Q4 '22 Earnings Preview

CTG, Inc. (CTG) reports Q4 ’22 results on Thursday, February 23. Our estimates are generally consistent with consensus and skew toward the lower end of management’s implied Q4 guidance. Much like the results to date in FY ’22, we expect revenue growth to remain challenged by FX headwinds, CTG’s disengagement from non-core staffing services and the uncertain macroeconomic environment, which has elongated sales cycles. We also remind investors that last year’s Q4 included a large Epic implementation go-live engagement that will make for an especially difficult comp on the top line. That said, our focus remains on margins, which we expect to hold steady in Q4 and expand significantly in FY ’23.

Exhibit I: Our Estimates Versus Consensus

Sources: K. Liu & Company LLC; FactSet Estimates

Our Q4 estimates include revenue of $77.5 million (-31% Y/Y), slightly above consensus of $76.2 million. By segment, we estimate North America IT Solutions and Services revenue of $23.0 million (-49% Y/Y), Europe IT Solutions and Services revenue of $33.4 million (-17% Y/Y), and Non-Strategic Technology Services revenue of $21.1 million (-23% Y/Y). Reflecting the acquisition of Eleviant and a higher mix of IT Solutions and Services revenue, we assume gross margin expands both sequentially and Y/Y to 25.3%. We also model an increase in SG&A expenses as the company continues to invest in new business development initiatives and to drive increased adoption of Eleviant’s SaaS solutions. Our adjusted EBITDA and non-GAAP EPS estimates of $3.9 million and $0.11, respectively, are generally in line with consensus.

Turning to guidance, we remain comfortable with CTG’s ability to exit FY ‘23 with an adjusted EBITDA margin near management’s 7% target despite lingering recession concerns. Recall that in November 2022, CTG announced new leadership in Europe, which we view as a prelude to a concerted effort to narrow the margin gap between the North America and Europe IT Solutions and Services segments. We surmise this will entail both reducing exposure to lower margin non-core services, albeit to a much lesser extent than seen in the Non-Strategic Technology Services segment, and leveraging the company’s recently acquired off-shore service delivery centers in India. In short, we expect guidance for another year in which revenue declines but margins expand. Worth noting, we believe a return to revenue growth is plausible by year-end. Our price target remains $9.25 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.