Mastech Digital, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial figures below are in millions unless stated otherwise.
Business context
Mastech provides digital transformation, data and analytics consulting, and IT staffing services. It reports two segments: Data and Analytics Services and IT Staffing Services. Most revenue is generated in the United States.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $47.8 | $63.2 | $155.0 | $185.0 |
| Gross profit / margin | $12.6 / 26.3% | $16.3 / 25.8% | $39.7 / 25.6% | $49.0 / 26.5% |
| Operating income (loss) | $(0.05) | $3.4 | $(2.3) | $10.2 |
| Net income (loss) | $0.1 | $2.4 | $(1.8) | $7.2 |
| Diluted EPS | $0.01 | $0.20 | $(0.15) | $0.59 |
| Cash from operating activities | Not provided separately | Not provided separately | $10.5 | $7.7 |
Q3 revenue declined 24% year over year; nine-month revenue declined 16%. Q3 segment revenue fell 20% in Data and Analytics and 25% in IT Staffing. Nine-month segment revenue fell 17% and 16%, respectively. Q3 total gross margin improved 50 basis points, reflecting better Data and Analytics utilization, while the nine-month margin declined 90 basis points, principally due to lower IT Staffing margins.
Liquidity, debt and financial position
- At September 30, cash and cash equivalents were $15.9 million, versus $7.1 million at December 31, 2022. Current assets were $56.2 million and current liabilities $19.7 million.
- No bank debt was outstanding at quarter-end. The company had approximately $24.8 million of available borrowing capacity under its credit facility and reported compliance with its covenants. The term loan was fully repaid in January 2023.
- Nine-month cash from operations was $10.5 million; investing cash outflow was $0.1 million and financing cash outflow was $1.5 million. Operating cash flow benefited from a $7.2 million reduction in operating working capital, including lower receivables associated with reduced revenue.
- Shareholders’ equity was $86.2 million. Operating lease liabilities totaled $4.4 million.
Material changes, outlook and risks
- Management attributed weaker demand to continuing economic uncertainty, particularly reduced client demand in financial services. IT Staffing billable consultants numbered 992 at quarter-end, versus 1,307 a year earlier; the average Q3 bill rate was $80.96, compared with $81.60.
- Data and Analytics Q3 bookings were $5.1 million, significantly below Q2, amid delays in awards for assignments with verbal client commitments. Management noted that bookings can fluctuate and are not a substitute for revenue trends.
- SG&A increased to $42.0 million for the nine months, including a $3.1 million employment-claim reserve recorded in Q2. The claim was settled and paid in Q3; settlement terms are confidential. Professional-service fees related to the matter were $1.2 million for the nine months.
- Declining Data and Analytics revenue triggered an interim goodwill impairment test in Q3; no impairment was recorded. Management cautioned that further revenue declines could reduce implied goodwill fair value and lead to impairment in a later period.
- Revenue concentration remains material: CGI represented 21.1% of Q3 revenue and 23.7% of nine-month revenue; the top ten clients generated approximately 52% and 54%, respectively. Client contract termination rights and concentrated customer exposure add risk.
- Management said cash, operating cash generation, and credit availability should fund business needs and the announced share-repurchase program over the next 12 months, excluding acquisitions. The company did not provide specific financial guidance. Management also cited potential staffing-margin pressure from managed service providers and systems-integrator relationships, and skilled-labor supply constraints that could persist into 2024.
- The company repurchased 62,361 shares for an average $9.15 per share during the first nine months under its 500,000-share authorization; it made no repurchases in Q3. A Canadian subsidiary is under tax audit for 2018 and 2019. Management said ordinary-course legal proceedings are not expected to materially adversely affect results or cash flows.
Important facts for investors to verify
- Whether client demand, especially in financial services, and IT Staffing billable headcount stabilize or continue to decline.
- Whether Data and Analytics bookings convert to revenue, and whether further weakness affects goodwill valuation.
- How margins and operating expenses respond to lower revenue, including self-insured medical claims and Data and Analytics overhead.
- The cash-flow sustainability of the working-capital release and the availability of credit-facility capacity.
- Whether customer concentration, the completed employment settlement, or the Canadian tax audit produces additional material effects.