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MHH: Mastech Digital’s Q3 Earnings Soar 54%

10/28/2020

By Lisa Thompson

NYSE:MHH

READ THE FULL MHH RESEARCH REPORT

Mastech Digital's (NYSE:MHH) Q3 was a repeat of Q2 in that margins came in higher than expected as costs remained in check. While revenues for the quarter were down 4% gross and operating margins improved resulting in an earnings increase of 53.8%. Some of the profitability gain was from higher rates on new assignments and some from continued austerity programs that are still in effect with no sign of abating just yet. Management claims its spending will pick up as its revenues do. In Q4 the company will benefit by the addition of AmberLeaf revenues and profits, albeit initially at lower than average corporate gross margins.

Specifically total revenues in Q3 declined 4% but total gross margin was 27.6% versus 24.9% a year ago and 26.2% in Q2 2019; gross margin dollars increased 6.2%. It has weathered the pandemic better than many of its competitors due to its conscious decision to focus on what it calls “digital technologies.” These are described at leading edge sectors such as data and analytics, cloud computing, mobile, social and AI, and opposed to maintenance of legacy systems on mainframes and the like. It has gone from digital being 16% of sales in 2016 to 50% today with AmberLeaf pushing it an even higher percentage.

Looking at the two segments reveals, IT staffing decreased 5% to $40.2 million and was 85% of revenues. It had 1,037 billable consultants compared to 1,197 the year before and 1,035 in the second quarter of 2020. Gross margin for this segment improved to 22.6% from 21.4% last year and 22.4% in Q2 2020 as new assignments are added at higher rates and higher consultant utilization. Data and analytics grew 1% to $7.2 million or 15% of sales. Gross margins also improved in this segment to 55.9% from 45.7% a year ago. Gross margin dollars for this segment increased 24%. Part of the improvement in margin as well as lower revenues was due to reduced travel expense and it too had better consultant utilization.

In Q1 the company implemented austerity and surprisingly SG&A was again reduced this quarter albeit by only by $169,000 million sequentially. It was $8.9 million compared to $$9.3 million a year ago. The company said although expenses were down $1.1 million, it spent $800,000 on expanding the data and analytics platform.

Operating income increased 37.4% to $4.2 million and margin improved to 8.9% from 6.2% a year ago, and 7.6% in Q2 2020.

Other expense declined to $191,000 compared to $380,000 a year ago as the company pays off higher interest rate debt.

For the quarter the tax rate was at the expected rate of 25.5% range where we expect it to stay without factoring any more stock option exercises.

GAAP net income was $3.0 million, up 54% from a year ago. On a non-GAAP basis it was $4.0 million up 57%.

GAAP EPS was $0.25 diluted compared to $0.17 a year ago and $0.25 in Q2 2020. On a non-GAAP basis it was $0.33 versus $0.23. The fully diluted share count was 11.9 million up 7.0%.

Balance Sheet

The company ended the quarter with $4.0 million in cash, a quick ratio of 1.8xs, working capital of $17.0 million, and debt of $8.4 million. It reduced debt $6.1 million since last quarter and $18.7 million since last year at this time. It paid $9.5 million in cash to buy AmberLeaf after the quarter ended on October 1st.

Estimates

For 2020 we are lowering revenues to $197 million, but again increasing EPS estimates to $1.22 per share based on lower spending and higher gross margins. We had expected a bigger pick up in business by now. Although North America, where almost all of the IT staffing business is, is starting to grow, the rest of the world, continues to be shutdown or locked down either fully or partially. This is delaying the ability for the InfoTrellis business to start new projects and win contracts in the typical amount of time. In the mean time, it will work to bring AmberLeaf’s gross margin from its current 35% up to InfoTrellis’ 55% by better consultant utilization, higher prices, and reducing its use of outside consultants.

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