CIBCHave never been the biggest fans yet even with their reservations, they still have a target that's 56% higher than our current SP which provides some indication of how oversold this is. GLTA
EQUITY RESEARCH
October 31, 2022 Earnings Update
CONVERGE TECHNOLOGY SOLUTIONS
CORP.
M&A Integration Progressing Slowly – Reducing FQ3 Estimates
Our Conclusion
Converge will report Q3/22 results on November 8 after market close and we expect this quarter to reflect higher operating expenses from the company’s latest acquisitions given a slower pace of integration with the larger deals. We will be looking for further colour on the M&A integration plans, particularly for TIG and the most recently announced Stone Group acquisition. We will also be looking for commentary on capital allocation plans and an update on the overall demand environment on the call on November 9 at 8:00 a.m. ET. We maintain our $8.00 price target and Neutral rating.
Key Points
Integration of Recent Acquisitions: With the target of acquiring $1B in
gross revenue completed earlier this quarter, the focus for Converge is now on integration and realizing synergies from completed acquisitions. While smaller deals typically see a relatively quick integration given volume rebates, etc., we believe that larger deals (including TIG) will take longer to integrate. We expect that TIG had similar volume rebates to Converge, while its relatively high cost structure will need to be right-sized over time. Given TIG’s August close, we expect that much of this integration will be done in Q4 and beyond.
Global Demand Environment: Our most recent conversations with
management suggest that Converge has been able to avoid some of the
macro headwinds impacting the demand environment in North America (U.S. demand solid, Canada seeing a more cautionary tone for F23) and Europe (demand in the education market remains solid, although other market segments are volatile). We will be watching demand indicators (backlog, days sales outstanding, bad debts) closely with the quarter and in an increasingly uncertain macro-economic climate we would not be surprised to see some reduction in near-term demand as SMB customers look to reduce spending. We will be looking for an update on the demand environment with Q3 results.
Changes to Our Model: We are reducing our Q3 adjusted EBITDA estimate to $32MM (from $39MM) and our Q4 estimate to $35MM (from $41MM) to account for higher SG&A associated with the TIG acquisition and a longer integration timeline.
Conference Call Details: Management will host a conference call on
Wednesday, November 9 at 8:00 a.m. ET; Webcast