Press Release: CTG Margins Expand in Third Quarter 2022 with Continued Transformation into Digital Solutions and Services Business
Nov 8, 2022
Improved mix of business as a result of digital transformation strategy drove gross margin expansion of 190 basis points to 24.3% on revenue of $75.0 million.
Revenue relatively unchanged year-over-year on a constant currency basis and excluding intentional disengagement of lower margin Non-Strategic Technology Services business.
North America and Europe IT Solutions and Services segments revenue increased on a constant currency basis and considering the impact in the prior year of the large training, implementation, and support engagement for a health system in North America.
North America and Europe IT Solutions and Services segments delivered combined gross margin of 29.1%, an increase of 130 basis points from the prior year.
Operating margin was 3.0%; non-GAAP operating margin expanded 70 basis points to 4.0%.
Achieved net income of $1.1 million; Adjusted EBITDA increased 2.1% to $3.8 million with a 100 basis points improvement in margin to 5.1%.
Generated $9.7 million of cash from operations in the quarter and $12.5 million year-to-date; free cash flow was $6.7 million year-to-date.
Eleviant acquisition accelerates strategy and portfolio innovation, while adding significantly higher margins.
BUFFALO, N.Y., November 8, 2022—CTG (Nasdaq: CTG) (“Company”), a leader in North America and Western Europe helping companies employ digital IT solutions and services to drive their productivity and profitability, today reported its financial results for the third quarter ended September 30, 2022.
Filip Gydé, CTG President and CEO commented, “We believe our results continue to validate the effectiveness of our strategy to evolve into a digital solutions and services focused business with solid margin expansion against revenue headwinds. Our strategy is delivering an improved mix of digital IT solutions while reducing lower-margin, non-core business. Our gross margin expanded 190 basis points year-over-year and 40 basis points sequentially, and gross margin for our North America and Europe IT Solutions and Services segments was a combined 29.1%. We continued to strengthen our business and disengaged from $8.8 million of non-strategic staffing business in the quarter.”
Mr. Gydé added, “We are excited to add Eleviant, which we acquired at the end of the quarter on September 29, 2022, to our solutions team. A compelling addition, Eleviant further advances our strategy of transformation into a higher value digital IT solutions provider. Eleviant provides strong offerings in AI, machine learning, and intelligent automation while complementing many of our other solutions and services. With the addition of established talent in India gained with the acquisition, we have increased capacity and added greater flexibility and agility to our global delivery network. From a financial perspective, Eleviant provides approximately $10 million of incremental annual revenue and given its industry-leading margin profile, is immediately accretive to EBITDA margin. We expect to leverage the capabilities of our growing global team of associates to drive sales synergies and deliver even greater value for our clients.”
Excluding the $5.7 million negative impact to revenue due to changes in foreign currency exchange rates and $8.8 million related to the disengagement from lower-margin non-strategic technology services business, revenue was down approximately 1%. Last year’s third quarter also benefited from the initial ramp up of a major engagement in North America.
Selling, general and administrative (SG&A) expenses declined 9.2% to $16.0 million reflecting strong cost discipline even as the Company continues to make investments in organic growth. As a percentage of sales, SG&A increased 190 basis points due to reduced operating leverage.
The effective tax rate was elevated in the quarter at 40.8% due to a reversal of deductions previously taken in a foreign jurisdiction.
North America IT Solutions and Services gross margin expanded 370 basis points, despite lower revenue, given the improved mix of digital solutions. Lower revenue was the result of the current macroeconomic climate, which has slowed clients’ decision-making process for IT solutions and services. In addition, the prior-year third quarter realized the benefits of a substantial project that began ramping up in that quarter and was completed during the fourth quarter of 2021.
On a constant currency basis, Europe IT Solutions and Services segment was relatively flat compared with the prior-year period even as macro-economic conditions presented headwinds in the European Union, particularly around labor constraints. Unfavorable foreign currency exchange rate fluctuations had a $5.7 million impact on revenue.
Contribution margin held relatively steady despite the revenue decline reflecting strong cost discipline.
Non-Strategic Technology Services segment margins have improved as the Company selectively disengages from its lowest margin business.
Balance Sheet and Cash Flow
Cash and cash equivalents were $26.8 million, compared with $35.6 million at year-end 2021. The purchase price of Eleviant included $17.4 million in cash at closing. Net cash provided by operations was $12.5 million for the year-to-date period. At quarter-end, the Company had no outstanding balance on its revolving line of credit facility or any other long-term debt. Days sales outstanding were 83 in the third quarter of 2022 compared with 82 in the prior-year period.
Successfully Executing on Strategy
CTG is a catalyst for digital transformation, helping IT and business leaders accelerate their effort to integrate digital technology into all areas of their operations to improve productivity, strengthen business processes, elevate internal controls, and deliver a higher value proposition to their customers. CTG’s strategy for growth is to transform into a higher performing, digital solutions based business. The three key elements of its strategy are to:
Become a larger, more relevant global provider of digital IT solutions by capitalizing on the compelling trend of digital transformation, leverage the CTG brand built on reliability and results, and deliver solutions primarily to the energy, healthcare, finance, and manufacturing sectors.
Expand the team organically by adding highly qualified and experienced associates and employing innovative tools and methodologies, and by making selective acquisitions.
Strengthen its margin profile both by the mix of business and by reducing delivery costs including the disengagement from low margin IT staffing service support in its Non-Strategic Technology Services segment.
John M. Laubacker, Chief Financial Officer, said, “We continue to be impacted by a range of macroeconomic headwinds as well as business-specific challenges. These include the foreign currency translation impacts resulting from the significantly devalued Euro in the first three quarters of 2022. Additionally, the recent increase in the competition for resources in Europe is creating labor constraints in meeting client demand. Finally, the macroeconomic climate in both North America and Europe has slowed our clients’ decision-making process for IT solutions and services. As we mentioned in our first quarter release, we expected quarterly performance at the outset of 2022 to be uneven due to engagement timing, and we now expect that to continue for the rest of the year. As a result, we are adjusting our revenue for 2022 to range from $320 million to $330 million which includes a reduction of approximately $30 million from the prior year as a result of the intentional disengagement from the lowest margin business in our Non-Strategic Technology Services segment, $20 million from foreign currency exchange impacts, and a significant expected reduction in fourth quarter 2022 revenue compared with the prior year due to the completion of a large project in 2021.”
“Despite the top-line decrease and challenging macroeconomic headwinds, we expect our operating margins for the year to improve over the prior year given the positive ongoing changes to our business mix, and the lower revenue will be offset in part by these improving operating margins. We now expect 2022 GAAP diluted earnings per share to range from $0.42 to $0.48, and non-GAAP diluted earnings per share to range from $0.52 to $0.58. Our long-range goal remains unchanged as we drive our adjusted EBITDA margins to approximately 7%* by the end of 2023.”
*The corresponding GAAP measure to adjusted EBITDA is net income. The Company is not providing forward looking net income guidance given the significant effort and assumptions involved in measuring net income. The GAAP to non-GAAP tables below include net income to adjusted EBITDA displayed on historical results for the past five quarters and the trailing twelve months ended September 30, 2022.
Conference Call and Webcast
CTG will hold a conference call today, November 8, at 11:00 a.m. Eastern Time to discuss the Company’s financial results and business outlook. To access the live call, dial +1 877 704 4453. The conference call will also be available via webcast in the Investors section of CTG’s website at www.ctg.com.
A telephonic replay will be available from 2:00 p.m. ET on the day of the call through Tuesday, November 15, 2022, by dialing +1 844 512 2921 and entering the access code 13733214. The webcast will also be archived on CTG’s website in the Events & Presentations section for at least 90 days following completion of the live conference call. A transcript will also be posted to the website once available.
CTG is a leading provider of digital transformation solutions and services that accelerate clients’ project momentum and achievement of their desired IT and business outcomes. We have earned a reputation as a faster and more reliable, results-driven partner focused on the integration of digital technology into all areas of its clients to improve their operations and increase their value proposition. CTG’s engagement in the digital transformation process drives improved data-driven decision making, meaningful business performance improvements, new and enhanced customer experiences, and continuous innovation. CTG has operations in North America, South America, Western Europe, and India. The Company regularly posts news and other important information at www.ctg.com.
Reconciliation of GAAP to non-GAAP Information
The Company has referenced non-GAAP information in this news release. The Company believes that the use of non-GAAP financial information provides useful information to investors and management to gain an overall understanding of its current financial performance and prospects. In addition, management uses non-GAAP financial measures for forecasting, facilitating ongoing operating decisions, and measuring the Company’s overall performance. The Company believes that these non-GAAP measures align closely with its internal measurement processes and are reflective of the Company’s core operating results.
A reconciliation of GAAP to non-GAAP information is included in the financial tables below. The non-GAAP financial information is presented using a consistent methodology from quarter-to-quarter and year-to-year. These measures should be considered in addition to results prepared in accordance with GAAP. Also, these non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles. The Company believes that non-GAAP financial measures have limitations in that they do not reflect all amounts associated with the Company's results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate the Company's results of operations in conjunction with the corresponding GAAP financial measures. As such, the non-GAAP financial measures disclosed by the Company should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP, and reconciliations between GAAP and non-GAAP financial measures included in this earnings release should be carefully evaluated.
This document contains certain forward-looking statements concerning the Company's current expectations as to future growth, financial outlook, business strategy and performance expectations for 2022 and beyond and statements related to cost control, new business opportunities, financial performance, market demand, and other attributes of the Company, which are protected as forward-looking statements under the Private Securities Litigation Reform Act of 1995. Generally, the words “anticipates,” “believes,” “expects,” “plans,” “may,” “will,” “might,” “would,” “should,” “could,” “seeks,” “estimates,” “project,” “predict,” “potential,” “currently,” “continue,” “intends,” “outlook,” “forecasts,” “target,” and other similar words identify forward-looking statements. These statements are based upon the Company's current expectations and assumptions, a review of industry reports, current business conditions in the areas where the Company does business, feedback from existing and potential new clients, a review of current and proposed legislation and governmental regulations that may affect the Company and/or its clients, and other future events or circumstances. Actual results could differ materially from the outlook guidance, expectations, and other forward-looking statements as a result of a number of factors and risks, including among others, any new or continuing regulatory, social and business responses to the COVID-19 pandemic, or the potential impacts of any similar items on the Company’s business, operations, employees, contractors and clients, and the potential impacts of any similar future public health crisis, pandemic, or epidemic, the availability to the Company of qualified professional staff, currency exchange risks, domestic and foreign industry competition for clients and talent, increased bargaining power of large clients, the Company's ability to protect confidential client data, the partial or complete loss of the revenue the Company generates from International Business Machines Corporation (IBM), the ability to integrate businesses when acquired and retain their clients while achieving cost reduction targets, the uncertainty of clients' implementations of cost reduction projects, the effect of healthcare reform and initiatives, the mix of work between solutions and services and non-strategic technology services, risks associated with operating in foreign jurisdictions, renegotiations, nullification, or breaches of contracts with clients, vendors, subcontractors or other parties, current macroeconomic conditions such as inflation, the change in valuation of capitalized software balances, the impact of current and future laws and government regulation, as well as repeal or modification of such, affecting the information technology (IT) solutions and services and staffing industry, taxes and the Company's operations in particular, industry, economic and political conditions, including fluctuations in demand for IT services, consolidation among the Company's competitors or clients, the need to supplement or change our IT services in response to new offerings in the industry or changes in client requirements for IT products and solutions, actions of activist shareholders, and other risks with domestic and foreign operations including uncertainty and business interruptions resulting from political changes and actions in the U.S. and abroad, such as the current conflict between Russia and the Ukraine, and volatility in the global credit and financial markets and economy, and other factors that involve risk and uncertainty including those listed in the Company's reports filed with the Securities and Exchange Commission. Such forward-looking statements should be read in conjunction with the Company's disclosures set forth in the Company's Form 10-K for the year ended December 31, 2021, including the uncertainties described in the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections and other reports, including but not limited to subsequent quarterly reports on Form 10-Q, that may be filed from time to time with the Securities and Exchange Commission and may be obtained through the Securities and Exchange Commission's Electronic Data Gathering and Analysis Retrieval System ("EDGAR") at www.sec.gov.The Company assumes no obligation to update the forward-looking information contained in this release.
Contacts: John M. Laubacker Chief Financial Officer and Treasurer Tel: +1 716 887 7368
Executive Vice President, Chief Financial Officer, and Treasurer
John Laubacker was appointed Executive Vice President, Chief Financial Officer, and Treasurer in May 2018. Previously he was Senior Vice President and Chief Financial Officer since April 2017, and before that he was Vice President and Treasurer since February 2017, Treasurer since 2006, and served as interim CFO from October 2014 to April 2015. John joined CTG in 1996.