CTG Q3 '20 Earnings Preview
CTG, Inc. (CTG) reports Q3 ’20 results on Tuesday, October 20. Our estimates sit nominally below consensus, which includes just one other set of forecasts. As we stated in our update last month, “Highlights from Virtual Non-Deal Roadshow with CTG,” we believe our estimates may prove conservative. Recall that management’s initial Q3 commentary suggested both revenue and margins would moderate on a sequential basis due to seasonality, an ownership change at a large energy customer and the expiration of government reimbursement programs in Europe. We assume the usual decline in utilization during the summer months materialized, but we suspect the other considerations for the quarter may have been less than feared. As noted in our prior update, CTG remains engaged with the aforementioned energy customer. With respect to Europe, several countries in which CTG operates have already extended existing furlough schemes beyond the end of August expiration date and indicated support will remain in place into 2021. We therefore expect CTG’s Q3 results to meet or exceed Street expectations. Our price target remains $6.25 based on a FY ’21 EV/EBITDA multiple of 5x.
Our Q3 projections call for revenue of $83.9 million (-13.7% Y/Y) and non-GAAP EPS of $0.04, slightly below consensus of $84.2 million and $0.05. By segment, we project IT Solutions revenue of $30.0 million (-9.0% Y/Y) and IT Staffing revenue of $53.9 million (-16.2% Y/Y). We surmise our IT Solutions forecast leaves room for upside given the conservatism embedded for any potential changes to the company’s relationship with its large energy customer and strong demand for help desk services from the company’s healthcare customers. On the staffing side, we expect the ongoing pandemic and management’s efforts to reduce exposure to lower margin engagements to remain a headwind to growth. Given the potential for a higher mix of solutions than reflected in our model, as well as the extension of some government reimbursement programs in Europe, we remain comfortable with our gross margin assumption of 20.5%. Rounding out our assumptions for the quarter are $16.5 million in operating expenses and $2.2 million in adjusted EBITDA.
Aside from the Q3 performance, we expect investors to be attuned to any potential changes to CTG’s longstanding relationship with IBM, which accounts for over 20% of revenue and recently announced plans to spin-off the Managed Infrastructure Services unit within its Global Technology Services (GTS) division. While we believe much of CTG’s business is with IBM’s Systems group, a portion of the revenue has also come from the GTS division. We doubt management will have much to share at this juncture but the likely near-term impact, in our view, is a continuation of the short-term extensions of CTG’s current master services agreement with IBM. Ultimately, we expect CTG to maintain its relationships across both IBM and NewCo, and we remind investors that following IBM’s divestiture of its PC business to Lenovo, the associated revenues made Lenovo CTG’s second largest customer.
Our report with model and disclosures is available here.
Disclosure(s):
K. Liu & Company LLC has received compensation from CTG, Inc. (CTG) in the past 12 months for “Sponsored Research.”
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