Q3 '22 Earnings Preview

CTG, Inc. (CTG) reports Q3 ’22 results next Tuesday, November 8. We anticipate results generally in line with consensus, which are nominally below our projections. Considering an increasingly challenging macro backdrop and another decline in the EUR to USD exchange rate in Q3, we see some risk on the top line. Regardless, we surmise an increasing mix of higher margin North America IT Solutions and Services revenue coupled with disciplined expense management will enable CTG to meet or beat expectations on the bottom line. Looking forward, we believe the added headwinds from FX and potential elongation in sales cycles should be largely offset by the company’s recent acquisition of Eleviant Tech. As such, we expect management to narrow its prior revenue and non-GAAP EPS guidance ranges for FY ’22, albeit towards the lower end where we have already been modeling.

Exhibit I: Our Estimates Versus Consensus

Sources: K. Liu & Company; FactSet Estimates

For Q3, we project revenue of $78.4 million (-13.4% Y/Y), slightly above consensus of $78.2 million. By segment, we estimate North America IT Solutions and Services revenue of $20.5 million (-3.5% Y/Y), Europe IT Solutions and Services revenue of $34.7 million (-11.6% Y/Y), and Non-Strategic Technology Services revenue of $23.3 million (-22.8% Y/Y). Reflecting a higher mix of IT Solutions and Services revenue, we assume gross margin expands from 22.4% in the year-ago period to 24.2%. We also expect SG&A expenses to decline versus last year while remaining relatively flattish from Q2. Our adjusted EBITDA and non-GAAP EPS estimates of $3.8 million and $0.13, respectively, sit slightly above consensus of $3.7 million and $0.12.

As for guidance, we believe the combination of ongoing FX headwinds and protracted decision making on deals in the pipeline is likely to prompt a narrowing of guidance towards the lower of management’s prior outlook for $330-$350 million in revenue and $0.58-$0.63 in non-GAAP EPS guidance. Of course, the acquisition of Eleviant Tech, which is expected to add $10 million in revenue on an annual basis and be immediately accretive to non-GAAP EPS, will provide a modest benefit in Q4. More importantly, Eleviant Tech should not only bolster revenue in 2023 but also aid in achieving management’s targeted 7%-8% adjusted EBITDA margin by the end of next year. Our price target remains $10.50 based on a FY ’23 EV/EBITDA multiple of 6x.

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.”

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.