MHH: Mastech Digital Reports Q2 Revenue Growth of 16% While Investing in D&A Staff Training

By Lisa Thompson

NYSE:MHH

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For Q2 2022, Mastech (NYSE:MHH) reported record revenues and improving total gross margin as both business lines continue to grow. Expenses were higher than we expected as the new head of the D&A business invested in employees to fill new contracts as well as in anticipation of new business. In the quarter approximately 60 new hires came on board but were not billable consultants as they were being trained. This training, which ranges from a few weeks to three months depending on expertise level, was expensed in cost of service bringing down gross margin on the D&A segment. If those consultants were billable, they could have brought in as much as $1.2 million in the quarter. As they are moved to clients, revenues and margins are expected to increase to more typical levels. This was a one-time large hire, and going forward we expect fewer consultants were be added per quarter in a steady state situation. The company also expects D&A will be able to move gross margins higher as the work it pursues are higher level strategic services which will provide an ROI to customers. D&A should be somewhat recession proof and its services typical save a client money as they implement a data modernization strategy.

The IT staffing continues strong with no sign of recession for Mastech. The company continues to grow its small India-based business which contributes higher margins. Despite observations that US job openings have fallen of late, this has not made hiring IT employees any easier for Mastech or anyone else.

We are tweaking EPS estimates for 2022 due to higher than expected short term spending which is expected to be somewhat negated by future cost savings on reorganized staffing. Mastech’s valuation remains well below its peers at 0.7 times EV to 2022 estimated revenues, growth should propel the stock closer to parity with its peers at 2.1xs. Even on a PE basis the stock is inexpensive at only 10.3 times 2023 non-GAAP EPS.

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