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spk04: Your conference will begin momentarily. Please continue to hold. Thank you. Thank you.
spk01: Ladies and gentlemen, thank you for standing by and welcome to CTG's second quarter 2021 financial results conference call. At this time, all participants are on 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 like to now turn the conference call over to CTG's executive vice president, and Chief Financial Officer John Lawbecker. John, please go ahead.
spk03: Thank you, Felina, and good morning to everyone on the call. Joining me on today's call is Felipe Day, CTG's President and Chief Executive Officer. Before we begin, I want to remind listeners that statements made during the course of this conference call that 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, Thursday, July 29, 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 as 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 8-K. With that, it is now my pleasure to turn the call over to Philippe for his opening remarks. Philippe?
spk05: Thank you, John. Good morning to everyone on the phone and webcast. And thank you for joining us on today's conference call. I'm pleased to report we have another solid quarter as we continue to execute our digital solution strategy. Revenue from solutions business grew 10% year over year, reached 45% of total revenue in the second quarter, and also increased 18% over the first half of 2020. Coupled with our ongoing actions to disengage from lower margin staffing engagements, we continue to drive an increased mix of higher value solutions business and significant improvements in our consolidated operating performance. Our gross profit margin and operating income for the second quarter increased sequentially and year over year, contributing to non-GAAP earnings increasing 30% in the first half of 2021 over the prior year period. The continued year-over-year improvement in our operating results further demonstrates that our strategy is very effective. As part of our broader solution strategy, we've increasingly narrowed our focus and continued to make ongoing investments around the core group of scalable digital transformation solutions. These include Agile and DevSecOps, Internet of Things, intelligent automation, data and analytics, cloud, and automated testing. Collectively, these core digital accelerators meaningfully expand our addressable markets as a series of disruptive strengths drive the need for new business models across a growing number of companies and industries. CTG is increasingly well positioned to benefit from this accelerating demand for digital transformation. We continue to expand our portfolio of digital solutions in order to further capitalize on this rapidly growing market opportunity. As mentioned on our previous conference call, we launched a highly successful rebranding and marketing campaign in February. This also included our introduction of CTG's new tagline, Transformation Accelerated, which is designed to reflect our mission of enabling clients to accelerate project momentum and achieve desired performance improvements from their digital transformation initiatives. We've continued to receive considerable positive feedback since the launch. Yet, I'm also often asked what CTG does for its clients in a typical digital solutions engagement. Therefore, I wanted to take the opportunity on today's call to briefly outline two real-world examples of CTG's digital solutions and the significant tangible value realized by our clients. As a reminder, a majority of our digital solutions offerings can be applied in many different vertical markets. I'll start with a recent project we completed on an automated testing engagement in the healthcare space. A large hospital system in the eastern U.S. wanted to reduce the amount of time, resources, costs, and complexity of the frequently required updates to their EHR system. CTG utilized the software testing platform called DECPLANT and applied intelligent automation to the testing of the client's workflows. The resulting benefits to the clients were dramatic. and included accelerated test cycles, lower cost, and a reduction in required resources. To further quantify the magnitude of the benefits, we enabled the client to decrease their average ambulatory workflow testing time by over 98%, from approximately 12 hours down to 11 minutes. Briefly summarizing another project, CTG was engaged by a railroad operating in North America that needed to rapidly modernize the core software application the company had utilized for 30 plus years to operate its business. CTG employed a combination of Agile and DevOps methodologies to completely redevelop the client's core application. After building an initial framework for the new application, CTG then utilized the scrum team as a service model to optimize functionality of the application, as well as implement the series of new features in near real time. Impressively, the team for this project consisted of talented employees from North America, Belgium, and Luxembourg. Ultimately, we completed delivery of the new core operating application to the client in less than six months, resulting in substantial improvements to the client's business operations and its customers' experiences. Today, this client continues to retain CTG for continued incremental enhancements to their core operating application. Now I will turn back to our broader solutions business and the current market environment. While the overall pace of proposal requests and contract commitments has generally remained slower in recent months, our team has done an excellent job of driving a higher conversion rate on new solutions. While we have also continued to be successful, in terms of building and maintaining a solid pipeline of new business opportunities, despite the elevated uncertainty still expressed by many clients due to the pandemic. Further highlighting our success, earlier this month, the team secured a new multi-million dollar contract to manage a large go-live Epic implementation project and provide associated training with a large regional healthcare system in the U.S. This represents our third Go Live implementation win in the past year. Initial work on the project is expected to begin this quarter, ramp significantly during the fourth quarter, and essentially be complete by the end of the year. In addition to our focus and ongoing investment, to expand CTG's digital solutions capabilities and offerings, we continue to further enhance how solutions are delivered to clients. Fundamental to this effort is our established network of global delivery centers, which enables us to utilize centralized hubs in North America, Western Europe, India, and South America to provide a broad scope of scalable, high-quality digital solutions that are also cost-effective to clients anywhere in the world. For example, we recently won a contract with an existing client in Luxembourg that had come up for renewal and been rebid by the client. The three-year renewal of the managed services contract included multilingual service desk, service management and governance, and infrastructure and network support. Importantly, the project also included transitioning delivery of the solution from our team in Europe to our recently established delivery center in Bogota, Colombia. The end result is a win-win for the client and for CTG. As we continue to increase the adoption of this proven delivery center model, we will provide more comprehensive and optimized solutions while also achieving cost efficiencies on solutions that represent value add for both clients and CTG. Another recurring question that I've been asked in recent months, what makes CTG and the digital solutions it delivers unique? My response is always the same. The core of our success is people. CTG has incredible people. As an organization, we pride ourselves on seeking out and retaining extremely talented individuals with deep industry experience. Working as teams, these individuals utilizing our innovative tools, methodologies, and digital solutions consistently deliver an exceptional level of service that clients recognize and value. This often leads to clients coming back to CTG and asking us to replicate our previous success in other areas of their business or on future projects. CTG's emphasis on finding and retaining key talent doesn't only apply to our employees. This extends from bottom to top, including to the company's board of directors. The board recently had the pleasure of appointing and welcoming CTG's newest director, Katie Stein, to the board in early July, which followed the addition of Raj Gopal in December. Both are seasoned industry executives that bring deep industry knowledge and valuable perspectives to our companies. and demonstrate CTG's ongoing commitment to board diversity. I will now turn the call over to John for a detailed review of our second quarter results, as well as commentary on our outlook for the coming quarters.
spk03: Thank you, Philippe. And again, good morning, everyone, and thank you for joining us on today's call. As reported in our press release earlier this morning, consolidated revenue in the second quarter was $92.2 million, paired with $97.1 million in the first quarter and $89.1 million in the second quarter of 2020. The sequential decrease in second quarter revenue primarily reflects too few billable days in the quarter, as well as our continued disengagement from lower margin IT staff and business. The increase in revenue year over year was driven by the continued expansion of our solutions business, as well as year-over-year growth in Europe. Currency translation had a positive impact of $3.9 million on revenue in the second quarter of 2021, compared with a positive impact of $4 million in the first quarter and a negative impact of $800,000 in the second quarter of 2020. Total billable days in the second quarter were 63, compared with 65 days in the first quarter and 64 days in the year-ago second quarter. Solutions revenue in the second quarter was $41.4 million, or 44.9% of total revenue. This compared with $43.4 million, or 44.7% of total revenue in the previous quarter. Year over year, solutions revenue increased $3.9 million, or approximately 10% from $37.5 million, or 42.1% of total revenue in the second quarter of 2020. Revenue from IBM in the second quarter was 19.6 million, or 21.2% total revenue, compared with 19.6 million, or 20.2% of total revenue in the first quarter, and 18.9 million, or 21.2% of total revenue in the year-ago quarter. No other client represented more than 10% of our revenue during the second quarter of 2021 or in recent comparable periods. Gross profit in the second quarter was $20.4 million or 22.1% of revenue compared with $20.8 million or 21.4% of revenue in the first quarter of 2021 and $18.7 million or 21% of revenue in the year-ago second quarter. Second quarter SG&A expense of $17.6 million reflected our continued investment in IT digital transformation offerings and business development resources consistent with our solution strategy. This compared with $18.7 million in the first quarter and $16.8 million in the second quarter of 2020. Gap operating margin in the second quarter improved to 3%, compared with 2.2% in the first quarter and 2.1% in the second quarter of 2020. Non-gap operating margin in the second quarter, which excludes approximately $165,000 of acquisition-related expenses, was 3.2%, compared with 2.8% in the first quarter and 3.2% in the year-ago second quarter. The effective income tax rate in the second quarter was 28% compared with 22.6% in the first quarter and 43.7% in the second quarter of 2020. The lower than historical effective tax rate in the first half of 2021 reflects the deduction of expenses that were previously non-deductible for tax purposes. And the higher tax rate in the second quarter of 2020 was a result of certain non-deductible expenses occurred in the U.S. during that period. GAAP net income in the second quarter was $1.8 million, or $0.12 per diluted share, and included approximately $119,000, or $0.01 per diluted share, of acquisition-related expenses. Non-GAAP net income for the quarter was $2 million, or $0.13 per diluted share. For comparison, GAAP net income for the first quarter of 2021 was $1.5 million or $0.10 per diluted share, included approximately $500,000 or $0.03 per diluted share of acquisition-related and rebranding expenses. Non-GAAP net income for the first quarter was $2 million or $0.13 per diluted share. GAAP net income in the second quarter of 2020 was $1.8 million or $0.12 per diluted share, which included approximately $400,000 of net income or 2 cents per diluted share comprised of severance and acquisition related expenses offset by gains from non-taxable life insurance and the sale of a building. Non-GAAP net income was 1.4 million or 10 cents per diluted share in the year-ago second quarter. Adjusted EBITDA in the second quarter of 2021 was 4.1 million compared with 3.7 million in the first quarter and $4.1 million in the second quarter of 2020. Adjusted EBITDA for the trailing 12 months as of the end of the second quarter of 2021 was $16.1 million. TCG's total headcount at the end of the second quarter was approximately 3,650, compared with 3,700 at the end of both the prior quarter and the year-ago second quarter. Approximately 90% of our second quarter 2021 headcount was billable. Turning to our balance sheet, Cash and cash equivalents at the end of the second quarter were $29.2 million, which in part reflected a cash outlay of approximately $5.6 million related to the timing of payroll on the last day of the quarter. At the end of the 2021 second quarter, the company had no outstanding balance on its revolving credit facility and no other long-term debt. Capital expenditures for the second quarter were $298,000, compared with $891,000 in the first quarter, and 493,000 in the second quarter of 2020. Looking forward, the evolving global impacts of the COVID-19 pandemic have continued to limit visibility in CGG's end markets and clients. As such, we are not providing quantitative guidance for the third quarter and full year 2021. The company does, however, expect continued year-over-year revenue growth, driven by an increasing mix of solutions revenues, partially offset by the ongoing strategic disengagement for lower-margin IT staffing business. We continue to be very pleased with our consistent progress and the advancement of the company's digital transformation strategy, which contributes to the growth of solutions revenue and our strong operating results in the second quarter and first half of the year. Specific to the third quarter, while we are well-positioned and expect to achieve continued top-line growth year-over-year, We also anticipate a return of more seasonal trends than in recent years, as many individuals, especially those in Europe, look to take more vacation time during the quarter. That completes our prepared remarks. Felina, could you please initiate and manage our question and answer session?
spk01: Yes, sir. Ladies and gentlemen, if you wish to ask a question, please press 1, then 0. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you wish to ask a question, please press 1, then 0 now. And our first question comes from the line of Josh Vogel with City T. Your line is open, sir.
spk02: Thank you. Good morning, John and Philippe. You guys are doing well. Good morning, Josh.
spk01: Good morning.
spk02: First question I have, can you quantify the pipeline conversion rate in the quarter and how it measured up? to historical rates. You know, I just, you know, with the heightened focus and need for digital transformation services and capabilities, especially those brought to light by the pandemic, you know, I'm just kind of curious seeing a level of pent-up demand that's coming through the channel that's meaningfully, you know, not only compressing the sales cycle but also improving the conversion rates. Thank you.
spk05: Sure, Josh. Well, we've seen that the new Delta variant still creates or sustains a challenging environment. However, we also saw a higher closure rate than we have seen in the last quarter. I think our teams worldwide have done an outstanding job of closing new deals and at the same time building the pipelines. I wouldn't say the conversion rate is already at pre-COVID levels, but we're seeing a noticeable improvement.
spk02: Okay, thank you. Maybe just a little tangent. I'm seeing a prevailing theme out there around pent-up demand, even as the pandemic lingers. I'm curious, once COVID a contract is signed, are clients looking to start engagements as soon as possible? Are you seeing any sort of compression there between when it's signed versus when you start ramping?
spk05: That's a very good question, Josh, because it also shows that there's a positive change in the market. It is, in fact, as soon as the clients have signed, they want to get started. And that is very much how it was pre-pandemic too. What still isn't pre-pandemic is the clients are still cautious about making decisions and the pace of the decisions is slower. But once the decision is made, then we almost start immediately. So we really have to be ready with our approaches, with our people, with our teams to start as soon as that signature has been put.
spk02: All right, great. And shifting gears a little bit, maybe for John, thinking about the strategic initiatives and what it takes to expand your addressable market, we've highlighted or you've highlighted areas like sales and business development, new offerings, expanding the global delivery network. Can you just give some directional commentary around the level of spend we should expect outside or above normal business operations, as well as other targeted areas that you plan to focus on the back half of this year?
spk03: It's a great question, Josh. The approach that we've taken overall from a spend standpoint is to position the company for what comes next. And so as we've pretty consistently talked about, we continue to make investments in the solutions leadership and solutions talent to, as Philippe was indicating on signed contracts, be very responsive when those contracts come in and are signed and have people in a position to drive those solutions. Some of it is thought leadership around building out and developing those solutions to expand them, to expand the market. Some of those investments are in traditional sales roles and business development roles as well. And so the investments themselves are across the gamut from solutions to business development to thought leadership. From that perspective, We made significant investments at the beginning of the year to bring people on board and, again, drive those perspectives that will drive revenue in the second half of the year and years beyond. I would anticipate that we will continue to be aggressive in building that knowledge base and that talent base and that business development base in the second half of the year, but not as aggressive on a spend perspective as we did in the first and second quarter, or at least not in the first quarter.
spk02: Okay, thank you for that. Philippe mentioned the new multi-million dollar contract with the Go Live implementation in Q3, ramps in Q4, ends at the end of the year. Can you just give us a sense of what type of revenue contribution that could and should add in the quarters?
spk05: Well, it's a significant, when we're talking multimillion where we're thinking that most of the work is going to happen in Q4 as Q3 is already ongoing of course and it needs to start prep work is never the big mass of people or work so it's going to be Q4 mostly yeah and that's how it's going to be John, could you add some color?
spk03: Yeah, Josh, we haven't, as you know, we didn't put out guidance or didn't extend guidance for the second half of the year. This is a significant project that, again, to Philippe's point, will mostly be completed in the fourth quarter, our fiscal fourth quarter. So we do expect a significant increase in revenue in that quarter.
spk02: Okay, great. Understood. Last one for me. The adjusted EBITDA generated by the business, your press release mentioned 70% coming from solutions. I'm curious when you hit your targets, you know, 50-50 revenue split, what do you think the contribution will be from solutions? And then also, you know, I calculate about a 7% margin there. there for solutions? And if I recall, you recently talked about solutions being on 10%. I know that you're in the midst of investing, but, you know, is that still the goal or target, you know, when we think about long-term EVA down margin on the solutions business?
spk05: Maybe I'll start with the high-level answer, and then I'll pass on to John. Our A longer-term target for EBITDA, Josh, is obviously higher than the 7%. Knowing that we're still investing in getting the solutions, the business development, the marketing ready when the machine is starting to run at the right speed, cruising altitude, so to speak. I think those investments will obviously weigh less and less on the total. Also looking at our margins, moving to digital solutions, our global delivery network, helping us to lower delivery costs by also moving work offshore to India and South America. All those elements should help us increase that EBITDA level above that 7%. Yes, 10% does seem for the long-term percentage where we need to go to. John, you want to add more detail?
spk03: Thanks, Philippe. I think that the points you made are great and sort of round out the continued thought process around investments that we're going to make going forward. But I would agree, Josh. In the release itself and some of the financial information in the back, we had a gross profit went up to 22.1. So overall, you see that that increased in gross profit on solutions was 32.3%, up 2% from last quarter. So as we continue to sell the right business and, as Philippe said, deliver it as effectively as we can, utilizing offshore and whatnot, those margins will continue to go up. We're going to continue to invest as we've talked a couple times already on this call, but at the end of the day, a long-term target of 10% is certainly out there and certainly something that we think we can achieve. And Flip and I talk about this a lot, not to get ahead of ourselves because, again, we've got a lot of work to do to get to 10%, but we talk about destinations. I don't think that's a milepost on the destination. I don't think that that's the ultimate destination.
spk02: Great. Well, appreciate all the insights and for taking my questions.
spk03: Thank you.
spk01: Thanks, Josh. Thank you. And our next question comes from the line of Kevin Liu with K. Liu Company. Your line is open.
spk04: Hi. Good morning, guys.
spk01: Hey, Kevin. Good morning, Kevin.
spk04: First question here, just wanting to delve into some of the seasonality dynamics a little bit more. You know, certainly if we go back past years, Q3 tends to be down, as you guys mentioned, because of, you know, vacation, particularly in Europe. At the same time, this quarter, you're talking about a lot more pipeline conversion into new business. So when we flush that all out, can you just give us some help on whether you expect revenues to actually be down seasonally here in Q3, or do you have enough new business to perhaps help offset that and keep things relatively stable if not growing?
spk05: John, I think this is a question right up your alley.
spk03: Thanks, Philippe. Kevin, there's really, I think, a number of moving dynamics. One is the seasonality that we talked about and mentioned specifically around Q3, and not just in Europe, but certainly in Europe and throughout the North America, people's interest in taking some time off, taking a holiday after a very long COVID period. Now, obviously, the rise or the increase of the Delta variant of COVID might impact that. And I think we've got transforming or changing perspectives, quite frankly, over the last – you know, a few weeks. And so if that delta variant continues to rise, we may see less vacations taken and holiday time taken than we originally anticipated. At the same time, we do have, as you mentioned, and as we've said, pipeline conversion and nice opportunities. And we do have a large project that will start, although most of it's in Q4. Some of it will start in Q3. And then you've got our continued strategic part of our plan to disengage from the lowest margin staffing business. So I don't anticipate a significant sequential change in revenue either up or down. It might be up and it might be down. But I do anticipate revenue overall being higher than last year's number, which was almost $89 million. So year over year, I do expect an increase. Sequentially, I don't expect a lot of change. Again, maybe up, maybe down. But there's three or four factors that are driving that underneath the surface.
spk04: Understood, and I appreciate that, Culler. Certainly some of the new wins you guys talked about tended to stem more from the healthcare side. I was curious if that's indeed the case where it's mostly coming in healthcare, or are you seeing other industries where conversion rates are picking up as well?
spk05: Well, that's a very good question. We're actually seeing the same trend in more industries. We're seeing in Europe, though, usually Europe is a little more cautious in picking up the positive trends than happens normally in the States. But also in Europe, in the finance sector, even in the government, we see more and more movements, indications, Healthcare, of course, you heard the examples. We see that conversion rates picking up, but also energy. And so I think we're pleased that it's kind of almost all over the board.
spk04: Got it. And just looking at your headcount numbers and kind of what you ended up reporting for the staffing segment, it did look like you guys perhaps disengaged from some business intra-quarter. The questions I had around that was just is your headcount at the appropriate levels to support some of the pipeline conversion we've had or would you expect to add talent over the next quarter or two? And then more specific to the staffing side of the business, have we seen that full impact of any business you've disengaged from in the quarter or would there be another kind of fall off as we move forward in the back half of the year?
spk05: All right. I think we will add talent going forward. With the higher conversion rates, we see new projects starting. They're not all projects that are only focused on or mostly focused on one quarter. A lot of the wins we have are multi-years and are ramping up over time. So I see us growing in the solutions area. And I think you picked it up very well. We are continuing to disengage from lower margin staffing. We have done that already this year and we plan to continue that whenever it makes sense. Like we said, we have a very solid and strict way of looking at that business and seeing if it makes sense to continue or to walk away at renewal time. So we anticipate that our staffing resources will go down, not only in the next couple of quarters, but we'll probably see that continuing, knowing that we're also focusing on staffing that is more and more aligned with the skill sets that we need for our digital solutions. So our staffing and solutions is coming together in digital solutions and the staffing that's outside of that and low margin is going to slowly disappear.
spk04: All right. And then just one last question for me, you know, perhaps using kind of the renewal of the managed services contract as an example, or if you guys want to generalize a little bit more outside of this customer, you know, but for an engagement where you are getting that renewal and you're able to move more of the delivery offshore to your Columbia Center, can you talk a little bit about what sort of impact that has both in terms of the amount of revenue you can generate from the program as well as what impact you see on the margin side?
spk05: All right. We see that that trend for CTG is only just starting. So we see that we have a proven global delivery network that our clients are seeing that we're delivering results and that each time there's a renewal or each time there's a new managed services contract, we can present them with different options. an option that's fully onshore, an option that's fully offshore, and options that are mixed, that are hybrids. When you look at the cost difference between delivering something fully from India, for instance, and fully from the United States, it easily is one-third or one-fourth of the cost. Obviously, if you work with a client that we have worked with always on an onshore basis and we're moving the work offshore, that client is naturally expecting some of the benefit and some of the price cuts from that and also wants to pay a lower price. So it's not that cost savings we're doing on the delivery side is immediately an increased margin. So it's, like I said in my prepared remarks, it always is a win-win for clients and CTG.
spk04: Great. Well, thanks for taking the questions, and good luck here in the second half. Thanks, Kevin. Thanks, Kevin.
spk01: I would like to now turn the call back over to management for closing remarks.
spk05: Thank you, Felina. In closing, we have a comprehensive strategy in place centered around digital solutions that is producing tangible results as evidenced by the continued year-over-year growth of our solutions business, as well as improved operating performance in both the second quarter and for the first half of 2021. I am very proud of the CTG teams throughout our global organization and the consistent progression we've demonstrated toward achieving CTG's longer-term vision and positioning the company as a leading enabler and accelerator of digital transformation services. As we continue to execute our strategy and build off of our solid pipeline in the second half of the year, I'm confident we will continue to succeed in driving higher revenue and operating profits and in turn create higher value for our shareholders. Thank you for participating on today's conference call and your continued support of CTG. Felina, you may now disconnect the call.
spk01: Ladies and gentlemen, your conference is now terminated. You may now disconnect. Thank you for using AT&T Teleconferencing Services.
spk00: We're sorry. Your conference is ending now. Please hang up.
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