We expect to see the company’s continued focus on organic growth through (i) increased product/services penetration across acquired businesses, (ii) focus on high-margin initiatives and new-age offerings, and (iii) bolstering presence across underserved mid-market customer segment. We believe M&A will stay lower on priority list for the next few quarters, as the company works towards strengthening its Balance Sheet with excess capital being used for internal reinvestments, paying down the debt and share repurchase/dividend payout.
KEY POINTS
Strong Financial profile despite weak macro. We estimate Q3/23 Gross Revenue of ~$910 million and Net revenues of $636 million (assuming 30% adj.) ~3% higher than SGBM estimates and ~4% higher than current consensus estimates for the quarter, assuming ~27% gross margin (in line with last year and our previous estimate). This implies Gross Revenue growth of ~24%, which includes ~9% organic growth and ~15% acquired growth. Net Income for Q3/23 is estimated to be in line with Q2/23 results, which was reported at GAAP Net income of $(4.5) million and non-GAAP net income of ~$25 million.
Sustained focus on cash generation. In the pre-released Q3 guidance the company noted improved CFO, resulting in positive free cash flow and a reduction in net debt. Recall, CFO was one of the key metrics that was cause for investor concerns during Q2/23 results driven by working capital deficit. We expect this improved cash flow profile to result in reduced leverage/interest expense. Net debt was reported at ~$400 million as of Q2/23,
Overall, we believe Converge is progressing in the right direction, with this positive guidance update an indication of the company’s strengthening business profile. We continue to maintain our $7.00/share price target and reiterate our Sector Outperform rating. The company will provide further details for Q3/23 financial results on Nov. 14th, 2023.