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spk00: Ladies and gentlemen, thank you for standing by and welcome to CTG's fourth quarter 2020 results conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will conduct a question and answer session and instructions will be given at that time. As a reminder, today's conference call is being recorded for replay purposes. I would now like to turn the conference call over to CTG's Executive Vice President and Chief Financial Officer, John Laubacher. Please go ahead.
spk04: Thank you, Kara. Good morning, everyone. Joining me on today's call is Philippe Day, TTG's President and Chief Executive Officer. Before we begin, I want to remind listeners that statements made during the course of this conference call state the company's or management's intentions, hopes, beliefs, expectations, and predictions for the future are forward-looking statements. It is important to note that the company's actual results could differ materially from those projected. These forward-looking statements are based upon information as of today, Tuesday, February 23, 2021. The company assumes no obligation to update these statements based upon information from and after the date of today's conference call. Additional information concerning factors that could cause actual results to differ from those made in the forward-looking statements is contained in today's earnings press release as well as in the company's SEC filings. In addition, the company's press release and management statements during the call include discussions of certain adjusted non-GAAP measures and financial information. These financial measures and reconciliations of GAAP to non-GAAP results are provided in both today's press release and the related Form 8K. With that, it is now my pleasure to turn the call over to Philippe for his opening remarks.
spk01: Thank you, John. Good morning to all of you joining us on the phone and participating via webcast. It's a pleasure to be speaking with you today and report on our continued success. The team's consistent commitment to disciplined execution on our strategic plan resulted in a strong finish to a year of exceptional financial performance. Fourth quarter revenue was up more than 14% sequentially, driven by growth from our solutions business. including increased demand for our portfolio of digital solutions offerings. Revenue from solutions grew 22% sequential, expanding to 42% of total revenue. Contributing to our strong sequential growth was a larger than anticipated increase in health solutions business. During the quarter, we benefited from further expansion and the completion of an extensive engagement for a previously announced go-live implementation and training services project with a large existing healthcare system in the U.S. Another notable area of strength was our IT infrastructure and implementation business in Luxembourg, where year-end spending by existing clients contributed to meaningfully higher sales in the fourth quarter. Additionally, we maintained robust utilization of our billable resources across the organization, including lower levels of unallocated bench resources within our European operations. Combined with our gradual disengagement from lower margin staffing business, we closed out 2020 with our highest operating margin in five years. For the full year, we significantly improved overall profitability with both operating and net income, as well as adjusted EBITDA, increasing year over year to represent new multi-year highs. When considering the challenging environment and a lower consolidated revenue base, our strong operating and bottom-line results for the year serve as important validations that our existing solution strategy is working and yielding the anticipated outcomes. We have continued to demonstrate growing momentum in our solutions business, coupled with a focused expansion of CTG's digital solutions offerings. Our emphasis on solutions and the ability to deliver them remotely allowed us to capitalize on increased demand for digital solutions. as clients adapted to the prolonged impact of the global pandemic and the remote working environment. For example, we experienced strong demand for our Microsoft 365 and Teams implementation and consulting services, which are expanded offerings that we launched in the second half of the year to complement our broader cloud conversion and integration solution. Additionally, we were awarded the first in series of potential engagements to rapidly deploy and manage COVID-related help desk solutions for healthcare provider clients. In conjunction with the sustained shifts toward remote working and online collaboration that were brought about by the COVID-19 pandemic, there are also a number of megatrends emerging as meaningful market disruptors. Most applicable to CTG and our clients are new technological breakthroughs, which produce fast and constantly moving market trends that have effectively forced all businesses to embrace digital transformation as one of their top priorities. At the core of CTG's solution strategy, we provide the technologies and methodologies to meet the evolving needs of clients as they increasingly seek to integrate digitalization into their business decisions and day-to-day operations. Today, our existing portfolio of digital transformation solutions addresses clients' needs in numerous high-demand areas, including artificial intelligence, machine learning, Internet of Things, and cloud computing platforms. Notably, according to market research, a majority of the technology projects, the digital technology projects initiated by companies, ultimately fail to deliver the intended value. We believe this translates to an opportunity for CTG, given our proven track record of reliably delivering repeatable digital transformation solutions through our established network of global delivery centers. Our centralized and scalable delivery approach ensures a unique combination of higher reliability and minimized overall delivery costs for our clients. Over the past year, we have continued to expand our capabilities and expertise through investments in our sales and business development organizations, development of new innovative digital solutions offerings, and broader global delivery center capabilities. Today, we have a well-defined solution strategy and dedicated leadership team in place that together has been the fundamental driver of our substantial progress and strong operating performance over the past year. With a solid foundation in place, we are now looking to take the next step to meaningfully advance our digital solution strategy as a catalyst and accelerator of digital transformations. Over the past several months, we have been working diligently on a major new initiative aimed at empowering a growing client base with the digital solutions they need for their businesses to succeed. We are extremely excited about this initiative, which accelerates the expansion of our digital capabilities and expertise, while positioning CTG to capitalize on a substantial and growing market opportunity. In advance of our planned launch in the coming days, I want to take this opportunity to preview four of the key elements and areas in which we are making focused investments as part of this initiative. Industry-leading talent. CTG is actively assembling a world-class global solutions organization comprised of talented industry leaders and multidisciplinary professionals that are focused on developing expanded digital solutions and service offerings that can readily be scaled to meet clients' needs. Following a series of key new hires and appointments over the past year, we have eight solutions leaders, which includes Olivier Saussure, a proven digital strategist and transformation expert who we promoted to vice president CTG Global Solutions in January. Breakthrough digital transformation offerings. We are working aggressively to expand CTG's portfolio of digital transformation solutions with a focus on specific areas that leverage technologies which enable the accelerated achievement of business outcomes. Innovative tools and methodologies. We are also making ongoing investments in tools, training programs, and methodologies which help clients increase their speed to market maximize innovation, and support high performance. Global delivery network. We've implemented initiatives to further leverage CTG's existing delivery centers in North America, Western Europe, India, and South America. Expansion of our delivery center platform will enable us to provide the broader spectrum of scalable IT systems including process automation, application development and maintenance, testing, infrastructure and cloud solutions management and maintenance, and service best. Each of these four key elements and areas of investment are in direct support of our larger solution strategy, enhancing our ability to accelerate project momentum and enable clients' successful digital transformations. More specifically, we are focused on empowering clients to innovate faster, make more informed data-driven decisions, create better experiences for end customers, and ultimately, realize tangible business performance improvements. In addition to our focus on leveraging this new initiative to drive transformative growth, we will continue to pursue synergistic acquisitions that are accretive to earnings, complement our existing offerings, and further accelerate the introduction of new digital solutions capabilities across new geographies and an expanded client base. Importantly, I also want to emphasize that the primary objectives underlying our solution strategy and plan remain unchanged. These include our continued commitment to immediately improve margins and earnings, generating longer-term growth above that of our served markets, targeting higher margin digital solutions, and optimally allocate capital in support of continued operating performance and strategic acquisitions that accelerate the expansion of our digital solutions portfolio. These objectives, along with our solution strategy and our new digital transformation initiative, all go hand in hand. Collectively, they are the driving force behind CTG being premier global solutions provider that is widely recognized for enabling client successful digital transformations. As we make incremental progress toward this goal through the execution of our strategic plan, we are confident that we will continue to achieve sustained improvement in our operating performance and profitability. I will now turn the call over to John for a detailed review of our fourth quarter results, as well as commentary related to our outlook for the current quarter and year.
spk04: Thank you, Philippe. And again, good morning, everyone. Thank you for joining us today. As reported in our press release earlier this morning, consolidated revenue in the fourth quarter was $101.3 million, compared with $88.6 million in the third quarter and $99.3 million in the fourth quarter of 2019. The sequential increase in total revenue was driven by multiple factors, led primarily by the continued expansion of our solutions business that included a sizable contribution from the completion of a multi-quarter project with the Health Solutions client in the fourth quarter. Additionally, currency translation had a positive impact of $3.1 million in revenue in the fourth quarter compared with a positive impact of $1.8 million in the third quarter, and a negative impact of $1.3 million in the 2019 fourth quarter. Total billable days in the fourth quarter were 67, compared with 63 days in the third quarter and 65 days in the year-ago fourth quarter. Solutions revenue in the fourth quarter increased $7.7 million, or approximately 22% sequentially, to $42.8 million and represented 42.2% of total revenues. This compared with 35.1 million or 39.6% of total revenue in the previous quarter. Solutions revenue also increased 4.9 million or 12.8% year-over-year compared with 37.9 million or 38.2% of total revenue in the fourth quarter of 2019. Revenue from IBM in the fourth quarter was 20.1 million or 19.9% of total revenue compared with 18.6 million or 21% of total revenue in the third quarter, and $21.4 million, or 21.6% of total revenue in last year's fourth quarter. As previously disclosed, during the fourth quarter, CTG renewed its long-term master services agreement with IBM for a three-year period expiring in October of 2023. No other client represented more than 10% of revenue during the fourth quarter of 2020 or in recent comparable periods. Cost of services as a percentage of revenue were 78.7% in the fourth quarter compared with 77.9% of revenue in the third quarter and 79.6% of revenue in the year-ago fourth quarter. Gap operating margin in the fourth quarter was 3.3% compared with 2.1% in the third quarter and 2.4% in the year-ago quarter. Non-gap operating margin in the fourth quarter which excludes approximately $300,000 of acquisition-related expenses, was 3.5%, compared with 2.7% in the third quarter and 3% in the year-ago quarter. The fourth quarter GAAP operating margin increased 120 basis points sequentially and 90 basis points year-over-year, while the non-GAAP operating margin was 80 basis points higher sequentially and improved 50 basis points year-over-year. Both measures reflect an increased mix of solutions revenue to our total revenue in the fourth quarter and our successful efforts to sustain higher utilization of billable resources, especially within our European operations. The effective income tax rate in the fourth quarter was 45.6% compared with a negative 31.2% in the third quarter and 34% in the fourth quarter of 2019. The tax rate was higher in the fourth quarter due to non-deductible expenses for tax purposes. The negative effective tax rate in the third quarter was primarily the result of implementing newly enacted legislation that allowed the exclusion of certain high taxed income associated with the global intangible low taxed income or GILTI regulations. This change of legislation resulted in a one-time tax benefit of $1.1 million or $0.08 per diluted share during the third quarter. Gap debt income in the fourth quarter was $1.9 million or $0.13 per diluted share and included approximately $200,000 or one cent per diluted share of acquisition related expenses. Non-GAAP net income for the fourth quarter was $2.1 million or 14 cents per diluted share. For comparison, GAAP net income for the third quarter was $2.8 million or 20 cents per diluted share and included a net $200,000 of non-operating income or two cents per diluted share comprised of gains from non-taxable life insurance and partially offset by acquisition related expenses. Excluding these items, non-GAAP net income for the third quarter was $2.6 million or $0.18 per diluted share. Both GAAP and non-GAAP net income in the 2020 third quarter included the $0.08 gain from a change in tax legislation. GAAP net income in the fourth quarter of 2019 was $1.7 million or $0.12 per diluted share, which included $300,000 or $0.02 per diluted share of acquisition related expenses. Non-GAAP net income was $2 million, or 14 cents, per diluted share in the year-ago fourth quarter. For the full year ended December 2020, net income on a GAAP basis increased approximately 85% year-over-year to $7.6 million, or 53 cents per diluted share, which included a net $100,000 benefit, or 1 cent per diluted share, comprised of severance and acquisition-related expenses offset by non-taxable gains from life insurance and the sale of a building. Non-GAAP net income for the full year 2020 increased approximately 34% year-over-year to $7.5 million, or $0.52 per diluted share. Adjusted EBITDA for the full year 2020 increased approximately 25% year-over-year to $15.6 million. CTG's total headcount at the end of the fourth quarter was approximately 3,900, compared with $3,750 at the end of the third quarter and $3,950 at the end of the year-ago fourth quarter. Approximately 91% of our fourth quarter 2020 headcount was billable. Turning to our balance sheet, cash and cash equivalents at the end of the fourth quarter were $32.9 million. During the quarter, we paid the remaining outstanding balance on the company's revolving credit facility, resulting in no long-term debt outstanding at the end of the year. Capital expenditures in the fourth quarter were $169,000, compared with $685,000 in the third quarter and $1.2 million in the fourth quarter of 2019. Looking forward, given the current business landscape remains highly dynamic, in large part due to the sustained global impact of the COVID-19 pandemic, including reduced visibility on TTG's end markets and clients, we are not providing quantitative guidance for the first quarter and full year 2021. However, we are very pleased with the recent performance across the business and the success of our strategic focus on digital solutions, which has yielded consistent and significant improvements in the company's margins and profitability. We remain committed to the execution of our strategy and investing in our global solutions organization, which will yield expanded digital capabilities in support of our highest priority to deliver long-term value to all of CTG's stakeholders. Kira, can you please initiate and manage our question and answer session, please?
spk00: As we move to Q&A, please press pound two on your telephone's keypad to enter the question queue. You will hear a notification when your line is unmuted. At that time, please then state your name and your question. Once again, pressing pound two will indicate that you wish to ask a question. We do have a question in the queue. Let's go to the first caller. Your line is unmuted. Please go ahead.
spk03: Hey, good morning. This is Kevin Liu with K. Liu and Company.
spk01: How are you guys doing?
spk03: Great. First question I wanted to touch on. Philippe, you mentioned a couple of awards that could be the first in a series from some healthcare providers. It sounded like that was related to some COVID items. Could you just talk a little bit more about what those awards were, how meaningful they are and how you see them kind of expanding over time?
spk01: Sure, Kevin. We're talking about, like it was said, COVID-19 related help desk solutions that need to be deployed very quickly. You can think, for instance, of vaccination support for health systems. and that all of that is and the speed of with which they're coming and the size uh will depend or is depending on the the availability and the logistics of the vaccines so it's uh it's a bit of a target that's in movement there we have a first uh contract that's been awarded uh significant um but it's it's a little At the same time, it's early and it's already ongoing to understand how fast and how big this is going to become. I hope in the States, logistics with the vaccines are not as difficult as they are in Europe. That's for sure.
spk03: Understood. That's helpful. And then maybe more generally, you know, in the past few quarters as the COVID pandemic was going on, you guys talked about sales cycles flowing with your healthcare provider customers. Given that they're still dealing with some issues here, but at the same time, maybe there's light at the end of the tunnel. I'm curious if those discussions around other aspects of your healthcare business are moving forward and what you expect in terms of being able to kind of grow bookings over the course of 2021.
spk01: That's a very difficult and tough question, Kevin. You're almost asking me to make a statement on how COVID is going to evolve in the next couple of months. We all expect we're going to get out of this and vaccination is going to prove part of the or a big part of the solution. We see that in countries, well, for instance, the state's also Israel, UK starting coming out. We also see that a lot of work has been deflected to what is actually extremely urgent. In the beginning, it was the collaboration software, the support of work from home. Now with those COVID-related help desk solutions, we believe that when we're at the the other end of the tunnel or when that image is very clear that business is going to take up. But I don't know when that's going to be because it's also very dependent on the global situation and the different speed in progress in vaccination between the continents is big. Timing is still a question mark. And that's also why we didn't give any guidance for the remainder of 2021 at this moment.
spk03: Yeah, understood. And that being said, maybe this question is for John. But just in terms of the guidance and outlook statements, I know it's more qualitative at this point. But, you know, you talk about expecting solid revenue growth this year. Just curious how much visibility you guys have in that with striving that level of confidence. And then beyond that, just in terms of the mention of disengagement from larger staffing business, just wanted to check and see if there were other sizable engagements that you have or potentially are expecting to walk away from over the course of this year.
spk04: Sure, Kevin. So a couple points there. Relative to the revenue growth, the solid revenue growth comment that we put in the release, we're excited, and I'm sure you can tell from the release and from the call today, about the execution that we've had over the past year, really over the past couple years, on driving the solution strategy now further with a digital solution strategy. We do see opportunities in front of us. As Philippe just said, there's somewhat – Hard to predict at times because the throughput from opportunity to closing a deal has become longer. But we see enough opportunities in front of us, especially in the solutions area, especially that area where we are primarily focused, that we do believe that we can continue to generate or we can this year generate, rather, some revenue growth. So solid is not a double-digit number, but it is a growth number. Relative to the staffing business, and stepping away from the lowest margin staffing business. I think we're going to continue to do that. All of our effort, time, and resources and energy are going into driving the solutions business in a variety of different ways. Again, whether it be skills, whether it be methodologies, whether it be processes. We understand that that's where we're focused. I think our discipline execution this year has been great. And part of that story is continuing to disengage, as appropriate, from the staffing business. So I don't envision us doing that in a very, very significant way, but we are going to continue to critically evaluate the staffing opportunities as they come up for renewal.
spk03: Great. That's helpful. Well, congrats on a strong year here, especially given the circumstances, and good luck in 21.
spk04: Thanks, Kevin. Thanks, Kevin.
spk00: Moving to the next caller in the queue. Your line is unmuted. Please go ahead.
spk02: Hey, good morning, Philippe and John. Josh Vogel at Sudoti. Hope you guys are doing well. Good morning, John. Good morning. So, you know, in the absence of giving guidance, I just kind of want to get a little bit of a sense of, you know, directional commentary around Q1. you know, with the completion of the multi-quarter project and just general seasonality, you know, can you just kind of talk to what kind of step down in revenue we could expect for Q1?
spk01: John, would you like to take this one?
spk04: Yeah, sure. I think we'll definitely see a step down in revenue in Q1, Josh, but it won't be significant, you know, or unusual. We had strong, as we indicated on the call, we had strong business from this multi-quarter go-live that we had done. We had very good sales in Luxembourg relative to infrastructure IT there. However, and there are also a few less billable days in the first quarter. So having said that, I don't think it'll be materially different than sort of our run rate on billable days. So From that perspective, I think you can get comfortable that we had some really good events and really good projects that drove the fourth quarter, which is fantastic. But it's not a significant from sort of a static run rate on revenue per day to be materially different in Q1.
spk02: Understood. Can you remind me the total number of billable days that you have for Q1? Just want to make sure mine matches up.
spk04: Yeah, I'll... I don't have that right in front of me, but I'll get back to you on that.
spk02: Okay, sounds good. Shifting gears a little bit, understanding that as solutions grows, so should the margin profile of the overall business. I know that utilization benefited from low vacation and sick time. Should we expect that utilization to maybe swing back a little in the other direction post-pandemic or as things normalize? How should we think about that?
spk01: John? Sure.
spk04: Our solutions margins have pretty consistently been significantly higher than our staffing margins. And how we've looked at it, Josh, internally is it depends upon the service being provided on both sides of that fence, the staffing service and the solutions. But generally, the margins at the end of the day, are two to three times higher. So it's not unreasonable to think that a staffing engagement would yield margins that are two and a half times as high. So from that perspective, we would, as we continue to drive the solution side of the business and, again, disengage from the lowest margin staffing business, we really think that there's a progression, a steady progression higher on a pretty consistent basis on both Two or three things. One is the overall margin for the organization. Two, as we stress and sell and deliver digital solutions, we think that that's got an even higher opportunity and higher margin within the solutions portfolio, so we think our solutions margin, again, should gradually increase. Now, we've said to you in the past and we've said in general that it isn't always going to be a linear increase. Some quarters won't be up or some quarters will be down, but we think long-term... a very steady climb in the solutions from mid to high 20s to a higher number, and overall beginning to look more toward the mid-20s overall. Now, I'm not sure that we're going to get there in 2021, but significant improvement on both ends.
spk02: I appreciate the insights there. So we had the expanded agreement with the higher client in Northeast, which is a driver behind the increase there. We also saw a jump in financial services sequentially, and I'm just curious, was that related to the IT infrastructure implementation business in Luxembourg, or was there a new win or an expansion there or a bit of both?
spk01: I didn't hear the first part of the question, John. I'm not sure if you...
spk04: Yeah, no, I'm sorry, Josh. You broke up a little bit at the beginning of the question, so I wasn't exactly sure.
spk02: Oh, I apologize. Just to shorten it up, I just saw a big sequential increase in financial services revenue, and I was just curious where that came from. Was there a new win, an expansion, a bit of both? We saw in Luxembourg. Just curious what drove that.
spk01: I think it's a little bit of a mix of everything, Josh. It's definitely the infrastructure side in Luxembourg that helped us, but also in Belgium and in France there was higher activity towards the end of the year in the financial services market. But not one specific big contract. It was more like a like an overall increased activity.
spk02: Okay, great. And just lastly, given the new digital transformation initiative and the investments there, you know, again, outside of giving guidance, I'm just curious how we should think about SG&A this year relative to 2019 and 2020, just kind of a base, how should we think about that?
spk01: Sounds like a question for you too, John.
spk04: Okay. Overall, we expect margins to go up as we just talked about. As you just asked, we just talked about what solutions margins themselves. And then within the concept of disengaging from the staffing, I think overall margin will increase. We know we've got to make continued investments in our solutions and our business development on that side of the business, and we're going to continue. We plan to continue to do that. So, from that perspective, we still think the operating margin goes up. So, we think that within the direct or gross margin, we think that increases. We know that we've got to spend some more money, so we think the SG&A increases, but we think at the operating income level that that increases as well. Probably, again, not substantively, but we definitely believe that we can continue to improve on where we are from an operations standpoint. We've used this in the past on calls, and Philippe and I talk about it all the time. It's a bit of a journey, right? We know we're not at the destination today, but we're definitely headed down a path where we're going to see gradual improvement as time passes. And on the bill of days for Q1, it's 65 for the first quarter.
spk02: All right, great. Well, I appreciate all the details and insight. Impressive to see how the results ended up being in 2020, given everything going on. So good luck in 2021, and thanks again for taking my question.
spk04: Thanks, Josh. Thanks, Josh.
spk00: We have no further questions in the queue. At this time, we will turn the call back to management for any closing remarks.
spk01: Thank you, Kira. In closing, we are very pleased with our strong results in the fourth quarter. Reflecting on the past year, I'm very proud of our highly dedicated team that worked together to overcome challenges and what we as an organization ultimately accomplished despite the unprecedented environment. We not only rapidly adapted to the changing business landscape without any loss in productivity, but we made significant strides in successfully expanding our solutions offerings and how we deliver services to meet the evolving needs of our clients. We exited the year with growing momentum for our expanding portfolio of digital transformation solutions, and we are just getting started in terms of our realized potential. Today, we have a solid foundation in place, and I'm excited about what we are positioned to achieve in 2021. as we accelerate CTG strategy and empower clients with the digital solutions required to succeed. With continued focus and disciplined execution of our strategic plan, I'm confident we will drive near and long-term success that results in meaningful value creation for all CTG stakeholders. Thank you for participating on today's conference call. and for your ongoing support of PTG. Kira, you may now disconnect the call.
spk00: That concludes our conference. Thank you for using event services. You may now disconnect.
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