Mastech Digital, Inc. (MHH) Q2 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Mastech Second Quarter 2015 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 Holdings, Inc. Thank you, Ms. Ford Lacey, you may begin.

Thank you, Adam. And welcome to Mastech's second quarter 2015 conference call. If you have not yet received a copy of our earnings announcement, it can be obtained from our Web site at www.mastech.com. With me on the call today are Kevin Horner, Mastech'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 believe, anticipate, 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 2014 Annual Report on Form 10-K, filed with the Securities and Exchange Commission and available on their Web site at www.sec.gov. 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 second quarter 2015 results.

Thanks Jen and good morning. First off, I'm pleased to inform everyone that we completed our acquisition of Hudson Global U.S. IT staffing business on June 15, 2015. Accordingly, Hudson IT's financial performance from the closing date through the end of second quarter are included in our overall Q2 2015 results. At the point of reference, Hudson IT revenues and net income included in our second quarter 2015 consolidated numbers approximated $1.3 million and $70,000 respectively. As you may have noticed, management has elected to provide 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 Web site at www.mastech.com Addressing our financial results, revenues for the second quarter of 2015 totaled $29.3 million compared to $27.7 million during the second quarter of 2014. Our revenue increase largely reflected the consolidation of Hudson IT. Exclusive of the 206 consultants-on-billing that we acquired with the acquisition, we modestly grew organically our COBs during the quarter. Additionally, our average bill rate for the second quarter of 2015 approximated $75 per hour or about 2% higher than in the corresponding quarter of 2014. Activity levels were generally flat from the previous quarter. However, we did improved our assignment win rate from last quarter which resulted in some COB growth in Q2. Gross profits for the second quarter of 2015 totaled $5.5 million or 18.8% of revenues compared to $5.1 million or 18.5% of revenues during the same period last year. Our gross profit dollar improvement reflected the additional revenue volumes from Hudson IT as well as a higher overall gross margin percentage. Our second quarter 2015 gross margin percentage rebounded nicely from the previous quarter 17.3% [TM] performance. As we mentioned on our last call, while we were largely unsuccessful in securing bill rate increases on existing assignments to cover increased benefit cost associated with the Affordable Care Act, we did however adjust our pricing module to recover these higher benefit cost on new assignment. What we're seeing in Q2 is higher is higher GM on new assignments replacing lower GM on assignments that ended during the quarter. GAAP net income for the second quarter of 2015 was $382,000 or $0.09 per diluted share, compared to $893,000 or $0.20 per diluted share in the second quarter of 2014. Non-GAAP net income for the second quarter of 2015 was $801,000 or $0.18 per diluted share, compared to $947,000 or $0.21 per diluted share in the corresponding quarter of 2014. Q2 SG&A expense items not included in the non-GAAP financial measures, net of tax benefits or one, amortization of acquired intangible assets, two, acquisition transaction cost and three, stock-based compensation. Addressing our financial position at June 30, 2015, we had $13.4 million of outstanding bank debt net of cash balances on hand. The increase in debt during the quarter reflected the funding of our $17 million cash purchase price for the Hudson IT business. Our borrowing availability at quarter end approximated $8.3 million. During the quarter, we expanded our credit facility with PNC Bank by $6 million, which is total $26 million facility in support of our acquisition and ongoing cash needs. We also extended the revolving loan component of the facility, which totaled $17 million through June 15, 2018 and the term loan component which total was $9 million through June 15, 2020. Principal repayment requirements under the term loan totaled $150,000 per month or $1.8 million annually over a five year period. The effective interest rate incurred in June 2015 on outstanding borrowings was slightly less than 3% per annum. I’ll now turn the call over to Kevin for his comments.

Thanks Jack and good morning all. First, I would like to comment on our second quarter 2015 performance and then I’ll give you some of my thoughts on our recently acquisition of Hudson IT. On the yield of a large scale change to our sales organization in late Q1, I'm feeling little bit positive about how the organization responded to that change. Additionally, I feel good about several key components of our operating performance in the quarter. First and foremost, we were able to achieve positive growth in a number of consultants-on-billing during the quarter. Number two, majority of our new consultants-on-billing came directly from the acquisition of Hudson IT, but just as importantly, we also have organic COB growth in the quarter as well. The key for me moving forward is our ability to minimize disruption for the business, as we integrated Hudson IT into Mastech and at the same time drive sales and recruitment performance from our legacy business. I’m also very pleased with our initiative to improve our gross margins by being more disciplined with respect to profit content on new assignments. Gross margins in the second quarter 2015 improved a full 150 basis points over the previous quarter. While Q1 is historically a lower GM quarter due to higher payroll tax expense, the extent of our increase was very satisfying to me. We made specific changes in pricing policies and pricing processes to ensure we recovered all the additional cost related ACA and we pushed our teams hard on securing better pricing on new deals and on extensions in recognition of the extremely tight candidate market. Additionally, we materially closed the year-over-year earnings gap that we experienced in the first quarter of 2015. Just to reinforce which act is already communicated. Our second quarter non-GAAP diluted earnings per share was $0.18, which was $0.03 below Q2 2014's non-GAAP equivalent. On a non-GAAP basis, diluted earnings per share in Q1 of 2015 were $0.10 below the corresponding 2014 period. Thus, we closed $0.07 of that $0.10 year-over-year gap in diluted earnings per share during the second quarter. My view, good progress made sequentially in Q2 2015 plus the platform to build on for the remainder of 2015. Now, let me take a minute to say a few words about our recent acquisition of Hudson IT. With the June 15th acquisition of Hudson IT, I’m excited about the opportunity this transaction brings to Mastech. First, the acquisition jump starts our retail channel revenues with Hudson's healthy portfolio of direct end user clients and their relationship selling model that caters to the market dynamics of a retail client. Secondly, it provides growth opportunities for our newly combined company by leveraging the strength of our offshore recruiting model directly into the Hudson retail business. Third, we get the benefit of learning the retail business in the relationship selling skills across the existing Mastech sales organization. And finally, the acquisition brings season talent to Mastech. Not only in the form of business leadership, but throughout the sales and recruitment organizations as well. I spent a lot of time over the last few months with the Hudson organization and experienced firsthand the talent that had committed employees, which I’m delighted to say are now an integral part of Mastech’s future. When I sum up the merits of the Hudson acquisition, I think about it in very simple terms. The combination of our businesses allows us to capitalize on our collective strength. It's a classic acquisition opportunity where one plus one can really equal more than two. At this time, I’d like to open it up for your question.

Thank you. We would now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of David Polonitza with AB Value Management. Please go ahead with your question.

Wanted ask a couple of questions, but you are only about a month into fully or six weeks and before to kind of closing the acquisition, but post acquisition even though its early on, have you been able to strengthen Hudson IT now that or begin the process of strengthening they're coming now that is in a 100% focus IT staffing environment?

Yes, so Dave I’ll answer that in a couple of different ways. Number one, the way you asked the question, I know you know the first answer is going to be, we’re really too early into the process to make anything, any comments that are definitive. Secondly, I would also say that to-date, I think we’ve seen some initial successes with the direct retail business that Hudson had with several clients which was more MSP oriented and fits directly with Mastech’s offshore recruiting model. So we have been able to begin to work some business that generally the Hudson team in their past structure was really unable to work. So too early to tell, but some of the immediate synergies that we saw in the deal are beginning to play themselves out.

All right. And I’ll just ask one more question here and step aside. But I’m sure it will take a while to fully integrate and kind of execute on this acquisition, but over the longer term horizon, if you are able to successfully leverage your centralized recruiting model in this retail environment, is there any reason why Mastech can’t kind of further supplement its platform with additional acquisitions along the line of Hudson IT?

Again, really early into the game, but I -- Dave, I think that that could -- that outcome could -- is clearly a possible outcome to where we could take this process, but I hesitate to create expectations before we’ve got a couple of quarters under our belt and we know what things begin to look like. Yes, so, I hate to give you such a non-committal response, but yes, theoretically, I think the answer to your question is yes. I just don’t -- I want to try to -- I don’t want to try to create expectations for anyone on the call or anyone who read the transcript later that we’re out looking for the next month because frankly speaking, we’re working really hard to get this one integrated and positioned inside of Mastech so that we capture all of the benefits that Hudson brings with it and don't create any disruption.

Thank you. [Operator Instructions] Our next question is a follow-up from David Polonitza with AB Value Management. Please go ahead with your follow up.

I think I might be the only one on the question area here, so let just ask one more. What changed or what were you able to do I think you alluded to a little bit? To bring back organic growth to what Mastech pre-acquisition and going forward, do you believe the pieces are in place generally over the long run to continue an organic growth trend for what Mastech was prior to the acquisition?

That's a good question, Dave. I think there's several things that have changed and continue to change right now. First and foremost, in some respect to staffing business is fairly simple. It's really all about activity on both sides of the organization. From a selling standpoint, it's about bringing new good requisitions for jobs into the organization, right. And that's from both current customers and new customers. And it's about activity on the recruiting side, right. It's about building relationships with potential candidates and submitting candidates to job requisition. It's in many respects, we are not doing brain surgery, right. It’s a pretty straight forward business. And activity has begun to increase as we sit here today and as we move forward, so I think we begin to get positioned to continue to grow organically, okay. And I think the thing that we have to be careful of is as you all know, anytime an acquisition happens, there is a massive amount of change that goes on frankly for the entirety of the organization, right, or the legacy portion of the organization goes through change and the new part of the organization goes through change. So the key for all of us is to ensure that we are not creating disruption that would slowdown any of that activity stuff that I talked about a minute ago. So that's where we are in the third quarter as we are really pushing hard to manage that change related to the organization and to not allow any disruption to the business [indiscernible].

And one question for Jack. In terms of the debt that the company has currently, is there anything or is there any covenants or reasons why if Mastech desires you can pay down the debt faster than currently scheduled because it looks like you have done a pretty decent job since the acquisition of paying some of that down already?

Yes. I think we have and again, at the end of the quarter on the revolver side, we had availability of $8.3 million, so our debt requirements on the term are 1.8 and obviously we are cash flowing positive. So I mean we feel pretty comfortable with the debt service requirements and we have covenants, we have negotiated covenants with PNC that gives us good room from a leverage standpoint and a fixed charge ratio, so we feel pretty good.

Hey Dave, if I can only add to that was I was with our representative from PNC on Monday. And frankly, he was a bit surprised that Jack's team was able to pay down as much as we had already paid down in five weeks that since we have done the acquisition.

Sure. No, that was a good number. I was surprised at that number in a good way.

Thank you. [Operator Instructions]. Ladies and gentlemen we have no further questions in the queue at this time. I would like to turn the floor back over to management for closing remarks.

Thank you. Given there are no further questions, I would like to thank everybody for joining the call today. We look forward to sharing our third quarter 2015 results with you in late October. Everyone have a great day.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.