By Lisa Thompson

NYSE:MHH

READ THE FULL MHH RESEARCH REPORT

Despite a tepid Q1, green shoots are appearing predicting growth going forward. Both of Mastech's (NYSE:MHH) business segments pointed to signs of improving business. In IT staffing the company hired 99 new billable consultants, resulting in 9% sequential growth—a new company record. This may not result in 9% sequential revenue growth for this segment in Q2, but it should definitely result in a meaningful sequential improvement. After suffering contract delays and an elongated sales cycle, business at Data & Analytics is also picking up. It was able to book near $16 million in new contracts in the quarter, the second largest amount on record. Customers are aggressively moving to the cloud to become more nimble and D&A is booking business helping companies prepare their systems to move, helping them once they have moved, and also with cloud data governance. In Q1 the company added one multi-year contract Center of Excellence client with another expected to be signed imminently.

Q1 resulted in revenues of $49.8 million down 1% from $50.4 million in Q1 2020. While gross margins improved, spending increased resulting in non-GAAP earnings decrease of 17%. As expected revenues picked up sequentially and IT staffing revenues were shown to have hit bottom in Q4 2020.

Gross margin was 25.7% versus 25.2% a year ago and 26.8% in Q4 2020; gross margin dollars increased 0.7%. Margins are expected to continue to improve going forward as revenues increase and as synergies and cost cutting measures at AmberLeaf continue to take full effect.

Looking at the two segments reveals, IT staffing decreased 4.8% to $41.0 million and was 82% of revenues. It had 1,167 billable consultants compared to 1,100 the year before and 1,068 in the fourth quarter of 2020. Gross margin for this segment declined to 21.4% from 21.5% last year and 22.2% in Q4 2020. Data and analytics increased with the addition of AmberLeaf. It reported growth of 19% to $8.8 million versus $7.4 million. Gross margins also declined in this segment to 45.7% from 47.1% a year ago mostly due to AmberLeaf's lower margins. Gross margin dollars for this segment increased 15.4%.

SG&A increased sequentially by $957,000 as the company brought forward some spending to support future growth. It added in sales and recruiting. SG&A was $10.9 million compared to $10.2 million a year ago. AmberLeaf also added expenses versus last year's quarter.

Operating income decreased 24.5% to $1.9 million versus $2.5 million and margin declined to 3.8% from 4.9% a year ago.

Other expense increased to $232,000 compared to $226,000 a year ago despite lower debt levels.

For the quarter the tax rate was 27%, higher than the 25% we expected. Stock option exercises affect the rate.

GAAP net income was $1.2 million, down 36% from a year ago. On a non-GAAP basis it was $2.2 million down only 17%. GAAP EPS was $0.10 diluted compared to $0.17 a year ago and $0.29 in Q4 2020. On a non-GAAP basis it was $0.19 versus $0.23. The fully diluted share count stayed at 12.0 million sequentially but up 2.8% year over year.

Balance Sheet

The company ended the quarter with $7.2 million in cash, a quick ratio of 1.9xs, working capital of $20.9 million, and debt of $16.2 million. It increased debt $10 million to buy AmberLeaf, and paid down $1 million of it this quarter. It paid $9.5 million in cash to buy AmberLeaf on October 1^st.

Estimates

For 2021 we are tweaking revenues up to $214 million, but reducing EPS estimates down to a non-GAAP $0.98 per share based on higher than expected spending on operating expenses to support growth.

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