Morning,
Haven't had time to fully dig into their report (trying to get all our bull list and foundational stocks updated...so many reporting at the same time) but did have a look. Converge is one that has been asked about quite a bit by our members as it was a darling during the tech craze during the pandemic. That said, it had taken a step back this year due to previous guidance that was revised downward and because they have a high enough debt load after going on an acquisition spree over the past few years. Keep in mind, those acquisitions were acquired at premiums compared to today's valuation since broadly, tech has undergone a significant valuation reset.
End result? You have a company that is down 40% year to date and as a small cap, it was even more susceptible to the the drawdown in the tech sector.
As for recent results, Converge saw decent revenue increase (~30%) but that was pretty much all acquisition related as organic sales growth only came in at 1.8% YoY. Compare this to the 13.7% organic growth it achieved last year, and you can see there has been a big slowdown. On the bright side, it remains profitable which is a bonus in such times. Not many small cap tech companies have achieved profitability and it is one of the reasons why CTS made for an attractive target for investors. I do question why it pays a dividend. It is the same issue with NVEI which came out and decided to pay a dividend. This is out of the norm for high-tech growth companies. Usually, they prefer to re-invest in the business and dividends are only announced when they feel as though growth opportunities through internally generated cash flows aren't as robust as they once were. Either that, or they are a company that has reached a particular point in their maturity cycle (see Apple). However, CTS certainly hasn't reached that point so it is an odd decision.
All in all, it seemed like an 'ok' quarter and it dip top expectations on the top and bottom lines. However, slowing organic growth is an issue and they generated negative operational cash flow in the quarter. On the year they are fine, but this past quarter was negative. Important to see if that is just a one-time thing or a trend. The key issue in terms of debt...interest paid jumped to 7.3M vs 2.1M last quarter. As mentioned, debt loads are higher and with interest rates the way they are, it is eating into company cash flows. On the bright side? It did pay back ~22M worth of debt.
I still think it is a decent little company, just don't get caught up with valuations against historical averages since growth has changed and there has been an overall valuation recent. That said, it does look attractively valued here.
Mat