By Lisa Thompson
NYSE: MHH
READ THE FULL MHH RESEARCH REPORT
This quarter, Mastech Digital (NYSE: MHH) changed its segmented accounting for revenues into Talent and Services from its historical IT Staffing and Data and Analytics segments. This better aligns with its business prospects and focus. Talent generates revenues from placing staff with customers, often through a third party, while Services generates revenues from projects or from staffing with customers for whom the company can provide services to because of the contract Mastech has with that customer. For example, Fidelity, its largest customer, is under Staffing, as it provides manpower only to the company.
The services business seeks to do project work and is focusing on data and AI projects in specific verticals, where the company will build software to address these verticals. Its depth of capabilities brings it in competition with boutique firms like Fractal Software, LatentView Analytics, Credence Management Solutions, and Tiger Analytics (all of whom are private companies), in addition to the traditional generalists like Accenture and Wipro. The company expects that Service revenues will generate higher overall margins going forward, as it is less competitive than staffing.
In order to better understand the breakdown, the 10Q provides this:
The Data & AI segment provides direct client engagements that are managed as service-led accounts. These offerings include data management and analytics, digital transformation consulting, AI and Industry Solutions, staffing to direct customers, data engineering and IT services, and managed services. Engagements are typically project-based and may be structured as time-and-material or fixed-price arrangements and delivered using a combination of on-site and offshore resources.
The Talent segment consists of staffing engagements that provide clients with access to skilled technology professionals across a broad range of digital and mainstream IT disciplines. These engagements include both intermediated arrangements through managed service providers and system integrators, as well as certain direct client staffing relationships that are managed as staffing-only engagements. Substantially all revenue within this segment is recognized over time as services are performed, generally based on hours worked.
Transforming to an AI First Provider
The company has completed the cost-cutting part of its transformation, having reduced and consolidated staff and moved some overhead operations to low-cost India. With these savings, estimated at a run rate of $2 million a quarter, the company will redeploy this money to increase its AI capability through tools and education. As a result, we expect operating expenses to tick up throughout the quarter this year. Ultimately, this effort should result in higher margin revenues, more stickiness, and less competition while serving a hot market for many years to come. By specializing in verticals, the company hopes to become known as experts in these industries, aiding marketing efforts and profitability. This quarter, the company landed a new large contract with a current health care client, which it hopes to replicate at other companies in that business.
Near term, selling has been facing headwinds from the political and economic environment as companies hold back decision-making. Should wars end and oil return to normal, business should pick up. The company continues to make progress despite all that, as it pursues a rapidly growing market on the critical path of its customers. Despite having missed numbers in Q1, we are impressed by the strategy and believe Mastech has a bright future. The stock is now trading at an enterprise value of $47 million despite a revenue run rate of $164 million and profits. Its peers trade at 1.5 times EV/2026 estimated sales.
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