Computer Task Group CEO Discusses Q4 2011 Results - Earnings Call Transcript

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 |  About: Computer Task Group Inc. (CTG)
by: SA Transcripts

Computer Task Group, Inc. (CTGX) Q4 2011 Earnings Call February 21, 2012 10:00 AM ET

Operator

And our next question is from the line of Matt McCormack with BGB Securities. Please go ahead.

James Boldt

Good morning, Matt.

Matt McCormack

Hi. Good morning. First question on the EMR pipeline, is there any way you can talk about – you referenced the sizes are much bigger than the ones that are rolling off. Is there any way to quantify that, first of all? And then secondly, why are you seeing that trend?

James Boldt

This is a guess, just looking at the numbers, I would guess that we're about double in size. And the project, if it's a 1,000-bed hospital the project is $10 million. If it's a 2,000-bed hospital, the project's probably $20 million. So it's linear in terms of my fees. And I would guess the project size in 2010 was probably averaging just below a 1,000-bed. Now the new opportunities we're picking up are above that. One of the reasons is some of the largest hospitals in the United States didn't start the projects. They're just doing it now. I know that seems unbelievable but it is absolutely true. So the sizes of the projects are just increasing.

I think that our class ratings and the fact that we've done so well in class over a period of time, I think that we're getting better recognition too at the larger market even though we might not have been deliberately marketing to them.

Matt McCormack

Right. Okay. And then you referenced staffing shortages. How is that going to impact margins this year? Are you able to increase your prices?

James Boldt

Clearly both billing and margins are going up. It's not just up. (audio gap) we honestly believe that any person who has any experience on an EMR project is already on a project. So when we hire somebody we're basically stealing someone from one of our competitors. And it just makes it a much tougher environment. Now if we actually fill just the (inaudible) we had in health, we could fill all of them today. We would probably hit – I know we'd hit the 25% number for the year. We're just being held back by the number of resources.

This is very much like Y2K. I mean in the early days of Y2K, CIOs would absolutely not take anyone that was newly trained. And you can use 25% to 50% of the people on a project could be newly trained. We've run them before without any problems. But during Y2K in 1998 it got to the point that there just weren't any resources available and then CIOs were willing to take newly trained people. We think that’s going to happen but is that going to happen in 2012 or 2013 or 2014? We can't tell you.

Matt McCormack

Okay. And then you mentioned on the staffing side some of the technology providers have pulled back a little bit as you said expected. But you also mentioned Europe. Is that still deteriorating or has that remained fairly steady over the last few months?

James Boldt

No. I would depict it as more steady than deteriorating. The staffing side of our business – I'll do maybe the US first and then I'll talk about Europe. The staffing side of our business is very dependent on economic growth. We usually are brought in – a client for some reason needs to increase their productivity either in the plants or in a services business and they're putting in some kind of a new application that'll increase productivity and they don't have enough people to run an entire project. So they'll use some of our people to help them.

During periods of economic growth they obviously need to do that more and more. If the client thinks that there's not going to be that much economic growth next year, they have less of those kind of projects. And I think that's probably what we're seeing. And it's not just us. I read that Manpower for instance conference call script and in there they disclosed that they're revenue growth if you will in the Americas in the fourth quarter was the minus 1%. So I think across staffing you're beginning to see it in general.

Even the people who follow the IT services industry, this would be both services and both the staffing and solutions, have been lowering their growth models as they go along. So if you looked at Gardener or Forrester, a year, year and a half ago the projection for the industry for 2012 would have been about 4.5% to 4.7%. The last estimate that I saw it's 3.1%. And they're putting the same thing in there, that even in the United States where economic growth has been pretty good for a couple of quarters people are concerned that the European crisis is going to back up and affect us.

In terms of Europe the European economy is soft. We're still growing in Europe even in constant dollars and the reason is that we're located in Belgium. The union is being formed in Belgium. It's kind of like building Washington, DC 200 years later and we're one of the largest IT services company in Belgium. So we are getting more work from the government sector because of the European union being formed there than we had in the past. And that's the reason that we've been able to post some positive results in 2011 in the European markets. But I think most of the IT services firms are seeing negative growth.

Matt McCormack

Okay. And then you reiterated I guess your 50/50 mix target 6% to 7% margin. What's the timing of that? Is that 2014, 2015 or could it be earlier?

James Boldt

No. It's actually probably earlier than that. Our actual target, the company's goal is to get to 6% to 7%. As you know Wall Street likes to have metrics to kind of look at. So they asked initially how we were going to do that, where we're going to get to more of a 50/50 mix in our revenue. If the staffing side of the business exactly 3% operating margin and the solutions exactly 10%, at 50/50 you're at 6.5%. And what we've told people that we expect by the fourth quarter of 2013 we should be in the range, in the 6% to 7% range, which was our goal .

Now we don't actually have to get the 50/50 to be able to do that. Actually if the margins are 3% for staffing and 10% for solutions, we have to get 43% solutions and 57% staffing to achieve that. And if you look at last quarter where up to 40% of the business was solutions, we're certainly getting close to that.

Matt McCormack

Okay. Understood. All right. Thank you.

Operator

(Operator Instructions) And we do have a question from the line of Vincent Colicchio with Noble Financial. Please go ahead.

Vincent Colicchio

Yes. Thanks, Jim. On your EMR business I think you said you lost two deals since the last earnings call. Is that correct? And who is it that you – if you characterize who you lost to, that'd be helpful.

James Boldt

I apologize for this. For some reason my line is breaking up. Could you repeat that?

Vincent Colicchio

Yes, Jim. I think you said you lost EMR deals since the last earnings call. Could you characterize who you lost to?

James Boldt

Certainly. One was to a – relatively – we usually compete against six kind of national firms. They're generally bigger than us. They're the people in class. They're rated as having full services. There are a couple of boutique firms out there and one of the engagements – which are much smaller. They may have an EMR offering but nothing else. One of the engagements we had lost to one of the smaller boutique firms and they had gone in and they had done a strategy project for them earlier. And because of that relationship and having done the strategy we think that they won.

The other one was kind of a unique RFP. We don't usually get them like this. It was an RFP where they wanted you to do the EMR and they also wanted a Lawson financial package implementation at the same time, which isn't one of our strong points so we actually didn't bid on part of the project and we lost it we think because of that.

Vincent Colicchio

And then SG&A expenses went up sequentially a bit more than I was expecting. Could you explain the variance there?

James Boldt

Yes. We had an unusual write-off, bad debt write-off in the fourth quarter of the year. Probably the largest one in our history. Or at least I've been here for 16 years. Certainly the largest one in 16 years. It was a little over $0.50 million and that increased SG&A in the fourth quarter.

Vincent Colicchio

Okay. How are you feeling about bad debts. Are there other items out there we should be concerned about?

James Boldt

No. Most of our business it's either with large hospitals so they're a billion or two billion dollars in revenue. I saw a report the average cash that a 1,000-bed hospital had on their balance sheet last year was like $400 million. So they may pay us a little slower but they actually have the cash and the rest of the business is with Fortune 1000 type companies. And in this case it was one of them that filed for bankruptcy.

Vincent Colicchio

And then your IBM revenue contribution declined year-over-year. Any thoughts on how that may play out in 2012?

James Boldt

It's hard to predict. I believe that IBM uses us and actually any staffing company to supplement the fact that they constantly have a lot of projects starting and ending. And particularly in the fourth quarter I believe that they probably had a lot that were ending, which is why our revenues dropped from them. They don't actually even plot out what they all are. They have so many of them. So it's very difficult for us to tell whether they'll need a lot more people or not. It's just a cycle we go through on a regular basis.

Vincent Colicchio

And then, Brendan, do you know portion of revenue from healthcare IT solutions in the quarter?

Brendan Harrington

Hang on. Well total healthcare in the quarter was 31% of revenue. And the vast majority of that is solutions. There's probably 2% or so of that that's not solutions, that's staffing revenue.

Vincent Colicchio

Okay. Thanks. Nice quarter, guys.

James Boldt

Thank you.

Brendan Harrington

Thanks.

Operator

And our next question is from the line of Phil O'Laughlin with O'Laughlin Financial Group. Please go ahead.

Phil O'Laughlin

Jim, you said the guidance for this year 2012 on the revenue line is $430 million, up 8.5%. I was surprised that the number being only 8.5% or 9%. Can you comment on that?

James Boldt

As I mentioned in my introduction it's not the healthcare side of the business. It's the staffing side of the business. Staffing side is tied to the economy and I think most staffing companies are seeing a reduction in demand as companies even in the US are concerned that the economic growth isn't going to continue and they often cite the financial situation in Europe as the reason.

Phil O'Laughlin

I had a question on electronic medical records but it was answered the analyst from Noble. Earnings projections for this year, up 21%. That's a pretty good number. Not as good as last year. So revenue up 8.5% and yet earnings guidance 21%. I was surprised at the spread there. I would have thought the earnings guidance would be lower given the lower revenue guidance. Can you comment there.

James Boldt

Yes. It's the mix of business. The healthcare side of the business, which is almost all solutions, which yields about a 10% operating margin is still growing at 25%. The staffing side of the business, which has about a 3% operating margin is growing at 2%. So we're getting the mix change that we've been getting now for years but it's happening more rapidly in 2012 because the staffing side of the business is growing at such a low rate.

Phil O'Laughlin

Jim, thank you.

Operator

And we have a follow-up from the line of Bill Sutherland with Northland Capital Markets. Please go ahead.

Bill Sutherland

Thanks. Brendan, what is going to be the billing day total for 2012? Is it 254?

James Boldt

No. It's 255 because of the leap year.

Brendan Harrington

Yes. There's 64 days in the fourth quarter, Bill. I'll give it to you by quarter. Q1 is 64. Q2 is 64. Q3 is 63 and Q4 is 64.

Bill Sutherland

Okay. Okay. And then you go back to probably 254 next year?

Brendan Harrington

Correct.

Bill Sutherland

Jim, do you think – I realize the hesitancy of some clients – more clients to use newly trained people but are you anticipating (audio gap) there's going to be a mind shift that changes eventually and therefore you can start some training classes?

James Boldt

Well we definitely have not seen that in the market so far particularly as some of the largest hospital systems in the US start up, they're going to have to do that. But exactly when that's going to happen is the part that we haven't been able to determine. When we train people we usually – particularly for the initial engagement we usually try and train them – we usually hire people from the city where we know is going to use them to cut down on travel expenses in the first couple of years.

So at some point we think that it's definitely going to happen. But we just can't tell whether it's 2012 or 2013. As soon as it happens though, yes, we are going to start training classes back up again.

Bill Sutherland

And then one last one on the EMR. As you look out at the projects underway this year. How many do you expect would likely be completed say by the end of the year?

James Boldt

Well that’s a good question and it's been something that's very difficult for us to figure out. What's happened –

Bill Sutherland

You get extensions, I know.

James Boldt

Yes, we get extensions. Two things have been happening to us. One, we'll be finishing the larger system and they'll buy another hospital. So we've got a couple of situations where that's happened and we've gone back in or switched the people over to do that. The other thing that's happened in some hospitals is they've actually retained us to go back and improve the system. Basically go back and do enhancements.

Many of the hospitals told us because – a 1,000-bed hospital it's about a million – was a million dollars a month they were losing by not adding meaningful use that they absolutely wanted us to go in and just add meaningful use. So you might train 30% of the docs for instance in how to use computerized physician order entry for prescriptions. The hospital really wants 100% trained. But you only need to hit the 30% and you move on to something else.

So when we got to the end of some of the projects, the hospital said, okay. Now go back and do these things that we told you to skip or only to meet the minimum requirement because we want enhancements. If you look at it, it should be what happened two years ago, right. They're two-year projects. So in 2010 we started up six EMR projects. You'd expect them to come to an end this year. We probably have three other projects that we're on this delay where they've held us on the project because they're buying hospitals or doing further enhancements to the system. So those three too may end this year. So it could be half of the projects we have, maybe nine. It's probably something in the six to nine range.

Bill Sutherland

Wait. I didn't follow how you just ended up with the math there. You said you had six –

James Boldt

Started in, yes, 2010. Right. But our experience is that most of them that should end usually get delayed for a while.

Bill Sutherland

Right. So let's say – so you're saying that maybe half complete this year? Is that what you're –

James Boldt

It's possible. Yes. But I suspect it's something probably between six and nine. I think that we'll get some extensions on some of the projects that we're working on.

Bill Sutherland

Six and nine complete?

James Boldt

Six to nine, yes. Between – somewhere between six and nine projects will be completed this year. The six we started in 2010 obviously are in the pot plus three additional that have been extended. Actually started in 2009.

Bill Sutherland

I see. I see. I see. Okay. Thanks for the color.

James Boldt

Okay.

Operator

And, gentlemen, there are no further questions in queue. Please continue.

James Boldt

CTG is (inaudible) established in healthcare, one of the fastest growing major US industries. We have offerings for electronic medical records, ICD-10 conversions, accountable care organizations and medical informatics, all of which are expected to be in strong demand for the next several years. We therefore remain very excited about CTG's future.

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

Operator

Thank you, ladies and gentlemen. This conference will be available for replay after 11:30 a.m. Eastern, today, February 21, 2012 and will end February 24 at midnight. You may access the AT&T replay service at any time by dialing 1-800-475-6701 and entering the access code of 221718. International participants please dial area code 320-365-3844 with the access code 221718. That does conclude our teleconference call for this morning. Thank you very much again for your participation and for using the AT&T executive teleconference service. You may now disconnect.

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