ConvergeOne Announces Third Quarter 2018 Financial Results
EAGAN, Minn., Oct. 30, 2018 /PRNewswire/ -- ConvergeOne Holdings, Inc. (NASDAQ: CVON) ("ConvergeOne" or the "Company"), a leading global IT services provider of collaboration and technology solutions, today announced financial results for the third quarter ended September 30, 2018.
Third Quarter 2018 Highlights:
-- Total revenue of $404.8 million, an increase of 64.9% year-over-year.
-- Services revenue of $211.2 million, accounting for 52.2% of total
revenue.
-- Collaboration revenue of $264.6 million, accounting for 65.4% of total
revenue.
-- GAAP net income, before the presentation effect of earnout
consideration, of $14.5 million. GAAP net loss to common shareholders of
$48.5 million, including the presentation effect of $(63.0) million of
earnout consideration. ((1))
-- Adjusted EBITDA per credit agreement of $47.6 million, an increase of
52.6% year-over-year.
-- Adjusted net income of $27.9 million, Adjusted earnings per diluted
share ("Adjusted EPS") of $0.31.
"We are pleased with our third quarter results, which outperformed our expectations and reflect strong execution across the board including robust growth of our Services and Collaboration revenues and ongoing realization of synergies from recent acquisitions," said John A. McKenna Jr., Chairman and CEO, ConvergeOne. "We are increasing our 2018 guidance range reflecting strong results, good growth in our pipeline and backlog, the impact of our acquisition of Advantel Networks, and increased visibility into the rest of the year."
Third Quarter 2018 Financial Results:
-- Total revenue for the quarter ended September 30, 2018 was $404.8
million compared to $245.4 million in the third quarter of 2017.
-- Services revenue for the third quarter of 2018 was $211.2 million,
an increase of 69.8% compared to $124.4 million in the third quarter
of 2017. Services revenue accounted for 52.2% of total revenue
compared to 50.7% in the third quarter of 2017.
-- Technology Offerings revenue for the third quarter of 2018 was
$193.5 million, an increase of 59.9% compared to $121.0 million in
the third quarter of 2017.
-- Gross Profit for the quarter ended September 30, 2018 was $118.3 million
compared to $70.9 million in the third quarter of 2017. Gross margin for
the third quarter of 2018 was 29.2% compared to 28.9% for the third
quarter of 2017.
-- Services gross profit was $69.1 million for the third quarter of
2018, compared to $45.3 million in the third quarter of 2017.
-- Technology Offerings gross profit was $49.3 million for the third
quarter of 2018, compared to $25.6 million in the third quarter of
2017.
-- GAAP net income, before the presentation effect of earnout
consideration, was $14.5 million for the quarter ended September 30,
2018, compared to GAAP net income of $1.3 million in the third quarter
of 2017. GAAP net loss to common shareholders, including the
presentation effect of $(63.0) million of earnout consideration for
earnings per share purposes, was $48.5 million for the quarter ended
September 30, 2018, compared to a GAAP net income of $1.3 million in the
third quarter of 2017.( (1)) Third quarter 2018 GAAP net loss to common
shareholders includes $4.1 million of transaction costs primarily
related to the acquisitions of Arrow Electronics' Systems Integration
Business and Advantel, Inc. and integration costs associated with
previous acquisitions. Third quarter 2018 GAAP net loss to common
shareholders also includes a $1.2 million increase to the Company's
previously recorded preliminary bargain purchase gain on the acquisition
of Arrow Electronics' Systems Integration Business.
-- Adjusted EBITDA per credit agreement for the quarter ended September 30,
2018 was $47.6 million, an increase of 52.6% compared to Adjusted EBITDA
per credit agreement of $31.2 million in the third quarter of 2017.
-- Adjusted net income for the quarter ended September 30, 2018 was $27.9
million, or $0.31 per diluted share based on 89.4 million
weighted-average diluted common shares outstanding, compared to adjusted
net income of $11.4 million in the third quarter of 2017. ((1))
-- Net cash provided by operating activities for the nine months ended
September 30, 2018 was $17.2 million, and capital expenditures totaled
$10.6 million, compared with cash used in operating activities of $6.7
million and capital expenditures of $7.3 million for the prior year's
period.
Balance Sheet and Liquidity
-- At September 30, 2018, ConvergeOne had $11.2 million in cash, compared
to $13.5 million at the end of 2017. Net of debt issuance costs, total
debt outstanding at September 30, 2018 was $708.5 million, compared to
$572.1 million at the end of 2017.
-- Pursuant to its common stock repurchase program, during the three months
ended September 30, 2018, the Company repurchased in the open market
approximately 1.1 million shares of its common stock at a total cost of
approximately $10.0 million (an average price of $9.41 per share).
2018 Financial Expectations
ConvergeOne management is raising its full year 2018 financial outlook:
-- Revenue is expected to be in the range of $1,550 to $1,650 million.
-- Gross profit margin is expected to be in the range of 29.5% to 30.5%.
-- Adjusted EBITDA per credit agreement is expected in the range of $184 to
$186 million.
-- Adjusted Net Income is expected to be in the range of $70 to $78
million.
-- Adjusted EPS is expected to be in the range of $0.90 to $1.00 based on
80 million weighted average shares outstanding on a diluted basis.
Earnings Teleconference Information
ConvergeOne will discuss its third quarter 2018 financial results during a teleconference today, October 30, 2018, at 5:00 PM ET. The conference call can be accessed at (833) 366-1123 (domestic) or (412) 902-6736 (international). A replay of the conference call will be available until November 7, 2018 at (877) 344-7529 (domestic) or (412) 317-0088 (international). The replay passcode is 10125368. The call will also be broadcast simultaneously at https://investor.convergeone.com/. Following the completion of the call, a recorded replay of the webcast will be available on ConvergeOne's website.
About ConvergeOne
Founded in 1993, ConvergeOne is a leading global IT services provider of collaboration and technology solutions for large and medium enterprises with decades of experience assisting customers to transform their digital infrastructure and realize a return on investment. Over 10,400 enterprise and mid-market customers trust ConvergeOne with collaboration, enterprise networking, data center, cloud and security solutions to achieve business outcomes. Our investments in cloud infrastructure and managed services provide transformational opportunities for customers to achieve financial and operational benefits with leading technologies. ConvergeOne has partnerships with more than 300 global industry leaders, including Avaya, Cisco, IBM, Genesys and Microsoft to customize specific business outcomes. We deliver solutions with a full lifecycle approach including strategy, design and implementation with professional, managed and support services. ConvergeOne holds more than 6,000 technical certifications across hundreds of engineers throughout North America including three Customer Success Centers. More information is available at www.convergeone.com.
Footnotes
(1) In the third quarter of 2018, the
Company recorded total earnout
consideration of $63.7 million
related to the merger of Forum
Merger Corporation and ConvergeOne,
as the September 30, 2018 last
twelve months pro forma EBITDA, as
calculated in accordance with the
merger agreement, was in excess of
$165.0 million, and therefore, the
last of the three tranches of the
earnout has been deemed to be
achieved. The earnout consideration
was recorded as an equity
transaction of $63.0 million and
compensation expense of $0.7
million. For accounting
presentation purposes, the equity
portion of the earnout
consideration is reflected as a
reduction of the net income
available to common shareholders
for the third quarter of 2018.
Forward Looking Statements
This press release includes "forward-looking statements" regarding ConvergeOne with respect to its financial condition, its results of operations, its intended future capital return and its stock repurchases; the future impact of momentum in its pipeline and backlog; anticipated synergies and impact from integrating Advantel Networks; and its financial outlook for 2018. These forward-looking statements reflect ConvergeOne's current views and information currently available. This information is, where applicable, based on estimates, assumptions and analysis that ConvergeOne believes, as of the date hereof, provide a reasonable basis for the information contained herein. Forward-looking statements can generally be identified by the use of forward-looking words such as "may", "will", "would", "could", "expect", "intend", "plan", "aim", "estimate", "target", "anticipate", "believe", "continue", "objectives", "outlook", "guidance" or other similar words, and include statements regarding ConvergeOne's plans, strategies, objectives, targets and expected financial performance.
These forward-looking statements involve known and unknown risks, uncertainties and other factors, many of which are outside the control of ConvergeOne. These risks, uncertainties, assumptions and other important factors include, but are not limited to: (1) the possibility that ConvergeOne may be adversely affected by economic, business, and/or competitive factors; (2) ConvergeOne's ability to identify and integrate acquisitions and achieve expected synergies and operating efficiencies in connection with acquired businesses; (3) changes in applicable laws or regulations; and (4) other risks and uncertainties indicated from time to time in the reports ConvergeOne files with the Securities and Exchange Commission ("SEC") including its Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q.
Actual results, performance or achievements may differ materially, and potentially adversely, from any projections and forward-looking statements and the assumptions on which those vary from forward-looking statements are based. There can be no assurance that the data contained herein is reflective of future performance to any degree. You are cautioned not to place undue reliance on forward-looking statements as a predictor of future performance as projected financial information, cost savings, synergies and other information are based on estimates and assumptions that are inherently subject to various significant risks, uncertainties and other factors, many of which are beyond our control. All information herein speaks only as of (1) the date hereof, in the case of information about ConvergeOne, or (2) the date of such information, in the case of information from persons other than ConvergeOne. Except as required under applicable law, ConvergeOne undertakes no duty to update or revise the information contained herein.
Use of Non-GAAP Financial Measures
To supplement the financial measures presented in the Company's press release in accordance with accounting principles generally accepted in the United States ("GAAP"), ConvergeOne also presents the following non-GAAP measures of financial performance: Adjusted EBITDA, Adjusted EBITDA per credit agreement, Adjusted net income, and Adjusted EPS.
A "non-GAAP financial measure" refers to a numerical measure of the Company's historical or future financial performance, financial position, or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP in the Company's financial statements. The Company provides certain non-GAAP measures as additional information relating to its operating results as a complement to results provided in accordance with GAAP and should not be considered a measure of the Company's liquidity. The non-GAAP financial information presented here should be considered in conjunction with, and not as a substitute for or superior to, the financial information presented in accordance with GAAP. There are significant limitations associated with the use of non-GAAP financial measures. Further, these measures may differ from the non-GAAP information, even where similarly titled, used by other companies and therefore should not be used to compare the Company's performance to that of other companies.
The Company has presented: Adjusted EBITDA, Adjusted EBITDA per credit agreement, Adjusted net income, and Adjusted EPS as non-GAAP financial measures in this press release. The Company defines adjusted EBITDA as net income (loss) plus (a) total depreciation and amortization, (b) interest expense and other, net, and (c) income tax expense, as further adjusted to eliminate non-cash stock-based compensation expense, acquisition accounting adjustments, transaction costs, and other one-time nonrecurring costs. The Company defines Adjusted EBITDA per credit agreement as Adjusted EBITDA plus (a) Board of Directors related expenses (b) one time and non-recurring process and efficiency improvements, (c) pro forma synergies, and (d) EBITDA per acquisition. The Company defines Adjusted net income as net income (loss) adjusted to exclude (a) amortization of acquisition-related intangible assets, (b) amortization of debt issuance costs, (c) non-cash share-based compensation expense, (d) costs related to debt refinancing, (e) acquisition accounting adjustments, (f) transaction costs, (g) other costs, and (h) the income tax impact associated with the foregoing items. The Company defines Adjusted EPS as Adjusted net income divided by weighted shares outstanding on a diluted basis.
The Company believes the use of non-GAAP financial measures, as a supplement to GAAP measures, is useful to investors in that they eliminate items that are either not part of the Company's core operations or do not require a cash outlay, such as stock-based compensation. ConvergeOne management uses these non-GAAP financial measures when evaluating the Company's operating performance and for internal planning and forecasting purposes. The Company believes that these non-GAAP financial measures help indicate underlying trends in the Company's business, are important in comparing current results with prior period results, and are useful to investors and financial analysts in assessing the Company's operating performance.
The Company has not reconciled its Adjusted EBITDA per credit agreement and Adjusted Net Income 2018 outlook to GAAP net income, or its Adjusted EPS 2018 outlook to GAAP EPS, because the reconciling items between such GAAP and Non-GAAP financial measures cannot be reasonably predicted or accurately forecasted due to the uncertain of timing and the magnitude of the reconciling items, and therefore, is not available without unreasonable effort.
ConvergeOne Holdings, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share amounts)
As of
As of
September 30,
December 31,
2018 2017
(unaudited)
Assets
Current Assets
Cash $11,228 $13,475
Trade accounts receivable, less
allowances 390,114 289,236
Inventories 34,719 14,717
Prepaid expenses and other current
assets 15,326 9,294
Deferred customer support contract
costs 41,534 35,151
Income tax receivable 23,595 10,576
Total current assets 516,516 372,449
Other Assets
Goodwill 342,758 331,456
Finite-life intangibles, net 163,951 173,642
Property and equipment, net 36,304 36,659
Deferred customer support contract
costs and other, noncurrent 6,787 3,915
Non-current income tax receivable 580 2,620
Total other assets 550,380 548,292
Total assets $1,066,896 $920,741
===
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities
Current maturities of long-term debt $6,700 $5,652
Accounts payable 215,544 157,778
Customer deposits 21,631 22,498
Accrued compensation 38,210 34,522
Accrued other 34,174 27,362
Earnout consideration payable 99,000 -
Deferred revenue 87,569 68,127
Total current liabilities 502,828 315,939
Long-Term Liabilities
Long-term debt, net of debt issuance
costs and current maturities 701,815 566,424
Deferred income taxes 3,792 18,056
Long-term income tax payable - 1,563
Deferred revenue and other long-term
liabilities 15,126 13,118
Total long-term liabilities 720,733 599,161
Commitments and Contingencies
Stockholders' Equity (Deficit)
Preferred stock, $0.0001 par value;
10,000,000 shares authorized; no
shares issued and outstanding -
Common stock, $0.0001 par value;
1,000,000,000 shares authorized;
76,398,309 shares issued and
75,331,363 outstanding as of
September 30, 2018; 39,860,610
shares issued and outstanding as of
December 31, 2017* 8 4
Class B convertible common stock,
$0.0001 par value; 16,000,000
nonvoting shares authorized;
6,585,546 nonvoting shares issued
and outstanding as of December 31,
2017* - 1
Subscription receivable from related
party - (1,805)
Additional paid-in capital 78,864 13,464
Treasury stock, 1,066,946 shares at
September 30, 2018 (10,044) -
Accumulated deficit (225,493) (6,023)
Total stockholders' equity (deficit) (156,665) 5,641
Total liabilities and stockholders'
equity (deficit) $1,066,896 $920,741
===
* Retroactively restated for the
effect of the reverse
recapitalization
ConvergeOne Holdings, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---
2018 2017 2018 2017
---
Revenue
Technology offerings $193,507 $121,033 $532,123 $315,201
Services 211,247 124,379 569,983 304,499
Total revenue 404,754 245,412 1,102,106 619,700
---
Cost of revenue
Technology offerings 144,250 95,444 402,385 245,732
Services 142,157 79,045 378,661 191,965
Total cost of revenue 286,407 174,489 781,046 437,697
---
Gross profit
Technology offerings 49,257 25,589 129,738 69,469
Services 69,090 45,334 191,322 112,534
Total gross profit 118,347 70,923 321,060 182,003
---
Operating expenses
Sales and marketing 57,172 35,657 156,297 93,904
General and
administrative 25,108 15,385 79,992 36,989
Transaction costs 4,116 3,920 16,167 5,955
Depreciation and
amortization 12,064 9,127 35,421 23,112
Total operating expenses 98,460 64,089 287,877 159,960
Operating income 19,887 6,834 33,183 22,043
---
Other (income) expense
Interest income (53) (44) (118) (51)
Interest expense 12,362 9,772 50,097 41,553
Preliminary bargain
purchase gain (1,212) (12,185) -
Other expense, net (168) 44 (142) 49
Total other expense, net 10,929 9,772 37,652 41,551
---
Income (loss) before
income taxes 8,958 (2,938) (4,469) (19,508)
Income tax benefit (5,540) (4,241) (20,312) (6,323)
Net income (loss) 14,498 1,303 15,843 (13,185)
---
Earnout consideration (63,041) (187,047) -
Net income (loss)
available to common
shareholders $(48,543) $1,303 $(171,204) $(13,185)
Net loss per common share:
Basic and diluted $(0.64) $0.03 $(2.53) $(0.33)
Weighted average number of shares outstanding:
Basic and diluted 75,507,802 39,860,619 67,538,373 39,867,488
===
Cash dividends declared
per common share $0.02
$ - $0.04
$ -
ConvergeOne Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine months ended
September 30,
2018 2017
---
Cash Flows from Operating Activities
Net income (loss) $15,843 $(13,185)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Preliminary bargain purchase gain (12,185)
Depreciation of property and
equipment in operating expense 8,004 5,221
Depreciation of property and
equipment in cost of revenue 4,183 1,112
Amortization of finite-life
intangibles 27,417 17,891
Change in fair value of acquisition-
related contingent consideration (956)
Deferred income taxes (10,180) (3,991)
Amortization of debt issuance costs 1,213 2,205
Loss on extinguishment of debt 14,732 13,638
Stock-based compensation expense 7,530 521
Other (145) 49
Changes in assets and liabilities, net of business acquisitions
Trade accounts receivable (29,083) (5,684)
Inventories (13,738) 4,475
Prepaid expenses, deferred customer
support contract costs and other 3,877 8,739
Income tax receivable (10,961) 2
Accounts payable and accrued expenses 25,859 (22,028)
Customer deposits (1,222) (2,522)
Income tax payable (1,562) (6,618)
Deferred revenue and other long-term
liabilities (11,421) (6,479)
Net cash provided by (used in)
operating activities 17,205 (6,654)
---
Cash Flows from Investing Activities
Purchases of property and equipment (10,635) (7,251)
Acquisition of business, net of cash
acquired (42,965) (97,543)
Net cash used in investing activities (53,600) (104,794)
---
Cash Flows from Financing Activities
Proceeds from revolving credit
agreement 184,000 84,000
Repayment of revolving credit
agreement (154,000) (58,000)
Proceeds from term notes, less
discount 670,000 510,138
Payment on long-term debt (564,000) (415,213)
Payment of deferred financing costs (9,806) (6,513)
Payment of extinguishment charges (5,684) (3,353)
Dividends paid (3,055)
Repurchase of common stock (10,044) (385)
Proceeds from issuance of common
stock 476
Proceeds from subscription receivable 1,805
Proceeds from Forum cash 147,335
Payment of reverse recapitalization
costs (30,934)
Payment to former C1 Securityholders (182,847)
Repurchase of warrants (9,098)
Deferred offering costs (1,175)
Net cash provided by financing
activities 34,148 109,499
---
Net decrease in cash (2,247) (1,949)
Cash -beginning of the period 13,475 9,632
Cash - end of the period $11,228 $7,683
ConvergeOne Holdings, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(In thousands)
Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
(in thousands)
Adjusted EBITDA reconciliation:
Net income (loss) $14,498 $1,303 $15,843 $(13,185)
Depreciation and amortization (a) 13,455 9,549 39,604 24,224
Preliminary bargain purchase gain (1,212) (12,185) -
Other expense, net 12,141 9,772 49,837 41,551
Income tax (benefit) expense (5,540) (4,241) (20,312) (6,323)
EBITDA 33,342 16,383 72,787 46,267
Stock-based compensation expense 1,099 191 7,530 521
Acquisition accounting adjustments (b) 3,208 2,651 6,472 2,654
Transaction costs (c) 4,116 3,920 16,167 5,955
Other costs (d) 66 525 460 2,661
Adjusted EBITDA 41,831 23,670 103,416 58,058
Additional Adjustments:
Board of Directors related expense 128 26 562 (198)
One time and non-recurring process
and efficiency improvements (e) 2,456 1,470 5,570 3,952
Pro Forma synergies (f) 1,851 2,834 8,504 4,366
EBITDA per acquisition (g) 1,299 3,176 7,222 26,861
Adjusted EBITDA per Credit Agreement $47,565 $31,176 $125,274 $93,039
(a) Depreciation and amortization
equals the sum of depreciation and
amortization included in total
operating expenses and in total
cost of revenue.
(b) Acquisition accounting
adjustments include charges
associated with non-cash
acquisition accounting fair value
adjustments to deferred revenue
and deferred customer support
costs.
(c) Transaction costs of (1) $4.1
million for the three months ended
September 30, 2018 include $1.3
million related to transaction-
related professional fees,
including legal, accounting, tax,
and advisory fees, $2.5 million of
acquisition-related integration
costs, and acquisition-related
expenses of $0.3 million related
to severance charges and employee
retention bonuses, and (2) $3.9
million for the three months ended
September 30, 2017 include
acquisition-related expenses of
$2.3 million related to
transaction-related professional
fees and expenses, and $1.5
million of acquisition-related
integration costs.
(d) Other costs of (1) $0.1
million for the three months ended
September 30, 2018 represent one-
time recruiting expenses, and (2)
$0.5 million for the three months
ended September 30, 2017 include
expenses of $0.3 million related
to severance and related legal
expenses and $0.2 million related
to payments to Clearlake for
advisory and consulting services
pursuant to its management and
monitoring services agreement.
(e) One time and non-recurring
process and efficiency
improvements of $2.5 million in
the three months ended September
30, 2018 primarily related to
Cloud product development
activities related to the launch
of our Cloud Platforms and costs
associated with the process of
going public. One time and non-
recurring process and efficiency
improvements costs for the three
months ended September 30, 2017
include $1.5 million of Cloud
product development activities
related to the launch of our Cloud
platforms.
(f) Pro Forma synergies represent
unrealized cost synergies of
acquired companies post-close.
(g) EBITDA per acquisition is the
acquired companies EBITDA prior to
the company's ownership.
ConvergeOne Holdings, Inc.
Reconciliation of GAAP to Non-GAAP Financial Measures
(In thousands except per share amounts)
Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
(in thousands)
Adjusted net income reconciliation:
Net income (loss) $14,498 $1,303 $15,843 $(13,185)
Amortization of intangible assets 9,318 6,711 27,417 17,891
Amortization of debt issuance costs 414 450 1,213 2,205
Preliminary bargain purchase gain (1,212) (12,185) -
Stock-based compensation expense 1,099 191 7,530 521
Costs related to debt financing 999 14,732 15,193
Acquisition accounting adjustments 3,208 2,651 6,472 2,654
Transaction costs 4,116 3,920 16,167 5,955
Other costs 66 525 460 2,661
Income tax impact of adjustments (3,577) (5,384) (15,896) (16,410)
Adjusted net income $27,930 $11,366 $61,753 $17,485
Adjusted Net Income per share
Adjusted EPS - Basic $0.37 $0.91
Adjusted EPS - Diluted $0.31 $0.77
Weighted average number of shares outstanding (a)
Basic shares 75,508 67,538
Diluted Shares 89,394 79,691
(a) The weighted average diluted
shares includes the effect of the
common share equivalents for the
quarter. The amount differs from
diluted shares in the financial
statements, as common share
equivalents were excluded for
financial reporting purposes, due
to the anti-dilutive effect since
there was a net loss to common
shareholders. Diluted shares for
Adjusted EPS include approximately
10.6 million of equivalent common
shares representing the liability
for the 2018, 2019 and 2020
Earnout Cash Payments of $99.0
million. If Clearlake elects to
pay the Earnout in cash, these
additional common share
equivalents would not be included
in the calculation of Adjusted EPS
- Diluted.
Contacts:
Media Contacts:
Scott Clark
Vice President, Marketing, ConvergeOne
651.393.3957
sclark@convergeone.com
Investor Relations:
Scott MacDonald
651-393-6399
smacdonald@convergeone.com
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SOURCE ConvergeOne Holdings, Inc.
