With the market falling faster than the marginal peace in the Middle East as Qadaffi takes hold of Tripoli (and screw Tripoli, Money McBags would settle for taking hold of double E), faster than the SEC’s already piss awful reputation (as apparently their top lawyer made off with some Madoff profits), and even faster than Jessica Simpson’s fupa (and really Jess, what happened to you?), Money McBags thought he would step back from macro commentary today and look at one of his favorite little companies, CTGX, as they just announced their earnings.

Just to refresh your memories, CTGX has two basic businesses.  The first is more boring and vapid than George Will’s essays (Dear George, Please leave me the fuck alone.  Love, Baseball) as it is a low margin staffing business that basically provides people to help IT departments in large organizations.  This is ~64% of their revenue with ~half of that coming from farming people out to IBM in order to help install servers and do all the shit no one in IT wants to do (like shower and talk to girls) and that companies don’t want to pay a full time person to do since most companies are not in the IT business.  If that is all this company did, Money McBags would waste less time on them than he does waxing his taint (because he believes in being au naturel) or trying to solve the Kryptos, sculpture because low margin uncompetitively advantaged businesses are for douchey value investors to buy when the shit becomes too cheap as there really isn’t defensible growth (even though the business is growing strong now coming out of the down cycle).

The reason Money McBags talks about this company so much is because of their Electronic Medical Records installation business as they are one of only 6 or 7 companies that can do that, the government has mandated all hospitals to be compliant by 2014, and fewer than 20% have been penetrated (like a high school freshman cheerleading squad).  So the shit is going to start to grow, CTGX has a stellar reputation in the health care field, and these EMR deals have 10%+ margins and last ~2 years so each deal brings in solid recurring revenue.  Money McBags has said before that EMR installation is a fuckload Y2Kish, but in this case Y2K lasts 3 to 4 more years, is really just starting as federal funds get spent and hospitals once again can get bank loans, and there is less competition.

Money McBags has been writing about this stock since it was <$8 and we have seen a nice run up of ~50% appreciation, so it’s not disgustingly cheap anymore, but there is still value.  The company was actually down ~2% with the market today despite what Money McBags thought was a good earnings call, so he’ll break down the good and the bad before figuring out what the fuck to do.

1.  Revenue growth remained stronger than Portia Di Rossi‘s breath on a Sunday morning.  Money McBags actually thought you should buy ahead of the quarter because he thought their shitty staffing business would see a spike based on IBM’s earnings call where IBM said they were getting a fuckton of demand for their service contracts and IBM is ~32% of CTGX’s business.  For the Q, the staffing business grew 23%, so not stupid high growth, but more like slightly dumb growth and that is fine because the business is rebounding.

The big revenue growth story remains their services business which grew 37% driven by an 86% jump in their EMR installations which is exactly what we want to see (though we’d like to see this this a little bit more).  In total, revenue was up 30% in the Q and 20% for the year and that is growth in which we can believe.

2.  Operating margins continue to climb as the mix shifts towards their high margin EMR business.  Operating margins went from 3.8% to 4.9% as CTGX gets more leverage than Gabourey Sidibe on a see saw opposite the late great He Ping Ping.  And this is really the story as they continue to shift their business to higher growth and higher profit verticals.

3.  Earnings were the most in over a decade:  Wow, just wow.  That must have been more of a lost decade than the 1990s (or 1980s or 2000s) for Josef Fritzl’s daughter.  CTGX earned $.16 per share so that puts them at a $.64 eps run rate and they are trading at ~18x that, so not all that cheap, but that assumes no growth, which is more unlikely than Qadaffi winning dictator of the year or the Fed not resorting to QE3.

4.  Guidance was solid, not great, but reasonably tempered.  Management guided to $365MM to $385MM revenue which is 13% growth at the midpoint and $.63 to $.73 eps which is 31% growth at the midpoint.  Not too fucking bad but given that EMR is just hitting the inflection point and staffing is expected to grow in the very low double digits, it is a bit underwhelming, like US Grant’s presidency or Cameron Diaz’s face.  As you all remember, Money McBags guessed they would earn ~$.75 per share next year but he assumed the current business would remain flat and that the growth would come from closing ~5 EMR deal a Q as this is supposedly the year when those deals heat up, so the fact that guidance is below Money McBags’ guess and includes 10%ish growth in the staffing business is a bit worrisome.  That said, guidance is still for ~30% eps growth, so the company is getting leverage and working.

5.  They continue to win EMR deals.  They closed four since Q3 and have six open RFPs where they are just waiting to hear back from clients (and hopefully the clients will like like them).  CTGX currently has 17 EMR projects underway with those four new ones so had 13 underway in Q4 and brought in ~$12MM in revenue from them so each one is ~$4MM in revenue a year.  On the call, management reiterated this by claiming that EMR deals are $4MM to $6MM annually in revenue which is twice what CTGX management told Money McBags a few yeas ago when he talked with them, so that is some interesting news.  Of course they were charging 40% below compeitors back then so hopefully they have raised their fucking prices, but still, $4MM to $6MM annually is twice what Money McBags had been using so shit, if they are really earning that, they should outperform Money McBags’ $.75 eps guess from before.

6.  They are still working on a bunch of other shit.  Every year it is the same BS about them launching fraud prevention software, data analytics whatever, and johnson rod measuring.  This all goes in one of Money McBags’ ears and out the other because they have yet to see shit from any of this.  So while Money McBags applauds their efforts, so far it’s delivered less value than a Flowbee.

7.  Kate Upton’s twitter account is spanktastic.  This has nothing to do with CTGX, but you can all admit it is important information.

8.  Their balance sheet remains solid with $15MM in cash (~$1 per share), $6.6MM cash flow from operations in Q4, no debt, and a 1MM share buyback program.  Money McBags loves clean balance sheets like this as if they were Alice Eve.

9.  There could be another huge Y2Kish type opportunity for them.  Money McBags needs an Ines Sainz assload more information about this but on the call a question was asked about ICD codes which apparently are used by doctors to classify diseases with the issue being that the US uses 9 digits and the rest of the world uses 10.  So if Money McBags understands correctly, by 2013 that shit has to all be standard and going from 9 digits to 10 isn’t that easy (and going from 10 to 12 makes you Antonio Alfonseca).  On the call they said it is a $12B to $30B opportunity though not clear how much of that is available to them or how the fuck they will get involved.  Definitely worth learning more about, just like Diane Kruger.

10.  They lost out on EMR deals for the first time ever.  This was the worst and most important part of the call and yet no one asked them questions about this.  Two deals they bid on went to competition and as far as Money Mcbags knows, they have the best reputation for service and the cheapest prices, so um, losing a deal is fucking troubling.  They gave no details as to what happened but this is a huge red flag.

11.  Legacy EMR projects are ending.  Projects typically last 2 years so the six projects they started in 2009 will start rolling off in Q2 2011 and thus the deals they just won are really just fucking filling in for projects ending.  That’s not great as they now need to accelerate growth even more to make up for projects falling off.

Valuation:

So what the fuck do we do?  The company is trading at ~16x their high end guidance and that guidance is for 16% top line growth and 38% eps growth, so a fairly reasonable valuation for a mostly low quality business.  The question is, can the pace of EMR wins accelerate and boost them above the high end of guidance, especially as this is apparently when EMR deals should be heating up.  Money McBags is hella concerned that they just lost deals for the first time because it could mean competition has finally come down to their pricing level or they don’t have as much of a service advantage as Money McBags thought.  So shit, there’s really not much to do here unless we can get some fucking clarity from management.

So CTGX managemt, if you’re reading this (and Money McBags knows you are, because wtf else would you be doing?  Fighting over thin mints?), Money McBags would like to know:

1.  Why did you lose your first EMR deals ever?

2.  Is it $2MM to $3MM per annum for an EMR deal or $4MM to $6MM?

3.  What is this ICD opportunity and should we care?

4.  How does Ziona Chana put up with 39 fucking wives living together? This isn’t relevant to CTGX, but really, it just seems mentally impossible.

5.  If this isn’t the inflection point for EMR when will it be and what will growth accelerate to because 13% topline growth in what should be one of your best years is less interesting than soccer.

Anyway, Money McBags wouldn’t be selling here, but he also wouldn’t be adding unless the stock drops more or he gets some clarity on the above questions.  He still likes the company and thinks there is upside, but he’s just not sure when that hits and how it will accelerate.

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