Converge Technology still a Buy, says Eight Capital

Eight Capital analyst Christian Sgro remains curious in regards to Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart, News, Analysts, Financials TSX:CTS), maintaining a “Buy” rating and $14.50/share target price for a projected return of 36 per cent in an update to clients on Wednesday.

Toronto-based Converge Technology Solutions operates in both Canada and the United States, providing storage devices and systems, computer products and software, along with peripherals and accompanying support to corporate and government institutions.

Sgro’s updated analysis comes after Converge released its fourth quarter financial results along with 2021 year-end figures.

“With a $350 million backlog that we expect could expand before unwinding, we view the outlook as uncertain as key vendors continue to grapple with supply chain issues,” Sgro said. “With that said, we continue to believe that many of these challenges will likely be resolved within the calendar year, creating the potential for organic growth well over 10 per cent in 2022.”

Converge’s quarterly report was headlined by $505 million in net revenue, just beyond the high end of the preliminary guidance range of between $497.5 million and $504.5 million, to produce 37 per cent sequential growth and a 74 per cent year-over-year increase. The number was also a beat in relation to the consensus forecast of $489.3 million, while being slightly closer to the Eight Capital projection of $500.8 million. Meanwhile, net revenue came in at $645.2 million, good for 37 per cent sequential growth and a 54 per cent year-over-year increase.

Converge’s gross profit was also on the high end of its guidance at $115.9 million for a 22.9 per cent margin, with the guidance having set a target between $114 million and $116 million, while coming in slightly ahead of the consensus expectation of $113.4 million and the Eight Capital forecast of $115 million. 

It was a similar story for the company’s adjusted EBITDA, which came in at $34.7 million and a margin of 6.9 per cent, with the figure again being at the high end of the guidance range of between $32.1 million and $34.8 million. The number was also a beat in relation to the consensus estimate of $32.4 million and a 6.6 per cent margin, while the Eight Capital forecast was closer at $33.1 million for a 6.6 per cent margin.

All told, the company exited the quarter with $248.2 million in cash, along with access to an additional $300 million through its ABL facility.

“To achieve the net new logos and organic growth the Company has reported, while managing backlog and inventory challenges, really speaks to the level of commitment and success our employees strive for and reinforces the strength of our corporate culture,” said Shaun Maine, CEO of Converge Technology Solutions in a March 22 press release. “I believe it is safe to say that Converge has advanced its business strategy beyond expectations for 2021 and will continue to do so throughout 2022, as we leverage our industry leaders who provide invaluable leadership to our family of companies and overall global strategy.”

According to Sgro, the one miss in the company’s report was ARR of $89 million, slightly off the $100 million projection on account of delays in networking gear and other key hardware deliveries, another byproduct of the ongoing global supply chain headwinds Converge, along with many of its key vendors, are facing.

“We expect the $200 million goal for 2022 is intact considering the backlog and contribution from PDS acquired in Q1/22,” Sgro noted.

The company recently made a significant move on the executive side, bringing in John Teltsch, a 28-year veteran of IBM in a variety of roles including heading the IBM Partner Ecosystem and engaging with partners like Converge, as its new Chief Revenue Officer, where he is expected to deepen Converge’s relationship with IBM while also building the company’s maturing revenue and profitability strategies/targets across the organization.

Converge has also completed three acquisitions in the opening quarter of 2022, two in North America and one in Europe, to produce what Sgro forecasts to be a cash outlay of $80 million on top of the cash the company exited 2021 with. 

The three acquisitions were German company Visucom, which supplies professional screens, interactive blackboards, loudspeakers, cameras, projectors, displays, and media controls for education and public sector clients, along with digital transformation outlet PDS Holding Company, and most recently, the $3 million tuck-in acquisition of digital transformation accelerator and CRM outfit Portage CyberTech.

Converge’s stock price has climbed to a 90.9 per cent return over the last 12 months, though the start of 2022 has seen the value drop by 5.4 per cent. After hitting a 52-week low of $5.09/share on March 29, the stock has remained on the upward trajectory, hitting a 52-week high of $12.85/share on September 7.