CORP.
Pre-released Guidance In Advance Of Q3/23 Reporting
Our Conclusion
Converge pre-released guidance for its upcoming Q3/23 results, with the
mid-point of adj. EBITDA guidance 3.6% above CIBCe. The mid-point of the
company’s gross profit guidance was 5.7% above CIBCe, implying an
EBITDA margin (as a percent of gross profit) that is 50 bps lower than prior
CIBC estimates as Converge continues M&A integration activities. Overall,
we view the announcement as neutral to slightly positive and continue to
watch for signs that integration activities are driving cross-sell opportunities
into higher growth cloud and software offerings. We retain our Neutral rating
and $3.00 price target.
Key Points
Pre-releases Q3/23 Results: Converge pre-announced Q3/23 results, with
the company expecting gross profit in the range of $168 million to $174
million, with the mid-point 6% above consensus/CIBCe ($162 million). The
company also pre-announced adj. EBITDA of $39 million to $41 million, with
the mid-point 3.6% above CIBCe ($39 million) and 8.1% above consensus
($37 million). The company also noted that net income for Q3 is expected to
be comparable to Q2.
Changes To Our Estimates: We are increasing our Q3/23 gross profit
estimate by 5.8% to $171MM and increasing our adjusted EBITDA estimate
by 3.3% to $40MM. Accordingly, we have decreased our adjusted EBITDA
margin estimate (as a percent of gross profit) by 60bps. With the pre-release
noting “significantly improved” operational efficiencies, we will be looking for
further details with Q3/23 results.
Debt Repayment Remains A Priority: The announcement noted that CFO
is “significantly improved”, resulting in positive free cash flow and a reduction
in net debt. We view this news as positive, given FCF in Q2/23 of -$13MM
which was impacted by negative net working capital due to slow payment
cycles and inventory purchase timing. We expect improved working capital
management to be a driver of the positive Q3/23 FCF. We will be looking for
an update on debt reduction and leverage as well as supply chain
management.
Demand Environment: Converge described positive demand signals from
clients with last quarter’s results despite a decline in hardware sales to the
public sector and the global slowdown in hardware demand. The updated
guidance did not include revenue details but pointed to strength of demand in
Q3/23. We will be looking for an update on the demand environment with
Q3/23 results.
Reporting Date: Converge will report its Q3/23 results on November 14.
Conference call details are not yet available.