Mastech Digital, Inc. (AMEX:MHH) Q4 2022 Earnings Call Transcript

Mastech Digital, Inc. (AMEX:MHH) Q4 2022 Earnings Call Transcript February 8, 2023

Operator: Greetings, and welcome to the Mastech Digital, Inc. Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Lacey, Manager of Legal Affairs for Mastech Digital, Inc. Thank you. You may begin.

Jennifer Lacey: Thank you, operator, and welcome to Mastech Digital’s fourth quarter 2022 conference call. If you have not yet received a copy of our earnings announcement, it can be obtained from our website at www.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 recently appointed Chief Executive Officer of the company’s Data 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.

Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify certain forward-looking statements. These statements are based on information currently available to us and we assume no obligation to update these statements as circumstances change. There are risks and uncertainties that could cause actual events to differ materially from these forward-looking statements, including those listed in the company’s 2021 annual report on Form 10-K filed with the Securities and Exchange Commission and available on its website at www.sec.gov. Additionally, management has elected to provide certain non-GAAP financial measures to supplement our financial results presented on a GAAP basis.

Specifically, we will provide non-GAAP net income and non-GAAP diluted earnings per share data, which we believe will provide greater transparency with respect to the key metrics used by management in operating the business. Reconciliations of these non-GAAP financial measures to their comparable GAAP measures are included in our earnings announcement, which can be obtained from our website at www.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 fourth quarter and full year 2022 results.

Jack Cronin: Thanks, Jen, and good morning, everyone. Fourth quarter 2022 was clearly a difficult quarter for Mastech Digital, as we saw both of our business segments negatively impacted by economic uncertainty, including customer concerns regarding inflationary conditions and a possible recession. Revenues for the quarter totaled 57.2 million, representing a 3% revenue decline compared to $59 million in Q4 2021. Our data and analytics services segment contributed revenues of $9.1 million in Q4 2022 compared to $10.1 million in the 2021 fourth quarter. As order bookings in the second half of the year came in short of expectations and as a result, utilization rates were well below our historical norm. Q4 2022 revenues in our IT staffing services segment totaled $48.1 million compared to $49 million in the fourth quarter of 2021.

Customer demand declined during the quarter which when combined with seasonal high levels of assignment ends resulted in our lower revenues. Consolidated gross profits in the fourth quarter of 2022 totaled $14.2 million compared to $15.7 million in the fourth quarter of 2021. Gross margins as a% of revenue in Q4 2022 was 24.8% compared to 26.6% in the 2021 fourth quarter. This margin decline was entirely related to our D&A Services segment and was attributable to lower utilization and reduced margins on several long term assignments, largely due to compensation increases in today’s inflationary environment. GAAP net income in the fourth quarter of 2022 was $1.5 million or $0.13 per diluted share compared to $3.9 million or $0.32 per diluted share in Q4 2021.

Non GAAP net income for Q4 2022 was $2.8 million or $0.23 per diluted share compared to $4 million or $0.32 — $0.34 per diluted share in the fourth quarter of 2021. SG&A expense items not included in Q4 non GAAP financial measures net of tax benefits are detailed in our fourth quarter 2022 earnings release, which is available on our website. Highlighting our full year 2022 results, revenues were $242.2 million, which were up 9% year-over-year as both of our business segments achieved revenue growth during 2022. IT staffing services had 10% revenue growth in 2022 and D&A Services had 6% revenue growth. Consolidated gross profits grew to $63.2 million in 2022, up 6% compared to $59.4 million in 2021. GAAP diluted earnings per share were $0.72 in 2022 compared to $1.02 in 2021.

And non GAAP diluted earnings per share were $1.13 in 2022, compared to $1.19 in 2021. During 2022, our liquidity and overall financial position remained strong. Today, we are 100% debt free, we have cash availability of approximately $32 million under our revolving credit facility. Additionally, our credit facility’s accordion feature can provide us up to an additional $20 million in term loan capacity for M&A activity. And our day sales outstanding measurement at December 31, 2022 improved to 59 days from 61 days a year ago. I now turn the call over to Vivek for his comments.

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Vivek Gupta: Good morning, everyone. Thank you Jack for the detailed financial review of our operating results for 2022. Let me start by saying the obvious, our 2022 financial results didn’t end up the way we started in the first half of the year. Concerns over a possible recession, high inflation and an acceleration of interest rates have led to many of our clients taking a conservative posture with respect to spending, which clearly impacted our demand curve in the fourth quarter 2022. However, despite the fourth quarter’s underwhelming performance for the full year 2022, we achieved 9% revenue growth, 6% gross profit expansion and solid profitability. And I believe that our businesses and their future prospects remain fundamentally strong.

Let me point out a number of positives heading into 2023. First, we have on board a new Chief Executive Officer for our Data and Analytics Services business, Michael Fleishman, who I will introduce to you in a few minutes. Second, our Board of Directors has authorized a share repurchase program of up to 500,000 shares of the company’s common stock over the next two years. As described in our earnings release, repurchases will be dependent upon market conditions regulatory requirements and other considerations. Third, our balance sheet has never been stronger. We currently have no bank debt, we have access to approximately $32 million of borrowing availability and up to an additional $20 million for M&A activity. Fourth, we have a business model that historically generates free cash flows that should strengthen our balance sheet even further as the year progresses.

And finally, fifth, we have high quality accounts receivables with days sales outstanding measurement of 59 days. Let me now introduce to you Mr. Michael Fleishman, our new Chief Executive Officer of the Data and Analytics Services segment. I won’t steal Michael’s thunder, but I have to say that he is a very strong addition to our management team with an impressive background and I believe Michael will be a difference maker in our ability to execute our business plan more effectively and accelerate revenue growth. Over to you, Michael.

Michael Fleishman: Thanks on my background. I have a little over 26 years of enterprise IT experience with close to 14 of it being with IBM, where I held sales and sales leadership positions across the majority of IBM’s portfolio at the time. Hardware, software and services, both consulting as well as traditional IT outsourced services. I left IBM in 2010 to pursue roles as a P&L owning GM, as well as sales leadership roles across several (ph) services providers that have strong delivery capability out of India. Before joining Mastech, I ran digital transformation for capital markets in North America at Cognizant. The majority of my 26 plus years have been spent driving strong levels of sales growth across multiple verticals, both across North America, as well as globally for the company’s I was with.

I joined Mastech late last year, because I saw a company with excellent capabilities across data modernization, especially in data management and data warehousing. Warehouses, lakes and lake houses with a strong customer base of marquee logos that had not fully capitalized on their opportunity for growth nor on their competitive differentiation in data modernization. I think it’s not just a dream of mine, but a dream of many leaders to have the opportunity to work for a company that has Mastech’s strengths and capabilities, not to mention existing customer base with so much upward mobility in front of them and a market space where the demand is expected to exceed $3 trillion by 2026. Mastech’s capability to deliver our competitive differentiation and the significant opportunity for growth in front of us were the primary reasons why I joined Mastech.

I’ll turn the call back to you, Vivek.

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

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Q&A Session

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

Lisa Thompson: Good morning.

Vivek Gupta: Good morning, Lisa.

Lisa Thompson: Welcome, Michael. Sounds like you have an excellent background for this position and it’s very exciting to hear from you.

Michael Fleishman: It’s excited to be heard from. Thank you.

Lisa Thompson: So I guess the number one question is, after last quarter’s call with your record IT staffing revenue, it seems like everything fell apart quickly. And I know it’s not your first time through business cycles. I was wondering if you could like go into a little detail of what happened?

Vivek Gupta: So Lisa, the IT staffing got impacted because of the drop in revenue that I mentioned in the last earnings call that happened in Q3 and it continued into Q4. So we had a drop in demand and that impacted this number of starts that we have on the staffing side. And then we also had much higher than the seasonally expected ends that we expect in Q4. Q4 is always a low quarter from an ends point of view, there are more ends in that quarter seasonally than other quarters. But this time they were even more than usual. So it’s really that same kind of equation which is not enough starts and higher number of ends and that ended up impacting our staffing business. The positive note that I can share is that, the demand seems to be better. We’ve only had five weeks into this quarter, but the demand seems to be better this quarter than what we saw in Q4. So we are optimistic, but it’s still too early for this quarter. But I guess that’s how the market is panning out.

Lisa Thompson: So is there any bright side to this? Are you having — obviously, everybody being laid off in Silicon Valley? Is it easier to find the ideal people for your needs?

Vivek Gupta: Yes, to some extent, there is a larger pool available now, because there are so many companies which have let go of large numbers of IT resources. But for us to be able to fully leverage that, we also need to have greater demand. And right now, customers are being cautious, right? In light of the recessionary conditions or seeing what’s happening elsewhere in the other IT companies. So the demand needs to pick up, but definitely there is — the pool is becoming a little larger right now to fish from.

Lisa Thompson: All right. That totally makes sense. How do you feel this is going to flow through to next year? Is it just — you think it’s going to be a down year for revenues just because of the economy?

Vivek Gupta: Lisa, no, we are not taking that attitude or approach. We are — as I said, it’s only the first few weeks. We are seeing some signs of demand picking up. But we still have to see how the year is going to pan out. But we are preparing for growth rather than preparing for any shrinkage. So we will, of course, be very careful with our costs. We’ll keep a very close eye on the demand. And take a quick action as we did in 2022 when COVID hit us and we got adversely impacted and we did a pretty decent job in the first couple of quarters controlling our costs. So we’ll keep a keen eye on this and see if that needs to be done. But we are actually preparing for some growth rather than shrinkage in this year.

Lisa Thompson: And I guess, the last logical question is, given the economy and the opportunities, are you going to be more likely or less likely to do M&A?

Vivek Gupta: I think the honest answer, Lisa, is that, Michael has just come on board and the year is — because there’s a lot of changes that Michael is bringing into the organization, I think we just have to give ourselves a little bit of time for him and the organization to settle down. But we have not shelved the idea of the M&A, we are still going to go back to it. It may be a little later in the year, later quarters, but it’s definitely on the cards. We will get back to the strategy of inorganic acquisition.

Lisa Thompson: All right. I guess my final question has been, how many consultants did you end the quarter with?

Vivek Gupta: Jack, can you have a look at that?

Jack Cronin: Yes. Results at the end of the quarter?

Vivek Gupta: Yes. Sure.

Jack Cronin: We had 1,208.

Vivek Gupta: Great. Thank you. That’s all my — right. Thanks. That’s all my questions.

Jack Cronin: Thank you.

Operator: Our next question comes from the line of Timothy Call with The Capital Management Corporation. Please proceed with your question.

Timothy Call: Good morning. Given your history of accretive acquisitions and the last one AmberLeaf was roughly $1 million, do you consider the $52 million of potential borrowings for acquisitions to be exceedingly high? Would you ever have multiple acquisitions or acquisitions that large? And are your disciplines for acquisitions still the same or they would be immediately accretive and additive to the company?

Vivek Gupta: So I think, Tim, we don’t have any targets right now in front of us. But it could be a one large acquisition, it could be multiple or maybe two smaller acquisitions, it would depend what kind of companies are out there and what kind of pricing they’ll be able to command. But I think this total war chest that we have, which Jack mentioned, of about $52 million plus we think is adequate for what we need. We may not even need all of it or we may need that one. It all is a function of what kind of company we find out there.

Timothy Call: And in the interim given your free cash flow and $7 million of balance sheet cash and zero debt. Do you expect to actually repurchase some stock in the upcoming year?

Vivek Gupta: Jack, do you want to take that?