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Computer Task Group, Incorporated (CTGX)

Q3 2008 Earnings Call Transcript

October 22, 2008 10:00 am ET

Executives

Deborah Pawlowski – IR

Jim Boldt - CEO

Brendan Harrington - SVP & CFO

Analysts

William DiTullio – Boenning & Scattergood Inc.

Presentation

Operator

Ladies and gentlemen, thank you for standing by, welcome to the CTG conference call. (Operator instructions) As a reminder, today’s call is being recorded. Starting off, we have Deborah Pawlowski, please go ahead.

Deborah Pawlowski

Thank you Kevin 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 2008 and 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 Web site at www.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 is 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 Web site or at the SEC's Web site www.sec.gov. So please review our forward-looking statements in conjunction with these precautionary factors.

With that, I would like to turn it over to Jim to begin the discussion. Jim?

Jim Boldt

Thanks Debbie 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 earnings release, our revenue in the third quarter of 2008 was at the lower end of guidance while our earnings once again exceeded our guidance. As Brendan will explain further in a minute, revenue was affected by the fluctuations in foreign exchange rates that occurred during the quarter. We are very excited about the fact that increased income primarily from our healthcare solutions business caused our earnings per share to once again more than double when compared to last year.

I’m going to talk more about our business and expectations in a minute 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. For the third quarter of 2008, CTG's revenue was $89.1 million, an increase of $8.5 million or 10.6% compared with the third quarter of 2007. Operating income increased 113% in the third quarter to $3.5 million, largely as a result of the growth in our more profitable solutions offerings and favorable operating leverage. These factors also drove the year-over-year 190-basis point increase in our operating margin to 3.9% of revenue.

Net income in the third quarter increased 128% to $2.1 million from $0.9 million in the third quarter of 2007. Net income per diluted share was $0.13 for the quarter, a 117% increase from last year’s $0.06. Both the 2008 and 2007 third quarter results included equity compensation expense of approximately $0.01 per diluted share net of tax. The third quarter of 2007 results included a $0.01 net of tax charge related to merger evaluation cost incurred in 2007.

Solutions revenue in the third quarter of 2008 was 32% of total revenue or $28.9 million. This represents 4.5% growth in our solutions revenue compared to the third quarter of 2007. We had $28.7 million in revenue from IBM, our largest staffing customer in the quarter compared with $24.2 million in the third quarter of 2007. This represents 32.2% and 30% of total revenue in the 2008 and 2007 third quarters respectively. Total staffing revenue was $60.2 million in the quarter.

Revenue from our European operations was $18.7 million in the third quarter, a 6.5% increase from the $17.5 million recorded in last year's third quarter. Excluding the foreign exchange fluctuations, European revenue in the quarter would have decreased by 1.8% over last year. The strengthening of the US dollar during the 2008 third quarter negatively affected our third quarter revenue by approximately $0.7 million as compared to the revenue guidance we provided for the quarter. The impact of the strengthening dollar in our 2008 revenue guidance is an additional reduction of approximately $2.4 million for the full-year guidance that we provided in our second quarter earnings release. This change is reflected in our updated 2008 revenue guidance of $356 million to $358 million, a 9.4% to 10% increase over 2007 revenue.

Direct costs as a percentage of revenue were 78% in the third quarter compared with 77.3% in the third quarter of 2007 and 77% in the second quarter of 2008. The tax rate for the 2008 third quarter was approximately 39% compared with 38% last year. The expected tax rate for the full year 2008 is between 42% and 44% compared with 38% in 2007.

The company had 3,500 employees at the end of the third quarter of 2008 of which approximately 89% are billable resources. On the balance sheet, our days sales outstanding was 56 days compared with 60 days at the end of the third quarter 2007 and was 59 days at the end of the second quarter 2008.

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