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Computer Task Group, Incorporated (CTGX)

Q4 2007 Earnings Call

February 21, 2008 10:00 am ET

Executives

Deborah Pawlowski

James R. Boldt – Chairman of the Board, President & Chief Financial Officer

Brendan M. Harrington – Chief Financial Officer & Senior Vice President

Analysts

Richard Doty – Columbia Management

William Sutherland – Boenning & Scattergood

Presentation

Operator

Ladies and gentlemen thank you for standing by. Welcome to the CTG Fourth quarter earnings conference call. At this time all participants are in listen only mode. Later we will conduct a question and answer session. (Operator Instructions) As a reminder today’s conference is being recorded. I would like to turn the conference over to Deborah Pawlowski.

Deborah Pawlowski

Good morning everyone. We certainly appreciate your time and your interest in CTG. On the call today we have President and 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 fourth quarter and full year 2007 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 press release discussing our financial results you can access it at the company’s website 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 or 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 them at our website or the SEC’s website at www.SEC.gov. So, 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

Good morning everyone this is Jim Boldt. I want to thank you for joining us this morning for our fourth quarter conference call. As you saw in our earnings release our fourth quarter revenue and earnings were at the midpoint of our guidance. We’re certainly pleased with the fact that before merger evaluation costs net income in the fourth quarter increased by 34%. Our higher margin solutions business continues to grow causing us to be very optimistic about our outlook for 2008. I’m going to talk more about our business expectations in a minute but first I’m going to ask Brendan to start us off with a review of our financial results.

Brendan M. Harrington

Good morning. For the fourth quarter of 2007 CTG’s revenues were $84.5 million an increase of approximately $6.5 million or 8.3% compared with the fourth quarter of 2006. Net income of $1.2 million in the fourth quarter of 2007 grew at a faster rate than revenue and increased by 13% from $1.1 million in the fourth quarter of 2006. For the quarter net income per diluted share was $0.07 and net income per diluted share excluding equity compensation was $0.08. These results include approximately $200,000 or $0.01 per diluted share that CTG recorded in costs related to advisory fees incurred in connection with our consideration of two unsolicited merger proposals from RCM Technologies, Inc. As mentioned in the release our board unanimously rejected both proposals. We expect an additional $200,000 in advisory fees in the first quarter as we close out the activities associated with these proposals. When you exclude the merger evaluation fees from our fourth quarter results operating income was $2.2 million, 9.5% higher than the 2006 fourth quarter. Net income excluding these fees was $1.4 million or $0.09 per diluted share a 34% increase from 2006 fourth quarter net income. Our 2007 fourth quarter net income and net income per diluted share before both merger evaluation costs and equity based compensation expense was $1.6 million or $0.10 per diluted share a 26% increase from $1.3 million or $0.08 per diluted share in the fourth quarter 2006. The proportion of solutions revenue in 2007 was 32% of total revenue or $105.3 million compared with 30% or $98.2 million in 2006. This represents 7% growth in our solutions revenue.

Direct costs as a percentage of revenue were 77.8% in the fourth quarter compared with 75.5% in the fourth quarter of 2006 and 77.3% in the third quarter of 2007. Slightly higher direct costs were primarily due to lower utilization of available staff. Operating margin excluding merger evaluation costs was 2.6% of revenue in both the fourth quarter of 2007 and 2006. We had $27.9 million in revenue from IBN, our largest staffing customer in the fourth quarter of 2007 compared with $23.7 million in the fourth quarter of 2006. This represents 33% and 30% of total revenue in the 2007 and 2006 fourth quarters respectively. The majority of growth in staffing was from IBN although they made a major cut back in the fourth quarter 2006, we did see solid improvement in this last quarter.

Quarterly revenue from our European operations was $19.8 million in the 2007 fourth quarter a 23% increase from the $16.1 million recorded in last year’s fourth quarter. Foreign exchange fluctuations accounted for 12% of the 23% increase in our European revenue in the quarter. The remainder reflects our efforts to expand into healthcare and financial services verticals. The tax rate for the 2007 fourth quarter was 36.5%. The tax rate for the full year 2007 was 37.6%. The rate decrease from approximately 43% in 2006 due to the utilization of net operating loss carry forward in 2007. The expected tax rate for 2008 is between 38 and 40%.

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