Q2 '23 Earnings Preview

CTG, Inc. (CTG) reports Q2 ’23 results on Wednesday, August 9. We expect the results to meet our estimates, which are generally consistent with consensus. Where we would hedge somewhat is on the revenue line, specifically CTG’s Non-Strategic Technology Services segment. Given the uncertain macro conditions that have persisted thus far in the year, demand for IT and other staffing services has waned as enterprises have pared back hiring and spending plans. The softer demand environment coupled with CTG’s own desire to disengage from non-core staffing services may present a headwind on the top line, but we believe the impact to profitability should be nominal considering the low contribution margin associated with staffing. Recall also that CTG secured a significant healthcare win in Q1 and continues to work towards passing along indexed wage increases in its Europe IT Solutions segment. We believe progress on these fronts will allow for continued margin expansion in Q2. Looking to the latter half of the year, many software and IT services vendors have indicated that sales cycles for new projects remain elongated. We therefore assume CTG will once again narrow its FY ’23 guidance ranges, perhaps bringing the revenue midpoint closer to our estimates and consensus, which currently skew towards the lower end of management’s targets. Our price target remains $8.25 based on a FY ’23 EV/EBITDA multiple of 6x.  

Exhibit I: Our Estimates Versus Consensus

Sources: K. Liu & Company LLC; FactSet Estimates

We project Q2 revenue of $78.4 million, comprised of North America IT Solutions and Services revenue of $24.6 million, Europe IT Solutions and Services revenue of $40.3 million, and Non-Strategic Technology Services revenue of $13.4 million. Consensus calls for revenue of $78.7 million. We assume gross margin expands from 23.9% last year to 26.8% in Q2 ’23 due to the increasing mix of IT Solutions and Services revenue. Considering CTG’s accelerated pace of hiring to start the year, we expect SG&A expenses to moderate sequentially but remain well above year-ago levels. We estimate adjusted EBITDA and non-GAAP EPS of $4.3 million and $0.15, respectively, slightly above consensus of $4.1 million and $0.14. For FY ’23, we surmise management is likely to narrow its revenue and non-GAAP EPS guidance ranges, which currently call for $310-$340 million and $0.56-$0.64, respectively. We note that both our top line estimate and the Street’s currently sit near the low-end of guidance, while the corresponding earnings expectations reflect the midpoint.

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.”

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