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Converge Technology Solutions Reports Third Quarter 2022 Financial Results USA – English – USA – English – PR Newswire

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TORONTO and GATINEAU, QC, Nov. 8, 2022 /PRNewswire/ – Converge Technology Solutions Corp. (“Converge” or “the Company“) (TSX: CTS) (FSE: 0ZB) (OTCQX: CTSDF) is pleased to provide its financial results for the three and nine months ended September 30, 2022.  All figures are in Canadian dollars unless otherwise stated.
Financial Summary
In $000s except per share amounts
3-month
Q3 2022
3-month
Q3 2021
Growth
%
9-month
Q3 2022
9-month
Q3 2021
Growth
%
Gross revenues1
730,571
472,419
55 %
2,134,178
1,332,639
60 %
Net revenues
603,206
367,349
64 %
1,749,899
1,022,858
71 %
Gross profit (GP)
139,654
83,771
67 %
381,851
229,811
66 %
Gross margin %
23.2 %
22.8 %
21.8 %
22.5 %
Adjusted EBITDA1
30,967
18,862
64 %
99,804
59,349
68 %
Adjusted EBITDA1 as a % of GP
22.2 %
22.5 %
26.1 %
25.8 %
Adjusted EBITDA1 as a % of Net Revenue
5.1 %
5.1 %
5.7 %
5.8 %
Net income
18,228
4,596
297 %
27,449
9,287
196 %
Net income per diluted share
$0.10
$0.02
400 %
$0.14
$0.05
180 %
Adjusted net income1
21,266
13,815
54 %
73,676
39,979
84 %
Adjusted EPS1
$0.10
$0.07
43 %
$0.34
$0.22
55 %

Financial highlights for the three-month period ended September 30, 2022 (“Q3-2022”):

_________________________________
1  This is a Non-IFRS measure (including non-IFRS ratio) and not a recognized, defined or a standardized measure under IFRS. See the Non-IFRS Financial Measures section of this news release for definitions, uses and a reconciliation of historical non-IFRS financial measures to the most directly comparable IFRS financial measures.
2 Bookings backlog is calculated as purchase orders received from customers not yet delivered at the end of the fiscal period.


Q3-2022 Business Highlights & Subsequent to Quarter

“We continue to report record financial results, and I am incredibly proud that Converge grew by over 60% year-over-year across revenue, gross profit and Adjusted EBITDA,” said Shaun Maine, CEO of Converge. “The fact that after 3 quarters Converge has higher revenue, gross profit and Adjusted EBITDA compared to our full year 2021 results illustrates how Converge’s combination of organic and inorganic growth is the best growth model in the IT Services industry.  Combined with that, our 85% year over year growth in professional services is at a higher rate than the overall business proving our shift to become strategically more valuable to our customer. This means that we now have an approximately $500m annualized services business. The expansion of our advisory business, particularly around analytics and cybersecurity, has resulted in record gross profit and accelerated services growth.  Having completed our 10th transaction in 2022 we exceeded our goal of adding $1b gross revenue through acquisitions this year. Now we will focus on integration and our cross-selling strategies, particularly around services and high value solutions. We expect to see the high demand for our services-led, software-enabled hybrid IT solutions continue for the remainder of 2022, with Q4 growth rates consistent with Q3 year-to-date, and this high demand continuing into 2023.”
Conference Call Details:
Date: Wednesday, November 9th, 2022
Time: 8:00 AM Eastern Time
Participant Webcast Link:
Webcast Link – https://app.webinar.net/kOdERzOlj7K
Participant Dial-in Details:
Confirmation #: 18195364
Toronto: 416-764-8609
North American Toll Free: 888-390-0605
International Toll-Free Numbers:
Germany: 08007240293
Ireland: 1800939111
Spain: 900834776
Switzerland: 0800312635
United Kingdom: 08006522435
Recording Playback:
A recording of the webcast will be available after the call using the following link:
Webcast Link –  https://app.webinar.net/kOdERzOlj7K
Expiry Date: November 9th, 2023
A live audio webcast accompanied by presentation slides and archive of the conference call will be available by visiting the Company’s website at https://convergetp.com/investor-relations/. Please connect at least 15 minutes prior to the conference call to ensure time for any software download that may be needed to hear the webcast.
About Converge
Converge Technology Solutions Corp. is a software-enabled IT & Cloud Solutions provider focused on delivering industry-leading solutions and services. Converge’s global solution approach delivers advanced analytics, application modernization, cloud, cybersecurity, digital infrastructure, and digital workplace offerings to clients across various industries. The Company supports these solutions with advisory, implementation, and managed services expertise across all major IT vendors in the marketplace. This multi-faceted approach enables Converge to address the unique business and technology requirements for all clients in the public and private sectors. For more information, visit convergetp.com.
Summary of Consolidated Statements of Financial Position
(expressed in thousands of Canadian dollars)
September 30, 2022
December 31, 2021
Assets
Current assets
 Cash
$          172,229
$       248,193
 Restricted cash
4,348

 Trade and other receivables
637,764
416,499
 Inventories
163,777
104,254
 Prepaid expenses and other assets
21,502
11,762
999,620
780,708
Long-term assets
Property, equipment, and right-of-use assets, net
64,708
30,642
Intangible assets, net
454,117
233,586
Goodwill
502,575
323,284
Other non-current assets
663
617
$       2,021,683
$      1,368,837
Liabilities and shareholders’ equity
Current liabilities
Trade and other payables
$          686,629
$         519,434
Borrowings
371,690
816
Other financial liabilities
43,073
29,407
Deferred revenue
69,371
27,581
Income taxes payable
14,153
13,977
1,184,916
591,215
Long-term liabilities
Other financial liabilities
106,413
85,296
Borrowings

412
Deferred tax liability
90,685
43,086
$        1,382,014
$          720,009
Shareholders’ equity
Common shares
609,916
633,489
Contributed surplus
6,497
2,325
Exchange rights
1,641
2,396
Accumulated other comprehensive (loss) income
(530)
329
Deficit
(9,874)
(25,050)
Total equity attributable to shareholders of Converge
607,650
613,489
Non-controlling interest
32,019
35,339
639,669
648,828
$          2,021,683
$        1,368,837

Summary of Consolidated Statements of Income and Comprehensive Income
(expressed in thousands of Canadian dollars)
For the three months ended
September 30,

For the nine months ended
September 30,

2022
2021
2022
2021
Revenues
  Product
$
474,006
$
289,591
$
1,419,216
$
823,385
  Service
129,200
77,758
330,683
199,473
Total revenue
603,206
367,349
1,749,899
1,022,858
Cost of sales
463,552
283,578
1,368,048
793,047
Gross profit
139,654
83,771
381,851
229,811
Selling, general and administrative expenses 
111,032
66,092
287,267
173,365
Income before the following
28,622
17,679
94,584
56,446
Depreciation and amortization
23,094
10,162
54,751
24,548
Finance expense, net
5,886
1,528
10,798
5,675
Special charges
8,211
8,702
19,492
17,101
Share-based compensation expense
1,275
1,193
4,172
1,193
Other income
(25,570)
(8,491)
(22,432)
(5,485)
Income before income taxes
15,726
4,585
27,803
13,408
Income tax expense (recovery)
(2,502)
(11)
304
4,121
Net income
$
18,228
$
4,596
$
27,499
$
9,287
Net income (loss) attributable to:
      Shareholders of Converge
20,595
4,596
30,819
9,287
      Non-controlling interest
(2,367)

(3,320)

$
18,228
$
4,596
$
27,499
$
9,287
Other comprehensive income
Exchange differences on translation of foreign operations
5,352
(641)
(859)
(23)
Comprehensive income
$
23,580
$
3,955
$
26,640
$
9,264
Comprehensive income (loss) attributable to:
      Shareholders of Converge
25,947
3,955
29,660
9,264
      Non-controlling interest
(2,367)

(3,320)

$
23,580
3,955
26,640
9,264
Adjusted EBITDA[2]
$
30,967
$
18,862
$
99,804
$
59,349
Adjusted EBITDA as a % of Net Revenue2
5.1 %
5.1 %
5.7 %
5.8 %
Adjusted EBITDA as a % of Gross Profit2
22.2 %
22.5 %
26.1 %
25.8 %
_______________________________
2  This is a Non-IFRS measure (including non-IFRS ratio) and not a recognized, defined or a standardized measure under IFRS. See the Non-IFRS Financial Measures section of this news release for definitions, uses and a reconciliation of historical non-IFRS financial measures to the most directly comparable IFRS financial measures.

Summary of Consolidated Statements of Cash Flows
(expressed in thousands of Canadian dollars)
For the three months
ended September 30,

For the nine months
ended September 30,

2022
2021
2022
2021
Cash flows from operating activities
Net income
$
18,228
$
4,596
$
27,499
$
9,287
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization
24,101
10,324
58,071
26,635
Unrealized foreign exchange gains
(24,233)
(7,991)
(20,532)
(5,025)
Share-based compensation expense
1,275
1,193
4,172
1,193
   Finance expense, net
5,886
1,528
10,798
5,675
   Change in fair value of contingent consideration

3,808

4,405
   Income tax expense (recovery)
(2,502)
(11)
304
4,121
22,755
13,447
80,312
46,291
Changes in non-cash working capital items
Trade and other receivables
71,898
34,045
(4,241)
93,065
Inventories
6,511
(7,103)
17,769
(31,290)
Prepaid expenses and other assets
835
(4,146)
(3,781)
(4,447)
Trade and other payables
(86,206)
16,896
(69,836)
(48,706)
Income taxes payable
(1,901)
(634)
(18,926)
(2,613)
Other financial liabilities
(338)
6
1,898
1,877
Deferred revenue and customer deposits
1,396
(4,390)
7,996
13,123
Cash from operating activities
14,950
48,121
11,191
67,300
Cash flows used in investing activities
Purchase of property and equipment
(4,332)
(810)
(18,812)
(3,661)
Proceeds on disposal of property and equipment 

421
(6)
552
Repayment of contingent consideration


(10,135)
(5,502)
Repayment of deferred consideration
(121)
(1,879)
(7,069)
(5,627)
Business combinations, net of cash acquired
(154,212)
(148,143)
(353,683)
(244,293)
Cash used in investing activities
(158,665)
(150,411)
(389,705)
(258,531)
Cash flows from financing activities
Transfers from (to) restricted cash
141
(11,467)
(4,372)
(11,467)
Interest paid
(1,229)
(561)
(4,287)
(5,639)
Dividend paid


(1,080)

Payments of lease liabilities
(3,462)
(2,584)
(8,494)
(7,001)
Net proceeds from issuance of common shares

248,370

493,886
Repurchase of common shares
(30,539)

(30,539)

Repayment of notes payable
(37)
(376)
(196)
(3,790)
Net proceeds from (repayment of) borrowings
173,084
(51,900)
357,901
(135,448)
Cash from financing activities
137,958
181,482
308,933
330,541
Net change in cash during the period
(5,757)
79,192
(69,581)
139,310
Effect of foreign exchange on cash
(6,189)
6,229
(6,383)
6,267
Cash, beginning of period
184,175
124,923
248,193
64,767
Cash, end of period
$
172,229
$
210,344
$
172,229
$
210,344

Non-IFRS Financial Measur
es
This news release refers to certain performance indicators including “Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA)”, “Adjusted Free Cash Flow”, “Adjusted Free Cash Flow Conversion”, “Adjusted Net Income” and “Adjusted Earnings per Share”, “Gross Revenue”, and “Organic Growth” which are not recognized under IFRS and do not have any standardized meaning prescribed by IFRS. Converge’s method of calculating such non-IFRS measures and ratios may differ from methods used by other companies and therefore may not be comparable to similar measures presented by other companies. Management believes that these measures are useful to most shareholders, creditors, and other stakeholders in analyzing the Company’s operating results, and can highlight trends in its core business that may not otherwise be apparent when relying solely on IFRS financial measures. The Company also believes that securities analysts, investors and other interested parties frequently use non-IFRS measures in the evaluation of issuers.
Management also uses non-IFRS measures and ratios in order to facilitate operating performance comparisons from period to period, prepare annual operating budgets and assess the ability to meet capital expenditure and working capital requirements. These non-IFRS financial measures and ratios are furnished to provide additional information and should not be considered in isolation or as an alternative to the consolidated income (loss) or any other measure of performance under IFRS. Investors are encouraged to review the Company’s financial statements and disclosures in their entirety and are cautioned not to put undue reliance on non-IFRS measures and ratios and view them in conjunction with the most comparable IFRS financial measures.
Adjusted EBITDA
Adjusted EBITDA represents net income (loss) adjusted to exclude amortization, depreciation, interest expense and finance costs, foreign exchange gains and losses, share-based compensation expense, income tax expense, and special charges. Special charges consist primarily of restructuring related expenses for employee terminations, lease terminations, and restructuring of acquired companies, as well as certain legal fees or provisions related to acquired companies. From time to time, it may also include adjustments in the fair value of contingent consideration, and other such non-recurring costs related to restructuring, financing, and acquisitions.
Adjusted EBITDA is not a recognized, defined, or standardized measure under IFRS. The Company’s definition of Adjusted EBITDA will likely differ from that used by other companies and therefore comparability may be limited.  Adjusted EBITDA should not be considered a substitute for or in isolation from measures prepared in accordance with IFRS.
The Company has reconciled Adjusted EBITDA to the most comparable IFRS financial measure as follows:
For the three months
ended September 30,
For the nine months
ended September 30,
2022
2021
2022
2021
Net income before taxes
$    15,726
$    4,585
$     27,803
$    13,408
Finance expense
5,886
1,528
10,798
5,675
Share-based compensation expense
1,275
1,193
4,172
1,193
Depreciation and amortization
23,094
10,162
54,751
24,548
Depreciation included in cost of sales
1,008
683
3,320
2,443
Foreign exchange gain
(24,233)
(7,991)
(20,532)
(5,025)
Special charges
8,211
8,702
19,492
17,107
Adjusted EBITDA
$   30,967
$   18,862
$   99,804
$   59,349

Adjusted Free Cash Flow and Adjusted Free Cash Flow Conversion

The Company calculates Adjusted Free Cash Flow as Adjusted EBITDA less: (i) recurring capital expenditures (“Recurring Capex”) and (ii) lease payments relating to the IFRS 16 lease liability (“IFRS 16 Lease Liability”). Management defines Recurring Capex as the actual capital expenditures which are required to maintain the Company’s existing and ongoing operations in its normal course of business. Recurring Capex excludes one-time expenditures to support growth initiatives that the Company categorizes as non-recurring in nature. Adjusted Free Cash Flow is a useful measure that allows the Company to primarily identify how much pre-tax cash is available for continued investment in the business and for the Company’s growth by acquisition strategy.
Management also believes that Adjusted EBITDA is a good proxy for cash generation and as such, Adjusted Free Cash Flow Conversion is a useful metric that demonstrates that the rate at which the Company can convert Adjusted EBITDA to cash.
The following table provides a calculation for Adjusted Cash Flow and Adjusted Cash Flow Conversion:
For the three months
ended September 30,
For the nine months
ended September 30,
2022
2021
2022
2021
Adjusted EBITDA
$   30,967
$   18,862
$   99,804
$   59,349
 Capex
(2,765)
(810)
(8,622)
(3,661)
 Payment of lease liabilities
(3,462)
(2,584)
(8,494)
(7,001)
Adjusted Free Cash Flow
$   24,740
$   15,468
$   82,688
$   48,687
Adjusted Free Cash Flow Conversion
80 %
82 %
83 %
82 %

Adjusted EBITDA as a % of Net Revenue

The Company believes that Adjusted EBITDA as a % of Net Revenue is a useful measure of the Company’s operating efficiency and profitability. This is calculated by dividing Adjusted EBITDA by net revenue.
Adjusted EBITDA as a % of Gross Profit
The Company believes that Adjusted EBITDA as a % of Gross Profit is a useful measure of the Company’s operating efficiency and profitability. This is calculated by dividing Adjusted EBITDA by gross profit.
Adjusted Net Income and Adjusted Earnings per Share (“EPS”)
Adjusted Net Income represents net income adjusted to exclude special charges, amortization of acquired intangible assets, and share-based compensation. The Company believes that Adjusted Net Income is a more useful measure than net income as it excludes the impact of one-time, non-cash and/or non-recurring items that are not reflective of Converge’s underlying business performance. Adjusted EPS is calculated by dividing Adjusted Net Income by the total weighted average shares outstanding on a basic and diluted basis. 
The Company has provided a reconciliation to the most comparable IFRS financial measure as follows:
For the three months
For the nine months
ended September 30,
ended September 30,
2022
2021
2022
2021
Net income
$    18,228
$      4,596
$      27,498
$      9,287
Special charges
8,211
8,702
19,492
17,107
Amortization of acquired intangible assets
17,785
7,315
43,047
17,417
Foreign exchange gain
(24,233)
(7,991)
(20,533)
(5,025)
Share-based compensation
1,275
1,193
4,172
1,193
Adjusted Net Income:
$    21,266
$    13,815
$    73,676
$       39,979
     Basic
0.10
0.07
0.34
0.22
     Diluted
0.10
0.07
0.34
0.22

Gross revenue

Gross revenue, which is a non-IFRS measurement, reflects the gross amount billed to customers, adjusted for amounts deferred or accrued. The Company believes gross revenue is a useful alternative financial metric to net revenue, the IFRS measure, as it better reflects volume fluctuations as compared to net revenue. Under the applicable IFRS 15 ‘principal vs agent’ guidance, the principal records revenue on a gross basis and the agent records commission on a net basis. In transactions where Converge is acting as an agent between the customer and the vendor, net revenue is calculated by reducing gross revenue by the cost of sale amount. 
The Company has provided a reconciliation of gross revenue to net revenue, which is the most comparable IFRS financial measure, as follows:
For the three months
For the nine months
ended September 30,
ended September 30,
2022
2021
2022
2021
Product
$    474,006
$     289,591
$    1,419,216
$     823,385
Managed services
35,681
25,785
101,932
64,205
Third party and professional services
220,884
157,043
613,030
445,049
 Total
$    730,571
$     472,419
$    2,134,178
$     1,332,639
Adjustment for sales transacted as agent
127,365
105,070
384,279
309,781
 Net revenue
$    603,206
$    367,349
$    1,749,899
$      1,022,858

Organic Growth

The Company measures organic growth on a quarterly and year-to-date basis, at the gross revenue and gross profit levels, and includes the contributions under Converge ownership in the current and comparative period(s). In calculating organic growth, the Company therefore deducts gross revenue and gross profit generated from companies that were acquired in the current reporting period(s).
Gross revenue organic growth is calculated by deducting prior period gross revenues, as reported in the Company’s public filings, from current period gross revenue for the same portfolio of companies. Gross revenue organic growth percentage is calculated by dividing organic growth by prior period reported gross revenues.
The following table calculates gross revenue organic growth for Q3-2022:
Q3
(3-month)
Q3 YTD
(9-month)
Gross revenue
$    730,571
$    2,134,178
Less: gross revenues from Companies not owned in comparative period
230,348
634,781
Gross revenue of Companies owned in comparative period
500,223
1,499,397
Prior period gross revenue
472,419
1,332,639
Organic Growth – $
$      27,804
$      166,758
Organic Growth – %
5.9 %
12.5 %

Gross profit organic growth is calculated by deducting prior period gross profit, as reported in the Companies public filings, from current period gross profit for the same portfolio of companies. Gross profit organic growth percentage is calculated by dividing organic growth by prior period reported gross profit.
The following table calculates gross profit organic growth for Q3-2022:
Q3
(3-month)
Q3 YTD
(9-month)
Gross profit
$    139,654
$   381,851
Less: gross profit from companies not owned in comparative period
44,994
117,539
Gross profit of companies owned in comparative period
94,660
264,312
Prior period gross profit
83,771
229,811
Organic Growth – $
$      10,889
$       34,501
Organic Growth – %
13.0 %
15.0 %

Forward-Looking Information

This press release contains certain “forward-looking information” and “forward-looking statements” (collectively, “forward-looking statements“) within the meaning of applicable Canadian securities legislation regarding Converge and its business. Any statement that involves discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions, future events or performance (often but not always using phrases such as “expects”, or “does not expect”, “is expected” “anticipates” or “does not anticipate”, “plans”, “budget”, “scheduled”, “forecasts”. “estimates”, “believes” or intends” or variations of such words and phrases or stating that certain actions, events or results “may” or “could, “would”, “might” or “will” be taken to occur or be achieved) are not statements of historical fact and may be forward-looking statements. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while the Company considers reasonable, are subject to known and unknown risks, uncertainties, and other factors which may cause the actual results and future events to differ materially from those expressed or implied by such forward-looking statements. Except as required by law, Converge assumes no obligation to update the forward-looking statements of beliefs, opinions, projections, or other factors, should they change.  The reader is cautioned not to place undue reliance on forward-looking statements.
For a detailed description of the risks and uncertainties facing the Company and its business and affairs, readers should refer to the Company’s filings available on SEDAR under the Company’s profile at www.sedar.com including its most recent Annual Information Form, its Management Discussion and Analysis and its Annual and Quarterly Financial Statements.
SOURCE Converge Technology Solutions Corp.
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