Wolf of OakvilleI've always considered Sangoma and CTS as comparable but after reading the Wolf's comments , I have a better understanding .
Converge Technologies $CTS.TO (3.5 / 5)
September 1, 2023|2023 Q2
Financials release a couple of weeks ago, and the stock was been beaten like a rented mule initially and has since started to recover. An eerily similar market reaction occurred after their Q1 (which I reviewed at 3.5 stars).
Balance Sheet:
A much improved current ratio of 1.12. It still isn't sexy, but significantly better than the .8 they were at just three months ago. The biggest difference for that is their long term debt was listed as current three months ago due to a lease liability issue. They received a waiver for this from their lender back in April. So today their balance sheet consists of about $81M in cash including restricted, $781M in receivables and $160M worth of inventory against about $890M in liabilities due over the next twelve months (deferred revenue excluded). Converge has $429M of long term debt and $51.7M in other long term commitments, the majority of which for contingent consideration for previous acquisitions.
Cash Flow:
Converge burned $9.6M via operations in their second quarter, after generating $30M in operational cash flow in their first quarter. There are $40M worth of non cash working capital that plays a big part in this, but this is no doubt a disappointing number here and the 44% decrease in their cash position from their last financials three months ago and 50% from the start of the year rightly has some investors spooked. In the quarter, they paid out $5M in acquisition related consideration, paid down their debt by nearly $23M, $2.07M worth of dividends and bought back $14.2M worth of stock. All of that adds back to the $81M in cash they possessed at the end of June, down from the $160M from the start of the year. When they were generating $10M in operational cash flow like they did in the first quarter, the dividends and the share buybacks made sense. So is this just one quarter where their burn rate is just negatively impacted by timing difference in cash flows or a trend? Watch this space.
Share Capital:
- 204.9M shares outstanding, almost 10M less than one year ago via their NCIB
- About 5% ownership and 31% nstitutional ownership (per Yahoo Finance)
- Buying back shares continued through the first couple weeks of July, and at the end of last month, renewed the NCIB for another year where they could buy back up to 10% of the float.
- 18M options available under their long term incentive plan with 2.8 issued and outstanding
Income Statement:
Revenue continues to be extremely strong, growing by 29.2% in the quarter to $665.8M, up from $515.2. Through two quarters, revenue has exceeded $1.34B, up 33% from 2022 and showing excellent growth in both their product and service segments. Gross profit continues to improve as well, up 60 basis points in the quarter to 26.4%, and up 180 basis points YTD to 25.8%. Expense control or lack thereof sadly also continues, with SG&A expenses rising at a higher rate than revenue. SG&A expenses were up by 42.7% in the quarter, and 52.5% YTD. While the growth of expenses was much better in Q2 than in Q1 (42% vs 64%), they still have a ways to go to make a more meaningful impact to their bottom line.
Income before other expenses grew by $13M, but depreciation grew by $21M, interest expense related to their debt quadrupled YoY to $20M, resulting in a near $22M worsening on the bottom line before taxes.
Overall:
Feels like a minor step backwards here, but maintaining my 3.5 stars based on my estimation that the sub $600M MC holds tremendous potential here long term.