CTG Reports 11% Net Income Growth on Lower Revenue in Second Quarter 2022 as Strong Execution of Strategy Drives Strengthened Margin Profile

• North America IT Solutions and Services revenue grew 21.3%, partially offsetting an intentional decline pursuant to our strategy of $6.1 million in Non-Strategic Technology Services, and a $4.9 million revenue decline from foreign currency exchange headwinds

• Gross margin expanded 180 basis points to 23.9%, the highest level in more than 10 years; two-year gross margin improvement was 290 basis points
• Operating margin was 3.8% and non-GAAP operating margin was 4.2%, increases of 80 and 100 basis points, respectively
• Net income increased 11.3%, and adjusted EBITDA increased to 5.1%, an increase of 70 basis points
• Second quarter GAAP diluted EPS of $0.13 increased $0.01, or 8%, despite lower consolidated revenue; non-GAAP diluted EPS increased 15% to $0.15
  

BUFFALO, N.Y., Aug. 04, 2022 (GLOBE NEWSWIRE) -- CTG (Nasdaq: CTG) (“Company”), a leader in helping companies employ digital IT solutions and services to drive productivity and profitability in North America and Western Europe, today reported its financial results for the second quarter ended July 1, 2022.

Filip Gydé, CTG President and CEO commented, “Our second quarter results again demonstrated our strong operational execution and the success of our digital solutions and service strategy, while we also continue to disengage over time from our lower margin, non-strategic technology services business. Our margin profile continued to improve with measurable expansion at the gross and operating levels on a consolidated basis, which translated into profitability improvement despite top-line headwinds.”

“While we are still facing uncertainty due to macroeconomic challenges, we have a high level of confidence in our teams’ ability to continue to execute our strategy over the long-term. With our stronger core business platform and flexible balance sheet, we will look to accelerate our pace of growth and enhance our margin profile through focused acquisitions.”

Consolidated Second Quarter 2022 Review(Narrative compares with prior-year period unless otherwise noted) (unaudited)

* A reconciliation of GAAP to non-GAAP information is included in the financial tables below

• Strong growth in North America IT Solutions and Services partially offset the $6.1 million decline in revenue related to the disengagement from lower-margin non-strategic technology services business, as well as a negative $4.9 million impact to revenue due to changes in foreign currency exchange rates. Additionally, labor constraints have impeded growth in the Europe IT Solutions and Services segment.
• Selling, general and administrative (SG&A) expenses as a percentage of revenue increased 90 basis points due to the loss of operating leverage and continued investments in the business but declined on an absolute basis by 5.7% to $16.6 million.
• Operating income increased 13.3% on improved business mix as the Company continued to advance its strategy to provide higher-value digital IT solutions and reduce its exposure to lower-margin business.
  

Second Quarter Segment Performance
(unaudited)

IT Solutions and Services

North America

Second Quarter Segment Performance (continued)
(unaudited)

Europe

• North America IT Solutions and Services revenue increased 21.3%, reflecting new business and strengthened business from existing customers.
• The revenue change in the Europe IT Solutions and Services segment primarily reflects $4.9 million of unfavorable foreign currency exchange rate fluctuations, and macro-economic headwinds in the European Union, particularly around labor constraints. Despite the lower revenue, segment gross margin expanded 140 basis points on strong execution, which helped to offset inflationary pressures.

Non-Strategic Technology Services

• The Company continued to disengage from its lowest margin IT staffing services within the Non-Strategic Technology Services segment as part of its strategic plan.
  

Consolidated Year-to-Date Results
(unaudited)

* A reconciliation of GAAP to non-GAAP information is included in the financial tables below

Year-to-date Segment Performance
(unaudited)

IT Solutions and Services

North America

Year-to-Date Segment Performance (continued)
(unaudited)

Europe

Non-Strategic Technology Services

Balance Sheet and Cash Flow

Cash and cash equivalents were $35.5 million, compared with $35.6 million at year-end 2021. Net cash provided by operations was $2.8 million for the year-to-date period.

At the end of the second quarter of 2022, 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 second quarter of 2022 compared with 81 in the prior-year period.

Strategy

CTG is a catalyst for digital transformation, helping IT and business leaders accelerate their project momentum and achieve their desired outcomes. This strategy includes:

• Providing breakthrough digital transformation solutions to our clients
• Investing in expanding our digital transformation solutions and services, both organically and through acquisitions that focus on highly synergistic solutions or personnel
• Utilizing innovative tools and methodologies
• Expanding our global delivery network, and
• Disengaging from our lowest margin IT staffing services within the Non-Strategic Technology Services segment
  

2022 Outlook

John M. Laubacker, Chief Financial Officer, noted, “With nearly half of our revenue coming from European operations, we are not immune to the challenging foreign currency translation impacts resulting from the significantly devalued Euro in the first half of 2022. Additionally, the recent increase in 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. 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 $330 million to $350 million which includes a reduction of $20 million to $30 million from the prior year as a result of the intentional disengagement from lowest margin business in our Non-Strategic Technology Services segment.”

“Despite the top-line decrease and challenging macroeconomic headwinds, we expect our operating margins to improve over the prior year given the positive ongoing changes to our business mix. We expect that lower revenue will be offset in part by improving operating margins. We expect 2022 GAAP diluted earnings per share to range from $0.48 to $0.58, and non-GAAP diluted earnings per share to range from $0.53 to $0.63. Our long-range goal remains unchanged as we drive our adjusted EBITDA margins to 7% to 8%* within the next two years.”

Conference Call and Webcast

CTG will hold a conference call today, August 4, 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, August 11, 2022 by dialing +1 844 512 2921 and entering the access code 13731263. 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.

About CTG

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 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.

Forward-Looking Statements

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, the lingering effects of the COVID-19 pandemic and any regulatory, social and business responses thereto 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.

COMPUTER TASK GROUP, INCORPORATED (CTG)
Condensed Consolidated Statements of Income
(Unaudited)
(amounts in thousands except per share data)

COMPUTER TASK GROUP, INCORPORATED (CTG)
Condensed Consolidated Balance Sheets
(Unaudited)
(amounts in thousands)

COMPUTER TASK GROUP, INCORPORATED (CTG)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(amounts in thousands)

COMPUTER TASK GROUP, INCORPORATED (CTG)
Segment Information
(Unaudited)
(amounts in thousands)

For reporting purposes, the Company discloses three segments, including IT Solutions and Services in each of North America and Europe, and Non-Strategic Technology Services, primarily in North America. The Company continues to invest in business development, including solutions, sales, delivery, and recruiting to drive its digital transformation strategy in both the North America and Europe IT Solutions and Services segments. The Company is not making any investment in its Non-Strategic Technology Services segment that includes lower margin staffing services. Contribution profit represents operational profit after consideration of expenses such as sales, solutions, delivery, recruiting and administrative expenses.

* Non-GAAP costs represent certain acquisition-related expenses

* Non-GAAP costs represent certain acquisition-related expenses

COMPUTER TASK GROUP, INCORPORATED (CTG)
Segment Information (continued)
(Unaudited)
(amounts in thousands)

* Non-GAAP costs in 2020 represent certain acquisition-related expenses and costs associated with severance

* Non-GAAP costs represent certain acquisition-related expenses

COMPUTER TASK GROUP, INCORPORATED (CTG)
Segment Information (continued)
(Unaudited)
(amounts in thousands)

* Non-GAAP costs represent certain acquisition-related expenses and rebranding costs

* Non-GAAP costs in 2020 represent certain acquisition-related expenses and costs associated with severance

COMPUTER TASK GROUP, INCORPORATED (CTG)
Segment and Vertical Market Trends (Unaudited)
Supplemental Financial Information

Other Information (in millions except Billable Days and EPS)

Balance Sheet Information (in millions except DSO)

COMPUTER TASK GROUP, INCORPORATED (CTG)
(Unaudited)

The non-GAAP information below excludes expenses associated with certain acquisition-related expenses and the reversal of a tax valuation allowance. The acquisition-related expenses consist of amortization of intangible assets and changes in the value of earn-out payments upon the achievement of certain financial targets from the Company’s recent acquisitions.

Reconciliation of GAAP to non-GAAP Operating Income

Reconciliation of GAAP to non-GAAP Operating Margin