Q2 '21 Earnings Preview
CTG, Inc. (CTG) reports Q2 ’21 results on Thursday, July 29. We expect the company’s results to meet our estimates, which largely mirror the consensus. Underlying our model are expectations for another quarter of double-digit growth in the IT Solutions segment as management continues to transition the business away from lower margin Staffing engagements and as enterprises invest further in digital transformation initiatives. From a profitability standpoint, we expect further expansion in gross margin as the revenue mix increasingly skews towards solutions, but we believe the flow through to both adjusted EBITDA and earnings will be somewhat limited by higher expenses to support CTG’s transformation. As for the near-term outlook, we assume management will again provide more directional guidance for revenue per billable day as opposed to issuing specific top and bottom line targets. We think an outlook for relatively flattish revenue per billable day in Q3 is a reasonable expectation in this regard, and we believe management will also reiterate its prior commentary for solid growth in FY ‘21. Our price target remains $11.00 based on a FY ’21 EV/EBITDA multiple of 8x.
Exhibit I: Our Estimates Versus Consensus
Our Q2 estimates for revenue of $93.7 million, adjusted EBITDA of $3.8 million and non-GAAP EPS of $0.12 are generally consistent with consensus expectations for $94.1 million, $3.8 million and $0.12, respectively. Recall that management previously guided for revenue per billable day to remain relatively steady with Q1 levels, implying revenue of approximately $94.0 million. By segment, we anticipate another quarter of double-digit growth in IT Solutions revenue to $41.4 million (+11.4% Y/Y) and relatively flattish IT Staffing revenue of $52.3 million (+0.6% Y/Y). Given our assumption for IT Solutions to comprise 44% of sales versus 42% in the prior year period, we are modeling 70 basis points of gross margin expansion to 21.7%. With CTG investing to support its long-term growth initiatives, however, we expect the expansion in gross margin to be offset by higher operating expenses, resulting in adjusted EBITDA of $3.8 million versus $4.0 million last year. Our non-GAAP EPS of $0.12 reflects a $0.02 increase from Q2 ’20 due to a lower assumed tax rate. Beyond Q2, we are modeling a modest step up in revenue per billable day in Q3 before more meaningful gains exiting the year as the demand environment gradually recovers from the depths of the pandemic.
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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