Zacks Small Cap Research – MHH: Mastech Digital Reports Q3 Revenue Decline – Earn Charter

By Lisa Thompson

NYSE:MHH

READ THE FULL MHH RESEARCH REPORT

Mastech (NYSE:MHH) reported another year-over-year revenue decline in Q4 but it was 20% compared to 24% in Q3. During the quarter business seemed to improve and D&A had its strongest all-time quarterly booking number, coming in at $19 million. It also had a sequential improvement in revenues. Gross margins improved both year over year and sequentially except for the IT staffing segment which showed a year-over-year decline due to utilization and an increase in costs from direct hire and medical costs.

On November 27, 2023, Michael Fleishman resigned as CEO of Mastech InfoTrellis, Inc. and he will be paid a gross cash severance amount of $2.1 million over the next year. A reserve charge of $2.4 million was taken in the quarter and included other employees. The company says there was a disagreement over the strategic direction of the D&A business. With the need to fill the position, the board decided to take advantage of the change and took on a strategic advisor in January to lay out options to improve the company’s plans. Advice could include service offerings, focus, and M&A up to and including selling the company, but a sale is not the objective.

Earnings on a non-GAAP basis came in as expected and should improve in Q1 2024 as revenues could improve and expenses decline. Mastech’s enterprise value is now $77 million– or 0.4 times EV/2024 Estimated Sales. Its peers trade at 2.6xs. On a PE basis, the stock trades at 12.8 times 2024 non-GAAP EPS.

Q4 Results

Q4 2023 resulted in total revenues of $46.1 million down 19.5% from $57.2 million in Q4 2022. The IT staffing business declined to $39.7 million from $53.1 million a year ago and $39.7 million in Q3 2023. IT staffing was 82% of revenues and ended the quarter with 946 billable consultants compared to 1,208 the year before. D&A also declined year over year to $8.2 million from $9.1 million in Q4 2023. It did however improve sequentially by $114,000. Business is greatly affected by the economy and outside contractors are always the first to go and the last to be hired in a downturn.

Total gross margin was down slightly year over year. Gross margin declined in staffing to 20.3% from 22.5% in Q4 2022 due to utilization as well as an increase in health insurance costs while improving greatly in D&A. Margins were down sequentially however for both businesses.

SG&A was up slightly to $13.0 million compared to $12.2 million a year ago. In the $13.0 million there was $2.4 million in one-time severance costs for the CEO and others in D&A. We expect SG&A to be down sequentially in Q1 2024 by that amount. There was an impairment charge of $5.3 million in the quarter for the Infotrellis acquisition as revenues did not meet and are expected not to meet the original basis for the goodwill calculation.

The operating loss was $6.9 million versus a profit of $2.0 million last year. Other income was $44,000 compared to $284,000 a year ago. For the quarter there was a tax reversal of $1.5 million, compared to paying taxes of 32% last year. For the full year, the tax rate was 21% but is expected to return to 28% next year as profits return.

The GAAP loss was $5.4 million compared to a profit of $1.5 million last year. On a non-GAAP basis, it was $1.3 million down 52%. GAAP loss per share was $0.46 compared to EPS of $0.13 a year ago. On a non-GAAP basis, it was $0.11 versus $0.23. The share count was 11.6 million, flat with last year.

Balance Sheet

The company ended the quarter with $21.1 million in net cash aided by the collection of $2.2 million in insurance recovery, a quick ratio of 2.8xs, working capital of $36.6 million, and no debt. The company has a positive free cash flow and considerable debt capacity. It currently has a borrowing availability of $22.5 million under its revolving credit facility.

During the fourth quarter, Mastech purchased 5,000 shares of common stock under the share repurchase program. Its original stock buyback plan was for 500,000 shares to be executed over the next two years with an extension possible. It is limited to buying 25% of the daily volume each day and at the moment that is only an average of about 4,700 shares per day making the process slow. Its normal blackout period ends two days after an earnings announcement and begins again when the quarter ends, however, in Q4 there were corporate events that increased the blackout period. This combined with the low trading volume of MHH stock led to less opportunity to buy back stock. Activity is expected to be greater in Q1 2024.

After the Quarter Ended

On January 12, 2024, Mastech entered into a three-year consulting agreement with Phaneesh Murthy and Srinjay Sengupta. These consultants will provide Mastech with strategic advisory and management consulting services. These consultants have extensive experience and contacts in the industry and Mr. Murthy was the Chief Executive Officer of iGATE Corporation from 2003 until 2013. Mastech Digital was originally the IT staffing business of iGATE.

The agreement is for three years or until the sale of the company. Mastech will pay: $100,000 per month for the first 9 months, $30,000 per month for months 10 through 12, $25,000 per month for months 13 through 18, $20,000 per month for months 19 through 24, and $120,000 on the second anniversary. Additionally, Mastech issued to each of Murthy and Sengupta 192,500 options exercisable at $8.34 per share with a third vesting after each of the three years. As additional incentive compensation to the consultant: If the company is sold within the next year, Murthy and Sengupta will each receive from the founders 1.1% of the total number of shares of common stock outstanding on the date upon which the definitive agreement of the sale. After a year if sold but before three years, Murthy and Sengupta will each only receive 0.55% of the total shares.

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