White Falcon Capital Q1 2024 Partner's Letter

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White Falcon Capital is an independent entity and have a mandate to do the right thing for the portfolio and the partners. Our goal is to protect and compound capital over the long term on a risk-...

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Our goal is to protect and compound capital over the long term on a risk-...</p>\n\n<a href=\"https://seekingalpha.com/article/4683979-white-falcon-capital-q1-2024-partners-letter\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>White Falcon Capital Q1 2024 Partner's Letter</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nWhite Falcon Capital Q1 2024 Partner's Letter\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-16 19:25 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4683979-white-falcon-capital-q1-2024-partners-letter><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>White Falcon Capital is an independent entity and have a mandate to do the right thing for the portfolio and the partners. Our goal is to protect and compound capital over the long term on a risk-...</p>\n\n<a href=\"https://seekingalpha.com/article/4683979-white-falcon-capital-q1-2024-partners-letter\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4533","symbol_name":"AQR资本管理(全球第二大对冲基金)","start_time":0,"source_url":"https://seekingalpha.com/article/4683979-white-falcon-capital-q1-2024-partners-letter","article_id":"2427828650","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1358927461/image_1358927461.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2427828650","pubTimestamp":1713266700,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"White Falcon Capital is an independent entity and have a mandate to do the right thing for the portfolio and the partners. Our goal is to protect and compound capital over the long term on a risk-adjusted basis.We achieved a satisfactory result on an absolute basis.We maintained our approach of trimming holdings where valuations are stretched, while redirecting capital into reasonably valued small and mid-capitalization stocks.Due to the rally in gold, the weight of precious metal royalty companies is on the higher side of our typical 10-15% allocation to them.cemagraphics Dear Partners, While individual client returns may differ based on their inception dates, consolidated performance of all accounts for the period ending March 31, 2024, is as follows:     Q1 2024 2023 2022 ITD*   White Falcon  8.7% 36.0% -9.26% 32.2%   S&P 500 TR  12.8% 23.2% -12.6% 28.7%   MSCI All Country TR  10.5% 18.5% -11.9% 19.9%   S&P TSX TR 6.6% 11.8% -5.8% 13.9%","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4533":"AQR资本管理(全球第二大对冲基金)","LU0661504455.SGD":"Blackrock Global Equity Income A5 SGD-H","LU2264538146.SGD":"Fullerton Lux Funds - Global Absolute Alpha A Acc SGD","ATZAF":"Aritzia Inc.","LU2177674079.SGD":"Fidelity Asia Pacific Opportunities A-ACC-SGD (hedged)","BK4535":"淡马锡持仓","LU0511384066.AUD":"SUSTAINABLE GLOBAL THEMATIC PORTFOLIO \"A\" (AUDHDG) ACC","BK4121":"生命科学工具和服务","SG9999018857.SGD":"United Global Quality Growth Fd Cl Acc SGD-H","BK4538":"云计算","IE00B1BXHZ80.USD":"Legg Mason ClearBridge - US Appreciation A Acc USD","AMD.AU":"Arrow Minerals Ltd","LU0061475181.USD":"THREADNEEDLE (LUX) AMERICAN \"AU\" (USD) ACC","LFCR":"LIFECORE BIOMEDICAL INC","LU0211327993.USD":"TEMPLETON GLOBAL EQUITY INCOME \"A\" (USD) ACC","CEO":"中海油","BK4094":"服装零售","SG9999014880.SGD":"大华全球优质成长基金Acc SGD","IE0009356076.USD":"JANUS HENDERSON GLOBAL TECHNOLOGY AND INNOVATION \"A2\" (USD) ACC","SG9999014906.USD":"大华全球优质成长基金Acc USD","IE00B7KXQ091.USD":"Janus Henderson Balanced A Inc USD","CAD.AU":"Caeneus Minerals","SG9999017495.SGD":"UGDP UNITED GLOBAL QUALITY GROWTH \"B\" (SGD) ACC","LU0323240290.USD":"HSBC GIF GLOBAL EQUITY CLIMATE CHANGE \"AD\" INC","ACN":"埃森哲","IE00B3S45H60.SGD":"Neuberger Berman US Multicap Opportunities A Acc SGD-H","BK4548":"巴美列捷福持仓","AMD":"美国超微公司","IE00BJJMRX11.SGD":"Janus Henderson Balanced A Acc SGD","IE00B19Z9505.USD":"美盛-美国大盘成长股A Acc","IRR":"ING Risk Managed Natural Resourc","CTSDF":"Converge Technology Solutions Corporation","LU0053666078.USD":"摩根大通基金-美国股票A（离岸）美元","VAR.AU":"VARISCAN MINES LTD","LU0889565833.HKD":"FRANKLIN TECHNOLOGY \"A\" (HKD) ACC","LU0079474960.USD":"联博美国增长基金A","GB00BDT5M118.USD":"天利环球扩展Alpha基金A Acc","TECK":"泰克资源有限公司","LU0082616367.USD":"摩根大通美国科技A（dist）","CDMO":"Avid Bioservices, Inc.","BK4554":"元宇宙及AR概念","NU":"Nu Holdings Ltd.","BK4532":"文艺复兴科技持仓","FNV":"Franco Nevada Corp","LU0061474960.USD":"天利环球焦点基金AU Acc","DAVA":"Endava Ltd","IE00BKDWB100.SGD":"PINEBRIDGE US LARGE CAP RESEARCH ENHANCED \"A5H\" (SGDHDG) ACC","BK4534":"瑞士信贷持仓","LU0310799852.SGD":"FTIF - Templeton Global Equity Income A MDIS SGD"},"translate_title":"白隼资本Q1 2024合伙人信","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"AMD":1,"VAR.AU":1,"TECK":1,"NU":1,"LFCR":1,"IRR":1,"FNV":1,"DAVA":1,"CTSDF":1,"CEO":1,"CDMO":1,"CAD.AU":1,"ACN":1,"AMD.AU":1,"ATZAF":1},"content_text":"White Falcon Capital is an independent entity and have a mandate to do the right thing for the portfolio and the partners. Our goal is to protect and compound capital over the long term on a risk-adjusted basis.We achieved a satisfactory result on an absolute basis.We maintained our approach of trimming holdings where valuations are stretched, while redirecting capital into reasonably valued small and mid-capitalization stocks.Due to the rally in gold, the weight of precious metal royalty companies is on the higher side of our typical 10-15% allocation to them.cemagraphics Dear Partners, While individual client returns may differ based on their inception dates, consolidated performance of all accounts for the period ending March 31, 2024, is as follows:     Q1 2024 2023 2022 ITD*   White Falcon (net of fees) 8.7% 36.0% -9.26% 32.2%   S&P 500 TR (CAD) 12.8% 23.2% -12.6% 28.7%   MSCI All Country TR (CAD) 10.5% 18.5% -11.9% 19.9%   S&P TSX TR 6.6% 11.8% -5.8% 13.9%  \nClick to enlarge *Inception date is Nov 8, 2021 We achieved a satisfactory result on an absolute basis. It's worth noting that markets typically experience an 8-10% annual increase, and during this ongoing bull market, we achieved this level of performance within a single quarter. As we move forward, it's reasonable to anticipate increased market volatility, and in navigating these fluctuations, our focus remains on optimizing the quality and Internal Rate of Return (IRR) of the portfolio. In the first quarter, we were helped by the positive contribution of Nu Holdings (NU), Converge (OTCQX:CTSDF), Amazon.com (AMZN), AMD (AMD), and Aritzia (OTCPK:ATZAF). The big detractors this quarter were Endava (DAVA) and Lifecore Biomedical (LFCR). Overall, we maintained our approach of trimming holdings where valuations are stretched, while redirecting capital into reasonably valued small and mid-capitalization stocks. With these actions, we believe we are laying the groundwork to enhance the IRR potential of the portfolio in the future. We must reiterate that our 'metric' for measuring success is risk adjusted absolute returns across a market cycle and not an index. Appreciation of the US dollar relative to the Canadian dollar has significantly contributed to the returns of the S&P 500 (SP500, SPX) when measured in CAD, as illustrated above. For instance, since the inception of White Falcon, the S&P 500 has delivered 18.2%, while the Nasdaq has achieved a 16.9% return in USD. As a comparison, we have had, on average, about 50-55% of the portfolio in US stocks.  \"The stock market is designed to transfer money from the active to the patient\" -Warren Buffett  In the appendix to the letter, we delve into our investment in Converge Technology Solution. This was not an easy to hold investment and emphasizes the importance of deep due diligence and conviction. Converge declined from our original purchase price of $7.2 per share in May 2022 and bottomed at $2.3 per share in October 2023. When a stock experiences a decline like this, it's crucial for the portfolio manager to assess the situation impartially and determine whether to sell the stock, do nothing or increase the position. In the case of Converge, we opted to increase our position and average down, reducing our cost basis to under $3.8 per share. Our laggards - Endava and Lifecore - have detracted ~ 350 bps from performance this quarter. Endava was down 40% after it reported earnings in February. This was a 3% position before this decline, but we have since added to the stock to make it one of the top 5 positions (by cost) in the White Falcon portfolio. Endava is a founder-led IT service provider headquartered in London, UK. It competes with the likes of Accenture (ACN) and provides IT services to clients in the financial services, travel, retail, software, healthcare among other industries. We believe scaled IT service providers are good businesses as they are essentially a 'royalty' on IT spend. They are an important link between technology and corporations who increasingly need technology to transform their business. We see a favorable backdrop for businesses like Endava with rising investments in technology, growing trends in outsourcing, and the emergence of new technologies such as Artificial Intelligence (AI). Importantly, we believe that Endava has the culture, scale and competencies required to succeed. So what happened? Endava guided for negative growth in its business for the current fiscal year (ending June 2024). On the other hand, management had made hiring decisions expecting a growth in revenues, leading to a mis-match in the cost structure. Due to this, operating margins collapsed and Endava's earnings are likely to decline ~30% in FY 2024 compared to FY 2023.  \"Uncertainty is the friend of buyer of long term value\" -Warren Buffett  Client projects are being delayed due to three reasons, (1) AI is new and clients require time to discern the optimal use-case scenarios, leading to a cautious \"wait and see\" approach; (2) IT services 'over-earned' during Covid and had a stellar performance in 2022. Some of this is now normalizing as clients 'digest' previous implementations; and (3) Endava is over-exposed to the financial sector, specifically payments, a sector that is seeing a pronounced slowdown in demand. Clients may postpone these projects temporarily, but ultimately, they will need to invest in order to maintain competitiveness. In essence, Endava (and EPAM) is currently going through a phase of cyclical weakness which, we believe, will subside in the near future leading again to strong topline growth. Importantly, Endava has a robust balance sheet and a capable management team, instilling confidence in their ability to effectively navigate these challenging circumstances. At 11x LTM EV/EBITDA and potentially 8x NTM EV/EBITDA, we believe the risk-reward is favorable for an increased allocation to Endava. In our FY 2023 letter, we noted our less-than-ideal experience with merger-arbitrage strategies, with Lifecore Biomedical being the sole remaining investment of this nature in the portfolio. We anticipated a positive outcome for this particular investment, but that proved too optimistic when Lifecore's board of directors decided to end the strategic process without a deal. Lifecore was also a 3% position in the portfolio and, after this announcement, the stock declined from $7.5 to $4.5 per share. However, unlike our other merger-arbitrage positions, we had made the decision that we will be happy owning the stock if a deal does not materialize. We bought more shares at $4.8 per share to bring Lifecore back to a 3% position. Our average cost is $5.3 and the stock closed at $5.8 at quarter end. Lifecore Biomedical is a Contract Development and Manufacturing Organisation (CDMO) with expertise in specialty formulation, aseptic filling, and final packaging of complex, injectable medical drug products. Our previous experience investing in similar businesses has taught us that these are very difficult to operate assets, largely attributable to a single factor - compliance. FDA grants authorization and conducts regular inspections of facilities to ensure compliance with regulatory standards. When a pharmaceutical product is developed and manufactured by a CDMO, the FDA holds both the CDMO and the sponsor (the company that owns the drug) responsible for ensuring that the product meets regulatory requirements for safety, efficacy, and quality.  \"You're looking for a mispriced gamble. That's what investing is. And you have to know enough to know whether the gamble is mispriced. That's value investing\" -Charlie Munger  Lifecore is increasing capacity from 22 mn units to 70 mn units over the next 4 years. Not all capacity can be filled at the same price, but this means that Lifecore's revenues can increase 2-3x over the next 4-5 years. This, when combined with operating leverage, will mean a rapid growth in earnings - perhaps closer to 3x. Importantly, most of this capacity is already paid for, potentially leading to a surge in free cash flow. As we have mentioned before, our philosophy on portfolio construction is that we want to be concentrated enough to matter but diversified enough to survive. Even with dramatic drops in stock prices of Endava and Lifecore, our performance overall was not unduly affected. We manage risk at the business level and at the portfolio level by utilizing appropriate position sizing. In fact, these drops help us add capital to attractive opportunities. Even as the general markets are at an all-time high, we remain optimistic on the White Falcon portfolio due to business such as Endava and Lifecore in the portfolio, which we believe we have underwritten at very attractive IRRs. The top 5 positions in the White Falcon portfolio are Nu Holdings, Converge, Amazon.com. Precious metal royalty companies, and Teck Resources (TECK). We have sold a third of our AMD position, about a fifth of our Nu Holdings position, and trimmed several other stocks. We still believe these companies have a good future, but valuations leave no margin for error. As mentioned earlier, the capital from these trims is being allocated to the laggards in the portfolio as well as in initiating new positions in small and mid-capitalization companies at very reasonable valuations. Due to the rally in gold, the weight of precious metal royalty companies is on the higher side of our typical 10-15% allocation to them. We recently wrote an article for the Globe & Mail on Franco-Nevada Corp (FNV), a portfolio company, that can be accessed on our blog. We believe that royalties are a better way to express an opinion on gold as they pay a dividend and have optionality on both the price of gold as well as additional discoveries by operating companies. With debt and deficits increasing by the minute and the central bank's inability to control inflation, we believe that it is prudent to have an 'outside the system' asset in the portfolio that can protect our purchasing power over time. As we look ahead, earnings are poised to take on greater significance, especially considering that multiples have largely been responsible for driving the market's upward trajectory thus far. The US economy stands out as a notable exception, with higher interest rates serving to slow down other economies around the world. As always, we will maintain a vigilant approach, closely monitoring the earnings of both portfolio holdings and companies on our watchlist. This ongoing analysis allows us to gather valuable insights into underlying business trends, which then helps us to both pick stocks and manage risks. In closing, I want to express my enduring gratitude to each and every partner of White Falcon. Your support has been invaluable, and I am truly thankful for the partnership we share. Please feel free to get in touch with me at any time for any questions or feedback you may have. With gratitude, Balkar Sivia, CFA Founder and Portfolio Manager, White Falcon Capital Management Ltd.  Converge Technology Solutions Research Report  \"If you're going to invest in stocks for the longer term, there are going to be periods when there's a lot of agony. I think you just have to learn to live through them.\" -Warren Buffett   Converge Technology Solutions Corp. is a North American IT solution provider. They specialize in helping organizations modernize their IT infrastructure, leverage emerging technologies, and optimize their operations to drive business growth and innovation. Converge offers a wide range of IT services, including cloud solutions, cybersecurity, advanced analytics, digital infrastructure, and managed services. In 2018, Converge went public with a strategy to consolidate small and medium-sized IT service providers (ITSPs). Initially successful, it attracted investors, including us, interested in both inorganic and organic business growth. However, in 2022, the M&A strategy faced challenges due to accumulated debt and a declining share price. Converge acquired well, but the problem was that it was not integrating these acquisitions and deriving revenue or cost synergies. Our initial mistake in this investment was believing that the management team was doing both things well. Value investors typically step in as a stock declines like this, however, Converge's situation was complicated. The company had become a disparate collection of businesses through rapid M&A. In addition, Converge faced working capital problems. Capital tied up in working capital resulted in a lack of free cash flow, causing skepticism among value investors about reported earnings. There was also the issue of a reputed CFO departing just after a few months on the job! All this contributed to a decline in the stock price from C$12 per share in 2021 to a low of $2.3 per share in 2023 as there were no natural buyers of the stock. At its bottom, it was trading for 3x EV/EBITDA. We held several meetings with management, including the new CFO, Avijit Kamboj, and determined that Converge is headed in the right direction. At that point, we significantly added to the position. Since then, Converge has undergone significant changes, including putting the M&A strategy on hold. We anticipate improvements in free cash flow conversion in 2024, along with structural changes leading to margin expansion. The outlook for 2024 and 2025 includes modest revenue growth, margin expansion, and low double-digit earnings growth. Additionally, with better free cash flow conversion, Converge aims to deleverage its balance sheet and repurchase stock. We believe all this will lead to a re-rating and narrow the gap to intrinsic value. Business In 2016, Shaun Maine incorporated Converge Partners to implement the roll-up strategy, targeting regional ITSPs in North America. In the beginning, the roll-up strategy at Converge, led by Shaun, generated significant shareholder value. Converge went public in 2018 and continued its M&A strategy. The idea was very simple: buy small ITSPs and derive synergies on cross-selling, costs, and managed services. Converge's affiliated companies distribute a diverse array of products and solutions, encompassing standard hardware like laptops and mobile devices, business analytic software, AI solutions, blockchain solutions, cybersecurity software, public and private cloud solutions, data centers, networking, and storage products, among others. Most of Converge's existing customers are small-to-mid-sized enterprises or state/local governments. Here is an overview of the business:  Source: Converge Presentation We have talked about IT services companies before with our report on EPAM. ITSPs bridge the gap between suppliers and customers in a highly fragmented environment. Customers struggle to select vendors and manage IT spending efficiently, while even large suppliers find it challenging to reach every customer effectively. The primary role of an ITSP is to provide outsourced distribution/sales for suppliers and outsourced procurement for consumers. For context, Converge, CGI, Accenture, and CDW boast extensive vendor relationships, along with a range of in-house solutions. In addition to using ITSPs for procurement, many customers are increasingly turning to IT professional services for enhancing digital capabilities and implementing new IT products and services through project-based work. The growing complexity and diversity of IT solutions pose challenges for most non-experts. Converge is a little different than full service IT services companies and contributes value to customers in three key ways:  Offer software, hardware, and services either as resellers or directly. Provide project-based professional services encompassing design, configuration, integration, installation, and implementation. Offer ongoing managed services, essentially functioning as outsourced IT. This is the highest margin and most recurring revenue part of the business.  Managed IT services are gaining popularity as IT service providers take on ongoing responsibilities. Outsourcing IT functions to external experts proves cost-effective and reliable, especially for small-to-mid-market clients. For example, overseeing a customer's cloud requirements, managing cybersecurity, managing networks etc. The key variables are uptime and how fast the IT services company responds to tickets or problems faced by the customer. Converge's focus has now been on growing this part of the business. They have consolidated the operations in Mexico and standardizing processes so that they can increase the profitability of this division. Source: 10th man deep dives There is a really good report on Converge by 'The 10th Man'. Anyone interested in reading in detail about the business, industry, M&A strategy should give that report a read. The investment thesis is as follows: Converge will increase margins by integrating the front and back end of all its acquisitions, thereby deriving synergies. In addition, free cash flow conversation will normalize that will then help Converge to pay down debt and buy-back stock. All these factors will force the market to re-rate the company closer to its peers.  \"Our focus continues to be reinvesting back in our business, our innovations and on completing the integration of previous acquisitions, all in addition to paying down our debt and repurchasing our stock. We are capable of pulling several levers simultaneously with the cash we expect to generate from operations.\" -CFO (Q3 Earnings Call)  Margins Converge was good at acquiring businesses, but was not very good at integrating them. A lot of its current problems stem from this fact! The organizational landscape became increasingly complex as they focused on M&A. The acquisitions were made across verticals and across geographies. In fact, I would go as far as some acquisitions had no strategic rationale and were only made because they could be had for a decent multiple. Converge acknowledged challenges in encouraging Value-Added Reseller (VAR) salespeople to sell services. This issue is attributed to the relationship-oriented individual model, making it difficult to transition them into service-oriented sales roles. Once M&A stopped and management understood that they had to execute for organic growth, they changed tack and started integrating the acquired companies.  \"So our North America integration is the fastest integration continues to be on track. As I mentioned on last quarter's call, our front office is primarily integrated with our back office as we're working on this new ERP, which goes live mid next year, that's where you'll probably see the biggest synergies and operational efficiencies. We continue to look at how we're going to integrate our European business, given that there are 2 separate restrictions. We are on a path to integrate the 2 businesses, distinct businesses that we bought in Germany into one Converge Germany.\" -Greg Berard (Q3 Earnings Call)  Today, they are largely done integrating the front end. They significantly changed the sales organization and their incentive structure to align with the new priorities. The sales organization is now compensated on gross margins, cash conversation and sales of managed services. To provide some more detail, the current approach involves organizing regional structures led by VPs, with an emphasis on consolidating sales individuals within these structures. The transformation involves categorizing them into practice areas, enabling Converge to track the number of practice areas each sales representative is managing. Currently, 60% of sales reps are handling sales across four practice areas. On the back end, Converge has decided to implement NetSuite as the new ERP solution. The primary objective is to unify all North American operations on a single, effective system. In addition, Converge will be able to seamlessly integrate and consolidate all relevant data for improved efficiency and accuracy in the operations. The other factor that will help with margins is managed services. As we have mentioned before, the whole organization is now focused on growing the services, and specifically, managed services business.  \"We want to get to $1 bn in managed services. We have 10K IBM reps selling our solutions. Most pure play do not have this channel. Mid-market companies cannot manage their network. Can we do it for you? Yes! Demand is very strong. We also do analytics on the cloud.\" -Shain Maine (CEO)  In essence, the margin lift comes from,  Front-end and back-end integration Higher proportion of professional and managed services  Converge has been making EBITDA margins of ~5-6% but has the potential to make margins of 7-8% over the longer term. We believe we will see snippets of this in 2024 with margins approaching 8% in 2025. Converge has made these margins in the past, and this will be in-line with its peer group. Cash Conversion Converge was a negative working capital company in 2020/21, but this flipped 180 degrees in 2022/23. With so much M&A, there is always a risk that target companies inflated their revenues and that the actual cash from these revenues may not materialize. This remains a risk with Converge and some part of the revenue may never come back but, (a) Converge has not made a new acquisition recently and all past acquisitions have now been more or less integrated, and (b) Incentive structures have been changed and policies have been put in place to convert earnings into cash flow. This cash conversion problem was made worse by the fact that Converge produced an 'adj free cash flow' metric. When a business has leverage on the balance sheet and needs to pay interest expense, then it can only be paid with real free cash flow and not 'adj free cash flow'. I think the management understands this now. Converge started compensating sales executives with payments tied to invoicing rather than cash receipts. However, there has been a recent shift in the commission structure. All incentives are now set to cash. To reinforce this, regional VPs regularly convene on calls, underscoring the importance of customer payments as a fundamental aspect of their operations. The message is clear: customers must fulfill their payment obligations. This is already bearing fruit, and Converge had a fantastic Q3 from a cash collection perspective.  \"The snapback in cash generation this quarter was driven by moving swiftly to implement improved receivables and payables processes across the company with disciplined measures being put in place to better define terms and parameters for our contracts and operating hurdles for our operation. Implementation of these improvements is in progress and will continue.\" -CFO (Q3 Earnings Call)  With maturation of acquisitions, new ERP, and change in incentives, we believe cash conversion will increasingly get better. The CFO has a target of 55-60% cash conversion between EBITDA and FCF, and we believe this number. Financials  As we can see, FCF conversion suffered in 2022 and this was all due to the $77 mn in working capital. In addition, actual cash conversion also suffered from 'one time items' related to M&A and increasing interest expense as all of Converge's debt is floating rate.  The net debt concluded the quarter at around $307.5 million, leading to a leverage ratio of 1.84x of TTM EBITDA. Converge has about $292 million in available capital encompassing cash reserves and the available capacity under the credit facility. It will likely use about 50% of its FCF to pay down debt and the balance reserved for investments in the business and share buybacks. Converge is currently valued at 6.5x EV/EBITDA and we believe this is extremely cheap for the quality of the business. As investors realize that the cash conversion is real and as Converge pays down debt and buys back stock, we believe that the market will value Converge closer to 10x EV/EBITDA which means the stock can double in 3 years from these levels.  Disclosure: White Falcon has a long position in the shares of Converge. Disclaimer Past performance is not necessarily indicative of future results. All investments involve risk, including the loss of principal. It should not be assumed that any of the transactions or investments discussed herein were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the investments discussed herein. 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White Falcon also undertakes no commitment to take or refrain from taking any action with respect any of the companies mentioned in this letter. \nClick to enlarge Original Post Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2427828650"}