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spk05: Greetings. Welcome to Mass Tech Digital Incorporated's second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Ford-Lacey, Manager of Legal Affairs for Mass Tech Digital. Thank you, Ms. Ford-Lacey. You may begin.
spk06: Thank you, Operator, and welcome to Mass Tech 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.masstechdigital.com. With me on the call today are Vivek Gupta, MassTech Digital's Chief Executive Officer, Jack Cronin, our Chief Financial Officer, and Ganesan 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.maztechdigital.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.
spk04: 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 analytic services segment contributed revenues of $11.3 million, which represented organic growth of 26% over last quarter's Q2 revenues. Sequentially, revenues increased by 11% from the previous quarter. In our IT staffing services segments, revenues totaled $50.9 million and represented a year-over-year increase of 14% compared to Q2 of 2021. Activity levels continued to remain elevated during the second quarter as we increased our billable consultant headcount by 4% during the current quarter. Gross profits in the second quarter of 2022 totaled $16.7 million, or 17% higher than in the corresponding quarter of 2021. Gross profits as a percent of revenue in Q2 2022 was 27% compared to 26.7% in the 2021 second quarter. Gap net income for Q2 2022 was $2.4 million or 20 cents per diluted share compared to $3.7 million or 31 cents 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 12 cent benefit in diluted earnings per share in the 2021 second quarter. Non-GAAP net income for Q2 2022 was $3.6 million or 30 cents per diluted share compared to $3.4 million or 29 cents 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 now turn the call over to Vivek for his comments.
spk03: 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 segments, performance and outlook, and then pass the mic over to Ganesan for his remarks on our data and analytics business segment. As you're all aware, there are a number of headwinds facing the US 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 contract 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 continue to expand in the second quarter 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 Ganesan for his remarks on our data analytics services segment.
spk01: Thank you, Vivek, and good morning, everyone. It's a pleasure to be here today talking to you on my second MassTech 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 expected 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? A, we have extended our core capabilities to offer advisory services around the data modernization, which includes current state assessment and the roadmap for transformation. This positions us at the higher end of the decision-making chain. B, we are building automations and templatized frameworks to accelerate our implementations and migrations as they are repeatable in nature. C, our post-implementation managed services offerings are designed to drive tech cost optimization, which will result in repeatable revenues for us. All of this will also improve our gross margins. The second area of focus, identifying and addressing the gaps in our technology and current talent. To support the advisory services of our go-to-market strategy, we introduced new roles at the leadership level and made a few changes to the existing leadership. We are also strengthening our solution architecture teams and building out cloud native capabilities. We are strengthening our business development team and expanding on our technical pre-sales capabilities. While we bring in this new talent, we will also be rationalizing our SG&A costs in the next couple of quarters. The third area of focus, robust execution methodology to support the go-to market. For each of the go-to-market services that I called out earlier, we have established a set of differentiators that include a four to eight-week assessment framework to develop roadmaps, reusable solutions to accelerate deployments and migrations, a differentiated product-oriented delivery model to drive speed and execution predictability. We are seeing early stage positive validation to our new value proposition from several Fortune enterprises in the US and in Canada where the nature of conversations with the clients have pivoted from I need you to implement this versus how can you help us solve this data problem for me. This has also positioned us to expand our footprint into other partner ecosystem with similar offerings such as IBM Data Solutions, without having to reinvent the wheel. All of the above, I believe, will have a very positive impact on our market brand positioning, deal sizes, and the tenure of our deals in future. With that summary, I thank you for your attention and turn the mic back to you, Vivek.
spk03: Thank you, Ganesan. Operator, this concludes our prepared remarks. We can take questions now.
spk05: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up the handset before pressing star keys. Our first question is from Lisa Thompson. with Sachs Investor Research. Please proceed. Hi, good morning.
spk07: So I was wondering if you could expand a little about what you did as far as training. Is this something that people got trained for three hours or three days or three weeks? And how much revenue would they have generated had they been billable consultants?
spk03: Hi, Lisa. This is Vivek here. I think this question is probably best answered by Ganesan because it pertains to the data analytics side. So, Ganesan, would you take that?
spk01: Sure. Hi, Lisa. Good morning. Good morning. So, as part of looking out into the second half, we hired people, and we hired 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 to first go through the training for the first couple of months and then they will become productive and they start to build on projects.
spk07: Okay, so there's going to be more of that in Q3?
spk01: More of training, you mean?
spk07: Yes, more new people and more training.
spk01: 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 deprived into billable engagements during the course of the couple of quarters. Hey, Lisa, Jack.
spk04: Let me answer the second half of the 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, you know, the estimate of, you know, the you know, the extra cost, the higher-end utilization was approximately $600,000. So if you assume a 50% margin when they're on projects, you know, that would have been about $1.2 million.
spk07: All right, great. So is that going to be the same sort of numbers for Q3?
spk04: Well, I mean, I think they're going to be on project in Q3. So, you know, depending on, you know, how many of your skill and training programs are on bench versus how many have went into a project status will depend on the additional revenue.
spk07: Okay, so probably not as good. So does any of that cost go into cost of revenue once they shift to billables?
spk04: Yeah, it's in cost of revenue while they're on training. It's in cost of revenue when they're on projects.
spk07: They're, you know, relegated to... So the increase in SG&A was other stuff?
spk08: Yeah.
spk07: And that should continue to, there was, was there anything unusual in this quarter or does that just continue to go up?
spk04: Well, in, in, in DNA, um, you know, there, RSG and a cost increased about 500,000. Um, w we said in our prepared remarks that we invested in cloud services. Um, that investment was, was people and. for the quarter, that was about $200,000. You know, Ganesan came on board in April. In the first quarter, we had no CEO cost. So, you know, that increased our SD&A in second quarter by another $200,000. And then we had travel and event cost, which was more of a one-time hit of $100,000. So that sort of makes up at a high level, the increase in SG&A cost in Q2 versus Q1.
spk07: Okay, so I guess it won't increase as much in Q3 and Q4 then.
spk04: You know, I'll let Ganesha answer that, but I can tell you this. We are rationalizing our SG&A expense in both of our segments. And, you know, I know for certain that we found some savings in the DNA, SG&A expense. So the question is, you know, what is Ganesan's hiring pattern to fulfill some of these gaps that he mentioned? And, you know, what's the timing of that? So I'll just defer to Ganesan on that one.
spk01: Yeah, thank you, Jack. As Jack mentioned, we are rationalizing our SG&A costs, which will have its impact in the next couple of quarters. But the SG&A costs as a percentage of revenue, you will begin to see it drop as we begin to trigger our rationalization activities.
spk07: Okay, that helps. I guess the last question is just a big picture question. I do see signs of recession and all these things, and I did see that job hiring listings are down, you know, sequentially all around, but 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?
spk03: I'll take that, Lisa. Right now, you know, the demand continues to be pretty high for ITC. 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 when 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 this impending missionary conditions. But demand hasn't come down. And that's why we were able to increase our billable headcount on the staffing side by as much as 4% during the quarter.
spk07: Okay, great. Thank you. That's all my questions.
spk03: Thanks, Lisa.
spk05: As a reminder, it is star 1 on your telephone keypad if you would like to ask a question. Our next question is from Tim Call with the Capital Management Corporation. Please proceed.
spk10: 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?
spk04: Jack, would you take that? Yeah, 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 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 individuals that left the company and they didn't exercise. So, you know, I don't want to, you know, detail you in accounting, but we had a extra tax expense because we got no gain, tax gain for those options. And so there was about a $75,000 discount additional hit on taxes because of that event. I can't say it's a one-time shot, but I would be surprised if our tax rate for the second half of the year didn't return to what we call normal, which is about 27, 27.5%. Thank you. And your cash or
spk10: 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 and being opportunistic there?
spk09: Vivek, you want me to answer that the best I can?
spk03: Actually, I don't think we are considering that at this point in time. That's the best answer I can give you, right?
spk10: Well, it would 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. Thank you.
spk04: Thank you, Tim.
spk05: Our next question is from Mark Rydrick with Sedoti. Please proceed.
spk03: Hi, good morning. Hi, Mark.
spk02: I just realized I just said good morning, but that's not appropriate for everyone, is it? So hello to everyone. 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 two. 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. Sure.
spk03: Okay, I'll pass these questions to Jack first.
spk09: Jack? Jack, you may be on mute.
spk04: I'm trying to look up the headcount. Our total headcount, I think, was at least in the The staffing and data analytics segment, it's about, correct me if I'm wrong, but I think it's about 2,400. Yeah. That includes subcontractors.
spk03: But our cash flow is,
spk04: 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 a 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, you know, 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 expenditures go down pretty dramatically.
spk02: 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 it went live July 1st?
spk04: True.
spk02: Okay. Okay. Great. And then I wanted to touch a little bit on the timing as far as maybe what you're seeing from from customers, particularly, it sounds as though certainly the activity continues to be solid up to this point, despite recessionary concerns and fears. I was wondering if you're seeing any particular pockets of strength, either by industry, vertical, geography, or if there's anything in particular amongst your customers that stands out either positively or negatively.
spk03: I think there's a little bit of heightened concern among the financial services organizations. That's one. Healthcare 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, I don't It's one continuum. It's not that one is extremely on this side or that side. It's there, and all of us are reading the same newspapers every day, and we are having conversations with customers. They're keeping their powder dry, but they really are not firing the gun as yet. And demand continues to be in pretty good shape for us. So we are making the most of demand being more than supply right now.
spk02: 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 that? maybe shifts of client demands that might have either a benefit or impact on margins, besides some of the training conversations that we've had up to this point.
spk03: So I can say about IT staffing, and I'll let Ganesan add on the data analytics side, but on the IT staffing side, You know, 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, you know, keep pace with that. One positive thing that's happened is the offshore staffing, which seems to be gaining a lot of traction. And a lot of customers are realizing that, you know, because of the cost arbitrage, you're able to do more for less. And as everybody's 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 the 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 opportunity to have better gross margins. And that is partly contributed to the record gross margins that we've been able to achieve in this court. And I wanna say something about the data analytics side.
spk01: 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 the 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, A, 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 a premium pricing, which will have a positive influence on the gross margins as well. So 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.
spk09: Excellent. Thank you very much. Thank you, Mark. Thank you.
spk05: As a reminder, it is star 1 on your telephone keypad. If you would like to ask a question, we will just pause for a brief moment to poll for any final questions. There are no more questions at this time. I would like to turn the conference back over to management for closing comments.
spk03: Thank you, Aubrey. 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.
spk05: Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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