Computer Task Group, Incorporated (CTG)

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Computer Task Group, Incorporated (CTG)

Q3 2013 Earnings Call

October 22, 2013 10:00 AM ET


James Culligan – Director, IR

James Boldt – Chairman, President and CEO

Brendan Harrington – SVP and CFO


Brian Kinstlinger – Sidoti & Company

Vincent Colicchio – Noble Financial

Kevin Liu – B. Riley & Company

Frank DiLorenzo – Singular Research

Rick D’Auteuil – Columbia Management

William Sutherland- Emerging Growth Equity



Ladies and gentlemen, thank you for standing by and welcome to the CTG Third Quarter 2013 Conference Call. At this point, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder today’s conference call is being recorded.

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

James Culligan

Thank you, Paul and good morning, everyone. We certainly appreciate your time and your interest in CTG.

On the call today we have CTG’s CEO, Jim Boldt; and Brendan Harrington, Senior Vice President and CFO. Jim and Brendan are going to review the results for the third 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 could 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 third quarter earnings conference call. As you saw in our news release our revenues decreased 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.

Our focus on expense control helped our earnings per share to come in at the midpoint of our guidance and once again caused our operating margin to be 6%. I’m going to talk more about our results and what we see for the fourth quarter and the 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 third quarter of 2013 CTG’s revenue was $100.7 million, a decrease of $5.7 million compared to the third quarter of 2012. Third quarter 2013 had 63 billing days, the same as in the third quarter of 2012. Solutions revenue in the third quarter of 2013 totaled $40 million, a decrease of $4.2 million or 9.5% compared to the third quarter 2012, primarily due to lower revenue from electronic medical record projects. As a percentage of total revenue, Solutions revenue was 40% compared to 42% a year ago.

Staffing revenue in the quarter decreased $1.5 million or 2.5% to $60.7 million, reflecting reductions in staffing from a large client offset by higher demand for technical resources from several other clients.

Third quarter revenue from IBM, our largest customer, was $23 million compared with $28.3 million in the third quarter 2012. As a percent of total revenue, revenue from IBM decreased to 22.9% in the 2013 third quarter compared with 26.6% of total revenue in the 2012 third quarter. The revenue from IBM in the quarter was negatively impacted by approximately $1.2 million when compared with the third quarter of 2012, as a result of IBM’s spin-off of its retail business to another large company. Although this change lowered our revenue from IBM the spin-off 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 $18.2 million, a 12% increase from the $16.3 million recorded in last year’s third quarter. The effect of foreign currency fluctuation during the third quarter of 2013 increased consolidated revenue by approximately $1 million. On a local currency basis our European revenue increased 5.6% compared with the 2012 third quarter. Excluding the impact of the etrinity acquisition that we closed in February 2013, European revenue increased by 8% or 2.5% in constant currency.

Direct costs as a percentage of revenue were 79% in the third quarter compared with 78.3% in the third quarter of 2012, reflecting the decrease in the higher margin EMR revenue. SG&A expenses as a percent of revenue decreased to 15% from 15.8% in the third quarter of 2012, as a result of our disciplined cost management. The billable travel expenses included in the third quarter 2013 revenue and direct costs were $2.8 million. The billable travel expenses for the third quarter of 2012 totaled $3.3 million.

Third quarter operating income was $6.1 million, a decrease of approximately $300,000 or 4.3% year-over-year. Operating margin in the third quarter increased to 6% of revenue, a 10 basis point improvement from last year’s 5.9%. The year-over-year decrease in operating income was due primarily to the decreases in our EMR revenue offset by lower SG&A expenses.

Net income in the third quarter was $3.9 million, an increase of $50,000 or 1.3% compared to the third quarter 2012. On a per-diluted share basis net income was $0.23 for the quarter, the same as in the third quarter of 2012.

The tax rate for the 2013 third quarter was 35.2% compared with 39% in the 2012 third quarter. The lower rate is primarily a result of the reversal of certain tax reserves and federal tax credits recorded in the third quarter of 2013 that did not occur in the third quarter 2012.

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