Desjardins Securities analyst Jerome Dubreuil thinks the third quarter was “a reminder of the volatility” that Converge Technology Solutions Corp.’s business faces.
“We expect the company will continue to see pricing pressure and cautiousness from its clients over the next few quarters, which has led us to once again cut our forecast significantly,” he said. “That said, CTS’s low leverage enables management to be opportunistic with buybacks and steadfast in its strategy of moving CTS higher in the value chain, and to prepare itself for the more attractive market we anticipate in 2H25.”
Before the bell on Tuesday, the Toronto-based IT service management company reported revenue, profit and adjusted EBITDA that all fell with ranges provided in the preliminary results on Oct. 24.
“As we expected, updated 2024 guidance implies a continued EBITDA shortfall in 4Q as the yearly guidance was revised downward by $19-million (at the midpoint) while 3Q EBITDA was C$13-million below the 3Q guidance provided in August,” the analyst said.
“Improvement not immediate, but a decent setup for 2H25: While we expect top-line pressure to persist going into 1H25, several details should help CTS return to growth in 2H25. Management anticipates that the IBM mainframes downcycle could be relatively short given the upcoming refresh schedule. Moreover, Windows 10 reaching end of support in October of next year should improve demand for end-user devices in 2025. In addition, management is maintaining its 10-per-cent growth objective for account executives in North America despite top-line pressure — management has historically stated that sales from new account executives typically double in year 2.”
While investors met the release with enthusiasm, sending its shares 5.95 per cent higher on Tuesday, Mr. Dubreuil cut his revenue and earnings projections through 2025, leading him to drop his target for Converge shares to $5 from $7 with a “buy” recommendation. The average is $5.54.
Elsewhere, other changes include:
* Eight Capital’s Adhir Kadve to $6 from $9 with a “buy” rating.
“Converge released Q3/24 results in-line with pre-released ranges and adjusted down guidance accordingly,” said Mr. Kadve. “Uniform with headwinds seen in enterprise budgets, Converge is navigating a challenging demand environment in North America and witnessed deal slippage into Q4 and F25. That said, the company noted that 25 per cent of these deals have been booked in Q4-to-date, with F25 to offer stabilization and demand recovery. Given the ongoing weakness in the stock, M&A remains off the table, and we like that capital is being allocated towards shareholder returns. Our updated estimates reflect adjustments made to F24 guidance, and we exercise caution with a back-half F25 recovery. We think consistent execution against targets will re-rate this stock from depressed levels today.”
* TD Cowen’s David Kwan to $4.50 from $5 with a “buy” rating.
“Given the recent macro-driven weakness in hardware spending could persist well into 2025 and potential tax-loss selling heading into year-end, we believe patience is needed. However, at 5.4 times EV/EBITDA (C2025E), CTS continues to trade at the bottom end of the peer group and its historical range. We expect the surge in buyback activity following the disappointing Q3 pre-release to continue,” said Mr. Kwan.