TD Converge Technology Solutions
(CTS-T) C$4.88
Q4/F23 First Take: In-Line Quarter; Expecting a Solid Year Ahead
Event
This morning, Converge reported its Q4/F23 results.
Conference Call: 1-888-390-0605.
Impact: SLIGHTLY POSITIVE
Our take. Given the Q4 pre-announcement, there was not too much to note in the
Q4 release at first glance. The Q1/F24 guidance was better than expected, but it
implies a continued deceleration in organic growth and flattish margins. Interestingly,
Converge provided F2024 guidance that was in-line with expectations that at the mid-
point, implies a deceleration in organic growth to ~6% and an ~140 bps improvement
in Adjusted EBITDA margins.
Gross profit and Adjusted EBITDA in-line. Q4/F23 gross profit of $181.5mm
and Adjusted EBITDA of $46.5mm were in-line with guidance and TD/consensus.
Adjusted EBITDA margins were 25.6%, flat y/y.
Product backlog was $412mm, down ~14% y/y and q/q. Organic growth remains choppy. Organic growth was 5.7% y/y on a gross profit basis, down from 10.1% last quarter and has varied from 2.5% in Q2/F23 to 16.5% in Q1/F23 this year. There is similar volatility in organic growth on a gross revenue basis (10.9% y/y this quarter).
Strong FCF driven by a reduction in sharp reduction in inventory levels. FCF
was $99.1mm, driven by an ~$92mm tailwind from a reduction in inventory levels to
$73.2mm (down 54% y/y and 56% q/q). This follows the $84mm payables tailwind
last quarter. Net debt fell to $263.4mm (from $357.8mm last quarter), resulting in
leverage of ~1.6x exiting Q4/F23.
Q1/F24 and F2024 guidance in-line to better-than-expected. Q1/F24 guidance:
Gross profit of $170mm-$178mm (TD: $174.4mm/consensus: $170.6mm).
Adjusted EBITDA of $40mm-$44mm (TD: $43.4mm/consensus: $39.8mm).
F2024 guidance:
Gross profit of $735mm-$760mm (TD: $734.3mm/consensus: $742.2mm).
Adjusted EBITDA of $185mm-$198mm (TD: $191.8mm/consensus: $191.2mm).
At the mid-point, the Q1/F24 guidance implies organic gross profit growth of ~1% y/
y, a second quarter of decelerating growth, with Adjusted EBITDA margins of 24.1%,
flattish with F2023 levels.
At the mid-point, the F2024 guidance implies organic growth of ~6%, down from ~8%
in F2023, with Adjusted EBITDA margins of ~25.6%, up from 24.2% in F2023 but
slightly below F2022 at ~25.9%.