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Executives

Debbie Pawlowski – Investor Relations

James Boldt – President and Chief Executive Officer

Brendan Harrington – Senior Vice President and Chief Financial Officer

Analysts

Rick D’auteuil – Columbia Management Advisors, LLC

William Ditullio – Boenning & Scattergood Inc.

Frank Sparacino – First Analysis Securities Corporation

Ben Desinberth – Thomas Nogales Financial, LLC

Bill Sutherland – Boenning & Scattergood Inc.

Jason Schacht – Heartland Advisors Inc.

Computer Task Group, Incorporated (CTGX) Q2 2008 Earnings Call July 23, 2008 10:00 AM ET

Operator

Welcome to the CTG Conference Call. (Operator Instructions) I would now like to turn the conference over to our first speaker, Debbie Pawlowski from Investor Relations for CTG.

Debbie Pawlowski

Thank you, Linda, and good morning, everyone. We certainly appreciate your time and your interest in CTG. On the call today we have President and 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 second quarter of 2008 and update you on the Company's strategy and outlook. We will follow with an opportunity for Q&A. If you do not have the news release discussing our financial results, you can access it at the Company's website at www.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 is 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 them at our website or the SEC's website at www.sec.gov. So please review our forward-looking statements in conjunction with these precautionary factors.

So with that, I would like turn it over to Jim to begin the discussion. Jim?

James Boldt

Thanks, Debbie. Good morning, everyone. This is Jim Boldt. I want to thank you for joining us this morning for our second quarter earnings conference call. As you saw in our earnings release, our second quarter revenue and earnings were both well above our guidance. We are pretty excited about the fact that revenues from our health care business increased by 20% over the second quarter of last year. The growth in our solutions business has been a major contributor to the 200-basis-point improvement in our operating margin in the quarter. The favorable outlook for our solutions business has caused us to raise our guidance once again for the year.

I am going to talk more about our business and expectations in a minute, but first I am going to ask Brendan to start us off with a review of our financial results. Brendan?

Brendan Harrington

Thanks, Jim. Good morning. For the second quarter of 2008, CTG's revenue was $94.1 million an increase of $13.9 million or up 17.4% compared with the second quarter of 2007.

Operating income increased 126% in the second quarter to $4.0 million, largely as a result of the growth in our more profitable solutions business. This growth also drove the 200-basis-point increase in our operating margin to 4.2% of revenue, its highest level in several years.

Net income was $2.1 million in the quarter, an increase by 105% from $1 million in the second quarter of 2007. Net income per diluted share was $0.13 for the quarter, a 117% increase over last year. Both the 2008 and 2007 second quarters' results include equity compensation expense of approximately $0.01 per diluted share net of tax.

Solutions revenue in the second quarter of 2008 was 34% of total revenue or $31.9 million. This represents 14% growth in our solutions revenue compared to the second quarter of 2007.

Direct costs as a percentage of revenue were 77% in the second quarter compared with 77.6% in the second quarter of 2007 and 78.4% in the first quarter of 2008.

We had $29.3 million in revenue from IBM, our largest staffing customer in the quarter compared with $23.6 million in the second quarter of 2007. This represents 31.2% and 29.5% of total revenue in the 2008 and 2007 second quarters respectively.

Revenue from our European operations was $21.4 million in the second quarter, a 23% increase from the $17.4 million recorded in last year's second quarter. Excluding foreign exchange fluctuations, European revenue in the quarter would have increased by 7.6%.

The tax rate for the 2008 second quarter was approximately 48% compared with 39% last year. The rate was higher than normal due to the increase of valuation reserves for net operating losses of our foreign subsidiaries. The expected tax rate for the 2008 full year is between 40% and 44% compared with 38% in 2007.

The Company had 3,500 employees at the end of the second quarter of 2008 of which approximately 89% are billable resources. On the balance sheet, our days sales outstanding was 59 days compared with 64 days at the end of the second quarter 2007 and with 60 days at the end of the first quarter 2008.

Our cash flows from operations in the second quarter were approximately $36,000. We had $792,000 of capital expenditures and recorded depreciation expense of $490,000 in the quarter.

During the second quarter of 2008, while adhering to SEC-imposed volume limitations. We repurchased 176,000 shares of CTG common stock. The repurchases in the quarter were made at an average price of $4.97 per share.

During this most recent self-imposed blackout period prior to releasing earnings, we repurchased shares under our 10b5-1 plan. We intend to continue our repurchase program throughout 2008. Jim?

James Boldt

Thanks, Bernard. The primary driver of the significant increase in our profitability in the second quarter was our solutions business. There is no doubt that we are realizing the benefits from the investments that we made in our solutions business over the last few years, particularly in the health care market.

Several new health care projects began in the second quarter 2008 and will continue to ramp up in the third quarter of the year. There is proposal activity in the pipeline and our health care vertical continues to be strong. We expect to see additional health care business come online as the year progresses.

Health care solutions business has been the main driver of our margin improvement and quite frankly, it allowed us to achieve an operating margin above 4% a lot sooner than we anticipated.

Our staffing business increased 19% in the second quarter of 2008 when compared to the second quarter of last year. The increase was higher than we anticipated and we believe it to be significantly higher than that experienced by the US staffing industry.

Growth in our business to the technology service provider market, as well as additional revenue we generated from taking over the staffing responsibility for a new area at an existing customer site during the first quarter of the year were the major contributors to the growth in our staffing business.

As to the third quarter of 2008, we are forecasting revenues in the range of $89 million to $91 million, 10% to 13% higher than last year's third quarter. As you know, we had 64 billable days in the second quarter. One billable day equates to about $1,450,000 of revenue and we will have 63 billable days in the third quarter 2008.

In addition, as the billable staff takes more vacation in the third quarter than in the second, we generally lose about 3% of our revenue quarter to quarter due to the additional vacation time. Given the revenue forecast, we are forecasting earnings per share in the third quarter of 2008 to be in the range of $0.10 to $0.12 per diluted share, 67% to 100% above the third quarter of 2007.

As you know, we have also increased our guidance for the year. We currently believe that CTG's 2008 revenue will be in the range of $363 million to $367 million, 12% to 13% above 2007. We expect that net income per diluted share in 2008 will be in the range of $0.44 to $0.48, 76% to 92% above last year. To sum it up, our second quarter performance was significantly better than we expected.

We expect our solutions business will continue to advance as additional solutions projects ramp up, primarily in our health care vertical. As our health care solutions proposal activity remains strong, we continue to expect that our improving mix and more profitable solutions business will drive higher year-over-year earnings in the second half of the year.

The bottom line is that despite a weaker economy. We believe that CTG is on track to have a very good year in 2008. Even more importantly, as we look beyond 2008, we see further opportunity as CTG capitalizes on its excellent traction in the growing health care industry by developing new and innovative solutions to improve patient care and lower cost of the technology.

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

Question-and-Answer Session

Operator

Okay. (Operator Instructions.) Our first question will come from the line of Rick D'Auteuil from Columbia Marketing. Please go ahead.

James Boldt

I think that is D'Auteuil. Good morning, Rick.

Rick D'auteuil - Columbia Management Advisors, LLC

Good morning. That is actually Columbia Management, too, so...

James Boldt

Okay.

Rick D'auteuil - Columbia Management Advisors, LLC

We are two for two. A couple of questions. First of all, excellent quarter and great progress. Love to see the operating margin improvement and progress that we have been hoping for.

To start on that subject, I think last time I asked you what your guidance implied for operating margin in Q2 and the prior guidance was around 3.3% to 3.7% band. Clearly, you blew that away. What was incrementally that much more positive to get you to 4.2%? You referenced health care, but you knew health care was strong going into the quarter, too.

James Boldt

We actually had more health care and solutions projects start up in the quarter than we anticipated. And the other thing and I suppose we should have anticipated this, but these are new, many of them are new projects that we have never done before to new customers.

The margins on the new projects are significantly higher than we expect. We have told people and actually, in the quarter, pretty much the solutions business was now starting to hit its target margins but we have told people on average we expected operating income from solutions of about 10%.

The new projects that we are starting up are significantly higher than that because the things that, we are the only person, perhaps, in the market that is offering or they are solutions where there is a tremendous return and therefore the margins are just better.

So the margins have been better on the health care business and we have more than we expected. And even on the staffing business, we really did not expect a 19% increase in our staffing revenue for the quarter. The margins there did not improve. They are still running around 3% or so, but they did add incrementally to the income.

Rick D'auteuil - Columbia Management Advisors, LLC

Okay. That was another question I had. The staffing margins in fact stayed relatively flat?

James Boldt

Yes. They were almost identical to last year.

Rick D'auteuil - Columbia Management Advisors, LLC

Okay, and so the bill rates and pay rates are fairly stable on the staffing side?

James Boldt

I would have to do that separately. In the US, I would answer that yes, they are stable with where they were last year. In Europe because of shortages that are starting to occur over there, we are actually starting to see some inflation more like general inflation 2% or 3% increases.

Rick D'auteuil - Columbia Management Advisors, LLC

Okay. And that is on both bill and pay rates?

James Boldt

Yes.

Rick D'auteuil - Columbia Management Advisors, LLC

Okay. And then how do you feel, so I think, if taking your comments on your prepared remarks on the health care solutions business, you expect to see more assignment ramps in the coming quarter and the pipelines continues to be strong. And if new projects are having better-than-average operating margin, it sounds like you feel pretty good about the sustainability and probably even opportunities to continue to increase the operating margin as the year progresses, right?

James Boldt

Well, we are somewhat cyclical, unfortunately. If you were to rank the quarters, second quarter's the best because you do not get many people taking vacation compared to other quarters, and there is only one holiday.

In the third quarter of the year, you have got a couple holidays, lots of people taking vacation. So in some years, we have actually ramped our SG&A expenses down to somewhat adjust for that. And to some extent, we probably will this year. But because we have so many opportunities, we want to keep the investments, particularly in the solutions business, going.

So in the third quarter of the year, if you looked at the midpoint of our guidance for instance we are projecting about 3.6% in terms of operating margins. And it is really dropping because of the fixed costs as a percentage of revenue as being relatively flat, and the revenue is dropping because of the vacation and the one less billing day.

In the fourth quarter of the year at the midpoint of our guidance we have indicated about a 4% margin. Fourth quarter we get hit by the holidays at the end of the year. So we are somewhat cyclical.

Rick D'auteuil - Columbia Management Advisors, LLC

Okay, more seasonal, I guess.

James Boldt

Seasonal, seasonal. Yes.

Rick D'auteuil - Columbia Management Advisors, LLC

Okay. That is helpful. And then the other thing, I think, that held the jack a little bit this quarter, and you made reference to it in your release, again, I am sorry. I missed the first few minutes of your prepared remarks. But the tax rate, I am a little confused by that. Can you elaborate on that?

James Boldt

Yes. Unfortunately, there is going to be a fairly long explanation, so if you have follow-on questions, please ask, because I am sure other people are thinking the same thing. As you know, we have been on the NHS contract in the UK for three years, now, since basically its inception.

Part of our business over there the largest part of our business over there has been with Fujitsu, one, the prime contractor in the Southern region. At the very end of the second quarter and they both announced at the same time, either the NHS terminated Fujitsu, or Fujitsu were through. Those were the two comments that the two parties made. And therefore, Fujitsu's no longer the prime vendor for the Southern region, and they have not selected a new vendor yet, and I suspect it's going to take them a little bit of time to do that.

In the UK, we had decided that we were going to create a health care practice and we actually looked at it as an investment, long-term investment. And as a consequence of that, we had more salespeople et cetera, than you would normally have for the revenues that we are getting.

Unfortunately, the revenue did not ramp up as quickly as we originally anticipated because the software was not available. So we actually have run losses in the UK. Under the accounting rules, if you have a loss and you anticipate that at some point you are going to get the money back, a net operating loss carries forward, at some point you will apply that to future earnings. You are allowed not to recognize the loss currently. You can basically put it on the balance sheet as a deferred tax asset, and when you get the money back, it just kind of goes away. It never hits your income statement.

When you get to the end of each quarter, you have to forecast what your earnings are in each one of the countries that you do business. And in the past, we always forecast that certainly those NOLs would be retrieved as the NHS project ramped up and as Fujitsu started to do more and more hospitals.

Well, we cannot do that at the moment, because, while I am very hopeful that we will supply the next vendor with people and we do have people currently in the London region and we have people directly with the Trust. It is not as easy for us to forecast, but we are definitely going to make income in the next few years in the UK and therefore be able to use the net operating loss. And the accounting rules take a more conservative approach. If you are in that position, you write the NOL off at that point in time, which is what we did during the quarter.

So that it is about $0.02 a share, really that in the second quarter of the year we wrote off with NOLs, losses we had accumulated, mostly previously, though there was a loss as well in the second quarter, that now we cannot look at the future and say we are sure we are going to get that money back from the government.

Rick D'auteuil - Columbia Management Advisors, LLC

Okay. And have you done anything, are you retaining the infrastructure over there, still in anticipation of an eventual ramp or has anything changed regarding that?

James Boldt

We have adjusted it some, because we are kind of in this, we are not sure what is going to happen next mode. The people that were in health care that were from England, we have basically sold either to the London region or to some of the individual hospitals or trusts, as they call them.

We had some people that came from the United States who actually were getting close to their three-year commitment anyway, and we decided to bring them back into the United States and placed them over here. But we still are in an investment mode, actually. We are still forecasting for the rest of the year that we will lose money in the UK until we see what happens with the NHS, who are they going to pick for the next provider and then for the Southern region, and then whether we can market additional people to them.

Rick D'auteuil - Columbia Management Advisors, LLC

Okay. And then…

James Boldt

In the long term, we still think that there is an opportunity for us in England in the health care market.

Rick D'auteuil - Columbia Management Advisors, LLC

So the guidance on tax rate for the full year is 40% to 44%. What is the implied rate for the second half in that?

James Boldt

Forty-four percent.

Rick D'auteuil - Columbia Management Advisors, LLC

Forty-four percent. So it stays high and there is still more, I guess you took an NOL write-off, but then you take the write-offs as they are incurred for the balance of the year?

James Boldt

That is correct.

Rick D'auteuil - Columbia Management Advisors, LLC

Okay. All right. I will let others ask. Thank you.

James Boldt

Okay. Thanks, Rick.

Operator

The next question comes from the line of William DiTullio from Boenning and Scattergood. Please go ahead.

William Ditullio - Boenning & Scattergood Inc.

Good morning. Thank you for taking my question. Somewhat quick number question. What was the total FX impact on total revenue?

James Boldt

In the second quarter, okay, I will give it to you both ways. So Europe, we reported a 23.1% increase in the revenue, 15.5% of that was because of the exchange so 7.6% was the real growth if you used the same exchange rate in both years. For the entire corporation our reported increase in revenue was 17.4%; 3.3% of that was the exchange, so if the rate had stayed the same, our growth would have been 14.1%.

William Ditullio - Boenning & Scattergood Inc.

Great. And just to kind of add onto the previous question about the UK project, could you give us an idea what the revenue run rate was for the second quarter?

James Boldt

Sure. This is an annualized run rate. In the first quarter of the year, it was about $5 million. Actually, Fujitsu started to ramp down a little in the second quarter, so our run rate went to about a $4 million run rate in the second quarter of the year. For the third quarter, we are projecting about a $2 million run rate. So the Fujitsu business is impacting us for about $2 million a year in revenue, so it is about $500,000 a quarter.

William Ditullio - Boenning & Scattergood Inc.

Okay. And do you expect that to kind of level off after Q3?

James Boldt

I wish I had a forecast going forward. We still have opportunities in the London region. We still have opportunities with the individual hospitals, but the thing that we have no way of predicting is who, if anybody, will step up and be the prime for the Southern region.

William Ditullio - Boenning & Scattergood Inc.

Okay, great. Okay, those are basically the only two questions I had here. Congratulations on the strong quarter.

James Boldt

Thank you.

Operator

The next question will come from the line of Frank Sparacino from First Analyst. Please go ahead.

Frank Sparacino -First Analysis Securities Corporation

Hi, Jim. I had a question on the Southern region. Is it your impression that the other trusts are simply not moving forward or sort of standing still until someone is replaced or what is the general sort of trend in that marketplace right now?

James Boldt

Well, just so everybody knows, there are five regions in the NHS. The London region, the prime is BT for the other regions, it is CSC. And each one of them has a contract, and there is delivery dates on all of them. So my impression is that everything is moving forward as quickly as it can.

The issue really is that the software, while it is improved greatly that the NHS is looking for is not available. They are not willing to sign off that this software meets all of their requirements and we can go ahead with the full-blown implementation.

There are about 1,000 hospitals alone. It is redoing all the software for the hospitals, clinics, and the doctors' offices. Hospitals probably go the first. There are about 1,000 hospitals in the UK. In the Southern region they have done, I figure around nine, and it is probably all the hospitals that they have done so far. So I think it is moving forward, but the issue continues to be that the software is not ready, at least not in the eyes of the NHS.

Frank Sparacino -First Analysis Securities Corporation

And Jim, do I hear you correctly, saying there are 1,000 hospitals in the UK, and there is only nine in the Southern region?

James Boldt

No. They have actually, there has been three versions, actually, I am sorry, there has been two versions of the software that have been installed, kind of a beta of, "Does this software meet the NHS's requirements?" There was a version zero and then a version one, and they actually have installed some software in nine hospitals, but it is our understanding that the NHS will not sign off and say, "That software meets all of our requirements, and therefore you can go full-blown and install it in all the hospitals."

Frank Sparacino -First Analysis Securities Corporation

Okay.

James Boldt

Also just a reminder that the software being used is different region to region. So in the Southern two regions, it is Cerner software, so that is the software that installed it, and then in the northern three regions, it is iSOFT.

Frank Sparacino -First Analysis Securities Corporation

Okay. And then the last question. You talked about some new opportunities in health care. I may have missed it, but I was just wondering if you would be more specific in terms of what some of those new opportunities are.

James Boldt

Okay. Let me give it to you both ways. I am not sure where you picked it up in my presentation, but in the second quarter we had projects start up in the areas of electronic medical records for the first time. We have done a lot of work in electronic medical records. In 2005, it was 1% of our revenues. Last year it was, I am sorry, in 2007, it was 5% of our revenues. But it is all been in hospitals, so we have been installing it just for the hospital to use.

Starting in the second quarter, we actually started a project up to work on doing a community-wide electronic medical records system for RHIO. So it is the first time that we have ever done that and probably the first time anybody is ever done that, actually.

We also started up a project in the area of a redesign of a version upgrade and testing for one of the payers. We started up several implementation and integration projects putting software in the hospitals, which is kind of an ongoing business we have had for many years, did some outsourcing work for a payer, and then we are doing a mainframe migration over to servers for a payer. So those are some of the projects that I talked about started up the second quarter that is going to continue to ramp up, really, during the third quarter.

And going forward, we have a series of offerings. We actually have worked on offerings for three years and this year in 2008, the offering actually became commercial. The Electronic Medical Records is a really good example of it. Going forward we had some other offerings for the health care market that the methodology tools that helped undo that are just being completed now. An example of the offering we expect that will become commercial in the second half of the year would be in the area of fraud, waste and abuse, it is a tool set that will help in hospitals identify Medicaid and Medicare fraud waste and abuse.

Frank Sparacino -First Analysis Securities Corporation

Great. Thank you.

James Boldt

Okay.

Operator

Our next question will come from the line of Ben Desinberth from Nogales Financial. Please go ahead.

Ben Desinberth – Thomas Nogales Financial, LLC

Good morning, gentlemen. Good morning. Congratulations on a wonderful quarter.

James Boldt

Thank you.

Ben Desinberth – Thomas Nogales Financial, LLC

A couple of questions. When you go to your press release and you talk about the coming quarter, your guidance for the year, you say it is a combination of three components. Let me see if I can reference it here, the strength of your core business, proposed activity, and solutions pipeline. I would think the first two items are perfectly clear for the balance of the year. The solutions pipeline is probably where you are getting some guesswork. But just give me a little idea about how it all works. If you have pipeline business, I assume you are referring to proposals that are out there?

James Boldt

Right. And sales opportunities going forward.

Ben Desinberth – Thomas Nogales Financial, LLC

Certainly. Okay. And if essentially, what is the lag time? It is late July right now. If you were to… you know how many proposals you have out there, you know the time it takes to close the proposals and then you know the time it takes to generate the first dollar from those proposals. Is that in fact a weighed activity?

James Boldt

That is, but let me just explain the history. And I am going to be specific to the health care solutions business, because it is probably the biggest area that we have going forward.

We have a system that is, I think, a fairly good system of handicapping items on our proposal based upon whether we have done business with the customer before, the fact that we have done that offering before and how many times we have won and things like that. And if you look back and look actually at our quarterly guidance, for six years, so 24 quarters, we were within our guidance range for all of those. And the only reason we were not before that, in the seventh quarter, we had our tax benefit from our tax court case.

So that the system works, we think, very well. And we have been very consistent and have been able to estimate what our revenues are going forward up until the first quarter of this year. And in both the first quarter of this year and the second quarter of this year, we did better than we anticipated. And the primary reason was that in the health care area, we are proposing new offerings that we may never have done before or no one has ever done before, for instance, the regional electronic medical record plan.

And often the customer is a brand new customer, one that we have not dealt with before. And under our system, they got a very low probability of being successful, it is kind of a factoring system because of the fact that it is a new offering and it has never been done before.

Now, on both the first quarter and the second quarter and we believe that the right thing to do at the moment is to forecast in that manner. Now, the first quarter and the second quarter were above our guidance in both quarters and the reason was that one of those projects actually delivered. But in one of, part of your question was what the cycle is?

Well, on some of these things, like the electronic medical record for RHIO, the sales cycle was probably 12 to 24 months. Even the fraud, waste and abuse, we have been working on that and actually selling it, at least to the first customer for I think 18 or 19 months. That is a relatively long sales cycle. We feel pretty comfortable with our guidance going forward. And as I said in the past, our system has been relatively accurate.

Ben Desinberth – Thomas Nogales Financial, LLC

Okay, great. And one unrelated question, see if you can answer it. Now that your stock price has catapulted over $5.00, what might be the stock repurchase plan expectations for the Board? In other words, would they reconsider it or is there… will there be an ongoing program?

James Boldt

Well, we have purchased stock at these levels and higher, actually in the past. So certainly $5.00 or above $5.00 does not bother us. What we look at is, as an IT services Company, we have to look at our investments. And in terms of capital usually for the last couple of years, at least, our CapEx and our depreciation has been about the same. So there is no significant investment really required there.

We are looking for acquisitions, particularly in the health care space, but we are very kind of picky as to what we are looking for. We are looking for a health care acquisition solution and a particular solution, so it is going to take us longer to find that.

Once we get beyond those two, there really is not much else we can invest in terms of the business and in terms of the balance sheet. We look at the stock and even today, when I signed on, I think it was around $5.18, to the call. The PE was only, trading was like only 14 to 18 and the future was 11. But still, in my estimation, a good buy, so I do not think, certainly at $5.18 that our opinion as to what is going to happen in terms of the stock repurchase plan changes at all. We still think it is undervalued.

Ben Desinberth – Thomas Nogales Financial, LLC

Very good. Thanks again.

James Boldt

Okay. Thank you.

Operator

The next question will come from the line of Bill Sutherland from Jennings, pardon me...

James Boldt

Boenning and Scattergood. Hey, good morning, Bill.

Bill Sutherland - Boenning & Scattergood Inc.

Hi, Jim. A couple of just clarifications, I guess. The health care revenue was up 20% and that was net of the decline in the UK. So domestic healthcare revenue growth was more like 25% to 30%?

James Boldt

That is a good question. I actually did not figure that out separately.

Bill Sutherland - Boenning & Scattergood Inc.

But it is pretty simple math, I suppose.

James Boldt

Well, the thing you have to remember, though, is that the $5 million and the $4 million are annualized numbers.

Bill Sutherland - Boenning & Scattergood Inc.

Right.

James Boldt

So really, in the quarter, you are talking about $250,000. So it is probably is like 1% to 2% higher. So 22% or 21%.

Bill Sutherland - Boenning & Scattergood Inc.

Okay. What are you assuming for your healthcare growth in Q3? I know you are going to be down $2 million annualized, more or less, in the UK.

James Boldt

Well, let me step back. Brendan just handed me a report, and actually in the United States health care was up 24%.

Bill Sutherland - Boenning And Scattergood

Okay. That is good to know.

James Boldt

Up from the previous. I do not really want to give out a projection for that.

Bill Sutherland - Boenning & Scattergood Inc.

Okay.

James Boldt

And it is because of this unknown, how many of the items in the pipeline are actually going to close. I just do not feel comfortable about giving that out for the year.

Bill Sutherland - Boenning & Scattergood Inc.

Okay. The staffing business, I wonder if you can just give us a little more color in terms of the strong results in Q2 and kind of how you are feeling about extrapolating on that.

James Boldt

Okay. The two areas that I mentioned, the technology service provider business which grows most in our IBM business, and this new area that we took over for a customer, not in any one of our three primary verticals are the biggest drivers of the revenue growth during the quarter. And actually, the new area that we took over, we kind of took it over mid first quarter. So you are seeing quarter to quarter, at least, having that business in our revenue for the full quarter versus only half a quarter the quarter before.

I think, as most people know, our IBM business is primarily to one IBM division. It is the STG division, the server division, and that business is more driven by project. It is the number of projects they start up versus the number of projects that end. And it definitely was strong for us in the last year.

I think that they had reached a low point. They had a lot of projects that finished in the third quarter of 2006, and that impacted our revenue at that point in time. And I think that it just got back to a more normal number of projects, probably, in their mix. Now, I actually do not have a view into their projects. All that we know is the demand that we get from them. And so I really do not have a demand forecast going forward.

I really do not believe that we are going to run at a 19% increase for the next couple of quarters in our staffing business. I think it will drop down. I think it will definitely drop down below the solutions side of the business. But it could easily, based upon the number of people that we have added during the first six months of this year, be a double-digit gain even for the next couple of quarters.

Bill Sutherland - Boenning And Scattergood

Last question, any notable solution offerings being rolled out commercially or just in a good cycle outside of health care for you right now? Thanks.

James Boldt

We do have some other ones. We have one that I think has a tremendous potential. It is a voice recognition system that can be used in a warehouse so you no longer have to input numbers into a laser gun that is kind of reading the bar code, bar code gun or write things down manually. And it is a system that can be used in areas where there is a lot of ambient noise around you. So it is very good at hearing the person and communicating with the person via computer.

I personally think it is an amazing system, because I, when they were developing it. I was very concerned about the fact that in various areas of the country. You have different accents, which is a problem. And parts of the country, you have some workers that might speak Spanish that are using the system and that it would be very difficult for the system to pick up. Our guys did a fabulous job, I think, of programming it so that it would take different languages, different dialects. I actually got hooked up to it for an hour or two, and I could not fool it.

Even saying things like "Yeah" instead of "Yes." It correctly realized it. And then it repeats the answer back to you, so if it had picked me up incorrectly, I would have an opportunity to fix it or say "Si" instead of yes, still picked it up.

So that is one that is outside of the health care area that I think has some potential going forward, and we do have some opportunities in the pipeline for it going forward. But again we have it installed, by the way, at one very large customer, finishing off the installation for all of their warehouses, and I think we will have it operational, certainly by the end of the year in at least 200 of their warehouses.

But going forward, I think that we will be able to sell that. But it is another offering where we have very little experience with that particular offering so the focus going forward, it is weighted very low.

Bill Sutherland - Boenning & Scattergood Inc.

Is there a good productivity gain for the customer?

James Boldt

Huge. It is unbelievable, actually, the productivity gain. The productivity gain that I know one of the customers in the sales cycle indicated was actually a lot more than what we would have told him probably more conservative, but I think one of the customers I know that I got feedback from, he was thinking it was probably 5% to 10% of his labor cost.

Bill Sutherland - Boenning & Scattergood Inc.

Really?

James Boldt

Yes. Now, you have got to remember, different people are at different stages. Some people, now, are still doing everything manually, so the savings is better.

Bill Sutherland - Boenning & Scattergood Inc.

Interesting. Good work. Thanks, Jim.

James Boldt

Thank you.

Operator

Our next question will come from the line of Jason Schacht from Heartland Advisors. Please go ahead.

Jason Schacht - Heartland Advisors Inc.

Hey, good morning, guys.

James Boldt

How are you?

Brendan Harrington

Good morning.

Jason Schacht - Heartland Advisors Inc.

The first question for you guys. I think you had mentioned that the insurance fraud detection service might be ready to go commercial in the second half of this year. Does that mean that the testing of this service has been showing results as you have been expecting to see here?

James Boldt

Yes. The testing is gone very well, and we are actually we have a client in the payer space who is our first targeted client, and they were excited about it. They have actually been providing us with real data so that we can test it on live data.

Testing has gone very well, and that client will probably run up data of it, so actually, when I say "testing," we are using relatively small bits of information. We are running 100 of their claims through it at a time just to make sure that the system seems to be working correctly.

And in the third quarter of the year, where they are, we will most likely do a full-blown data, which is we will install it at the site and run it against all of their claims to see how it is handled, and we are anticipating by the fourth quarter of the year that it actually will be commercial, and we would like to sell it, obviously, to that payer. We will also put the sale force to go out and start calling on other payers and then providers.

Jason Schacht - Heartland Advisors Inc.

Okay. Excellent. And then lastly, how much is left on the stock repurchase authorization?

James Boldt

Brendan?

Brendan Harrington

Nine-hundred thousand shares, roughly, Jason.

Jason Schacht - Heartland Advisors Inc.

Oh, okay. Thanks, guys.

Operator

Your next question will come from the line of Rick D'Auteuil from Columbia Management. Please go ahead.

Rick D'auteuil - Columbia Management Advisors, LLC

Thank you. Just to follow up on a few of the things with the UK. I saw today that Cerner reported and took $178 million out of their backlog related to the Fujitsu termination. Is there any, I know you guys are not necessarily the best source of information, you guys are kind of hearing second-hand like we are, but what does that mean? Does that mean they will not be tied to the new provider or prime there? And how will that impact you guys if it is not Cerner in that region?

James Boldt

I am speculating on part of this, particularly as it applies to Cerner. But it is speculating having guys that have been in that environment. That the prime hit deals with the software vendors. So I would imagine now, Cerner has been in there. The prime is gone. They do not have to deal with an ex-vendor. No one knows who it is going to be.

If CSC picks it up, I could easily see them saying they are going to use iSOFT, right because that is what they are using in the three northern regions. If BT picks it up, they are still using Cerner in the central region, so I could see them using Cerner. And if it is somebody else, God only knows what they will use. But they do, if hospitals are already with the version running that is pretty good, I mean, it gets most maybe not everything the NHS was looking for, but it is functioning and the hospitals are operating under it et cetera.

In terms of us, we are absolutely vendor neutral. We actually started with Fujitsu when they were going to install IDX and we were advising them as to how to do the implementation. We actually did the original implementation plan for IDX in the Southern region.

When they switched to Cerner, we did have to change some of our people. We have experts in Cerner, IDX if you name a software package. We have experts in it. So we did have to switch the people because they had changed software vendors. But we really are not tied to any particular software, so I do not think it would impact us if they switched from IDX to another software.

Rick D'auteuil - Columbia Management Advisors, LLC

I see. As we look at your health care practice in the United States, it is obviously robust with a strong pipeline. Is there an opportunity, I know you are doing some of this over in the UK but given that these big, that the NHS’s program is sort of slow to kick off due to the software issues that you spoke to. Is there a one-off hospital opportunity? Can you just do regular business like you are doing here in the United States there while you are waiting for this big project to develop?

James Boldt

There is definitely opportunity. A year ago we opened an office in Germany. There was a client in Europe that purchased a German software company that had a software product for hospitals in Germany. And we have been working with them since then.

In most of the rest of Europe, it is a socialized medical system. So that there are vendors that are providing them with services and the governments have relationships with various IT services companies. I think the door of opportunity for us is and we truly believe this is going to happen when the rest of the countries in Europe begin to put in more sophisticated software, perhaps when they are running current.

There is some sophisticated software, but by and large, the software that is probably state of the art is more from the United States. So as they do that, and European competitors have no knowledge of that software, that is a big opportunity for us to go in and open up, a health care practice in one of the other countries.

I have heard a lot of speculation that the primes all believe that that is going to happen. I do not know why. One of the primes was convinced a couple of years ago that Portugal would be the next country. I think it would be difficult for us to predict that on a kind of hit-and-miss basis, to open and office in Portugal hoping that they make the change first because it is partially a financial decision. It is partially based upon when the UK looks like it is done.

You know, often the Europeans on various things including IDOL and ISO, et cetera. The British actually went through the pains of working it out, and when it was working fine, then Europe began with it. And I suspect that is what will happen here, too.

The UK project has not gone as well as anyone had hoped. It is costing a lot of money, a lot more money than it was originally anticipated. We believe that eventually they will get the system in, though. They will have the first countrywide electronic medical records system. It will be much more efficient, certainly, than the old legacy systems that they are throwing out. But I do not think you are going to see a lot of the other European countries start to move in that direction until they are sure that the UK has most of the bugs out of their system.

I could see them doing it, let us say that tomorrow, and this would kind of be maybe one of my wishes, but tomorrow Cerner gets the system so the NHS gets it to going they start to do all the hospitals in the Southern region. It would take them a couple of years, probably, to do that but once the software was available and the other European countries could see that it was working in the hospitals that they installed it in. I think you might see some of the other European countries step up and say, "Okay, we have got to begin our plan."

Rick D'auteuil - Columbia Management Advisors, LLC

This is once it starts. It is likely to be a five to ten-year kind of run over there?

James Boldt

Absolutely. Well, and it is in each country, too, because in the UK it probably will take them 10 years in total to do it. So when another county starts up, it is 10 years from today, and another country waits five years and starts up, another 10 years. So this would be, I think you are going to see people or countries in Europe working on these kinds of implementations for the next 20 to 30 years.

Rick D'auteuil - Columbia Management Advisors, LLC

Right. And then, like I said before, I missed the beginning of the call. Can you just go over just quickly the IBM staffing and solutions split on revenues?

James Boldt

Yes, I am going to ask Brendan to do that because it is in his part of the presentation.

Rick D'auteuil - Columbia Management Advisors, LLC

Okay, thank you.

Brendan Harrington

IBM was $29.3 million of revenue in the second quarter.

Rick D'auteuil - Columbia Management Advisors, LLC

Yes?

Brendan Harrington

That is 31.2% of revenue and last year in the second quarter was $23.6 million, and that was 29.5%.

Rick D'auteuil - Columbia Management Advisors, LLC

Okay. And staffing versus solutions?

Brendan Harrington

For the quarter, staffing was 66% and solutions 34%.

Rick D'auteuil - Columbia Management Advisors, LLC

Okay. Thank you very much.

James Boldt

Thanks, Rick.

Operator

There are no further questions at this time. Please continue.

James Boldt

Thank you. In closing, I would like to repeat that our strategy is to continue to increase CTG's solutions business, particularly in our health care vertical, by being opportunistic in growing our staffing business. To maintain the strong momentum in our solutions business, we are stepping up our sales and marketing activities while making additional investments in developing unique and innovative solutions to meet customer needs.

As the solutions part of our business grows. We look forward to further earnings growth and margin expansion.

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

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