It appears the Wolf is not infallible as it seems I left a lot on the table here. I decided to exit just shy of $4 just after their Q3 release. I did have some healthy buys with a $2.70 average so I did make out ok, but it does sting a little seeing this approach $5.40 this morning.
While I didn't do a formal review, I do know that I wasn't very impressed with much below the top line. My last published review on Converge was back in September, it's second straight receiving 3.5 stars. I'm assuming I would have downgraded them in November. The stock price didn't actually do much post financials so maybe I was onto something. But the stock has been on a tear since their Jan 29th news release reporting an expected $100M in cash flow for their fourth quarter. Juicy news. Let's check in on their annuals to see how they finished 2023.
Balance Sheet:
A what I'll call "just ok" current ratio of 1.1 consisting of $170M in cash, $814k in receivables and about $100M in other current assets against $979M in current liabilities due within the next year. Long term debt of $378M, down from $412 last quarter. $112M of their A/R is over 60 days, but notable that trade receivables are down and unbilled revenue is way up, which is good, but I still never like to see 80% of ones current assets tied up in receivables when they also have over $900k in trade payables.
Cash Flow:
During 2023, generated a very impressive $229.5M worth of operational cash flow, more than 5.5x they generated in 2022 of $41.6M. That is an increase of $188.5M. Their news release was indeed correct with generating $134M worth of operational cash flow in Q4 alone. I'm going to say kudos to their communications team however as they deserve more credit than the actual performance that led to these numbers. While the $188.5M improvement in operational cash flow is indeed factual, $146M of that variance comes from working capital adjustments, mainly their reductions in inventory spend and their payables growing by $111M. I don't see their OCF trending this way so it will be interesting to look at their upcoming couple of quarters. If we look at operational flow before working capital adjustments, that improvement is under $40M. They utilized $103M through investing activities, primarily through various methods of consideration for past acquisitions, paid $33k of interest payments, $6.1M worth of dividends, paid off a net of $40M of debt and bought back $17.4M worth of stock. Overall they had an improvement of $11M in cash from where they began the year at.
Share Capital:
- Just shy of 204M shares outstanding at the end of 2023, almost 5M less than where they began the year, and over 10M less than two years ago due to share buy backs
- 4.22M stock options , with the 1.9M awarded this year at $2.88 well ITM and the remainder well out over $9
- Nominal penny a share quarterly, yielding under 1%
- Still continuing to buy back shares to the tune of about a few hundred thousand a month post financials under their NCIB
- 5% insider ownership and 31% institutional per Yahoo Finance
- Some insider buys from multiple insiders in December
Income Statement:
$2.7B in annual revenues, blowing away last year by precisely 25% or $541M. Gross profit was up by 60 basis points on the year from 25.4% to 26%. Sounds small but on that volume works out to $162M more on the GP line. Unfortunately their SG&A expenses rose by 31% during the year, quite a bit higher than their annual revenue increase so they were only able to convert $24M more in Income before other items out of $541M more revenue. After $36M in higher depreciation costs and $22M more in finance expenses results in a $6.4M loss compared to the $22.8M profit they made in 2022. Tack on a $24 turnaround in foreign exchange losses and their comprehensive loss is a gap of over $52M to last year. While business was strong in the US, up 31% and Europe, up 53%, it was down 25% within Canada.
Overall:
Well after seeing the stock rise by 30% since that January 29th press release, I was expecting much better than this and that's without discussing that their QoQ revenue was down by 8.3% compared to Q3, and doubled their net loss from where they ended Q3. I don't think their cash flow is anywhere near as impressive as they touted and once again, didn't convert a damn cent underneath their gross profit line. I think the decision to pay dividends is laughable and the continuation to buy back stock with this level of debt is unwise. Am I just bitter about losing out on another 30%? Yeah, probably. But even with just a market cap of just over $1B, I'm still downgrading to 3 stars.