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Computer Task Group, Inc. (CTGX)

Q4 2012 Earnings Call

February 19, 2013 10:00 AM ET

Executives

Jim Culligan – Director, IR

Jim Boldt – Chairman, President and CEO

Brendan Harrington – SVP and CFO

Analysts

Brian Kinstlinger – Sidoti

Bill Sutherland – Northland Capital Market

Vincent Colicchio – Noble Financial

Kevin Liu – B. Riley

Frank DiLorenzo – Singular Research

Rick D’Auteuil – Columbia Management

Frank Sparacino – First Analysis

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the CTG Fourth Quarter 2012 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later, we will conduct question-and-answer session and instructions will be given at that time.

(Operator Instructions). As a reminder, today’s conference is being recorded.

And I’d now like to turn the conference over to our first speaker, Director of Investor Relations, Mr. Jim Culligan. Please go ahead.

Jim Culligan

Thank you, Brian. Good morning, everyone. We certainly appreciate your time and your interest in CTG. On the call today, we have CTG’s Chief Executive Officer, Jim Boldt; and Brendan Harrington, Senior Vice President and Chief Financial Officer. Jim and Brendan are going to review the results for the fourth quarter of 2012, and then update you on the company’s strategy and outlook. We’ll follow with an opportunity for Q&A. If you don’t have the news release discussing our financial results, you can access it at our website at ctg.com.

Before we begin, I want to mention the statements in 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’s important to note that the company’s actual results could differ materially from those projected.

Additional information concerning factors that could cause actual results to differ from those in the forward-looking statements is contained in our earnings release as well as in the company’s SEC filings. You can find these at our website or the SEC’s website at sec.gov. Please review our forward-looking statements in conjunction with the precautionary factors.

With that, I’d like to turn it over to Jim to begin the discussion.

Jim Boldt

Thanks, Jim, and good morning, everyone. This is Jim Boldt. I want to thank you for joining us this morning for our fourth quarter earnings conference call. As you saw in our news release, we had an excellent fourth quarter with revenue increasing 7% over 2011 and earnings per share excluding the life insurance gain increasing 20%. Revenue was at the low end of our guidance, and earnings per share excluding the insurance gain was at the high end of our guidance. As we expected, our higher margin Solutions business continues to grow and increased 12% in the fourth quarter of 2012, while revenue from our lower margin Staffing business grew by approximately 3% when compared with the fourth quarter of 2011.

I’m going to talk more about our results and what we see for the 2013 first quarter and full year. But first I’m going to ask Brendan to start us off with the review of our financial statements. Brendan?

Brendan Harrington

Thanks, Jim. Good morning, everyone. For the fourth quarter of 2012, CTG’s revenue was $107.9 million, an increase of $7 million or 6.9% compared with the fourth quarter of 2011. Fourth quarter 2012 had 64 billing days, one more day then in the fourth quarter of 2011

Solutions revenue in the fourth quarter of 2012 increased $5 million or 12% compared to the fourth quarter of 2011, and totaled $45.3 million. As a percentage of total revenue, Solutions revenue was 42% compared with 40% a year ago. The continued improvement in our business mix is mainly being driven by revenue growth from more profitable healthcare projects. Staffing revenue in the quarter increased $2 million or 3.4% to $62.6 million.

Fourth quarter revenue from IBM, our largest customer was $27.9 million compared with $27.4 in the fourth quarter of 2011. As a percent of total revenue, revenue from IBM decreased to 25.8% in the 2012 fourth quarter, compared with 27.2% of total revenue in the 2011 fourth quarter.

Our revenue from IBM in the quarter was negatively impacted by approximately $2.1 million, when compared with the fourth quarter of 2011, as a result of IBM spinoff of its retail business to another large company. Although this change lowered our revenue from IBM, the spinoff had no impact on CTG’s overall revenue since we’ve retained the business with this new client.

Revenue from our European operations was $18.3 million and 11% increase from the $16.5 million recorded in last year’s fourth quarter. The effect of foreign currency fluctuations during the fourth quarter of 2012 decreased consolidated revenue by approximately $700,000 or 0.6%. On a local currency basis, our European revenue increased by 15.2% compared with the 2011 fourth quarter.

Direct costs as a percentage of revenue were 78.3% in the fourth quarter compared with 77.4% in the fourth quarter of 2011. SG&A expenses as a percent of revenue decreased to 15.8% from 17.2% in the fourth quarter of 2011. The billable travel expenses included in the fourth quarter of 2012 revenue and direct costs are $3.2 million. The billable travel expenses for the fourth quarter of 2011 totaled $3.3 million.

Fourth quarter operating income grew to $6.4 million, an increase of $939,000 or 17% year-over-year. Operating margin in the fourth quarter increased to 5.9% of revenue, a 50 basis point improvement from last year’s 5.4%. The year-over-year increases in operating income and margin were due primarily to the increase in the Solutions business in our sales mix and the additional operating leverage.

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