Q2 '22 Earnings Preview

CTG, Inc. (CTG) reports Q2 ’22 results next Thursday, August 4. We expect results to meet our estimates, which are slightly below consensus. We note that the consensus forecast is comprised of just one other set of estimates reflecting modest sequential growth versus our projection of a slight decline. Recall that CTG secured the largest digital solutions contract in its history last quarter, which we assume will support solid sequential growth in the North America IT Solutions and Services segment. However, we have taken a more conservative posture across the remaining segments to reflect the impact of one less billable day than in Q1 and the internalization of a client project in Europe. Moreover, fluctuations in foreign exchange rates during Q2 have further exacerbated the currency headwind seen in Q1. Considering these factors, we surmise revenue could be shy of consensus in Q2.

Exhibit I: Our Estimates Versus Consensus

Source: K. Liu & Company LLC; FactSet Estimates

More specifically, we project Q2 revenue of $87.4 million (-5.2% Y/Y), slightly below consensus of $89.9 million. By segment, we estimate North America IT Solutions and Services revenue of $22.4 million (+33.6% Y/Y), Europe IT Solutions and Services revenue of $40.0 million (-9.2% Y/Y), and Non-Strategic Technology Services revenue of $25.0 million (-20.4% Y/Y). Reflecting a higher mix of IT Solutions and Services revenue, we assume gross margin expands from 22.1% in the year-ago period to 23.0%. We also expect higher SG&A expenses on a sequential and Y/Y basis, resulting in our adjusted EBITDA and non-GAAP EPS estimates of $3.6 million and $0.12, respectively. We note that our margin expectations reflect a fair amount of conservatism, and we believe the higher consensus estimates are achievable.

Turning to the outlook, further strengthening of the U.S. dollar since CTG last reported combined with rising global economic uncertainty could prompt management to trim its prior revenue guidance slightly. As the impact of currency on the bottom line is naturally hedged, we believe management’s EPS guidance for the full year should remain intact. That said, we are also cognizant of the inflationary environment and would not be surprised if management were to take a more conservative stance on margins should its revenue targets ultimately move lower. Regardless, we remain comfortable with our modeling assumptions and thus maintain our price target of $13.00, which represents a FY ’22 EV/EBITDA multiple of 8x.

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.