Mastech Digital : Q3 2022 Mastech Digital Earnings Call Transcript

Mastech Digital, Inc.

Third Quarter 2022 Earnings

November 2, 2022

Operator

Greetings and welcome to the Mastech Digital, Inc, Third Quarter 2022 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.

If anyone should require operator assistance during the conference, please press "*", "0" on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jennifer Lacey, Manager of Legal Affairs for Mastech Digital, Inc.

Thank you. You may begin.

Jennifer Lacey

Thank you, Operator, and welcome to Mastech Digital's Third Quarter 2022 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 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

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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 2021 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 the 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 Vivek for his comments on several recent noteworthy events.

Vivek Gupta

Thank you, Jennifer. Good morning, everyone.

First, let me address the press release that was issued last night related to a change in leadership and our Data Analytics Services business segment.

Ganeshan Venkateshwaran resigned yesterday from the Company, as the CEO of the Data and Analytics Services segment. Our Board accepted his resignation with immediate effect.

I will serve as the Chief Executive of the D&A Services business, until Ganeshan's successor is in place.

Secondly, as mentioned in this morning's third quarter earnings release, we experienced a cyber-security breach involving a single employee email account and which indirectly impacted two Mastech InfoTrellis clients. Our IT team identified the point of entry, decommissioned the affected laptop and email address and changed logins and passcodes for this email account. To be doubly sure and as a good business practice, we also engaged external advisors to relegate our findings and remedial action steps.

As part of this engagement, these experts are assisting us with forensic analysis to determine whether any "personally identifiable information", also known as PII, was compromised as a result of this breach. For any PII data determined to have been compromised, these advisors will be assisting us in determining the appropriate compliant steps required with respect to such PII data.

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We have accrued a pretax loss reserve of $450,000 in the third quarter 2022 related to this event, which reserve includes the costs of engaging our external advisors, as well as an estimated other potential losses, relating to the breach.

Finally, in third quarter, 2022 we made a decision to close our underperforming operations in Singapore and Ireland and to rationalize our operating cost structure in the UK. Accordingly, we've reserved $120,000 of severance expense, related to these actions.

Let me now turn the call over to Jack for a detailed review of our third quarter, 2022, financial results.

Jack Cronin

Thanks, Vivek, and good morning, everyone.

During the third quarter of 2022, revenues totaled $63.2 million, compared to $59.5 million in the corresponding quarter of 2021. This 6% year over year increase reflected an 8% increase in the IT Staffing Services segment and a 4% decrease in our Data and Analytics Services Segment.

The 8% revenue improvement in IT Staffing reflected a higher level of consultants ongoing and a higher average fill rate, during the 2022 third quarter compared to corresponding quarter, a year ago.

The 4% revenue decline in Data and Analytics comes after a 26% year over year improvement during the previous quarter and, largely, reflects the timing of workable orders available in the second quarter versus the third quarter of 2022.

Gross profits in Q3, 2022, totaled $16.3 million, compared to $16.6 million in the third quarter of 2021. Gross profit as a percent of revenues in Q3, 2022, was 25.8%, compared to 27.9% in the 2021 third quarter. The decline in Q3, 2022, gross margins was largely due to lower utilization in the Data and Analytics Services segment, as we were unable to fully deploy the second quarter ramp-up of billable resources. Additionally, we incurred a project overrun of approximately $300,000 on a fixed price assignment scheduled to complete at year end.

GAAP net income for the third quarter of 2022 was $2.4 million, or $.20 per diluted share, compared to $3.4 million, or $.28 per diluted share in Q3, 2021. It should be noted that reserves for a cyber-security breach and severance expense associated with the closure of our Singapore and Ireland operations, as well as the rationalization of our cross structure in the UK had a negative impact on GAAP diluted earnings per share of approximately $0.04

Non-GAAP net income for the third quarter of 2022 was $4 million, or $.33 per diluted share, compared to $4.6 million, or $.38 per diluted share in Q3, 2021.

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SG&A expense items not included in Q3 non-GAAP financial measures, net of cash benefits, are detailed in our third quarter, 2022, earnings release, which is available on our website.

Addressing our financial position, on September 30, 2022, we had cash balances on hand of $3.5 million, outstanding term loans of $2.2 million, no borrowings under our revolving credit facility and cash availability of $36.4 million, in addition to term loan capacity of up to an additional $20 million, under our revolving credit facility accordion feature. During the third quarter, we elected to pay $7.6 million of our outstanding term debt with excess cash balances on hand. Given our term loan repayment schedule, we expect to be debt free in early January of 2023.

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

Vivek Gupta

Thank you, Jack.

Clearly, we're not happy with the third quarter performance of our Data and Analytics Services business segment and view the decline in year-over-year revenues and sizable gross margin shortfalls as unacceptable. Moving forward, we need to focus more on new business development activities, strengthen our relationships with existing clients, align our billing workforce with secured workable orders, which we believe will, in turn, improve utilization and, proactively, monitor all fixed price assignments. We will endeavor to focus on these issues immediately in an effort to avoid such occurrences in the future.

Our IT Staffing Services segment continued to grow in the third quarter of 2022 at improved gross margins and at higher bill rates. We did, however, see some weakness in demand during the quarter, which resulted in a 30 billable consultant headcount decline. We will continue to monitor activity levels in Q4 to assess if this was an aberration or the beginning of a shift in market dynamics.

Lastly, I would like to mention that, during the 2022 third quarter with the central bank continuing to increase interest rates, we made the decision to pay $7.6 million of outstanding term loan in July. This action will lower our quarterly interest expense by approximately 100K, as we continue to deleverage our balance sheet in today's uncertain environment.

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

Operator

Thank you. We will now 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.

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One moment, please, while we pull for questions.

Thank you. Our first question comes from the line of Lisa Thompson with Zack's. Please proceed with your question.

Lisa Thompson

Good morning.

Vivek Gupta

Hi, Lisa.

Lisa Thompson

You folks have certainly had a busy quarter.

Jack Cronin

That's for sure.

Vivek Gupta

Yeah, thanks, Lisa.

Lisa Thompson

Okay, so, I think we'd be interested in getting a little bit more clarity on what you think might be happening at D&A. You certainly have a lot of cash to make an acquisition is that something you could do and then bring in that business to run your current business?

And do you think that the weakness there is due possibly to people reigning in their plans to a recession or is that just missteps?

You elaborate a little more.

Vivek Gupta

Can you-can you just repeat the last part? I didn't quite get that part of the question.

Lisa Thompson

Do you think that say, the pipeline drying up, or whatever, is due to your own missteps, or is that from a recession where customers are pulling back their plans.

Vivek Gupta

Okay. So, Lisa, let me try and answer the second one, first. The second one is I think when I mentioned the demand reducing a bit, it's more on the IT Staffing side.

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