CTG, Inc. Q4 '19 Earnings Preview
CTG, Inc. (CTG) reports Q4 ’19 results before the market opens on Tuesday, February 25. We expect results at least in line with our estimates, which sit near the lower end of management’s implied guidance. Specifically, we project revenue of $96.1 million, adjusted EBITDA of $2.9 million and non-GAAP EPS of $0.07. We note that our estimates also represent the consensus. Management’s FY ’19 guidance calls for revenue of $390.0-$400.0 million and non-GAAP EPS of $0.33-$0.39, implying Q4 revenue of $95.2-$105.2 million and non-GAAP EPS of $0.06-$0.12.
As for the assumptions underlying our Q4 estimates, we project IT Solutions revenue of $33.6 million (+12.1% Y/Y) and IT Staffing revenue of $62.6 million (-1.0% Y/Y). Considering that our forecast for the higher margin solutions business implies only a modest sequential increase from the seasonally slower Q3, any upside on the top line relative to our model is more likely to materialize here. With respect to the anticipated decline in staffing, recall that CTG opted to walk away from a non-core staffing client last quarter and subsequently reduced the high-end of its revenue guidance. We assume gross margin remains relatively stable versus the prior quarter and year at 19.0% and model a slight sequential increase in operating expenses.
With respect to guidance, we believe management’s willingness to forgo a low margin staffing engagement is not an isolated incident, and we anticipate similar decisions may be made over the coming quarters as CTG emphasizes higher margin solutions growth to ensure sustainable earnings expansion over the long-term. As such, our model reflects flattish revenues of $391.9 million in FY ’20, an increase in adjusted EBITDA to $13.5 million and a penny increase in non-GAAP EPS to $0.35. We remain comfortable with our estimates and would not be surprised to see management’s initial outlook for the year reflect a low single-digit decline to a low single-digit increase in revenue with earnings in line to better than our current forecast.
Aside from the print and guide, our focus will be on CTG’s success in securing new solutions engagements across its core Application Advantage, Enterprise Information Advantage and Testing services, particularly in the healthcare vertical. CTG’s ability to sustain strong growth in Europe amidst softer economic conditions is also top of mind. In the staffing business, we will be attuned to any traction the company has had in converting clients to managed services relationships as well as further insight into the magnitude of lower margin engagements that may be considered non-core. Finally, any update related to Assurance Global Services’ (AGS) enhanced offer to acquire CTG for $7.00 per share in cash is obviously of interest. On that note, we reiterate our view that CTG provides investors with multiple paths to upside, which combined with the stock trading at a discount to both AGS’ bid and CTG’s peer group, makes for a compelling risk-reward proposition. Our price target remains $8.00 based on a FY ’20 EV/EBITDA multiple of approximately 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.”
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