McGraw Hill, Inc. Q1 FY2024 earnings call

• Macro environment: More positive than end of 2023 with clients more optimistic about prospects.
• Financial results: Q1 2024 revenues $46.8M, 15% Y/Y decline but 2% sequential growth. IT Staffing Services had 6% consultant headcount increase. Data and Analytics Services revenue $8.1M, flat sequentially. Q1 2024 bookings $9.6M, surpassing last year's Q1 by $1.2M.
• Data and Analytics: Q1 bookings from existing clients, margin strengthened to 46.4%, participated in Gartner's Data and Analytics Summit.
• IT Staffing: Demand increased, revenue expected to be better in Q2 due to 6% consultant headcount increase.

For the first quarter of 2024, total revenues were $46.8 million, a 15% year-over-year decline from $55.1 million in Q1 2023 but a 2% sequential increase from Q4 2023. The IT Staffing Services segment had Q1 2024 revenues of $38.8 million compared to $45.7 million in Q1 2023, a 15% Y/Y decline, with a 2% sequential growth from Q4 2023 and a 6% increase in global consultant headcount during the quarter. The Data and Analytics Services segment had Q1 2024 revenue of $8.1 million compared to $9.4 million in Q1 2023, with sequential flat revenues vs Q4 2023. The Data and Innovative Services segment margins improved to 46.4% in Q1 2024 from 38.5% in Q1 2023, and IT Staffing Services gross margins were flat Y/Y but 130 basis points better than Q4 2023.

• Management stated they will not provide guidance during this call nor in subsequent one-on-one meetings or calls.
• Vivek mentioned revenue in Q2 should be better than Q1 due to increased headcount.

Q: It's great to hear some optimism for change. My first question is about the staffing increase. You said you increased the consultants by 6%. Does that mean that Q2 might be up 6% sequentially?

A: While, as you know, we don't give guidance. What I can say is that the revenue in Q2 should be better than the revenue of Q1 as a result of this increased headcount.

Q: And how has the head count trended this quarter?

A: Well, so far, we've just finished the first month. And again, I can say that it has been positive. We've had some net growth in April. So it's a good sign.

Q: So as far as expenses go, I had thought they would be down a little bit, but they didn't seem to come down that much. Can you talk about what to expect going forward?

A: Yes. They came down 3%, Lisa. But again, our activity levels increased in Q1 over Q4. we're being very conservative about increasing our expenses. So even if market conditions continue to get better and there's more opportunity out there, we're still going to be conservative in adding SG&A costs, but I think they would trend up a bit.

Q: Also hoping you could give us an example of how client interactions and sentiment have changed this year.

A: Sure, sure. So last year, we saw that the customers were holding back, and they were not willing to give large projects out. They were not willing to spend large amounts of money. The money was being diverted towards keeping the lights on rather than building the business, as we've seen. And we've seen that towards the end of 2023 and more in the beginning of 2024, customers are now beginning to open up their wallets and willing to sign projects, much larger projects, the ones that they were holding out for a long time. And also, you see when you have 4 of 6 -- 4 to 6 quarters of holding back, there is that pent-up IT demand, which doesn't go away, just stays there and just becomes larger and larger. So we are seeing that they're now beginning to release funds towards that. So the conversations, a, the bookings that we've had, but I guess the conversations that we are having with our customers are pointing towards them wanting to now get back on to their IT plans. And it's not floodgates yet, but it's looking much more positive. They're looking -- customers seem to be much more comfortable. So -- and that projects typically tend to happen on the data analytics side. On the staffing side, again, the same thing we have seen that the customers are now are willing to hire contract staff as well as permanent staff. And the pace and the quantum is picking up, at least that's what we've seen in Q1 and right into the last month of April. Does that answer your question, Tim?

Q: So I was curious as to -- I just want to sort of follow up on that thread. The types of projects that folks are beginning to act on. Is there any particular pipe that you are seeing as far as what those first initial kind of sort of loosening of funds as being put toward and then if maybe if you could share whether that's seemingly coming from any particular customer industry vertical that stands out to you as far as being more willing to put money to work now.

A: Mark, what we are seeing is more generic in general across all industries, and I don't think it's that some industries more than the other. Banking, of course, as you know, was hit quite badly banking industry, and they were really holding back quite a bit in the previous year 2023. And that -- they have now started spending on IT services. Now what kind of projects they are, it's -- they are all kinds out there, but I think I do would like to use the same distinction that I made a minute ago, which is you have to keep the lights on, so you are maintaining what you already have. That never stopped, that didn't stop in 2023 either. It was really building the bank or building the company or building the enterprise for the future. So the new initiatives, the new developments for competitive advantage and growth some of those were being held back, and it was beginning to, I guess, impact their businesses. So customers are now beginning to look at the build the business side of IT. I don't know if that answers your question.

Q: And then I was wondering if you could talk a little bit about the pricing dynamic that you're seeing out there, bill rates and the like. I mean is there much in the way of meaningful pushback as far as pricing? Or what are you experiencing now? And has that changed since the year began?

A: So the pricing pressures are always there. And I guess they got intensified in 2023. They still haven't gone away. But as the spending has started, customers do realize that if you're looking for better consultants or better services than the price point in the marketplace is because of inflation and otherwise, the rates are going up. And by and large, the customers are receptive to looking at that for the right candidates. I mean I'm talking more on the IT staffing side. So the pricing pressures are there, but they are not -- what's the word I'm looking for. They're not unduly impacting our business, right now.

Q: The the pickup in gross margin in Data and Analytics year-over-year, it's about 800 basis points there. I just want if you talk a little bit about that gross margin pickup. Is that -- how much of that may be -- are we talking about, I would imagine there's a little bit of everything, but how much of that is increased utilization, how much of that is revenue mix? What should we be looking at there as far as that gross margin pickup in data and whether that has an opportunity to continue going forward?

A: So Mark, there were basically 2 reasons why our gross margins improved as compared to the same quarter last year. The first one was the actual project execution. So I said we'll continue our focus on the delivery performance. It's looking at how do we deliver the projects to our customers with better gross margins, and that obviously means better utilization. Also, the second thing which impacted us last year was we had a large bench. So we are doing a very tight bench management, which obviously doesn't mean that you bring the bench down to 0, you always have to be a little ahead of the need of the people because people have to be brought on board. They have to be trained and ready for when the projects actually start. So I think we are doing a much better job of the bench management, much better job of utilization and much better job of doing a better -- getting better gross margins out of the projects in execution. So it's a bit of many of these things. I don't know if that answers your question. Jack, is there anything else that you'd like to comment on this?