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MHH: Mastech Digital Reports Q4 2020 and Looks Forward to Normal Growth in 2021

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By Lisa Thompson

NYSE:MHH

READ THE FULL MHH RESEARCH REPORT

Mastech (NYSE:MHH) closed out the year slightly weaker than expected as shutdowns due to the pandemic lingered longer than expected. In March, we had expected this virus to have run its course by now and for business to rebound, but the “two weeks” devolved to nine months and counting. As the company is heavily dependent on the economic cycle, we believe investors would find it a play on global recovery. The company has done remarkably well during the pandemic, as its services are both critical as well as easily done remotely. Customers have learned to adapt and function under new (albeit temporary) rules. In these late stages, customers have finally stopped delaying decisions and pressed on despite shutdowns. Mastech has seen deals that should have closed as early as Q3 2020 finally close in Q1 2021, as they had been put off long enough. While countries still haven’t opened for international travel, business should pick up nonetheless in the interim.

Q4 resulted in revenues of $48.7 million down 3% from $50.3 million in Q4 2019. Gross and operating margins improved resulting in a non-GAAP earnings increase of 19%. In Q4 AmberLeaf contributed $2.1 million in revenues at lower than average corporate gross margins. Ex-AmberLeaf (which was acquired on October 1, revenues were down 7%. Management expects revenues to pick up in Q1 2021 sequentially and believe IT Staffing revenues hit bottom in Q4 2020.

Gross margin was 26.8% versus 24.5% a year ago and 27.6% in Q3 2020, as AmberLeaf brought down margins; gross margin dollars increased 2.4%. Margins are expected to improve going forward as synergies and cost cutting measures at AmberLeaf take full effect.

Looking at the two segments reveals, IT staffing decreased 7.9% to $39.8 million and was 82% of revenues. It had 1,068 billable consultants compared to 1,167 the year before and 1,037 in the third quarter of 2020. Gross margin for this segment improved to 22.2% from 21.4% last year and 22.6% in Q3 2020. Data and analytics grew 25% to $8.9 million versus $7.2 million last year or 17% of sales as AmberLeaf added $2.1 million by itself. Without AmberLeaf, this segment’s revenues would have been down 4.8%. Gross margins also declined in this segment to 46.7% from 49.1% a year ago mostly due to AmberLeaf. Gross margin dollars for this segment increased 20.7%.

SG&A increased sequentially $1.1 million sequentially, with $650,000 of it being from one-time expenses from acquiring AmberLeaf. AmberLeaf added expenses. SG&A was $10.0 million compared to $$9.3 million a year ago.

Operating income decreased 10.7% to $3.1 million versus $3.5 million and margin declined to 6.4% from 6.9% a year ago with the one-time expense included; it was $3.7 million without.

Other expense declined to $196,000 compared to $327,000 a year ago as the company paid off higher interest rate debt.

For the quarter the tax rate was 30%, higher than the 25% we expected. Stock option exercises affect the rate.

GAAP net income was $2.0 million, down 11% from a year ago. On a non-GAAP basis it was $3.4 million up 19%.

GAAP EPS was $0.17 diluted compared to $0.20 a year ago and $0.32 in Q3 2020. On a non-GAAP basis it was $0.29 versus $0.26. The fully diluted share count was 12.0 million up 8.7%.

Balance Sheet

The company ended the quarter with $7.7 million in cash, a quick ratio of 1.9xs, working capital of $19.2 million, and debt of $17.4 million. It increased debt $8.8 million since last quarter to buy AmberLeaf, but was still down from a year ago when it had $25.3 million in debt. It paid $9.5 million in cash to buy AmberLeaf on October 1st.

Estimates

For 2021 we are lowering revenues to $212 million, but again tweaking EPS estimates up to a non-GAAP $1.34 per share based on continued lower spending and higher gross margins due to product mix. We had expected a bigger pick up in business by now. Shutdowns and locked downs, either fully or partially remain in much of the world, though fortunately many companies have decided life must go on and proceeded with new projects. The InfoTrellis business is starting new projects and won some contracts delayed from as far back as Q3 last year. Since the beginning of 2021, it closed two deals in Asia and one deal in Europe totally well over $1 million. It is also working to bring AmberLeaf’s gross margin from its current 35% up to InfoTrellis’ 55% by better consultant utilization, higher prices, and reducing its use of outside consultants.

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