Mastech Digital, Inc. (MHH) Earnings Call Transcript

Hello and thank you for standing by. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Mass Tech Digital Second Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. I would now like to turn the call over to Jenna Lacey, General Counsel and Corporate Secretary at MassTech Digital. Please go ahead.

Thank you, Operator, and welcome to MassTech Digital's second quarter 2026 conference call. If you have not yet received a copy of our earnings announcement, it can be obtained from our investor section on our website at www.masstechdigital.com. With me on the call today are Nirav Patel, MassTech Digital's Chief Executive Officer, and Kannan Sugandharaman, 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 2025 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. 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. We appreciate you joining us as we review our second quarter 2026 results. I'm pleased to share the progress we made during the second quarter. On a consolidated basis, Mastic Digital delivered sequential revenue growth of 0.9%. Within that figure, our talent segment saw a modest sequential decline of 1.9%, while our data and AI segment grew 7.2% sequentially. its first quarter of sequential growth since 2024. We believe this growth is a direct reflection of the progress we are making as an AI-first company. During the second quarter, we entered into a strategic engagement with the leading American convenience store chain and e-commerce retailer that operates more than 10,000 stores globally to build the agentic foundation that will power its e-commerce apps and store operations. We have been entrusted to architect, build, and deploy semantic search for the consumer experiences, a retail knowledge fabric as an ontology layer beneath it, and an agentic foundation for building, orchestrating, and monitoring agents at scale. We view this engagement as an early indicator of the new capabilities we are building. to help accelerate AI adoption and grow customer revenues. Real wins like this engagement have contributed to a positive year over year quarter in bookings, which is building further on a strong first quarter. And we are encouraged by our trajectory. As part of our initiatives under the growth office, which I will talk about in a moment, we are pleased to have launched our partner program during the second quarter. We participated in four major industry events, Google Cloud Next, Informatica World, the Snowflake Summit, and the Databricks Data and AI Summit. and we value the connections and relationships that have come out of our participation in these events. This partner program reflects a serious commitment to our partners and a willingness to go deep in the capabilities we build around them. It is about how we more meaningfully serve our customers by building trust through the value we demonstrate alongside our partners. We look forward to building on this program in the coming quarters. Kandan will provide more color on the segment performances in his remarks. I want to spend a moment on the market environment because it continues to shape how enterprises are approaching their roadmaps and their investment decisions. Here in Frontier Labs, companies like Anthropic and OpenAI continue to push the pace of innovation in AI, and that pace continues to accelerate. Enterprises, especially the global 2,000 customers we work with, are beginning to shift their spending away from what has traditionally been considered standard expected technology investments and towards innovation and AI. Recent analysis from Zinnof suggests that as much as 30% of traditional IT spending could rotate into new AI-oriented investments. We believe there are two areas where enterprises acceleration has been most consistent. AI Foundation and Business Transformation. AI Foundation is an important layer where enterprises are doing the groundwork, getting their underlying data clean, structured and governed enough to actually support AI at scale. This is where we continue to see significant dollars being spent because without the foundation in place, nothing built on top of it holds up. is also the layer that questions of trust, safety, and governance ultimately live. Business transformation is the other area of acceleration. If your enterprises are developing use cases, they can tie directly to top line or bottom line results. We are seeing enterprises narrow in on the specific domains and use cases that help them differentiate from their competitors and become a true AI-first enterprise. We believe this area has the most potential to drive business impact and sets the groundwork for us to deliver outcome-based engagements that position us as a trusted partner in their AI journey. We are beginning to see progress in both of these areas. Let me also highlight some of the progress we have made on our strategic initiatives. To meet the acceleration we described earlier in AI foundation and business transformation, we made a deliberate effort during the second quarter to build out our modern data and AI readiness offerings, hiring strong local and international talent to meet the market where the demand is. We are also investing in becoming an autonomous enterprise ourselves, acting as customer zero for our own AI and transformation initiatives. During the second quarter, we assessed all of our enabling functions and their maturity levels with the intention of becoming a fully autonomous AI-led company. This is also the quarter where we launched our growth office function, investing across four areas that we believe will compound over time. New Logo Sales is focused on opening and developing new client relationships, giving us a dedicated motion for winning first-time business. Performance and revenue marketing covers our events, demand generation, campaigns, inbound leads, and broader engagement efforts, feeding a stronger pipeline into that motion. Partnership Ecosystem Build is focused on partner source deals and ecosystem development, an area that ties directly into the partner program momentum I mentioned earlier. And finally, large deal enablement brings cross-functional teams together to synergize best practices in pursuing and winning our largest, most strategic deals. Together these four investments within the growth office are designed to build a more complete commercial engine. One that wins new business, deepens through partners and competes for the deeds that matter most. As I described earlier, we are seeing two forces continue to move together in the market. The pace of AI innovation coming out of the frontier labs, and the pace of AI adoption inside enterprises as they rotate their own spending towards AI foundation and business transformation to keep up. We believe that is exactly where our opportunity lies. In our view, there is a clear place for partners like us who understand both the depth of enterprise systems and the pace of AI innovation. We view this position as an important place for us to be as we support enterprises in increasing their AI adoption and we are focused on meeting this moment and driving value for our shareholders. We believe we are entering the second half of the year in a position of strength. The redeployment of edge savings into our strategic initiatives, the investments we have made in our capabilities and our growth offers, and the the early wins we are seeing in data and AI all give us confidence that our plan is working. Our Balance Sheet strength, our leadership team, and the alignment across our organization position us well to compete for the opportunities ahead. We are grateful for the trust our clients, our employees, and our shareholders continue to place in us, and we intend to continue earning it going forward. With that, I will hand it over to Kannan, who will walk you through the financials in more detail. Thanks Nirav. Good morning everyone. Nirav touched on the sequential growth we saw in our data and AI segment during the second quarter and the discipline behind it. I want to start there because that discipline is best reflected in how we have executed on edge. The EGGS initiative, Efficiencies Driving Growth and Expansion, which we launched in Q3 2025, continued to advance through the second quarter of 2026. We have always said edge has two parts, an efficiency phase and an investment phase. Last quarter, we highlighted that the efficiency phase had delivered. We signal that redeployment of these efficiencies had begun into our leadership and talent base, our competencies and our market growth initiatives. During the second quarter, that redeployment started to accelerate. We are now investing significantly in talent, in competency building, and in overall expansion across our data and AI space. As we have said before, these investments are a leading indicator. We have made the commitment. We believe the revenue will now follow. We expect to continue this space of investment through the second half of 2026. We remain encouraged by what we are seeing take shape, and we continue to believe that the most meaningful growth edge enables is still ahead of us. I will now discuss our second quarter financial results. During the second quarter, we delivered consolidated revenue of $41.4 million, a 15.6% decrease year over year compared to the previous year period. Our talent segment delivered revenue of 28 million, 16.2% lower than the prior year period, though our focus on revenue quality continues. Our bill rates once again reached an all-time high for MassTech at $92.17, up from $88.36 a year ago. Our billable consultant base declined by 170 consultants since the second quarter of 2025, a 22.3% reduction consistent with the same two factors we have been highlighting for the past few quarters. The first of these factors is insourcing activity from one of our top 10 clients, which continued during the second quarter. This single client accounted for almost 90 percent of our headcount reduction on the talent side in the second quarter. excluding this client or year-on-year decline in talent revenue would have been limited to approximately 3%. The second factor is our continued discipline. We have deliberately exited lower margin, non-strategic staffing positions in favor of higher quality, higher margin engagements. the effect of that discipline is visible in our historically strong buildings. We anticipate that these dynamics will continue for a few quarters. On data and AI segment, reported revenue of $13.5 million, a decrease of 14.4% compared to the prior year period, a growth of 7.2% sequentially, marking our first such quarter of revenue growth since 2024. On the booking side, second quarter bookings totaled $13.6 million on total contract value or TCV basis compared to bookings of 9 million TCV in the prior year period. We added three new logos across multiple markets as we continue to build momentum in bookings. Gross profit of $12 million was a decrease of 13.2% compared to the prior year period, though our profits grew by $1 million sequentially and gross margins increased by 90 basis points over the second quarter of 2025. GAAP net loss for the three month ended June 30th was $0.1 million or negative 1 cent per diluted shaft. compared to gap net income of 0.1 million or one cent per diluted share in the prior year period. Non-GAAP net income for the three months ended June 30th was 1 million or 8 cents per diluted share, compared to 1.8 million or 15 cents per diluted share in the prior year period. Gap net income for the six months until June 30th was 0.2 million or one cent per diluted share. to a gap net loss of 1.3 million or minus 11 cents by diluted shard in the prior year period. Non-GAAP net income for the six months ended June 30th was $2.2 million or 19 cents per diluted share. back to 2.6 million dollars or 21 cents per diluted share in the prior year period. During the second quarter of 2026, our liquidity and overall financial position remains solid. On June 30th, 2026, we had $35.6 million in cash on hand. no mandate outstanding and cash availability of $20.4 million under our revolving credit facility. A day sales outstanding on June 30, 2026, total 61 days, which is above our DSO measurement a year ago. During the second quarter of 2026, we did not repurchase any shares of MassTech common stock. And as a result, as of 30th June 2026, the entire $5 million remains available under the share repurchase program. Operator, this concludes our prepared remarks. We will now open the line for questions.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. We will pause for a moment to compile the Q&A roster. And your first question is from the line of Lisa Thompson with Zacks Investment Research. Please go ahead.

Good morning. I'm glad to see all the progress. I was wondering if you could talk a little bit about this new partnership program. How do you define it? Like what is it actually?.

Good morning Lisa, this is Nirov. I can take that. I would, so this is first of all a very strategic program as you know that A year ago, we already announced a partnership with Informatica, but this particular program, I would characterize it as something early stage and I think it is important to be upfront about that. You know, these four events that we really participated in terms of Google Next, Informatica, World, Snowflake, Databricks, you know, are really about building and deepening relationship with the partners whose platforms our clients are standardizing on and that is not something that turns into a signed deal overnight. So it takes time to really build that levels of trust. That said, We think that we would not have launched this formally or invested in a dedicated partnership ecosystem building function within our growth office if we did not see early signals worth building on. So we're seeing amount of conversations start to happen and some early relationship momentum, but I would like not to point too hard measurable pipeline numbers on this as yet. So we think that this partnership program that we have engaged on are very strategic for us to deepening our capabilities. that allows our customers to really think of us as a full service provider as they engage more aggressively in their data modernization initiatives. So is it kind of a sales sharing arrangement or staffing or how, what does one look like? Yes, yes. So you said it's a little bit more sales motion. Think about it as something that is very critical for us because more and more clients choose their modernization efforts to go into some of these strategic partnership programs and remember these partners have hundreds if not sometimes thousands of partners that they actually service and work together with. So this is a clear sales motion and that's exactly why we are working We brought this under our growth office function, which is a commercial engine for us.

to continue to accelerate this. Okay. On another topic, your billable rates went up quite a bit, which was very impressive. Do you see that continuing for the next few quarters as much as a dollar an hour?.

Yes. Hey, Lisa. Kannan here. Let me take that. So, what the number reflects is, as you would see revenue quality discipline and we have over the last few quarters. We have been deliberately exiting lower margin non-strategic positions in favor of higher quality. And the bill rates are a byproduct. So as for whether it continues to move in this direction, we're not sure. But we will continue to assess every opportunity on its own merit. And that's the intention as we move forward. So clearly, our focus is on higher quality, higher margin engagements.

Okay, so that'll continue for a few more quarters. It'll increase.

The intent is to have this, you know, that we will go for high margin, high value elements. So and as you would see at 92, we are at a fairly good position. We intend to keep it high again, right? on the kind of opportunities that we get to sign up in the next few quarters.

Okay. My last question is, could you talk a little bit more about this convenience store deal? Can you just simplify for us normal people what exactly you're going to do for them and then how applicable that is to other companies?.

Absolutely, Lisa, Nirav here. Let me just take a stab at that. So this is like, you know, think about it this way, right? Like as enterprises prepare themselves to get themselves to be AI first and using and deploying AI all across their enterprise, what they really have to really start thinking about is a layer of foundation and which is what we refer to as the AI foundation. It's very critical for them to really establish a sort of a layer that, you know, ensures things like trust, safety, governance. And so this engagement for us is very strong. strategic in a way that we are starting off with establishing some level of that foundation along with along with the fact that we are now starting to work with this customer on a few areas of their use cases. One example that you mentioned is the agent e-commerce and this particular retailer is wanting to use you know grow their revenues through agent e-commerce as you know that uh historically uh almost everybody wrote their ways of commerce through online platforms like Amazon, more and more the younger generations continue to really fully be on the GPTs and so how does this turn into a revenue opportunity for our clients and client is really engaging with the in helping them establish that agent e-commerce use case to be the primary case that they want to really build with. So, To simplify it, think about if people start to shop on chat GPTs and tropics of the world, how will how will customers like this one will benefit out of it and so it requires the levels of foundation layer but also equally important it needs the necessary domain depth to understand how to integrate the systems and make it real for them.

Okay, that's great. I guess, and one last question is, what do bookings look like for this quarter?.