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Computer Task Group, Inc. (CTGX)

Q3 2012 Earnings Call

October 23, 2012 10:00 am ET

Executives

James M. Culligan – Director-Investor Relations

James R. Boldt – Chairman, President, CEO and Head-Investor Relations

Brendan M. Harrington – Senior VP, Chief Financial and Risk Officer

Analysts

Matthew J. Mccormack – BGB Securities, Inc.

Brian Kinstlinger – Sidoti & Company, LLC

Frank DiLorenzo – Singular Research

Kevin Liu – B. Riley & Company, Inc.

Vincent A. Colicchio – Noble Financial Capital Markets

Bill Sutherland – Northland Capital Markets

Rick G. D'Auteuil – Columbia Management Investment Advisers LLC

Michael S. Needleman – Preservation Asset Management LLC

Presentation

Operator

Ladies and gentlemen, good morning, thank you for standing by, and welcome to the CTG Third Quarter Earnings Conference Call. At this time, all lines are in a listen-only mode. And there will be an opportunity for your questions. [Operator Instructions]

At this time, I would like to turn the conference over to our host, Director of Investor Relations, Mr. Jim Culligan. Please go ahead.

James Culligan

Thank you, Tom, 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 for the third 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 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 those 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 R. Boldt

Thanks, Jim. And good morning everyone, this is Jim Boldt. I want to thank you for joining us this morning for our third quarter earnings conference call. As you saw in our news release, we had an excellent third quarter with revenue at our guidance and earnings per share at the high end of our guidance. Revenue in the third quarter of 2012 increased over 2011 by 5%.

The operating margin expanded by 140 basis points and earnings per share increased 28%. As we expected, our higher margin solutions business continues to grow and increased 13% in the third quarter of 2012 while revenue from our lower margin staffing business was approximately the same as it was in the third quarter of 2011.

I’m going to talk more about our results and what we see for the 2012 fourth quarter and the full year. but first I’m going to ask Brendan to start this off with a review of our financial results, Brendan?

Brendan M. Harrington

Thanks, Jim. Good morning everyone. For the third quarter of 2012, CTG’s revenue was $106.4 million, an increase of $5.3 million or 5% compared with the third quarter of 2011. Third quarter of 2012 had 63 billing days, the same as in the third quarter 2011.

Solutions revenue in the third quarter of 2012 was $44.2 million, an increase of $5.1 million or 13% compared with the third quarter of 2011. As a percentage of total revenue, solutions revenue was 42% compared with 39% 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 $200,000 or three tenth of 1% to $62.2 million. Third quarter revenue from IBM, our largest customer was $28.3 million compared with $30.8 million in the third quarter 2011. As a percent of total revenue, revenue from IBM decreased to 26.6% in the 2012 third quarter compared with 30.4% of total revenue in the 2011 third quarter.

Approximately $1.2 million or 46% of the decrease in revenue from IBM in the quarter was the 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 $16.3 million, a 2% increase from the $16 million recorded in last year’s third quarter. The effect of foreign currency fluctuations during the third quarter of 2012 decreased consolidated revenue by approximately $2.1 million or 1.9%. On a local currency basis, our European revenue increased by 14.7% compared with the 2011 third quarter.

Direct costs as a percentage of revenue were at 78.3% in the third quarter compared with 79.3% in the third quarter compared with 79.3% in the third quarter of 2011. SG&A expenses as a percent of revenue decreased to 15.8% from 16.2% in the third quarter of 2011.

The billable travel expenses included in the third quarter of 2012 revenue and direct costs are $3,312,000. The billable travel expenses for the third quarter 2011 totaled $3,074,000. Third quarter operating income grew to $6.3 million, an increase of $1.7 million or 38% year-over-year.

Compared with the trailing second quarter of 2011, operating income increased $180,000 or 2.9%. Operating margin in the third quarter increased to 5.9% of revenue, a 140 basis point improvement from last year’s 4.5%. The year-over-year increases in operating income and margin were due primarily to the increase in the solutions business and our sales mix and the additional operating leverage.

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