CTG Reports Third Quarter 2015 Results
Third Quarter Financial Highlights
Revenue was $93.1 million, a decrease of 1.8% from the second quarter and down 3.8% from the prior year quarter
Operating margin was 3.8%, compared with 1.2% in the second quarter, after charges, and 4.7% in the third quarter 2014
GAAP net income was $0.13 per diluted share, compared with $0.03 per diluted share in the prior quarter, which included $0.08 of charges, and $0.17 per share in the year-ago quarter
The quarter ended with cash and short-term investments of $20.9 million, reflecting balance sheet restructuring and cessation of client early pay program and
Paid quarterly cash dividend of $0.06 per share.
CTG Chief Executive Officer Cliff Bleustein commented, “We continued to make meaningful progress on a number of our business initiatives during the quarter, including sales capacity, cost improvements and capital efficiency. More specifically, we exceeded the high-end of our earnings guidance despite a reduction in headcount at a large staffing customer that resulted in lower than expected quarterly revenue. While the current environment continues to be challenging for many of our customers, we remain committed to enhancing our leadership, sales and technical capabilities to elevate the value that CTG provides.
“Strategic staffing services reflected our ability to partially mitigate the pressure from the lower headcount by closely aligning services with both our direct customers and their end customers. We also continued to invest in additional capacity to drive growth in this business, including a 33% increase in recruiting staff year-to-date, a number of new sales roles to support business development, and a search for a vice president. Our early success is demonstrated by winning a number of new customer accounts as we seek to diversify our staffing business not only across industries, but also within additional divisions at existing customers.
“Our higher margin healthcare solutions consulting group also achieved a meaningful amount of activity during the quarter. We continue to manage the trail-off in EMR business while realigning our talent and technology assets to better position CTG for an evolving set of new opportunities. These efforts include expanded advisory and technology services, off-shore partnerships and cross-selling between our business groups. We are actively in the process of hiring multiple healthcare sales professionals in support of our initiatives to broaden engagements with existing customers as well as grow our customer base. Additional new technical capabilities are also being added which will expand our solutions offering for customers. We also continue to invest in the growth of our energy and European markets through the addition of sales professionals and recruiters.
“We expect to face continued headwinds for the next few quarters, including a challenging macro-environment for customers. We are also continuing to transition our healthcare business in response to the trail-off of legacy EMR implementations. Although the investments we are making in leadership, sales and technology services will take time to implement and yield material results, successful execution on our initiatives will create a business with more diverse revenue, improved profitability and broader growth opportunities.”
Revenue in the third quarter ended October 2, 2015 was $93.1 million, compared with $94.7 million in the second quarter of 2015 and $96.8 million in the third quarter of 2014. Revenue was impacted by the continued decline of CTG’s EMR business, a reduction in staffing headcount at a large customer and $3.1 million of unfavorable currency impact in the quarter.
Direct costs in the third quarter were $75.6 million, or 81.2% of revenue, compared with $79.1 million, or 83.5% of revenue in the second 2015 quarter, and $77.7 million, or 80.3% of revenue, in the year-ago quarter. SG&A expense was $13.9 million, down from $14.5 million in the second quarter and year-ago quarter.
Operating income increased sequentially to $3.6 million, or 3.8% of revenue, compared with 1.2% of revenue in the second quarter of 2015. Second quarter 2015 operating margin included a 240 basis point reduction related to charges for CTG’s European workforce reduction and the write-down of its medical management tool. Operating margin in the third quarter of 2014 was 4.7%.
CTG’s effective income tax rate in the third quarter was 41.5%, compared with 48.4% in the second 2015 quarter and 39.9% in the third 2014 quarter.
GAAP net income in the third quarter of 2015 was $2.1 million, or $0.13 per diluted share, compared with GAAP net income of $554 thousand, or $0.03 per diluted share, in the 2015 second quarter. Second quarter 2015 net income was reduced by $0.08 due to the company’s workforce reduction and medical management tool write-down. GAAP net income in the third quarter of 2014 was $2.7 million, or $0.17 per diluted share.
Cash and short term investments at the end of the third quarter were $20.9 million, compared with $31.4 million at the prior quarter end. During the third quarter, the company repaid $17.5 million in loans against company-owned life insurance policies, partially funded by $10.0 million of new long-term debt. The company also terminated an early payment program with a large customer, which increased accounts receivable sequentially to $75.0 million at the end of the third quarter from $63.5 million at the end of the second quarter, and days sales outstanding to 73 days from 61 days. These actions and respective changes reflect the company’s business plan to lower its cost of capital.
Stock Repurchase Program
CTG repurchased 78,000 of its shares in the 2015 third quarter, at an average price of $7.24 per share. As of October 27, 2015, there were approximately 455,000 shares available under CTG's current repurchase authorization.
2015 Guidance and Outlook
CTG expects total revenue for the 2015 fourth quarter to range between $87 and $89 million. GAAP net income is expected to be between $0.11 and $0.13 per diluted share. There are 62 billing days in the fourth quarter 2015 vs. 66 billings days in the prior year quarter.
For the full year 2015, CTG expects revenue to range between $373 and $375 million. The revenue outlook includes approximately $12 million in negative currency adjustments. GAAP net income is expected to be between $0.35 and $0.37 per diluted share. Net income includes $0.08 for costs associated with CTG’s European workforce reduction and the write-down of its medical management tools undertaken earlier in 2015.