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Computer Task Group Inc. (CTGX)

Q1 2013 Earnings Call

April 23, 2013 10:00 am ET

Executives

James Boldt – Chief Executive Officer

Brendan Harrington – Chief Financial Officer

James Culligan – Director, Investor Relations

Analysts

Bill Sutherland – Northland Capital

Brian Kinstlinger – Sidoti & Co.

Vincent Colicchio – Noble Financial

Rick D’Auteuil – Columbia Management

Kevin Liu – B. Riley

Frank Sparacino – First Analysis

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the CTG 2013 First Quarter Earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time, and if you should require assistance during the call, please press star then zero. As a reminder, this morning’s conference call is being recorded.

I would like to turn the conference over to our first speaker, Director of Investor Relations for CTG, Mr. Jim Culligan. Please go ahead, sir.

James Culligan

Thank you, Coleman, and 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 of the first quarter of 2013 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 the company’s website at ctg.com.

Before we begin, I want to mention that 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 these precautionary factors. With that, I’d like to turn it over to Jim to begin the discussion.

James Boldt

Thanks, Jim, and good morning everyone. This is Jim Boldt. I want to thank you for joining us this morning for our first quarter earnings conference call. As you saw in our news release, we had a good first quarter with revenues increasing 5% over 2012 and earnings per share increasing 20%. Both revenue and earnings per share were at the midpoint of our guidance for the quarter.

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

Brendan Harrington

Thanks Jim. Good morning everyone. For the first quarter of 2013, CTG’s revenue was 108.5 million, an increase of 5.1 million or 5% compared with the first quarter of 2012. First quarter 2013 had 63 billing days, one less day than in the first quarter of 2012. Solutions revenue in the first quarter of 2013 increased 1.9 million or 4.7% compared to the first quarter of 2012 and totaled 42.7 million. As a percentage of total revenues, solutions revenue was 39%, approximately the same as a year ago. Staffing revenue in the quarter increased 3.2 million or 5.1% to 65.8 million.

First quarter revenue from IBM, our largest customer, was 28.9 million compared with 28.4 million in the first quarter 2012. As a percent of total revenue, revenue from IBM decreased to 26.7% in the 2013 first quarter compared with 27.4% of total revenue in the 2012 first quarter. Our revenue from IBM in the quarter was negatively impacted by approximately 1.1 million when compared with the first quarter 2012 as a result of IBM’s spinoff of its retail business to another large company. Although this change lowered our overall revenue from IBM, the spinoff did not have a negative impact on CTG’s revenue since we have retained the business with this new client.

Revenue from our European operations was 19.4 million, a 13% increase from the 17.2 million recorded in last year’s first quarter. The effect of foreign currency fluctuations during the first quarter of 2013 increased consolidated revenue by approximately 100,000. On a local currency basis, our European revenue increased by 12.2% compared with the first quarter of 2012. A portion of the increase was due to the acquisition in February of a Belgian-based IT services firm.

Direct costs as a percentage of revenue were 79.2% in the first quarter compared with 78.9% in the first quarter of 2012. SG&A expenses as a percent of revenue decreased to 15.1% from 15.7% in the first quarter of 2012. The billable travel expenses included in the first quarter of 2013 revenue and direct costs were 3.1 million. The billable travel expenses for the first quarter of 2012 totaled 3.2 million.

First quarter operating income grew to 6.2 million, an increase of approximately 600,000 or 10.4% year-over-year. Operating margin in the first quarter increased to 5.7% of revenue, a 30 basis point improvement from last year’s 5.4%. The year-over-year increases in operating margin and income were due primarily to the increase in the higher margin business in our sales mix and the additional operating leverage. Operating margin declined 20 basis points compared with the fourth quarter of 2012 due to the ending of two EMR projects, the delayed start of three new EMR projects, and due to increased revenue from our staffing business.

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