Mastech Digital, Inc. (AMEX:MHH) Q3 2023 Earnings Call Transcript

Mastech Digital, Inc. (AMEX:MHH) Q3 2023 Earnings Call Transcript November 5, 2023

Operator: Greetings, and welcome to the Mastech Digital Q3 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Ford Lacey, Manager of Legal Affairs for Mastech Digital. Thank you, Ms. Lacey Ford. You may begin.

Jennifer Ford Lacey: Thank you, operator, and welcome to Mastech Digital’s Third Quarter 2023 Conference Call. If you have not yet received a copy of our earnings announcement, it can be obtained from our website at www.mastechdigital.com. With me on the call today are Vivek Gupta, Mastech Digital’s Chief Executive Officer; Jack Cronin, our Chief Financial Officer; and Michael Fleishman, our Chief Executive Officer of the company’s Data and Analytics Services business segment. I would like to remind everyone that statements made during this call that are not historical facts are forward-looking statements. These forward-looking statements include our financial growth and liquidity projections as well as statements about our plans, strategies, intentions and beliefs concerning the business, cash flows, costs and the markets in which we operate.

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Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify certain forward-looking statements. These statements are based on information currently available to us, and we assume no obligation to update these statements as circumstances change. There are risks and uncertainties that could cause actual events to differ materially from these forward-looking statements, including those listed in the company’s 2022 annual report on Form 10-K filed with the Securities and Exchange Commission and available on its website at www.sec.gov. Additionally, management has elected to provide certain non-GAAP financial measures to supplement our financial results presented on a GAAP basis.

Specifically, we will provide non-GAAP net income and non-GAAP diluted earnings per share data, which we believe will provide greater transparency with respect to the key metrics used by management in operating the business. Reconciliations of these non-GAAP financial measures to their comparable GAAP measures are included in our earnings announcement, which can be obtained from our website at www.mastechdigital.com. As a reminder, we will not be providing guidance during this call nor will we provide guidance in any subsequent one-on-one meetings or calls. I will now turn the call over to Jack for a review of our third quarter 2023 results.

Jack Cronin: Thanks, Jen, and good morning, everyone. Our third quarter 2023 financial results continued to be impacted by economic uncertainty and our current and prospective clients responses to these challenging market conditions. Third quarter revenues totaled $47.8 million, representing a 24% year-over-year revenue decline. Both of our business segments contributed to this decline. Our Data and Analytics Services segment reported revenues of $8 million in Q3 2023 compared to $10.1 million in 2022 third quarter as customers continued to reduce resources on existing projects and order bookings experienced delays in signing new projects during the quarter. Q3 2023 revenues in our IT Staffing Services segment totaled $39.8 million compared to $53.1 million in the third quarter of 2022.

Demand continued to be soft in Q3 2023 as our global consultants declined during the quarter, albeit at a slower rate than experienced in the previous two quarters. Consolidated gross profit as a percent of revenues in Q3 2023 improved to 26.3% compared to 25.8% in the third quarter of 2022, resulting in our best gross profit performance over the last five quarters. In our Data and Analytics Services segment, gross profit as a percent of revenue improved significantly over Q3 of 2022. This improvement reflected higher utilization in the 2023 quarter and the impact of a $300,000 project cost overrun in the third quarter of 2022. In our IT Staffing Services segment, gross margins were down 80 basis points compared to the third quarter of 2022, largely due to year-over-year reductions in our direct hire revenues.

Generally, contract gross margins held up well when compared to last year despite challenging market conditions. GAAP net income for Q3 2023 was $125,000 or $0.01 per diluted share compared to $2.4 million or $0.20 per diluted share in Q3 2022. Non-GAAP net income for the third quarter of 2023 was $1.3 million or $0.11 per diluted share compared to $4 million or $0.33 per diluted share in the third quarter of 2022. Our third quarter non-GAAP 2023 net income and earnings per diluted share results were in line with last quarter’s numbers despite lower revenues. SG&A expense items not included in Q3 2023 non-GAAP financial measures, net of tax benefits or stock-based compensation and the amortization of acquired intangible assets. A description of non-GAAP items for all periods presented is included in our third quarter 2023 earnings release, which is available on our website.

Addressing our financial position, on September 30, 2023, we had approximately $16 million of cash balances on hand, no bank debt outstanding and borrowing availability of $25 million under our revolving credit facility. Our days sales outstanding measurement was 55 days at quarter-end, which is much better than our targeted range of 60 to 65 days and one day better than our DSO measurement a quarter ago. I’ll now turn the call over to Vivek for his comments.

Vivek Gupta: Thank you, Jack. Good morning, everyone. The same macroeconomic headwinds that we experienced during the first half of 2023 continued to impact our client spending dynamics in the third quarter, resulting in a lower demand for our services. Our IT staffing services segment continued to see clients taking a more conservative approach with respect to spending on new projects and new initiatives. Our Data and Analytics Services segment was also impacted by clients reducing resources on existing projects and delaying project starts on new orders. Michael will discuss our order booking performance and prospects in his prepared remarks. While recent growth in domestic GDP is a positive data point for the US economy, the recent conflict in the Middle East is yet another geopolitical event that has created additional uncertainty in the global economy.

We are continuing to aggressively pursue steps to reduce our SG&A expenses as a mitigating action in these uncertain economic conditions. Our operating expenses totaled $12.6 million in the third quarter of 2023, which is a reduction of approximately $800,000 from the previous quarter. Let me reiterate that we believe that our company remains on a sound financial footing with a solid balance sheet, access to $25 million of capital under our credit facility and long-standing relationships with several top companies in the world. I’m confident that both of our businesses will strongly recover when the market conditions improve. Let me now turn the call over to Michael for his comments related to our Data and Analytics Services segment. Over to you, Michael.

Michael Fleishman: Thanks, Vivek, and good morning, everybody. As Vivek mentioned, uncertain economic conditions are clearly impacting our clients’ spending behavior as we continue to see clients reducing resources on existing projects. While activity levels in our pipeline of opportunities remained elevated during the third quarter, project award delays resulted in a disappointing bookings performance of $5.1 million in the third quarter as clients and prospects implemented tighter expense controls. There is a bit of good news, however, since two sizable projects that were scheduled to commence in Q3 2023 as well as various additional smaller Q3 projects, all of which total approximately $3.5 million have been awarded in October of 2023, this past October.

Behind our financial numbers, we believe we are making good progress in transforming our organization from a master data management firm to a much broader data and analytics company with capabilities around the entire suite of data modernization services. In this regard, our pipeline of opportunities continues to broaden with data modernization assignments constituting a higher percentage of our 2023 bookings and pipeline versus master data management when compared year-over-year. Also, in the third quarter of 2023, we continued to expand our gross margins to 45.8%, which increased 620 basis points over Q3 2022 gross margins. We believe a predictable utilization rate is a key component to our gross margin improvement in 2023 and is a point of emphasis by our delivery teams.

This emphasis, coupled with tighter execution processes on our delivery are giving rise to increase margins year-over-year. In closing, I would like to say that I agree 100% with Vivek’s belief that our financial foundation is strong and that both of our business segments are poised for growth once more clarity in the global economy occurs. I’ll now turn the call back over to Vivek.

Vivek Gupta: Thank you, Michael. Operator, this concludes our prepared remarks. We can take questions now.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Lisa Thompson with Zacks Investment Research. Please proceed with your question.

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Q&A Session

Lisa Thompson: Good morning.

Vivek Gupta: Hi, Lisa.

Lisa Thompson: So all right. So I have a few questions. First off, did you do — buy back any stock this quarter?

Vivek Gupta: We did not. Jack, can you comment on this?

Jack Cronin: Sure, sure. In the — we extended our blackout period for Q3. And the reason behind that is we had an outstanding employment claim that was settled in Q3, and we didn’t buy shares during that negotiation period. But clearly, we think our share price is a great value relative to the businesses intrinsic potential and you’re likely to see us buy shares in the fourth quarter.

Lisa Thompson: All right. Sounds good. Which leads to the second question. What was — what happened with the claim? And why is it still on the balance sheet? Are you going to get paid for that? Or how is that working?

Jack Cronin: Yeah. It’s — the claim is settled. It’s a confidential settlement. It was settled at the economic terms and conditions that we reported in the second quarter. You’ll see — if you looked at the balance sheet, you would see that we still have $2.2 million of insurance recovery that is expected to happen within the next 30 days. So that will generate some additional cash flow for us. But the agreement is finalized and it’s settled.

Lisa Thompson: Okay. Good. And what — in the quarter, what expenses did you have for that besides the actual payment, like lawyers?

Jack Cronin: For the claim, we were fully reserved in second quarter. We did have a couple of hundred thousand dollars of legal expense. But as far as the claim that was all reserved in Q2 of 2023.

Lisa Thompson: Okay. So that maybe I could take $200,000 off next quarter’s expenses because of the lawyers.

Jack Cronin: Yes. Yes.

Jack Cronin: Okay. Okay. All right. That’s good stuff. And then as far as the contracts that you signed in Data and Analytics, you said $3.5 million, I guestimate that’s a one-year contract. Is that additional revenue going to just replace what you’re losing or is that going to be adding to revenue sequentially?

Michael Fleishman: Vivek, if that’s okay with you, I’ll take that one.

Vivek Gupta: Yeah, I was going to pass it on to you anyway. Yeah, go ahead.

Michael Fleishman: Okay. Thanks. Lisa, great questions. So it’s a combination of some one years, there are a couple of multiyear contracts in there. There’s multiple contracts in that $3.5 million over five. Two of them were decent sized as in $1 million-plus and one of those was a multiyear contract. One of the large ones was from a new logo. I can’t disclose the name of the account, but it was a new logo and it was north of $1 million. That is a one-year and so we will see all of that revenue in 2024, and it’s a new logo, so it’s net new revenue to the business, not just continuance and carryover. One of the other larger sizable ones was a renewal, but a multiyear renewal and that revenue will continue, but that account has — we feel has growth potential. And then the other accounts were all net new or expansion on existing accounts. Does that answer your question?

Lisa Thompson: Except for the part where I asked, would that mean that you’ll have sequentially increasing revenues, netting all that out?

Michael Fleishman: With all of them except for one, for those deals that closed because one of them was a linear renewal. So the revenue will be flat year-on-year for that one opportunity that closed. All of the other opportunities that closed in October were sequential growth for 2024 or for 2023.

Lisa Thompson: Okay. And they would compensate for anything you might have lost? Right?

Michael Fleishman: Yes. Yes. That is correct. Yes, that is a correct statement.

Lisa Thompson: Okay. All right. Good. That’s a great sign. Thank you. That’s all the questions I have.

Vivek Gupta: Thank you, Lisa.

Operator: [Operator Instructions]. Our next question comes from the line of Marc Riddick with Sidoti & Company. Please proceed with your question.

Marc Riddick: Hey, good morning everyone. I wanted to just start maybe if you can bring us up to date on just a couple of things to fill in on. Where did we finish on the quarter on headcount and maybe you could give us a utilization update?

Vivek Gupta: Sure. Sure, Mark. Again, for that number, I’ll ask Jack to answer the headcount?

Jack Cronin: Yeah. The staffing billable consultant and that’s a number that we publish in the Q every quarter, it was 992 billable consultants. And that was down 49 consultants from the previous quarter. Well, I don’t want to say the previous quarter. From the beginning of the third quarter. But that loss was materially better than what we experienced in Q1 and Q2 of 2023. So there is some hope and improvement in that number.

Marc Riddick: Okay. And then could you share anything on utilization and maybe bill rates as well?

Jack Cronin: Yeah. Our — well, in staffing, our bill rate was relatively flat from the last quarter. It was a little over $20 — $80 per hour, a little over that, and it was pretty close to being flat from the second quarter number. Utilization was — utilization is a number that’s very, very important to data and analytics. As far as the utilization on the staffing business, it’s generally a pay an hour, bill an hour. And so utilization is less important in that business. But our margins have improved dramatically in the D&A business, and a lot of that has been improved utilization. So I think our utilization, and Michael, you can correct me if I’m wrong, we’re approaching 80% — we approached 80% in Q3 of 2023.

Michael Fleishman: So yes, that is correct. Our utilization has continued to be a very heavy focus for us in 2023. Our utilization has improved right around 17% since January of this year through October end. We have a forecast target for the year of about 75% utilization for the year is our current target with a pretty decent level of confidence.