TD 2 QUARTERLY PREVIEW
ITSP Q1/F24 PREVIEW: EXPECTING A SLOW START TO A POTENTIAL REBOUND YEAR
THE TD COWEN INSIGHT
IT Solution Providers have endured some challenging times in recent years, but a significant improvement is expected in 2024. Several headwinds still persist leading to an expected soft Q1, but demand is expected to improve as the year progresses, which should benefit Softchoice and Converge, particularly in H2/C24.
Macroeconomic uncertainty, rising interest rates, supply chain challenges, and cost optimization initiatives have been among the more significant IT spending headwinds in recent years. However, we expect conditions to begin improving this year, aided by increased GenAI adoption, a rebound in cloud migration activity, and increased PC refresh cycle activity. Gartner is now forecasting global IT spending to increase ~8% to $5.06T in 2024, up from its prior 6.8% forecast and the 3.3% growth in 2023 and 2.9% in 2022. That said, we expect the pickup in growth this year to be more back-half weighted, as the impact of some of these headwinds linger.
Converge (CTS-T: HOLD; C$6.00 target) - While our gross profit and Adjusted EBITDA forecast is at the high-end of Q1/F24 guidance, we expect Converge to deliver another quarter of decelerating organic growth, before an expected pick-up starting in Q2/F24. Last quarter, Germany was a significant drag (down 32% y/y) and we look for signs that demand conditions are improving.
We are forecasting flattish margins in H1/F24, as cost optimization initiatives and the completion of Phase 1 of its ERP migration should begin to yield benefits starting in H2/ F24. Also, Q1 typically benefits from large volumes of hardware sales to the Canadian government, but the gross margin on these sales can be very low. The very strong improvement in FCF in H2/F23 is not sustainable, as we expect FCF to decline to more normal levels in Q1.
PC shipments (finally) return to growth. Based on preliminary data from IDC, the worldwide PC market returned to growth in Q1/C24, following eight consecutive quarters of declines. PC shipments totaled 59.8mm in the quarter, up ~1.5% y/y. This was aided by an easy comp, as the market declined ~29% in Q1/C23, alongside PC shipments returning to pre-pandemic levels as Q1/C24 figures were just shy of the 60.5mm units shipped in Q1/C19.
IDC pointed out that PC shipments have begun to recover across most regions, leading to growth in the Americas and the EMEA region. We see this as a potential positive for both Converge and Softchoice. Industry experts expect a further improvement going forward, as newer AI PC's are introduced in the market and commercial buyers go through their PC refresh cycle.