Investment Thesis Converge Technology Solutions

SUMMARY & COMPANY DESCRIPTION

• Has increased by 49% annually over the past 3 years.

• The business is in good financial condition.
• The management team is aligned.
• The company is ready to make new acquisitions.
• Shares have been bought back at a price above the going rate.
• Lists a competitive valuation of 8x P/FCF and 7x EV/EBITDA.
• A target price of around $35- 30 until 2027.
Small-cap Canadian company with triple-digit growth in the Cloud Computing market.
Converge Technology Solutions (CTS) is an IT services firm that trades on the Toronto Stock
Exchange.
Converge Technology Solutions, went public in Canada in 2018 for around a dollar per share (1
CAD) and is currently worth CAD 6.10 per share, representing a five-fold increase in less than
four years.
It is an IT company that offers hardware, software, and high-quality service management
solutions. Clients include both private enterprises and public organizations, although they are
mostly SMEs. They primarily operate in Canada and the United States, but as we will see later
in their strategic plan, they are expanding to other European nations such as Germany and the
United Kingdom.
His business approach is to assist SMEs in digitizing themselves. They are focused on the
modernization and development of IT infrastructure so their clients can provide better services,
particularly in the cloud environment.
The company provides both technology and software to help businesses transition to digital life,
specifically the installation of cloud computing or cloud services, as well as advanced analytics,
cybersecurity, and managed services.
The company is divided into two divisions: software and solutions and professional services,
each with multiple subgroups.
Software and solutions:
Evaluations, strategic advice, program design and management, mobile applications, system
development, and modernization are all available. It now encompasses the subdivisions listed
below.
-Advanced analytic skills. Which oversees business analysis, AI, and application development.
-Cloud. Cloud computing, public cloud computing, private cloud computing, system
modernization, and cloud application The distinction between public and private clouds is that
public clouds store your data alongside millions of other people's data, which means that if you
are hacked, your data may be exposed, so it is best not to store sensitive business information in
them, whereas private clouds store your data exclusively for you, with the disadvantage of
higher costs but higher security.
The company collaborates with a variety of cloud service providers, including Amazon through
its Amazon Web Services (AWS) branch, Microsoft Azure, and Google Cloud. Essentially, this

Arturo Reina García 27/09/2022

segment consists of storing customers data on the infrastructure built by these companies, which
means that the company pays these large corporations to use their networks, which does not
affect a possible increase in the prices of these technological behemoths because such cost
increases are reflected in the prices that Converge customers charges to its clients.
To put it another way, converge can raise the prices if infrastructure providers raise their prices
to Converge, and customers have no reason to switch companies and leave Converge because if
they contract the services of another company to perform these Cloud services, they will have to
pay the same fees that those providers charge.
-Cybersecurity. Data security, incident management, and security intelligence
Profesional services.
-Managed services. All the services that the company gives to its customers once the systems
have been installed are included here, including instructions on how to use them, software
upgrades and improvements, system maintenance, and user experience enhancements. Because
all these services will be required once the client programs are installed, for which an annual fee
is normally levied, this component of the business earns the majority of the revenue (25%) and
ensures that the company has steady revenue.
-Digital infrastructure. Collaboration, networking, and service setup are all aspects of data
centers.
-Talent solutions. Which oversees recruiting professionals for the company.
Essentially, the company is responsible for assisting its clients, who are mostly small and
medium-sized businesses, in modernizing and progressing toward the digitalization of their
businesses, by providing both physical equipment and information technology programs,
particularly for installing the cloud model and all that it entails, as well as services that can be
managed once all the equipment is installed.
CTS serves both government agencies (primarily in Canada) and private-sector corporations as
clients. CTS providing government security services makes perfect sense because the
government will not leave everything related to information and cyber security in the hands of
an external company due to the risk of hacking and espionage posed by sensitive information,
could destabilize the country.
The company grows organically and inorganically (mergers and acquisitions or M&A), with
2021 revenues of 1527 million CAD, of which 300 million come from acquisitions made that
year, accounting for 20% of total revenues received by the company for that fiscal year, with
organic growth accounting for 76% of total revenues

Arturo Reina García 27/09/2022

Source: Converge Technology Presentation

BUSINESS MODEL AND STRATEGY

In 2017, the company made 52 million Canadian dollars, and by 2021, it earned 1527 million
Canadian dollars, showing a compound annual growth rate (CAGR) of 132% and 49% over the
previous three years.
The company's EBITDA in 2017 was -210 CAD, with 2018 being the first year that it became
profitable, with an EBITDA of 15.78 million CAD, and 2021 is the same, with a CAGR of
275% and 57% in the last three years.
In 2019, the EBITDA to FCF conversion rate was 42%, whereas it will be 66% in 2021. The
EBITDA growth rate over the last three years has been 79%. This is because each year becomes
more profitable, as the denominator increases due to the significant increase in EBITDA, and
the denominator decreases as it has to pay less interest and the CAPEX remains low in
comparison to sales, so this percentage will increase until it is approximately 80%, which is
more or less the average in this type of company.

Source: Converge Technology Presentation

The company's financial status is quite solid since it has no debt and holds a bank balance of
248 million Canadian dollars, which it can use to continue making acquisitions.
This rapid development is the result of the company's rapid expansion in both Canada and the
United States, and it illustrates the sector's huge potential among SMEs, both in terms of finding
new customers and pursuing prospective acquisitions.
The company issued an optimistic projection in its annual general meeting of investors,
expecting to invoice for $5,000 by 2025, meaning a 40% yearly rise in revenues, signalling a
very high possibility of success.
For that purpose, the company devised a four-phase growth strategy that began in 2018 and is
currently in Phase 4:

Arturo Reina García 27/09/2022

 - First phase: Establishment of broad geographic coverage, which
includes 9 acquisitions in 2018 and the development of a managed
services division to build a client base and recurring revenue.
-Second phase (2019-2020): establishment of hybrid cloud services and
a cross-selling system, to continue with the M&A strategy of being
present in the 30 largest cities in the United States, as well as to
strengthen the recurring revenues that offer managed services through
cross-selling by joining the group other companies that provide
complementary services such as cloud computing or cyber security.
-Third phase (2020-2021): establishment of a cost-control system when
carrying out synergies with acquired companies, to achieve scale and
reduce costs through acquired companies of greater size, as well as
expanding the company's cross-selling system with its existing client
base, resulting in scale and cost reductions and benefit margin increases.
-The fourth phase, which began in 2022 consists of expanding the
business to other markets such as Europe, which will result in significant
growth given the company's large potential for acquisitions due to the
large number of markets to which it is already committed.
The company has a continuous ROE of around 20%, as well as a ROCE
or ROIC of between 15% and 25%, depending on whether or not taking
goodwill into account, which gives us an idea of how profitable the
company is with the capital that is invested. This means that the
company earns between 1.15 and 1.25 Canadian dollars for every dollar
invested, far exceeding the market average of 13%. The average of the
sector in which CTS operates is around 60%. According to data from the
first three-quarters of 2022. The ROIC for this year will be 101% due to a substantial increase in
operational benefit, debt reduction, and account growth, which has caused the return on invested
capital, or ROIC, to decline.

GROWTH STRATEGY

The company's growth through acquisitions is approximately 25-30% of its annual revenues,
representing a significant portion of those revenues.
CTS's core objective is to acquire smaller regional IT providers, increase their margins through
cost savings, and boost client retention through product and service cross-selling. Converge has
purchased approximately 30 firms since its founding, with 9 completed in 2021 alone.
The company's acquisition strategy is to buy companies that generate more than $100 million in
revenue and have a minimum EBITDA margin of 3%, paying around x5 EBITDA, which
means making acquisitions for less than $15 million and increasing the margin to 6.5% once the
acquired company has fully integrated into the group and found synergies.

Arturo Reina García 27/09/2022

Source: Converge Technology Presentation
Once integrated into the parent company, the acquired company gains access to additional
benefits that allow it to be much more economically efficient, such as the ability to make
payments every 60-75 days rather than every 45 days, resulting in a 3-7 million CAD increase
in working capital, as well as the ability to activate the cross-selling system and offer additional
services to the acquired company's clients, such as credit card processing.

DIVISIONS

Source: Converge Technology Presentation

The corporation, through its several subsidiaries, is largely active in the IT services industry;
nevertheless, the following subsectors can be found within that sector:
-Managed services. The managed services sector is predicted to grow at a CAGR of 10% until
the year 2026, with a total capitalization of around 350 billion dollars. Given that North
America controls 30% of the global market, this corresponds to almost $100 billion,
highlighting the sector's considerable growth potential as well as the significant prospects that

Arturo Reina García 27/09/2022

CTS may bring in the short term.

Source: Converge Technology Presentation

-Cloud computing. The cloud computing sector is one of the fastest growing in the world right
now, owing to the massive shift from physical storage to cloud storage that is taking place
across all industries. It is estimated that this industry would grow at a 19.6% CAGR from 2021
to 2028. It is possible to conclude that the COVID-19 pandemic has been accelerated even
further due to telework, in which the worker was unable to visit the office but required access to
all stored information to continue working on his or her task from home. The cloud market grew
to $369 billion in 2021, with a projected value of $1.250 billion in 2028, indicating the
tremendous growth potential that the sector's companies can expect.

Source: Converge Technology Presentation

-Cybersecurity. The cybersecurity sector is also rapidly expanding as a result of the increased
use of communication and information technology such as mobile phones, computers, smart
televisions, tablets, and so on, and it is that the hiring of a service by a client to modernize their
information systems as well as integrate the cloud system into their devices entails explicitly the
installation of the cloud system. The cybersecurity sector is estimated to have an approximate
annual growth of 15%, capitalizing in the year 2019 about 150 billion dollars, expecting a
growth of up to 400 billion dollars by the year 2026.
-Advanced Analysis This relates to the gathering, storage, administration, and use of data. This
is critical for Converge clients since it provides them the ability to collect and make available
important data in real-time.

Arturo Reina García 27/09/2022

Source: Converge Technology Presentation
-Digital Infrastructure Converge assists its clients in modernizing their data centers and
storage to increase efficiency while decreasing costs in this segment.

Source: Converge Technology Presentation

As can be seen, the company operates in a sector with strong future perspectives due to
technological advancements in recent years, and there are still many years of business
development and modernization ahead of it, so the company can expect organic growth if it
continues to implement its policies as it has done so far because the sector is growing rapidly by
itself.

The company has grown by 49% in earnings or revenues over the last three years,
demonstrating a superior growth rate in comparison to the sectors in which it operates,
indicating that the company is executing its policies well by growing faster than its sector and
its competitors.

MOAT

-Change costs. Once the company obtains a new client, it installs its information system,
manages all system updates, and performs security maintenance with its cybersecurity division.
It is difficult for the client to refuse their services because they are extensive, and the cost of
finding a new provider, halting production for a few days, adapting to the new systems, and
reorganizing the workforce is prohibitively expensive.
As a result of all of this, the client's average time spent with the company is 10 years, which
includes the recurring revenue that the company earns each time a new client is gained.
-Pricing power. The competitive advantage described above allows the company to set the price
to pay for its services, as well as the ability to increase these charges year after year or every
certain period, because, as previously stated, changing service providers is much more
expensive than paying a small percentage extra every certain period to maintain the services
provided by CTS
-High Quantity. As the company gains new customers, the price it pays AWS or Google for
using its cloud infrastructure will become more affordable, as it will earn more money and reap
more benefits from the investment it makes to expand its operations, increasing the profit
margins and making the company more profitable.
- Low-cost product, but customer-critical. It is important to remember that today, whether the
firm is large or little, everything is controlled by information technology. This involves the use
of software to retain business control, as well as a particular level of security to ensure that your
data is not stolen or lost.

Arturo Reina García 27/09/2022

- It is a low-cost business that requires little investment to continue operating. All that is
required are offices, computers, tables, chairs, and a few other items.

MANAGEMENT

One of the key elements in this thesis that give me a lot of faith in the organization is the
leadership team. Shaun Main, the business's co-founder, and current CEO has substantial
expertise in the IT services market, having previously held key positions at Pivot Technology
Solutions, a Canadian company that also specializes in IT services and was acquired by
Computacenter in 2020.
Shaun has worked hard to build and execute his strategic acquisitions plan with Converge, and
he hasn't changed anything since 2017 since he understands what he's doing and believes in his
strategy, which has yielded extremely positive results so far.

Source: Converge Technology Annual Report

If that wasn't enough, Shaun is strongly aligned with the investors, as he is currently the
company's second-largest shareholder, owning approximately 4% of Converge's stock, which is
equivalent to roughly $62 million in dollars, or roughly 70 times his annual salary.
The rest of the executive team has a good amount of stock options and owns around 5% of the
company.

Source: Seeking Alpha

For the last six months, the executive team has been buying equities and has not sold any. This
is an excellent indicator because when insiders sell stocks, it may be because they want to
purchase a house, or a car, or go on vacation, however when they buy, there is only one reason:
they are certain that their firm will generate money.

Arturo Reina García 27/09/2022

RISKS

-That the corporation starts making acquisitions that don't deliver the same value or synergies as
previously, resulting in a decrease in benefits.
-To provide services to consumers, the company relies on third-party cloud infrastructure
providers such as Amazon (AWS) and Google (Google Cloud). This suggests that CTS has
contracts with these companies under which they pay X amount of money to use their storage
facilities; thus, an increase in costs or a significant change in contractual conditions could
jeopardize the company's sustainability.
- Because CTS's subsidiary companies are unable of adjusting to frequent technical changes as
well as new client requests and needs, the corporation must seek out new service providers.
-That the corporation continues to issue too many shares to raise funds for future expansion,
diluting the shareholders, even though the number of shares in circulation has nearly quadrupled
in a year.
-That the company is offered a takeover bid, and as a result the upside that it can have over time
is severely constrained, even though this may suggest making money rapidly and without
danger, but in much lesser amounts.

VALUATION

As we can see, converge has increased its earnings by 50%, with a 61% increase in 2021 over
2020, and a 20% increase in organic growth, implying a 15% increase in the next years. This
would be equivalent to pursuing organic growth while ignoring acquisitions.
Also, I intend to increase margin EBITDA by 12% by 2027, even if, as previously stated, a 15-
18% increase is feasible, but I like to be more conservative. Furthermore, we will pay 15x
EV/EBITDA, which is lower than the industry average.
Penalize stock dilution; contemplate a 10% annual penalty, albeit it might be considerably lower
because they already have more than $400 million in cash and a $300 million credit line
available for acquisitions without the need to issue stock.
Taking all of this into account, I estimate that they will be generating around $550M in
EBITDA in 2027, which multiplied by the previously mentioned 15x will result in a Market
Cap of $8.2B; if we add a Net Debt/EBITDA ratio of 1, we would be looking at an Enterprise
Value of $8.7B. This equates to a price per share of CAD 30.58, which would quintupli the
investment in five years at current prices of CAD 6,10, or a 23-24% annual return.
The reason to be so undervalued is that the market for small size Canadians is less visible, and
market inefficiencies are more severe, as it typically takes months or years for the market to
recognize a company's full value, which is not as common in a more scrutinized market like the
United States.
As previously stated, the gross margin and EBITDA are constrained by the acquisitions and
promotions that must be made to achieve sales because they are still a small competitor. Future
margins are likely to be between 33-35% for gross margins and 15-18% for EBITDA margins,
which is the industry average for companies with many more years on the market.

Arturo Reina García 27/09/2022

Despite its rapid growth and prospects for further expansion, Converge is trading at 7x adjusted
EV/EBITDA, in line with the sector average.

As we can see, CTS is trading at a considerably lower multiple than peers like Epam, Endava,
Cognizant or Perficent, even though it is the one that is growing the most in terms of sales and
FCF and has one of the best balance sheets.
According to the estimate, which I insist on, it is conservative in terms of the company's recent
earnings growth and the guidance provided for 2025, as well as the multiple to apply in the
valuation, which is lower than what the comparables are estimating, with a target price for 2025
of around 30-35 euros, implying an x5 or x6 chance of meeting these expectations.
If the company's guidance is met and it achieves 500 million euros in EBITDA for 2025 and a
valuation multiple of x15, it will result in a target price of 30 euros for 2025, multiplying our
initial investment by more than six times over four years.

Arturo Reina García 27/09/2022