Convergint Outlook Turns Negative

By John Honovich, Published Apr 16, 2020, 11:24am EDT (Info+)

Convergint's outlook has turned negative, according to bond rater Moody's, released shortly after IPVM's report about Convergint's billion dollars in junk debt.

Numerous Convergint employees were outraged by IPVM's report, even claiming that junk made up "95% of the market". This is wrong, per S&P, it is just 28% of the market. Junk debt is dangerous, especially so in the coronavirus crisis.

The chart below overviews Convergint's debt-fueled acquisition boom, their ambitious hopes to hit $2.3 billion revenue in 2023 and Moody's expectation of sharply declining revenue for 2020:

Inside this report, we examine these 3 dynamics, including the key positive factors Convergint has going for it, the downward pressure from the debt and Coronavirus and the future challenges for the once high flyer.

Moreover, we examine the details of the financial covenant on Convergint's debt and how this restricts their ability to operate and puts more pressure on their employees.

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Vote / ****

Comments (28)

Here are the 2 Moody's links - Convergint Moody's press release and Convergint Moody's credit opinion (paywalled). As we said in the post, we bought and reviewed the full credit opinion but the license does not allow sharing it. Our archiver won't let us post the links in the report body but we'll fixed this and add to the body of the report later today.

Btw, here is the LinkedIn thread where Convergint employees vent their anger at IPVM. I genuinely find it insightful to understand their mindsets and that most of them have an extremely poor understanding of economics. On the plus side, their anger shows the strength of Convergint culture, which will help them in this crisis.

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Funny

I come to IPVM for the insight on products and interesting articles on the future of the industry as it relates to new technologies, yet lately it seems like all IPVM wants to do is try to hold onto subscribers with shock headlines and outrage articles.

Perhaps Convergint employees are venting their anger in that article (and I'm sure this one as well) because in these extremely stressful times it seems that IPVM for whatever reason continues to pile on. Yes times are tight, yes we had to furlough some employees, yes we've all taken pay hits . It's not anything that thousands of other companies are doing at this exact same point. It's starting to feel like you have a personal vendetta against Convergint. If you are going to keep slinging mud please do similar expose's on other large integrators - at least spread the "love".

Regardless of initial finances, if the COVID situation continues on indefinitely then no one will be left standing.

Every single colleague I work with is doing everything in their power to persevere through this crisis and come out the other side and to keep morale high.. Perhaps instead of writing negative articles all the time how about trying to write positive articles about how to get through this crisis?

You do what you have to but at the end of the day...I am Convergint.

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Full Disclosure: I am Convergint.

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Out of curiosity, how do you categorize the Moody's reports? Is Moody's "slinging mud"?

I know that for me personally, if I were employed by a large organization with the kind of financial situation Convergint was in, I would want to know that so that I could plan my career accordingly. Why didn't Convergint make this more clear to their legions of employees? Surely highly loyal and knowledgeable people would be able to take this kind of data in without getting scared or upset, right? What is the downside to Convergint being more open with their employees?

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I come to IPVM for the insight on products and interesting articles on the future of the industry as it relates to new technologies, yet lately it seems like all IPVM wants to do is try to hold onto subscribers with shock headlines and outrage articles

IPVM is doing a lot on the "insights on products" side of things - all this and more in the last 24 hours:

IPVM New Products Online Show With 40+ Manufacturers LIVE NOW

Avigilon Open Analytics Tested

Vivotek LPR Camera Tested

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I see IPVM as just publishing observations and facts here. I see no mud slinging whatsoever. They are just reporting actual events.

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You do what you have to but at the end of the day...I am Convergint.

I totally respect the passion that Convergint employees have for their company. I mean that seriously. And to the people voting #1's comment unhelpful, please don't. It's an important, valuable response.

It's starting to feel like you have a personal vendetta against Convergint.

I have heard the same thing over the years from Pelco, Avigilon, Hikvision, Arecont, etc., etc., employees. I don't have a personal vendetta but I get why you would think that way in the context of our recent negative coverage. However, if you look more broadly at our coverage, you certain could argue I / IPVM are 'negative' but it's not 'personal'.

Perhaps instead of writing negative articles all the time how about trying to write positive articles about how to get through this crisis?

I honestly don't know what the positive solution for Convergint is here. Convergint is the combination of Caddyshack and a wall street movie.

I don't know any of the Convergint execs but I know lots of people who do know them and they universally say they are good people and that the V&B and 'fun and laughter' is the real deal.

But the junk debt gamble is a real problem. My understanding is that their plan was to get to 2023's $2.3 billion and Ares would sell Convergint, letting Ares and the executives get their payday. Perhaps in a non-Coronavirus world, they get there and the debt gets paid off.

The most positive realistic thing I can see is accept the reality of this and if you truly love Convergint, work hard and sacrifice to right the ship.

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In my area I have heard a whole lot of negative stuff about Convergient, from customers who feel locked in - excessive pricing on exclusive products with no pricing concessions during Covid. People sometimes remember you in the good times but they never forget you in the bad times. Articles like these are very important although negative they allow smaller companies the ability to plan.

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Full disclosure up front: I am not Convergint. I am a competitor, who rarely sees them in our marketplace, so this article has little bearing on my business.

I found this article actually just stating the facts from Moody's and explaining them with simple and understandable explanations that most can understand. I must admit that reading a Moody's report even with a degree in business can be confusing.

My company has been on the good and bad side of IPVM. While I agree sometimes they poke the bear, they always seem to find the underlying truth of the matter.

Convergint folks.... what do they gain if they effect your business positively or negatively?

To infinity and beyond <--I felt I needed a catch phrase since everyone else had one... sorry too much quarantine with kids.

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Do a search for ADT and you will see IPVM spreads the love just fine. I know it is hard not to feel picked on by IPVM when the company you love is part of a negative article, but I learned long ago that it is a waste of time and energy to worry about it and write comments as you did.

Check out Investor, Bloomberg, Seeking Alpha, Motley Fool or your favorite investing blog website and there are thousands of articles just like this one informing the audience of revised projections and the reasons why (and they all have "sensationalist" headlines). It's nothing personal, I don't think I've ever read a negative comment about Convergint on IPVM, you are in good shape and this article won't change that.

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I don't think I've ever read a negative comment about Convergint on IPVM...

icymi

Junk Debt Laden Convergint Facing Coronavirus Crisis

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I am not Convergint and I'm not a competitor either. In fact, I really don't have a dog in this fight. What I find interesting is the business economics. This report is about Convergint, but it could be about a bunch of other businesses, regardless of their industry. It's not how we run our business, but it gives me insight into how some other companies operate. Obviously this isn't a low light camera test, but it is factual reporting on something that not only impacts our industry, but also business in general.

I get it's not fun to be the subject of the examination, but at the same time, I think it's valuable to read and learn from.

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I can't comment on the financial aspect of Convergint as there is so much uncertainty going on right now, but I just wanted to comment about the culture of Convergint. In my opinion, their culture is very admirable to say the least. They have incredible camaraderie within each branch and even across their branches.

I have worked with many Convergint team members throughout my career, some of which I would put at the very top of their class. At the end of the day, relationships are big part of this business (any business really) and that is something they do very well.

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I've been following this and many other posts that come from IPVM. Holding back on commentary is my usual MO however, the Videos, comments by Convergint folks and what is written in places such as Glass Door Reviews and Indeed Reviews, at least raise an eyebrow? I don't think the challenge should be to the writers at IPVM; I think you owe to yourselves in the world of Convergint to challenge the Leadership you have rallied for? I also don't know what it means when the sign-off's are "I am Convergint"?? You all have identities that appear to be second....or third, to a privately owned Corporation? Without you, the person, the Corporation has nothing. No company has a perfect structure and no company is safe in these unprecedented times (stating the obvious), but when we are asked to take financial hits while working for large International organizations, albeit that the bosses followed suit to some extent, taking a moment to assess yours and the Corporation's future might be worthwhile. Just saying...

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Short answer from what I have seen Convergint that there are some Offices or "CTC's" that will do really well ( the ones near Pharma, and national'/global chains), in fact there are 5 CTC's that I have seen maintain or pick up more work since the death flu as appeared, others will have to be cut.

however not every CTC is pulling their weight ( more importantly certain positions within those CTC's), and due the structure of Convergint Those are the ones are most likely going to be cut.

I will say its not just Convergint suffering these issues. all of the other integrators in my area are getting hit too. From the small local guys to JCI, ADT as well. They are trimming staff back to the just bread winners and not to many helpers floating around.

If this drags out like I think it will Convergint will have to restructure how they do things, along with every other company out there. like everyting else out there when the next round of free monopoly money gets handed out I expect them to get some along with quite a few others.

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Is Convergint day postponed? Could a wood chuck chuck wood if a wood chuck CHOKES?

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Moody's Blues...

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There are a lot of amazing people at Convergint and it is unfortunate that so many are suffering due to this. It is frustrating to see the situation that has arisen. COVID is the driver for the economical state we are in, but historically, we were overdue for down turn aside from the pandemic. Debt loading during a time that historical trends showed a correction was due was a high risk gamble. A focus on building recurring revenue should have been the focus while the economy was hot to help weather inevitable storms. Unfortunately, a lot of orgs won't increase that focus because of short-term hits on the books. However, it would have been the right decision for the company and the employees. By no means did anyone expect a global pandemic but there were other economic factors that should have kept the org from taking on so much debt.

Hoping for the best for everyone affected. There are a lot of families having to make hard decisions right now and I'm sure that even Convergint's competitors don't want to see that.

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A focus on building recurring revenue should have been the focus while the economy was hot to help weather inevitable storms.

Good comment. Two thoughts here.

(1) As a recurring revenue business, certainly I / we have seen the benefits of that.

However (2) non-recurring revenue-focused businesses like Convergint can grow a lot faster in good times. Each project is $500,000 here, million there, $3 million, etc. Comparable RMR / SaaS growth is much harder. This is, obviously, not meant as a defense of Convergint but a realization of why project based businesses are pursued.

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100% agreed on #2 and it isn't really defending Convergint (which is also fine to do - plenty of very smart people).

There is no doubt that project based capital injects a ton of revenue into the org without having to wait. With the PE firm involved, making the books look thick NOW is important; especially with what my assumptions are for what their 5 year plan for Convergint was. There in lies what I feel was the major flaw however; not enough preparation for a very rainy day which was a possibility from a large variety of economic factors. We were hot for a long time and creating recession-resistant revenue streams would have made the organization safer.

It is also worth noting - recurring revenue focused business models create drastically higher multipliers on EBIDTA than project focused ones. From a sale standpoint, it can do little but help benefit in that aspect.

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recurring revenue focused business models create drastically higher multipliers on EBIDTA than project focused ones.

For sure, that is true. Look at Convergint. Moody's says Convergint got acquired by Ares for $1.6 billion, ~15x EBITDA and just over 2x sales. It's hard to value most SaaS businesses by EBITDA since most by design aim to lose money or break even as they continue to build out their customer base, maximizing long term revenue and profits. However, SaaS companies are routinely valued at 5x to 10x of sales, which is far higher than Convergint who itself was valued far higher than the average project based integrator.

Could Convergint have built their business at its target enterprise market by focusing on recurring revenue? I think it would have been hard as most enterprise physical security buyers still prefer non-SaaS options. While that will change over the next decade, Convergint was stuck will selling in the way that their targeted buyers preferred, yes/no?

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You are correct in regard to enterprise customers in our industry specifically but the scope of focus on recurring revenue extends beyond just SaaS. The two don't need be considered mutually exclusive but for other types of businesses it surely is they key ingredient. The transition from a project company to a recurring one is massive and certainly could not even be feasible for Convergint in their entirety. My note was more on strengthening programs that worked toward bringing the discrepant split closer to center. They also have a large midmarket base whom is much more open to SaaS, etc conversions. I'll explain more...

Convergint's multiplier truly was practically unheard of for their type of organization. Massive kudos on what they were able to achieve. Anyone arguing their past successes would be foolish. My concern is more the strategy and timing of their post-ares era and how much debt weighs a large corporation down, coupled with the timing of it all. There are some great tax savings in this scenario, for sure. However, it raises the question on how Ares intended to fully capitalize on their investment in the way that we all know PE firms do - after investing at such a multiplier. I like to watch business strategy and compare to that of the past but wish I had more time to do so. I have not had time to dig into how Ares funds its capital. Is this LBO or what do the funds look like under the covers? How long was Ares planning to hold investments before seeing their investments returned?

As a business owner, I find more intrigue in the strategies than many I am sure but the timing on debt-loading seems massive risk (again even Covid aside).

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Convergint has a new video giving an update on their business. There are no quantitative nor metrics given about the business but certainly good video to keep people's spirits up top.

Of the 5 speakers, Sean Flint presenting for the US was the most confident:

He declared:

I can assure you is this no matter what choppy waters lie ahead in front of us we have never been as positioned as favorably as we are today and I could not be more confident in Convergint's short-term and long-term future [emphasis added]
Maybe he believes it but that's one hell of a wildly optimistic view. Whether you 'like' or don't 'like' Convergint, Convergint was clearly much better positioned at the start of 2020 than it was today.
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Whether you 'like' or don't 'like' Convergint, Convergint was clearly much better positioned at the start of 2020...

maybe he means relatively; only the strong survive?

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Yes, that would be the most plausible explanation of if he truly believed it rather than just saying things to make people feel better.

But Convergint had this debt machine that none of their rivals did and now they don't so I struggle to see how relatively their positioning has improved.

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But Convergint had this debt machine that none of their rivals did and now they don't so I struggle to see how relatively their positioning has improved.

Most at risk are companies with underlying financial health issues.

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Agree, the question becomes did the average integrator have more or less 'underlying financial health issues' than Convergint? Surely there are many integrators with such challenges but I think that's a minority, especially compared to Convergint's own issues. This is further offset that many integrators got the PPP and Convergint does not qualify for any of those programs to date.

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If you were faced with a decision of taking a job offer somewhere else (I still see Ziprecruiter send out regular emails about job postings) or staying with Convergint, would you not want to know the full story of about the health of the company you are working for?

If you were looking to invest money in the security industry and bonds related to Convergint came up, would you not want news about that company that would help in your decision?

Do you know who else loved their company and stuck with it right to the very end? Enron employees. Now sorry, I'm not trying to equate Convergint with Enron, but I am trying to make a point, it's nice to like the company you work for, but you should never, ever marry your job. You will find it a fickle mate. That's any company.

Out of curiosity, and I don't know but maybe IPVM does or can find out, how much of employees retirement plans at Convergint are tied up in company stock? And if in Convergint stock, what are the options for having Convergint stock converted for other stock or fund options in the retirement plan? Point being, if your retirement plan is heavily vested in company stock, would you not want to know the true financial health of the company so you could decide where to move your money?

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