Bullboard - Stock Discussion Forum Converge Technology Solutions Corp CTSDF

Primary Symbol: T.CTS

Technology Information Technology Services

Converge Technology Solutions Corp. is a services-led, software-enabled, information technology (IT) and cloud solutions provider. Its global approach delivers advanced analytics, artificial intelligence (AI), application modernization, cloud platforms, cybersecurity, digital infrastructure, and digital workplace offerings to clients across various industries. It supports these solutions with... see more

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TSX:CTS - Post Discussion

Converge Technology Solutions Corp > TD

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Post by retiredcf on Oct 20, 2023 8:51am

TD

Converge Technology Solutions

(CTS-T) C$2.33

Preliminary Q3/F23 a Modest Beat; Margin Issues Persist Event

Yesterday, after market close, Converge announced preliminary Q3/F23 results, with the full release scheduled for November 14.

Impact: SLIGHTLY POSITIVE

Modest Q3/23 beat expected. Citing strong demand and significantly improving operational efficiencies, Converge expects Q3/F23:

Gross profit of $168mm-$174mm vs. TD at $162.3mm, consensus at $160.9mm, and guidance of ~$158mm-$167mm (down ~5-10% q/q).
Adjusted EBITDA of $39mm-$41mm, vs. TD at $38.5mm, consensus at $37.3mm, and guidance of ~$37.5mm-$39.5mm (similar margins to Q2/F23).
Positive FCF and a reduction in net debt, driven by significantly improved operating cash flow.
Net income comparable to Q2/F23, which was ($4.5mm).

Margin issues persist. The midpoint of the preliminary results implies Adjusted EBITDA margins of ~23.4%, slightly below our 23.7% estimate, as we believe management still has plenty of work ahead to right-size its cost structure, as LTM Adjusted EBITDA margins have continued to trend downward over the last two years. Our view that evidence of a sustainable and material rebound in Adjusted EBITDA margins was likely at least a few quarters away was a key driver of our downgrade post-Q2/F23. We also have concerns with the potential disruption from its second ERP migration in as many years and its debt covenants restricting share buyback activity.

That said, we view the improved operating cash flow as a positive, particularly given the working-capital headwinds Converge has faced in the last year-and-a-half, and the reduction in net debt (~2.6x leverage exiting Q2/F23).

TD Investment Conclusion

We are maintaining our C$3.50 target price, based on 5.5x our F2024 Adjusted EBITDA estimate. We acknowledge the healthy return to our target, with the stock down ~20% following our post-Q2/F23 downgrade. However, given the recent share- price weakness (down 16% this month), we expect a modest rebound in the stock due to the pre-release, and we will revisit our target price/rating once we get more details into what drove the modest beat with the full Q3/23 release next month.