CIBC Earnings PreviewConverge Technology Solutions Corp.
Earnings Date: TBD
Conference Call Details: TBD
Q1 Overview: The demand environment remains uncertain for Converge and other IT
Solutions peers with hardware exposure. Last quarter Converge’s gross revenue growth
decelerated to 0.8% Y/Y, down sequentially from 6%, partly due to increasing backlogs
caused by supply chain disruptions. We expect the company to progress on acquisition
integration in H1/23 and will be looking for margin synergies over the course of the next
two quarters. We believe the focus this quarter will be on integration progress as well as the
demand environment in core geographies. With Q1 results, we will also be looking for an
update on supply chain disruptions and updates from the strategic review.
Key Topics For The Quarter
1. Demand Environment: We expect Q1 revenue growth of 16.3% Y/Y as the focus
remains on the spending patterns of customers across the various geographies and end
verticals. Converge reported slower organic growth in Q4, partly due to supply chain
disruptions and headwinds from hardware exposure as customers cut back on spending.
The demand environment does not appear to have improved in Q1. U.S. peer CDW
pre-announced Q1 results on April 18 and guided to Q1 revenue of $5.1B versus
consensus at $5.58B. CDW noted more cautious consumer spending and the company
now expects the U.S. IT market to decline at a high-single-digit rate in 2023.
2. Update On Cost Outlook And Supply Chain: We expect Q1 EBITDA margins (as a
percentage of gross profit) of 27.6%, up 40 bps Y/Y. We forecast gross margin of 25%,
up 520 bps Y/Y. We will be looking for an update on the supply chain issues that
increased the backlog last quarter by $45MM+, including any changes in fulfillment
timelines.
3. Strategic Process Update: Converge announced a strategic review in November 2022
in response to received expressions of interest. The company provided no updates with
Q4 results that were released on March 15 and we will be looking for an update on the
strategic process with Q1 results. We consider private equity as the most likely buyer,
although any acquirer would have to be comfortable with the integration process of the
~$1B in gross revenue acquired in 2022. We also see valuation as a potential stumbling
block to any sale process.
4. M&A Integration Update: We expect Converge to be muted on the M&A front in H1/23
as the company integrates the $1B+ of gross revenue acquired in 2022. We will be
looking for further details on the near-term cost synergies and longer-term revenue
synergy opportunities from acquired businesses. We will also be looking for details on
managed services revenue, including guidance for 2023. Managed services revenue in
2022 was $138MM, below the company’s target of $150MM-$200MM