Greetings, and welcome to the Mastech Digital Inc. Quarter One 2021 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Jennifer Ford Lacey, Manager of Legal Affairs for Mastech Digital Incorporated. Thank you Ms. Ford Lacey. You may begin.

Thank you operator, and welcome to Mastech Digital's first quarter 2021 conference call. If you have not yet received a copy of our earnings announcement, it can be obtained from our website at www.mastechdigital.com. With me on the call today are Vivek Gupta, Mastech Digital's Chief Executive Officer; Paul Burton, Mastech InfoTrellis Chief Executive; and Jack Cronin, our Chief Financial Officer. I would like to remind everyone that statements made during this call that are not historical facts are forward-looking statements. These forward-looking statements include our financial growth and liquidity projections, as well as statements about our plans, strategies, intentions, and beliefs concerning the business, cash flows, costs, and the markets in which we operate. Without limiting the foregoing the words believes, anticipates, plans, expects, and similar expressions are intended to identify certain forward-looking statements. These statements are based on information currently available to us, and we assume no obligation to update these statements as circumstances change. There are risks and uncertainties that could cause actual events to differ materially from these forward-looking statements including those listed in the company's 2020 annual report on Form 10-K filed with the Securities and Exchange Commission and available on its website at www.sec.gov. Additionally, management has elected to provide certain non-GAAP financial measures to supplement our financial results presented on a GAAP basis. Specifically, we will provide non-GAAP net income and non-GAAP diluted earnings per share data, which we believe will provide greater transparency with respect to the key metrics used by management in operating the business. Reconciliations of these non-GAAP financial measures to their comparable GAAP measures are included in our earnings announcement which can be obtained from our website at www.mastechdigital.com. As a reminder, we will not be providing guidance during this call nor will we provide guidance in any subsequent one-on-one meetings or calls. I will now turn the call over to Jack for a review of our first quarter 2021 results.

Thanks, Jen, and good morning everyone. The first quarter had some strong indications that the COVID-19 pandemic is dissipating with respect to its impact on the macroeconomic environment. Activity levels generally increased during the quarter with the rate of increase varying significantly from industry to industry and geography to geography. For instance, our IT staffing services segment had a significant uptick in activity from Q4 levels. While our Data and Analytic services segment didn't see noticeable market improvement in the latter half of the quarter. As I review our Q1 2021 financial results, you will see this uneven recovery from the impact of the pandemic in our two business segments. First quarter 2021 revenues totaled $49.8 million, compared to $50.4 million in the first quarter of 2020. Our Data and Analytics services segment contributed revenues of $8.8 million, essentially flat from the fourth quarter of 2020. Project delays continued to affect revenues during the quarter. However, bookings rallied in the second half of the quarter to finish close to $16 million, which is quite strong and an indication of a solid revenue pipeline. Additionally, we saw activity improvements in Europe and parts of Asia, which are important growth markets for us. The uncertainty that still remains in the marketplace relates to when projects and pent-up demand will be released in earnest. And we believe that we're getting very close to this inflection point as we approach the second quarter. In our IT staffing services segment, activity levels increased from the fourth quarter of 2020 as we grew our global consultant base by a record 9%. This performance essentially offset all of the billable headcount declines that we experienced during the pandemic impacted first half of 2020. Gross profit in Q1 of 2021 totaled $12.8 million, compared to $12.7 million in the first quarter of 2020. Gross margins, as a percentage of revenue increased by 50 basis points compared to Q1 2020. During the quarter, we made additional investments in SG&A expense of approximately $1 million, largely in sales, operations, and leadership staff in efforts to capture anticipated future revenues as the COVID-19 recovery continues to gain traction globally. Our decision to invest in advance of an expected revenue growth curve reflects improving demand and early customer acceptance of our broadened Data and Analytics service offering, which Paul will touch on later in his prepared remarks. GAAP net income for Q1 2021 was $1.2 million or $0.10 per diluted share, compared to $1.9 million or $0.16 per diluted share in Q1 2020. Non-GAAP net income for Q1 of 2021 was $2.2 million, or $0.19 per diluted share, compared to $2.7 million, or $0.23 per diluted share in the first quarter of 2020. SG&A expense items not included in non-GAAP financial measures, net of tax benefits, are the amortization of acquired intangible assets and stock-based compensation and are detailed in our first quarter earnings release, which is available on our website. Lastly, addressing our financial position at March 31, 2021, we had cash balances on hand of $7.2 million, no outstanding borrowings under our revolving credit facility, and cash availability of approximately $25 million. During the quarter, we reduced our term debt by $1.1 million to $16.4 million at quarter end. I should note that this debt balance includes the $10 million that we borrowed to finance the AmberLeaf acquisition in October of 2020. I’ll now turn the call over to Vivek for his comments.

Good morning, everyone. Thank you, Jack, for the detailed financial review of our operating results for the first quarter of 2021. Clearly, project delays impacted revenues in our Data and Analytics services segment this quarter. And hiring for projects that could ultimately be pushed out at the last minute took its toll on our profit margins. Nevertheless, we continue to invest for the future despite a bit of revenue lumpiness. Paul will have more to say about the Data and Analytics segment performance and where we believe we are headed. Now let me share with you the good news with respect to our IT staffing services segment. From the outset of Q1 2021, we saw a strong increase in demand in the segment. As a result of this demand uptick, we were able to increase our consultants on billing by 99 consultants, or a record 9% compared to our headcount entering the New Year. Revenues increased sequentially by 3% during the first quarter, and the headcount and demand increases should have a more pronounced impact on Q2 revenue performance if these trends are sustained. On a year-over-year basis, 2021 revenues were still down 5% from the first quarter of 2020. This performance represents a strong improvement over the 8% year-over-year decline in Q4 2020, as compared to Q4 of 2019. Gross margins were in line with last year's performance despite slightly higher benefit costs. I should reiterate that Q1 is historically a lower gross margin quarter in the staffing business due to a higher payroll tax load. Q1 2021 operating expenses for the segment were lower than the first quarter of 2020 by approximately $600,000, which allowed us to slightly top last year's operating income for the segment despite the 5% decline in revenues. During the quarter, we did unwind some of the austerity measures implemented during the first half of 2020. Additionally, you will see a prudent increase in expenses for the segment in the coming quarters to support our anticipated growth. I will now turn the call over to Paul for his comments on our Data and Analytics services segment.

Thanks, Vivek. Q1 represented a mixed performance for our Data and Analytics segments. While revenue was basically flat from Q4 2020, we posted nearly $16 million in bookings in Q1 2021, which suggests to us that some of the pent-up demand for Data and Analytic services is being released. Significantly, we signed one new multiyear Center of Excellence deal and received a verbal award on a second, which we expect to close in early Q2. This bodes well for the future, and we see it as a clear indication of the value we're able to deliver to our clients. Revenue, on the other hand, excluding AmberLeaf, compared unfavorably to Q1 2020, which was a very strong quarter for Data and Analytics. This sluggish performance was significantly the result of our reduced bookings performance during the second half of last year when our clients were being substantially impacted by the pandemic. However, with strong bookings in Q1 2021, we now have reason to believe that revenue will recover and that we will re-establish the strong growth trajectory we were on prior to the onset of the pandemic. For instance, as Jack has already mentioned, we're seeing deals close in Europe and Asia, which are accretive to our baseline revenue performance. Moreover, our pipeline in these geographies is very strong and growing. These trends, along with the expected release of demand in North America, are a positive sign for the coming quarters. Notwithstanding all of the challenges we faced last year, we believe that we are extremely well positioned and, in many respects, stronger than we have ever been. We have broadened our service offerings to encompass the cloud and are in the process of delivering our first cloud engagements with more in the pipeline. We have developed a managed services offering for our customer experience line of business and have closed our first deal with several more promising prospects in the pipeline. We have also developed a managed services offering for data governance and have closed our first deal. Furthermore, we recently received an RFP award for our second deal in this line of offerings. We expect this deal to close in Q2 as well. Finally, we have initiated an offshore application development offering. Again, we have closed our first deal which is set to yield at least $700,000 of revenue this year. This offering is particularly strategic for us, as it is directly relevant to the application modernization imperative pandemic to commercial enterprises as they move their application portfolios to the cloud. Overall, we believe we are seeing success in each offering area we've chosen to compete in over the last year. With limited business travel, we had the opportunity to focus on new offerings and the skills needed to deliver them. Additionally, our Data and Analytics pedigree continues to serve us well as we leverage these skills in the cloud and with our application modernization offering that I just alluded to. We believe we are well equipped and very well positioned to meet our clients’ needs as they modernize and migrate applications and infrastructure to the cloud. Data and Analytics services are especially germane to this outcome because in this age of digital applications and digital infrastructure clients must be poised to move smartly with agility and speed. We differentiate ourselves with the capability to deliver smart, cloud-enabled infrastructure and applications. And we're seeing traction in the market for our operating offerings and capabilities. We are confident about the future. This concludes my prepared remarks, and I'll hand the call back to Vivek now.

Thanks, Paul. Operator, you can now open the session for questions.

Our first question is from Josh Vogel with Sidoti and Company. Please go ahead.

Hi, everyone, thanks for taking my questions. I got a couple here for you. The first one, I wanted, hoping you could talk a little bit more about SG&A. You talked about where the investments were targeted? I'm curious, how much is planned in Q2 and over the balance of the year? And at what point do you feel that you have the cost structure and personnel in place that the line for these future growth opportunities?

Josh, this is Vivek. Let me try and break your question or the answers into two parts. Let me talk about the IT staffing piece, and then I'm going to ask Paul to talk about the data analytics piece because these two are slightly different. On the SG&A front, we did tighten our cost structure last year, as we were going through the pandemic. And as I've mentioned in my previous earnings calls, we didn't cut things so far that it would hurt when the business started picking up. That served us very well. Because this quarter Q1, we were able to capitalize on this demand that came in a big way. We were able to do that because we have not cut ourselves down to the bone. But as we go forward, we will have to keep increasing our SG&A costs in terms of having the right amount of capacity for the producers, salespeople, and recruiters to keep pace with the demand that we are hoping will sustain. That being said, I think we are already in a fairly good position. We are not talking about a very large increase, but there will be some incremental increase as the quarters progress. We will obviously keep pace with the demand. If the demand keeps increasing, we will rev up the engine a little bit more, if it slows down, we will slow down as we have been doing prudently, and as we've done pretty successfully last year. Now, regarding the data analytics part, I'm going to ask Paul to take that question. Paul?

Thanks for that. As Jack mentioned, we invested about a million dollars in SG&A. And as I mentioned in my prepared remarks, we saw the closure of one significant Center of Excellence deal with another award forthcoming hopefully imminently. We expect to close that soon. What we're seeing in our installed base is a significant number of multiyear deals that are requiring SG&A and salespeople and operations capability in order to meet the demand. So we felt comfortable investing forward seeing the demand in the pipeline. We anticipate more of these deals coming along. So specifically with respect to SG&A, we added seven people in the Data and Analytics business to meet this demand and hopefully capture going forward. I hope that answers your question.

Yes, I appreciate the insights there. So, I'm just looking a little bit higher level. When we think about SG&A on a full-year basis, when you go back to 2018 and 2019, you were about 16% to 17% of revenue last year just under 20. Understanding that you do need to invest certainly on the D&A side when you know ahead of certain projects. What should we think about an annual run rate for the cost side of the equation going forward? Should it still be sub 20%, should it be closer to 2020 or maybe closer to like an 18% range? Any sort of insights that would be helpful. Thank you.

Josh, I think it should be below the 20% mark, but I'm going to ask Jack if he has a feel for what the rest of the year SG&A could rest at. Jack?

Yes, Josh, I would say that it clearly is going to be higher than our historical trend. Because as Paul said, we continue to develop new service offerings, etc. And we always seem to be staffing ahead of the curve, which is a good thing, obviously if you project the revenue growth curve properly. So I would say, for 2021, we would likely be a little bit plus or minus of the 20% range.

Great, that's helpful. Thank you for your question. Oh, yeah, Yes, it did. Thank you. Sorry, mute button wasn't unmuting. A question, I guess, for Paul. With easing headwinds around COVID, I guess it's still a little surprising that project delays were still impacting D&A. You did talk about a strong pipeline in the latter half. And some, just the pressure letting up there. But I was curious. Are you seeing any of the projects that were delayed last year? Are they off or any off the table or not going to materialize? Just thoughts on your confidence level around that?

Yes, yes. So I can look at the business across two dimensions with respect to our core business, the clients that we have significant relationships with and that we've been building over time. We are seeing projects come back, and they're coming back as we would expect, without a terrible amount of delay. So that piece of the business is performing as expected. There is, however, a transactional aspect to the business of deals that come to us, shall we say, transactionally, or ad hoc perhaps. And those deals are just now starting to come back. So, project delays, I think, for the most part are coming to an end, and we're starting to see demand return to a pattern that we saw before COVID. While there still is a bit of uncertainty out there in certain geographies, for example, as we know, India is suffering from the pandemic terribly right now, and that is a bit of a wild card going forward. But in terms of the overall demand, our core business, our core accounts are coming back exactly as expected, and I think strongly, and the transactional demand, which is a little bit more volatile quarter-over-quarter, is starting to return to a normal pattern as well. So I am seeing things come back the way we would expect.

That's great to hear. You provided good commentary around new offerings like cloud engagement, data governance, and application development. I'm curious about the sales cycle for these newer service offerings. Can you discuss how engagement signings are starting to ramp up and when we can expect them to be fully ramped, and how this compares to pre-pandemic projects?

There continues to be a significant move to the cloud. Clients are realizing that if they want to move with any type of agility or speed, they can't stand up infrastructure by servers, stand up networks, and do the typical things that they would have done years ago. So, moving to the cloud offers a significant speed advantage in terms of bringing technology capabilities online. In terms of the sales cycle, it's different. We're seeing three to six months sales cycles for cloud offerings. And significantly with respect to the cloud, as clients move to the cloud, they actually have to move something to the cloud. And so we're seeing a significant number of application modernization offerings coming along, which bodes well for the future. When I say application modernization offerings, as application portfolios are picked up off-premise and moved to the cloud, there's a certain amount of work that has to go into it to make it cloud-ready. That work, for the most part, is beginning to spike as we come out of the pandemic and clients return to something resembling a normal posture. So I would say a three to six month sales cycle for cloud engagements and application modernization engagements, which can be quite large, can take longer, but they're broken into pieces, and we're starting to see those come as well.

That's really helpful. Thank you. And just one more and I'll hop in the queue, maybe for Jack. Just wanted to make sure I was doing the math right. Talking about billable consultants, are we now sitting somewhere closer to the second-half 2019 levels, which is like just north of 1150? And then could you just have quick comments around how bill rates are trending? Are they still in the mid-60s or the mid-70s, around $76 to $77?

Yes, you're thinking about the billable consultants correctly, we are in that range, 1150 or a little bit above. And the average bill rate is still in the mid-70s. It came down a little bit in Q1, but we're still in the mid-70 range.

Sounds great. I’ll get back in the queue. Thanks for taking my questions, everyone.

Sure.

Our next question is with Lisa Thompson from Zacks Investment Research. Please proceed with your question.

Good morning.

Good morning.

So I'm using my highly scientific algorithm, if you increase staffing, consultants 9%, does that mean sequentially revenue should be up 9%?

So Lisa, the revenue 9%. I don't think I want to make a statement like that because there are still quite a lot of things that need to happen in terms of how this quarter pans out. But I would just like to leave it and say yes, this quarter, the revenue should definitely be up in comparison with Q1.

Okay, and since it's already April 28, is this quarter tracking the same amount of adds?

Actually, we haven't quite reached the end of the month yet. That's when we really do the pluses and minuses. A lot of contracts actually end on the last day of the month because that's how the customers often signed the contracts. So we have to wait for the end of April to happen before we can say what happened in this. But it is looking positive. I don't know what the final thing will eventually look like.

Okay. So could you possibly tell us what AmberLeaf contributed in the quarter? Or you're not talking anymore?

I'm actually going to pass this question over to Paul.

Yes, hi. So AmberLeaf was fully integrated into the business effective January 1. We're not running separate P&Ls on them anymore. What I can tell you is that AmberLeaf as a channel certainly opened up eight new logos in the first quarter. We continue to see opportunities as a result of that acquisition. But we're not tracking the P&L separately.

Okay. And going back to your bookings of $16 million, is that a record number?

No, that's not a record number. It may be a second-best number, but it's not a record number; the record number was Q4 of 2019.

Okay. And I was interested; you quickly went through all the new things that you were working on. I was wondering if you could talk a little bit more about what you meant when you said about the first cloud engagement, and then also the managed services for data governance. Can you talk a little bit about what that means?

Yes, so what we're seeing is as clients move to the cloud, they don't necessarily have the skills on staff to manage and sustain their cloud environment, to migrate data into the cloud, etc. And so there is a managed services opportunity to stand up a team offshore, and to essentially run this business for them, run the project, if you will, for them over an extended period of time. So when we talk about managed services, we're talking about putting a team in place to sustain and maintain their cloud infrastructure environment and doing certain tasks around data migration into the cloud over time. So that's what we're talking about when we discuss managed services in the cloud. With respect to data governance, again, as clients are moving their applications to the cloud, what we're finding is all of their data must follow it, but there are certain standards that their data has to meet in terms of hygiene and cleanliness. There is a tremendous amount of work available to help clients straighten out their data as it gets moved to the cloud. So it's appropriate for applications. And we have closed one deal and expect to close the second deal around that soon.

Okay, great. So I also assume in your business that margins, gross margins will continue to improve as you get AmberLeaf figured out.

Yes, yes. I expect gross margins to hold and improve throughout the balance of the year.

Okay, great. Thank you. That's all my questions.

Thank you, Lisa.

Our next question is with Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.

Hi, good morning, guys. Thanks for taking my question. When you talk about delays, is it delays in getting new contracts signed, meaning longer sales cycles, or is it delays in getting signed contracts to begin? Or is it both?

It’s the former Brian. It’s delays in getting the contracts signed. Typically once the contracts are signed, we start execution as soon as possible after that. You can have the contract in hand, and at the last minute the customer may say, can you delay the start date of this by a certain period. But that's less frequent.

So with that said, there was discussion about winning a large Center of Excellence contract, I think in late 1Q. I may be assuming those with the timing. Has that program started? Or if not, when do you expect that will start?

That contract signed, and it's effective April 1, so billing will start on that. It really did start on that on April 1.

Right. And then finally, maybe you can talk about the competitive landscape in the data analytics business. I mean, it's obviously a buzzword; it's a popular target market right now. So talk about the competitive landscape and is pricing higher or lower, or even with last year.

Pricing is improving. Thanks, Vivek. Pricing is improving; there continues to be a shortage of skills in the market for Data and Analytics, especially Data and Analytics as it relates to the cloud and to applications. What we're seeing is, as applications are ported or migrated or modernized into the cloud, is that they're being infused with analytics and with intelligence or business intelligence as they're migrated into the cloud, so there is a big opportunity for this to happen. The skills in this area are relatively scarce compared to other areas. I would expect pricing to hold and improve depending on the skill and the project we're talking about. I don't see any dilution or erosion in pricing or gross margin this year in this business. I expect things actually to get better.

Great, thank you.

Okay, our next question is with Josh Vogel from Sidoti and Company. Please go ahead with your question.

Thank you. Just a quick one around mass remote. We're about a year in now. When we think about your staffing business longer term and the delivery model. How much business do you think is targeting to be run through MAS-REMOTE? Can you remind me if the margin profile or bill rates are any different there? And any sort of commentary? Thank you.

Sure, Josh, the MAS-REMOTE offering was really well-timed. We launched it in June. Since then, almost two-thirds of our placements that we have been doing have been in remote locations. Even last quarter, 65% of our placements were remote. When customers are signing up, there is an expectation from half of them. So roughly when I say two-thirds, one-third out of the whole are expected to come back in some shape or form to the office locations, once the customer is comfortable that the pandemic is under control and they can do that. It may not be a full, all five days kind of thing. But the interesting thing is the remaining one-third will always remain remote because the consultants are living in very different locations altogether, often different cities and states. That will continue to be. We see this kind of trend going forward that from this even today, the requirement, the demand that I'm talking about, which is coming to us, there is a majority of them okay for remote locations. To answer your other question about gross margins, etc., gross margins still tend to be in the same range. It’s just that the price point changes depending on where the candidates are. If they are in lower-cost locations, you're able to attract them, and the clients get the benefit of that lower cost as well. They are willing to make the compromise of not having the candidates come over at any point in time to their locations, if they are able to get better quality candidates and better pricing as well. So I don't know if this answers your question.

No, that definitely does. Thank you. And just one last one for Jack. Can you remind me the contingent consideration math that could be paid this year in future years, if AmberLeaf hits its targets?

Yes, they total? Well, the fair value that we have on our balance sheet is about $2.9 million. That's a statistical value based on a probability model, so that's on the balance sheet. But that's what we believe the fair value is likely to be. But the contract earn out is $4.5 million. That splits into two years. The first year is fiscal year 2021, and the second, of course, is fiscal year 2022. So, if they make their earn out, their payments would probably happen in April of 2022 and April of 2023. I mean, if you're trying to assess your cash flow and evaluation.

Yes, perfect. Thanks again, guys.

Sure, Josh.

Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back to Vivek Gupta for closing remarks.

Thank you, operator. So if there are no further questions, I would like to thank you all for joining our call today. And we look forward to sharing our second quarter 2021 results with you in late July. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.