Mastech Digital, Inc. (AMEX:MHH) Q4 2023 Earnings Call Transcript

Mastech Digital, Inc. (AMEX:MHH) Q4 2023 Earnings Call Transcript February 7, 2024

Mastech Digital, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Mastech Digital, Inc. Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Ford Lacey, Manager of Legal Affairs for Mastech Digital. Thank you. You may begin.

Jennifer Ford Lacey: Thank you, operator and welcome to Mastech Digital’s fourth quarter 2023 earnings conference call. If you have not yet received a copy of our earnings announcement, it can be obtained on our website at www.mastechdigital.com. With me on the call today are Vivek Gupta, Mastech Digital’s Chief Executive Officer; and Jack Cronin, our Chief Financial Officer. I would like to remind everyone that statements made during this call that are not historical facts are forward-looking statements. These forward-looking statements include our financial growth and liquidity projections as well as statements about our plans, strategies, intentions, and beliefs concerning the business, cash flows, costs, and the markets in which we operate.

Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify certain forward-looking statements. These statements are based on information currently available to us, and we assume no obligation to update these statements as circumstances change. There are risks and uncertainties that could cause actual events to differ materially from these forward-looking statements, including those posted in the company’s 2022 annual report on Form 10-K filed with the Securities and Exchange Commission and available on its website at www.sec.gov. Additionally, management has elected to provide certain non-GAAP financial measures to supplement our financial results presented on a GAAP basis.

Specifically, we will provide non-GAAP net income and non-GAAP diluted earnings per share data, which we believe will provide greater transparency with respect to key metrics used by management in operating the business. Reconciliations of these non-GAAP financial measures to their comparable GAAP measures are included in our earnings announcement, which can be obtained from our website at www.mastechdigital.com. As a reminder, we will not be providing guidance during this call nor will we provide guidance in any subsequent one-on-one meetings or calls. I will now turn the call over to Jack for a review of our fourth quarter and full year 2023 results.

Jack Cronin: Thanks Jen and good morning everyone. Our fourth quarter 2023 financial results were impacted by economic uncertainty and our current and prospective clients responses to these challenging market conditions. Fourth quarter revenues totaled $46.1 million, representing a 20% year-over-year revenue decline. Both of our business segments contributed to this decline. Our Data and Analytics Services segment reported revenues of $8.2 million in Q4 2023 compared to $9.1 million in the 2022 fourth quarter as customers continue to reduce resources on existing projects, albeit at a lower rate in Q4 when compared to Q2 and Q3 of 2023. Also, Q4 order bookings totaled $19 million, which was one of our best performances since we acquired the Data and Analytics Services segment.

Accordingly, we achieved a modest tick up in revenues on a sequential basis over the third quarter of 2023. Fourth quarter 2023 revenues in our IT Staffing Services segment totaled $37.9 million compared to $48.1 million in the fourth quarter of 2022. During the quarter, our billable consultant base declined, again, at a slower rate when compared to Q2 and Q3 of 2023 and in a quarter where consultants headcount declines are the norm in the industry as clients historically seek to complete existing projects and resources prior to the start of the new year. Consolidated gross profits as a percent of revenues in Q4 2023 totaled 24.6% compared to 24.8% in Q4 2022. In our Data and Analytics Services segment, gross margins improved materially to 44.7% compared to 37% in the fourth quarter of 2022.

This improvement reflects higher utilizations in the 2023 quarter and reduced margins on several significant assignments in the fourth quarter of 2022. In our IT Staffing Services segment, gross margins were down compared to Q4 of 2022, largely due to a year-over-year reduction in to direct hire revenues and unusually high medical claim expenses related to our self-insured healthcare program. GAAP net income for Q4 2023 totaled a loss of $5.4 million or negative $0.46 per diluted share compared to a profit of $1.5 million or $0.13 per diluted share in Q4 2022. These GAAP numbers do include a $5.3 million goodwill impairment charge. Non-GAAP net income for Q4 2023 was $1.3 million profit or $0.11 per diluted share compared to $2.8 million or $0.23 per diluted share in the fourth quarter of 2022.

SG&A expense items not included in non-GAAP financial measures net of tax benefits are detailed in our fourth quarter 2023 earnings release, for all periods presented, which is available on our website. Addressing our full year 2023 results, revenues were $201.1 million, which were down 17% on a year-over-year basis. Again, both business segments contributed to this decline. Gross margins for the full year 2023 totaled 25.4% compared to 26.1% in 2022. Our Data and Analytics Services segment gross margin percent increased by 200 basis points year-over-year on improved utilization and our IT Staffing Services segment gross margin percent declined by 140 basis points due to lower direct hire revenues and higher healthcare expenses. GAAP diluted earnings per share was a loss of $0.61 in 2023 compared to a profit of $0.72 in 2022.

Non-GAAP diluted earnings per share totaled a profit of $0.44 in 2023 compared to a profit of $1.13 in 2022. Throughout 2023, our liquidity and overall financial position remains solid. Today, we’re 100% debt-free with no borrowings outstanding under our PNC facility. Also, we have $21.1 million of cash balances on hand and have cash availability of another $22.5 million under our revolving credit facility. I should also point out that our day sales outstanding measurement on December 31st, 2023, improved to 53 days from 59 days a year earlier. Thus, despite challenging economic conditions, we prudently managed our accounts receivable credit risk and incurred no bad debt expense in 2023. I’ll now turn the call over to Vivek for his comments.

Vivek Gupta: Good morning, everyone. Thank you, Jack, for the detailed financial review of our 2023 operating results. In 2023, macroeconomic headwinds clearly had a significant impact on our financial performance, concerns over a possible recession, high inflation, increased interest rates, as well as geopolitical events, led many of our clients to take a conservative posture with respect to spending on new projects and on new IT initiatives. While the US economy seems to be entering a recovery mode with positive data points in job growths and GDP expansion, concerns still exist with respect to inflation, high interest rates, and the possible escalation of a wider conflict in the Middle East. Notwithstanding these potential economic issues, we are starting to see some signs of increased customer demand in both of our business segments.

In our Data and Analytics Services segment, Q4 order bookings totaled approximately $19 million, which was one of our best performances on record. Additionally, we had a modest revenue increase on a sequential basis over Q3 of 2023. In our IT Staffing Services segment, we saw positive billable headcount growth for the first time in October and November after 15 consecutive months of declines. In December, we did see high year end project ends but they were largely in line with the seasonal decreases we experienced at year end. Overall, the Q4 billable headcount decline was less than the declines we experienced in the fourth quarter of the prior two years. We are encouraged by these positive indicators as we enter 2024. During the quarter, Michael Fleishman resigned from his position as the Chief Executive Officer of the Data and Analytics Services segment.

We thank Michael for his service, and we wish him success in his future endeavors. Until his successor is appointed, the functional heads of this segment are directly reporting to me. Also, during January 2024, we engaged Pimenta, Inc. as a strategic advisory consultant. Pimenta is a firm deep experience and knowledge of the broad IT services industry and an impressive track record of strategy and business process improvements for a number of notable clients. We are excited about this engagement and the opportunities that it presents for Mastech Digital. Finally, despite 2023’s difficulties, we believe that our businesses remain fundamentally sound, both operationally and financially and we are optimistic that we are positioning our businesses for an improved financial performance in 2024.

And that concludes our prepared remarks. Operator, we can take questions now.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Tim Call with Capital Management Corporation. Please proceed with your question.

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Q&A Session

Tim Call: Well, it’s great to hear that the — some forward-looking indications are positive. You — one year ago, the Board authorized a share buyback program and it’s not too big. You have over $20 million of cash on your balance sheet and no debt. So, the net cash position is about 22% of your stock market capitalization. So, it seems to be a no-brainer to put $20 million to share buybacks. The Board was very modest and improved $500,000 share buyback. What’s the status of that? And why is it taking a year to make accretive share buybacks when your long-term prospects are so positive?

Jack Cronin: Yes, Tim this is Jack. Yes, we 100% are committed to the share buyback program. I mean I think we think our stock is undervalued compared to the intrinsic value that it presents and we have bought back, I think right now to-date, we — I think we bought back around 60-some-thousand shares in Q4. We only bought back 5,000 and the reason for — its 5,000 shares. And the reason for that is we were in an extended blackout period with respect to some of these corporate events. But we are 100% committed to the share buyback program. And I think you will see us purchase more shares in first quarter of 2024.

Tim Call: There are some bigger companies that are buying back stock on a more regular basis. And maybe the person advising you for blackout periods is a little too conservative and maybe you need a new advisor in that area.

Jack Cronin: Yes, I think we would generally be cautious on the conservative side.

Tim Call: And if expecting — if you’re not expecting any near-term acquisitions should the Board authorize a larger share buyback authorization. If you have over $20 million cash. It’s 22% of your stock market capitalization. If the stock is such a good deal, hopefully, the Board will consider increasing the authorization. I understand you want to get through this first one, but hopefully, that can accelerate now?

Jack Cronin: Yes. Yes, I mean the Board could — once this one has been completed, the Board has the ability to immediately do another buyback. So, it’s not like once this is over, all bets are off. We have the ability to be flexible and do more if we — if the Board so desires. But again, the other thing that — Tim, the other thing is our volume is relatively low. So, that’s another headwind where we’d like to buy, but we’re limited based on our volume, the number of shares that we can buy. But again, I think the Board — management is committed to take advantage of our stock position and buy back shares.

Tim Call: Terrific. And thanks for your hard work and great to see the indications that business can improve next year.

Jack Cronin: Thanks Tim.

Vivek Gupta: Thanks Tim.

Operator: [Operator Instructions] Our next question comes from the line of Lisa Thompson with Zacks Investment Research. Please proceed with your question.

Lisa Thompson: Good morning. Again, you people had a very busy fourth quarter.

Vivek Gupta: Yes, opposed busy indeed, Lisa.

Lisa Thompson: So, could you just kind of go through the events that led to the CEO resigning and then you’re hiring the consultants and exactly what the consultants are hired for? Are the two related or completely unrelated?

Vivek Gupta: They are unrelated, Lisa. So let me pick the first 1 first. The Board of Directors and Michael had a series of discussions around the goals and strategies for Mastech and for [Indiscernible]. And once it was clear that our long-term goals would not align, Michael felt it was best to design and the Board accepted Michael’s resignation. So, that is what led to Michael’s exit. As regards the consultant Pimenta coming in, Pimenta has deep experience across the global technology and business services industry and its principles have helped create business value and drive transformational change for a number of large-scale organizations in our industry. And the Board felt it would be really good to engage Pimenta in order to positively impact the organization and provide strategic direction towards significantly improving our business performance and growth. And that’s what led to us engaging Pimenta to help Mastech Digital.

Lisa Thompson: Okay. So, as I read through the documents, I first thought the kind of turnaround improvement guys and then I got a little concern that maybe they were hired to sell the company. Can you discuss that?

Vivek Gupta: Well, I can say that emphatically that we have not engaged Pimenta for selling the company. They have been engaged in order to make that positive impact I spoke about to the organization and provide the strategic direction that would help us with improved performance and growth. That is really the main objective.

Lisa Thompson: Okay. Just checking. And can you talk a little bit about how business is going? Are you feeling these different reactions in different verticals of your base? And I always worry about CGI when I read about banks. Can you talk about that?

Vivek Gupta: So, yes, as I said in my prepared remarks that there are some signs that we are seeing that the business is picking up. Last time when we spoke a quarter ago, we had just completed October and seeing some positive signs. Now, if we exclude December, we’ve had two quarters — two months of positive activity and also in January, which just ended, we had a positive net growth. So, three out of four months have been positive. And I think that’s really encouraging. It’s a positive indicator. And again, three months don’t really guarantee what the rest of the year will look like, but it’s a positive sign, direct volume is better than what it was a few months ago. So, that’s the positive side on the IT Staffing side. And on the Data and Analytics side, as we mentioned, we managed to sign a pretty large quantum of bookings adding up to $19 million.

I must caution everyone that a lot of the business in that is actually multiyear annuity deals. So, it doesn’t mean that immediately we’ll see a jump start in the revenues as a result of that. What it does mean is that we’ve got the right kind of business where we are seeing customers’ commitment for multiple years. So, there is going to be a steady stream of revenue coming in and just the kind of business we would like to have more and more of. So, again, for customers to open up their wallets and sign multiyear deals is a very positive sign. But these are only sort of early indicators. We have to now make sure that we maximize what we can from this to the fullest and make sure that 2024 turns out to be a better year.