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Executives

James M. Culligan – Director – IR

James R. Boldt – Chairman, President, CEO & Head – IR

Brendan M. Harrington – Senior VP, Chief Financial & Risk Officer

Analyst

Kevin Liu – B. Riley & Company.

Rick G. D’Auteuil – Columbia Management

Richard Close – Avondale Partners

Bill Sutherland – Northland Securities

Matthew J. McCormack – BGB Securities.

Vincent A. Colicchio – Noble Financial

Computer Task Group, Incorporated (CTGX) Q1 2012 Earnings Call April 23, 2012 10:00 AM ET

Operator

Ladies and gentlemen, good morning. Thank you for standing by, and welcome to the CTG Conference Call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions) And as a reminder, today’s conference is being recorded.

I would now like to turn the conference over to our first speaker, Director of Investor Relations for CTG, Mr. Jim Culligan. Please go ahead.

James Culligan

Thank you, Tom, 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 for the first quarter of 2012 and then update you on the company’s strategy 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 at 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 at 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, we had a solid first quarter with revenue and earnings per share both at the midpoint of our guidance. Revenue in 2012 increased over 2011 by 8%, the operating margin expanded by 60 basis points and earnings per share increased 18%. As we expected, our higher margin Solutions business grew by 22% in the first quarter of 2012 while our lower margin Staffing business was approximately the same as it was in the first quarter of 2011.

I’m going to talk more about our results and what we see for 2012’s 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 2012, CTG’s revenue was $103.4 million, an increase of $7.5 million or 8% compared with the first quarter of 2011. First quarter 2012 had 64 billing days, one less day than the first quarter 2011. On a per billing day basis, revenue increased by 9.5%.

Solutions revenue in the first quarter of 2012 was $41.2 million, an increase of $7.5 million or 22% compared with the first quarter of 2011. As a percentage of total revenue, Solutions revenue was 40% compared with 35% a year ago. The improvement in our business mix was mainly driven by revenue from more profitable healthcare projects. Staffing revenue in the quarter remained flat at $62.2 million.

First quarter revenue from IBM, our largest customer, was $28.4 million compared with $28.7 million in the first quarter 2011. As a percent of total revenue, it decreased to 27.4% in the 2012 first quarter compared with 29.9% of total revenue in the 2011 first quarter.

Revenue from our European operations was $17.2 million, a 1% increase from the $17.1 million recorded in last year’s first quarter. The effect of foreign currency fluctuations during the first quarter of 2012 decreased consolidated revenue by approximately $728,000 or 0.7%. On a local currency basis, our European revenue increased by 4.9% compared with the first quarter 2011.

Direct costs as a percentage of revenue were 78.9% in the first quarter compared with 79.4% in the first quarter of 2011. SG&A expenses as a percent of revenue decreased slightly to 15.7% from 15.8% in the first quarter 2011.

First quarter operating income grew to $5.6 million, an increase of $1 million or 22% year-over-year reflecting the favorable effect of operating leverage and our higher margin Solutions work. Compared with the trailing fourth quarter of 2011, first quarter operating income increased $141,000 or 2.6%.

Operating margin in the first quarter increased to 5.4% of revenue, a 60 basis point improvement from last year’s 4.8% and the same as the 5.4% operating margin in fourth quarter 2011. The year-over-year increase was primarily due to the increase in the Solutions business in our sales mix and the additional operating leverage.

Net income was $3.4 million in the quarter, an increase of 19% from $2.8 million in the first quarter of 2011 and a 2% increase from the fourth quarter of 2011. On a per diluted share basis, net income was $0.20 for the quarter, an 18% increase from the $0.17 in the 2011 first quarter and the same as the 2011 fourth quarter.

The 2012 first quarter results include equity compensation expense of approximately $0.02 per diluted share net of tax. The equity compensation expense in the 2011 first quarter was $0.01 per diluted share net of tax. The tax rate for the 2012 first quarter was 39.4% compared with 38% in the 2011 first quarter. We expect the tax rate for the full year 2012 to be between 38% and 40%. The increase in the rate in 2012 is primarily due to the expiration of certain federal tax credits that were realized in 2011.

Our head count at the end of the first quarter was 3,700, the same as at the end of 2011. Of the 3,700 employees at the end of the first quarter 2012, 90% were billable resources. Year-over-year, head count increased by 100 people or up 3% from the end of first quarter 2011.

At the end of first quarter, we had no debt and $19.3 million of cash on the balance sheet. At the end of the 2011 first quarter, we had no debt and $8.9 million of cash. Both the first quarter 2012 and 2011 ended on a U.S. bi-weekly payroll date.

Our day sales outstanding was 59 days at the end of the first quarter 2012, down from 62 days at both the end of first quarter 2011 and the end of 2011, due mainly to the timing of payments from our customers at quarter end. This reduction in DSO also improved our cash flow from operations. Our cash used in operations in the first quarter of 2012 was approximately $2.4 million as compared with cash used in operations of approximately $7.2 million in the first quarter of 2011. In the quarter, we had $340,000 in capital expenditures and recorded depreciation expense of $648,000.

We repurchased approximately 59,000 shares of CTG common stock during the first quarter of 2012. During the second quarter prior to releasing earnings, we repurchased approximately 34,000 shares under our 10b5-1 plan. As of today, our repurchase authorization is for approximately 770,000 shares. As it remains accretive to our earnings, we intend to continue our repurchase program during 2012.

Jim?

James Boldt

Thanks, Brendan. As I mentioned, in aggregate our Solutions business which is significantly more profitable than our Staffing business increased by 22% in the first quarter of 2012. The Solutions business was 40% of our total revenue in the first quarter. The growth in Solutions work is primarily coming from EMR projects and is continuing to drive margin expansion. Overall, our healthcare business was up 19% over the first quarter of last year, but the Solutions component of our healthcare business rising 26%.

At our conference call at the end of February, we mentioned that we had received four RFPs for electronic medical record projects in the first quarter of 2012 for which the hospitals had not decided what IT services firms would be awarded those projects. In addition, we bid on three RFPs last year for which the IT services firm had not been selected. Of those seven RFPs that were undecided in February, we won two and lost one project. That means we still have four bids outstanding for which an IT services firm has not been selected.

When we started the first quarter of 2012, we had 18 active EMR projects. During the first quarter we started two projects and two projects came to an end. That means that at the end of the first quarter 2012, we had 18 active EMR projects. We also have one project that we won in the first quarter of 2012 that will not start until the second quarter.

As I mentioned before, we have a tremendous amount of opportunity for EMR business currently. While we expect significant growth in EMR work, unfortunately the limited number of resources with EMR experience challenges our ability to grow our EMR business to its full potential. In response to this competitive market, we continue to add to our healthcare recruiting team. While this will help bring on new EMR consultants until the market begins to accept newly trained staff, the number of experienced resources that we can hire is going to be the limiting factor in growth for our EMR business.

We’re currently marketing our ICD-10 conversion offering that supports conversions in the U.S. from ICD-9, the current U.S. standard for diagnostic codes to ICD-10, the international standard. CMS, the Federal agency that regulates the ICD transition process has recently proposed delaying the conversion date by one year to October 1, 2014. As most hospitals have not started their ICD-10 projects, we think that the delay is needed. We also believe that by providing more time for the conversion, we should achieve more in aggregate revenue as we’ll be able to better utilize our resources.

Longer term, we believe healthcare informatics will be a major opportunity for growth in serving the healthcare industry. We have a solid head start in this opportunity based upon our strong data analytic experience in the three solutions that we’ve already developed for the healthcare market that employee, medical informatics to identify the ways to improve the quality and efficiency of healthcare delivery.

Having covered healthcare, I’d also like to talk a little bit about the other three vertical markets that we focus on. Demand from the technology service provider market was relatively weak in the first quarter 2012. As to our financial services and energy markets, we depict those businesses as stable and we would expect they’ll remain so in the near future.

Turning to our Staffing business which generates most of its revenue from the technology service provider market, its revenue was flat when you compare the first quarter of 2012 to the first quarter of 2011.

Since the summer of 2011, demand in our Staffing business has moderated consistent with our expectations and also due to some clients being concerned about the impact of the European financial crisis and continued U.S. economic growth. We, therefore, do not expect an increase in personnel in our Staffing business in 2012.

Looking at the second quarter 2012, we’re forecasting total revenue to be in the range of $104 million to $106 million, or a 7% increase to the midpoint of our guidance over last year’s second quarter. We’re forecasting earnings per share in the second quarter of 2012 to be in the range of $0.20 to $0.22 per diluted share, or a 24% increase to the midpoint of our guidance over the second quarter of last year.

For the 2012 full year, we expect a revenue range of $420 million to $430 million, or a 7% increase to the midpoint of our guidance over 2011. Based upon our revenue forecast and the anticipated mix of business, we continue to expect net income per diluted share in 2012 to be in the range of $0.81 to $0.91, or a 21% increase from 2011 at the midpoint of our guidance.

We thought that it’d be helpful to once again recap the assumptions we used to set our 2012 guidance. We’re currently seeing tremendous opportunities in our healthcare Solutions business. We think that our healthcare business will grow by approximately 25% in 2012. As we mentioned before, given the opportunities in the market, we could grow faster than that, however, there are significant labor shortages in the market and our customers are not yet willing to accept recently trained staff. We therefore believe that resource availability will be the limiting factor in our healthcare business in 2012.

For our non-healthcare Solutions business, we’re projecting a revenue increase of approximately 8% in 2012. For the reasons that I mentioned today and in our February conference call, we believe our Staffing customers’ concern about economic growth will limit adding additional personnel to our Staffing business in 2012. For that reason we’re not forecasting a change in our Staffing revenues for this year.

Our revenue forecast for the full year also takes into account the effect of foreign exchange rates in our European business. Given the fact that both the euro and the British pound dropped in relationship to the dollar, we’re assuming a 5% negative impact on our European revenues in U.S. dollars when compared to 2011 due to foreign exchange fluctuations.

To sum it up, CTG had a great year in 2011 and a solid first quarter. Given our strategy and position in the marketplace, we expect another excellent year in 2012.

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

(Operator Instructions) our first question today comes from line of Kevin Liu with B. Riley & Company. Please go ahead.

Kevin Liu – B. Riley & Company

Hi. Good morning, guys.

James Boldt

Good morning, Kevin.

Kevin Liu – B. Riley & Company

Great results in the quarter. Looking at your outlook, your Q1 numbers seem to come right in line with where you saw. It sounds like the assumptions you’ve made in terms of the overall environment and the impact on your business hasn’t changed much. So, maybe if you could walk us through a little bit about why your guidance was taken down slightly on the high end, low end for the full year?

James Boldt

Sure. It really, it was totally the Staffing business. When we finished February, we had clients concerned about the European situation and we had forecasted a slight increase about 2% of an increase in our Staffing business. And as we got into the month of April, particularly if you read the Wall Street Journal I think more of our clients are now concerned about it. So, basically went from same when have a 2% increase in Staffing to having a flat increase in Staffing this year.

Kevin Liu – B. Riley & Company

Got it. And in terms of some of the medical informatics knowledge that you guys have put out, there maybe you could walk through which ones you actually trying to see more traction on, whether how effectively you’ve moved from clients in pilot mode into actual commercial deployments?

James Boldt

Yeah, we actually have commercially deployed all three of the applications. We currently have one client that is in the process of doing the fraud, waste and abuse. It’s lower than we thought because it’s a new process for them and also for us, but it is long. And we have a lot of people interested actually in the fraud, waste and abuse. We also have at least one proposal out on the medical management model and we’re waiting to hear back on that one. And on the actuarial underwriting, we’ve got several insurance companies that are interested that we’re basically doing betas with. We have had one insurance company use it real time so far and we’re hoping to get additional clients.

Kevin Liu – B. Riley & Company

Got it. And you talked a little bit about the ICD-10 delay. I’m just kind of curious as to how much activity you’re putting in the marketing given that that’s probably not going to be a near-term revenue driver? And then also how interested some of your EMR customers are that engaging you for those once their implementations are done?

James Boldt

Yeah, the ICD has been kind of a rollercoaster because as they thought, as the hospitals thought that CMS wasn’t going to defer the date, everybody got interested in it. Then when CMS came out and said they would defer it but didn’t announce how long it was going to be of a deferral, everybody kind of just stopped because their whole planning cycle is based upon, okay; I got to switch over a particular date.

And even with the current date, CMS didn’t come out and say it is October 1st of 2014, they just proposed it. So, they haven’t quite decided yet. So, we currently are working on one assessment and we’re working on one actual remediation and we hope a whole bunch of clients that are sitting that are saying what’s the date going to be so we can figure out when we need to start.

Kevin Liu – B. Riley & Company

Great. And then just one last housekeeping one for Brendan, I am wondering what the reimbursable expenses number that contributed to revenues was for the quarter?

Brendan Harrington

It was $3.2 million Kevin, $3.229 million.

Kevin Liu – B. Riley & Company

Great. Thanks so much.

Operator

The next question today comes from the line of Rick D’Auteuil with Columbia Management. Please go ahead.

Rick D’Auteuil – Columbia Management

Good morning.

Brendan Harrington

Morning.

Rick D’Auteuil – Columbia Management

Good morning.

James Boldt

Morning.

Rick D’Auteuil – Columbia Management

So, couple questions on the update on the EMR projects, you talked about seven active RFPs still, seven were open, two wins, one lost, four undecided. Were the two wins in the – can you characterize the size of the two wins relative to...

James Boldt

Is there a large, if not a larger.

Rick D’Auteuil – Columbia Management

Yeah.

James Boldt

Okay.

James Boldt

They just continue to seem to be winning larger.

Rick D’Auteuil – Columbia Management

Okay. And in the pipeline of the four undecided, are they also, do they also look also on the low side?

James Boldt

Yeah, tend to be larger on average.

Rick D’Auteuil – Columbia Management

Okay. ICD-10, so you said you just gave a little more detail, one assessment, one remediation, did you have people fall out that had begun the process or it’s just the pipeline never won anywhere because of the push outs?

James Boldt

Well, we’ve had a couple of different things. One, a lot of the AMA’s lobbying to never make the conversion, right. I don’t think that’s going to happen because they just have to be able to continue to follow diseases. But so some hospitals they are sitting back saying we want to see what the next deadline is. Some hospitals did assessments.

I think we finished two assessments actually and then when they said they were going to delay the date, said okay, just going to stop and see what the date is before we figure out how long. We want to know how long we have to do this before we actually start. And we haven’t seen as many hospitals in the first quarter start their assessments as we would have expected and we think the reason is they’re just waiting to find out what the final date is for this.

Rick D’Auteuil – Columbia Management

Okay. And as far as the talent base there, it’s not the same, necessarily the same people that you’re using on EMR, right?

James Boldt

No, it isn’t. The kind of the talents goes where need, any people who can do version upgrades and then integrate into the rest of the packages that they have. So, some of the people in EMR group obviously can do that because just putting EMR in it requires it to integrate with the other packages but most of the people in the EMR are specific to EMR. And the other skill set they need is people who understand ICD codes because at some point you’re actually going to have to train the physicians, et cetera. And just in general in the marketplace those people have always been in very short supply.

I mean there’s just never been enough people that know the ICD code and it’s going to be particularly difficult this time because it takes nine months to train somebody so that they would know all of the ICD codes. Now we don’t think we’re really going to do that, people probably get trained for an area in a hospital. Most areas like radiation doesn’t use 14,000 codes, they probably use 25 and they’re not going to use 14,000 codes. They’re probably going to use maybe 50 or 75 codes when the day is over. So but those are basically the two skill sets they need primarily, people that can do integrations and package upgrades and then people who know the ICD codes.

Rick D’Auteuil – Columbia Management

Okay. And then somebody brought up I don’t know where I saw it but is there an issue potentially, is there an ICD-11 that’s now out there?

James Boldt

Yeah, the WHO came out with ICD-10 in 1993. So, the WHO is announced, they’re going to come out with ICD-11 on January 1st of 2015.

Rick D’Auteuil – Columbia Management

I mean could that muck up things there?

James Boldt

It could but if you think about it, 11 is going to have everything that 10 did, plus some stuff so. It really all depends on CMS. I mean when they say the date is and actually stick to it, that’s going to be the date that people have to hit.

Rick D’Auteuil – Columbia Management

Yeah. Will they now specify likely ICD-11 instead of 10?

James Boldt

I know people have speculated on that. The problem is that they’re having a hard time now not being able to assign codes or having to stop following diseases because they’ve run out of code numbers. So, that would basically mean that they have to go whether only October of 14 I guess. I suppose you could – it’s only a few months. I don’t know, but I – if they’re going to change the date because of 11, I suspect that it’ll just be three months later, right.

Rick D’Auteuil – Columbia Management

What are the assumptions embedded in your operating margin for the year, is it in mid or upper 5...

James Boldt

Well, at the mid – that’s a good question, at the midpoint of our guidance it’s 5.6% and what we’re really basing that on is that we think that for the entire year that our Solutions revenue will be about 42% of our total.

Rick D’Auteuil – Columbia Management

Okay. Still no positive signs on the energy side?

James Boldt

No, not really. Unfortunately, that for one of our largest customers that work is off. We are getting some traction in other customers but it’s still a relatively weak market for us.

Rick D’Auteuil – Columbia Management

All right, I’ll circle back with others. Thanks.

James Boldt

Thanks, Rick.

Operator

Our next question today comes from the line of Richard Close with Avondale Partners. Please go ahead.

Richard Close – Avondale Partners

Yes. Thank you for taking the questions. With respect to the EMR implementations, how many, and I don’t know if you give this, how many open slots do you have in terms of people I guess that you need to really take advantage of the growth opportunities that exist out there?

James Boldt

We don’t generally give out that number because that literally changes every day. But if we filled all the open reqs that we currently have, we’d grow more than 25%, our hope to the business this year.

Richard Close – Avondale Partners

Okay.

James Boldt

So clearly it’s the supply that’s limiting us at the moment.

Richard Close – Avondale Partners

And then so you talked a little bit about the bids and the decisions yet to be made. I guess my question would be in looking at the pipeline of things that are maybe coming down the road once these decisions get made, has everyone chosen a vendor or, and begun the process or is there still some people out there that still have yet to go through this process of selecting IT vendor, software vendor and implementer for this?

James Boldt

No, there’s still people we haven’t selected IT services vendor yet that’s for sure. As a matter of fact, one of the top 10 systems in the United States, one of the largest actually is still trying to decide between two different software packages. They’re actually running a beta and it’s not scheduled to finish until the beginning of next year.

Richard Close – Avondale Partners

Okay. So, we haven’t necessarily started the downhill dissent in terms of adoption at this point?

James Boldt

No. I don’t remember who it was, but somebody actually surveyed the software vendors as to what they thought. And the smaller players tended to think that their peak year would be 2013, the larger vendors Cerner for instance thought that their peak year would be 2014. If you think about it, they actually record their revenue on the data project starts and we record our revenue over the implementation period, which is at least two years, sometimes a little longer. So if Cerner’s right and their peak year is 2014, ours will probably be 2015.

The other thing we haven’t talked much about because there’s not a tremendous amount of traction is Europe. Europe is looking very hard meaning most of the countries in Europe at electronic medical record. Now, the United States government’s belief is that if there’s a cost of $100 billion for everyone in the U.S. they have an electronic medical record. They also came out with if everyone had an electronic medical record, they believe it would reduce healthcare cost by $200 billion to $300 billion a year mainly just from eliminating duplicate test.

Europe is in the same situation and there it’s their government’s problem because it’s socialized medicine generally. So, many of the European countries are watching what’s happening in the United States. Epic which is a private company but clearly the biggest winner in the EMR space has already opened an office in the Netherlands and they’re beginning to market their product over in Europe. So, we think that it’s quite possible and we’re actually hoping Europe doesn’t click in until after the peak in the United States because we would be, we’d want to take some of our U.S. resources and bring them over to Europe to help those projects once they start up. So, there may actually be kind of a second peak for us if you will, if Europe starts up their conversion to electronic medical records.

Richard Close – Avondale Partners

I guess final question for me is what are you guys doing about trying to add to your bench strength with respect to EMR, is there any type of programs you’re working with in terms of educational institutions, anything along those lines or and then I guess the competitiveness I would assume is pretty significant?

James Boldt

Yes. And the problem really is that the marketplace isn’t willing to accept newly trained people. We actually have the capacity to train people and we’ve won projects with 50% newly trained and 50% experienced, probably averaging a 15 years experience actually in healthcare. But the clients are, particularly the CIOs are looking at incentives, my neck if I’ll get this done on time. I’ve already missed a lot of government funding and I only want experienced people on my projects.

To get more experienced people, we actually increased our recruiting for healthcare by number of people by 70%, seven zero percent in the last 12 months to get more people with experience into the company and we have all kinds of programs to help attract people and retain them, et cetera. But until the marketplace changes and is willing to accept newly trained people, the market is going to be limited. And it’s not just us, I mean every, we know all of our competitors are having exactly the same problem.

Richard Close – Avondale Partners

And so do you envision that growth of 70%, do you think you have to accelerate that to execute, let’s say you get a bunch of projects here where you have to accelerate that, do you think has the potential to crimp margins?

James Boldt

First, could the number of people we need increase? I hope that it does because that just means we’re winning more business. I don’t see it crimping margins. The margins and the bill rates are going up because of the shortage. I mean in our industry like I think all industries when there is a scarcity, the price goes up and the margins go up. So, I think actually that if we have more win, we have to add more recruiters. I think that our margins probably will still go up, not down.

Richard Close – Avondale Partners

Okay, great. Thank you. Congratulations.

James Boldt

Oh, thank you.

Operator

And I understand we’re at the end of your time slot for question today or...

James Boldt

No, we can take more questions.

Operator

Take another one, okay?

James Boldt

Sure.

Operator

We’ll go to line of Bill Sutherland with Northland Capital Markets. Please go ahead.

James Boldt

Hey, Bill.

Bill Sutherland – Northland Capital Markets

Hey, Jim. Almost didn’t get in, did I? So, I’m just trying to understand I guess the components of your healthcare growth in the quarter and as you see the year. So, total growth was 19%?

James Boldt

Correct.

Bill Sutherland – Northland Capital Markets

And then you had the Solutions component of healthcare in the 25% range.

James Boldt

26% actually. Yeah, let me – that’s the excellent question, let me explain that. We do have staffing in our healthcare business it’s mostly in life sciences. So, the provider side of the market which is the EMR side for instance, we really are virtually all Solutions. What happened was the provider side; the Solutions side of the business grew at 26%. We had a life sciences customer we’ve done business with for a long period of time.

We decided that they would outsource to one of the large aggregators, mainly to take that business offshore and that caused our staffing side of the business, which is like the rest of our Staffing business isn’t as profitable as Solutions, to decline by 18% in the first quarter. And then other solutions were growing at 11%, so we kind of blend all that together and you get a 19% increase in healthcare overall, a 22% increase in solutions.

Bill Sutherland – Northland Capital Markets

And healthcare – can you differentiate as far as talking about percentage of total between Solutions and total healthcare, other words, healthcare Solutions, yeah, okay.

James Boldt

Yeah, we’re generally don’t most but 70% of the business in healthcare is in the provider side of the market.

Bill Sutherland – Northland Capital Markets

Okay.

James Boldt

20% is now in the payer which is mostly Solutions too and about 10% is in life sciences, which is the kind of Staffing component. So, we have a couple percent in Staffing now, it’s actually dropped, and most of it is actually Solutions and healthcare offerings.

Bill Sutherland – Northland Capital Markets

And so total healthcare as a percent of total is?

James Boldt

31%.

Bill Sutherland – Northland Capital Markets

31%, okay. And then the last question I have on this is if EMR revenue was up 12%, what was – and Solutions was up 26% in healthcare, what was...

James Boldt

Right in the rest.

Bill Sutherland – Northland Capital Markets

Yeah.

James Boldt

It’s two things. One is the ICD project is a fairly large, the remediation project is a fairly large project that’s for a payer which was a very large project for us. So, that’s one component. And then the other, we also the second largest offering that we have overall in healthcare is outsourcing, often its transitional outsourcing, so we maintained our old applications while they migrate to new ones. And that business also was up and that’s causing healthcare to be up faster than EMR this quarter.

Bill Sutherland – Northland Capital Markets

And was the EMR, I realize it was a balance of odds and ends, so I guess the preponderance of growth was just increase in average size.

James Boldt

Yeah.

Bill Sutherland – Northland Capital Markets

But, so how do we think about the rest of the year for EMR? I mean this, 12% isn’t a function of the labor constraint, correct? I mean you could do more than 12% even with the labor issues, right?

James Boldt

Well, yeah for the year definitely, yes, we believe that we can. In the first quarter though there was probably partially, it’s partially labor and it’s partially just a function of the larger coupled with, the couple big projects ending and unfortunately a big ratable project ended and the project started they doesn’t work their way. So, they ended and then so we have been in a delay before the new one started.

James Boldt

I suspect that in order for us to hit a 25% growth in our revenue in healthcare this year that the EMR business is probably going to have to grow to at least 20% to 25% this year.

Bill Sutherland – Northland Capital Markets

You had a pretty fair pocket when the ends ended before the starts.

James Boldt

Yeah.

Bill Sutherland – Northland Capital Markets

Okay. I get it. And then finally on the FW – I am sorry the fraud, waste, abuse, can you a little color on you said the clients been just working slower?

James Boldt

Well, slower than we would have expected, maybe it is some slow in terms of the industry. The kinds of fraud, waste and abuse that we look for are very different than other people and providers have a very unusual relationship with – our payers have an unusual relationship with the provider side of the market. They need to have the providers, the individual docs in their network in order for them to be able to market their products. So they’re not as used to going back to them, and saying hey, if you billed us twice or you billed us for this and looking at the data, it’s not correct.

So there is just much more hesitancy on their part to go through the process of kind of confronting them and saying, we had a problem here in you owe us money instead of us owing you money in this one. I’m convinced it’ll happen but it’s and I also would’ve thought that it would’ve mainly been at lower levels in the organization but it turns out almost the entire organization because it affects the relationship with the providers actually is getting involved.

Bill Sutherland – Northland Capital Markets

So, there is – so I understand, they are determining how they are going to solve these, collect these sum balances?

James Boldt

Well, yeah how and even if and in some cases I think that they probably decide that they won’t go after what they’ve gotten in the past but they will change their policies so that it can never happen again and looking at each one of them I think separately and that’s really what’s taken the time.

Bill Sutherland – Northland Capital Markets

And as far as addition, yeah go ahead.

James Boldt

At the end of the day, I think that they will actually go back and get the money. They are just trying to figure out how to do it in a way that is most amenable to the providers that are in the market.

Bill Sutherland – Northland Capital Markets

Right. And then is there another, are you proposing or developing business with another insurance company at this point?

James Boldt

Yeah. We’ve actually a number of betas underway, where they have given us sample of their data, we run the data. We don’t go through and give them specifics of exactly who it was, but we’ll go back to them and say okay we found this amount of money and here is how it breaks down. And that’s the way that we sold this first payer to do exactly the same thing.

Bill Sutherland – Northland Capital Markets

You would hope before year end certainly, we might be signing up one or two more?

James Boldt

Yes.

Bill Sutherland – Northland Capital Markets

Yeah, okay. Thanks Jim.

James Boldt

Thank you.

Operator

And our next question today comes from the line of Matt McCormack representing BGB Securities. Please go ahead.

James Boldt

Good morning Matt.

Matthew McCormack – BGB Securities

Yes, good morning. You clarified the healthcare vertical in terms of the growth of the Solutions and the staffing business, I was wondering if you could go through the other vertical and generally give us what percentage of revenue there it was in the quarter for each vertical and if there is any major discrepancies, I know most of its staffing but if there is any discrepancy in the staffing versus Solutions growth rates in the other verticals.

James Boldt

Sure, just roughly the – actually the only two that changed were healthcare and the technology services so the rest of them are pretty much the same as you’ve probably seen in the past. Healthcare as we already announced was 31% of the total, technology service providers was 32% they would have declined last there was 35%, last year healthcare was 28%, energy remained at 6%, financial services was at 6% that’s down a little bit from last year and then other was around 25%.

Matthew McCormack – BGB Securities

Okay. And was there any some financial services, can you – what was going on there and then also can you talk about the other vertical as well?

James Boldt

Yeah, as I was previously asked anything happening with energy and we do have one customer who is cutting back and that has nothing to do with us their cutting back in general and that’s been impacting us the last couple of years in energy.

Financial services, almost all of our financial services at least 5% of our total revenue is in Europe and it’s the currency fluctuation that’s actually causing that to drop. The technology service providers as we mentioned the demand was weak in the first quarter. That’s actually been true since probably last August and it’s I think that that one is the one that’s most sensitive to the European markets and what’s happening over there.

Matthew McCormack – BGB Securities

Okay. In terms of the supply constraint or the head count issue, I mean is there any – are you looking for resources offshore, is there any possibility to use those types of assets or is this all on-site with the client, all the client or the client doesn’t want any of those assets at this point?

James Boldt

The client really isn’t looking for any offshore assets and even if they were, we probably couldn’t use many of them. About 80% of this work, remember you’re not writing code, you’re just flipping switches in a software package which doesn’t take as much time. 80% of it roughly are actually sitting in front of the clients saying okay, how do you want this done and then 20% is flipping switches.

So, theoretically, I guess if you wrote something up and send it offshore, you could probably get it back. Because these are EMR applications, the hospitals are incredibly sensitive about their data and they want to take it offshore. So, although there isn’t much data actually in the system at this point but most of the hospitals are more comfortable if it’s done on their sites.

Matthew McCormack – BGB Securities

Okay. Okay, great. Thank you.

James Boldt

Thank you.

Operator

And we have a question from the line of Vincent Colicchio with Noble Financial. Please go ahead.

James Boldt

Good morning, Vince.

Vincent Colicchio – Noble Financial

Yeah, I’m glad I made it in as well. So, just a couple, Jim, for you. Are you seeing any movement on healthcare information exchange front, I haven’t heard about that from you in a while?

James Boldt

No, we’re not seeing a lot and I think the problem there is funding. I am convinced there’s still about $18 billion in the AURA funding that the Federal Government hasn’t released yet. But the kind of spurt that we saw was when the Federal Government gave the states about $600 million they give to their HIVs to at least start them up and take a look at things. They need a source of funding and that isn’t been readily available and I’m hopeful at some point the Federal Government realizes that and releases some of the stimulus money.

Vincent Colicchio – Noble Financial

How you expect the IBM business track on the staffing side versus the rest of the staffing business for the rest of the year?

James Boldt

Well, I’ll tell you what’s in our projection; it’s basically flat for the rest of the year. It’s very difficult though for us to forecast because we’re kind of the flex point for IBM. I mean if they need additional people on a project we’re the additional people, if the project finishes and they don’t need as many people, we’re probably the people that come off. So, it depends on how many new projects IBM starts this year and there is no central point that we can go to and find out what that number is.

So, at the moment we’re going with flat. We’re hoping and there’s been some discussions about they may have more projects in the second half of the year than they did in the first half of the year but we really got to just wait and see on that. Virtually that side of the business isn’t as profitable, I don’t know if it’s fortunately or unfortunately, but when we lowered the revenue guidance by $5 million because it’s only best on average of 3% operating margin, it really had no impact on net income.

Vincent Colicchio – Noble Financial

What’s in the healthcare revenue piece, the rather large piece that’s outsourcing, is there any, are there any, I assume that’s several clients, are there any large contracts coming up anytime soon?

James Boldt

No, and it’s lots of clients. It tends to be not as big as the EMR engagement. So, it’s just a number of clients. And while we originally sign up to maintain those systems during the transition, it quite often happens that they get to a point and they decide we’re just going to continue to use those old systems or part of them forever because it’s too expensive. They’re working; it’s too expensive to make the conversion. So, those engagements will originally when we sign up for them, I think they’re going to be a two or three year period. It’s not unusual that they go 5 or even 10 years.

Vincent Colicchio – Noble Financial

And one last question, what are your expectations for the European business for the balance of the year?

James Boldt

Well, I’m actually very pleased with our European operations. I mean in Euros they were up 4.9% in the first quarter. Now, when it comes through in U.S. dollars it’s basically flat, because of the currency exchange and that’s really our expectation for the year, but in Euros they’re going to be up, but because of the exchange rates that probably look like they’re flat in the U.S. Books.

The reason that we’re up the commercial business as you know is soft in Europe, ours is like everybody elses. Our headquarters for Europe are in the Flemish part of Belgium and we’re one of the largest IT services company in the Flemish part of Belgium and the new European Union starting up there and we’re getting additional business from the European Union and that’s really why the revenue were up and then we expect that will continue throughout the year.

Vincent Colicchio – Noble Financial

Thanks for answering my questions.

James Boldt

Okay. Thanks Vince.

Operator

Gentlemen, there are no further questions at this time.

James Boldt

Okay. CTG is firmly established in healthcare, one of the fastest growing U.S. industries. We have offerings for Electronic Medical Records, ICD-10 conversions, Accountable Care and Medical Informatics, all of which are expected to be in strong demand for several years. We 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

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation and for using the AT&T Executive Teleconference. You may now disconnect.

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