Good morning ladies and gentlemen, and thank you for standing by. Welcome to Mastech Digital Incorporated Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. It is now my pleasure to introduce your host Jennifer Ford Lacey, Manager of Legal Affairs for Mastech Digital Incorporated. Thank you, Ms. Ford Lacey. You may begin.

Thank you operator and welcome to Mastech Digital’s third quarter 2020 conference call. If you have not yet received a copy of your 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 Paul Burton, our Chief Executive of our Data and Analytics 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 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 2019 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 2020 results.

Thank you operator and welcome to Mastech Digital’s third quarter 2020 conference call. If you have not yet received a copy of your 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 Paul Burton, our Chief Executive of our Data and Analytics 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 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 2019 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 2020 results.

Thanks Jen, and good morning everyone. The COVID-19 pandemic and the resulting economic downturn continue to impact our revenue performance in third quarter 2020 albeit to a lesser extent when compared to the previous two quarters. Hence economic uncertainty will continue in Q4 and probably into 2021 our financial performance will likely be impacted in some fashion during these challenging times. During this period, we'll continue to manage our businesses for the long-term, but we'll be mindful of the short-term decisions that are necessary to protect our bottom line results. With that backdrop, revenues for the third quarter of 2020 totaled $47.4 million and represented a 4% decline compared to $49.5 million in the third quarter of 2019. Sequentially, revenues were essentially flat compared to the previous quarter, which we view as a positive in today's environment. Our Data and Analytics Services segment contributed $7.2 million of revenue during Q3, 2020, which exceeded last year's Q3 revenue results by more than 1% and more importantly increased our previous quarter's revenue performance by 6%. Activity levels in this segment held up relatively well, despite numerous projects being forced to Q4 and some likely into the first half of 2021. Notwithstanding these near term revenue challenges, our pipeline of opportunities continued to remain strong as we wait for clients to release new assignments. Year-over-year revenue from our IT Staffing Services segment was down only 5% in Q3, 2020 as we saw traction for our new remote staffing offering, MAS-REMOTE and less early assignment ends during the quarter. Despite low activity levels, we were successful in achieving a positive net growth in our global consultant base during Q3 after significant global consultant headcount declined in the previous two quarters. Gross profits for the third quarter of 2020 increased to $13.1 million, compared to…

Good morning, everyone. Thank you, Jack for the detailed financial review of our operating results for the third quarter of 2020. After I make my comments on the quarter, I will turn the call over to Paul for his comments and views on our recent acquisition of AmberLeaf Partners, Inc. First, let me share my comments on the quarter. At the outset, I'd like to say that I'm very pleased with the performance of both of our business segments in Q3 against the backdrop of uncertain economic conditions globally. During the quarter, we continued to operate with the mindset of navigating today's challenges from a position of relative strength. A term I've used before in our previous two earnings calls. Our third quarter 2020 financial results clearly show the benefit of this approach. To summarize, revenue in both segments improved in terms of sequential performance. Our Data and Analytics segment achieved 6% revenue growth compared to our Q2 results, and our IT Staffing segment reported nearly flat sequential revenues after two quarters of decline. As Jack stated and I want to reiterate, our billing consultant base expanded in the third quarter after declines in Q1 and Q2, which I view as one of the most positive [services] from a third quarter performance. Gross margins continue to perform incredibly well, setting a new record of 27.6% during the quarter, as both business segments expanded gross margins yet again. Despite year-over-year revenue declines of 4% in Q3, 2020, our gross profit dollars were 6% higher than in the corresponding quarter of 2019. SG&A reductions also contributed to our bottom line results in Q3, and are reflective of our focused and decisive austerity measures that not only considered the short-term impact on our financial results, but also considered the long-term consequences of such…

Good morning. It's a pleasure to speak with you today about the Q3 performance of Mastech InfoTrellis, our Data and Analytics business and AmberLeaf, the latest addition to our family. We're pleased with Mastech InfoTrellis's performance in Q3 especially given market conditions. We continue to see stability and some growth in our core business in North America. Clients continue to renew and extend our contracts, as well as award us new business. North America however, is not representative of the world at large. In EMEA, we are seeing significant delays and contract awards for deals I would characterize as well qualified. I would say much the same about APAC. We are not losing deals in these two geographies, rather deal cycles are simply being extended beyond what I would recognize as a normal deal cycle in a pre-COVID world. Given the strength of our deal pipelines in these two geographies, I expect improvement as businesses adapt their operations to the current macro environment, and additional improvement when the impact of COVID mitigates. In Q3, we completed due diligence on AmberLeaf Partners with an acquisition closing on October 1st. AmberLeaf is a data and analytics business that focuses on providing consulting technology, implementation and managed services to the sales, marketing and customer service functions. Importantly, these functions are sold and marketed to buying centers that are different than the historical information technology buying centers that Mastech InfoTrellis has historically targeted. AmberLeaf extends our reach more broadly and deeply across our clients business, opening new buying centers and providing new opportunity for data engineering and analytics services. This expansion is in line with our vision of providing our clients with a comprehensive view of their operating and competitive environments, unrestricted by functional boundaries or data silos. We believe that we are approaching this area with a methodology and a theoretical foundation that is distinguishable from our peers as we strive to become the leader in continuous enterprise learning. AmberLeaf also positions us to move up the value chain to provide industry leading analytics services around prominent issue areas that confound our clients like entity resolution, and 360 degree view of the client. We've had significant clients approaches for help in these areas. And this reflects the fundamental transition we're making from being an implementer of technology to an architect of capabilities that use novel technologies, and frankly, our thought leadership to deliver client solutions. I believe the future of Mastech InfoTrellis is very bright. COVID will pass and with the capabilities we have acquired and built organically, we're very well positioned for the future. Thank you for your attention. And I'll now hand the call back to Vivek.

Thanks, Paul. I've now opened the session for your questions.

[Operator Instructions] Our first question is from Josh Vogel with Sidoti.

I think my first one would be for Vivek. Maybe if you could talk a little bit about the - what was behind the strong margin performance in the IT Staffing business. You've talked about MAS-REMOTE, but I was just wondering, achieving that all time high gross margin was that due to leveraging MAS-REMOTE or there are other things at play like better bill pay spreads and is it sustainable going forward?

Okay, Josh, always a pleasure to talk to you. The MAS-REMOTE has definitely played an important role in the improvement of the gross margins, but that's not the only one, but staying with MAS-REMOTE, I mean the amount of traction that we have seen in the last four months now has been very heartening and encouraging. And we have found that as a result of that placing people, finding the right talent. But in other locations, we've been able to get our customers to give us better pricing and in the process we got better gross margins. But gross margins have also been on account of the austerity measures that we took earlier on in the first quarter itself. And the pandemic hit us, and we took some pretty decisive and quick actions. And those actions have continued right through the second of the third quarter as well. So they've also helped us. There has been pricing pressure and we've been able to manage that fairly well. And it's really a mix of all that plus something that we have been doing for the last few quarters now, or maybe a couple of years, which is our emphasis on digital staffing or staffing of digital technology resources. And that has also been slowly helping us over a period of time. And so it's really a mix of a bunch of things that we had put into place, which have sort of culminated in where we have reached. Can we sustain this going forward? Yes, it's very hard to make that prediction, because we still not out of the pandemic yet. And there is only so much you can do in terms of austerity measures. And it's only so much you can push the rates up. So we'll have to wait and see how that pans out over the next few quarters. Let me ask Jack, if is there anything I've missed in this answer.

No, Vivek. I think you said it well.

I appreciate the insights there. And I'm not sure if you disclose this. But when we look at the revenue level last quarter, I'm just curious how much was done through MAS-REMOTE?

Okay. So while I don't have the exact revenue number, but I can give you an indication of the number of starts that we did, more than half hour starts. And but it starts I mean, start in on billing for staffing services, more than half have been MAS-REMOTE. Now, does that mean that they are all entirely new, and they weren't there if MAS-REMOTE wasn't there? No, a lot of the on-premise kind of staffing has also moved towards MAS-REMOTE, because it's also the need of the hour. Right now everybody is working from home. It is a very well timed offering. And it was embraced very well by the organization, our own internal sales, marketing, delivery. And the customers have been pretty warm to the offering. So it has, I mean, it gives you an indication of how the change is happening in terms of starts. If you want exact revenues, that calculation, I'm sure can be done by Jack and can be shared later.

And maybe a couple for Paul here. You talked about some project delays in EMEA and APAC, I'm just curious why you think you're not seeing that as much in North America, maybe just give a little bit more of an overview of why those regions are facing some pressure versus or in the dialogue versus what you're seeing here?

Yes, for specifically in Singapore, I can tell you that the entire country is locked down, they're not allowing people into the country, there is no inner regional travel, it's locked down for business essential services only. As Americans, I don't believe we can even fly to Singapore, and much, much the rest of Southeast Asia and North Asia actually is the same Japan for example. So they are just locked down much more tightly than we are in APAC. As a result there is no business travel, it's harder to build relationships and open up new accounts and to close big deals. Also, because of the lockdown in the corresponding impact on business spending, there is a reduction in business spending in that region as well. Similarly, in Europe, I believe that London, for example, just went into a tier three lockdown, and different parts of Europe are locked down more tightly as there's apparently a rebound in COVID. So different parts of the world are handling the COVID pandemic, much differently than the U.S. is and I think it's reflecting in deal cycles and business transactions. I don't think it's any more complicated than that. And as I said in my remarks, as COVID mitigates, which will at some point, we expect all of this to turn around, because we have a very well qualified pipeline in both Asia and Europe.

I appreciate the insight there. And maybe she has been to AmberLeaf seemed like a good deal for you. I was wondering if you could share how their business has held up through the pandemic. I know, I think - it was not 8-K at about 11 million in revenue last year. And I'm just curious how that looked through the first three quarters of this year?

Yes, they're slightly ahead for the first three quarters, fourth quarter is an open book right now. But we are not anticipating any deterioration I believe revenues 2020 versus 2019.

And you mentioned that clients come to you asking for help with certain projects or assignments. And as we think about the D&A platform, are there any other capabilities or services that you think you would like to add, whether it's with internally or inorganic? And could you talk to that, and maybe kind of parlay that into acquisition pipeline?

Well, the name of the game in Data and Analytics is to take all of the client's information and be able to aggregate it into one repository, and then leverage that data for different purposes. That's, you know companies and businesses have been trying to do this for a year, but they're in many cases hamstrung by their architectures. In other words, they're hamstrung by the fact that all of their data is siloed. And so the capabilities that make sense, which we are involved with and in some cases, developing those capabilities organically is this idea of being able to resolve different data sources and bring them together into a coherent data set across functional domains. So integrating marketing data with customer data with operational data, with logistics data, with open source data and when you start bringing all these different sources of data together into a coherent data set to inform you about a particular entity, a person, a product, a vendor, a place, it becomes very powerful. And I can tell you that many of our larger customers are all on this journey of trying to pull this off. And so, those are the types of discussions we're involved in. We have specific capabilities that we've put together and pursued in those areas. And I think there's a tremendous future there.

And just one last one for Jack, I noticed the increase in the payroll tax liability in the quarter. I was wondering if you anticipate anymore in Q4 and maybe just talk to any other potential government stimulus plans that you plan to participate or expect in Q4?

No additional stimulus plans, but with respect to the payroll tax deferment we’ll probably enjoy another million or so of deferment in Q4. So that liability will increase, closer to $4.5 million, $5 million by the time it closes out at the end of December.

Our next question is from Lisa Thompson with Zacks Investment Research.

So another incredible quarter and I'm in awe of how you spending still is down and even down sequentially. You said that it was down, I think it was down $1.1 million and then you spent $800,000 on Data and Analytics business. And now with the adding on AmberLeaf where do you feel that expenses are going to go next quarter, just to understand what the base is?

Jack, would you like to take that question?

Sure, sure I mean, their SG&A spend is likely to be in the $500,000, $600,000 range in a quarter. So that sort of the level that we're looking at.

Okay, and are they the same gross margins as you are in Data and Analytics?

The margins right now are lower than our core business margins. They're around 35% right now. Paul has visions to move those margins up rapidly. But - it's definitely going to have an impact on our D&A segment at least in the short-term from a margin perspective.

Okay. And just to understand this austerity thing, every time I hear you say that I'm afraid that you've got all this pent-up spending, that's going to get released someday. And that expenses will pop back up to make up for what you didn't spend? Is that something you serious or are you now down at a level where a lot of this is going to be permanent?

I think eventually, we're going to have to, you know start to spend in both of our segments, I think in D&A, Paul has been, reluctant to make some expenses or expenditures that he'd like to make. And eventually as market conditions improved, he's going to make those expenditures. In staffing yes, we have cut costs pretty dramatically helped our bottom line results. But eventually, as things pick up, and COVID goes away. We are going to start spending more in SG&A. So, I don't want to say it's just going to pop up back to normal levels, but there's going to be a trend going forward that we're going to be spending.

Okay. And you haven't started to release yet in Q4, right?

No, we really haven't started to release depending on activity levels improving and our headcount improving. Some of the expenses that just occur, because they're volume related type expenses, hopefully will increase in Q4, because that would be a good thing, because our activity levels will be moving upward. But I don't see a dramatic increase in Q4 SG&A.

Okay. And do you think business is picking up in North America enough to start growing revenues sequentially, even without AmberLeaf?

Paul, you want to take that from a D&A perspective?

Yes, so I'm very sanguine about the future of Data and Analytics, particularly in North America. As I mentioned in my comments a minute ago, North America has not seen the same, is not seeing the same slowdown that Europe and APAC are seeing. Because the - just quite frankly, the pandemic has been handled differently here by our political leaders. So North America is strong right now. As I mentioned in my remarks, we're seeing extended contracts, new business renewals, albeit at a slightly slower pace, but it continues to come to us. So, I'm very confident about North America and I would expect our North America to continue to improve going forward.

Okay. And the rest of the business?

On the staffing side, maybe the activity levels Lisa are picking up. They aren't quite at the same level as they were before the pandemic. But they are at least encouraging signs in the last few weeks that the activity levels are much better than they were what we saw in the previous six months. But again, we are not out of the pandemic, we are still in it we don't know how things will spike and what's going to be happening down the line. So it's hard to predict whether you know, this kind of an uptick will sustain itself, but we are seeing encouraging signs there.

Our next question is from Brian Kinstlinger with Alliance Global Partners.

Over the trailing six - over the last trailing six months your IT staffing business is held up relatively well compared to the pressure in the industry that you know others are experiencing and it's only down modestly. Especially when you hire - when you take into account the highlighted pricing pressure, you know, we've seen other staffing firms report more significant year-over-year revenue drop. So do you think this is a result of your customer base, because it's something you're doing differently than your peers? Or maybe you can provide some factors of how you've been able to hold that revenue lines pretty level, while that pricing pressure and reduce industry demand is going on?

Actually, this again goes back Brian to the earlier question, I think Josh had asked, but the points are probably similar. It's been a bunch of things, it's really not one single item which has helped us but we've been able to kind of manage the pricing pressure quite well because of again you said that as well, that type of customer base that we have. And it's really the quality of skills that we are working with. And as I said a little earlier, we do focus a lot on digital technologies, and digital technologies command a different kind of pricing and a different kind of margins I mean for that matter. So our team stayed focused on those and then this MAS-REMOTE actually helped us tremendously in sort of backfilling what would have been otherwise lost as on-premise kind of requirements. So it's actually a bunch of different actions that we took. And it's really from that word, the beginning in March, when the pandemic hit us, we started looking at both sides of it. One is the austerity measures of cutting costs and pushing out or postponing discretionary spend, by the same time we started looking at how can we now prop up our top line, and gross margin as much as possible. And in the MAS-REMOTE was an outcome of the innovation, the brainstorming that we did, and we saw the market going in a certain directions, and came out with the right product at the right time for the market. So it's really not one or two things. It's actually a bunch of different things. It's also the last thing I should add is it's a cultural change in the organization that happened when we went from on-premise, as we call it on-premise staffing to the buying or remote staffing world. But our sales, marketing, delivery, all of them embraced this new offering so well and they've been able to convince customers, influence their thinking, their planning. So it's a bunch of different things that actually lead to that. And once again, I'll pause here and ask Jack, if I missed something in this fairly large answer.

The only other thing that I would add with that is, one of the advantages of focusing on digital technologies is a higher bill rate. And in 2020 versus 2019, our bill rate has increased approximately 2%, actually a little well over 2%. So that has some positive impact on our overall revenues.

And then, Jack, you talked about higher utilization in staffing was one factor in the improved gross margins. What was staffing utilization, compared to where it's been the historical average? And then as the market turns, and we see stronger demand do you expect utilization to be brought back down to historical averages?

That's an interesting question. You know, I can say that from the utilization that we can sort of control our bench levels, we've been very rigid on reducing bench as much as possible. So in a normal environment, would we be more willing to keep people in bank probably, but it's a controllable decision by us. The wild card is, consultants taking PTO. And maybe this is COVID-related, but they have an opportunity to work, and they work, and they're differing PTO and how that's going to play out in the future, Brian, I have no idea.

Right. The last question I have, you mentioned the gross margin of AmberLeaf. I'm curious why it's much lower than InfoTrellis price, is it some sort of mix and what are the levers you can pull over the next 6, 12, 18 months that can improve those margins?

I can provide Paul on that. Yes, he can take.

I can talk about the AmberLeaf gross margin. So there is really four things that go into gross margin, there is consultant utilization, there is pricing itself, there is pass-through of travel expenses which is typically a zero percent gross margin, and then finally, there is contractors, which are typically passed through at a lower gross margin than an [WTO employee]. And so if you want to improve gross margin, you've got to affect those four triggers. And so with respect to AmberLeaf, which is a fairly small company relative to us just bringing them on and integrating them into our practices with respect to consulting utilization, pricing, we expect AmberLeaf pricing to improve and to converge on what we're seeing at InfoTrellis. And with the less use of contractors, it's inevitable. Inevitable might be a strong word, but it seems likely that their gross margins will converge into what we're seeing at InfoTrellis. And that's my expectation. So I'm not worried about AmberLeaf gross margins at this point in time there will be as they get blended together with InfoTrellis going forward into future quarters, obviously, will average ours down a little bit. But in the medium to long-term, I expect gross margins to converge about where they are right now.

[Operator Instructions] We have a follow-up question from Lisa Thompson.

Hi, I just had two quick ones. First off, Vivek do you have the number of consultants you have for the quarter?

Yes, we ended Q3 with 1037. That's in the staffing business.

Okay, right, right. And then just when you say you focus on digital technologies, compared to competitors, can you just expand on what do you mean by that, and what they're doing that you're not doing or what you're doing that they're not doing?

So Lisa this is something which we saw it shift happening around the time I joined the organization in 2016 that customers were increasingly asking for digital technologies. And the mainstream or legacy technologies were their requirements were shrinking. So we define what is digital for us. And it is standard data analytics. It was cloud, mobility, social, and artificial intelligence. And then we created Centers of Excellence within the organization where people who understood technologies and they were training the recruiters, the salespeople to be able to talk that language, understand what the customers are trying to do in that space. And over a period of time, we've been able to slowly increase the amount of revenues that we are getting from the digital technologies. In fact, towards the end of 2016, changed the name of the company from Mastech to Mastech Digital, which was a message to the outside world that we are going to be increasingly focusing on digital technologies. And even the acquisition or our foray into data analytics was really an outcome of that our push towards digital technologies. Now fast forward till today, almost half in fact exactly half of our revenues are coming from digital technology. And we were barely 18% of our business coming from digital technologies in 2016. So that's the improvement we've been able to bring. And as Jack said, that has given us the advantage of being able to improve our bill rate, our gross margins because clearly the demand for these digital technologies is greater, and it does command better pricing in the market. I don't know if that answers your question Lisa.

Yes, that does. Could you just like explain or define what goes on in the non-digital part like what's legacy? What was things people be doing?

Oh, basically everything which I said, which is not a part of that. So there is mainframe technologies, there could be a lot of ERPs, which are out there, the traditional CRMs, which are the non-cloud based kind of. So it's actually a lot of the legacy technologies which were out there - are still there because customers especially financial institutions, they've invested heavily in large or application, which were built around the older technologies, and they still need people to keep running them and maintaining them. But increasingly, they're building newer technologies, which are the basically the digital side much more. So there is a transition, which is happening over a period of time.

Okay. So they're kind of maintaining the old stuff where the other group is building the new stuff.

Thought of - yes. You know very simple, yes, that’s correct.

Perfect. Trying to be simple. Okay, thank you so much.

[Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back to management for closing remarks.

Thank you, Operator. If there are no further questions, I would like to thank you all for joining our call today. Stay safe and we look forward to sharing our fourth quarter and full year 2020 results with you in early February. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.