Mastech Digital : Q2 2023 Mastech Digital Earnings Call Transcript

Mastech Digital, Inc.

Second Quarter 2023 Earnings Call

August 2, 2023

Operator

Greetings. Welcome to the Mastech Digital, Inc. Q2 2023 Earnings Call.

At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press "*", "0 on your telephone keypad.

Please note this conference is being recorded.

It is now my pleasure to introduce your host, Jenifer Ford Lacey, Manager of Legal Affairs for Mastech Digital, Inc. Thank you, Ms. Ford Lacey. You may begin.

Jennifer Ford Lacey

Thank you, operator, and welcome to Mastech Digital's second quarter 2023 conference call. If you have not yet received a copy of our earnings announcement, it can be obtained from our website at www.mastechdigital.com.

With me on the call today are Vivek Gupta, Mastech Digital's Chief Executive Officer; Jack Cronin, our Chief Financial Officer; and Michael Fleishman, our Chief Executive Officer of the company's Data and Analytics Services business segment.

I would like to remind everyone that statements made during this call that are not historical facts are forward-looking statements. These are 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 listed 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.

Page 1 of 13

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 provide--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 second quarter 2023 results.

Jack Cronin

Thanks, Jen, and good morning, everyone. Second quarter 2023 was another challenging quarter for Mastech Digital. Revenues totaled $52.2 million, representing a 16% year-over-year revenue decline. Both of our business segments were impacted by customer concerns regarding slow economic growth, high inflation, and the possibility of a U.S. recession, which has lowered demand for our services in the near-term.

Our Data and Analytics Services segment contributed revenues of $8.8 million in the second quarter of 2023, compared to $11.2 million in the 2022 second quarter, as customers reduced resources on existing projects in light of continued economic uncertainty. Order bookings, however, increased to $10.1 million in the second quarter of 2023, compared to $8.4 million in the first quarter of this year. Additionally, our pipeline of opportunities continue to improve with the caveat that customers are taking a little longer to actually start new projects, once awarded.

Second quarter 2023 revenues in our IT Staffing Services segment totaled $43.4 million, compared to $50.9 million in the second quarter of 2022. Demand continued to be soft in the current quarter, particularly with respect to financial services clients.

Gross margins in the second quarter of 2023 was 26.1%, compared to 27% in the second quarter of 2022.

In our Data and Analytics Services segment, gross margins improved by 200 basis points compared to the second quarter of '22 gross margins. This favorable margin variance was largely due to higher utilization rates in the 2023 quarter, as we continued to drive better efficiency in our delivery processes.

Page 2 of 13

In our IT Staffing Services segment, gross margins were down 110 basis points, compared to Q2 2022, due to reductions in direct hire revenues higher and usual medical claims related to our self-insured healthcare program.

In the second quarter of 2023, we recorded a pre-tax settlement reserve of $3.1 million on an outstanding employment related claim. No lawsuit has been filed to date, and we are currently in negotiations to settle this matter.

GAAP net loss for the second quarter of 2023 was ($2.2 million), or a loss of ($0.19) per diluted share, compared to a $2.4 million net income, or $0.20 per diluted share in the second quarter of 2022. The settlement reserve noted above had the effect of reducing GAAP diluted earnings per share, by $0.19 per share.

Non-GAAP net income for Q2 2023 was $1.3 million, or $0.11 per diluted share, compared to $3.6 million, or $0.30 per diluted share in the second quarter of 2022.

SG&A expense items not included in second quarter non-GAAP financial measures, net of tax benefits were: one, stock-based compensation; two, the amortization of acquired intangible assets; and three, the 2023 settlement reserve on an outstanding employment related claim.

A description of these items is included in our second quarter 2023 earnings release, which is available on our website. Also, it should be noted that both GAAP net income and non-GAAP net income in the second quarter of 2023, included $600,000 of professional service expense related to the outstanding employment claims.

Addressing our financial position on June 30, 2023, we had $18.6 million of cash balances on hand. We had no bank debt outstanding and borrowing availability of $23.9 million under our revolving credit facility.

Our day sales outstanding measurement was 56 days at quarter end, which is well below our target range of 60 to 65 days and are five days--and were five days better than our measurement at March 31, 2023.

During the second quarter of 2023, we executed on our share repurchase program purchasing approximately 62,000 shares of Mastech Digital common stock at an average price of $9.15 per share.

I'll now turn--turn the call over to Vivek for his comments.

Vivek Gupta

Good morning, everyone. Thank you, Jack, for the detailed financial review of our operating results for Q2 2023.

Page 3 of 13

The same macroeconomic headwinds that we experienced during the first quarter of 2023 continued to impact our clients' spending dynamics in the second quarter, resulting in lower demand for our services.

Our IT Staffing Services segment continued to see clients taking a more conservative approach with respect to spending on new assignments due to concerns around a potential recession on the horizon. Our Financial Services clients, in particular, were even more inclined to tighten their purse strings, given the recent regional bank failures and worries about a broader banking crisis. In recent weeks, however, we did see a modest improvement in demand from some of our clients in the Financial Services space, but I wouldn't call this a trend, just yet. Also, during the quarter, we expanded our portfolio of staffing offerings with an entry into Engineering Staffing Services, or ESS, as we call it for short.

ESS is an adjacency to IT Staffing and will be using the same recruitment engine that our customers depend upon and trust. Since its launch in late May, ESS is gaining traction with both our existing, as well as new customers, and we are hoping to see in the quarters ahead this new service offering make up some of the recent declines in IT Staffing.

Our Data and Analytics Services segments performance was also impacted by clients reducing resources on existing projects, as they respond to economic uncertainty.

Michael will talk more about the state of affairs in the Data and Analytics Services business in a few minutes.

While we are encouraged by improvements in recent inflation data and some signs that the U.S. may dodge a recession, we have and will continue to take prudent actions to reduce our SG&A expenses in an effort to protect our operating profits.

I would like to reaffirm with 100% confidence our belief that our businesses remain fundamentally sound, that our financial clients are among the strongest in the industry, and that we have a solid balance sheet and access to ample capital to fund our current business needs and to support the share repurchase program that we announced, earlier this year.

Let me now turn the call over to Michael for his comments related to the Data and Analytics Services segment. Over to you, Michael.

Michael Fleishman

Thanks, Vivek, and good morning, everyone. As Vivek mentioned, uncertain economic conditions are clearly impacting our clients' spending behavior.

During the first half of 2023, we have seen clients reducing resources on existing projects as their way of mitigating concerns over economic conditions, and this posture has negatively impacted our revenues. However, beyond the revenue numbers, we believe we are making

Page 4 of 13

good progress in our efforts to reposition our organization from a master data management company to a much broader Data and Analytics Services firm that focuses on end-to-end data modernization services. Our progress in this transition can clearly be seen in our increased order bookings and pipeline building performance, year-to-date. In the second quarter of 2023, order bookings increased to $10.1 million, or $1.7 million higher than the first quarter of this year, 2023. Our first quarter bookings were also $1.6 million higher than the previous Q4 2022. Furthermore, during the second quarter, the number of our RFP submittals as well as our overall pipeline of opportunities, both increased. My expectation is that bookings will continue to expand over the second half of 2023, which should set us up nicely in 2024.

Also, in the second quarter of 2023, we made solid improvements in our gross margins. Our second quarter gross margins were 45.6% of revenues, which were 200 basis points higher than the corresponding quarter of 2022. This improvement reflected a higher utilization rate in the 2023 quarter versus the second quarter of 2022. From a strategic point of view, we aim to consistently have gross margins in the upper 40% gross margin range, irrespective of our revenue levels. Simply put, we need to quickly adjust our billable workforce to real time revenue streams. This ability to adjust is something that is a primary focus of our delivery team.

I'll now turn the call back over to Vivek.

Vivek Gupta

Thank you, Michael. Operator, this concludes our prepared remarks. We can take questions now.

Operator

At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press "*", "1" on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press "*", "2" if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset, before pressing the star keys.

One moment, please, while we poll for questions.

Our first question comes from the line of Lisa Thompson with Zacks Investment Research. Please proceed with your question.

Lisa Thompson

Good morning.

Vivek Gupta

Hi, Lisa.

Lisa Thompson

Page 5 of 13