Converge Technology Solutions (CTS-T; Buy)
Material slowdown hit very late in Q3. CFO Avjit Kamboj mentioned that up until the last week of the quarter, business activity remained in-line with internal expectations. However, in the final days of the quarter, the company realized that certain deals had slipped into Q4 or F2025, with some customers continuing to delay spending decisions due to macroeconomic and geopolitical uncertainties/challenges. Specifically, Converge saw procurement departments, particularly at the enterprise level, remain more involved in identifying IT-related needs for their respective companies. Consequently, Converge announced preliminary Q3 results that were materially below guidance and expectations (link).
The delayed deals also included the large, high-performance AI compute deal that was removed from its annual guidance when it reported its Q2 results in August. Mr. Kamboj stated that the client is still in the process of building its own data centers and has decided to delay placing orders until they are fully built. Once completed, the client could place one large order with Converge or place a series of smaller ones over time.
Mr. Kamboj mentioned that he remains very comfortable with the guidance range for Q4/F24 (link), as management took a comprehensive bottom-up approach to assess the probability of deals closing within the quarter.
Microsoft licensing changes creates opportunity. Mr. Kamboj believes that recent changes introduced to MSFT's Cloud Solution Provider (CSP) Program could even the playing field for the company in competing for contracts for large enterprises. Historically, only a limited number of ITSPs/VARs (called Large Account Resellers) were able to sell Enterprise Agreements (EA). However, Microsoft has now changed its incentives to include CSP's, allowing Converge to compete for these contracts, which could provide further opportunities for growth for Converge in both North America and Europe. That said, Mr. Kamboj clarified that it would have to wait for existing EAs to expire before going for these clients/contracts (EAs typically have a 3-year term).
European business is viewed as non-core; open to inbound interest. Both Germany and the U.K. are deemed to be non-core to Converge's strategy. While Germany had a decent Q3, with GP growing ~26% y/y to $15.1mm, the results were helped by one-time hardware (iPad) transactions in the education market (link), and the outlook remains uncertain as the region remains heavily impacted by macroeconomic and geopolitical headwinds.
Meanwhile, the U.K. market has remained relatively steady, but growth remains below management's expectations. Converge is looking to expand its footprint in the U.K. from the education and government verticals into the commercial market, and is seeing some early success there with software sales.
Although there is no formal strategic review for these businesses, management is open to inbound interest for these businesses, as it refocuses its efforts on the large growth potential it still sees in the North American market.