CTG Adds Crowdtesting Capabilities Through Acquisition of StarDust
CTG, Inc. (CTG) has acquired StarDust, a leading provider of testing and quality assurance services based in France, for $4.85 million in cash. The acquisition bolsters the company’s strong presence in Europe and is expected to support the expansion of CTG’s testing services into the North American market. Although StarDust brings many similar capabilities in testing and quality assurance that CTG currently offers to its customers, the acquisition also adds new crowdtesting capabilities that have been absent from CTG’s suite of testing services. Stardust’s crowdtesting platform leverages a large community of on-demand testers across the globe to evaluate the performance and functionality of mobile applications, software and websites, as well as Internet of Things (IoT) and other connected objects. We expect the acquired crowdtesting franchise to support ample cross-selling opportunity while minimizing requisite workforce investments as CTG expands its testing services domestically.
From a financial standpoint, StarDust has generated strong growth throughout its history and is expected to contribute $7 million in revenue on an annualized basis. With over 300 projects completed each year, we estimate a typical engagement is in excess of $20,000. That said, management expects the size of its testing projects to increase as the company cross-sells into its existing base and targets emerging opportunities in healthcare. Given the nature of StarDust’s business and expectations for the acquisition to be immediately accretive (excluding acquisition-related expenses), we assume gross margin above both CTG’s consolidated gross margin and the mid-20% level for its existing testing services. We also assume a near double-digit operating margin. Specifically, our Q1 revenue estimate increases by approximately $0.5 million to reflect one month’s worth of contribution with no substantive impact on our adjusted EBITDA or non-GAAP EPS estimates. For FY ’20, we raise our revenue forecast by $6.1 million, resulting in a slight uptick in our adjusted EBITDA projection and a penny increase in our non-GAAP EPS estimate. Our revised FY ’21 projections reflect mid-teens revenue growth for StarDust and similar margin assumptions as in FY ’20. As the acquisition is not large enough to move the needle from a valuation perspective, 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 has received compensation from CTG, Inc. (CTG) in the past 12 months for “Sponsored Research.”
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