Converge Technology Solutions Corp.

Good morning. Welcome to the Converge Technology Solutions Corp second quarter 2021 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, simply press star and the number two. Your main hosts today are Sean Main, Chief Executive Officer, and Matt Smith, Interim Chief Financial Officer. Before we begin, I'm required to provide a forward-looking statement respecting forward-looking information which is made on behalf of Converge and all its representatives that are on this call. All statements made on the call will contain forward-looking information. The actual results could differ materially from the conclusion, forecast or production in the forward-looking information. Certain material factors or assumptions are applied in drawing a conclusion or making a forecast or a projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in Converge's filings with the Canadian Provincial Security Regulators. Converge does not undertake to update any forward-looking statements. Such statements only speak as of the date made. Today's discussion also refers to adjusted IBIDA, which is a non-IFRS measure and has no standardized meaning. Please refer to the Converge's filing of the Canadian Provincial Security's regulators for an explanation and reconciliation to IFRS measures. Thank you. Mr. Sean Main, you may begin your conference.

Thanks, Emma. Good morning, everyone, and thank you for participating on today's Q2 earnings call. At our AGM in June, I had the opportunity to discuss the trajectory of our company as we enter into a new phase of growth. Today, I am honored to provide an update on our record Q2 financials, which reaffirmed the fact that we are on track to execute the company's three-phase plan by the end of 2021. In what follows, I will provide a business update on the quarter, beginning with commentary on our successful entry into the European market, and I will outline other significant accolades achieved over the past quarter. As a reminder, the new phase of growth the company enters will be dedicated to growing the company from 2 billion in annual revenues to 5 billion in annual revenues over an approximate four-year period, which will depend heavily on our European strategy and growing our managed services offerings. Keeping that in mind, Converge closed its first European acquisition last week, marking the 23rd acquisition announced over the past four years. Located in Mainz, Germany, RedNet AG is an IT services provider specialized in serving education, healthcare, and government public sector, providing detailed advice, economic planning, smooth logistics, and fast service to clients. Acquiring RedNet was truly a momentum statement for the company as we set our sights on expanding into the European markets, allowing us to service clients on an international scale. During Q2, Converge announced strategic changes to our senior management and board members, including the addition of Doris Alvarez to the European Advisory Board, along with Thomas Volk and Darlene Kelly to the Converge Board of Directors. Doris is a highly experienced executive who has served in various global roles, leading international teams at IBM and Dell Technologies. Additionally, Thomas Volk is a notable and highly respected senior executive with unique experience leading global technology enterprises and mid-market companies. These additions, along with Darlene's years of financial and operational experience within the industry, have all proved invaluable to the development of our European strategy and the optimization of our business outlook. Convergence achievements are the direct result of our employees and their collective efforts. I can confidently say that we are thrilled with these additions to the team and their perspectives. In addition to our recent acquisitions in Europe, Converge announced four additional North American acquisitions through Q2. At the beginning of the quarter, we announced Dasher Technologies, an exceptional enterprise networking and cybersecurity IT service provider with a fantastic mid-market customer base on the West Coast. Dasher is the fifth largest HPE partner in North America. and has been awarded multiple HPE awards, including the recently announced HPE 2021 North American SMB Partner of the Year. Complementing our recent North American and global efforts, Converge closed the acquisition of Exactly IT, a next-generation managed IT service provider headquartered in North Carolina with operational offices in Mexico. which brings a key competitive advantage in both cost to delivery and access to high-quality cloud, cybersecurity, and managed services engineers and experts. Exactly IT not only advances the company's solutions offerings with comprehensive knowledge in Google Cloud Services, cybersecurity services, and SAP managed services, but also brings valuable clients of various sizes across multiple industries. including Fortune 500 companies and multi-billion dollar international enterprises in North America and Europe. Finally, to wrap the quarter up, Converge announced the signing of a definitive agreement to acquire both Viacom Infinity, a world-class IBM mainframe solutions provider, and Infinity Systems Software, which has been a leading supplier of software and services for IBM platforms for more than 20 years. These transactions are expected to close at the end of this month. As many of you have noted, Converge is extremely meticulous in the execution of its activism strategy. Every subsidiary discussed has resulted in value-add for the business, whether that be employee expertise and the delivery of top-notch solutions to advance our managed service efforts, a powerful customer base in various regions to complement our cross-selling initiatives, or strong vendor relationships to secure Converge's position as an industry leader. Time and time again, we've announced the addition of subsidiaries who have trusted relationships with our customers and vendors. And this has been validated with the ongoing awards we continue to secure. During Q2, Converge received five IBM awards, including the 2021 Beacon Award, Top North American Cell Business Partner of the Year, the Top North American IBM and Red Hat Synergy Partner of the Year, the winner of the IBM Data and AI Business Unit Excellence Award for Cloud Pak for Data, and the winner of the IBM Business Unit Excellence Award for Protect Digital Trust. Additionally, the company upgraded its status with multiple partners, including achieving titanium status with Intel, diamond status with Palo Alto Networks, and elite status with Pure Storage. The accumulation of industry and partner awards has undoubtedly advanced Converge's reputation with both our customers and our partners, allowing us to run our business more effectively while delivering solutions to our clients. Reaffirming this sentiment, Converge was ranked within the top 50 of CRN's 2021 solution provider list, and the subsequent to this quarter was ranked 14th on the 2021 Fast Growth 150 list. recognizing the fastest-growing North American technology integration solution providers and IT consultants. As highlighted on previous calls, one of the key reasons Converge has been able to position itself for ongoing success has been due to integration and the cross-selling efforts. Greg Barrett, our president, has implemented two key features that enable cross-selling, customer technical workshops and executive briefings. In Q2, Converge held 66 customer-facing events, hosting approximately 1,500 external attendees. Primarily as a result of this, Converge has 121 net new logos in the second quarter. Additionally, since the beginning of 2021, we have hosted 446 executive briefings initiated by approximately 170 different Converge sales reps, which helps drive the cross-sell of our higher margin cloud managed services, along with our professional services. These executive briefings are building a large pipeline for the remainder of the year and 2022, while allowing our new acquisitions to immediately cross-sell analytics, DevOps, cybersecurity, and cloud managed services. Analyzing our sales for Q2, 17% of our revenue came from the technology sector, 24% from government and education, 24% from finance, 13% from healthcare, and 6% from retail. Regarding recurring revenue in Q2 2021, our gross annualized recurring revenue was $327.9 million. This is made up of $67.5 million of managed services annualized recurring revenue which are typically on three-year contracts paid monthly, $88.8 million of gross public cloud annualized recurring revenue, which are typically on three-year contracts and paid monthly, and $171.6 million of software subscription support, which are typically paid annually. On that note, I would like to pass the call to our Interim Chief Financial Officer, Matt Smith, to discuss our financials in further detail.

Thank you, Sean. Second quarter revenue increased 52% to $345.3 million compared to $227.8 million last year. Product revenue, which includes hardware and software, increased 60% to $281.3 million from $175.3 million over last year, primarily due to the impact of acquisitions completed in the second half of 2020 and first half of 2021, and reflects the overall strengthening of the IT market as companies begin to increase spending now that COVID vaccines have begun to be rolled out. Managed services, which are long-term contracts, increased 21% to $16.9 million from $13.9 million last year, primarily due to organic growth of managed cloud services to customers. With the acquisition of Exactly IT, which strengthens and expands our managed services capacity, we expect this to be a key area of growth going forward. On an annualized basis, our managed services at the end of the quarter was over $67 million. Professional and other services, which include professional and staffing services, and the net revenue from public cloud resale and software support, increased 22% to $47.1 million from $38.6 million last year. As COVID vaccines have increased, we are beginning to see large projects that required in-person services that had previously been put on hold start to be implemented. As Sean mentioned, by industry, the breakdown was approximately 24% from the financial sector, 24% from government, 17% from technology, and 13% from healthcare. At the six months ended June 30th, revenue increased 40% to $655.5 million from $469.4 million in 2020. Product revenue increased 46% to $533.8 million from $365.7 million over last year, primarily due to higher hardware sales to the Canadian government and the impact of acquisitions. Managed services revenue increased 21% to $33.3 million from $27.4 million last year, and professional and other services revenue increased 16% to $88.5 million from $76.3 million last year. Gross profit for Q2 increased 43% to $78.2 million from $54.5 million last year. Gross profit margin was 22.7% compared to 24.1% last year. As expected, we saw gross margin grow by approximately 1% sequentially from Q1 2021, which was a particularly hardware concentrated quarter. For the six months ended June 30th, gross profit increased 33% to $146 million from $109.7 million in 2020. Gross profit margin for the six months was 22.3% compared to 23.4% over the same period in 2020. The gross margin decrease in the three- and six-month periods was due to the impact of recent acquisitions that sold primarily hardware. As we cross-sell higher-margin cloud and manage services to customers of recently acquired companies and increase sales to existing customers as they expand their cloud-based IT infrastructure, we expect gross margins to increase. SG&A for the three months ended June 30, 2021, was $57.6 million, increasing from $44.2 million in the same period last year. For the six months ended June 30th, SG&A was $107.3 million compared to $89.6 million last year. As a percentage of sales, SG&A made up 17% and 16% for the three and six-month periods respectively, compared to 19% for the same periods last year, which reflects the integration savings over the last 12 months, which cumulatively have been over $28 million on an annualized basis. Adjusted EBITDA for the three months ended June 30th increased 86% to $21.7 million compared to adjusted EBITDA of $11.6 million last year. As a percentage of revenue, adjusted EBITDA was 6.3% compared to 5.1% last year. For the six months ended June 30th, adjusted EBITDA increased 80% to $40.5 million from $22.5 million last year and was 6.2% of revenue compared to 4.8% for 2020. In the near term, Our EBITDA percentage reflects the impact of recent acquisitions, which have lower EBITDA margins when we acquire them, but more than double within the first year as we integrate operations and cross-sell managed and cloud services to the customer base. Interest and finance expense for the quarter was $1.7 million compared to $5.3 million last year. For the six-month period, interest and finance expense was $4.1 million as compared to $10.8 million last year. These significant savings are a direct result of lower interest costs on our ABL, which, as we announced in Q4 last year, had been switched from a specialty lender to a syndicate of Canadian banks, including CIBC, Scotiabank, and Laurentian, as well as interest savings as a result of us paying off higher non-ABL debt. At the end of the quarter, the total cash was $125 million. Total borrowings were $51.2 million, and we had approximately $140 million of borrowing capacity under the ABL. As Sean mentioned, on August 5th, we announced the acquisition of RedNet for approximately €96 million. On a pro forma basis, including RedNet, our borrowing, collateral, accounts receivable, and inventory far exceeds our current ABL limit, and we will seek to increase our deadlines going forward. Thank you, and I'll pass the call back over to Sean.