Mastech Digital, Inc. (MHH) Q3 2021 Earnings Report, Transcript and Summary

00:02 Greetings, and welcome to Mastech Digital Inc. Q3 twenty twenty one 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 Inc. Thank you Ms. Ford Lacey, you may begin.

00:33 Thank you, operator, and welcome to Mastech Digital's third quarter twenty twenty one 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; Paul Burton, Mastech InfoTrellis Chief Executive; and Jack Cronin, our Chief Financial Officer. 01:07 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. 01:35 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. 01:54 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 twenty twenty annual report on Form ten K filed with the Securities and Exchange Commission and available on its website at www.sec.gov. 02:13 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. 02:37 Reconciliations of these non-GAAP financial 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. 02:57 I will now turn the call over to Jack for a review of our third quarter twenty twenty one results.

03:04 Thanks, Jennie and good morning everyone. I’m pleased to tell you that third quarter twenty twenty one was one of our best financial performances since going public in two thousand and eight. As Paul Burton is fond of saying, we floated a number of BOATs during the quarter. BOATs being the acronym for best of all time. 03:27 Our third quarter twenty twenty one revenue revenues totaled a record fifty nine point five million dollars compared to forty seven point four million dollars in the third quarter of twenty twenty. This revenue increase represented twenty six percent year over year growth and twenty one percent organic growth when adjusting for the AmberLeaf acquisition, which occurred in October twenty twenty. 03:57 Additionally, this revenue performance was eleven percent higher sequentially than our results in Q2 twenty twenty one. Our Data and Analytics Services segment contributed record revenues of ten point five million dollars, compared to seven point two million dollars in the third quarter of twenty twenty. 04:20 After adjusting for AmberLeaf, our organic revenue growth on a year over year basis was approximately nineteen percent. Sequentially, revenues were eighteen percent higher than our previous quarter. 04:37 During Q3, we continue to see further evidence that the D&A market is in recovery mode. Order bookings were strong for the third consecutive quarter at ten million dollars, despite several major orders pushing to Q4. And our pipeline of opportunities continues to show much promise. 05:00 Still some uncertainty remains in the marketplace with the existence of the delta variant that we feel very good about the microeconomic conditions in the D&A space and are very, very optimistic about twenty twenty two. In our IT staffing services segment, we reported record revenues of forty nine million dollars, an increase of twenty two percent on a year over year basis and ten percent sequentially higher than Q2 twenty twenty one. 05:37 Activity levels continued to remain strong in the third quarter of twenty twenty one. And we grew our global consultant base by approximately five percent. Through the first nine months of twenty twenty one, we increased our global consultant base by twenty four percent that's an annual record and we still have three months to ago. 06:03 Gross profit in the third quarter of twenty twenty one totaled a record sixteen point six million dollars, compared to thirteen point one million dollars in the third quarter of twenty twenty, an increase of twenty seven percent. Gross margins as a percent of revenue in the twenty twenty one third quarter was twenty seven point nine percent compared to twenty seven point six percent in the twenty twenty third quarter. 06:34 GAAP net income for Q3 of twenty twenty one was three point four million dollars or zero point two eight dollars per diluted share compared to three million dollars or zero point two five dollars per diluted share in Q3 twenty twenty. Our non-GAAP net income for the third quarter of twenty twenty one was four point six million dollars or zero point three eight dollars per diluted share compared to three point eight million dollars or zero point three two dollars per diluted share in the third quarter of twenty twenty. 07:08 SG&A expense item not included in Q3 non-GAAP financial measures, net of cash benefits for the amortization of acquired intangible assets and stock based compensation and are detailed in our Q3 earnings release, which is available on our website. 07:29 Addressing our financial position, at September thirty twenty twenty one, we had cash balances on hand of five point four million dollars, outstanding bank debt of approximately fourteen million dollars, no borrowings under our revolving credit facility and cash availability of thirty million dollars. 07:53 Our days sales outstanding measurement increased by three days during the quarter from sixty three days at June thirty, twenty twenty one. This increase was largely due to two major clients paying us in early October versus on contract terms of September thirty. So, while this hurt our days sales outstanding measurement, the impact on our business was really in [all events] [ph]. 08:22 I’ll now turn the call over to Vivek for his comments.

08:28 Good morning, everyone. Thank you, Jack for the detailed financial review of our operating results for the third quarter of twenty twenty one. It is great to host these calls when you're sitting on record financial results. It's even better when you believe you are well positioned to surpass these, if you continue to execute your plan and that's exactly how I feel today. 08:52 Both of our business segments had an outstanding quarter. The Data and Analytics Services segment is experiencing much better market conditions than during the first half of the year, and I'm optimistic that more improvement is in the cards for twenty twenty two. 09:10 Order bookings during the first nine months of twenty twenty one were approximately forty million dollars and our pipeline of opportunities continues to improve. Paul will provide more color on the D&A segment in a few minutes. 09:25 As for our IT staffing services segment, it continues to hit the ball out of the park with twenty two percent year over year growth, gross margin expansion, and record non-GAAP operating profits in Q3 of twenty twenty one. 09:41 Our MAS-REMOTE service offering continues to gain traction and we have successfully expanded this offering to include India based offshore consultants. We believe customers who have become comfortable with the work from home model are ready today to enjoy material cost savings by embracing offshore staffing. 10:01 We continue to think this concept have both merit and great potential. With respect to our financial position, we believe we have a solid balance sheet with being high quality accounts receivables, which means a strong and predictable cash flow conversion metric. 10:19 In addition to reliable internal cash generation, we currently have access to capital, sufficient not only to support our existing businesses, but also to capitalize on acquisition opportunities that we believe can better position us in our respective markets. As we have said many times and also demonstrated in the past, in organic growth is a key element of our overall growth strategy for the future. 10:45 I'll now turn the call over to Paul for his comments on our Data and Analytics services segment.

10:52 Thank you, Vivek. Good morning, everyone. Q3 represented a discontinuous jump in performance for Data and Analytics. Ten point five million in revenue was one point five million dollars higher than the previous quarter, and in my opinion represents a bending of the growth curve. 11:08 As I said in my previous earnings calls this year, bookings are [indiscernible] of revenue to come. The strong bookings in the first half set up our Q3 very nicely and that can be seen with the results we report today. Although Q3 bookings were below this year's Q1 and Q2 they were still strong, and when you consider that two large deals slipped into Q4 because of their complexity, we remain bullish on revenue over the short to medium term. 11:36 Generally, we are finding good acceptance of our Data and Analytics offerings in the market, especially when they are positioned in the context of our emerging cloud capabilities. This has allowed us to continue to sign a high value of long term contracts with our clients, as well as augment existing long term contracts. 11:53 We believe that our capabilities in advisory, cloud native application development and managed services along with Data and Analytics all in the cloud. These things present a strong market opportunity for us and our focus on capture it to not be stronger. We are striking at the heart of our client’s digital transformation dilemma and in so doing helping them deliver real impact to their business. 12:16 Overall, I'm quite happy as D&A continues to become a proportionately larger percentage of overall Mastech revenue and especially operating profit. We expect this not only to continue, but to accelerate us our investments in SG and A and new offerings continue to bear fruit. 12:32 Operator, this concludes our prepared remarks. We can now take questions.

12:37 [Operator Instructions] Our first question is from Josh Vogel with Sidoti & Company. Please proceed with your question.

13:09 Thank you. Good morning, guys. Thanks for taking my questions. Certainly, strong quarterly results, good work there. I have a couple of questions for you here. I guess I wanted to start with Paul. We're seeing consistent improvement in margins at D&A. Is this sustainable even as you ramp new engagements and I know that you were – we were in the mid-fifties last year, how should we be thinking about the margin profile of D&A going forward, even in an environment where you’re winning new business at a healthy clip?

13:47 Yeah, I don't expect erosion in margin going forward. I expect margins to be – gross margins to be out where they're at of some slight improvement. The reason I say that is, if we goose up gross margins fifty five percent, sixty percent in that area, which is possible by the way, then it prevents us from investing the cash back in the business that we need for growth. So, I'd be quite happy with gross margins in the fifty percent to fifty two percent range and pushing the excess back into the business for growth. 14:18 So, I would expect gross margins to say pretty much where they're at, maybe improve a little bit, but our objective is not to jump margins out of the park. Our objective is supply the cash back into the business for growth.

14:30 Yes, understood. And when we think about the recent wins earlier this year in Q3, I guess, first, those two of the projects are engaged subject to Q4 was that just the uncertainty around the Delta variance that resulted in that? And then, also when we about the build in the business and the business one year to today, is it fair to assume we see a nice a sequential step up in D&A revenue in the Q4 similar to what we saw in Q3?

15:03 With respect to the two projects that are slipping in or did slip into Q4, didn't have anything to do with the Delta. It was purely a matter that they were [Technical Difficulty] additional approvals with clients, which is a good thing to have as a high quality up that you might guess. 15:23 In terms of Q4 revenue, I certainly can't predict or put out a guidance on Q4 revenue, but I don't see a problem with Q4 right now.

15:33 Okay. A question for Jack, if we think about SG and A going forward, you've noted that you're wired for scale now, we saw that last quarter, but what level of spend do you need to have on a quarterly basis to sustain the growth you see ahead? And understanding that you may need to add headcount in certain from time to time, where do you think those investments would be focused?

15:59 Josh, I think in the short-term, the spend that we have in SG and A in Q3 is about the spend that we're going to have in Q4. We may be up a couple hundred thousand or down a couple hundred thousand, but it's not going to be a material difference. 16:23 I really don't even want to comment on twenty twenty two. We go through, we did go with budgeting process. We look at where we want to spend additional SG and A dollars if any need. So, that's sort of where I think we're going to hit into Q4 and more to come on twenty twenty two.

16:48 Okay. And while I have you, can you just talk a little bit about your total liquidity? You mentioned thirty million in available cash, how much of that is dry powder to explore M and A activity? And then also just some comments around the costs of your debt, what average interest rate you have today? Thanks.

17:07 Sure. We have thirty million dollars under our revolving credit facility. It's unused. I mean all of that is in play for acquisitions. We include relationship with our lead bank PNC, should we do an acquisition? I would suspect that we go to PNC and try to get an increase in not only the revolver, but also an increase in the term loan. 17:41 As far as our interest expense, our term loan is priced a little bit higher than our revolver or revolver is collateralized with receivable so the risk profiles are a bit lower, but right now our term loan is priced at three point five percent interest rate or revolver is a little bit lower than that three percent. So, today, since we're not borrowing under the revolver, our average cost of debt, pre-cash is by three point five percent.

18:19 That's helpful. Thank you. And if I could sneak in one more for Vivek. Are we getting to a point in the staffing cycle where we might start to see the recovery revert back to more historically [seen patterns] [ph] for example, where we tend to speak Q4 step down a little in Q3 or is there still enough pent out bend out there and structural shifts in the marketplace and people, as you mentioned being more comfortable in breathing remote work and certainly offshore, should we expect to see this build in Q4 at least for this year?

18:57 Josh, the demand of course, continues to be really good at this moment. But we are all getting signals from our customers that the seasonal reduction which happens towards the end of December on account of Christmas holidays some forced furloughs and numerous engagements, which just logically come to an end on the thirty first of December because the purchase orders run out or whatever the planning process is. 19:28 So that seasonality will still show up in Q4, but on the other hand, the demand still continues to be pretty good and as I've said before in my last call as well, the market is hard. So, even the ends are on a rise. So, in Q3 for instance, we had record ends, and of course, we also had record starts. That's how we were able to show the five percent growth, but that kind of situation continues to be there.

20:03 That's helpful. Thank you for taking my questions.

20:06 Thank you, Josh.

20:09 And our next question is from Lisa Thompson with Zacks Investment Research. Please proceed with your question.

20:16 Good morning.

20:17 Good morning, Lisa.

20:20 As I’m excited to hear what's going on over there because of this entire new dystopian world we live in where everybody's quitting or getting fired. And I thought the stock staffing business must be having unusual times. Are things accelerating as far as demand or are people shifting to more remote? And do you think this is going to keep going on? Because I mean, I just keep reading more and more crazy stories about people getting fired from their jobs and then hired back at staffing agencies into the same place. So, can you talk about that? And do you see this continuing for some while?

21:07 Sure, Lisa. I mean, the market as I mentioned earlier is hard. The demand seems to be pretty good and we are capitalizing on that. We are prioritizing the ones, the opportunities that we convert. The opportunities that can give us better margins. The opportunities that can give us better volume. So, that continues to be there. 21:31 We haven't seen evidence of that what you just mentioned, which is people getting fired and then they are being hired back as, you know through contracts, that we haven't really seen, but we haven't seen any change from what we were seeing in the last quarter. The demand continues to be high. 21:50 Yes, the consultants have the better opportunities today in terms of maybe getting better pay or being closer to the family or doing more exciting projects, etcetera. And that is the thing that entices them to leave and move on. But then at the same time, we are able to attract them as well on almost the same kind of attribute. So, it seems to be going well. We don't see any immediate signs of this tapering off.

22:25 And do you feel that you can hire as many consultants in Q4 as you did this quarter?

22:32 See that, seasonally the demand in Q4 is a little less than Q3. Q2 and Q3 are usually the best quarters. So, we are going to see a bit of that and the demand will come down, but I'm not saying it's a huge kind of falling off the cliff. It's just a little, tapers down a little bit and then the end start picking up. And as we say that net growth is an equation, starts minus ends is equal to net growth. 22:58 So with ends picking up, I don't know whether we'll be able to get that kind of net growth as we've had before we could even have a, you know remain flat or maybe it could even be a tiny dip, but that's seasonally what is expected and we expect this Q4 to be no different.

23:16 Okay. And can you talk a little bit more about remote workers based in India? How is that different than plain old MAS-REMOTE? Is it just that they're living in India? How does that work?

23:29 MAS-REMOTE basically is a concept that people can be anywhere in the world. I mean, initially, MAS-REMOTE was launched as a concept where consultants could be anywhere else in the United States, but you can easily extend that to global level, and that's what has happened. 23:47 So there is, our customers often times have requirements of skills, which are pretty complex. We call them purple squirrels. They are very hard to find over here in the U.S. at times. And we are able to find them out of this large pool of IT resources that India has. So, by opening MAS-REMOTE up to the Indian consultants, we've been able to bring those high quality purple squirrels to the customers. 24:19 And the cost arbitrage also works to the customers advantage, you know they are able to get someone little cheaper and they're able to save some money and get the right kind of skills and we are finding that this concept, they were, a lot of customers were not amenable to this couple of quarters ago, but with the world becoming comfortable with working from anywhere, that is beginning to become attractive and we are having numerous conversations with customers on those lines.

24:51 That sounds great. And I love that term, the purple squirrels. Alright. I think everything sounds, oh, just one last question about the two deals that you said slipped into Q4, Paul did those close?

25:09 Not yet. Again, the reason they flipped in the Q4 was they required additional approval because of [Technical Difficulty] size, and we're expecting them to close in Q4.

25:32 Okay, great. Thank you. That's all my question.

25:38 And our next question is from Tim Call with The Capital Management Corporation. Please proceed with your question.

25:46 Thank you. Just to follow on one of the biggest fears in the last six months was disruption because of the pandemic affecting foreign workers even though they were working from their homes. I guess, with the pandemic subsiding a little bit in places like India, do you think that's no longer a concern and do you find because many of them working from their homes? And hindsight wasn't a huge uncertainty or do you think because of the pandemic is subsiding in those geographic regions, it's not as big of an uncertainty today?

26:33 Thank you for your question, Tim. Actually, we were prepared for the worst. We were sort of expecting maybe the third way to come to India as well. And after the second way, we actually once again went back into shutting down our offices and asking everyone to work from home. And even today although the virus issue seems to be on the vain at the moment, our teams in both our locations where we have these centers in India, Chennai and in Noida, near Delhi, everyone is still working from home. 27:16 And we are encouraged by the outlook on the corona front and we are seeing signs of companies coming back and having their employees come back to the offices. So, we are going to be looking at that. In any case, we don't expect even in the long term and we have made that announcement to our employees last year itself, we don't expect everybody to be coming back full time to the offices. 27:46 We are probably going to be twenty percent of the people working in the office’s twenty percent of the time, and that will be sort of the future way of working. So, I think it's not completely over at the moment, but the signs are very positive at the moment.

28:05 With some businesses requiring vaccinated workers is a get around of that to have remote workers or contract workers who are not salaried on board, but higher through an agency to fill those jobs that are left open with people who may or may not be vaccinated?

28:34 You know, Tim, when we look at our entire customer base, I mean customers have different positions on this situation. And they could well be, you know one of the reasons why they are more, you know they're happy with the remote working because they're able to address this issue or maybe avoid this issue in the process, but clearly it's, every customer has a different position on this.

29:06 Another fear over the last six months was that as you staffed up for business returning that expenses were going to be front loaded and hopefully revenues would eventually follow with margin recovery, do we see most of that fear behind us as you've staffed up and revenue has started growing? And so, we should not fear large margin degradation because of that staffing up that occurred earlier this year?

29:46 I'm going to ask Jack to comment on this. Jack, will you take this question?

29:51 Sure. Tim, I think the ramp up in G and A is pretty much behind us. Like I said, Q4 we may be a minor amount higher, but the [Technical Difficulty] of the sturdy measures that we did in twenty twenty one are pretty much baked into our Q3 results. So, I don't think you're going to see an additional big spike in SG and A going forward.

30:31 Well, congratulations on a strong quarter and strong outlook and all of your hard work paying off. That's terrific. Thank you.

30:41 Thanks Tim.

30:47 Your next question is from Josh Vogel with Sidoti & Company. Please proceed with your question.

30:53 Yes, thank you. I just had a follow-up. I was looking at your ten Q filing last quarter and saw revenue from India basically double sequentially and is was more than all of twenty twenty combined. So, I was just curious, how much revenue came from India in Q3 and what percent of MAS-REMOTE volume is current? I know it's still early days, but what percent of that volume is currently being done with India based consultants?

31:23 Josh, I'm going to ask a Jack to respond to the first one. But the second one about how much of the MAS-REMOTE volume is coming from India, that's actually negligible at the moment in the larger scheme of things because it's only just picking up. We've had probably one percent of our work forces right now working out of India. So, it's not very significant, but the larger question about what is the India revenue, Jack, can you address that?

32:01 We do have work done in our delivery center on the Data and Analytics side and you're right, our revenues are much higher in twenty twenty one than twenty twenty. In third quarter, I would say we're going to be probably a little under a million in third quarter from more out of India. And if you look at twenty twenty that's a healthy increase.

32:36 Great. And it seems like an exciting opportunity to leverage the talent pool over there. And I understand that it brings lower pay rates that you can basically market to clients with lower bill rates, but is there an opportunity for you to capture greater spread over time by utilizing overseas to consultants?

33:00 Yes, Josh. I mean that's an exciting possibility and we are looking at ways of fueling the engine more. So, I think more is going to come over the next few quarters, but we definitely want to add fuel to this fire, which is burning quite nicely now.

33:28 Great. Thank you again.

33:36 Okay. [Operator Instructions] And it appears that we have reached the end of the question and answer session. I'll now turn the floor back over to Vivek Gupta for closing remarks.

33:58 Thank you, operator. If there are no further questions, I'd like to thank you all for joining our call today. And we look forward to sharing our fourth quarter twenty twenty one results with you in early February. Thank you.

34:13 And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.