Converge Technology Solutions Corp.

Good morning. Welcome to the Converse Technology Solutions Corporation third 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 the pound key. Your main hosts today are Shawn Main, Chief Executive Officer, and Matt Smith, Interim Chief Financial Officer. Before we begin, I am required to provide the forward-looking statement respecting forward-looking information, which is made on behalf of Converge and all of its representatives that are on this call. All statements made on this call will contain forward-looking information. The actual results could differ materially from a 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 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 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 filing with the Canadian Provincial Securities 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 EBITDA, which is a non-IFRS measure and has no standardized meaning. Please refer to the Converge's filing of Canadian Provincial Securities Regulators for an explanation and reconciliation to IFRS measures. Thank you. Mr. Shawn May, you may begin your conference.

Thank you. Good morning, and thank you for participating on today's Q3 earnings call. Before we begin, I would like to take a moment on Remembrance Day to commemorate the veterans and troops who have dedicated their lives and care for the freedom of our communities. We would also like to extend our gratitude to those within our Converge family who have served. Your bravery, sacrifice, and example are valued each and every day. In what follows, I will provide a business update on the quarter, beginning with commentary on our successful expansion into Europe. We will discuss our continued impressive integration results, as well as detail the leadership of our sales and marketing teams, which drove cross-selling efforts in our higher margin business, despite the challenges related to supply chain issues widely experienced. And Matt Smith will provide an update on the financials, including a record cash flow generated from operations of $48.1 million, an increase of 86% year-over-year. Beginning with acquisitions, Converge successfully closed four transactions since July of 2021, including RedNet AG, Viacom Infinity, and Infinity Systems Software, and LPA Software Solutions. Viacom Infinity and Infinity Systems Software are two leading providers of IBM mainframe solutions and IBM software and services. With more than 20 years of experience, the addition of the Viacom acquisitions support the depth of Converge's solution offerings while reinforcing relationships with key vendors such as IBM. The addition of LPA software solutions occurring just subsequent to the quarter complements these efforts in that LPA is designated as one of the full-service IBM platinum partners that sells and implements IBM's business analytics software. Furthermore, LPA supports Converge's cross-selling initiatives by expanding on the company's analytics capabilities with a deep history of providing business analytics solutions and professional services. These world-class analytics capabilities built on our already strong team truly differentiate Converge in the mid-market. In Europe, RedNet AG, founded in 2004 and headquartered in Mainz, Germany, is comprised of an established management team operating within key verticals complementary to our customer mix, including education, healthcare, and government, which are poised to witness an acceleration in IT spending. With RedNet AG marking our entry in Europe, it acts as a platform acquisition to expand our solutions portfolio on the global scale while also leading the way for our ESG outlook. RedNet implements a 360 degree holistic approach to increasing IT life cycles through flexible maintenance while being mindful of environmental and sustainable initiatives. Optimized ecological footprints through the reduction of travel, Consolidation of infrastructure resources and visions of healthy IT lifecycle are just a few of the initiatives the company has placed on the top of our agenda. Other exemplary initiatives within Converge include our Diversity and Inclusion Council that strives to ensure all of our employees are treated equally and feel valued, as well as a wellness program focused on creating healthier lifestyle choices for our team with tools for mental resiliency and financial literacy. We believe these efforts have contributed overall to employee and individual wellness, directly correlating to successful metrics and employee performance. I've often spoke of cross-selling efforts, which we've learned result from a healthy mix of clear vision, education, and leadership, and successful integration driven by positive communication between our sales team. I'm incredibly proud of the marketing and sales leadership as our team achieved 97 net new logos throughout the quarter, driven by 44 customer facing events with approximately 1,240 external attendees. Our teams have done a fantastic job engaging new and existing clients to our events, such as a Q3 co-hosted event with Red Hat and AWS, which attracted over 404 external attendees. Additionally, since the beginning of 2021, we have hosted 603 executive briefings, driving the cross of sale of our higher margin cloud and managed services, alongside our professional services, which we witnessed increased spending over the past quarter. Regarding recurring revenue, in Q3 2021, our gross annualized recurring revenue was $338.8 million. This is made up of 81 million of managed services annualized recurring revenue, 72.7 million of gross public cloud annualized recurring revenue, and 185.1 million of software subscription support, which are typically paid annually. One of the key differentiations of Converge is our ability to integrate acquisitions, and we have now integrated 19 of the 24 acquisitions that we have completed. These integrations include not just people, but tools and areas such as project management, professional services, IT, finance, and inside sales. Even though the pace of acquisition has accelerated this year, the integration team has expanded the scope of integration and will be rolling out a common CRM platform in January. In addition, we are now starting to streamline our entities and we'll start to remove some of the legacy branding of entities in 2022. Our industry has been affected by supply chain disruptions, with some of our vendors being impacted more than others, especially around endpoint devices. Bookings, which is orders received from customers that have not been delivered, stood at approximately 250 million at the end of Q3 compared to approximately 50 million in the previous year. Had there not been supply chain issues, we would have generated an additional 100 to 150 million in revenue during the quarter. Normally we see bookings convert into revenue in four to six weeks, but as some of you will have heard from vendors like Dell and Apple, these dates are being greatly extended due to manufacturing facilities not being able to run at full capacity. and they expect these issues to continue into 2022. In addition, our operating costs were impacted by a mismatching of our employee costs in configuration, installation, managed services, and other service areas who are not able to execute as a result of product delivery delays. We continue to communicate with our vendors on these issues and believe that the strong demand we are seeing will result in deferred revenue but not lost revenue. We continue to execute on our acquisition strategy as well and have the most robust pipeline we have ever had. Having a strong cash position and generating such strong free cash flow will enable us to execute on the next phase of our expansion in both North America and Europe. 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. Third quarter revenue increased 93% to $367.3 million compared to $189.9 million last year. Product revenue, which includes hardware and software, increased 67% to $289.6 million from $173.4 million over last year, primarily due to the impact of acquisitions completed in the second half of 2020 and those completed 2021 year to date, and the overall strengthening of the IT market as companies began to increase spending now that COVID vaccines have been rolled out. Managed services, which are long-term contracts, increased 34% to $20.3 million from $15.2 million last year. On an annualized basis, our managed services at the end of the quarter grew to over $81 million compared to $61 million last year, and has increased sequentially by approximately $14 million since Q2. Professional and other services, which includes the net revenue from public cloud resale and software support, increased 84% to $57.5 million from $31.3 million last year By industry, our revenue breakdown was approximately 12% from the financial sector, 8% from government, 20% from technology, 24% from manufacturing, and 20% from healthcare. As COVID vaccines have increased, we are beginning to see large projects that require in-person services that had previously been put on hold start to be implemented. We expect to see further growth in higher margin professional and other services as supply chain challenges lessen and backlog is delivered to end users. For the nine months ended September 30th, revenue increased 55% to $1.02 billion from $659.2 million in 2020. Product revenue increased 62% to $823.4 million from $509.1 million over last year, primarily due to higher hardware sales to the Canadian government and the impact of acquisitions. Managed services revenue increased 22% to $52 million from $42.6 million last year, and professional and other services revenue increased 37% to $147.5 million from $107.5 million last year. Gross profit for Q3 increased 60% to $83.8 million from $52.4 million for the same period in 2020, and gross profit margin was 22.8% compared to 27.6% last year. For the nine-month set at September 30th, gross profit increased 42% to $229.8 million from $162.1 million in 2020, and gross profit margin was 22.5% compared to 24.6%. Last year, our high gross margin illustrated how we've been able to successfully transition the companies we acquire from lower margin businesses that sell primarily hardware to higher margin software and services businesses through cross-sell. For 2021, margins are lower due to the fact that we acquired seven companies in the first nine months that sell mainly hardware. However, as we cross-sell higher margin cloud services and manage services to customers of these companies, and increased sales to our existing customers as they expand their cloud-based IT infrastructure. We expect gross margins to increase. SG&A for the three months ended September 30th was $66.1 million, increasing from $38.9 million in the same period last year. For the nine months ended September 30th, SG&A was $173.4 million, compared to $128.5 million last year. SG&A for the three- and nine-month periods continues to reflect the impact of the $20 million annualized savings that we announced last year. As a percentage of sales, SG&A made up 18% and 17% for the three- and nine-month periods, respectively, compared to 21% and 19% for the same periods last year, reflecting 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 September 30th increased 29% to $18.9 million compared to $14.6 million last year. As a percentage of revenue, adjusted EBITDA was 5.1% compared to 7.7% last year. For the nine months ended September 30th, adjusted EBITDA increased 60% to $59.3 million from $37.1 million last year and was 5.8% of revenue compared to 5.6% 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 increase as we integrate operations and cross-sell, as well as higher personnel costs associated with delivering product and managed services for future revenue that we haven't been able to recognize due to supply chain challenges. Interest and finance expense for the quarter was $1.5 million compared to $5.1 million last year. For the nine-month period, interest and finance expense was $5.7 million as compared to $15.9 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, have 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. This quarter, we generated record cash flow from operations of $48 million, which is attributable to year-over-year EBITDA growth and strong working capital management. At the end of the quarter, total cash on hand was approximately $210 million, and we had approximately 190 million in borrowing capacity under the ABO. And with that, I'll pass the call back over to Sean.