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Edited Transcript of MHH earnings conference call or presentation 31-Oct-18 1:00pm GMT

Q3 2018 Mastech Digital Inc Earnings Call

PITTSBURGH Nov 3, 2018 (Thomson StreetEvents) -- Edited Transcript of Mastech Digital Inc earnings conference call or presentation Wednesday, October 31, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jennifer Ford Lacey

Mastech Digital, Inc. - Head of Legal & Admin

* John J. Cronin

Mastech Digital, Inc. - CFO & Corporate Secretary

* Vivek Gupta

Mastech Digital, Inc. - President, CEO & Director

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Presentation

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Operator [1]

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Greetings, and welcome to the Mastech Digital, Inc. Q3 Earnings Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Jen Lacey, Manager of Legal Affairs.

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Jennifer Ford Lacey, Mastech Digital, Inc. - Head of Legal & Admin [2]

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Thank you, operator, and welcome to Mastech Digital's Third Quarter 2018 Conference Call.

If you have not yet received a copy of our earnings announcement, it can be obtained from our website at www.mastechdigital.com.

With me on the call today are Vivek Gupta, Mastech Digital's Chief Executive Officer; and Jack Cronin, our Chief Financial Officer.

I would like to remind everyone that statements made during this call that are not historical facts are forward-looking statements. These forward-looking statements include our financial growth and liquidity projections; as well as statements about our plans, strategies, intentions and beliefs concerning our business, cash flows, costs and the markets in which we operate. Without limiting the foregoing, the words believes, anticipates, plans, expects; and similar expressions are intended to identify certain forward-looking statements. These statements are based on information currently available to us, and we assume no obligation to update these statements as circumstances change. There are risks and uncertainties that could cause actual events to differ materially from these forward-looking statements, including those listed in the company's 2017 annual report on Form 10-K filed with the Securities and Exchange Commission and available on its website at www.sec.gov.

Additionally, management has elected to provide certain non-GAAP financial measures to supplement our financial results presented on a GAAP basis. Specifically, we will provide non-GAAP net income and non-GAAP diluted earnings per share data, which we believe will provide greater transparency with respect to the key metrics used by management in operating our business. Reconciliations of these non-GAAP financial measures to their comparable GAAP measures are included in our earnings announcement, which can be obtained from our website at www.mastechdigital.com.

As a reminder, we will not be providing guidance during this call, nor will we provide guidance in any subsequent one-on-one meetings or calls.

I will now turn the call over to Jack for a review of our third quarter 2018 results.

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John J. Cronin, Mastech Digital, Inc. - CFO & Corporate Secretary [3]

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Thanks, Jen, and good morning, everyone.

Revenues for the third quarter of 2018 totaled $44.3 million and represented a 13% increase compared to $39.2 million in the third quarter of 2017.

Our data and analytics services segment, which was acquired on July 13, 2017, contributed $5.8 million of revenue during the third quarter of 2018, which was slightly below last quarter's revenue performance of $6.1 million as several projects start dates were pushed into Q4. Activity levels for this segment remained healthy in Q3, but like most project-based businesses, there is some inherent lumpiness in quarterly revenues due to the timing of project ends and project starts. Our IT staffing services segment had excellent year-over-year organic growth of 10% in the third quarter of 2018, as our billable consultant base was higher by 94 consultants over the last 12-month period. Demand for IT staffing services remained robust during the quarter, and we were able to expand our billable headcount by 11 consultants during the third quarter despite close to a 20% increase in assignment ends from Q3 2017 levels.

Gross profits for the third quarter of 2018 totaled $10.7 million and represented a 22% increase compared to $8.8 million in the same period last year. Our gross margin percentage for the third quarter of 2018 was 24.2% of revenues, up from 22.5% in the third quarter of 2017 and in line with the previous quarter's performance.

Our data and analytics services segment had gross margins of 44.5% of revenues, which was up nicely from 42.2% reported in the second quarter of 2018, a quarter that was impacted by a cost overrun on a completed fixed-price project. Our IT staffing services segment had third quarter gross margins of 21.1% compared to 20% in the 2017 third quarter. This 110 basis point improvement from the corresponding quarter last year reflected higher direct hire revenues; and higher margins on new assignments, largely those deploying digital technology skill sets.

GAAP net income for the third quarter of 2018 was $1.6 million or $0.14 per diluted share compared to a loss of $136,000 or $0.01 per diluted share in the third quarter of 2017. Non-GAAP net income for Q3 2018 was $2.2 million or $0.20 per diluted share compared to $1.4 million or $0.13 per diluted share in the corresponding quarter of 2017.

Third quarter SG&A expense items not included in non-GAAP financial measures, net of tax benefits, were, one, the amortization of acquired intangible assets; two, stock-based compensation; and three, in the 2017 period, acquisition transaction expenses, and are detailed in our Q3 earnings release which is available on our website. I should note that all earnings per share numbers have been recast for our 2-for-1 stock split announced in July 2018.

Addressing our financial position. At September 30, 2018, we had approximately $40 million of outstanding bank debt net of cash balances on hand, and our borrowing availability was $6.5 million under our existing revolver credit line.

Our accounts receivable balance is of high quality, as evidenced by our historical low levels of bad debt expense. However, disruptions and hiccups related to our sales-to-cash conversion processes due to the implementation of our new cloud-based ERP system definitely had an impact on our cash flows and accordingly our debt balances in Q3 of 2018. We're hopeful that these teething issues will be behind us by the end of Q4.

I now turn the call over to Vivek for his comments.

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Vivek Gupta, Mastech Digital, Inc. - President, CEO & Director [4]

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Good morning, everyone. Thank you, Jack, for the detailed financial review of third quarter 2018, clearly another good quarter at Mastech Digital despite some headwinds in both of our business segments.

Our growth story continued in the third quarter with revenue and gross profit growths of 13% and 22%, respectively. Gross margins also expanded in both of our business segments during the quarter when compared to the same quarter in the previous year. What I'm particularly happy with is the company delivered $0.20 non-GAAP earnings per share. Having said that and as Jack mentioned, we did experience some teething pain related to our cloud ERP implementation. However, these transitory issues are outweighed by the long-term benefits of operating our business on a state-of-the-art technology platform.

Let me now share with you my thoughts on the performance of our 2 business segments during the third quarter of 2018.

First, data and analytics services. We continued to see good pipeline demand for our D&A services, and we secured a number of projects with some exciting new logos during the quarter. However, several project wins were delayed until fourth quarter, which had a negative impact on the quarter's revenue levels. As I've stated in our previous calls, our data and analytics services business has inherent lumpiness due to it being mainly project based. And therefore, some fluctuation should be expected in revenues from quarter to quarter. I continue to be extremely confident in all aspects of this business.

Turning to our IT staffing services. We are firing on all cylinders in this segment. As Jack mentioned, organic revenues grew 10% in Q3 on a year-over-year basis. We are adding nicely to our billable consultant base. Gross margins have improved by 110 basis points from Q3 of 2017, and our operating cost structure has stabilized from investments made in 2017. While the productivity continues to be at an all-time high, an increased level of project ends and elevated vacation downtime impacted growth in both billable consultant headcount as well as revenues in Q3 of 2018. The tight labor market, particularly in the technology sector, is impacting assignment ends due to consultant resignations. We believe that sustained higher productivity from our producers will help mitigate the impact of this market reality. We also feel that the level of project ends during the quarter was abnormally high notwithstanding the tight labor market.

In summary, I continue to be excited about the prospects and future that lie ahead for Mastech Digital.

And we'll now open the session for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And there are no questions at this time, and I'd like to turn the call back to management.

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Vivek Gupta, Mastech Digital, Inc. - President, CEO & Director [2]

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Thank you. If there are no questions, I would like to thank you for joining our call today, and we look forward to sharing our fourth quarter 2018 results with you in early February.

Thank you.

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Operator [3]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.