Mastech Digital, Inc. Q4 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the Mastech Digital Fourth Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jenna Lacey, Manager of Legal Affairs for Mastech Digital. Please go ahead.

Thank you, operator, and welcome to Mastech Digital's Fourth Quarter and Full Year 2025 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 Nirav Patel, Mastech Digital's Chief Executive Officer; and Kannan Sugantharaman, our Chief Financial and Operations 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 2024 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 Nirav for his comments.

Thanks, Jenna. Good morning, everyone. Thank you for joining us today as we review our fourth quarter and full year 2025 results. When I started in 2025 as CEO, I set three transformation priorities: mobilizing our leadership team; establishing clarity on where we are headed; and moving our organization towards that direction. We believe we have made meaningful progress across each of these priorities. The market backdrop remained challenging throughout 2025. Clients remain cautious with their technology budgets while pushing their modernization agenda as best as they could through prudent discretionary spending. Despite this environment and the revenue pressures that accompanied it, we delivered stable margins in Q4 and the full year. We believe this outcome reflects deliberate choices around stronger pricing discipline, tighter operational controls, and a focus on revenue quality. Beyond financial discipline, we believe we also took meaningful strides in establishing the foundational layer for our core capabilities. We expanded our data platform build and scale-up, moving our relationship with GCP and Snowflake to the next level alongside our established Informatica partnership that we announced earlier in the year. We also established our industry solutions practice where we are building AI-powered industry-led workflows as we help companies reimagine themselves in an AI-first world, whether they are accelerating with AI, transforming with AI, or reimagining with AI. Now let me provide you a brief summary of our segment performance. In our IT Staffing Services segment, revenues during the fourth quarter of 2025 declined 7% year-over-year, while headcount fell 16.7%, underscoring our focus on higher-value work and improved revenue quality. Kannan will provide more color on this in his remarks. Despite these volume pressures, we believe our business continued to perform well operationally even with the seasonal impact we typically face in Q4 from the holiday season. We achieved our highest ever average bill rates at $87.32, reflecting our disciplined approach to pricing and our emphasis on higher-value engagements, and we are increasingly positioning our staffing consultants, not just as capacity, but as enablers of our clients' AI modernization journey. In our Data and Analytics Services segment, revenues for the fourth quarter of 2025 declined 24% year-over-year, largely due to backlog reversal from some of our 2024 engagements and reflecting a challenging comparison against the results in the second half of last year. However, we saw strong bookings activity during the fourth quarter of 2025, up nearly 37% over the same period last year, driven by strong renewals, which we believe reflects our customers' confidence in our ability to continue delivering value for them. We believe the market is at a crossroads. We are seeing traditional business models being disrupted by AI, and this disruption is accelerating as leading AI hyperscalers like OpenAI and Anthropic become more enterprise-focused. To survive and thrive in this environment, we believe companies with strong fundamentals and forward-leaning leadership that can quickly pivot to the new will build a more sustainable moat over the long run. There is an open canvas to invest in, and we intend to position ourselves to capture that demand as it materializes. 2025 was a foundational year. As we look ahead, we believe 2026 will be a year of execution. We are seeing the strategic actions we took last year putting us in a position of strength as we implement our vision to build an AI-first services company. We have three clear priorities for 2026: to deliver long-term sustainable growth; unlock substantial value for our customers; and invest in building truly differentiated capabilities to win in the future. We believe we are entering 2026 with clarity on our direction, conviction in our strategy, and confidence in our ability to execute and win in the market. As I've said from day one, growth is only meaningful when it is sustainable and profitable. We intend to drive efficiency across the organization, operate with accountability, and ensure that every investment we make creates lasting value for our customers, employees, and shareholders. With that, let me turn it over to Kannan to walk through the financials.

Thanks, Nirav. Good morning, everyone. I will now discuss our fourth quarter and full year financial results. During the fourth quarter, we achieved consolidated revenue of $45.5 million, which represents a 10.4% decrease from the prior year. Our IT Services segment generated revenue of $37.7 million, down 7% from the same period last year. As Nirav mentioned, our emphasis on revenue quality led to record high Mastech bill rates at $87.32, even though we saw a decrease of 168 billable consultants since the fourth quarter of 2024, which is a 16.7% decline primarily occurring in the last two weeks of the quarter. This drop was mainly influenced by two factors: first, in-sourcing by one of our top ten customers, which they implemented consistently across all vendors during Q4, affecting us as well. We anticipate this impact will continue into the first half of 2026. Second, our focus on high-quality revenue and profitable deals has led us to purposefully exit non-strategic staffing roles. Our Data and Analytics Services segment reported revenue of $7.8 million, reflecting a 24% decrease compared to the previous year due to the reversal of backlog from some 2024 projects. Bookings for the fourth quarter totaled $11.3 million, an increase from $8.2 million in the prior year, after accounting for project reversals of $2.8 million in Q4 of 2024. Gross profit was $12.9 million, down 12.5% year-over-year. Gross margin decreased by 70 basis points compared to the fourth quarter of 2024. Although both segments improved in performance from Q4 2024 to Q4 2025, overall margins were affected mainly by changes in the business mix and a lower revenue share from the Data and Analytics Services segment than in the prior year. GAAP net income was $1 million, or $0.08 per diluted share, compared to a net income of $0.3 million, or $0.02 per diluted share, for the same period last year. We incurred $0.7 million in severance and transition costs during the fourth quarter of 2025, down from $2.1 million in the fourth quarter of 2024, which contributed to the year-over-year increase in GAAP net income. Non-GAAP net income was $2.5 million, or $0.21 per diluted share, compared to $2.8 million, or $0.23 per diluted share, in the prior year. For the full year 2025, we reported consolidated revenue of $191.4 million, a decrease of 3.8% compared to the previous year. Our IT Staffing Services segment generated revenue of $158.1 million, down 2.6% from a year ago. Our Data and Analytics Services segment reported revenue of $33.3 million, a 9.1% decline from the previous year. Gross profit was $53.1 million, a 4.6% decrease compared to the prior year. Gross margins remained steady year-on-year, primarily due to the decline in revenue from our Data and Analytics Services segment. GAAP net income was $0.6 million, or $0.05 per diluted share, compared to $3.4 million, or $0.28 per diluted share, in the previous year. As previously discussed, we expected severance and transition costs to affect our near-term financial results. We incurred $5 million in such costs during 2025, compared to $2.1 million in 2024, which contributed to the year-over-year decline in GAAP net income. Non-GAAP net income was $8.6 million, or $0.72 per diluted share, compared to $8.6 million, or $0.71 per diluted share, in the prior year. This year, we fundamentally redefined our operations. We didn't just talk about transformation; we took action. The EDGE initiative, which we launched in Q3 of 2025, is starting to reshape our cost structure, enhance our resource allocation, and allow for investments in capabilities that we believe will give us a competitive edge in the future. We maintained positive momentum on EDGE during the fourth quarter as we focused on optimizing our organization and operational model. We now believe EDGE has created the capacity we need to invest in execution in 2026, including our offerings, go-to-market strategies, leadership, and sustainable value creation as we evolve into an AI-first organization. SG&A expense items not included in non-GAAP measures, after tax benefits, are detailed in our fourth quarter 2025 earnings release available on our website. Regarding our financial position, our liquidity and overall financial standing remained strong in the fourth quarter of 2025. On December 31, 2025, we held $36.5 million in cash, no outstanding bank debt, and had $19.9 million in cash availability under our revolving credit facility. Our days sales outstanding measurement on December 31, 2025, stood at 54 days, well within our target range and consistent with our DSO measurement from a year ago. During the fourth quarter, we repurchased about $0.7 million worth of Mastech common stock at an average price of $7.2 per share. For the entire year, we repurchased around $2.2 million worth of stock at an average price of $7.49 per share. By the end of the fourth quarter, we had approximately 123,556 shares available under our previously announced share repurchase program, which expires on February 8, 2026. Lastly, I’m happy to announce that our Board of Directors has approved a new share purchase program effective February 16, 2026. Under this program, the company is authorized to repurchase up to $5 million worth of shares. We believe this authorization reflects the Board's confidence in our strategy and business trajectory. We also feel our strong financial position allows us to enhance shareholder value while continuing to invest for sustained growth. Operator, this concludes our prepared remarks. We will now open the line for questions.

And our first question comes from Lisa Thompson at Zacks Investment Research.

So I have a few questions, and then I just want you to go over the big strategy for this year and next. First off, what did you end the quarter with how many consultants?

So we ended our headcount for December at billable headcount 840, 840 billable consultants in IT staffing services as of December '25.

And how many employees do you have in total now?

1,488 as of December '25.

Right. So first question is, are we done with one-time expenses and severance or no?

Our finance and accounting transition is complete. So there are no more transition costs that we are likely to incur. And in most cases, most of our severances are already done with respect to the reorganization that we had done. So we don't expect anything more material or significant to hit us in the future.

Great. So now that you've had some time to implement all your cost cutting, how much more do you think you're going to be saving in 2026 versus what you spent in 2025, excluding all the one-time stuff?

Right. So let me explain that in terms of the overall program of EDGE, right? So the idea was efficiencies that drove growth and expansion. That program, which was focused on driving quality of revenue, process simplification, automation, and disciplined self-management was effectively to unlock capacity for investment, which we believe most of them has already gone in and has been delivered as of Q4. There were two tracks, efficiency to free capacity and the growth to reinvest. So our efficiencies, we were focused on cost optimization, diagnostics, process simplification, operational excellence, rationalization of our contracts and so on. And Q3 '25 actions continue to have a positive impact in Q4 '25. But one of the major milestones in Q4 '25 was the completion of, of course, the finance transition, right? Our growth, our focus on enhancing talent, competency building, and market expansion, we are now starting to invest a lot more on some of those elements. We now have the senior leadership team in place for our AI and analytics solution, and we are beginning to start traction in there. And we are also hiring leaders in the banking and financial services domain to target new logos in this space. So we see multiple levers playing a part in the transformation journey, and we are hoping that all of these will fill in seamlessly as we reinvest and reorient for growth in 2026. So look at 2025 as the laying foundation year, 2026 as the year of execution and investment where in Q1 of 2026, we will start disproportionately investing in our offerings, in our go-to-market strategy, and in our leadership. Lisa?

What are your plans for 2026 and 2027? Are you aiming to increase revenues, profits, or do you have a different objective for this year? How do you envision 2027 shaping up?

Nirav here. Let me address that question. Growth is our top priority. Our strategy and transformation efforts initiated last year aim to drive this growth. We are reorganizing around EDGE and adopting a new way of working with AI, while also preparing our capabilities and partnerships to scale in this area. Currently, we have clarity on three key questions: who we serve, what we serve, and how we serve. We have identified specific industries to focus on, like health sciences, financial services, and retail and consumer markets, as they are currently disrupted but offer opportunities for significant growth. We aim to concentrate our efforts on targeting Global 2000 customers, which are the largest players in the market. When it comes to what we serve, we want to provide offerings that enable companies to reinvent themselves in an AI-first world. Many companies are moving beyond pilot projects and are eager to scale their AI initiatives. Our offerings are crucial for those transitions, and we need to develop core capabilities that position us for success in the future. Lastly, how we serve revolves around our commercial and delivery model. We are redefining our organizational approach to align with go-to-market strategies while enhancing our delivery excellence. We are heavily investing in our workforce to ensure they are prepared for AI. Looking ahead to 2026 and 2027, our focus will be on this transformation and building a competitive edge for sustainable growth. I apologize for the lengthy answer, but I wanted to convey the importance of how we are restructuring to prepare for the future.

Yes. So given the environment out there for using IT consulting and staffing, can you grow this year? Or is the market just not going to cooperate?

I think if I kind of talk about the market trends, right, the macro backdrop continues to be volatile. Let's be clear on that. We are operating in an environment where kind of geopolitics, macroeconomics are driving what I call significant changes across trade, regulatory frameworks, and other areas that impact enterprise decision-making, right? Historically, the effects of these types of policy shifts usually takes a quarter or two to fully reflect in your client spending behaviors and IT budget decisions. What we are trying to do is to stay extremely focused and stay close to our, what I call, the biggest of the customers we serve to assess how many of these macro elements are impacting them. And so hence, try to gauge about where we think we are going to go as a direction with our clients we have today. As it relates to our top customers, this becomes a very important point. That said, I think so far in Q1 and the discussions that we have been having as the new year has been taken off, we haven't seen any radical shift or a pressure that really concerns us. I mean we are seeing reasonable confidence from our clients and a continued focus on modernization and accelerating that journey. I mean this is something they really want to push forward through 2026. While near-term visibility remains limited, which is consistent with what we have been seeing in the market, the underlying demand drivers haven't weakened to say the least. Our clients still need to move forward, and I think we are well positioned to help them do that.

And our next question comes from Marc Riddick of Sidoti.

I wanted to discuss the reduction in consultant count and how it impacts SG&A levels. Can you elaborate on the timing of this? Is the SG&A level for the fourth quarter a reasonable run rate to consider? How should we approach SG&A levels in relation to the EDGE program efforts?

Yes. So I think from an EDGE program, we have been able to achieve the efficiencies that we want thus far. So what you're seeing in our Q4, I would say, is reasonably efficient in our mind. But what, Marc, as I was talking and explaining, the EDGE has two parts to it, right? There is an efficiency part and there is the investment part. And from Q1 onwards, we do plan to have outsized investments that we are making on the talent and enhancing talent, competency building, and the overall market expansion in the AI and the analytics space, right? So that's what we intend to do at this point in time is to double down on some of those investments and make ourselves ready to capture the market, especially in the space that Nirav explained. Marc?

Okay. Great. And then maybe we could shift gears and go toward the bill rate improvements there and maybe sort of talk a bit about some of the things that you're seeing there and sort of the potential upside that may take place, whether it's ongoing pricing discipline or the like.

Sure. No. As you would have seen in what I spoke in my script, right, our headcount reduced 16.7%, but our revenues dropped only by 7%, right? And that's the factor of our focus on the quality of revenue, right? We were deliberate in choosing better margin projects with higher bill rates over low-margin staffing, and you will see that reflected in our average bill rate going up to $87.32, right? And we believe the strategy has helped us so far. And expanded the kind of work that we do with our customers. And we intend to continue with this while also focusing on expanding our current relationships and creating new pipeline for the staffing business. Marc?

Okay. And then also, I think in your prepared remarks, you made commentary around booking trends versus a year ago period as you were exiting Q4. Can you talk a little bit about that and maybe put some numbers on sort of where those were and maybe as an offshoot from that, what you're seeing with different client verticals, maybe what might be driving that?

Yes. And Nirav, you can chime in as required. But as we explained in the last quarter, there has been a good uptick with respect to our overall bookings. As I said in the prepared remarks. Our bookings is north of $11 million that we had closed for the Q4 as against 8.2 million that was after the project reversal. That's $11.3 million is what we closed. And at this time, our demand is largely broad-based, Marc. We have made inroads this past quarter with our healthcare customers, our financial services customers, our consumer clients, and are also actively pursuing large transformation initiatives and opportunities across these industries. So that's been our bookings. So we have been pretty encouraged by what we saw in Q4.

I want to add to what Kannan mentioned. The bookings indicate a couple of key points. First, the strong renewals show that our customers continue to see value in our services. In Q4, a significant portion of our bookings came from renewals, which reinforces that customers want to maintain our partnership. This is a strong signal regarding the importance of securing renewals. Additionally, these renewals give us an opportunity to help customers with their AI transformation efforts. As we develop new capabilities, these renewals boost our confidence in returning to our financial services and retail clients. During times of market volatility, focusing on existing customers and deepening those relationships is crucial. Overall, this is a significant achievement for us, as it reinforces client confidence in Q4 and gives me optimism as we shape our strategy for 2026 with new bookings and deals to expand within these accounts.

Great. And then last one for me, and I'm certainly encouraged to see the authorization announcement. That certainly is a positive signal. I was wondering if you could talk a little bit about one of the other benefits that we saw was improved cash. I think we're just $36.5 million of cash at the end of the year. How should we think about other cash usage prioritization potentially beyond EDGE, I guess, I mean, and maybe how you think about the potential for either M&A activity or appetite and thoughts on what valuations you may be seeing out there if you are inclined to consider those?

Yes, thank you for that, Marc. The company has generated strong cash flows, mainly due to solid operating cash generation and low capital expenditures. This performance reflects significant improvements in working capital, particularly in receivables and accrued liabilities, which helped offset some of the transition costs related to finance and account reorganization and structural optimization. We continue to manage cash conservatively, maintaining a completely debt-free balance sheet. We aim to use this cash for our strategic priorities, which include a continued share repurchase program. However, a larger focus will be on investments, such as partnerships, capabilities, and potential acquisitions. These are all opportunities we are evaluating to strategically invest the cash in our balance sheet. This approach is central to what we aim to achieve through the EDGE program and our ongoing investment initiatives, emphasizing capabilities, talent acquisition, and fostering appropriate partnerships, whether through organic growth or acquisitions.

I'm showing no further questions at this time. I'd like to turn it back to Nirav Patel 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 first quarter 2026 results with you in May.

This concludes today's conference call. Thank you for participating, and you may now disconnect.