Computer Task Group, Incorporated (CTG)

CTG 
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Computer Task Group, Inc. (CTG)

Q2 2013 Earnings Conference Call

July 23, 2013, 10:00 AM ET

Executives

James Culligan - Director of Investor Relations

James Boldt - Chairman, President and Chief Executive Officer

Brendan Harrington - Senior Vice President and Chief Financial Officer

Analysts

Vincent Colicchio - Noble Financial

Kevin Liu - B. Riley & Company

Rick D'Auteuil - Columbia Management

Bill Sutherland - EGE

Frank Sparacino - First Analysis

Frank DiLorenzo - Singular Research

Presentation

Operator

Welcome to the second quarter 2013 earnings conference call. (Operator Instructions) I'd now like to turn the conference over to our first speaker, Mr. Jim Culligan, Director of Investor Relations for CTG. Please go ahead.

James Culligan

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 second 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 second quarter earnings conference call.

As you saw in our news release, our revenues were flat when compared to last year, as we continue to experience delays in healthcare project starts, as hospitals deal with lower reimbursements caused by sequester cuts and as we experienced a reduction in spending from a significant staffing customer, fortunately our focus on higher margin offerings and expense control, allowed our earnings per share to come in at the midpoint of our guidance; and for the first time since we established our current strategy in 2001, caused our operating margin to be in our long-term targeted ranged of 6% to 7%.

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

Brendan Harrington

Thanks Jim. Good morning everyone. For the second quarter of 2013, CTG's revenue was $107.1 million, an increase of $400,000 compared with the second quarter of 2012. Second quarter 2013 had 64 billing days, the same as the second quarter 2012. Solutions revenue in the second quarter of 2013 totaled $42.3 million, a decrease of $1.7 million or 4% compared to the second quarter 2012, primarily due to delays in project starts on electronic medical record projects.

As a percentage of total revenue, solutions revenue was 40% compared to 41% a year ago. Staffing revenue in the quarter increased $2.1 million or 3.4% to $64.8 million, reflecting higher demand for technical resources from several clients, but offset by reductions in staffing from our largest client.

Second quarter revenue from IBM, our largest customer, was $26.6 million compared with $29 million in the second quarter 2012. As a percent of total revenue, revenue from IBM decreased to 24.9% in the 2013 second quarter compared with 27.2% of total revenue in the 2012 second quarter.

The revenue from IBM in the quarter was negatively impacted by approximately $1.4 million when compared with the second quarter 2012, as a result of IBM's spinoff of its retail business to another large company. Although this change lowered our revenue from IBM, the spinoff did not have a negative impact on CTG's overall revenue, since we've retained the business with this new client.

Revenue from our European operations was $18.6 million, an 11% increase from the $16.8 million recorded in last year's second quarter. The effect of foreign currency fluctuations during the second quarter of 2013 increased consolidated revenue by approximately $300,000. On a local currency basis, our European revenue increased by 9.4% compared with the 2012 second quarter. Excluding the effect of the etrinity acquisition that we closed in February 2013, the European revenues increased by 6% or 4.4% in constant currencies.

Direct costs as a percentage of revenue were 78.8% in the second quarter compared with 78.5% in the second quarter of 2012. SG&A expenses as a percent of revenue decreased to 15.2% from 15.7% in the second quarter of 2012. The billable travel expenses included in the second quarter 2013 revenue and direct costs were $3.1 million. The billable travel expenses for the second quarter 2012 totaled $3.7 million.

Second quarter operating income grew to $6.4 million, an increase of approximately $300,000 or 4.2% year-over-year. Operating margin in the second quarter increased to 6% of revenue, a 20 basis point improvement from last year's 5.8%. The year-over-year increases in operating income and margin were due primarily to the decreases in our lowest margin staffing business and increases in the higher margin business in our sales mix.

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