Mastech Digital, Inc.: Form 10-Q for the period ended Mar 31, 2025

You should read the following discussion in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2024, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on March 14, 2025.

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about future events, future performance, plans, strategies, expectations, prospects, competitive environment and regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words, “may”, “will”, “expect”, “anticipate”, “believe”, “estimate”, “plan”, “intend” or the negative of these terms or similar expressions in this quarterly report on Form 10-Q. We have based these forward-looking statements on our current views with respect to future events and financial performance. Our actual financial performance could differ materially from those projected in the forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections and our financial performance may be better or worse than anticipated. Given these uncertainties, you should not put undue reliance on any forward-looking statements. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under “Risk Factors”, “Forward-Looking Statements” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2024. Forward-looking statements represent our estimates and assumptions only as of the date that they were made. We do not undertake any duty to update forward-looking statements, and the estimates and assumptions associated with them, after the date of this quarterly report on Form 10-Q, except to the extent required by applicable securities laws.

Website Access to SEC Reports:

The Company’s website is www.mastechdigital.com (http://www.mastechdigital.com). The Company’s Annual Report on Form 10-K for the year ended December 31, 2024, current reports on Form 8-K and all other reports filed with the SEC, are available free of charge on the Investors page. The website is updated as soon as reasonably practical after such reports are filed electronically with the SEC.

Critical Accounting Policies

Please refer to Note 1 “Summary of Significant Accounting Policies” of the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2024 for a more detailed discussion of our significant accounting policies and critical accounting estimates. There were no material changes to these critical accounting policies during the three months ended March 31, 2025.

2024 Primentor, Inc. Consulting Agreement:

On January 12, 2024, we entered into a consulting services agreement with Primentor, Inc. (“Primentor”) to provide the Company with strategic advisory and management consulting services, as well as any other business and organizational strategy services as the Board of Directors of Company may reasonably request from time to time. The initial term of the consulting services agreement is for a three-year period that commenced on January 12, 2024, and the Company may request to renew the term for additional successive one-year terms, in which case Primentor and the Company will negotiate to agree upon the scope of the additional services and the amount of additional consulting fees. During 2024, the Company incurred consulting expenses of approximately $1.1 million related to these services. In 2025 and 2026, the Company expects to pay Primentor approximately $270,000 and $120,000, respectively, plus reimbursement of any reasonable and documented out-of-pocket expenses incurred by Primentor in rendering such services.

Transition of the Company’s finance and accounting functions to India:

During the first quarter of 2025, the Company’s Board of Directors made the decision to implement a long-term cost-cutting initiative to transition the Company’s finance and accounting functions to India. During 2025, the Company expects to incur additional costs related to the duplication of resources and travel expenses during the training and knowledge transfer process. This estimated additional expense is expected to range from $500,000 to $750,000 during the transition period. Additionally, the Company expects to pay approximately $1.3 million of severance expense related to this initiative. Post-transition cost savings are expected to approximate $1.2 million per annum.

Overview:

We are a provider of Digital Transformation IT Services to mostly large and medium-sized organizations.

Our portfolio of offerings includes data management and analytics services, other digital transformation services, such as digital learning services, and IT Staffing Services.

We operate in two reporting segments – Data and Analytics Services and IT Staffing Services. Our data and analytics services are marketed on a global basis under the brand “Mastech InfoTrellis” and are delivered largely on a project basis with on-site and off-shore resources. These data and analytics capabilities and expertise were acquired through our acquisition of InfoTrellis and enhanced and expanded subsequent to the acquisition. In October 2020, we acquired AmberLeaf Partners, Inc. (“AmberLeaf”), a Chicago-based customer experience consulting firm. This acquisition enhanced our capabilities in customer experience strategy and managed services offerings for a variety of Cloud-based enterprise applications across sales, marketing and customer services organizations. Our IT staffing business combines technical expertise with business process experience to deliver a broad range of staffing services in digital and mainstream technologies, as well as other digital transformation services.

Both business segments provide their services across various industry verticals, including financial services, government, healthcare, manufacturing, retail, technology telecommunications and transportation. In our Data and Analytics Services segment, we evaluate our revenues and gross profits largely by service line. In our IT Staffing Services segment, we evaluate our revenues and gross profits largely by sales channel responsibility. This analysis within both our reporting segments is multi-purposed and includes technologies employed, client relationships, and geographic locations.

Data and Analytics:

We provide information regarding our new bookings in our Data and Analytics Services segment, which represents the estimated value of client engagements, including those acquired through acquisitions, as well as renewals and extensions to existing contracts, because we believe doing so provides useful trend information regarding changes in the volume of our new business over time. New bookings can vary significantly quarter to quarter, depending, in part, on the timing of the signing of a small number of large engagements. Among other factors, the types of services and solutions to be delivered, the duration of the engagement and the pace and level of client spending impact the timing of the conversion of new bookings to revenues. In addition, substantially all of our contracts are terminable by the client on short notice, with little or no termination penalties. Information regarding our new bookings is not comparable to, nor should it be substituted for, an analysis of our revenues over time. New bookings involve estimates and judgments. There are no third-party standards or requirements governing the calculation of bookings. We do not update our new bookings for material subsequent terminations or reductions related to bookings originally provided in prior periods.

Economic Trends and Outlook:

Generally, our business outlook is highly correlated to general North American economic conditions, particularly with respect to our IT Staffing Services segment. During periods of increasing employment and economic expansion, demand for our services tends to increase. Conversely, during periods of contracting employment and / or a slowing global economy, demand for our services tends to decline. With economic expansion in 2010 through 2019 activity levels improved. However, as economic conditions strengthened, we experienced increased tightness in the supply side (skilled IT professionals) of our businesses. These supply-side challenges pressured resource costs and, to some extent, gross margins. As we entered 2020, we were encouraged by continued growth in the domestic job markets and expanding U.S. and global economies. However, with the COVID-19 pandemic surfacing in the first quarter of 2020, we realized that economic growth would quickly turn into recessionary conditions, which had a material impact on activity levels in both of our business segments. In 2021, we were encouraged by the global rollout of vaccination programs and signs of economic improvement, however, the proliferation of COVID-19 variants had caused some uncertainty and disruption in the global markets. In 2022 and 2023, COVID-19-related concerns seemed to subside; however, increased inflation, challenges in the financial sector related to increasing interest rates, and concerns about a possible recession created much uncertainty and impacted demand for our services in the second half of 2022 and for the entire year of 2023. In 2024, economic conditions in North American improved over the course of the year as job growth and inflationary outlooks showed positive signs of improvement. As we enter 2025, a new level of uncertainty and caution has returned to the marketplace, largely related to unknowns with respect to the incoming administration’s policies that it is likely to adopt and the impact of such policies on our businesses. Accordingly, it is difficult to predict how market conditions are going to unfold over the course of 2025 and beyond.

In addition to tracking general economic conditions in the markets that we service, a large portion of our revenues is generated from a limited number of clients (see Item 1A, the Risk Factor entitled “Our revenues are highly concentrated, and the loss of a significant client would adversely affect our business and revenues” in our Annual Report on Form 10-K for the year ended December 31, 2024). Accordingly, our trends and outlook are additionally impacted by the prospects and well-being of these specific clients. This “account concentration” factor may result in our results of operations deviating from the prevailing economic trends from time to time.

Within our IT Staffing Services segment, a larger portion of our revenues has come from strategic relationships with systems integrators. Additionally, many large end users of IT staffing services are employing MSPs to manage their contractor spending. Both of these dynamics may pressure our IT staffing gross margins in the future.

Recent growth in advanced technologies (social, cloud, analytics, mobility, automation) is providing opportunities within our IT Staffing Services segment. However, supply side challenges have proven to be acute with respect to many of these technologies.

Results of Operations for the Three Months Ended March 31, 2025 as Compared to the Three Months Ended March 31, 2024:

Revenues:

Revenues for the three months ended March 31, 2025, totaled $48.3 million, compared to $46.8 million for the corresponding three-month period in 2024. This 3% year-over-year revenue increase reflected 11% growth in our Data and Analytics Services segment and 2% growth in our IT Staffing Services segment. For the three months ended March 31, 2025, the Company had three clients that each had revenues in excess of 10% of total revenues (Fidelity =12.9%, CGI = 11.9% and Populus = 11.7%). For the three months ended March 31, 2024, the Company had one client that had revenues in excess of 10% of total revenues (CGI = 17.4%). The Company’s top ten clients represented approximately 56% and 51% of total revenues for the three months ended March 31, 2025 and 2024, respectively.

Below is a tabular presentation of revenues by reportable segment for the three months ended March 31, 2025, and 2024, respectively:

Revenues from our Data and Analytics Services segment totaled $9.0 million in the quarter ended March 31, 2025, compared to $8.1 million in the corresponding quarter last year. This 11% year-over-year increase reflected higher activity levels and new assignments from existing clients over the last several quarters. New bookings in the first quarter of 2025 totaled $11.7 million, compared to bookings of $9.6 million in the first quarter of 2024.

Revenues from our IT Staffing Services segment totaled $39.3 million during the three months ended March 31, 2025, compared to $38.7 million during the corresponding 2024 period. This 2% year-over-year increase reflected higher average billable consultants in the 2025 period, compared to the corresponding period last year. Billable consultants at March 31, 2025 totaled 991-consultants, compared to 1,004-consultants at March 31, 2024. For the 2025 quarter, our consultants on billing declined by 17 consultants from our billable consultant base at December 31, 2024. Our average bill rate during the first quarter of 2025 was $84.97 per hour, compared to $79.30 per hour in the first quarter of 2024. This increase in average bill rate was due to higher rates on new assignments during the last several quarters and was reflective of the types of skill sets that we deployed. Permanent placements / fee revenues were approximately $0.2 million during both the 2025 and 2024 first quarter.

Gross Margins:

Gross profits in the first quarter of 2025 totaled $12.9 million, compared to $12.1 million in the first quarter of 2024. Gross profit as a percentage of revenue was 26.7% for the three-month period ended March 31, 2025, compared to 25.9% during the same period of 2024. This 80-basis point increase related to higher gross margins in our IT Staffing Services segment.

Below is a tabular presentation of gross margin by reporting segment for the three months ended March 31, 2025, and 2024 respectively:

Gross margins from our Data and Analytics Services segment were 44.1% of revenues during the first quarter of 2025, compared to 46.4% of revenues during the first quarter of 2024. The gross margin decline reflected lower utilization and a reserve adjustment on a fixed price project during the first quarter of 2025.

Gross margins from our IT Staffing Services segment were 22.7% in the first quarter of 2025, compared to 21.6% in the corresponding quarter of 2024. This 110-basis point increase reflected higher margins on new contract assignments, and lower benefit costs in the first quarter of 2025, compared to the first quarter of 2024.

Selling, General and Administrative (“SG&A”) Expenses:

Below is a tabular presentation of operating expenses by expense category for the three months ended March 31, 2025 and 2024, respectively:

SG&A expenses for the three months ended March 31, 2025 totaled $14.7 million or 30.4% of total revenues, compared to $12.5 million or 26.7% of total revenues for the three-months ended March 31, 2024. Excluding the amortization of acquired intangible assets in both periods and severance expense in the first quarter of 2025, SG&A expense as a percentage of total revenues was 26.3% and 25.2%, respectively.

Fluctuations within SG&A expense components during the first quarter of 2025, compared to the first quarter of 2024, included the following:

• Sales expenses decreased by $0.3 million in the 2025 period compared to the corresponding 2024 period. Sales expenses in our Data and Analytics Services segment decreased $0.3 million due to lower staff headcount in our sales organization. Sales expenses in our IT Staffing Services segment were flat compared to the first quarter of 2024.
• Operations expenses increased by $0.1 million in the 2025 period compared to the corresponding 2024 period. Operations expenses decreased $0.1 million in our Data and Analytics Services segment due to staff reductions. In our IT Staffing Services segment, operations expenses increased by $0.2 million and reflected an increase in commissions and other variable related expenses.
• General and administrative expenses increased $1.1 million in the 2025 period compared to the corresponding 2024 period. General and administrative expenses allocated to both business segments increased due to higher executive compensation of $0.4 million, CEO recruitment fees of $0.3 million and higher stock-based compensation expense of approximately $0.4 million.
• Amortization of acquired intangible assets was $0.6 million in the 2025 period, compared to $0.7 million in the corresponding 2024 period, as a portion of our intangible assets became fully amortized in 2025.
• Severance expense was $1.4 million in the 2025 period, compared to zero in the corresponding period of 2024. The severance expense related to the Company’s exiting Chief Financial Officer.

Other Income / (Expense) Components:

Other Income / (Expense) for the three months ended March 31,2025 consisted of interest income of $115,000 and foreign exchange losses of ($24,000). For the three months ended March 31, 2024 Other Income / (Expense) consisted of interest income of $154,000 and foreign exchange losses of ($30,000). Lower interest rates in 2025 compared to 2024 were largely responsible for the decline in the year-over-year interest income.

Income Tax Expense (Benefit):

Income tax (benefit) for the three months ended March 31,2025 totaled ($323,000), representing an effective tax rate on a pre-tax loss of 18.3%, compared to ($121,000) for the three months ended March 31, 2024, which represented a 42.9% effective tax rate on pre-tax income. The 2025 period tax rate compared to the 2024 period largely reflected the Company’s utilization of Singapore tax benefits during the 2024 period.

Liquidity and Capital Resources:

Financial Conditions and Liquidity:

As of March 31, 2025, we had cash balances on hand of $24.7 million, no bank debt outstanding and approximately $23.7 million of borrowing capacity under our existing credit facility.

Historically, we have funded our organic business needs with cash generated from operating activities. Controlling our operating working capital levels by closely managing our accounts receivable balance is an important element of cash generation. As of March 31, 2025, our accounts receivable “days sales outstanding” (“DSOs”) measurement was 56 days, in-line with our March 31, 2024 DSO measurement.

We believe that cash provided by operating activities, cash balances on hand and current availability under our credit facility will be adequate to fund our business needs and support our share repurchase program that we announced in February 2023 over the next 12-months, exclusive of any acquisition activity.

Cash flows provided by (used in) operating activities:

Cash (used in) operating activities for the three months ended March 31,2025 totaled ($3.0 million) compared to cash (used in) operating activities of ($1.3 million) during the three months ended March 31, 2024. Elements of cash flows in the 2025 period were net (loss) of ($1.4 million), non-cash charges of $0.4 million, and an increase in operating working capital levels of ($2.0 million). During the three months ended March 31, 2024, elements of cash flows were a net loss of ($0.2 million), non-cash charges of $1.5 million and an increase in operating working capital levels of ($2.6 million). Operating working capital increased in 2025 and 2024 due to higher accounts receivable balances and payouts related to the Company’s annual bonus programs during the first quarter.

Cash flows (used in) investing activities:

Cash (used in) investing activities for the three months ended March 31,2025 was ($0.1 million) compared to ($0.3 million) for the three months ended March 31, 2024. In both 2025 and 2024 , capital expenditures were essentially responsible for our cash usage in investing activities.

Cash flows (used in) financing activities:

Cash provided by financing activities for the three months ended March 31,2025 totaled $27,000 and consisted of proceeds from the exercise of stock options. Cash (used in) financings activities for the three months ended March 31, 2024, totaled ($80,000) and consisted of purchase of treasury shares under our share repurchase program.

Off-Balance Sheet Arrangements:

Other than $324,000 in outstanding letters of credit issued under our Credit Agreement, we do not have any off-balance sheet arrangements. For further details about the outstanding letters of credit, refer to Note 8 — “Credit Facility” in the Notes to Condensed Consolidated Financial Statements included herein.

Inflation:

We do not believe that inflation had a significant impact on our results of operations for the periods presented, although economic uncertainty, including the concerns of our clients and other companies with respect to inflationary conditions in North America and elsewhere, has had and may continue to have an adverse impact on the demand for our services. On an ongoing basis, we attempt to minimize any effects of inflation on our operating results by controlling operating costs and, whenever possible, seek to ensure that billing rates reflect increases in costs due to inflation. However, high levels of inflation may result in higher interest rates which could increase our borrowing costs in the future if we elect to draw on our current or future credit facilities.

In addition, refer to “Item 1A. Risk factors” in our 2024 Annual Report on Form 10-K for a discussion about risks that inflation directly or indirectly may pose to our business.

Seasonality:

Our consultants’ billable hours are affected by national holidays and vacation policies. Accordingly, we generally have lower utilization rates and higher benefit costs during the fourth quarter. Additionally, assignment completions tend to be higher near the end of the calendar year, which largely impacts our revenue and gross profit performance during the subsequent quarter.

Recently Issued Accounting Standards:

Recent accounting pronouncements are described in Note 13 to the accompanying financial statements.

In addition to the inherent operational risks, the Company is exposed to certain market risks, primarily related to changes in interest rates and currency fluctuations.

Interest Rates

As of March 31, 2025, we had no outstanding borrowings under the Credit Agreement — Refer to Note 8 — “Credit Facility” in the Notes to Condensed Consolidated Financial Statements, included herein.

Currency Fluctuations

The reporting currency of the Company and its subsidiaries is the U.S. dollar. The functional currency of the Company’s subsidiary in Canada is the U.S. dollar because the majority of its revenue is denominated in U.S. dollars. The functional currencies of the Company’s Indian and European subsidiaries are the local currency of the location of such subsidiary. The results of operations of the Company’s Indian and European subsidiaries are translated at the monthly average exchange rates prevailing during the period. The financial position of the Company’s Indian and European subsidiaries is translated at the current exchange rates at the end of the period, and the related translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within Shareholders’ Equity. Gains and losses resulting from foreign currency transactions are included as a component of other income (expense), net in the Condensed Consolidated Statements of Operations, and have not been material for all periods presented. A hypothetical 10% increase or decrease in overall foreign currency rates in the first quarter of 2025 would not have had a material impact on our consolidated financial statements.

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of Company management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

We do not expect that our disclosure controls and procedures will prevent all errors and all instances of fraud. Disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and the benefits must be considered relative to their costs. Because of the inherent limitations in all disclosure controls and procedures, no evaluation of disclosure controls and procedures can provide absolute assurance that we have detected all our control deficiencies and instances of fraud, if any. The design of disclosure controls and procedures also is based partly on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2025 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2024, filed with the SEC on March 14, 2025.