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MHH: Q2 Austerity Lower Taxes Brings Greater Than Expected Profit to the Bottom Line

08/03/2020
By Lisa Thompson

NYSE:MHH

READ THE FULL MHH RESEARCH REPORT

While revenues were close to our estimate for Q2, an unexpected improvement in gross margin combined with austerity programs led to an earnings beat. Back in March the company reported that staffing was only slightly affected with cancellations but that some companies paused their plans to start Data and Analytics projects or to sign new contracts. Business soon resumed as businesses shifted to remote working and the company was able to sign $10 million in new data and analytics contracts in Q2 for projects ranging from six to eighteen months. 

On June 2, 2020 Mastech Digital (NYSE:MHH) launched a remote staffing service offering, branded as “MAS-REMOTE.” This service allows Mastech Digital to offer the top 10% handpicked talent in the US to work remotely on customers' projects. In contrast to remote working from home, the talent does not relocate to the customer’s geographic area, but permanently works remotely. For Mastech, this opens its pool of talent worldwide, not just the US. The market is ready for this product having been forced to experiment with remote working and having found good success. 

Total revenues in Q2 declined 2% but total gross margin was 26.6% versus 24.9% a year ago and 25.2% in Q1 2019 and gross margin dollars increased 5%.

Looking at the two segments reveals, IT staffing decreased 2% to $41 million and was 86% of revenues. It had 1,035 billable consultants compared to 1,113 the year before and 1,100 in the first quarter of 2020. Gross margin for this segment improved to 22.4% from 21.5% last year and 21.5% in Q1 2020 as the bill/pay spread improved.

Data and analytics grew 2% to $6.8 million or 14% of sales. Gross margins also improved in this segment to 52.2% from 46.1% a year ago. Gross margin dollars for this segment increased 15.2%. Part of the improvement in margin as well as lower revenues was due to reduced travel expense. Typically the company would have booked $300,000 - $400,000 in travel expense to clients at cost, so no travel reduced revenues by that amount and reduced cost of revenue by the same amount. We expect the same phenomena for Q3 at this point since travel has not restarted. 

In Q1 the company implemented austerity and SG&A was reduced by $1.3 million sequentially. Spending was even below the $9.5 million in Q2 of 2019. The company is still under austerity so we do not expect spending to increase much in Q3 2020. 

Operating income (subtracting the gain on evaluation of contingent consideration liability in 2019) increased 44% to $3.6 million and margin improved to 7.6% from 5.2% a year ago, and 4.9% in Q1 2020.

Other expense declined to $157,000 compared to $507,000 a year ago as the company pays off higher interest rate debt.

For the quarter the tax rate was lower than expected due to the exercise of stock, which results in a favorable tax treatment and reduced the tax rate to 14%. The company expects the second half of the year to still be in the 25-26% range without factoring any more stock option exercises.

GAAP net income was $3.0 million, down 50% from a year ago. On a non-GAAP basis it was $3.9 million up 79%.

GAAP EPS was $0.25 diluted compared to $0.53 a year ago and $0.16 in Q1 2020. On a non-GAAP basis it was $0.33 versus $0.20. The fully diluted share count was 11.9 million up 7.0%.

Balance Sheet

The company ended the quarter with $4.7 million in cash, a quick ratio of 1.8Xs, working capital of $17.1 million, and debt of $14.5 million. It reduced debt $7.4 million since last quarter and $18.3 million since last year at this time. Management feels it has enough liquidity to handle the effects of the pandemic. 

Estimates

For 2020 we are maintaining revenues at $198 million, but increasing EPS estimates to $1.11 per share based on lower spending and higher gross margins.

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