Greetings. Welcome to the Mastech Digital, Inc. Q2 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. It is now my pleasure to introduce your host, Jen Ford Lacey, Manager of Legal Affairs for Mastech Digital, Inc. Thank you, Ms. Ford Lacey. You may begin.

Thank you, operator, and welcome to Mastech Digital’s second quarter 2023 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 Michael Fleishman, the Chief Executive Officer of the company’s Data and Analytics Services business 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 2022 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 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 second quarter 2023 results.

Thanks, Jen, and good morning, everyone. Second quarter 2023 was another challenging quarter for Mastech Digital. Revenues totaled $52.2 million, representing a 16% year-over-year revenue decline. Both of our business segments were impacted by customer concerns regarding slow economic growth, high inflation, and the possibility of a U.S. recession, which has lowered demand for our services in the near term. Our Data and Analytics Services segment contributed revenues of $8.8 million in the second quarter of 2023, compared to $11.2 million in the 2022 second quarter as customers reduced resources on existing projects in light of continued economic uncertainty. Order bookings, however, increased to $10.1 million in the second quarter of 2023, compared to $8.4 million in the first quarter of this year. Additionally, our pipeline of opportunities continues to improve with the caveat that customers are taking a little longer to actually start new projects once awarded. Second quarter 2023 revenues in our IT Staffing Services segment totaled $43.4 million, compared to $50.9 million in the second quarter of 2022. Demand continued to be soft in the current quarter, particularly with respect to financial services clients. Gross margins in the second quarter 2023 were 26.1% compared to 27% in the second quarter of 2022. In our Data and Analytics Services segment, gross margins improved by 200 basis points compared to the second quarter of 2022 gross margins. This favorable margin variance was largely due to higher utilization rates in the 2023 quarter as we continued to drive better efficiency in our delivery processes. In our IT Staffing Services segment, gross margins were down 110 basis points compared to Q2 2022 due to reductions in direct hire revenues and higher than usual medical claims related to our self-insured healthcare program. In the second quarter of 2023, we recorded a pre-tax settlement reserve of $3.1 million on an outstanding employment-related claim. No lawsuit has been filed to date, and we are currently in negotiations to settle this matter. GAAP net loss for the second quarter of 2023 was $2.2 million, or a loss of $0.19 per diluted share, compared to a $2.4 million net income, or $0.20 per diluted share in the second quarter of 2022. The settlement reserve noted above had the effect of reducing GAAP diluted earnings per share by $0.19 per share. Non-GAAP net income for Q2 2023 was $1.3 million, or $0.11 per diluted share, compared to $3.6 million, or $0.30 per diluted share in the second quarter of 2022. SG&A expense items not included in second quarter non-GAAP financial measures, net of tax benefits were: one, stock-based compensation; two, the amortization of acquired intangible assets; and three, the 2023 settlement reserve on an outstanding employment-related claim. A description of these items is included in our second quarter 2023 earnings release, which is available on our website. Also, it should be noted that both GAAP net income and non-GAAP net income in the second quarter of 2023 included $600,000 of professional service expense related to the outstanding employment claims. Addressing our financial position on June 30, 2023, we had $18.6 million of cash balances on hand. We had no bank debt outstanding and borrowing availability of $23.9 million under our revolving credit facility. Our day sales outstanding measurement was 56 days at quarter end, which is well below our target range of 60 to 65 days and was 5 days better than our measurement at March 31, 2023. During the second quarter of 2023, we executed on our share repurchase program purchasing approximately 62,000 shares of Mastech Digital common stock at an average price of $9.15 per share. 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 Q2 2023. The same macroeconomic headwinds that we experienced during the first quarter of 2023 continued to impact our clients' spending dynamics in the second quarter, resulting in lower demand for our services. Our IT Staffing Services segment continued to see clients taking a more conservative approach with respect to spending on new assignments due to concerns around a potential recession on the horizon. Our financial services clients, in particular, were even more inclined to tighten their purse strings given the recent regional bank failures and worries about a broader banking crisis. In recent weeks, however, we did see a modest improvement in demand from some of our clients in the financial services space, but I wouldn’t call this a trend just yet. Also during the quarter, we expanded our portfolio of staffing offerings with an entry into Engineering Staffing Services, or ESS, as we call it for short. ESS is an adjacency to IT Staffing and will be using the same recruitment engine that our customers depend upon and trust. Since its launch in late May, ESS is gaining traction with both our existing as well as new customers, and we are hoping to see in the quarters ahead this new service offering make up some of the recent declines in IT Staffing. Our Data and Analytics Services segment's performance was also impacted by clients reducing resources on existing projects as they respond to economic uncertainty. Michael will talk more about the state of affairs in the Data and Analytics Services business in a few minutes. While we are encouraged by improvements in recent inflation data and some signs that the U.S. may dodge a recession, we have and will continue to take prudent actions to reduce our SG&A expenses in an effort to protect our operating profits. I would like to reaffirm with 100% confidence our belief that our businesses remain fundamentally sound, that our financial clients are among the strongest in the industry, and that we have a solid balance sheet and access to ample capital to fund our current business needs and to support the share repurchase program that we announced earlier this year. Let me now turn the call over to Michael for his comments related to the Data and Analytics Services segment. Over to you, Michael.

Thanks, Vivek, and good morning, everyone. As Vivek mentioned, uncertain economic conditions are clearly impacting our clients’ spending behavior. During the first half of 2023, we have seen clients reducing resources on existing projects as their way of mitigating concerns over economic conditions, and this posture has negatively impacted our revenues. However, beyond the revenue numbers, we believe we are making good progress in our efforts to reposition our organization from a master data management company to a much broader Data and Analytics Services firm that focuses on end-to-end data modernization services. Our progress in this transition can clearly be seen in our increased order bookings and pipeline building performance year-to-date. In the second quarter of 2023, order bookings increased to $10.1 million, or $1.7 million higher than the first quarter of this year 2023. Our first quarter bookings were also $1.6 million higher than the previous Q4 2022. Furthermore, during the second quarter, the number of our RFP submittals as well as our overall pipeline of opportunities both increased. My expectation is that bookings will continue to expand over the second half of 2023, which should set us up nicely in 2024. Also, in the second quarter of 2023, we made solid improvements in our gross margins. Our second quarter gross margins were 45.6% of revenues, which were 200 basis points higher than the corresponding quarter of 2022. This improvement reflected a higher utilization rate in the 2023 quarter versus the second quarter of 2022. From a strategic point of view, we aim to consistently have gross margins in the upper 40% gross margin range irrespective of our revenue levels. Simply put, we need to quickly adjust our billable workforce to real-time revenue streams. This ability to adjust is something that is a primary focus of our delivery team. I’ll now turn the call back over to Vivek.

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

At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Lisa Thompson with Zacks Investment Research. Please proceed with your question.

Good morning.

Hi, Lisa.

Nice to see that you made your earnings even though we had lower revenues due to those great margins. So that’s very encouraging.

Thank you.

So I have a few questions. First off, in staffing, you said you had a decline in financial services. Do you know what percent CGI was for the quarter?

Yes. Jack, would you have the precise number? I think it was close to 24%. Is that right?

Right, it was 24%.

Okay. So was it across the board, not just them?

Yes, actually, as I think we mentioned in the last earnings call, approximately 50% or just less than 50% of our business has been from financial services when we started the year. And we’ve seen that virtually across the board, customers – direct customers that we work with as well as customers through partners like CGI.

Okay. And what was the billable consultant number for the quarter?

Jack, do you have that number in front of you?

Yeah, I do. Yeah, at the end of the quarter, our billable consultant base was 1,041.

Okay. So that’s up. Good. Could you go a little bit more into an example of this ESS offering? Can you give us maybe an example of a customer using it and what they do?

Sure, Lisa. So this maybe I’ll add a little bit of color on the ESS beyond what you just asked as well, which is we see ESS as an adjacency, as I mentioned to the IT Staffing, because we are able to use the same recruitment engine. We are able to use the same sales engine. And we find on the customer side, the buying centers are also fairly similar often the same, which is the procurement processes that they have in place. Now, bill rates, gross margins, all seem to be in line with the IT Staffing. So, clearly, there is room to cross-sell. Now, to coming to your question, what kind of customers are we talking about? Actually, we found there are virtually 19 or 20 of our customers are already using engineering services. And by engineering services, the kind of people, the kind of consultants they’re looking for could be mechanical engineers, electrical engineers, test engineers, facilities engineers, industrial engineers, and so on and so forth. And it was easy for us in some ways to cross-sell this ESS to customers, who have been our customers for a very long time. So I hope that gives you a sense of what you’re looking for, Lisa?

Yeah. So it’s basically kind of like a job shop, where you sign up for a 6-month project or something as an engineer, is that right?

Yeah. It’s not very different from IT Staffing, which is the customers have requirements. They reach out to us either directly or through VMS or portals, and we look at those requirements and find appropriate consultants and go through the same process of putting them in front of the customers. They get them interviewed, and customers could be signing up for whatever duration they’re looking for. But it does average 6 to 9 months what we have seen their requirements tend to be in that range.

All right. Great. Sounds good. So, I just have one last question about this employment issue. So, on the balance sheet, you have $6 million for a liability and then $2.2 million for insurance recovery. Could you explain the mechanics of that?

Jack, will you go through the numbers?

Yeah, sure. And, again, these are all estimates and we’re in the process of negotiating the settlement.

Right.

Yeah. So, I mean, our estimate is that we’re going to have a gross claim before insurance and other offsets of $6 million. Our estimate on insurance claim would be $2.2 million. And then, we have some other recoveries that I don’t want to say right now, because we’re still in negotiations, but would bring down the net claim to $3.1 million.

Okay. And why that – is that the $6 million include the lawyers and all that sort of stuff?

It does not.

Okay. All right. And that you said that was $600,000 in the quarter for consultants or whatever?

Right.

All right. Great. Okay. Well, so should we expect revenues for both businesses to be sequentially up in Q3 and for expenses to be down a little? That’s the general thought.

So, Lisa, I would not want to make a projection there, but I mean, clearly, we are not out of the economic uncertainties at this point in time. So we need to go through this quarter and see how it pans out.

Okay. Great. Thank you so much. That’s all my questions.

Thank you.

Our next question comes from the line of Tim Call with The Capital Management Corporation. Please proceed with your question.

Good morning.

Hi, Tim.

Hi. With a clean balance sheet and no debt, and your share repurchase pace leaving you with $18 million on the balance sheet. Is there a way to make it so that earns interest if you put it in a 3- or 6-month U.S. Treasury bill? You might be making over 5% or $1 million a year on that $18 million cash. Are you able to invest any of that or earn interest on any of that cash balance on your balance sheet?

Jack?

Yeah, we are. And the interest income that we earned in the second quarter and, of course, we didn’t have all $18 million on day one of the quarter. We had interest income of, I would bet, about $120,000 in Q2. But you know what? And we have flexibility. We have an arrangement with our bank PNC, where as soon as they sweep the funds, we’re earning interest income. And the day that we need the funds to fund working capital, and just day to day accounts payable and payroll, it comes out. But it’s efficient with the monies that we have. Some of our monies are in foreign subsidiaries. We invest there as well. But to lock something up for a substantial period of time, we haven’t really looked at that yet, but we will, as our cash balances grow, we will take that approach to invest in multiple months rather than on a day-to-day basis.

Well, knowing your successful history and having Michael leave DNA and expanding into ESS. It’s a very bright outlook. Hopefully that cash can be put to use with accretive acquisitions, but also the share buybacks. So as you move out of this slower period, having those share buybacks continue or accelerate will have very positive long-term results. So congratulations on repurchasing some already. Thank you.

Thanks, Tim.

And our next question comes from the line of Marc Riddick with Sidoti & Company. Please proceed with your question.

Hey, good morning, everyone.

Hi, Marc.

So I wanted to scope a couple of things. One of the things that you’ve mentioned to in your press release and prepared remarks were some of the density reduction efforts. I was wondering if you could dig a little bit into that a bit more, and sort of how we should think about what those benefits are both within the quarter and going forward.

So I didn’t quite catch. Are you talking about the reduction in the SG&A expenses?

Sorry, I think it was within the press releases, just some of the cost control efforts that took place during the quarter and how that plays out going forward?

Yeah. So, Marc, the good thing in a way, is that we’ve been through this just a couple of years ago in 2020, when COVID hit us and we took all the prudent cost control steps at that time. So we were able to sort of revisit the same playbook. And what we have done is basically pushed out or deferred or canceled all discretionary expenditures. So things like if you’re having conferences, internal conferences, we are doing it more virtually rather than in person. We are looking at every single kind of relationships that we have with our vendors and seeing how we can improve upon it. We are looking at low performing staff and seeing if we can reduce our headcount and not have them. We’re looking at other expenses, which can be brought down. We’ve deferred compensation increases by a couple of quarters. So it’s basically looking at every element of the SG&A cost and seeing if there is a way we could either reduce or defer it. And that has been something we’ve done now for a couple of quarters. And we will continue to look at things as we go forward until things start opening up once again. So that’s the plan.

Okay. And then, Marc...

I’m sorry. Go ahead.

Yeah. This is Jack. The only other thing that I want to point out is some of our expenses are self-correcting, if you will. I mean, they come down on their own, such as commissions and bonuses, where if we’re in a recessionary type environment or a low growth environment, we have lower commissions, we have lower bonuses, we have lower background checks. So we’re going to get the benefit of and we have gotten the benefit of those types of expenses in addition to what Vivek said.

Okay, that’s helpful. Thank you. And then where do we finish? Can you give us an update as far as where bill rates were during the quarter and maybe some of any thoughts around what you’re seeing there?

So, Jack, you have the…

Yeah. The bill rates are trending down a bit, but it’s not like our gross margin content for most of our projects is trending down. It’s more of the types of resources that we’re using on a project. I mean, if we have resources that are $80 an hour resources, and we make 20%, 25%. Now, I think we’re using resources that are a little lower but still have the same or close to the same margin content, but we’re down a few bucks with respect to the average bill rate.

Okay. And then I think you said that I just want to make sure I heard you correctly, the headcount was 1,041?

Yeah. I think Lisa said that’s good, it’s higher. But it’s not higher, it’s lower.

Okay, I was just double checking on that. And then where was I going with this? Oh, yes. So there was commentary in prepared remarks around utilization within DNA, and I was wondering if Michael sort of talk about where those benefits occurred and sort of how they materialize there.

Michael?

Sure. Vivek, okay, if I take that? Yeah. No, thank you. So the utilization was predominantly increased through a couple of different avenues. One, tighter controls and processes over our existing project delivery so that we have greater visibility into our ramp times. So that when projects were starting to ramp down in resources, we’ve got right now controls in place to have a 4-month notification on that. So then we have 4 months to ensure that those resources are either renewed within the existing client or placed in net new opportunities within the existing client or placed in net new opportunities within other clients such that when they ramp down, they immediately ramp up into another project, either again within the same customer or another customer. This is the primary contributor to driving great utilizations, in addition to driving net new bookings which, of course, require resources to be leveraged and utilized. We never want to have a 0% bench because we always want people training and cross-certifying. But our goal internally is an 80% utilization rate, and we’ve been really, really good in consistently hitting that level of utilization internally, which then drives greater levels of gross margin which you’ve seen in our numbers consistently increasing over the past two quarters.

Okay, now that’s very helpful. Thank you. And then, I guess, last two questions for me. One, I know you’ve talked about some of the struggles within financial services. Why don’t you talk a little bit about maybe some of the other customer vertical industries, whether – what you’re seeing, whether it’s in retail or healthcare and the like? And then the second question is around the new engineering staffing services kind of maybe the type of revenue contribution that maybe we’re seeing initially and what you believe that can grow to? Thanks.

Sure. So, Marc, we’ve been seeing that cost control from the customer side across the board in all industries. And before the regional bank failures happened, it was evenly balanced, maybe to a lesser extent on the financial services side, and then suddenly that started picking up steam. So I wouldn’t want to single out any specific industry, but at this point in time, we are seeing it across the board. So that’s the first part of the first question. And the second one on the engineering services side, candidly, we just started this; we launched it on May 31. So we’ve just had a few weeks there. And right now at this point in time, we’re seeing a lot of interest, a lot of traction. We are seeing some wrecks coming through and we’ve only had a handful of placements. So we really don’t have enough data at this point in time to tell you how that is going to impact the overall numbers in terms of bill rates or gross margins. But our research has shown that the bill rates and gross margins should be comparable to what we are able to get on the IT Staffing side.

Okay, that’s helpful. Thank you very much.

Thank you, Marc.

And we have reached the end of the question-and-answer session. I’ll now turn the call back over to Vivek Gupta for closing remarks.

Thank you, operator. If there are no further questions, I would like to thank you for joining our call today. And we look forward to sharing our third quarter 2023 results with you in early November. Thank you.

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