Business Context and Reporting Period
Company: Mastech Holdings, Inc. (formerly a subsidiary of iGATE Corporation, separated September 2008).
Reporting Period: Quarterly Report (Form 10-Q) for the period ended June 30, 2009.
Business Overview: Provider of IT and brokerage operations staffing services. The company operates as a single reportable segment with four sales channels: Wholesale IT, Retail IT, Brokerage Operations, and Permanent Placements/Fees.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2009 |
Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|---|---|
| Revenues | $17,675 | $24,450 | $38,233 | $49,424 |
| Gross Profit | $3,404 | $4,765 | $7,247 | $9,698 |
| Gross Margin % | 19.3% | 19.5% | 19.0% | 19.6% |
| Net Income | $256 | $1,099 | $751 | $2,071 |
| Diluted EPS | $0.07 | $0.30 | $0.21 | $0.57 |
| Operating Cash Flow (6mo) | $2,666 | $3,920 | ||
| Cash & Equivalents (End of Period) | ||||
| Total Assets | $15,700 | $14,697 (Dec 31, 2008) | ||
| Total Liabilities | $5,414 | $5,294 (Dec 31, 2008) | ||
| Debt | No outstanding debt; $10M revolving credit facility available. |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 27.7% year-over-year for the quarter and 22.6% for the six-month period. This was driven by sluggish demand for IT staffing, pricing pressures, and the completion of a significant brokerage operations assignment in March 2009.
- Headcount Reduction: Billable headcount dropped to 477 consultants at June 30, 2009, down from 619 in the prior year. The decline in the quarter was 15 consultants, a slower rate of decline compared to previous quarters.
- Profitability: Net income fell significantly due to lower revenues. Gross margins remained relatively stable but faced pressure from Managed Service Provider (MSP) models and lower bill rates.
- SG&A Expenses: Selling, general, and administrative expenses decreased year-over-year due to lower recruiting costs and bonuses. However, the quarter included a $350,000 severance charge related to a change in leadership.
- Tax Rate: The effective tax rate increased to 40.6% for the quarter (from 20.7% in 2008) because the company no longer benefits from the former parent's consolidated tax return allocations.
Outlook, Risks, and Management Commentary
- Leadership Change: Steven J. Shangold resigned as CEO in April 2009. Thomas B. Moran was appointed CEO effective July 20, 2009.
- Economic Outlook: Management notes that business demand is highly correlated with U.S. economic conditions. They anticipate continued pricing pressures and lower gross margins until economic growth rebounds.
- Client Concentration: The company relies heavily on a limited number of clients. For the six months ended June 30, 2009, the top ten clients represented approximately 66% of total revenues.
- Liquidity: The company holds $6.9 million in cash and equivalents with no debt. Management believes operating cash flows and existing cash balances are adequate to fund business needs for 2009.
- Risks: Key risks include general economic downturns, client concentration, and the shift toward lower-margin MSP models in the retail channel.
Investor Verification Checklist
- Revenue Sustainability: Verify the impact of the completed brokerage assignment on future revenue projections and the stability of the remaining client base.
- Margin Pressure: Assess the long-term impact of the shift toward Managed Service Providers (MSPs) and wholesale channels on gross margins.
- Client Concentration: Review the specific identities and financial health of the top 10 clients, which account for over two-thirds of revenue.
- Leadership Transition: Monitor the strategic direction and execution under the new CEO, Thomas B. Moran.
- Working Capital: Track Days Sales Outstanding (DSO), which increased to 42 days from 39 days in the prior year, indicating potential collection delays.