Greetings. Welcome to Mastech Digital Inc. Second Quarter 2022 Earnings Call. [Operator Instructions] Please note this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Lacey, Manager of Legal Affairs for Mastech Digital. Thank you, Ms. Ford Lacey, you may begin.

Thank you, operator and welcome to Mastech Digital's second quarter 2022 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 Ganeshan Venkateshwaran, our Chief Executive Officer of the Data and Analytics Services 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. 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 2021 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 review of our second quarter 2022 results.

Thanks, Jen and good morning, everyone. Revenues for the second quarter of 2022 totaled $62.1 million, representing an organic increase of 16% over Q2 2021 revenues. This revenue performance was a new record for our company as both business segments showed sequential revenue improvement during the quarter. Our Data and Analytics Services segment contributed revenues of $11.3 million which represented organic growth of 26% over last quarter's Q2 revenues. Sequential revenues increased by 11% from the previous quarter. In our IT Staffing Services segment, revenue totaled $50.9 million and represented a year-over-year increase of 14% compared to Q2 of 2021. Activity levels continue to remain elevated during the second quarter as we increased our billable consultant headcount by 4% during the current quarter. Gross profit in the second quarter of 2022 totaled $16.7 million or 17% higher than in the corresponding quarter of 2021. Gross profit as a percent of revenue in Q2 2022 was 27% compared to 26.7% in the 2021 second quarter. GAAP net income for Q2 2022 was $2.4 million or $0.20 per diluted share compared to $3.7 million or $0.31 per diluted share in Q2 2021. It should be noted that a favorable revaluation of a contingent consideration liability was responsible for a $1.4 million benefit in net income and a $0.12 benefit in diluted earnings per share in the 2021 second quarter. Non-GAAP net income for Q2 2022 was $3.6 million or $0.30 per diluted share compared to $3.4 million or $0.29 per diluted share in Q2 2021. SG&A expense items not included in non-GAAP financial measures net of tax benefits are detailed in our second quarter 2022 earnings release which is available on our website. Note that net income in the second quarter of 2022 was impacted by several conscious decisions that we made for the benefit of the second half of 2022 and beyond. Specifically, we increased billable staff by 22% during the quarter in our Data and Analytics Services segment in anticipation of higher revenues during the second half of 2022. We invested in the cloud services space within our Data and Analytics Services segment. And we invested in offshore staffing within our IT Staffing Services segment. While these actions mitigated our net income during the second quarter of 2022, we believe that all of these actions will have a favorable impact in the second half of 2022 and beyond. Addressing our financial position, on June 30, 2022, we had outstanding bank debt net of cash balances on hand of $4.2 million. We had no borrowings under our revolving credit facility and we had cash availability of $36.8 million in addition to term loan capacity of $20 million under our credit facility's accordion feature. Given today's increasing interest rate environment and our elevated revolver availability, you'll likely see us early pay some of our term debt with excess cash during the balance of 2022. I'll now turn the call over to Vivek for his comments.

Good morning, everyone. Thank you, Jack, for the detailed financial review of our operating results for the second quarter of 2022. Let me start by saying that I'm very pleased with our Q2 2022 revenue performance in both of our business segments despite some impact on our earnings on account of investments made for the second half of 2022 and beyond. As I've stated more than once in the past calls, our main goal is to manage our businesses and our strategic objectives for the long term. I will now provide you with my comments related to our IT Staffing Services segment's performance and outlook and then pass the mic over to Ganeshan for his remarks on our Data and Analytics business segment. As you're all aware, there are a number of headwinds facing the U.S. and global economies. Inflation has skyrocketed, interest rates are increasing as central banks take actions aimed to reduce inflation, the labor market is continuing to be tight and the Ukraine-Russia conflict has added another element of uncertainty that the markets need to absorb. While many pundits and seasoned executives are predicting recessionary conditions in the immediate near term, so far, we have not seen any material signs of such in our clients' businesses. The IT Staffing Services segment delivered record revenues and record gross margins over the first two quarters of 2022. Revenues were strong in the second quarter of 2022 in both digital and mainstream technologies and also for both contracts staffing as well as permanent placements. Additionally, we are very encouraged with our offshore staffing service offering which has gained good traction and is one of the areas we have invested in to accelerate the pace of future growth. Gross margins continued to expand in the second quarter of 2022 to 23.3% in the IT Staffing segment. This is the second consecutive quarter of gross margin expansion and the first time that we have exceeded the 23% threshold since going public in 2008. Our operating profits also continue to grow despite our investments in offshore staffing and delivering compensation increases necessary to retain our talented workforce. Let me now turn the mic over to Ganeshan for his remarks on our Data and Analytics Services segment.

Thank you, Vivek and good morning, everyone. It's a pleasure to be here today talking to you on my second Mastech Digital earnings call. I'm actually taking this call today from our delivery center in Chennai, India. So good evening to all of our Indian friends on the call. As I near my fifth month with the company, I'm pleased to share that we are making progress on a number of fronts: one, formulating a new future state go-to-market strategy, leveraging on our current strengths; two, addressing the gaps in our technology and talent capabilities; and three, a robust execution methodology to support the go-to-market strategy. Let me start off by addressing our Q2 financial highlights and I will come back to the progress being made on the strategy side. In Q2 of 2022, we generated record revenues which were 26% higher than in Q2 of last year and 11% better than the previous quarter. Our bookings during the second quarter of 2022 approximated $10 million with one large deal closure slipping into Q3. Most of the orders secured in Q2 were close to the money bookings which means that they will be worked within the next 12-month period. As a result of the foregoing, we expect that the second half of the year's revenues to exceed our first half revenue performance. Coming to the strategic improvements that I mentioned earlier, we made progress on three fronts: the first, formulating a new future state go-to-market strategy. What do we do today? We have very strong implementation capabilities built around data and analytics and customer experience. While this expertise positions the company well with the stakeholders at the implementation level, it limits the opportunity to engage with the senior decision makers responsible for driving large data transformations. So what is new?…

Thank you, Ganeshan. Operator, this concludes our prepared remarks. We can take questions now.

[Operator Instructions] Our first question is from Lisa Thompson with Zacks Investor Research.

So, I was wondering if you could expand a little about what you did as far as training. Like is this something that people got trained for three hours or three days or three weeks? And how much revenue would they have generated have they been billable consultants?

I think this question is probably best answered by Ganeshan because it pertains to the data analytics side. So Ganeshan, will you take that?

Sure. So as part of looking out into the second half, we hired people and we had people both from lateral hires as well as freshers who were put through training. So as a part of the -- supporting the growth for the second half. So we have a plan for billing them but they have first to go through the training for the first couple of months and then they will become productive and start to bill on projects.

Okay. So there’s going to be more of that in Q3?

More of training, you mean?

Yes. More new people and more training.

Well, no, we inducted quite a few people to support the requirement for second half because when we are inducting freshers, they have to go through a training for at least two to three months and then they can be deployed into projects. So at this point of time, we don't expect to onboard any more freshers for the remainder of the year. But whoever we have had will be deployed into billable engagements during the course of the couple of quarters.

Lisa, let me answer the second half of your question. You said how much revenue was sort of missing or would have been increased if they would have been on -- if they were able to be on projects. And the estimate of the extra cost, the higher bench utilization was approximately $600,000. So if you assume a 50% margin when they're on projects, that would have been about $1.2 million.

All right, great. So is that going to be the same sort of numbers for Q3?

Well, I mean I think they're going to be on projects in Q3, so depending on how many are still in training programs or on bench versus how many have went into a project status will depend on the additional revenues.

Okay. So probably not as bad. So does any of that cost go into cost of revenue once they shift to billables?

Yes. It's in cost of revenue, while they're on training. It's in cost of revenue when they're on projects. They're relatively…

So the increase in SG&A was other stuff?

Yes.

And that should continue to – was there anything unusual in this quarter? Or does that just continue to go up?

Well, in D&A there -- our SG&A cost increased about $500,000. We said in our prepared remarks that we invested in cloud services. That investment was people. And for the quarter, that was about $200,000. Ganeshan came on board in April. In the first quarter, we had no CEO cost. So that increased our SG&A in second quarter by another $200,000. And then we've had travel and event costs which is more of a onetime hit of $100,000. So that sort of makes up at a high level, the increase in SG&A cost in Q2 versus Q1.

Okay. So, I guess it won’t increase as much in Q3 and Q4 then?

I'll let Ganeshan answer that but I can tell you this, we are rationalizing our SG&A expense in both of our segments. And I know for certain that we found some savings in the D&A -- SG&A expense. So the question is, what is Ganeshan's hiring pattern to fulfill some of these gaps that you mentioned and what's the timing of that. But so I'll just defer to Ganeshan on that one.

Yes. Thank you, Jack. As Jack mentioned, we are rationalizing our SG&A costs and which will have its impact in the next couple of quarters. But the SG&A cost as a percentage of revenue, okay, you will begin to see it drop as we begin to trigger our rationalization activities.

Okay, that helps. I guess the last question is just a big picture question. Do you see signs of recession in all these things? And I did see that job hiring listings are down sequentially all around. I assume that has nothing to do with IT. Are you having just as much time -- just as much trouble hiring IT people as before?

I'll take that, Lisa. Right now, the demand continues to be pretty high for IT people. And we haven't really seen much of a drop. I mean there is a little bit of seasonality which comes in around this time and people are on vacation, customers are on vacation. But we haven't seen that -- which doesn't mean that it's not coming or it's not going to happen. As I mentioned in my prepared remarks that when we are looking at each of our customer accounts closely, there is a lot of caution/concern about these impending discretionary conditions but demand hasn't come down. So we've -- and that's why we were able to increase our billable headcount on the staffing side by as much as 4% during the quarter.

[Operator Instructions] Our next question is from Tim Call with The Capital Management Corporation.

Congratulations on another strong quarter growth. Your tax rate increased greatly to around 32.5%. What should we expect as a tax rate going forward?

Jack, will you take that?

Yes. That's a good question. The increase in tax rate in Q2 was for two reasons. We looked at NOLs in our foreign subsidiaries and we made valuation allowances for those. And you make valuation allowances when it's more probable than not that you're not going to utilize those benefits. So that cost us about $100,000 of additional tax expense. And then, we had another circumstance with respect to the exercise of stock options. We had a couple of individuals that left the company and they didn't exercise. So I don't want to detail you in accounting but we had an after-tax expense because we got no gain -- tax gain for those options. And so there was about a $75,000 additional hit on taxes because of that event. I can't say it's a onetime shot but I would be surprised if our tax rate for the second half of the year did return to what we call normal which is about 27%, 27.5%.

And your cash or cash equivalents now exceed your long-term debt on the balance sheet. And so while you might pay that off early, have you given any thought at these price levels to offset stock option dilution by repurchasing some shares being opportunistic there?

Vivek, you want me to answer that the best I can?

Actually, I don't think we are considering that at this point in time. I mean, that's the best answer I can give you right.

Well, it will certainly be opportunistic and accretive to earnings per share and you have such a stellar balance sheet. So congratulations on the recurring growth and having such a clean balance sheet. You've done a great job managing the firm.

Our next question is from Marc Riddick with Sidoti.

I wanted to just – and forgive me, I think I lost connection with you for a couple of minutes there during Lisa’s question. So forgive me if I repeat one or 2. But I did want to double-check to see if you could bring us up to date as far as cash flow from operations and CapEx year-to-date and maybe a couple of housekeeping items around where headcount ended the quarter?

Okay. I'll pass these questions to Jack, first. Jack? Jack, you may be on mute.

I’m trying to look up the headcount. Our total head count, I think was at least in the Staffing and Data Analytics Segment, it’s about – Vivek, correct me if I’m wrong but I think it’s about 2,400.

Yes, [indiscernible] check that number.

That includes subcontractors. But our cash flow as far as our capital expenditures, et cetera, we had, for the first six months of 2022, we had operating cash flows of close to $2 million. Our capital expenditures were about $790,000 in CapEx. And the lion's share of that was we did an Oracle implementation on the Data and Analytics Services segment. That went live July 1. So those costs are pretty much completed. We're going to have some continued support but that's going to be an SG&A expense item that you'll see in the second half of the year that our capital expenditure has gone down pretty dramatically.

Okay. So I just want to make sure I got that right. So the Oracle implementation was completed during the second quarter and you said went live July 1?

True.

Okay, great. And then, I wanted to touch a little bit on the timing as far as maybe what you’re seeing from customers, particularly, it sounds as though certainly the activity continues to be solid up to this point given the – despite recessionary concerns and fears. I was wondering if you’re seeing any particular pockets of strength either by industry, protocol, geography or if there’s anything in particular amongst your customers that stands out, either positively or negatively?

I think there's a little bit of heightened concern among the financial services organizations. That's one. Health care seems to be the least impacted. Retail seems to be -- again, the concern seems to be there a lot more over there. And I would say somewhere in the middle is manufacturing. But I mean, it's one continuum. It's not that one is extremely on this side or that side. So it's there and all of us are reading the same newspapers every day and we are having conversations with customers. But I mean, they're keeping their powder dry but they really are not firing the gun as yet. And the demand continues to be in pretty good shape for us. So we are making the most of demand being more than supply right now.

Okay. And then are you seeing much in the way of change in revenue mix that would be a call out as far as gross margins or any thoughts around maybe shifts of client demands that might have either a benefit or impact on margins besides the – obviously beside some of the training conversations that we’ve had up to this point?

So I can say about IT staffing and I'll let Ganeshan add on the data analytics side. But on the IT staffing side, what should we say, the costs are going up, I mean what we pay to our consultants. But then the gross margins are kind of keep pace with that. One positive thing that happened is the offshore staffing which seems to be gaining a lot of traction. And a lot of customers are realizing that because of the cost arbitrage, they're able to do more for less. And as everybody is tightening their belts, that's a good strategy to do offshore staffing. Customers are already comfortable with remote staffing which is having people in other parts of United States. And this just seems to be the natural next step of doing people, having their staffing people in India rather than over here at a better price point but it also gives us opportunity to have better gross margins. And that has partly contributed to the record gross margins that we’ve been able to achieve in this quarter. And want to say something about the data analytics side?

Sure, Vivek. Again, I think on the data and analytics side, we are seeing a strong momentum. In fact, even while we see that there is a market trend from a recession standpoint, with some industries, we have been working with a Fortune 100 banking company and one of the top retail chains in the country. And the spend that we see with them when it comes to investing on their data transformation is significant. And as I speak about the shift in how we are going into the market, we are seeing clients beginning to talk to us about, hey, how can you help with our data transformation strategy. Now what that does is, it positions us on the upstream of decision-making. But when the conversion happens from a revenue standpoint, the downstream revenue becomes much more of -- the mix is much higher in quality of revenue. And from a pricing standpoint, again, it helps us to get to premium pricing which will have a positive influence on the gross margins as well. So, we will – we are likely to see a shift in terms of both the margin improvements as well as in terms of the quality of revenue that would be coming as we pivot towards the advisory services and the managed services type engagements.

[Operator Instructions] There are no more questions at this time. I would like to turn the conference back over to management for closing comments.

Thank you, operator. So 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 third quarter 2022 results with you in early November. Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.