CORP
Q3/23 First Look – At Top End Of Pre-announced Range
Conclusion: Converge posted Q3 results that were at the top end of its
pre-announcement last month, with gross profit 4% above consensus and
adjusted EBITDA 6% ahead of expectations. Gross margin came in 255 bps
below consensus expectations and adjusted EBITDA margin (as a % of
gross profit) was ~40 bps above expectations. Converge also released its Q4
outlook, with consensus currently at the top of that range. Organic gross
profit growth was 10% Y/Y and the company did not execute on any M&A in
Q3 as it continues to focus on integration and organic growth. We will be
looking for further details on the demand environment, supply chain, and
capital allocation on the call today at 8 a.m. ET.
Key Highlights
Q3 Results: Net revenue of $710MM was 15% above consensus and 10%
above our estimate ($619MM/$644MM). Gross profit of $174MM was 4%
above consensus ($168MM) and 2% above our estimate ($171MM).
Adjusted EBITDA of $41.3MM was 6% above the Street and 3% above our
estimate ($39.0MM/$39.9MM).
Q4 Outlook: CTS also announced its Q4 outlook, guiding to gross profit of
between $177MM-$184MM and adjusted EBITDA of between
$45MM-$47MM. Consensus is at the top end of the range, with the Street
expecting gross profit of $184MM and adjusted EBITDA of $50MM.
Revenue: Net revenue of $710MM was 15% above consensus ($619MM).
Converge had net product revenue of $560MM, up 45% Y/Y. Services
revenue of $150MM was up 16% Y/Y, driven by inorganic growth. Backlog
increased to $479MM in Q3/23, up 7% sequentially. Organic gross revenue
growth was 23.6% while YTD growth came in at 10.8%.
Profitability: Gross margin of 24.5% was 255 bps below consensus and
down 260 bps Y/Y. Organic gross profit growth came in at 10.1% Y/Y while
YTD growth was 9.2% Y/Y. Adjusted EBITDA of $41.3MM was 6% above the
Street at $39.0MM. EBITDA margin was 5.8% of revenue, 50 bps below the
Street and down 20 bps Y/Y.
Cash Flow: Converge had $95.9MM in cash flow from operations in the
quarter, up from $15.0MM in Q3/22. Free cash flow (CFO less capex less
lease payments) was $89.4MM, up from $7.2MM in Q3/22. FCF per share
was $0.44, up from $0.03 in Q3/22. The company did not spend on M&A in
the quarter. Converge ended the quarter with $307.5MM in net debt, with
leverage of 1.8x down sequentially from 2.24x.
Conference Call Details: Converge will be hosting a conference call at
8:00 a.m. ET today.