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spk07: Your conference will begin momentarily please continue to hold. We'll be right back.
spk03: Ladies and gentlemen, thank you for standing by. Welcome to the CTG fourth quarter and year-end 2021 investor call. At this point, all the participant lines are in a listen-only mode. However, there will be an opportunity for your questions. If you'd like to ask a question on the call today, please press 1, then 0. If you need any assistance during the call, please press star 0, and an operator will assist you offline. As a reminder, today's call is being recorded. I'll turn the call now over to Mr. Craig Mihalik. Please go ahead, sir.
spk01: Yeah, thank you, John. And good morning, everyone. We certainly appreciate your time today and your interest in CTG. Joining me on the call are Philippe Hidet, our president and CEO, and John Laubacher, our chief financial officer. We released our fourth quarter and full year 2021 financial results this morning before the market opened. You can access that release on our website at ctg.com. After Philippe and John's formal discussion this morning, we will open the line for Q&A. Let me first just mention that, as you are likely aware, we may make some forward-looking statements during the formal discussion, as well as during the Q&A session. These statements apply to future events that are subject to risks and uncertainties, as well as other factors that could cause actual results that differ materially from what is stated on today's call. These risks, uncertainties, and other factors are provided in the earnings release, as well as other documents filed with the Securities and Exchange Commission. These documents can be found on our website or at sec.gov. During today's call, we'll also discuss non-GAAP financial measures, which we believe are useful in evaluating our performance. You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided the reconciliation of non-GAAP measures with comparable GAAP measures in the tables in today's release and our FCC filings. I'll now turn the call over to Philippe to begin. Philippe?
spk05: Thank you, Craig, and good morning, everyone. We appreciate you joining us today. We had a very strong fourth quarter of 2021 with revenue up 11% and operating income increasing nearly 55% year over year. Importantly, this translated to strong bottom line performance with gap earnings in the quarter of 58 cents per diluted share and non-gap earnings of 25 cents. and excluding the reversal of the tax valuation allowance with North America and acquisition-related costs. We ended the year with earnings of 92 cents on a gap basis and 64 cents per share on a non-gap basis. The non-gap EPS increase was 45% from 2020. Our results clearly demonstrate the significant progress we are making on our digital solutions and services strategy. Let me start today's call by explaining our three business segments and how they relate to previous discussions we have had regarding disclosing financial information for solutions and staff. The segments including IT solutions and services, disclosed for each of North America and Europe, represents our solutions revenue and higher margin IT staffing services. It is in these segments that we are making investments in business development resources, including solutions, sales, delivery, and recruiting, to grow both revenue and profit margins. The non-strategic technology services segment only includes very low margin staffing business that we intend to disengage from over time. As you can see from our release, the revenue in this segment decreased 22% in the quarter and 15% for the year. Previously, when we discussed solutions, we included all of our solutions-based revenue, while staffing revenue represented all of our staffing revenue. With segment reporting, we are providing clarity around our strategy to segment the areas where we are making investments, which is the North America and Europe IT solutions and services business. Let me now turn to a discussion of the progress on our strategy. Our fourth quarter earnings results exceeded our expectations primarily due to the disciplined execution by our team on a large training implementation and support engagement for a health system in North America. On this engagement, we collaborated with our clients on activities related to training, staffing, and technical preparation for their goal lines. This included providing over 140 EPIC-certified or credentialed trainers that assisted with curriculum development, updated training content, supported EPIC specialists, and provided training on how to personalize the new system. We also provided over 1,000 at-the-elbow support to the client's team to ensure adoption and build confidence in the new system. This project was a tremendous success from all aspects, including planning and support to the logistics of quickly deploying such a large number of people in a short time period. At the end of the engagement, we had a very satisfied client. I continue to be impressed every day by the many highly skilled people we have working hard to drive our solution strategy and provide tremendous service to our clients. This was a very significant engagement during the fourth quarter and was a large contributor to North America IT solutions and services revenue, more than doubling year over year and generating 20% contribution margins. However, even if you excluded this engagement, our operating results in the quarter were excellent as we continue to execute our strategy as a digital transformation IT services provider that is driving consistently better results. Large engagements occurring in either North America or Europe will directly affect any particular quarter's contribution in the IT solutions and services segments. Accordingly, we have determined that it is best to provide a full year perspective on our outlook, while also giving some insight into how we see the next quarter playing out. During 2022, we will continue to disengage from lower margin non-strategic technology services. Additionally, we do not expect to have a large engagement that will be similar in size to the one we had in the fourth quarter of 2021. These items will provide a headwind of approximately 25 million to $35 million on 2022 revenue, resulting in our consolidated revenue expectation for the year of approximately 375 million to $395 million. Consistent with the shift in our business model, We expect earnings to grow at a greater rate than revenue and are expecting non-GAAP diluted earnings per share in the range of 64 cents to 72 cents in 2022, which is about 6% growth from 2021 at the midpoint of the range. We do expect that our first quarter will be the softest quarter in the year and revenue will be down year over year. This is both due to the timing of engagements and lower utilization due to a higher rate of illness from the impact the COVID-19 variant Omicron has had at the beginning of 2022 on our billable resources. For the long term, our objective is to grow IT solutions and services revenue in mid to high single digits organically. and deliver contribution margins for these segments in the mid-teens. We expect this will enable us to achieve our goal over the next two years with adjusted EBITDA margins increasing to 7% to 8% of revenue, given the operating leverage inherent in the business, and accelerating the pace of growth and increasing our margin profile through focused acquisition. CTG is well positioned to address the challenges our clients are facing in a constantly evolving digital landscape. Business performance, decisions driven by data, continuous innovation, and enhanced customer experience are all critical business outcomes our clients need to drive their success. And our expertise is the reason CTG is often engaged to assist in their digital IT initiatives. We look forward to continuing to execute on our strategy while also being the catalyst for digital transformation change for our clients. With that, let me turn it over to John to review our financial information. John?
spk02: Thank you, Philippe. And again, good morning, everyone. Thank you for joining us on today's call. As Philippe mentioned, consolidated revenue in the fourth quarter grew to $112.4 million or 11% compared with the prior year period. Despite having intentionally disengaged from nearly $22 million in non-strategic technology services revenue through the year, we still had revenue growth of 7% for 2021. Fourth quarter revenue growth was heavily influenced by the engagement Philippe discussed and resulted in revenue in our healthcare vertical increasing to 36% total revenue in the quarter, while also driving North American revenue 63% of our total revenue. By reporting our revenue in three segments, we have clearly identified our lower margin non-strategic technology services business, which totaled 31% over 2021 revenue. We will continue our efforts to shrink this part of the business as we, in turn, invest in our solutions and services business in both North America and Europe to support our growth plans. IBM revenue was $16.7 million or 14.9% of total revenue in the quarter and $74.8 million or 19.1% of total revenue for the year. The large engagement represented greater than $20 million of revenue in the fourth quarter. For our Europe IT Solutions and Services segment, Foreign currency translation had a negative impact of $1.6 million on revenue in the fourth quarter of 2021, excluding foreign currency. Revenue would have declined about 5% in the quarter for this segment, which likely reflects lower utilization resulting from a higher level of downtime around the holidays and from illness from the COVID-19 Omicron variant. Consolidated gross margin expanded 100 basis points in both the fourth quarter and full year period to 22.3%, and 22% respectively. Both periods reflected the increased mix of higher margin IT solutions and services revenue. Of note, our fourth quarter SG&A expense as a percentage of revenue decreased 40 basis points to 17.7% despite our continued investment in solutions and business development resources in support of our digital solutions and services strategy. The results of the improved revenue mix and operational leverage, we saw measurable improvement in our consolidated operating and bottom-line performance. Operating income for the fourth quarter increased 55%, with a margin of 4.6%, an increase of 130 basis points over the prior year quarter. When excluding approximately $211,000 of acquisition-related expenses, non-GAAP operating margin in the fourth quarter was 4.8%. For the 2021 full year, operating margin expanded 70 basis points to 3.2 percent, and on a non-GAAP basis, increased 50 basis points to 3.6 percent. We achieved net income of $8.7 million, or 58 cents, per diluted share in the fourth quarter, which included a $5.1 million, or 34 cents, per diluted share reversal of the valuation allowance against deferred tax assets in the United States. Excluding the tax valuation allowance reversal, and acquisition-related expenses, non-GAAP earnings per diluted share were $0.25, up $0.11 or nearly 80% from the year-ago period. This level significantly exceeded our prior guidance, largely due to the margin improvement during the quarter. For the full year of 2021, we delivered net income of $13.7 million, or $0.92 per diluted share, and on a non-GAAP basis, was $0.64 per diluted share, which was 45% higher than the prior year period. Adjusted EBITDA margin improved 90 basis points to 5.8% in the quarter, and for the full year was 4.6% of 30 basis points. TCG's headcount at year end was approximately 3,450, of which approximately 90% was billable. This compares with a 91% billable rate at the end of 2020. Turning to our balance sheet and cash flow. Cash and cash equivalents were $35.6 million, up $2.7 million or 8% since year end 2020. Full year net cash provided by operations was $7.4 million and was used in part to fund capital expenditures of $1.9 million. Also at the end of the year, the company had no outstanding balance on its revolving line of credit facility or any other outstanding debt. As Philippe covered our outlook and guidance, I would like to reemphasize that we continue to work hard to advance our strategy by investing in the talent, skills and processes necessary to drive change. This means adding solution skill sets, reviewing how we source and approach opportunities, and how we price our services. These investments and activities reflect the continued execution of our digital IT solution strategy. In the end, we believe we have the skills, knowledge and expertise to provide differentiated quality services and the high-speed pace of digitalization within any enterprise. That completes our prepared remarks. John, could you please open the call for questions?
spk03: Certainly. And just as a reminder, if you do have a question, please press 1, then 0. You may remove yourself from the queue by repeating the 1-0 command. Once again, if you have a question, please press 1-0 at this time. And first, we'll line up Josh Vogel with Sedodian Company. Please go ahead.
spk04: Thanks. Good morning, Philippe and John. Hope you guys are doing well. Good morning, Josh.
spk02: Hello, Josh.
spk04: Good morning. So, obviously, tremendous success with the health system engagement. I was just curious, is there any sort of residual business whatsoever that will fall into 2022, you know, maybe just from like a support perspective?
spk05: That's a very good question, Josh. Yes, this is exactly the type of client and the type of projects we want to continue doing in the future because it creates stickiness. We have been of tremendous value to the client. They are really very satisfied. And even while the go-live was going on, we were already working and talking about support afterwards. There's a small kind of tail to the project with a separate smaller go-live, and there will be continuation with the support afterwards.
spk04: So yes, is the short answer. Great. obviously an engagement of this scale and the success there. Maybe it's too early to tell, but are you seeing it open any other doors or prospects or opportunities for other clients?
spk05: Well, this wasn't the first of these kind of go-live supports that we have been doing. And actually, I'm not doing it justice. with using the word go live because it really is the end of a true digital transformation project for those health systems. It's changing the whole way they are working from start to finish. So we have a track record of delivering the reliability that CTG is known for and the acceleration that we're bringing to their go lives. We have done this before and We are looking at opportunities as we speak in our pipeline that are in the same direction. Yes, this is a really great reference in the market.
spk04: All right, great. Thank you. And looking at the guidance and just kind of using midpoints of some of the numbers, it kind of implies 6% organic growth baked in for 2022. And I was curious how much of that number, of the numbers you gave out, would you classify as recurring, where you have the visibility versus new business that you're expecting to fill the pipeline?
spk05: Okay, well, I'll answer the question high level and then refer to John for more color. From a normal business as usual kind of work, CTG has a high percentage of recurring business. We have a lot of loyal clients who have stayed with us for more than decades, so those clients generate ongoing business. These projects, as we have done at Health System, create other opportunities at the same client, so that is only increasing. John, is there any more color you can give to that?
spk02: Thanks, Philippe. Josh, as you know, we haven't put out specific numbers around recurring revenue at this time, and we continue to have not done that. But we see the amounts increase really from quarter to quarter pretty consistently. As Philippe answered so far, this engagement itself, while in itself was a large engagement, has now led to some follow-on support work. which is exactly what we're trying to drive with these types of engagements. And so we see that more and more often. I would also like to reiterate what Philippe just said, that our client base, we have such a great, loyal client base, recognizing that we're providing consistently a high level of quality of services. The amount of renewals and extensions and continuation of new projects that we get across our portfolio from whether it be North America or Europe tends to be very, very high.
spk04: I appreciate the color there. And two more quick ones, and I'll let others hop on. Can we expect any other valuation allowances as the U.S. business continues to post profits? Is that something that we could see in the Q3 or 4 in the future, kind of like what we saw this year? Or in 21, sorry. John, I believe that's a question for you.
spk02: Yeah, it's a great question, Josh, and I believe the answer is no. I don't anticipate any other reversals of valuation allowance. The actual valuation allowance, $0.34 in the fourth quarter, was a reversal of all of the valuation allowance against all of the U.S. deferred tax assets. We're really actually very excited about it. Obviously, it's a cash pickup within the financials itself, but what it demonstrates on a long-term basis is is that the North American business is improving, that there's a confidence level within the business itself to generate income and earnings that will offset those deferred taxes over time. And we felt now, for a number of reasons in the fourth quarter, primarily driven in part by this large project, which generated income in Q4. But looking at the prospects going forward, we felt now is the right time. So it's It's not just the event of reversing the valuation allowance and adding the $0.34 to the results in the fourth quarter of 2021. It does present a positive outlook that says the company feels really good about its future prospects in that area. It gives us the confidence to do it now.
spk04: Okay, great. Thank you. And just lastly, I just want to make sure I'm looking at it correctly. Based on your EBITDA margin guidance, That's 7% to 8%. That's a Q4 exit rate target. Am I thinking about that correctly for 2023?
spk02: Correct. That's exactly right. So as we exit 2023, our target is to have 7% to 8% consolidated whole company EBITDA margins.
spk04: Perfect. Well, thanks for taking my questions, and congrats on the great performance last year.
spk02: Thanks, Josh.
spk04: Thanks, Josh.
spk03: Next question is from Kevin Liu with K. Liu and Company. Please go ahead.
spk07: Hi, good morning, guys. Good morning, Kevin. In terms of the Omicron impact, you talked about how that impacted utilization in the fourth quarter, and also you've seen some impact here in the first quarter. Just curious if that's primarily on existing projects where you just weren't able to bill some of those hours or whether there's any sort of impact in terms of sales cycles or RFP processes you're currently going through.
spk05: All right. Yes, well, looking at how COVID affected us, In the fourth quarter, Omicron, as you know, was extremely contagious. And I'm happy that I'm using the word was maybe a little too fast, but it looks like it. It was very contagious. It wasn't causing a lot of severe illnesses among our workforce, but it was kind of like the effect of flu. So we had a lot more people infected. not available because of illness or utilization went down. But luckily, as you correctly put, Kevin, it was mostly on the existing projects that we couldn't build because people were sick. It didn't really affect the pipeline and the closing of the business. As a matter of fact, we're seeing now that a large number of opportunities, we're seeing solid win rates, and we're seeing throughput on the pipeline improving where before it had lacked for some time during the pandemic.
spk07: That's helpful. And maybe along those lines, could you talk a little bit about the pipeline today and what you're seeing, for instance, is it concentrated in any particular verticals or geographies? And maybe how does it compare in terms of what you were seeing pre-pandemic?
spk05: Well, it looks like we're getting closer to pre-pandemic situation. Like I said, our pipeline is healthy in all areas of the business. There's no one specific industry or digital solution set that jumps out. large number of opportunities, solid win rates, renewals and extensions continue at a very high pace and what is encouraging is that that throughput is improving and that is the thing we've mostly experienced in the earlier phases of the pandemic that the pipeline was still there but the throughput was not as fast, not as Not as good, and that is coming back and making us all very excited about what's coming.
spk07: That's great to hear. And then just on the non-strategic services segment that you guys are calling out now, can you talk a little bit about the pace at which you expect to disengage from further work? Does that accelerate kind of in 22 and 23, or should we think of it as kind of more moderate declines than what we've seen of late?
spk05: Well, as you've seen in the release, we've stepped away from $50 million in the last two years intentionally. We're continuing the stepping away. We're looking at it as fast as we possibly can do. But this segment is a combination of a lot of things, a different number of clients, contracts engagements all with different maturity dates and that makes moving away at one time or extremely fast impossible we must follow in our contractual provisions while supporting the clients some of those provisions prohibit immediate immediately ending or sale of the engagements And obviously, we also need to be mindful of the impacts on our organization. It is a very deliberate focus, Kevin, to only invest in the IT solutions and services area and to disengage from the lower margin business as fast as we can while respecting all of the boundary conditions around it.
spk07: And then just Given the current environment in terms of kind of a tight labor market and signs of wage inflation, I was curious what sort of impact you're seeing on your business. Have you been able to improve your bill rates with clients on kind of new engagements or renewals? And then conversely, what are you seeing from a talent retention and wage inflation perspective?
spk05: Well, we're all seeing again after a while during the pandemic, we're now seeing the war for talent coming here again. Obviously, there's a wage inflation. We've seen that, I think, first in Europe in the second half of the year. We're seeing it a little bit everywhere. We are able to match our pricing accordingly because pricing, when you're pricing in the solutions world, you're pricing to a deliverable or to a service level. And it's not so much directly related to a cost rate and a bill rate anymore. We are focusing really hard on retention because that is the best way of improving our margins. Each time you lose people during a project, And you need to rehire. You have the hiring costs. You have the training costs. You have some overlap you have to provide. So it all adds costs to the mix. Our retention at this moment is still extremely good. I think we're at the top of the market. And the fact that we're now, for the first time in our history, a great place to work certified, in all of the countries where we are delivering business, in all of the countries that were present, is definitely a contributor to that retention.
spk07: And just lastly for me, could you talk a little bit about the opportunities you're seeing in your acquisition pipeline and what you're seeing with valuations in this current environment?
spk05: Well, we're actively focusing on looking for acquisition targets. As you know, we have a very disciplined approach to that. We have a capital allocation framework, so every target is looked at with our criteria in mind. We're definitely not going to take any risks or going to pay extremely foolish multiples. So we have a very disciplined approach. We're seeing opportunities in the market, but we're looking, we're always looking, Kevin, for what I call seeds for growth. So we're looking at additional solution capabilities or solution capabilities that are very close to the solutions we already have that correlate with what we already have. We're looking for offshore delivery capabilities, geographies, clients, but always from a very disciplined approach. So we're not going to pay crazy multiples. And while we haven't done any acquisition in 2021, I think that is definite proof of our careful but thorough approach to DERG.
spk07: Got it. Well, thank you for taking the questions. Congrats on the strong 21, and good luck this year.
spk05: Thanks, Kevin.
spk03: And just a reminder, ladies and gentlemen, if you would like to ask a question, please press 1, then 0 at this time. And allowing a few moments, no further questions coming into queue. And we do have another question that just came in. We'll go to George Melas with MKH. Please go ahead.
spk06: Yes, good morning, gentlemen. Thanks for taking my question. Hello. You know, the margin goal that you have of 78% as you exit 2023 is a big improvement over the 2021 levels, which is at 4.6%. What are the major factors that are going to move the needle that much? And is acquisition part of that plan?
spk05: Thank you for that question, George. There are mainly four main drivers to the realization of this vision. First, we are continuing to robustly invest in our sales, solutions, partnerships, delivery, basically to drive our organic growth. Second, answering your second part of the question, yes, there is acquisitions involved. We have a focus on acquisitions that will grow and expand our IT solutions and services segments. Like I said, disciplined capital allocation approach, and focusing on digital capabilities, offshore capabilities, client sets, and geographies. Third, focusing on reducing our non-strategic technology services segment, which I went into a little more detail in the previous question. And fourth, focusing on lowering our delivery costs through our offshore delivery centers. Our new segment reporting is also providing greater clarity on where we do all these investments. And we firmly believe that continuing the disciplined execution we have shown in the last three years, executing these four strategic points, we will drive the operating results towards those 23 goals.
spk06: Okay, great, great. Thank you for the clarity. I appreciate that. Looking at the margins of the two solutions businesses in North America and Europe, just over the last three years, which is the data you provided, Europe seems to have meaningfully lower gross margins and contribution margins than North America. Can you sort of help us understand what explains that and also maybe explain what you're trying to do if you're trying to sort of, you know, improve European margins?
spk05: Sure. We have had a lot of long-term success in Europe over the last couple of years, and we will do so in the future. But in 2021, we saw that we had some particular challenges, a couple on gross profits. Starting in the third quarter, we were impacted by lower utilization from more holiday time. The COVID-19 pandemic diminished. People started to travel again. The fourth quarter, we had Omicron variants that created a higher level of sickness and made made it impossible for our people to build or to have the utilization we normally have. And finally, we're also impacted by the rising wage costs that at times we cannot always pass on to our clients. On the contribution profit level, and that's part of a longer story and also the story why we believe we will improve these numbers is that we continue to believe it's necessary to invest internally in sales, in solutions, in recruitment to drive future success. We know we have work to do in Europe to increase these margins, but we're confident by using those four levers that we will succeed
spk06: Okay, great. And then maybe just one quick final question, two quick questions. Maybe what are the NOLs that you have right now? And on the large health systems project, did you guys work on the EPIC implementation or did you really start getting involved in the go-live phase of the project?
spk05: We were involved in that project. We were involved in the application management, so keeping the current, the older applications running while the APIC implementation was going on. We were not directly involved in the APIC implementation, which makes it even more remarkable that we were awarded the go-live support which I think is a merit to the references that the teams have built over the last couple of years, and they've added a wonderful new reference to that list. Okay.
spk06: And just on the NOL?
spk05: I'm sorry about that. John, could you take that part?
spk02: Sure. On the net operating losses, the NOLs we have, most of those that we have remaining at this point in time relate to operations where we previously had operations or were holding companies that were operations fed or let up into them. So we've got some. We've got valuation allowance against those, and I don't see those changing in the future.
spk06: Okay. Thank you. Thank you very much.
spk02: Thank you.
spk06: Thank you.
spk03: And once again, ladies and gentlemen, if you have a question, please press 1, then 0 at this time. And at this point, no further questions coming in.
spk05: Thank you, John. In closing, The fourth quarter marked another quarter of continued progress and execution on CTG's digital solutions strategy. Our achievement of year-over-year growth continues to validate that we have an effective strategy and the right team in place to deliver on business objectives. Near-term, we expect to deliver increased operating profits and bottom-line results, further demonstrating the success of our strategy and the ongoing commitment to building long-term value for all CTG shareholders. Moreover, we are confident that our previous repositioning of CTG as a catalyst for clients to achieve accelerated digital transformation will lead to realizing our longer-term vision and financial targets for 2023. Thank you again for joining us today. and your continued support of CTG. John, you may now disconnect the call.
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