Q1 '23 Earnings Preview

CTG, Inc. (CTG) reports Q1 ’23 results next Tuesday, May 9. We expect the results to meet our estimates, which sit below consensus. We note that the higher consensus forecast is comprised of just one other set of estimates that reflects a quarterly progression akin to last year’s and thus skews higher for Q1. As management indicated earlier this year, however, indexed wage increases in CTG’s European business are expected to weigh on pipeline conversion and margins until the higher costs are accepted by clients. With this in mind, we believe Q1 should mark the trough in revenue and profitability for FY ’23 followed by gradual improvement in Q2 and a more significant step-up in growth and margin expansion during the latter half of the year.  

Exhibit I: Our Estimates Versus Consensus

Sources: K. Liu & Company LLC; FactSet Estimates

For Q1, we project revenue of $75.5 million, comprised of North America IT Solutions and Services revenue of $25.0 million, Europe IT Solutions and Services revenue of $35.2 million, and Non-Strategic Technology Services revenue of $15.4 million. We assume gross margin expands from 23.0% last year to 26.8% in Q1 ’23 due to a higher mix of IT Solutions and Services revenue and contribution from the acquisition of Eleviant. We suspect our gross margin assumption could prove conservative considering the inclusion of Eleviant elevated gross margin in North America to nearly 44% last quarter versus our 39% estimate for Q1. We expect SG&A expenses to increase both sequentially and Y/Y driven by investments to support growth and the kick-off of an ERP system implementation project. We estimate adjusted EBITDA and non-GAAP EPS of $3.3 million and $0.10, respectively.

As for guidance, we surmise a narrowing of management’s prior FY ’23 outlook for $300-$350 million in revenue and $0.56-$0.68 in non-GAAP EPS is the likely scenario. Considering that ongoing macro uncertainty and the aforementioned indexed wage increases in Europe may have delayed some new project starts, simply maintaining the midpoint of prior guidance would be positive, in our view, while a slight decrease is the more probable outcome. Regardless, we note that both our estimates and consensus for FY ‘23 already sit slightly below the midpoint of management’s guidance and remain readily achievable from our perspective. Our price target remains $9.50 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.