a limited stay in the hospital, they won't pay the fixed price if somebody is readmitted to a hospital in 30 days. So that is really hurting the hospitals right now. I honestly think that they have to do something within the next year (indiscernible) not been any cases to point to, but the smaller hospitals are really starting to get problems making cash flow, so it's just going to cause a huge problem if they don't let up.

Vincent Colicchio - Noble Financial Capital Markets

And I know Europe, you had a good quarter of financial services. Does the EU related spending continue to grow over there?

James Boldt

Yes, it does, more in Belgium and the (indiscernible) part where there is stabilizing European Union and they're working to use the product as well.

Vincent Colicchio - Noble Financial Capital Markets

And that should continue for the rest of the year or…?

James Boldt

I don't think so. We think Europe is going to (indiscernible).

Vincent Colicchio - Noble Financial Capital Markets

Okay. And then Brendan, I missed that cash from operations in the quarter. What was that number?

Brendan Harrington

That was – used 9.1 million.

Vincent Colicchio - Noble Financial Capital Markets

Okay. That's it from me for now. Thanks guys.

James Boldt

Thanks, Vince.

Operator

We'll go to Bill Sutherland with Emerging Growth Equity. Please go ahead.

William Sutherland - Emerging Growth Equity

Thanks. Good morning. Most of mine have actually been covered. One follow-up on Kevin's question about the quarterly phasing for data analytics, just with the second one kind of coming in, in the fourth quarter, should that be disproportionately as far as the total you expect for the year of $0.18?

James Boldt

Yes. The second quarter is the weakest because it's basically scheduled to start up May 1 and the fourth quarter is actually the strongest.

William Sutherland - Emerging Growth Equity

Just looking on the guidance, Jim, widened revenue range and now the EPS, what's the thought process there?

James Boldt

Just going through scenarios particularly on the staffing side of the business. It doesn't have as much impact on the EPS as it does on the revenue.

William Sutherland - Emerging Growth Equity

So on this ICD-10 thing, are you finding the administrators are or I should say the financial officers of these hospitals are [dutifully] (ph) pocketing that into their budget or are they looking at other IT initiatives? I mean do you think it could help you and it doesn't sound like you have a major change in your other healthcare solution pipeline right now, but do you think it could help it?

James Boldt

It may but quite frankly a lot of them are looking just at their cash flow and right now even a lot of the larger systems, which is most of our clients, are losing money. They can't borrow any more money, they can't go to their prime markets. So they were forced into spending money on ICD-10 and as soon as the legislation changed the date, they decided best spend it next year when they do have more cash.

William Sutherland - Emerging Growth Equity

I thought (indiscernible)

James Boldt

For hospitals?

William Sutherland - Emerging Growth Equity

Yes. I thought they weren't getting a little bit of excess to the markets?

James Boldt

Individually, yes. Like they had a budget spread up, so as they write themselves, they can get profitable again, they can go to the market, but most of them are losing money and you can't really tell.

William Sutherland - Emerging Growth Equity

Okay. And finally, are you getting any visibility on our healthcare pipeline in Europe or is it still just kind of early discussion phase with that place?

James Boldt

Yes. We have one project that we're doing some consulting work on and others are clearly just early discussion phase. I don't think they may have new system planning.

William Sutherland - Emerging Growth Equity

All right. I think that's it for me. Thanks, Jim.

James Boldt

Okay. Thank you.

Operator

(Operator Instructions). To the presenters, there are no additional questions coming in.

James Boldt

Okay. CTG is firmly established in healthcare, one of the fastest growing major U.S. industries. On the short term, our hospital clients have to deal with the reimbursement reductions imposed by them by the U.S. federal government they still have significant long-term information technology needs.

In addition, we're aggressively marketing our data analytics product that meet the needs of helpful organizations to lower costs, improve outcomes and expand business methodology. The demand for big data solutions like CTG is gaining momentum in the healthcare market. These products have the potential to significantly increase our future earnings. As such, we remain very excited about CTG's long-term growth prospects.

I would like to thank you for your continued support and for joining us this morning. Have a great day.

Operator

Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect.

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