Greetings. Welcome to Mastech Digital Inc. Second Quarter 2022 Earnings Call. Please note this conference is being recorded. I am pleased to introduce your host, Jennifer Lacey, Manager of Legal Affairs for Mastech Digital. Thank you, Ms. Lacey, you may begin.

Thank you, operator and welcome to Mastech Digital's second quarter 2022 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; Jack Cronin, our Chief Financial Officer; and Ganeshan Venkateshwaran, our Chief Executive Officer of the Data and Analytics Services segment. 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 2021 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 review of our second quarter 2022 results.

Thanks, Jen, and good morning, everyone. Revenues for the second quarter of 2022 totaled $62.1 million, representing an organic increase of 16% over Q2 2021 revenues. This revenue performance was a new record for our company as both business segments showed sequential revenue improvement during the quarter. Our Data and Analytics Services segment contributed revenues of $11.3 million, which represented organic growth of 26% over last quarter's Q2 revenues. Sequential revenues increased by 11% from the previous quarter. In our IT Staffing Services segment, revenue totaled $50.9 million and represented a year-over-year increase of 14% compared to Q2 of 2021. Activity levels continue to remain elevated during the second quarter as we increased our billable consultant headcount by 4% during the current quarter. Gross profit in the second quarter of 2022 totaled $16.7 million, or 17% higher than in the corresponding quarter of 2021. Gross profit as a percent of revenue in Q2 2022 was 27% compared to 26.7% in the 2021 second quarter. GAAP net income for Q2 2022 was $2.4 million, or $0.20 per diluted share, compared to $3.7 million, or $0.31 per diluted share in Q2 2021. It should be noted that a favorable revaluation of a contingent consideration liability was responsible for a $1.4 million benefit in net income and a $0.12 benefit in diluted earnings per share in the 2021 second quarter. Non-GAAP net income for Q2 2022 was $3.6 million, or $0.30 per diluted share, compared to $3.4 million, or $0.29 per diluted share in Q2 2021. SG&A expense items not included in non-GAAP financial measures net of tax benefits are detailed in our second quarter 2022 earnings release which is available on our website. Note that net income in the second quarter of 2022 was impacted by several conscious decisions that we made for the benefit of the second half of 2022 and beyond. Specifically, we increased billable staff by 22% during the quarter in our Data and Analytics Services segment in anticipation of higher revenues during the second half of 2022. We invested in the cloud services space within our Data and Analytics Services segment, and we invested in offshore staffing within our IT Staffing Services segment. While these actions mitigated our net income during the second quarter of 2022, we believe that all of these actions will have a favorable impact in the second half of 2022 and beyond. Addressing our financial position, on June 30, 2022, we had outstanding bank debt net of cash balances on hand of $4.2 million. We had no borrowings under our revolving credit facility and we had cash availability of $36.8 million in addition to term loan capacity of $20 million under our credit facility's accordion feature. Given today's increasing interest rate environment and our elevated revolver availability, you'll likely see us early pay some of our term debt with excess cash during the balance of 2022. 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 second quarter of 2022. Let me start by saying that I'm very pleased with our Q2 2022 revenue performance in both of our business segments despite some impact on our earnings on account of investments made for the second half of 2022 and beyond. As I've stated more than once in the past calls, our main goal is to manage our businesses and our strategic objectives for the long term. I will now provide you with my comments related to our IT Staffing Services segment's performance and outlook and then pass the mic over to Ganeshan for his remarks on our Data and Analytics business segment. As you're all aware, there are a number of headwinds facing the U.S. and global economies. Inflation has skyrocketed, interest rates are increasing as central banks take actions aimed to reduce inflation, the labor market is continuing to be tight, and the Ukraine-Russia conflict has added another element of uncertainty that the markets need to absorb. While many pundits and seasoned executives are predicting recessionary conditions in the immediate near term, so far, we have not seen any material signs of such in our clients' businesses. The IT Staffing Services segment delivered record revenues and record gross margins over the first two quarters of 2022. Revenues were strong in the second quarter of 2022 in both digital and mainstream technologies and also for both contracts staffing as well as permanent placements. Additionally, we are very encouraged with our offshore staffing service offering which has gained good traction and is one of the areas we have invested in to accelerate the pace of future growth. Gross margins continued to expand in the second quarter of 2022 to 23.3% in the IT Staffing segment. This is the second consecutive quarter of gross margin expansion and the first time that we have exceeded the 23% threshold since going public in 2008. Our operating profits also continue to grow despite our investments in offshore staffing and delivering compensation increases necessary to retain our talented workforce. Let me now turn the mic over to Ganeshan for his remarks on our Data and Analytics Services segment.

Thank you, Vivek, and good morning, everyone. It's a pleasure to be here today talking to you on my second Mastech Digital earnings call. I'm actually taking this call today from our delivery center in Chennai, India. So good evening to all of our Indian friends on the call. As I near my fifth month with the company, I'm pleased to share that we are making progress on a number of fronts: one, formulating a new future state go-to-market strategy, leveraging our current strengths; two, addressing the gaps in our technology and talent capabilities; and three, a robust execution methodology to support the go-to-market strategy. Let me start off by addressing our Q2 financial highlights and I will come back to the progress being made on the strategy side. In Q2 of 2022, we generated record revenues which were 26% higher than in Q2 of last year and 11% better than the previous quarter. Our bookings during the second quarter of 2022 approximated $10 million with one large deal closure slipping into Q3. Most of the orders secured in Q2 were close to the money bookings, which means that they will be worked within the next 12-month period. As a result of the foregoing, we expect that the second half of the year's revenues to exceed our first half revenue performance. Coming to the strategic improvements that I mentioned earlier, we made progress on three fronts: the first, formulating a new future state go-to-market strategy. What do we do today? We have very strong implementation capabilities built around data and analytics and customer experience. While this expertise positions the company well with the stakeholders at the implementation level, it limits the opportunity to engage with the senior decision-makers responsible for driving large data transformations. So what is new? A, we have extended our core capabilities to offer advisory services around data modernization which includes current state assessment and the road map for transformation. This positions us at the higher end of the decision-making chain. B, we are building automations and templatized frameworks to accelerate our implementations and migrations as they are repeatable in nature. C, our post-implementation managed services offerings are designed to drive tech-cost optimization which will result in repeatable revenues for us. All of this will also improve our gross margins. The second area of focus is identifying and addressing the gaps in our technology and current talent. To support the advisory services of our go-to-market strategy, we introduced new roles at the leadership level and made a few changes to the existing leadership. We are also strengthening our solution architecture teams and building out cloud-native capabilities. We are strengthening our business development team and expanding on our technical presales capabilities. While we bring in this new talent, we will also be rationalizing our SG&A costs in the next couple of quarters. The third area of focus is a robust execution methodology to support the go-to-market. For each of the go-to-market services that I called out earlier, we have established a set of differentiators that include a 4-week to 8-week assessment to framework to develop road maps, reusable solutions to accelerate deployments and migrations, and a differentiated product-oriented delivery model to drive speed and execution predictability. We are seeing early-stage positive validation to our new value proposition from several Fortune enterprises in the U.S. and Canada, where the nature of conversations with the clients have pivoted from, 'I need you to implement this' versus 'How can you help us solve this data problem for me?' This has also positioned us to expand our footprint into other partner ecosystems with similar offerings such as IBM Data Solutions without having to reinvent the wheel. All of the above, I believe, will have a very positive impact on our market brand positioning, deal sizes, and the tenure of our deals in the future. With that summary, I thank you for your attention and turn the mic back to you, Vivek.

Thank you, Ganeshan. Operator, this concludes our prepared remarks. We can take questions now.

Our first question is from Lisa Thompson with Zacks Investor Research.

So, I was wondering if you could expand a little about what you did as far as training. Like is this something that people got trained for three hours or three days or three weeks? And how much revenue would they have generated if they had been billable consultants?

I think this question is probably best answered by Ganeshan because it pertains to the data analytics side. So Ganeshan, will you take that?

Sure. So as part of looking out into the second half, we hired people and we had people both from lateral hires as well as freshers who were put through training. So as a part of supporting the growth for the second half. So we have a plan for billing them but they have first to go through the training for the first couple of months and then they will become productive and start to bill on projects.

Okay. So there’s going to be more of that in Q3?

More of training, you mean?

Yes. More new people and more training.

Well, no, we inducted quite a few people to support the requirement for the second half because when we are inducting freshers, they have to go through training for at least two to three months and then they can be deployed into projects. So at this point, we don't expect to onboard any more freshers for the remainder of the year. But whoever we have had will be deployed into billable engagements during the course of the couple of quarters.

Lisa, let me answer the second half of your question. You said how much revenue was sort of missing or would have been increased if they would have been able to be on projects. The estimate of the extra cost, the higher bench utilization was approximately $600,000. So if you assume a 50% margin when they're on projects, that would have been about $1.2 million.

All right, great. So is that going to be the same sort of numbers for Q3?

Well, I mean I think they're going to be on projects in Q3, so depending on how many are still in training programs or on the bench versus how many have gone into a project status will depend on the additional revenues.

Okay. So probably not as bad. So does any of that cost go into cost of revenue once they shift to billables?

Yes. It's in cost of revenue while they're in training. It's in cost of revenue when they're on projects. They're relatively…

So the increase in SG&A was other stuff?

Yes.

And that should continue to – was there anything unusual in this quarter? Or does that just continue to go up?

Well, in D&A, our SG&A cost increased about $500,000. We said in our prepared remarks that we invested in cloud services. That investment was people. And for the quarter, that was about $200,000. Ganeshan came on board in April. In the first quarter, we had no CEO cost. So that increased our SG&A in the second quarter by another $200,000. And then we've had travel and event costs, which is more of a one-time hit of $100,000. So that sort of makes up at a high level, the increase in SG&A cost in Q2 versus Q1.

Okay. So, I guess it won’t increase as much in Q3 and Q4 then?

I'll let Ganeshan answer that, but we are working on reducing our SG&A expenses in both segments. I'm confident that we've identified some savings in the D&A SG&A expenses. The question is about Ganeshan's hiring approach to address the gaps you've mentioned and the timeline for that. So, I’ll leave it to Ganeshan to respond.

Yes. Thank you, Jack. As Jack mentioned, we are rationalizing our SG&A costs and which will have its impact in the next couple of quarters. But the SG&A cost as a percentage of revenue, okay, you will begin to see it drop as we begin to trigger our rationalization activities.

Okay, that helps. I guess the last question is just a big picture question. Do you see signs of recession in all these things? And I did see that job hiring listings are down sequentially all around. I assume that has nothing to do with IT. Are you having just as much trouble hiring IT people as before?

I'll take that, Lisa. Currently, demand for IT professionals remains quite strong, and we haven’t observed a significant decline. There is some seasonality at this time with vacations affecting customers, but overall demand has been stable. This doesn’t rule out potential shifts in the future. As I mentioned earlier, while closely examining our customer accounts, we notice heightened caution regarding upcoming discretionary spending, yet demand remains unchanged. This stability is why we were able to increase our billable headcount in staffing by about 4% during the quarter.

Our next question is from Tim Call with The Capital Management Corporation.

Congratulations on another strong quarter growth. Your tax rate increased greatly to around 32.5%. What should we expect as a tax rate going forward?

Jack, will you take that?

Yes. That's a good question. The increase in tax rate in Q2 was for two reasons. We looked at NOLs in our foreign subsidiaries and we made valuation allowances for those. You make valuation allowances when it's more probable than not that you're not going to utilize those benefits. So that cost us about $100,000 of additional tax expense. Then, we had another circumstance with respect to the exercise of stock options. We had a couple of individuals that left the company and they didn't exercise. I don’t want to detail you in accounting, but we had an after-tax expense because we got no tax gain for those options. So there was about a $75,000 additional hit on taxes because of that event. I can't say it's a one-time shot, but I would be surprised if our tax rate for the second half of the year returned to what we call normal, which is about 27%, 27.5%.

And your cash or cash equivalents now exceed your long-term debt on the balance sheet. And so while you might pay that off early, have you given any thought at these price levels to offset stock option dilution by repurchasing some shares being opportunistic there?

Vivek, you want me to answer that the best I can?

Actually, I don't think we are considering that at this point in time. I mean, that's the best answer I can give you right now.

Well, it will certainly be opportunistic and accretive to earnings per share, and you have such a stellar balance sheet. So congratulations on the recurring growth and having such a clean balance sheet. You've done a great job managing the firm.

Our next question is from Marc Riddick with Sidoti.

I wanted to just – and forgive me, I think I lost connection with you for a couple of minutes there during Lisa’s question. So forgive me if I repeat one or 2. But I did want to double-check to see if you could bring us up to date as far as cash flow from operations and CapEx year-to-date and maybe a couple of housekeeping items around where headcount ended the quarter?

Okay. I'll pass these questions to Jack, first. Jack?

I’m trying to look up the headcount. Our total headcount, I think, was at least in the Staffing and Data Analytics Segment, it’s about – Vivek, correct me if I'm wrong but I think it’s about 2,400.

Yes, please verify that number.

That includes subcontractors. But our cash flow as far as our capital expenditures, etc., we had, for the first six months of 2022, we had operating cash flows of close to $2 million. Our capital expenditures were about $790,000 in CapEx. The lion's share of that was we did an Oracle implementation on the Data and Analytics Services segment. That went live July 1. So those costs are pretty much completed. We're going to have some continued support, but that's going to be an SG&A expense item that you'll see in the second half of the year that our capital expenditure has gone down pretty dramatically.

Okay. So I just want to make sure I got that right. So the Oracle implementation was completed during the second quarter and you said went live July 1?

True.

Okay, great. And then, I wanted to touch a little bit on the timing as far as maybe what you’re seeing from customers. Particularly, it sounds as though certainly the activity continues to be solid up to this point given the – despite recessionary concerns and fears. I was wondering if you’re seeing any particular pockets of strength either by industry, protocol, geography, or if there’s anything in particular amongst your customers that stands out, either positively or negatively?

I think there's some increased concern among financial services organizations. Health care appears to be the least affected, while retail shows more concern. Manufacturing is somewhere in between. It's a continuum, not a stark division. We are all following the same news and engaging with customers. While they are cautious and not making significant moves yet, demand remains strong for us. Thus, we are benefiting from demand exceeding supply at this time.

Are you noticing any significant changes in revenue mix that could affect gross margins, or do you have any insights on shifts in client demands that might impact margins, aside from the training discussions we've had so far?

So I can say about IT staffing and I'll let Ganeshan add on the data analytics side. But on the IT staffing side, what should we say, the costs are going up, I mean what we pay to our consultants. But then the gross margins are kind of keep pace with that. One positive thing that happened is the offshore staffing which seems to be gaining a lot of traction. A lot of customers are realizing that because of the cost arbitrage, they're able to do more for less. And as everybody is tightening their belts, that's a good strategy to do offshore staffing. Customers are already comfortable with remote staffing, which means having people in other parts of the United States. And this just seems to be the natural next step. People having their staffing individuals in India rather than over here at a better price point but it also gives us the opportunity to have better gross margins. That has partly contributed to the record gross margins that we’ve been able to achieve in this quarter. And want to say something about the data analytics side?

Certainly, Vivek. We are experiencing strong momentum in the data and analytics area. Despite the market trends indicating a recession in some industries, we are collaborating with a Fortune 100 banking company and a leading retail chain. Their significant investment in data transformation demonstrates this. Clients are increasingly inquiring about how we can assist them with their data transformation strategies. This engagement positions us at the forefront of decision-making. When revenue conversion takes place, the resulting revenue is of higher quality. Additionally, this facilitates premium pricing, positively impacting our gross margins. Therefore, we can anticipate improvements in both margins and the quality of revenue as we shift towards advisory and managed services engagements.

There are no more questions at this time. I would like to turn the conference back over to management for closing comments.

Thank you, operator. So if there are no further questions, I'd like to thank you all for joining our call today, and we look forward to sharing our third quarter 2022 results with you in early November. Thank you.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.