Third quarter 2018 revenue of $404.8 million
Adjusted EBITDA per credit agreement of $47.6 million
Adjusted earnings per diluted share of $0.31
Raises Full Year 2018 Guidance Range
EAGAN, Minn., October 30, 2018 — 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.
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.
(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.
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Condensed Consolidated Balance Sheets
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Condensed Consolidated Statements of Operations
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Condensed Consolidated Statements of Cash Flows
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Reconciliation of GAAP to Non-GAAP Financial Measures
(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.
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Reconciliation of GAAP to Non-GAAP Financial Measures
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(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.
Vice President, Marketing, ConvergeOne