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Computer Task Group, Incorporated (CTGX)

Q2 2008 Earnings Call

July 23, 2008 10:00 am ET

Executives

Debbie Pawlowski – Investor Relations

James Boldt – President and Chief Executive Officer

Brendan Harrington – Senior Vice President and Chief Financial Officer

Analysts

Rick D’auteuil – Columbia Management Advisors, LLC

William Ditullio – Boenning & Scattergood Inc.

Frank Sparacino – First Analysis Securities Corporation

Ben Desinberth – Thomas Nogales Financial, LLC

Bill Sutherland – Boenning & Scattergood Inc.

Jason Schacht – Heartland Advisors Inc.

Presentation

Operator

Welcome to the CTG Conference Call. (Operator Instructions) I would now like to turn the conference over to our first speaker, Debbie Pawlowski from Investor Relations for CTG.

Debbie Pawlowski

Thank you, Linda, and 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 second quarter of 2008 and update you on the Company's strategy and outlook. We will follow with an opportunity for Q&A. If you do not have the news 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, 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 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.

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

James Boldt

Thanks, Debbie. 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 earnings release, our second quarter revenue and earnings were both well above our guidance. We are pretty excited about the fact that revenues from our health care business increased by 20% over the second quarter of last year. The growth in our solutions business has been a major contributor to the 200-basis-point improvement in our operating margin in the quarter. The favorable outlook for our solutions business has caused us to raise our guidance once again for the year.

I am going to talk more about our business and expectations in a minute, but first I am going to ask Brendan to start us off with a review of our financial results. Brendan?

Brendan Harrington

Thanks, Jim. Good morning. For the second quarter of 2008, CTG's revenue was $94.1 million an increase of $13.9 million or up 17.4% compared with the second quarter of 2007.

Operating income increased 126% in the second quarter to $4.0 million, largely as a result of the growth in our more profitable solutions business. This growth also drove the 200-basis-point increase in our operating margin to 4.2% of revenue, its highest level in several years.

Net income was $2.1 million in the quarter, an increase by 105% from $1 million in the second quarter of 2007. Net income per diluted share was $0.13 for the quarter, a 117% increase over last year. Both the 2008 and 2007 second quarters' results include equity compensation expense of approximately $0.01 per diluted share net of tax.

Solutions revenue in the second quarter of 2008 was 34% of total revenue or $31.9 million. This represents 14% growth in our solutions revenue compared to the second quarter of 2007.

Direct costs as a percentage of revenue were 77% in the second quarter compared with 77.6% in the second quarter of 2007 and 78.4% in the first quarter of 2008.

We had $29.3 million in revenue from IBM, our largest staffing customer in the quarter compared with $23.6 million in the second quarter of 2007. This represents 31.2% and 29.5% of total revenue in the 2008 and 2007 second quarters respectively.

Revenue from our European operations was $21.4 million in the second quarter, a 23% increase from the $17.4 million recorded in last year's second quarter. Excluding foreign exchange fluctuations, European revenue in the quarter would have increased by 7.6%.

The tax rate for the 2008 second quarter was approximately 48% compared with 39% last year. The rate was higher than normal due to the increase of valuation reserves for net operating losses of our foreign subsidiaries. The expected tax rate for the 2008 full year is between 40% and 44% compared with 38% in 2007.

The Company had 3,500 employees at the end of the second quarter of 2008 of which approximately 89% are billable resources. On the balance sheet, our days sales outstanding was 59 days compared with 64 days at the end of the second quarter 2007 and with 60 days at the end of the first quarter 2008.

Our cash flows from operations in the second quarter were approximately $36,000. We had $792,000 of capital expenditures and recorded depreciation expense of $490,000 in the quarter.

During the second quarter of 2008, while adhering to SEC-imposed volume limitations. We repurchased 176,000 shares of CTG common stock. The repurchases in the quarter were made at an average price of $4.97 per share.

Read the rest of this transcript for free on seekingalpha.com