Mastech Digital, Inc. (AMEX:MHH) Q3 2023 Earnings Call Transcript

Mastech Digital, Inc. (AMEX:MHH) Q3 2023 Earnings Call Transcript November 5, 2023

Operator: Greetings, and welcome to the Mastech Digital Q3 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Ford Lacey, Manager of Legal Affairs for Mastech Digital. Thank you, Ms. Lacey Ford. You may begin.

Jennifer Ford Lacey: Thank you, operator, and welcome to Mastech Digital's Third Quarter 2023 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; Jack Cronin, our Chief Financial Officer; and Michael Fleishman, our Chief Executive Officer of the company's Data and Analytics Services business segment. 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 the business, cash flows, costs and the markets in which we operate.

A businesswoman in the modern cityscape of an IT metropolis, symbolizing the company's pioneering spirit in the world of information technology.

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 2022 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 the 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 2023 results.

Jack Cronin: Thanks, Jen, and good morning, everyone. Our third quarter 2023 financial results continued to be impacted by economic uncertainty and our current and prospective clients responses to these challenging market conditions. Third quarter revenues totaled $47.8 million, representing a 24% year-over-year revenue decline. Both of our business segments contributed to this decline. Our Data and Analytics Services segment reported revenues of $8 million in Q3 2023 compared to $10.1 million in 2022 third quarter as customers continued to reduce resources on existing projects and order bookings experienced delays in signing new projects during the quarter. Q3 2023 revenues in our IT Staffing Services segment totaled $39.8 million compared to $53.1 million in the third quarter of 2022.

Demand continued to be soft in Q3 2023 as our global consultants declined during the quarter, albeit at a slower rate than experienced in the previous two quarters. Consolidated gross profit as a percent of revenues in Q3 2023 improved to 26.3% compared to 25.8% in the third quarter of 2022, resulting in our best gross profit performance over the last five quarters. In our Data and Analytics Services segment, gross profit as a percent of revenue improved significantly over Q3 of 2022. This improvement reflected higher utilization in the 2023 quarter and the impact of a $300,000 project cost overrun in the third quarter of 2022. In our IT Staffing Services segment, gross margins were down 80 basis points compared to the third quarter of 2022, largely due to year-over-year reductions in our direct hire revenues.

Generally, contract gross margins held up well when compared to last year despite challenging market conditions. GAAP net income for Q3 2023 was $125,000 or $0.01 per diluted share compared to $2.4 million or $0.20 per diluted share in Q3 2022. Non-GAAP net income for the third quarter of 2023 was $1.3 million or $0.11 per diluted share compared to $4 million or $0.33 per diluted share in the third quarter of 2022. Our third quarter non-GAAP 2023 net income and earnings per diluted share results were in line with last quarter's numbers despite lower revenues. SG&A expense items not included in Q3 2023 non-GAAP financial measures, net of tax benefits or stock-based compensation and the amortization of acquired intangible assets. A description of non-GAAP items for all periods presented is included in our third quarter 2023 earnings release, which is available on our website.

Addressing our financial position, on September 30, 2023, we had approximately $16 million of cash balances on hand, no bank debt outstanding and borrowing availability of $25 million under our revolving credit facility. Our days sales outstanding measurement was 55 days at quarter-end, which is much better than our targeted range of 60 to 65 days and one day better than our DSO measurement a quarter ago. I'll now turn the call over to Vivek for his comments.

Vivek Gupta: Thank you, Jack. Good morning, everyone. The same macroeconomic headwinds that we experienced during the first half of 2023 continued to impact our client spending dynamics in the third quarter, resulting in a lower demand for our services. Our IT staffing services segment continued to see clients taking a more conservative approach with respect to spending on new projects and new initiatives. Our Data and Analytics Services segment was also impacted by clients reducing resources on existing projects and delaying project starts on new orders. Michael will discuss our order booking performance and prospects in his prepared remarks. While recent growth in domestic GDP is a positive data point for the US economy, the recent conflict in the Middle East is yet another geopolitical event that has created additional uncertainty in the global economy.

We are continuing to aggressively pursue steps to reduce our SG&A expenses as a mitigating action in these uncertain economic conditions. Our operating expenses totaled $12.6 million in the third quarter of 2023, which is a reduction of approximately $800,000 from the previous quarter. Let me reiterate that we believe that our company remains on a sound financial footing with a solid balance sheet, access to $25 million of capital under our credit facility and long-standing relationships with several top companies in the world. I'm confident that both of our businesses will strongly recover when the market conditions improve. Let me now turn the call over to Michael for his comments related to our Data and Analytics Services segment. Over to you, Michael.

Michael Fleishman: Thanks, Vivek, and good morning, everybody. As Vivek mentioned, uncertain economic conditions are clearly impacting our clients' spending behavior as we continue to see clients reducing resources on existing projects. While activity levels in our pipeline of opportunities remained elevated during the third quarter, project award delays resulted in a disappointing bookings performance of $5.1 million in the third quarter as clients and prospects implemented tighter expense controls. There is a bit of good news, however, since two sizable projects that were scheduled to commence in Q3 2023 as well as various additional smaller Q3 projects, all of which total approximately $3.5 million have been awarded in October of 2023, this past October.

Behind our financial numbers, we believe we are making good progress in transforming our organization from a master data management firm to a much broader data and analytics company with capabilities around the entire suite of data modernization services. In this regard, our pipeline of opportunities continues to broaden with data modernization assignments constituting a higher percentage of our 2023 bookings and pipeline versus master data management when compared year-over-year. Also, in the third quarter of 2023, we continued to expand our gross margins to 45.8%, which increased 620 basis points over Q3 2022 gross margins. We believe a predictable utilization rate is a key component to our gross margin improvement in 2023 and is a point of emphasis by our delivery teams.

This emphasis, coupled with tighter execution processes on our delivery are giving rise to increase margins year-over-year. In closing, I would like to say that I agree 100% with Vivek's belief that our financial foundation is strong and that both of our business segments are poised for growth once more clarity in the global economy occurs. I'll now turn the call back over to Vivek.

Vivek Gupta: Thank you, Michael. Operator, this concludes our prepared remarks. We can take questions now.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Lisa Thompson with Zacks Investment Research. Please proceed with your question.

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