Mastech Digital - Earnings Call - Q2 2025

Executive Summary

• Q2 revenue was $49.1M, up 2% sequentially vs $48.3M in Q1 and down 0.9% YoY vs $49.5M in Q2 2024; revenue exceeded Wall Street consensus of $47.9M by ~$1.2M*.
• Non-GAAP diluted EPS was $0.15, up from $0.06 in Q1 and above the $0.12 consensus by $0.03*; GAAP diluted EPS was $0.01, reflecting ~$0.9M of severance and finance/accounting transition costs.
• Gross margin improved to 28.1%, +147 bps QoQ vs 26.7% on pricing discipline and IT Staffing margin expansion; D&A bookings slowed to $5.8M amid cautious client decision cycles.
• Liquidity remains strong: $27.9M cash, no bank debt, DSO 53 days; management emphasized positioning customers for “AI-first organizations,” highlighting the expanded Informatica partnership.

Estimates marked with * retrieved from S&P Global.

What Went Well and What Went Wrong

What Went Well

• Margin expansion and disciplined pricing: consolidated gross margin rose to 28.1% (+147 bps QoQ); IT Staffing margin increased on higher bill rates and focused execution.
• Strategic focus on AI-driven data modernization: “positioning Mastech Digital as a trusted partner for enterprises to reimagine themselves and transition into AI-first organizations”.
• Strong liquidity and balance sheet: $27.9M cash, no bank debt, $22.2M revolver availability; DSO at 53 days.

What Went Wrong

• D&A softness: bookings of $5.8M in Q2 vs $11.7M in Q1; segment gross margin of 45.2% declined from 49.2% YoY, and segment operating loss of $(154)K.
• GAAP earnings muted: diluted EPS $0.01 was impacted by severance and finance & accounting transition expenses (combined ~$0.9M in Q2).
• Demand remains measured: “ongoing measured client activity and cautious decision-making” led to muted IT Staffing demand vs prior year levels.

Transcript

Speaker 0

Welcome to the Mastech Digital Second Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jenna Lacey, Manager of Voice Affairs. Thank you. You may begin.

Speaker 1

Thank you, operator, and welcome to Mastech Digital's Second Quarter 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 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 flow, 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 meeting. I will now turn the call over to Nirav for his comment.

Speaker 3

Thanks, Jenna, and good morning, everyone. We entered the second quarter in a market that remained cautious, but are now beginning to see early signs of stabilization, particularly in North America, where trade-related uncertainties appear to have become the new normal. Across industries, we are seeing clients continue to remain cautious, prioritizing investments that deliver clear business value while managing budgets prudently. Hiring decisions and project commitments also remain measured. Against an uncertain macroeconomic environment, I am pleased with our performance in the first half of the year, marked by continued year-over-year growth across both our IT Staffing Services and Data and Analytics Services business segments. We believe this performance demonstrates the strength of our portfolio and our disciplined execution. In our IT Staffing Services segment, we saw steady demand for high-value work as clients focused on flexible, cost-efficient, and value-generating workforce strategies.

While activity levels were lower than the prior year, we are seeing encouraging signs as macroeconomic conditions improve. I am particularly pleased with our gross margin performance. We achieved our highest gross margin to date in the second quarter through our focus on revenue quality, particularly among our financial services clients. Our Data and Analytics Services segment also showed positive year-over-year growth, while our order bookings came in lower than expected, driven primarily by slower decisions on capital programs by our top customers. Beyond our financial performance, we have made good progress this quarter on our strategic initiatives and have been methodical in preparing the organization for internal alignment and execution readiness. As part of this process, we have mobilized teams and started organizing our structure to help position the company for the future.

We've also focused on driving initiatives designed to unlock efficiency across the organization, starting with the recent transition of our finance and accounting function to India. We believe this implementation of our strategic initiatives will energize our teams, deepen client relationships, and reinforce our position as a trusted partner for enterprises navigating an AI-first environment. In summary, we believe we delivered a solid quarter in a measured and cautious market, demonstrating the resilience of our business and the relevance of our offerings. We remain focused on executing against our priorities and preparing the company to seize future opportunities. I would like to thank our employees, clients, and partners for their continued trust and support as we move forward with the implementation of our new strategic initiatives. With that, I will hand it over to Kannan for a deeper look at the quarter's results.

Speaker 2

Thanks, Nirav, and good morning, everyone. Our second quarter results reflect disciplined execution in a cautious but stabilizing market. Year to date, we have delivered revenue growth across both segments. IT Staffing Services remain stable on a year-on-year basis, supported by continued demand for high-value, flexible workforce solutions. In our Data and Analytics Services segment, we saw a modest decline this year, consistent with the more measured decisions on capital programs that Nirav highlighted earlier. Order bookings in our Data and Analytics Services segment were lower, reflecting the slower decision-making environment. We remain confident in our ability to deliver value as we move forward with implementing our strategic initiatives. Consolidated revenue during the second quarter of 2025 totals $49.1 million, a year-over-year decrease of 0.9% compared to the corresponding quarter of 2024.

Our Data and Analytics Services segment reported revenue of $8.6 million in Q2 of 2025, which was 3.2% lower than Q2 2024. Additionally, second quarter 2025 order bookings totaled $5.8 million, which was below last year's Q2 performance of $9.2 million. Second quarter 2025 revenue in our IT Staffing Services segment totaled $40.5 million, or 0.4% lower than revenue achieved during the second quarter of 2024. Our focus on revenue quality resulted in higher bill rates and higher gross margins in this segment, though our billable consultant base declined by 11 consultants. Consolidated gross profit dollars decreased by 1.1% in Q2 of 2025 compared to the corresponding quarter of 2024. Consolidated gross margins dropped by seven basis points over the second quarter of 2024, largely driven by the decrease in our Data and Analytics Services segment.

GAAP net income for the second quarter of 2025 totaled $0.1 million, or $0.01 per diluted share, compared to a net income of $1.4 million, or $0.12 per diluted share in the second quarter of 2024. Non-GAAP net income for Q2 2025 was $1.8 million, or $0.15 per diluted share, compared to $2.2 million, or $0.19 per diluted share in 2024 second quarter. However, our Q2 2025 performance was an improvement from Q1 2025, where non-GAAP net income was $0.8 million, or $0.06 per diluted share. SG&A expense items not included in non-GAAP financial measures, net of tax benefits, are detailed in our second quarter 2025 earnings release for all PDFs presented, which are available on our website. On the financial position during the second quarter of 2025, our liquidity and overall financial position remained solid.

On June 30, 2025, we had $27.9 million cash balance on hand, no bank debt outstanding, and cash availability of $22.2 million under our revolving credit facility. Our day sales outstanding measurement on June 30, 2025 totaled 53 days, which is well within our target range and in line with our day sales measurement a year ago. Operator, this concludes our prepared remarks. We can take questions now.

Speaker 0

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your place in the questions queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Lisa R. Thompson with Zacks Investment Research. Please proceed with your question.

Speaker 4

Good morning. I have a number of questions because we got so much action going on. My first question is, is our finance and accounting fully moved? Are there any more one-time expenses there?

Speaker 2

Hello, Lisa. This is Kannan here. Thanks for that question. Yes, we are on track with the transition of our finance and accounting functions to India, and we are pacing well against the targets outlined in our prior disclosures. We will be completing most of it by sometime by the fourth quarter of this year. We are seeing early gains, which have been encouraging, and not just from a cost standpoint, but also in terms of process agility, turnaround time, and better alignment across teams. That is how we see this is going as per the plan, and we hope that by Q4 of 2025, we should be completed with our transition.

Speaker 4

Are there any more one-time expenses going to be booked?

Speaker 2

We don't expect any other than that which has already been disclosed, Lisa.

Speaker 4

Okay. Great. As far as our Informatica, what's the progress on that and what's happening there?

Speaker 2

Lisa, if I can understand the question, you're just asking the partnership on our Informatica, that we announced a few months ago?

Speaker 4

Yes.

Speaker 2

Yeah. I think, look, we are continuing to accelerate our position on trying to build what I call a very differentiated offering in our portfolio. Among the many partnerships that we have been pursuing, one that we announced recently was with Informatica. I'm very pleased with the initial progress that we have made. We have really started to create joint solution offerings where we are creating what we call an impact offering that really allows us to set up a lab that we are actually building our core capabilities around and sort of bringing the strength of our current capabilities and market-leading positioning for Informatica to jointly serve our clients.

I think we're seeing pretty good with the progress that we have made, and we are continuing to really broadly assess many more such partnerships that we think are going to really allow us to build what I call a truly differentiated offering in a portfolio for us, for our clients.

Speaker 4

Okay. Interesting. I want to compliment you. I'm so excited to be able to get PNQs at the same time you report. In that, I saw that CGI is down another $2 million in revenues from last year. Is that number going to go to zero, or is there going to be some days that they still are going to do with you?

Speaker 2

Lisa, we do not expect a drastic change to that position. We are still working with that client. There is good client interaction that continues to happen, and our client engagement has been good with that particular client of ours. At this point in time, we do not expect any major attenuation to the current position that we are carrying with CGI from a relationship standpoint.

Speaker 4

Great. Thank you. That's my questions for now. Thank you.

Speaker 2

Thank you.

Speaker 0

As a reminder, if you would like to ask a question, press star one on your telephone keypad. Our next question comes from a line of Marc Frye Riddick with Sidoti & Company. Please proceed with your question.

Speaker 2

Hey, good morning.

Speaker 3

Good morning, Mark. Good morning. I wanted to touch a little bit on the commentary around the revenue mix and average bill rate. Maybe you could talk a little bit about the new assignments and the revenue mix there, and maybe how that may differentiate from prior year and how that impacts your views going forward.

Speaker 2

Sure, Mark. Thank you. This is Kannan here.

Speaker 3

Sure.

Speaker 2

As you would have seen, as of 2025, our bill rates have increased to approximately $85 to $86. It is up from last quarter of $84 to $85, but way above the same time last year at about $81 to $82. This is because it does reflect a combination of factors, including more deliberate efforts that we have put towards improvement in the quality of revenues across our portfolio. It is also supported by the clients who are prioritizing on the specialized challenge for long-term transformation projects. We do believe that this trend is a positive indicator of our positioning and is being valued in the current environment by our customers, Mark.

Speaker 3

Okay. Great. I believe the consultant count, so where we are currently, sharing thoughts or views as to where that makeup is going to now on the end of the year, or do you think it'll be relatively flat from end of quarter levels?

Speaker 2

At the end of June, we were at 980. In July, we are at 982. We do expect it to be about the same level by the end of the year. We are hoping that would continue showing a trend which is going to be relatively flat.

Speaker 3

Okay. The other disclosure, you guys talk a little bit about cash billed, approaching about $28 million at the end of the quarter, with a deficit amount down. That was one thing. We talked a little bit about cash usage prioritization and maybe some of the things that you might be even seeing as far as priorities. If there are any thoughts as to potential for acquisitions and maybe what that pipeline might look like.

Speaker 2

Sure, Mark. The fact that we had a very good SaaS position was also because of the efficiencies we are driving overall with respect to cash management and DSO. We are evaluating potential uses of the $28 million in cash right now. One part is, of course, the buyback program. Beyond that, we are very open to making targeted investments that align with the long-term growth priorities, whether that is in capabilities, in talent, or adjacent service areas. We do believe us to have strong balance sheet users that's flexibility. We do intend to deploy the capital in ways that accelerate our strategic intent. We continue to be thoughtful and deliberate in how we allocate these reserves. We'll continue doing so. We are being very programmatic about the way we approach these opportunities, Mark.

As we build these initiatives, we do believe that that will be a good use case for the cash in the days to come.

Speaker 3

Okay. Capex through the first half of the year is down from the prior year. Maybe you could talk a little bit about where you might see that swinging up by the end of the year, and if there are any projects or Capex needs that we should be thinking about swinging out at the end of the year.

Speaker 2

We do not expect a significant increase with respect to Capex at this point in time. We do have plans to have these investments eventually coming in when it comes to, you know, supporting the growth and supporting the initiatives that we are putting together. By the end of the year, we do not expect it to be significantly higher, and, you know, pretty much would be in line with what we explained in the past. That's the view that we are taking right now, Mark.

Speaker 3

Okay, great. Thank you very much.

Speaker 2

Thank you, Marc.

Speaker 0

Thank you. We have reached the end of the question and answer session. Mr. Patel, I'd like to turn the call back over to you for closing comments.

Speaker 2

Thank you, operator. If there are no further questions, I would like to thank you for joining our call today. We look forward to sharing our third quarter 2025 results with you in early November.

Speaker 0

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.