Acquires Eleviant Tech to Accelerate Digital Transformation Strategy
Late last week, CTG, Inc. (CTG) announced the acquisition of Eleviant Tech, a privately-held IT solutions and services company with a similar focus on accelerating its customers’ digital transformation initiatives. We believe the acquisition expands CTG’s capabilities in areas such as cloud migration, mobile and web application development and testing, and robotic process automation (RPA), while adding to its expertise in emerging technologies like artificial intelligence (AI), machine learning (ML) and blockchain. The acquisition also brings CTG a portfolio of software-as-a-service (SaaS) applications, including PeopleOne, an intranet solution; vChat, a platform for building chatbots; vBots, purpose-built bots to automate business workflows; vReport, a business intelligence dashboard solution; and vSales, a sales enablement tool. Although the bulk of Eleviant’s revenues at present are derived from services, the SaaS solutions support a growing subscription revenue base that we expect will see greater investments in sales and marketing as part of CTG. In terms of headcount, Eleviant adds approximately 300 employees, most of whom are software engineers. The acquisition also expands CTG’s global footprint to include two service delivery centers in Chennai and Coimbatore, India and one in Dallas, TX.
As for the numbers, CTG acquired Eleviant for a total purchase price of $18.6 million, comprised of $17.4 million in cash, $1.2 million in common stock and 200,000 stock options. CTG financed the acquisition with cash on hand and its revolving credit facility. Eleviant is expected to add approximately $10 million in annualized revenue and be immediately accretive on a non-GAAP basis. Importantly, we believe Eleviant has exhibited strong growth in excess of 20% over the past three years and boasts both gross and EBITDA margins well above CTG’s, all of which should continue post-acquisition. From a valuation perspective, this implies CTG paid 1.9x sales and likely a low double-digit EV/EBITDA multiple. We believe these multiples are fair given Eleviant’s growth rate and margins but surmise investors will also wonder if CTG’s shares are the better buy at 0.2x sales and less than 4x EBITDA.
Given the timing of the acquisition, we are leaving our estimates unchanged at this juncture and will update our model once the company reports its Q3 ’22 results. All else equal, however, we would expect our FY ’23 revenue projection to increase by $10.0 million to $343.4 million and our adjusted EBITDA estimate to increase from $20.5 million to $22.0 million. On the whole, we like the acquisition as it accelerates CTG’s own transformation from a staffing to solutions company, bolsters the company’s growth and margin profile and provides an avenue to further reduce service delivery costs over time. Our price target remains $10.50 based on a FY ’23 EV/EBITDA multiple of 6x.
Our model with report 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.”
Sponsored Research produced by the firm is paid for by the subject company in the form of an initial retainer and a recurring monthly fee. The analysis and recommendations in our Sponsored Research reports are derived from the same process and methodologies utilized in all of our research reports whether sponsored or not. The subject company does not review any aspect of our Sponsored Research reports prior to publication.