Converge Technology Solutions Reports Second Quarter 2022 Financial Results

Rhea-AI Summary

Converge Technology Solutions Corp. (CTSDF) announced strong financial results for Q2 and H1 2022. Key highlights include:

• Net revenue surged by 73% year-over-year to $596.7 million.
• Gross profit rose 70% to $133.2 million.
• Adjusted EBITDA increased 80%, reaching $39.2 million.
• Net income grew significantly by 1039% to $11.7 million.
• Achieved 109 net new logos in Q2.
• Engaged in acquisitions totaling $939.2 million in gross revenues.

Positive

• Net revenue increased 73% to $596.7 million in Q2 2022.
• Gross profit rose 70% to $133.2 million in Q2 2022.
• Adjusted EBITDA grew 80% to $39.2 million in Q2 2022.
• Net income increased 1039% to $11.7 million in Q2 2022.
• Achieved 109 net new logos in Q2 2022.
• Completed 8 acquisitions year-to-date totaling $939.2 million in LTM gross revenue.

Negative

• Gross profit margin slightly decreased to 22.3% from 22.7% year-over-year.

TORONTO and GATINEAU, Quebec, Aug. 09, 2022 (GLOBE NEWSWIRE) -- 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 six months ended June 30, 2022. All figures are in Canadian dollars unless otherwise stated.

Financial Summary

In $000s except per share amounts	Q2 2022			Q2 2021			Growth %		H1 2022			H1 2021			Growth %
Gross revenues		729,678			452,120		61	%		1,403,607			860,220		63	%
Net revenues		596,656			345,307		73	%		1,146,693			655,509		75	%
Gross profit (GP)		133,152			78,244		70	%		242,196			146,040		66	%
Gross profit (GP) %		22.3	%		22.7	%				21.1	%		22.3	%
Adjusted EBITDA		39,188			21,720		80	%		68,837			40,488		70	%
Adjusted EBITDA as a % of GP		29.4	%		27.8	%				28.4	%		27.7	%
Adjusted EBITDA as a % of Net Revenue		6.6	%		6.3	%				6.0	%		6.2	%
Net income		11,678			1,025		1039	%		9,270			4,690		98	%
Net income per diluted share	$0.05			$0.01			400	%	$0.05			$0.03			67	%
Adjusted net income		29,900			14,148		111	%		52,410			26,164		100	%
Adjusted EPS	$0.14			$0.08			75	%	$0.24			$0.16			50	%

Financial highlights for the three-month period ended June 30, 2022 (“Q2-2022”):

• Q2-2022 net revenue increased 73% over the same quarter last year (“Q2-2021”) to $596.7 million
• Q2-2022 gross profit increased 70% over last year to $133.2 million
• Adjusted EBITDA¹ increased 80% to $39.2 million from $21.7 million last year
• For Q2-2022, the Company generated Adjusted Free Cashflow and Adjusted Free Cash Flow Conversion¹ of $33.8 million and 86%, respectively
• Reported Adjusted EPS¹ of $0.14 per share for Q2-2022 increasing by 75% from $0.08 per share in Q2-2021
• Organic gross revenue growth¹ for Q2-2022 was approximately 8.5%
• Product Bookings backlog² increased to approximately $507 million in Q2-2022 compared to $472 million in Q1-2022, after clearing $375 million worth of Q1 backlog during the quarter
• Q2-2022 Services Backlog² was approximately $71 million compared to $45 million in Q1-2022
• Achieved 109 net new logos in Q2-2022, securing 220 net new logos in H1-2022
  

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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.

Q2-2022 Business Highlights & Subsequent to Quarter

• Acquired approximately $939.2 million of LTM gross revenue and $56.0 million EBITDA through 8 acquisitions year-to-date including Paragon Development Systems, Inc. (“PDS”); Visucom GmbH (“Visucom”); 1CRM Systems Corp. (“1CRM”); Creative Breakthroughs, Inc. (“CBI”); Interdynamix Systems (IDX); Solutions Notarius Inc. (“Notarius”); Gesellschaft für digitale Bildung, Institur für modern Bildung, and DEQSTER (collectively “GfdB”); and Technology Integration Group (“TIG”).
• Announced a refinanced, five-year $500 million global revolving credit facility (the “Global Credit Facility”), led by J.P. Morgan and Canadian Imperial Bank of Commerce as joint lead arrangers with the Bank of Nova Scotia, the Toronto-Dominion Bank, and the Bank of Montreal participating in the lender group
• The Global Credit Facility includes an uncommitted accordion feature of $100 million, for a total borrowing capacity of up to $600 million; double the Company’s existing ABL credit facility of $300 million
• Converge announced TSX approval of Normal Course Issuer Bid to commence August 11, 2022 allowing the Company to purchase for cancellation up to an aggregate of 10,744,818 common shares
• Expanded Converge Board of Directors with addition of Dr. Toni Rinow, bringing more than 20 years of international experience as a transformational finance and business leader
• Converge ranked within the top 40 for both CRN® 2022 Solution Provider 500 list and CRN Fast Growth 150 list and placed eighth on 2022 CDN Top 100 Solution Providers

“We continue to report record financial results, and I am incredibly proud that Converge grew by over 70% year-over-year across revenue, gross profit and Adjusted EBITDA,” said Shaun Maine, CEO of Converge. “Despite the macroeconomic challenges faced in the consumer market, business demand for digital transformation and hybrid IT solutions remains robust while the deep technical skills that Converge possesses surrounding analytics, cybersecurity, cloud and managed services remain scarce, especially in the mid-market. I’m proud of the fact that the Company has executed on our stated acquisition plans, closing 8 acquisitions to date including GfdB and TIG completed after quarter end, equating to approximately $939 million in LTM gross revenue and $56 million in Adjusted EBITDA year-to-date. Our North American team continues to refine their acquisition, integration, and cross-selling strategies, and it is my great pleasure to announce that in addition to Greg Berard’s role as President, he will now become the North American CEO to clarify his operational role in North America to customers, partners and employees.”

Conference Call Details:

Date: Wednesday, August 10^th, 2022
Time: 8:00 AM Eastern Time

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Expiry Date: August 10^th, 2023

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.

For further information contact:

Converge Technology Solutions Corp.
Email: investors@convergetp.com
Phone: 416-360-1495

Summary of Consolidated Statements of Financial Position
(expressed in thousands of Canadian dollars)

		June 30, 2022			December 31, 2021
Assets
Current assets
	Cash	$	184,175		$	248,193
	Restricted cash		4,375			-
	Trade and other receivables		597,468			416,499
	Inventories		119,264			104,254
	Prepaid expenses and other assets		17,855			11,762
			923,137			780,708
Long-term assets
	Property, equipment, and right-of-use assets, net		49,097			30,642
	Intangible assets, net		355,968			233,586
	Goodwill		421,786			323,284
	Other non-current assets		609			617
		$	1,750,597		$	1,368,837
Liabilities and shareholders’ equity
Current liabilities
	Trade and other payables	$	647,488		$	519,434
	Borrowings		192,257			816
	Other financial liabilities		31,926			29,407
	Deferred revenue		52,391			27,581
	Income taxes payable		7,297			13,977
			931,359			591,215
Long-term liabilities
	Other financial liabilities		86,347			85,296
	Borrowings		80			412
	Deferred tax liability		72,850			43,086
		$	1,090,636		$	720,009
Shareholders' equity
	Common shares		633,809			633,489
	Contributed surplus		5,222			2,325
	Exchange rights		2,076			2,396
	Accumulated other comprehensive (loss) income		(705	)		329
	Deficit		(14,827	)		(25,050	)
Total equity attributable to shareholders of Converge			625,575			613,489
Non-controlling interest			34,386			35,339
			659,961			648,828
		$	1,750,597		$	1,368,837

Summary of Consolidated Statements of Income and Comprehensive Income
(expressed in thousands of Canadian dollars)

		Three months ended June 30,						Six months ended June 30,
		2022			2021			2022			2021
Revenues
Product	$	491,821		$	281,287		$	945,210		$	533,794
Service		104,835			64,020			201,483			121,715
Total revenue		596,656			345,307			1,146,693			655,509
Cost of sales		463,504			267,063			904,497			509,469
Gross profit		133,152			78,244			242,196			146,040
Selling, general and administrative expenses		95,823			57,630			176,235			107,273
Income before the following		37,329			20,614			65,961			38,767
Depreciation and amortization		17,178			7,898			31,657			14,386
Finance expense, net		3,094			1,727			4,912			4,147
Special charges		5,559			5,354			11,280			8,405
Share-based compensation expense		1,685			-			2,897			-
Other (income) expenses		(3,265	)		1,913			3,138			3,006
Income before income taxes		13,078			3,722			12,077			8,823
Income tax expense		1,400			2,697			2,807			4,133
Net income	$	11,678		$	1,025		$	9,270		$	4,690
Net income (loss) attributable to:
Shareholders of Converge		12,017			1,025			10,223			4,690
Non-controlling interest		(339	)		-			(953	)		-
	$	11,678		$	1,025		$	9,270		$	4,690
Other comprehensive income (loss)
Exchange differences on translation of foreign operations		5,883			820			(1,034	)		618
Comprehensive income	$	17,561		$	1,845		$	8,236		$	5,308
Comprehensive income (loss) attributable to:
Shareholders of Converge		17,900			1,845			9,189			5,308
Non-controlling interest		(339	)		-			(953	)		-
	$	17,561			1,845			8,236			5,308
Adjusted EBITDA2	$	39,188		$	21,720		$	68,837		$	40,488
Adjusted EBITDA as a % of Net Revenue3		6.6	%		6.3	%		6.0	%		6.2	%
Adjusted EBITDA as a % of Gross Profit4		29.4	%		27.8	%		28.4	%		27.7	%

^{___________________________________
2} Non-IFRS measure. See “Adjusted EBITDA” under the Non-IFRS Financial Measures section of this news release.
³ Non-IFRS measure. See “Adjusted EBITDA as a % of Net Revenue” under the Non-IFRS Financial Measures section of this news release.
⁴ Non-IFRS measure. See “Adjusted EBITDA as a % of Gross Profit” under the Non-IFRS Financial Measures section of this news release.

Summary of Consolidated Statements of Cash Flows
(expressed in thousands of Canadian dollars)

		For the three months ended June 30,					For the six months ended June 30,
		2022			2021			2022			2021
Cash flows from operating activities
Net income	$	11,678		$	1,025			9,270		$	4,690
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization		18,739			9,070			33,969			16,311
Unrealized foreign exchange losses (gains)		(2,968	)		1,954			3,701			2,966
Share-based compensation expense		1,685			-			2,897			-
Finance expense, net		3,094			1,727			4,912			4,147
Change in fair value of contingent consideration		-			-			-			597
Income tax expense		1,400			2,697			2,807			4,133
		33,628			16,473			57,556			32,844
Changes in non-cash working capital items
Trade and other receivables		(48,366	)		36,224			(76,139	)		59,019
Inventories		4,709			(12,019	)		11,258			(24,187	)
Prepaid expenses and other assets		(3,186	)		264			(4,615	)		(301	)
Trade and other payables		45,753			(30,462	)		16,370			(65,601	)
Income taxes payable		(16,272	)		(2,474	)		(17,025	)		(1,979	)
Other financial liabilities		319			1,871			2,236			1,871
Deferred revenue and customer deposits		9,985			13,833			6,600			17,513
Cash from (used in) operating activities		26,570			23,710			(3,759	)		19,179
Cash flows used in investing activities
Purchase of property and equipment		(3,123	)		(1,111	)		(14,479	)		(2,851	)
Proceeds on disposal of property and equipment		-			43			178			131
Repayment of contingent consideration		-			(2,134	)		(10,168	)		(5,502	)
Repayment of deferred consideration		(5,208	)		(624	)		(6,948	)		(3,748	)
Business combinations, net of cash acquired		(131,545	)		(85,956	)		(199,471	)		(96,150	)
Cash used in investing activities		(139,876	)		(89,782	)		(230,888	)		(108,120	)
Cash flows from financing activities
Transfers to (from) restricted cash		58,980			49,671			(4,513	)		-
Interest paid		(2,102	)		(2,619	)		(3,058	)		(5,078	)
Dividend paid		(1,100	)		-			(1,100	)		-
Payments of lease liabilities		(2,304	)		(2,133	)		(5,032	)		(4,417	)
Net proceeds from issuance of common shares and warrants		-			164,482			-			245,422
Repayment of notes payable		(38	)		(642	)		(159	)		(3,414	)
Net proceeds from (repayment of) borrowings		22,351			(87,791	)		184,819			(83,549	)
Cash from financing activities		75,787			120,968			170,957			148,964
Net change in cash during the period		(37,519	)		54,896			(63,690	)		60,023
Effect of foreign exchange on cash		4,526			1,595			(328	)		133
Cash, beginning of period		217,168			68,432			248,193			64,767
Cash, end of period	$	184,175		$	124,923		$	184,175		$	124,923

Non-IFRS Financial Measures

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) or income 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 June 30,					For the six months ended June 30,
		2022			2021		2022		2021
Net income before taxes	$	13,078		$	3,722	$	12,077	$	8,823
Finance expense		3,094			1,727		4,912		4,148
Share-based compensation expense		1,685			-		2,897		-
Depreciation and amortization		17,178			7,898		31,657		14,386
Depreciation included in cost of sales		1,561			1,065		2,312		1,760
Foreign exchange loss (gain)		(2,967	)		1,954		3,702		2,966
Special charges		5,559			5,354		11,280		8,405
Adjusted EBITDA	$	39,188		$	21,720	$	68,837	$	40,488

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 June 30,						For the six months ended June 30,
		2022			2021			2022			2021
Adjusted EBITDA	$	39,188		$	21,720		$	68,837		$	40,488
Capex		(3,123	)		(1,111	)		(5,857	)		(2,851	)
Payment of lease liabilities		(2,304	)		(2,133	)		(5,032	)		(4,417	)
Adjusted Free Cash Flow	$	33,761		$	18,476		$	57,948		$	33,220
Adjusted Free Cash Flow Conversion		86	%		85	%		84	%		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 six months
	ended June 30,					ended June 30,
		2022			2021		2022		2021
Net income	$	11,678		$	1,025	$	9,270	$	4,691
Special charges		5,559			5,354		11,281		8,405
Amortization of acquired intangible assets		13,946			5,815		25,262		10,102
Foreign exchange (gain) loss		(2,968	)		1,954		3,700		2,966
Share-based compensation		1,685			-		2,897		-
Adjusted Net Income:	$	29,900		$	14,148	$	52,410	$	26,164
Basic		0.14			0.08		0.24		0.16
Diluted		0.14			0.08		0.24		0.15

Gross revenue and Gross revenue for organic growth

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. Gross revenue for organic growth is calculated as i) the actual gross revenue for companies owned by Converge for at least three months that is included in the Company’s financial results for the year then ended, plus ii) for those acquisitions that occurred after January 1 and that have been under Converge ownership for at least three months, the pro forma gross revenue contribution had they been owned for the full fiscal year.

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 six months
	ended June 30,				ended June 30,
		2022		2021		2022		2021
Product	$	491,821	$	281,287	$	945,210	$	533,794
Managed services		32,268		17,990		66,251		38,420
Third party and professional services		205,589		152,843		392,146		288,006
Total	$	729,678	$	452,120	$	1,403,607	$	860,220
Adjustment for sales transacted as agent		133,022		106,813		256,914		204,711
Net revenue	$	596,656	$	345,307	$	1,146,693	$	655,509

The Company measures organic growth on an annual basis, at the gross revenue level, and includes companies that Converge has owned for at least three months. Once a company is acquired, there is lead time required to integrate and regionalize the acquired work force, align rebate programs, and begin to execute on cross-selling opportunities. Management believes that three months provides a good representation of the acquisition under Converge ownership and can begin to evaluate the acquired company from an organic growth standpoint. Organic growth is calculated by deducting prior year pro forma gross revenues from current year gross revenue for organic growth. Organic growth % is calculated by dividing organic growth by prior year pro forma gross revenues, as follows:

The following table calculates organic growth for Q2-2022:

	Q2 (3-month)
Gross revenue	$	729,678
Less: gross revenues of Companies below three months ownership		34,913
Gross revenue included in actual results		694,765
Add: pro forma gross revenue		-
Gross revenue for organic growth		694,765
Prior period pro forma gross revenues		640,091
Organic Growth - $	$	54,674
Organic Growth - %		8.5	%

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.

FAQ

What were Converge Technology Solutions' Q2 2022 financial results?

Converge reported a 73% increase in net revenue, reaching $596.7 million, with adjusted EBITDA up by 80% to $39.2 million.

How did Converge's net income perform in Q2 2022?

Net income for Q2 2022 reached $11.7 million, up 1039% compared to the same period last year.

What acquisitions did Converge complete in 2022?

Converge completed 8 acquisitions in 2022, totaling approximately $939.2 million in LTM gross revenue.

What is Converge Technology Solutions' stock symbol?

Converge Technology Solutions trades under the stock symbol CTSDF.