Converge Technology Solutions is aligned with IT spending trends, Paradigm says

Cloud and software sales should accelerate over the second half of the year for hybrid IT solutions provider Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart, News TSXV:CTS).

That’s according to Paradigm Capital analyst Kevin Krishnaratne, who Friday provided an update on the company and reaffirmed his “Buy” rating and 12-month target of $1.75 per share.

Converge served up its fiscal second quarter 2019 financials on Wednesday, coming in with revenue of $149.3 million, a 44.5 per cent increase year-over-year, and adjusted EBITDA of $5.5 million compared to $5.3 million a year prior.

Those numbers came in a little under Krishnaratne’s estimates, which had called for revenue of $151 million and EBITDA of about $6 million. Drilling down, the analyst says CTS’ opex was in line with his estimates and that the company’s increasing level of software spending (20 per cent of revenue over the first half of 2019) and incrementally higher gross margins quarter-on-quarter (22.9 per cent in Q2 versus 22..6 per cent in Q1) were key positives for the company.

“In our view, CTS’ deep understanding of its clients increasingly complex IT networks that leverage multiple IT vendors and a mix of public and private cloud services should enable it to drive an increasing mix of Managed Services revenue and drive profit upside…”

The analyst says with IBM’s deal for Red Hat now complete, he expects many opportunities for Converge to benefit from IBM’s push to accelerate its own cloud offerings, resulting in more upside to his forecast.

“We believe that CTS is well aligned where IT spending trends are moving, namely its strategy to offer its clients software, hybrid cloud, and Managed Services, which are higher growth and higher margin and help the company standout versus traditional Value Added Resellers (VAR) who focus more on Hardware and compete on price. In our view, CTS’ deep understanding of its clients increasingly complex IT networks that leverage multiple IT vendors and a mix of public and private cloud services should enable it to drive an increasing mix of Managed Services revenue and drive profit upside,” writes Krishnaratne.

Converge continued its growth-by-acquisition strategy over the Q2, acquiring Portland, Oregon-based Nordisk Systems, which has a mix of hardware, software and managed service offerings with a focus on IBM products. Nordisk generated US$19.3 million in revenue for the period ended April 2019 with EBITDA of US$1.5 million.

Krishnaratne says that the Nordisk deal compares well with the recent acquisitions of Presidio by BC Partners and PCM Inc by June Insight Enterprises. The analyst believes that Converge is on track to complete four to six deals this year.

Adjusting his forecasts, the analyst now thinks that CTS will generate full fiscal 2019 revenue and adjusted EBITDA of $673.2 million (previously $674.7 million) and $29.2 million (previously $29.8 million), respectively. For fiscal 2020’s revenue and adjusted EBITDA, the analyst is calling for $744.6 million (previously $746.5 million) and $34.8 million (unchanged), respectively.

Converge, which was formerly known as Norwick Capital Corp, underwent an amalgamation and share consolidation last November, with the stock now trading up two per cent since the November consolidation.

Krishnaratne’s $1.75 target price represented a projected 12-month return of 86.2 per cent at the time of publication.