Setting aside the variety of targets, the fact that every analyst is increasing them has got to be viewed positively. GLTA
CORP.
Executing On Integration
Our Conclusion
Converge continues to see a solid demand environment, with 10% organic
gross profit growth in the quarter and management noting that its regional
sales force does not foresee a slowdown in 2024, despite the uncertain
macro environment and recent peer commentary. Management continues to
execute on M&A integration, although we expect margin improvement to be
gradual and require a revenue mix-shift at several high-volume, low-margin
acquisitions. Cash flow was a Q3 highlight, with management on track to
realize its target of 70% cash conversion in 2023. We retain our Neutral
rating and increase our price target to $4.00 (prior $3.00) as we raise the
multiple one turn amid continued M&A integration.
Key Points
Executing On Its Financial Targets: Converge laid out several financial
targets with Q3. The company is targeting 70% cash conversion from adj.
EBITDA to CFO and a 40% cash conversion from adj. EBITDA to FCF. With
a very strong Q3 CFO of $96MM and the implementation of more stringent
corporate receivables and payables policies, we believe that Converge is on
track to meet its target this year. The company also noted a three- to four-
year target of 30% of adj. EBITDA margins (as a percentage of gross profit).
We expect that margin improvement will occur gradually, primarily through
H2/24 and beyond as the company completes its North American ERP. We
also believe that the 30% target requires several of the larger 2022
acquisitions (TIG, European acquisitions) to transition to higher-margin
services/software work. We have reduced our 2024 adj. EBITDA (as a
percentage of gross profit) estimate by 330 bps to 25.3% on the expectation
of a slower EBITDA margin ramp.
Demand Solid In Q3; We See More Uncertainty In 2024: Converge had
solid 10% organic gross profit growth in the quarter and noted that it was
seeing no slowdown in the demand environment, with customers prioritizing
cybersecurity, analytics and digital transformation. Backlog has normalized
(up $30MM sequentially), with network gear and GPU delays offset by client
spending in other areas. Despite solid organic growth this quarter, we do see
the possibility for a slowdown as we look out into 2024, with peers pointing to
slowing demand amid an uncertain macro environment. We are projecting
6% gross profit organic growth in 2024.
Leverage Down Sequentially: Converge paid down $44MM in debt in Q3
and ended the quarter with leverage as per its credit agreement of 2.55x.
The company did not complete any M&A in the quarter and continues to view
organic growth and share buybacks as its best use of excess capital. The
company executed on $1.1MM in share buybacks in Q3 and ended the
quarter with ~$290MM in available liquidity