Converge Technology Solutions
(CTS-T) C$4.14
Q4/F22 First Take: No Major Surprises; Strong Start to 2023
Event
Converge reported its Q4/F22 results yesterday after market close. Conference Call: 8:00 a.m. ET (#: 1 888-390-0605).
Impact: NEUTRAL
Delayed deals and supply-chain issues drive sharp deceleration in organic growth. Q4/F22 revenue, gross profit, and Adjusted EBITDA were in line with the preliminary release and our estimates. Organic growth was just 0.6% on a gross revenue basis and 1.5% on a gross profit basis, driven by the delay in its three largest year-end deals to H1/F23 and supply-chain issues. Although organic growth continued to decelerate throughout the year, particularly in H2/F22, it was healthy on a full-year basis at 8.6% based on gross revenue and 10.5% based on gross profit.
Accounting change leads to lower software revenue recognition. Due to an IFRS 15 accounting policy change, Converge is now netting down certain (typically standalone) OEM software licenses that it resells, a potential change we highlighted in our Q3/F22 note. Accordingly, reported Q4/F22 net revenue decreased by ~ $131mm to ~$641mm (was $772mm prior to the policy change). There is no impact on gross/operating/net profits.
Strong start to F2023. Aided by continued healthy customer demand, a full quarter of the Stone acquisition, two of the large delayed deals closing, and improving supply-chain conditions (>90% of its Q4/F22 backlog has shipped this quarter), Converge is expecting its seasonally weakest quarter (Q1) to be only modestly below its seasonally strongest quarter (Q4). In F2023, it expects to gain market share organically along with improvements in gross and Adjusted EBITDA margins.
CFO resigns. Richard Lecoutre has resigned as CFO for health reasons, following a medical leave. Matt Smith returns as Interim CFO. We believe Mr. Smith did a solid job filling in before Mr. Lecoutre joined last September. We believe a permanent CFO is unlikely to be appointed until after the strategic review is concluded.
Our take. Q4/F22 was another tough quarter, as execution remains a key issue and is a key reason why the shares are trading at a significant discount valuation, in our view. However, we expect stronger performances this year, especially should M&A activity slow as expected.