Mastech Digital : Q2 2022 Mastech Digital Earnings Call Transcript

Mastech Digital, Inc.

Second Quarter 2022 Earnings Call

August 3, 2022

Operator

Greetings. Welcome to Mastech Digital, Inc. Second Quarter 2022 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, Jennifer Ford Lacey, Manager of Legal Affairs for Mastech Digital. Thank you, Ms. Ford Lacey. You may begin.

Jennifer Ford Lacey

Thank you, operator and welcome to Mastech Digital's Second 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. Jack Cronin, our Chief Financial Officer, and Ganeshan Venkateshwaran our new Chief Executive Officer of the Data and Analytics Services segment.

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

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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 Jack for a review of our second quarter 2022 results.

Jack Cronin

Thanks, Jenny, good morning, everyone. Revenues for the second quarter of 2022, totaled $62.1 million, representing an organic increase of 16% over Q2, 2021 revenue. This revenue performance was a new record for our Company, as both business segments showed sequential revenue improvement during the quarter.

Our Data and Analytics Services segment contributed revenues of $11.3 million, which represented organic growth of 26%, over last quarter's Q2 revenues. Sequentially, revenues increased 11% from the previous quarter.

In our IT Staffing Services segment, revenues totaled $50.9 million and represented a year-over- year increase of 14%, compared to Q2 of 2021. Activity levels continued to remain elevated, during the second quarter, as we increased our durable consultant headcount by 4%, during the current quarter.

Gross profits in the second quarter of 2022 totaled $16.7 million, or 17% higher than in the corresponding quarter of 2021. Gross profit, as a percent of revenue in Q2, 2022, was 27%, compared to 26.7% in the 2021 second quarter.

GAAP net income for Q2, 2022 was $2.4 million, or $.20 per diluted share, compared to $3.7 million, or $.31 per diluted share in Q2, 2021. It should be noted that a favorable "revaluation of a contingent consideration" liability was responsible for a $1.4 million benefit in net income and a $.12 benefit in diluted earnings per share in the 2021 second quarter.

Non-GAAP net income for Q2, 2022, was $3.6 million or 30% per diluted share, compared to $3.4 million or $.29 per diluted share in Q2, 2021.

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

Note that net income in the second quarter of 2022 was impacted by several conscious decisions that we made for the benefit of the second half of 2022, and beyond.

Specifically, we increased durable staff by 22%, during the quarter in our Data and Analytics Services segment in anticipation of higher revenues, during the second half of 2022.

We invested in the cloud-services space, within our Data in Analytics Services segment, and we invested in "offshore staffing" within our IT Staffing Services segment.

While these actions mitigated our net income during the second quarter of 2022, we believe that all of these actions will have a favorable impact in the second half of 2022 and beyond.

Addressing our financial position, on June 30, 2022, we had outstanding bank debt, net of cash balances on hand, of $4.2 million. We had no borrowings under our revolving credit facility, and we had cash availability of $36.8 million, in addition to term loan capacity of $20 million under our credit facility accordion feature. Given today's increasing interest rate environment and our elevated revolver availability, you'll likely see us "early pay" some of our term debt with that said cash during the balance of 2022.

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 operating results for the second quarter of 2022.

Let me start by saying that I'm very pleased with our Q2, 2022, revenue performance in both of our business segments, despite some impact on our earnings on account of investments made for the second half of 2022, and beyond. As I've stated more than once in the past calls, our main goal is to manage our businesses and our strategic objectives for the long term.

I will now provide you with my comments related to our IT Staffing Services segment's performance and outlook and then pass the mic over to Ganeshan for his remarks on our Data Analytics business segment.

As you are all aware, there are a number of headwinds facing the U.S. and global economies. Inflation has skyrocketed, interest rates are increasing, as central banks take actions aimed to reduce inflation. The labor market is continuing to be tight, and the Ukraine Russia conflict has added another element of uncertainty that the markets need to absolve. While many pundits

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and seasoned executives are predicting recessionary conditions in the immediate near term, so far, we have not seen any material signs of such in our clients' businesses.

The IT Staffing Services segment delivered record revenues and record gross margins, over the first two quarters of 2022. Revenues were strong in the second quarter of 2022 in both digital and mainstream technologies and also for both contract staffing as well as permanent placements. Additionally, we're very encouraged with our offshore staffing service offering, which has gained good traction and is one of the areas we have invested in to accelerate the pace of future growth.

Gross margins continue to expand in the second quarter of 2022, to 23.3% in the IT Staffing segment. This is the second consecutive quarter of gross margin expansion, and the first time that we have exceeded the 23% threshold, since going public in 2008.

Our operating profits also continue to grow, despite our investments in offshore staffing and delivering compensation increases necessary to retain our talented workforce.

Let me now turn the mic over to Ganeshan for his remarks on our Data and Analytics Services segment.

Ganeshan Venkateshwaran

Thank you, Vivek. And good morning, everyone. It's a pleasure to be here today talking to you on my second Mastech Digital earnings call.

I'm actually taking this call today from our delivery center in Chennai, India. So, good evening to all of our Indian friends on the call.

As I near my fifth month with the Company, I'm pleased to share that we are making progress on a number of fronts. 1), formulating a new future state go to market strategy, leveraging on our current strengths. 2), addressing the gaps in our technology and talent capabilities. And 3), a robust execution methodology to support the go to market strategy.

Let me start off by addressing our Q2 financial highlights, and I will come back to the progress being made on the strategy side.

In Q2 of 2022, we generated record revenues, which were 26% higher than in Q2 of last year and 11% better than the previous quarter. Our bookings during the second quarter of 2022 approximated $10 million with one large deal closure slipping into Q3. Most of the others secured in Q2 were "close to the money" bookings, which means that they will be booked, within the next 12-month period. As a result of the foregoing, we expect that the second half of the year revenues to exceed our first half revenue performance.

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Coming to the strategic improvements that I mentioned earlier, we made progress on three fronts. The first, formulating a new future state go to market strategy. What do we do today? We have very strong implementation capabilities built around Data and Analytics and customer experience. While this expertise positions the Company well with the stakeholders at the implementation level, it limits the opportunity to engage with the senior decision-makers responsible for driving large data transmissions.

So, what is new? A), we have extended our core capabilities to offer advisory services around data modernization, which includes current state assessment and a roadmap for transformation. This positions us at the higher end of the decision-making team. B), we are building automations and improvised frameworks to accelerate our implementations and migrations, as they are repeatable in nature. C, our post-implementation managed service offerings are designed to drive big cost optimization, which will result in repeatable revenues for us.

All of this will also improve our gross margins.

The second area of focus, identifying and addressing the gaps in our technology and current talent. To support the advisory solutions software, go to market strategy, we introduced new roles at the leadership level and made a few changes to the existing leadership.

We're also strengthening our solution architecture teams and building out cloud native capabilities.

We are strengthening our business development team and expanding on our technical process capabilities.

While we bring in this new talent, we will also be rationalizing our SG&A costs in the next couple of quarters.

The third area of our focus, robust execution methodology to support the go to market. For each of the go to market solutions that I conduct a year, we have established a set of differentiators that include a 4-to-8-week assessment framework to develop roadmaps, reusable solutions to accelerate deployments and migrations, a differentiated product oriented dilutive model to drive speed and execution predictability.

We are seeing early-stage positive validation to our new value proposition from several Fortune Enterprises in the U.S. and in Canada with needed conversations with the clients have pivoted from-I need you to implement this versus how can you help us solve this data problem for me.

This has also positioned us to expand our footprint into other partner ecosystems with similar offerings, such as IBM data solutions without having to agreeing to one that we read.

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