CTG Q2 '20 Earnings Preview
CTG, Inc. (CTG) reports Q2 ’20 results on Tuesday, July 21. While we expect growth to be challenged amidst the ongoing COVID-19 crisis, we believe our estimates for the quarter, which also represent the consensus, adequately reflect the headwinds experienced. We therefore anticipate Q2 results consistent with, if not slightly better than, our projections. Similar to last quarter, the uncertainty arising from the pandemic is likely to preclude management from issuing formal guidance. However, we think commentary pertaining to RFP activity and CTG’s efforts to open a new service delivery center should be positive and point to better days ahead. Our price target remains $6.00 based on a FY ’21 EV/EBITDA multiple of 5x.
Recall that CTG’s Q1 results were only nominally affected by the COVID-19 pandemic. In early April, the company enacted a full furlough affecting a limited number of billable employees and a 20% furlough for all other non-billable employees. We believe these furloughs were in place throughout Q2 but more importantly, we are unaware of any further actions taken by the company. Thus, we remain comfortable with our prior Q2 projections, which include revenue of $85.3 million (-15.0% Y/Y), adjusted EBITDA of $2.0 million and non-GAAP EPS of $0.04. Underlying our assumptions are a 17.7% Y/Y decline in IT Solutions revenue to $29.3 million and a 13.6% Y/Y decline in IT Staffing revenue to $56.0 million. We model lower gross margin on a sequential basis and flattish operating expenses, both of which may prove conservative considering our assumption of a higher mix of IT Solutions revenue relative to Q1 and the furloughs in place for Q2. Furthermore, we note that CTG completed the sale of its headquarters in June for $2.5 million, which is not reflected in our model but should contribute an additional $0.6 million to the bottom line.
In regards to the outlook, we surmise the resurgence in COVID-19 cases throughout parts of the U.S. will again limit management’s willingness to put forth any guidance. That said, CTG’s recent hiring of Brett Hunt to lead its North American Solutions business coupled with the opening of a new delivery center in Columbia suggest that opportunities for growth remain in the pipeline and clients remain receptive to remote delivery of services. In particular, we believe interest in outsourced application management and service desk offerings have increased of late, helping to offset a more difficult demand environment for staffing, systems implementation and optimization services. As such, we remain optimistic that the combination of an expanding sales force and growing pipeline support our expectations for an improving growth trajectory over the coming quarters.
Our report with model and disclosures is available here.
Disclosure(s):
K. Liu & Company LLC (“the firm”) receives or intends to seek compensation from the companies covered in its research reports. The firm has received compensation from CTG, Inc. (CTG) in the past 12 months for “Sponsored Research.”
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