Press Release: CTG IT Solutions and Services Segments Deliver Gross Margin of 31.8% for Fourth Quarter 2022
Feb 23, 2023
Within IT Solutions and Services segments, an area of focus is Software Engineering, where revenue totaled more than $100 million for 2022, and fourth quarter gross margins exceeded 34%
Consolidated operating margin was 3.1% in the fourth quarter; non-GAAP operating margin expanded 30 basis points to 5.1%
Achieved fourth quarter net income of $1.2 million with a net margin of 1.6%; Adjusted EBITDA was $4.8 million with a margin of 6.2%, up 40 basis points
Remain on track to achieve goal of approximately 7% Adjusted EBITDA margin by year end 2023
Full year 2022 revenue was $325.1 million with gross margin of 24.6%, net margin of 2.0%, Adjusted EBITDA margin of 5.3%, up 70 basis points, and diluted earnings per share of $0.44; non-GAAP EPS was $0.56
$11.9 million of cash provided from operations in 2022
BUFFALO, N.Y., February 23, 2023—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 fourth quarter and full year ended December 31, 2022. Results include the first full quarter of Eleviant Technologies (Eleviant), which was acquired by CTG on September 29, 2022.
Filip Gydé, CTG President and CEO commented, “We are very excited about the momentum we have underway, with strong fourth quarter results that reflect an improved mix of digital IT solutions in both North America and Europe. Our fourth quarter gross margin from our IT Solutions and Services segments expanded 590 basis points to 31.8%, our highest level in recent years. Our fourth quarter North America IT Solutions and Services segment achieved gross margins of 43.9%, up from 29.4% a year ago, resulting from the increasing mix of our business toward digital solutions and driving the expansion in our adjusted EBITDA margins.”
Mr. Gydé added, “The acquisition of Eleviant is exceeding our expectations and accelerating our strategy. We look forward to further leveraging our new digital IT capabilities and increased global delivery capacity, flexibility and agility to deliver improving results as we work to achieve our 2023 goals. We began our journey to transform away from providing IT staffing services and into an IT solutions provider in 2018, and later added a digital focus in 2021. We are excited as we journey toward the completion of the first phase of our transformation and the upside on profitability which that represents. To date, we have made significant progress in all segments of our business and are finalizing our goals and objectives for the future. In the near term, we look forward to sharing our expectations for further improving operating results during the second phase of our transformation.”
The change in revenue reflects last year’s fourth quarter benefiting more than $25 million from a major health system engagement in North America, and $9.3 million related to the intentional disengagement from lower-margin non-strategic technology services business.
Selling, general and administrative (SG&A) expenses declined 4.1% to $19.1 million reflecting cost discipline while continuing to invest in business development and related resources. As a percentage of revenue, SG&A increased 680 basis points due to reduced operating leverage given the significant prior-year project.
Included in GAAP net income was $0.5 million of severance and $0.4 million of acquisition-related expenses while the prior-year period included a $5.1 million reversal of a valuation allowance against deferred tax assets in the United States and $0.2 million of acquisition expenses. Earnings per diluted share were $0.08 for the fourth quarter of 2022 compared with $0.58 for the fourth quarter of 2021. Excluding the atypical expenses from both periods, non-GAAP earnings per diluted share for the fourth quarter were $0.14 in 2022 compared with $0.25 in 2021.
The 2021 fourth quarter revenue included more than $25 million for a large training, implementation, and support engagement for a health system in North America that did not repeat in 2022. The 2022 fourth quarter results for our North America segment include Eleviant, the company we acquired at the end of the 2022 third quarter.
Segment margins saw substantial expansion, despite lower revenue, given the improved mix of digital solutions and contribution from Eleviant.
Segment margins benefited from improved utilization, strategic pricing and greater mix of digital solutions.
Non-Strategic Technology Services segment margins improved as the Company selectively disengages from its lowest margin business.
The full year results reflect similar impacts in the fourth quarter as the Company continued to shift its revenue mix to more solutions and services-based business. In 2022, the Company intentionally disengaged from $30.3 million from its lower-margin non-strategic technology services business, while the Company intentionally disengaged from $21.9 million in 2021.
SG&A expense as a percentage of revenue was 21.2% in 2022 compared with 18.8% in 2021. Included was $2.0 million of acquisition-related expenses and $0.8 million in severance, compared with $1.1 million of acquisition-related expenses and $0.2 million of rebranding expenses in 2021.
Balance Sheet and Cash Flow
Cash and cash equivalents were $25.1 million compared with $35.6 million at year-end 2021. The Company used $17.4 million of cash for the acquisition of Eleviant at the end of the third quarter. Net cash provided by operations was $11.9 million for 2022.
At year-end, the Company had no outstanding balance on its revolving line of credit facility or any other long-term debt. Days sales outstanding were 84 in the fourth quarter of 2022 compared with 67 in the prior-year period, which benefited from the large North America project.
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 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.
Fiscal 2023 Outlook
John M. Laubacker, Chief Financial Officer, said, “As demonstrated this past year, we are making strong progress executing our strategy and we expect it to continue in 2023. Our revenue outlook for 2023 includes a reduction of $35 million to $40 million from the prior year as a result of the intentional disengagement from the lowest margin business in our Non-Strategic Technology Services segment, slightly offset by a full year of revenue from Eleviant, which only contributed one quarter of revenue in 2022 as the acquisition was completed at the end of September. Ultimately, notwithstanding macroeconomic challenges and top-line pressure, we continue to expect to expand our margins and reach our adjusted EBITDA margin* goal of approximately 7% by the end of 2023. Looking ahead, we expect our prudent investment in business development resources will yield additional revenue and operating profits in the future.”
Mr. Laubacker added, “We are kicking off an Enterprise Resource Planning (ERP) system implementation which we expect to enhance our core operating systems in order to create additional efficiencies, capabilities and flexibility. The total project cost is estimated at $8 million to $10 million and will be largely spread out over a two-year period, with a completion date targeted around the end of 2024. A significant portion of these costs will be expensed throughout the project. Our GAAP EPS estimates for 2023 take this project into consideration, though we plan to back those costs out as part of our non-GAAP EPS disclosures. The difference in our GAAP and non-GAAP EPS will also be larger in 2023 as compared with prior years as we account for the amortization of the intangible assets created by the acquisition of Eleviant. Finally, the ranges below are larger than we normally provide given the uncertainty of the macroeconomic environment and the rate at which we may disengage from non-strategic business during 2023.”
Our guidance for 2023 is as follows:
Revenue: $300 million to $350 million Revenue—IT Solutions and Services: $245 million to $295 million GAAP diluted EPS: $0.34 to $0.46 Non-GAAP diluted EPS: $0.56 to $0.68
*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 December 31, 2022.
Conference Call and Webcast
CTG will hold a conference call today, February 23, 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 Thursday, March 2, 2023, by dialing +1 844 512 2921 and entering the access code 13735068. 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 2023 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 conflict between Russia and the Ukraine and developments in China, 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.
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John M. Laubacker EVP, Chief Financial Officer, and Treasurer +1 716 887 7368
Senior Vice President and Chief Financial Officer, Americas
John Laubacker was appointed Senior Vice President and Chief Financial Officer, Americas, in December 2023, at the time that Cegeka acquired CTG. Previously, he served as CTG’s Global Executive Vice President, CFO, and Treasurer since May 2018, Senior Vice President and Chief Financial Officer since April 2017, Vice President and Treasurer since February 2017, Treasurer since 2006, and interim CFO from October 2014 to April 2015. John joined CTG in 1996.