Zacks Small Cap Research – MHH: Mastech Digital Sees Demand Improvement Across the Board – Technologist

By Lisa Thompson

NYSE:MHH

READ THE FULL MHH RESEARCH REPORT

While Q1 showed another double-digit decline in revenues, Mastech (NYSE:MHH) has seen customers loosening their purse strings after four quarters of austerity. In that period, the IT needs have accumulated for these customers and they are starting to spend again. The company saw a 6% increase in consultant headcount during Q1, which has continued to increase thus far in Q2, portending a sequential increase in revenues for staffing. D&A had another strong booking number at $9.6 million which was a $1.2 million improvement over Q1 2023. Gross margins improved year over year and sequentially for the D&A segment, while staffing margins improved sequentially but were flat year over year. We expect a sequential increase in revenues and earnings throughout 2024.

Mastech’s enterprise value is now $83 million– or 0.4 times EV/2024 Estimated Sales. Its peers trade at an average of 2.3xs. The stock trades at 12.3 times 2025 non-GAAP EPS on a PE basis.

Q1 2014 Results Show a Sequential Revenue Improvement

Q1 2024 resulted in total revenues of $46.8 million down 15.0% from $55.1 million in Q1 2023. The IT staffing business declined to $38.8 million from $45.7 million a year ago but an improvement from the $37.0 million in Q4 2023. IT staffing was 83% of revenues and ended the quarter with 1,004 billable consultants compared to 1,125 the year before. D&A also declined year over year to $8.1 million from $9.4 million in Q1 2023. Its revenues were flat sequentially.

Total gross margin improved year over year. Gross margin was flat in staffing at 21.6%, while improving greatly in D&A to 46.4% after a bad Q1 in 2023. Margins were up sequentially for both businesses.

SG&A was down slightly to $12.5 million compared to $13.0 million a year ago. We expect that dollar amount to stay steady with some increase as revenues increase.

The operating loss was $406,000 versus a profit of $532,000 last year. Other income was $124,000 compared to an expense of $53,000 a year ago. In the quarter there was a tax reversal of $282,000, compared to paying taxes of 46% last year. For the full year, the tax rate is expected to equal approximately 28%.

The GAAP loss was $161,000 compared to a profit of $261,000 last year. On a non-GAAP basis, it was $763,000 down 46%. GAAP loss per share was $0.01 compared to EPS of $0.02 a year ago. On a non-GAAP basis, EPS was $0.06 versus $0.12. The share count was 11.6 million, flat with last year.

Balance Sheet

The company ended the quarter with $19.4 million in net cash ($1.63 per share), a quick ratio of 2.8xs, working capital of $37.6 million, and no debt. The company has a positive free cash flow and considerable debt capacity. It currently has a borrowing availability of $24.2 million under its revolving credit facility.

During the fourth quarter, Mastech purchased 9,000 shares of common stock under the share repurchase program at an average price of $8.70. 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 4,300 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. The low trading volume of MHH stock gives less opportunity to buy back stock. The company is amenable to buying any blocks that may present themselves for sale.

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