Converge Technology Solutions Corp.

Q4 2021 Earnings Conference Call

3/23/2022

spk08: Good morning. Welcome to the Converse Technology Solutions Corp fourth quarter and 2021 fiscal year results conference call. All alarms are placed on mute to prevent any background noise. After the speaker's remarks, there'll 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 with respect to 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 filings 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 gross revenue, adjusted EBITDA, organic growth, and adjusted free cash flow, and adjusted free cash flow conversion, which are non-IFRS measures and has no standardized meaning. Please refer to Converge's filing of Canadian Provincial Securities Regulations for any explanation and reconciliation to IFRS measures. Thank you. Mr. Shawn Mayne, you may begin your conference.
spk00: Thank you. Good morning, and thank you for participating on today's Q4 and 2021 Financial Year Earnings Call. In what follows, I will provide a business update on the fourth quarter and fiscal year, beginning with commentary on our earnings success, including our organic growth, and will discuss additions to our leadership team who are helping to contribute to such success, along with the reinforcement of the Converge corporate culture through various ESG initiatives. Furthermore, I will discuss the Converge acquisition strategy in further detail including commentary on the European expansion, integration successes, and the establishment of our subsidiary Portage CyberTech. Additionally, Matt Smith will provide more detailed commentary surrounding the Converge Q4 and fiscal year financial results. Reflecting historically for a moment, in 2020, Converge advanced its business strategy by expanding acquisitions into the largest North American cities, while establishing the roadmap for successfully cross-selling and realized cost synergies through these integration efforts. Throughout 2021, Converge fine-tuned its acquisition strategy towards advancing high-demand practice areas such as cybersecurity, advanced analytics, and managed services, while simultaneously executing on ERP and PSA integrations. These combined efforts contributed to a 61% increase in revenue to $1.5 billion for the fiscal year end, December 31st. Managed service revenue increased 33% to $75.9 million, and professional and other service revenue increased 52% to $215.7 million. Despite the acquisitive nature of Converge, including the nine acquisitions completed throughout 2021, the company was able to grow gross revenue organically by 9.6% through the various efforts discussed driven by dedicated work of employees and leadership team. Expanding on the Converge leadership team, as recently announced by the company, Converge appointed John Telsch as our chief revenue officer, and it should be noted that an announcement on a new CFO will be imminent. John is a senior executive who brings more than 40 years of leadership and growth experience to his role and will be invaluable alongside President Greg Berard in developing the Converge global strategy, overseeing profit alignment, and connecting various revenue-related functions. John joins Converge following a 40-year career with IBM, most recently as general manager of technology sales across the U.S., Canada, and Latin America. And with such an established reputation, we remain enthusiastic for the cutting-edge advantage this will create. Additionally, earlier in 2021, Thomas Volk and Doris Alvarez joined the Converge leadership team to guide the entry into the European markets. Doris is a highly experienced executive known as a growth generator and transformational leader who has served in various international roles, while Thomas is a senior executive with unique experience leading global enterprises and mid-market companies in both CEO and officer roles in Europe and the U.S. Doris and Thomas' efforts were integral to the platform acquisition of RedNet and complementary acquisition of VisuCom subsequent to the quarter, and will continue to be value-add in shaping the managed services and European strategy in the years ahead. Here at Converge, we live by being better together, and we remain confident that the strong foundation of our corporate culture bodes well for employee retention and recruitment, which is how we have successfully expanded our team while also maintaining high employee morale. Initiatives that contribute to this reality and support employees' wellness include our Women for Women Committee, our diversity and inclusion programs, and employee appreciation and awareness resources. We highly regard our Women for Women empowerment group, which was created to give the identified female population of Converge a voice and time to invest in leadership development, while receiving professional advice from female executives and fellow employees. Women for Women offers informative seminars, public forums, thought-provoking book clubs, and has plans for a company mentorship program in the future. Furthermore, Converge aims to be a diverse and inclusive workplace, with mindful hiring practices. The diversity and inclusion program at Converge was created from the understanding that our employees are our greatest asset. It is our belief that a bias-free and a diverse work environment not only fosters a culture of equality, but on value across the entire organization. The DEI Council focuses on two main components of training and education. Training and education efforts offered our employees and managers a safe space to learn, ask questions, and have meaningful conversations about the human experience throughout the year, including topics such as leading an inclusive culture and the glossary of terms. The rate at which Converge completes acquisitions may be perceived as a potential challenge to a successful integration and a barrier to consistent culture. However, the company strives to create synergies and capture opportunities for adopting meaningful policies, processes, and initiatives already in place at the various subsidiaries to positively impact the Converge culture. It should be noted that the acquisition team strategically pursues targets with complementary corporate values and seeks to build from the exemplary ESG policies that put people and the environment first. We are appreciative for the mutually beneficial opportunities to learn from one another, and at this time, I would like to recognize the humanitarian efforts in Germany where leadership has taken Ukrainian refugees into their homes at this time of crisis. Exemplary acts such as these demonstrate the proactive leadership and care that the Converge team strives for in all of its undertakings, and we are truly pleased with the portfolio of companies we have built to date. As a reminder, the Converge acquisition strategy is driven by components including culture, customer, geography, and capabilities. Through 2021, Converge added nine additional acquisitions to its portfolio of companies. which devoted particular attention to expanding the capabilities of advanced analytics through the addition of LPA and Carpe Datum. Converge strengthened managed service offerings through the acquisition of Exactly IT and Viacom. And lastly, advanced customer exposure through a multitude of efforts, including the addition of Dasher, a Silicon Valley-based digital transformation expert. Overall, The focus when completing a transaction is to deconstruct the organization so to allocate their sales teams to the appropriate regions while driving cross-selling opportunities and navigate the technical experts to their designated practice areas. The accumulation of efforts to date has resulted in over 300 salespeople within the organization supported by over 700 technical resources. It is significant to highlight at this point that the company has established a converged integration team specializing and focusing solely on increasing the pace and scale of acquisition integration across all areas of the business, including culture, finance, IT, sales, and operations. During the quarter, the integrations team migrated five additional subsidiaries to our designated CRM system, equating to 16 total navigations to date. Furthermore, a new converged standard ERP system including automation frameworks development and configurations was rolled out to 17 subsidiaries to date. Complementing these efforts, our HR team successfully navigated all Canadian subsidiaries along with 19 U.S. subsidiaries to a common payroll and are targeting the remaining companies by the end of Q3. On the back of creating the converged European Advisory Board, Converg completed its platform European acquisition of RedNet, an IT service provider headquartered in Mainz, Germany. Such expansion has greatly increased Converg's ability to serve clients globally and has added an established European management team familiar with operating in key verticals within our customer matrix, including education, healthcare, and government, which are all positioned within stable industries with accelerated IT expenditure needs. Subsequent to Q4, Converged acquired German-based organization VisuCom, a trusted supplier of media devices for the education and public sector, directly complementing the core business of RedNet. With that being said, Converged plans to further expand operations across the UK and Northern European regions, the Benelux region, mirroring the North American strategy executed over the past three years. While management continues to diversify its efforts over various regions, the acquisition pipeline for both North America and Europe remains strong, especially given the company's cash flow position. The company anticipates adding $1 billion of acquisition revenue in each of the next three years, and currently there are seven transactions moving from LOI to close, with three in North America to be announced shortly and four in Europe targeting Q2 announcements. 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.
spk06: Thank you, Sean. We are extremely proud of our continued year-over-year revenue growth. In Q4, we grew net revenue 74% to $505 million compared to $289.6 million last year, and on a full-year basis, net revenue grew by 61% to $1.5 billion from $948.8 million in 2020. Q4 product revenue, which includes hardware and software, increased 71% to $412.9 million from $241.1 million over Q4 last year and was $1.2 billion for 2021 compared to $752.2 million last year, an increase of 65%. Our product revenue growth reflects the impact of the nine acquisitions completed in 2021 and the overall strengthening of the IT market as COVID restrictions were lifted and demand for convergers products and services increased. Q4 Professional and other services, which includes the net revenue from public cloud resale and software support, increased 104% to $69.7 million from $34.2 million last year. Year over year, this revenue grew 52% to $215.7 million from $141.7 million in 2020. We attribute this to large on-premise projects that required in-person services that had previously been put on hold due to COVID that started to be implemented in 2021. We expect to see further growth in higher margin professional and other services in 2022 as supply chain challenges lessen. In Q4, we grew our managed services, which are long-term contracts, 56% to $22.4 million from $14.3 million in Q4 last year. And for the full year 2021, revenue increased 33% to $75.9 million from $56.9 million in 2020. On an annualized recurring basis, our ARR for managed services at the end of the year grew to $89.5 million compared to $57.2 million last year. Including the acquisition of PDS that we announced at the beginning of 2022, we begin this year with over $100 million in managed services ARR and are poised to show continued growth in this area in 2022 as backlog decreases and devices are delivered to end users including through our IBM Power Managed Services offering. And as Sean highlighted, despite the number of acquisitions made in 2021, we still managed to grow growth revenue organically by 9.6% on a full year basis. We attribute this growth to two things. One, our ability to seamlessly integrate our acquired companies, and two, the strength and breadth of our various practice areas. This allows us to execute our cross-selling product and services and expand customers' digital infrastructure. As a reminder, We calculate organic growth for those companies that Converge has owned for at least three months at the reporting date, based on their pro forma gross revenue for 2021 as compared to 2020 had we actually acquired them on January 1. We believe that the three-month rule provides a good representation of the acquisition under Converge ownership, and in doing so, we can begin to evaluate the acquired company from an organic growth standpoint. For Q4, our gross profit increased 63% to $115.9 million from $70.9 million for the same period in 2020, and gross profit margin was 23% compared to 24% last year. For the full year 2021, gross profit increased 48% to $345.7 million from $233 million in 2020, and gross profit margin was 23% compared to 25%. Last year, our higher gross margin illustrated how we're 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've acquired nine companies that sell mainly hardware. However, as we cross-sell higher margin cloud and manage services to customers of these companies and increase sales to our existing customers as they expand their cloud-based IT infrastructure, we expect gross margins to increase. Q4 adjusted EBITDA increased 48% to $34.7 million compared to $23.4 million last year, and increased 55% year-over-year to $94 million. As a percentage of revenue, adjusted EBITDA was 7% compared to 8% last year, and unchanged at 6% on a full-year basis. As a percentage of gross profit, or GP, which we believe to be a telling indicator of the company's overall operating efficiency and profitability, adjusted EBITDA was 30% compared to 33% 33% in Q4 last year, but increased to 27% of GP for full year 2021 from 26% in 2020. As we integrate operations of acquired companies and cross-sell managed cloud services to the customer base and increase our gross profit with higher margin revenue, we would expect these measures to increase over time. Q4 interest and finance expense was 2.1 million compared to 3.7 million last year, and on a full year basis was 7.8 million, decreasing by approximately 12 million in 2020. These significant savings are largely as a result of our lower-cost ABL facility, which, as we announced in Q4 last year, has been switched from a specialty lender to a syndicate of Canadian banks, including CIBC, Scotiabank, and Laurentian Bank. In November 2021, we announced that we upsized this facility from $190 million to $300 million and also added JP Morgan to our syndicate of banks. Shifting to our balance sheet, we finished the quarter in a strong cash position with over $248 million of cash on hand and were undrawn on our ABL with $300 million in borrowing capacity available and are well positioned to continue to execute on our acquisition targets in 2022. In Q4, our adjusted free cash flow, which we calculated as adjusted EBITDA, less capital expenditures and payments of lease liabilities, was $29 million, increasing from $17.5 million in Q4 last year. Adjusted free cash flow conversion, which we express as a percentage of EBITDA, was 84% in Q4, increasing from 75% last year. On our full year basis, adjusted free cash flow increased to $77.7 million from $45.8 million in 2020, and the conversion percentage was 83% as compared to 76% last year. We believe that adjusted EBITDA is a good proxy for cash generation, and as such, adjusted free cash flow conversion is a useful metric that demonstrates the rate at which the company can convert adjusted EBITDA to cash. The increase in these measures for the three and 12-month periods is attributable to the company's strong continued adjusted EBITDA growth and effective management of working capital while generally maintaining low CapEx requirements. And with that, I'll pass the presentation back to Sean.
spk00: Thanks, Matt. It's important to bear in mind that despite such positive results, our industry has been affected by supply chain disruption, as mentioned on the Q3 call. Bookings, which are orders received from customers that have not been delivered, stood at approximately $250 million at the end of Q3 and was approximately $350 million at the end of Q4, with networking suppliers being most affected. Given that open orders would have historically been less than $100 million at the end of Q4, there is an additional $250 million of revenue that the company would have had in 2021 with a normalized supply chain. Given that the company grew its gross revenue by 9.6% organically last year, this means that in 2022, the company should achieve 20% organic growth when the supply chain normalizes. We continue to proactively communicate with our vendors as our sales teams work diligently to provide solutions solidifying our role as trusted advisors to our customers. Throughout and subsequent to the quarter, Converge announced achieving two notable industry CRN awards, including the Managed Service Provider 500 in the Elite 150 category, which recognizes leading service providers in North America with forward-thinking approaches to managed services, helping to change the landscape of the IT channel. And Converge was also featured within the 2022 Tech Elite 250 category, which highlighted Converge as one of the highest achieving solution providers in vendor certifications in North America. Throughout 2021, Converge achieved a multiple of vendor awards and certifications, including five IBM awards, such as the 2021 IBM Beacon Award and Top North American Self-Business Partner of the Year, along with three Ingram Micro Awards, including Core Partner of the Year for North America and Cloud Reseller Partner of the Year. Further significant industry certifications include the AWS migration competency status, recognizing Converge's technical proficiency and proven client success with specific focus on cloud migration and hybrid cloud solutions, along with diamond status with Palo Alto Networks, elite partner status with Pure Storage, and platinum partner status with HPE, which is the highest level of partnership within these programs. These achievements not only reinforce our position within the industry to clients, but also help to strengthen our vendor relationships and reinforce the fact that we are not merely an acquisition platform. Historically, I have discussed various sales strategies which have continued to drive organic growth and cross-sell opportunities across our advanced analytics, cloud, cybersecurity, and managed services offerings. The following list highlights some of the key initiatives we have put in place to achieve our success. Regarding external efforts, the company has organized multiple demand generation events with our strategic partners, resulting in 196 client-facing events with 32 partners and approximately 5,000 external attendees throughout 2021. And we have continued to drive executive briefings, completing 660 since October 2020. Internally, management has identified our top 120 accounts, and assign strategic technical advisors to drive more expertise and value with our clients by exposing them to our overall solution areas. And the company has implemented new business development organization, helping to drive 95 net new logos in Q4, bringing the rolling total for 2021 to 393. Additionally, Converge introduced Salesforce to improve our execution across the sales organization and pipeline management of our high-value services offerings and recurring revenue. A quick example of how this is equating to more value with our clients includes a recent success case with a retail account which we introduced deeper analytic skills and resources to despite selling software maintenance to the account historically. our sales team delivered a data modernization workshop recommending and implementing a new data warehouse solution while creating strategic opportunities around migrating other legacy applications to the cloud. Wrapping up our discussions, I wanted to expand on the establishment of Portage CyberTech Inc., a cybersecurity-focused SaaS entity formed earlier this year which enables government and enterprises to securely offer digital services to their citizens and customers, thus better protecting digital identities and trusted data sharing. Digital identity and security has been a significant concern and thus high growth markets for citizens and organizations across the globe, and Portage products enable the ability to expand digital services, streamline trusted data sharing, drive down costs, and simplify end customer experiences. Throughout Q4, and subsequent to the quarter, OPEN and 1CRM were added to Converge's existing business units, Becker, Carroll, and Vivo. The combined capabilities of these four entities to date have formed a powerful set of tools branded as Portage Digital Trust Matrix, which can be sold independently to meet customers where they are on the digital transformation journeys. Upon closing 1CRM, Portage completed Phase 1 of its three-phase growth strategy and will embark on Phase 2 of their plan, which is to rapidly grow revenues organically and through larger acquisitions. Of note, Portage closed a $35 million private placement this past October to help finance future acquisitions. and the ability to utilize convergent Salesforce in our strategic partnership will be key to deploying the complete Portage CyberTech SaaS solutions across North America and Europe. On that note, let me open the floor to questions.
spk08: Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have any questions, please press star followed by one on your touchstone phone. You will hear a three-tone prompt acknowledging your question. will be pulled in the order that they are received. Should you wish to decline from the polling process, please press the pound key. If you're using a speakerphone, please lift your handset before pressing any keys. One moment for our first question. Our first question comes from Kevin Krishnarotney with the Jardins. Your line is open.
spk04: Hey there. Good morning, guys. Congrats on a good 2021. I'll start off with a smaller one in Europe, perhaps for Matt. Guys, in the disclosures you gave us the European revenue for the year, do you happen to have the corresponding EBITDA number for 2021 in Europe?
spk06: No, we're not providing guidance on the European EBITDA, just the revenue for today.
spk04: And as we – okay, Matt, as we think, though, going forward into 2022, can you talk about, you know, any level of spending or impact to EBITDA and margins there in the region as you're building out with that, you know, ramping up sales folks, capabilities, partnerships? Is there any – just trying to get some color on the level of investment outside of the margin profile of, you know, entities that you'll be buying in Europe, which I think will come at, you know, lower than average margins. But is there anything else we can think about in terms of the spending profile as you're ramping up there?
spk00: Yeah, we are setting up a shared service center in Ireland. That's really going to be focused around the finance function. Our new CFO will be London-based as well. And so the capability side, though, cloud and managed service are global offerings. Analytics and cybersecurity will be separate groups that will leverage each other on an offering side, but will be separate organizations. So there will be investment there. as we set up the various practice areas and as we set up the Shared Service Center in Ireland. But we did this very cost-effectively when we founded Converge and did this in North America, and you'll kind of see the same approach of making sure that it's at the appropriate times we make the right investments.
spk04: Okay, thanks for that, Sean. Maybe switching to looking forward, we're almost through Q1 here. Can you remind us on seasonality from Q4 to Q1? In this Q4, I think you had Vicon Infinity, which had a heavy Q4. You know, as you think about Q1, you know, how do we think about the seasonality? And then on top of that, you've got the layering on of PDS, and then you've got Backlog. Anything it can do to help us with sort of the revenue and even the margin profile as we model things out?
spk00: Sure, so Q1 is obviously much smaller than Q4 because most corporates who have calendar year end spend Q1 on kind of doing their budgets for the year, saying that in Q4 we saw extremely high demand and we're continuing to see that into Q1. Obviously, you'll layer PDS on top of that, so when you're comparing Q4, you're gonna go down to a normalized Q1 and then kind of add PDS. On the backlog side, Again, we're seeing really high demand, but there are supply chain constraints, especially around network gear. We saw some improvements. especially over in Europe around some of the Dell and Apple supply chains, but we're hearing some worrying things now out of China. So I had anticipated a lot of the supply chain unwinding in Q1, Q2, and Q3, and now I'm not as certain given some of the rumors we've had. I haven't seen anything specifically around that, but you're hearing some things in the marketplace. Again, we communicate very well with our vendors in order to try to anticipate those things. So, again, incredibly strong demand for Q1. You would expect to see the backlog still, though, increasing and then hopefully normalizing throughout the year.
spk04: And then the margin in Q4, you were 6.9%. You talked about I guess PDS comes in at a lower margin. I think Q4 may have seen some benefit from software sales that come in at the end of the year. So again, as we think about the margin profile for Q1, can you help us out there?
spk00: Yeah, you're exactly right. So if you look historically even in Q4 2020, your margin profile in Q4 is helped by one larger amount of sales on the same kind of cost base, but also things like software maintenance renewals and software renewals happening. A lot of them happened December 30th and 31st, so that definitely helped. assist there. Remember, we bought nine companies last year. And so when we buy the new companies, they have gross profit in the teens at around 3% EBITDA. And so then we go through adding rebates, doing the cost rationalization, and then cross-sell. And so it just takes a while to get there. So what you're seeing, and again, this year when you're buying a billion in revenue, you have to be very aware of the mix of we continue to get to 30% gross profit and 9% to 10% EBITDA for the companies we've owned for a while, but the new ones are coming in and need to go through that process. So the mix is important to look at how much of it is historical revenue versus how much is new, and then you're seeing that. So that percentage is higher in Q4. As we bought a PDS here in Q1, obviously that's starting at the lower end, and it'll move up as we add more managed services and streamline things like their service desk, et cetera.
spk04: Okay, gotcha. Just one last one. Thanks again for the disclosure on the gross revenue, the organic growth. as well. I just want to be clear on one thing. The gross revenue for 2021 we disclosed is sort of $2.275 billion. You know, that's the gross revenue pro forma for 2021. As we think about a starting point for 2022, as we model, is it fair for us to take that number, that gross revenue pro forma, and then net it down by the standard, I think, roughly 15-20% to kind of get a a pro-format net revenue for 2021 and then use that as a starting point for organic growth for 2022 on top of that number? Is that correct, or how do I think about the pieces there?
spk06: Yeah, Kevin, that's not an unreasonable approach. Obviously, the gross versus net down can vary based on product mix, but as kind of a general approach, that makes sense.
spk04: Okay, great. Super. Thanks a lot, guys. I'll pass the line.
spk06: Thanks, Kevin.
spk08: Our next question comes from Kristen Schro with Apes Capital. Your line is open.
spk05: Hi, good morning. The first question I want to ask is on the product side of the business, and more specifically on software. If there's supply chain constraints through the first bit of the year here, my question is, does software become a bigger mix of revenue? And just wondering what the margin implications would be if you see the impact there on gross margin or EBITDA or both.
spk00: Yes, the software is a constantly growing part of our business. Red Hat and VMware are our strategic partners. I think we grew our Red Hat revenue by 100% last year. So that's something that's really important to us, as well as some of our big software offerings, such as in the analytics space, Watson and Snowflake, and things like Curator, et cetera. So software is an increasingly important part of what we cross-sell into the companies we buy that have traditionally sold more data center equipment. On the margin profile, yes, you always have higher margin with the software and services than you do for the hardware. In the mid-market, hardware tends to be in kind of the team's gross profit. Software and services tends to be 30% to 40%. Managed services tends to be 50% plus gross profit. So definitely the more software and services you're selling, the higher your gross profit percentage is.
spk05: Okay, that's helpful. And I'll switch gears over to the managed services side of the business. It looks like, based on the introductory comments, It's through 100 million managed services ARR when you're including PDS. Now, would you say the goal of achieving 200 million is intact for the year? Does that depend on supply chain and, say, networking gear coming through? How would you think of the puts and takes this year on the managed services side?
spk00: Yeah, we're still looking for $200 million as our goal for the end of the year. You're absolutely right. Some of the networking gear delays did delay some of the onboarding. We have a very robust pipeline around our initiative with Google around hosting IBM-specific workloads. But in order to do that, you always have to add more networking gear to provide those workloads to the cloud. And some of the delays on the networking side, so people like Cisco and Palo Alto and Arista are up to six months. And so that has delayed the pipeline. We're trying to come up with solutions of doing things like can we introduce refurb and then later introduce the new gear. So we're working solutions around that. But yeah, we are very optimistic that that will be normalized. The other thing is that as we acquire this next group of acquisitions, We will be acquiring managed services revenue as part of that, and I believe that we've kind of gone through the strategy for when you're taking that managed services revenue and how you're then increasing its profit profile using what I call the Thomas Volk 123 of start off by making sure the resources are in the right locations, which is optimized, especially around Mexico and our Exactly IT operation. Second is automate those offerings, providing better customer satisfaction through the automation and better margin profiles, and then moving into the Montour standard profile. So of that 200 million target, there will be a fair amount of that that will come through acquisition.
spk05: Okay, right on. I'll just ask one more question off of the back of that. When we think of M&A through the next, say, quarter or so, seven targets spread across North America and Europe. When we think about Europe, is it fair to say that the next acquisition there could have more of a managed services component? Does that seem like the strategy right now given having RedNet and VisuCom there? And then the only follow-on to that is, is there the same opportunity to bring some of the work over to Mexico with the same framework as North America?
spk00: Well, to start with the last question first, absolutely. We have German language skills in our Mexican operation, and they are absolutely supporting some of our managed services out of Germany. Although the new acquisitions that we're doing in Germany are more to extend the geography to the other federated states. So it wouldn't be a correct assumption to say those new ones in Germany are necessarily focused on managed services, but RedNet obviously can provide that to their customers and the offerings that they'll have. The platform acquisition in the UK, you'd expect that platform, like RedNet, would have more management, more managed services, and there's other ones that we'll look to in other places that might have managed services. But whenever things have managed services, they're more expensive. And so if you're looking to extend geographies, you're looking more at the customers rather than, say, necessarily managed services. Unless, say, PDFs we paid 5.8 times, it had $16 million of managed services revenue. If we can get those for those reasonable prices, then we'll absolutely do that.
spk05: That's very helpful, Sean. Thanks for taking my question this morning.
spk08: Our next question comes from Robert Young with Canaccord. Your line is open.
spk03: Hi, good morning. Maybe first quick one. I don't think there's any impact, but if you could talk about any impact from Eastern Europe, Ukraine, Russia, are there any second derivative or direct impacts that you see there?
spk00: Yeah, first let me just say it's what a crisis, you know, and I really admire our German folks who have really taken Ukrainians into their homes, and so you can't ignore that, but also... really the compassion of our people, and it really kind of shows what our culture is. But from a supply chain's perspective, we don't get things, supplies from Ukraine and Russia. It disrupts some of the path to some places on the supply chain, but we haven't seen yet material impact to the supply chain. And unless this tragic incident widens, then we don't see it. But again, there's other things that are happening in places like China around coronavirus and lockdowns that might, but not the Ukraine-Russia conflict.
spk03: Okay. And maybe the next place to go would be the backlog. I think you noted that you think you can do 20% organic growth as the backlog normalizes and so forth. I mean, any help around the timing of that? I know that's hard to understand from your point of view, but probably easier for you than us. And then the lockdowns in Shenzhen, is that going to create backlog growth in Q1, or do you think the backlog will start to wind down in Q1? Any commentary around the timing of the backlog wind down?
spk00: Sure. So the network gear companies, we're seeing six-month ordering delays now. So that means if you're ordering something now, you're looking in Q3. And so that's been the big kind of bottleneck. We saw improvements on kind of Dell and Apple where over Christmas time, RedNet was receiving like hundreds of thousands of iPads. So that was getting better, and there was people like IBM and NetApp that were never impacted. So the network people, that's really where the crux of the problem is now. With the lockdown in China, so – Apple's contract manufacturer, Foxconn, I think it's only impacted iPhones so far, and we haven't seen necessarily the impact of iPads yet, but it's a worrying development, and so something that we're constantly talking to our suppliers and our our OEM partners with to see where that's going. So stay tuned. Demand is off the charts. We have incredibly strong demand. As we move our business to more and more software and services, in particular our own services, obviously those are not impacted. So again, an incredibly strong demand environment. Our team has done a great job of finding ways of getting solutions into customers, but it is challenging. But when that When that backlog unwinds, there's going to be some big quarters here coming up.
spk03: Okay. So it sounds like it isn't unwinding in Q1 because the quarter is almost done. Is there any likelihood of Q2 or is this the second half?
spk00: Again, some in Q2, but again, the worrying part is the network part. The network part is definitely of concern.
spk03: Okay. And when you look at that $350 million backlog number, Is there any risk in that number from double ordering or maybe cancellations if you're not able to get the physical product into your customer's hands?
spk00: How should you think about that? Those are firm POs, so no, and especially not into mid-market, maybe large enterprise that they might have able to do some things, but yeah, we haven't seen any cancellations of things around that. Again, we do try to find, when at time of ordering, try to find flexible solutions for our customers, but PO cancellation is not something we've seen.
spk03: Okay. Okay. And then you said that demand is extremely strong. That seems to be the same as some of your peers. At least one peer was talking about acceleration because companies are doing a lot of parallel activities instead of sequential ones. So are you seeing demand accelerate now as you look forward to 2022? Is that part of what gives you the confidence in that organic number you gave us?
spk00: Demand is absolutely accelerated. And then you look at those initiatives simultaneously. such as the German government putting 5 billion euros to digitize education. Education and healthcare is going through an incredible investment as those two industries which were not well tailored for online delivery of services are now doing that in both, you know, whether teachers are delivering online education, nurses and doctors delivering online care. There's a new model and a support model that basically we just gave nurses and teachers, here's Zoom, go teach online. And so the service offerings around managing the end users, providing help desk for teachers and nurses, providing managed services and cloud-based solutions, These are all new opportunities that historically were not five years ago or three years ago or even two years ago were not being delivered. So that's where the dedicated spend, and again, a lot of it's government spend that is going to fund these new models. We see very strong growth in 2022. Okay.
spk03: Maybe the last question for me is around the the monologue you talked a bit about transactions that you're going to execute on over the near term. I think you said seven transactions. If I get the numbers right, three in North America, four in Europe. Did you say all that was in Q2? No, no.
spk00: So you would expect to hear the three in North America be very soon. So again, we were targeting Q1 for those, and so we do realize there's 10 days left in Q1, so don't book any vacation.
spk03: Okay, thanks. I'll pass the line.
spk08: Our next question comes from Stephanie Price with CIBC. Your line is open.
spk10: Good morning. I wanted to focus on the M&A integration efforts and that integration team that you mentioned. The press release noted you had about 70% of the companies now on your platform. Maybe you can dig a bit deeper into integration here.
spk00: Sure. So the team, again, we bought nine companies last year and three this year. The team's done an amazing job of in parallel integrating doing multiple integrations. And this is everything from we deconstruct the companies, right? So even employees all go on to the payroll. There's one payroll in the U.S., one payroll in Canada, one payroll in Germany that they get migrated onto. It's their ERP system. It's their professional services system. ordering tool. It's their quoting system. It's their CRM. It's all of their systems. And so we're definitely keeping our integration team busy, but we've got a great model of how to migrate them to this common platform, which allows both us to use shared services to support those teams, because if you're using different tools and systems, then it's very difficult to log on to different systems to support someone, but also for our people to get access to all the capabilities around analytics, cyber, cloud, and managed services. So So it's absolutely full integration.
spk10: All right. Thanks for that. And just in terms of the tight labor market, just wondering if you could talk about any of the tailwinds and headwinds that you might be seeing from it.
spk00: So we are a very big on team. It's very difficult to build these capabilities through ones and twos. So last year we bought LPA and Carpe Datum, two analytics teams that we had partnered with, and really built that team up to 85 people in one of our strongest practice areas. We've got a very strong cyber team, but one of the acquisitions will be making that our largest practice area now. So what we try to do is, and again, we try to do it for very cost-effective prices, but buy these companies that have pre-built teams. One thing I commonly say is when you talk to converged people, you don't hear a lot of I's. You don't hear a lot of we's in the teams. And buying pre-built teams to do this is very helpful. The other thing is because we're migrating a lot of people to our Mexican shared service center around service desk, then that has definitely helped. We've got that to a few hundred. It'll get to a few thousand as really scaling up on the managed service and the service desk side. So I think we've got a little bit of a different approach when it comes to growing. It's much more done through acquisition than necessarily ones and twos and organically.
spk10: Great. Thank you very much.
spk00: Thanks, Stephanie.
spk08: Our next question comes from Rob Gough with Etwan. Your line is open.
spk02: Thank you very much for taking my question. You talked a bit towards this, Sean, but when you're looking at your organic growth, could you talk to the influence the various verticals within your mix might be having in terms of government, life sciences, and tech?
spk00: Historically, our four strongest verticals are technology, finance, healthcare, and education. We're seeing a tremendous growth in healthcare and education, especially around the services and managed services that we're deploying there. Again, it's because of that new business model. You're seeing much higher than traditional organic growth rates in those areas as these new online models need to be supported. And it's becoming much more of a recurring nature and a services and a managed services than it used to be more of a deployment. So that's, I think, education and healthcare. You'll see a particular focus on our acquisition strategy in 2022 around those verticals. Again, technology and finance are still very strong, but particularly the growth rate you're going to see this year organically in healthcare and education will surpass those.
spk02: Thank you. And with respect to the inorganic growth, again, With the prospects of adding roughly a billion dollars of revenues, could you talk to what the geographic mix might be in broad terms, what the underlying growth may be associated with these, and is this a 5% to 6% EBITDA margin business on average, and what sort of valuations might you be looking at?
spk00: So traditionally we've guided that 400 million Canadian in North America, 400 million euros in Europe is really the target and doing that every year for the next three years. And our traditional model is buying them at 3% and here's how we move them 6% beyond. There'll be variances in that, like we'll likely do more than both of those targets on a gross revenue basis here in the first half of the year. And some of them might, you know, higher or lower in that margin profile. But those are kind of good guidances. Again, when you buy companies, if you're looking for a platform company that has management, you'll pay more. If they have cloud, you'll pay more. If they have managed services, you'll pay more. If you're looking just to extend the geography of an existing company into other geographies, then you're really buying their customers, then those tend to be less expensive. So I think those are the variables that kind of go into valuation, and you've seen we've done 28 of these, and they're a good indication of what kind of prices that we've paid. And then, say, larger cloud management and managed services tend to make them more expensive.
spk02: Thank you. Good luck.
spk00: Thanks.
spk08: Our next question comes from Divya Goyal with Scotiabank. Your line is open.
spk07: Good morning, guys. Congratulations on a wonderful quarter and a wonderful year. So I wanted to discuss the organic growth side of things a little bit more. And as listed in the financial statements, it says that once a company has been with Converge for three months plus, you're going to start considering it as an organic growth story and an organic growth side of the business. In a normal acquisition, we would assume a year for the stub and then consider that to be a part of the organic business. So what's the consideration behind it and how do you see that going forward?
spk00: So again... We're including any company that we've had for at least a quarter because our ability to cross-sell happens immediately, and therefore, you want to capture what we're doing in the first year. Some acquisition companies don't do cross-sell, and so I think they focus in on integration first, and then they go cross-sell, so maybe it's more appropriate for them to wait for a year before doing it, but we're seeing cross-selling happening in the The first 30 days after we acquired, say, Dasher, I know that Greg was doing executive briefings in at those accounts. So those things happen within the first quarter. So I think looking in at it's an appropriate measure to anything that we've had for the quarter that that be included in the organic growth calculation. And again, the attempt here is to have apples to apples of here's all the gross revenue they would have had a year ago versus all the gross revenue we have today. I think that's an appropriate measure.
spk07: That's good to know. So from a modeling standpoint, would you say that as you are acquiring companies, instead of us modeling the company for a one-year stub, a quarter of stub would be sufficient and then start treating it as an organic growth story versus an acquired company? Is that how you would recommend us? doing?
spk00: I would think so, yeah. I mean, again, I would not be thinking that they're just going to be on the same path. Yeah, the organic growth grows after the first quarter, absolutely.
spk07: That's great. A second question, can you talk a little bit more about John's hiring and the strategy behind it? And you and I, we briefly talked about it, but if you can provide more color on that side. And convergent story going forward with IBM with John hiring now.
spk00: Well, I say I'm absolutely thrilled that John has joined us. I feel so fortunate to have both Thomas Volk and John Telish as part of our company. I think it's a real credit to the team that we've built a company that can attract that level of people. I feel like I have a real mentor in Thomas Volk to help me, especially around things like Europe and managed services and I think now Greg has the same thing, and John is one of IBM's top executives. His contacts around the globe are tremendous. His knowledge of the channel, he ran worldwide channels for IBM. His ability to help Greg in so many different ways. We are a rapid growth company. We were having our board meeting yesterday, and I'm looking around the team, and it's the integrations, it's the cross-sell, it's the acquisitions. It's one heck of a team. And adding John and Thomas to this team, and John, I can't speak highly enough of him. I make the joke that in 2019, Greg got me an hour at IBM Think with John, and I was thrilled for it. And now he's our chief revenue officer. I feel blessed to have him on board, and we have one heck of a management team.
spk07: That's great, John. Thanks a lot.
spk00: Thanks.
spk08: Our next question comes from Gavin Fairweather. With Cormark, your line is open.
spk01: Oh, hey, good morning. I wanted to start out on the managed services hub in Mexico. You talked about scaling that up to over 1,000 resources there. Can you just remind us about the labor market, how easy you're finding it to scale up that office, and just basically any strategies that you're having to find talent in that market?
spk00: Yeah, so I really have to give credit to Mohamed who runs the operation down there in Mexico. He's got an outreach program with the universities and college and a training program. They call it Converge University, which is a four-week training program to make sure that we give the right user experience to our customers. Net promoter score is incredibly important to us. We aim to have over 50 on net promoter score. And having your service desk people understand how to go above and beyond, not just to fulfill demand, but to have companies promote you is absolutely essential. So this is a, I would call it a production line that Mohammed's developed that is a real competitive advantage for us to find talent, not just to provide a service, but to provide a service with the right user experience for our customers to grow our managed services growth. So it is a key competitive advantage.
spk01: And just staying on the managed services trend, you know, obviously exiting 21 with kind of 90 million in ARR, you know, you've obviously got your target for 22 at 200 million and then looking to introduce, you know, additional automation. I guess I'm curious, once kind of that scaling and automation is in place, how far along does that get you towards your kind of 25% long-term EBITDA margin target on managed services, which I think had like a billion in revenue.
spk00: Yep, exactly. Our target is by the end of 2025 to have a billion of managed services revenue, making 25% EBITDA margins. When you look at CanCom's EBITDA margins, and again, I've used always Thomas and what he did at CanCom as kind of the model of what I'm trying to achieve, they make 33% EBITDA margins on their managed services. So a 25% margin is definitely achievable. The key part, as we're saying, is when you're acquiring managed services revenue is to make sure the resource is in the right location at the right price. Automation is absolutely key for increasing customer satisfaction and reducing your costs before standardizing offerings. Our goal is to get between 55% to 60% gross profit, and those three elements are absolutely essential. Exactly IT has some tools that we've been implementing as we've migrated different service desks, and this is a key part for especially when you're acquiring companies that have existing managed services revenue.
spk01: Awesome. Thanks so much.
spk00: Thanks, Kevin.
spk08: Our next question comes from David Kwan with TV Securities. Your line is open.
spk09: Hey, guys. Quick question just on the manager services and other questions. Just given what we're seeing in Eastern Europe, particularly in Ukraine, I know you've talked about in the past trying to build up your managed services business with an office in Eastern Europe. Just given what's going on there, geopolitical tensions in general, Is that something you might look to delay in terms of opening up that managed services center in Eastern New York and maybe kind of leverage your Mexico operations more?
spk00: Absolutely. Great question, David. And so when following what CanCom had done, they had their shared service center about 40 miles from where the Ukrainian border is. And so we were planning on having not for managed services, but a technical shared service center in Eastern Europe. We very prudently have delayed those plans until we can assess the situation more readily. So definitely that's something that we'll be looking to do in future, but we're definitely looking for the situation to settle down a little bit before we make those investments.
spk09: Great. Thanks, guys.
spk00: Thanks.
spk08: Our next question comes from Benjamin May with Barenberg Bank. Your line is open.
spk11: Hi, good morning, and well done on a good quarter. Just a question on customer base. You talked about cross-selling opportunities. Just curious if you've done any work to sort of put a number beside sort of what share of wallet you have with your customer base and what you think you could get to. So that would be my first question, and then I'll follow up on the next one.
spk00: Sure. And, Ben, that's a great question. It's important to understand that we're not taking spend away from another partner. We're moving internal IT spend to spend with us. So mid-market internal IT organizations are really struggling to put their applications inside of Kubernetes containers from Red Hat and VMware, to open up workloads to the cloud, to migrate those things. Our offerings and capabilities are much greater than most people in the IT services space. At our national sales meeting, when you looked at our club trip reps, our top club trip rep, Vince, had $6 million in gross profit. And when we looked at where the gross profit came from, it came from all the various practice areas. And he started the year with $2 million of recurring revenue in gross profit that starts the year off. But that wallet share is in the offering. So when you look at one of the things we – and what Greg's doing on the 120 top accounts is making sure from analytics, from cyber, from cloud, from managed services, and digital infrastructure that we're driving gross profit for all of those areas. When you look at most companies in this space – they don't have an analytics team. They wouldn't have, say, some of the other offerings around Workspace, they might not have as well. And so we have a much wider breadth of offerings into our customers, which means our wallet share with our customers is probably much higher than a lot of the traditional IT services players.
spk11: Okay, that's very helpful. And just in terms of cross-sell, when I look at the organic growth figure, which you've kindly provided for the first time now, You know, can we get a sense or, or any color for how much of that, um, almost 10% organic growth was coming from cross sell of managed services?
spk00: Well, we cross-sell not necessarily all managed services, but, again, when you sell those services, they have higher gross profit but lower revenue. So it's important to understand that hardware's got more revenue, right, and you'll see those, but really the more impactful ones are really happening. And what we really track internally is the gross profit per practice area that are being generated from each region, and that's really the way Greg's managing the business. Yeah. The revenue side isn't as important as the gross profit side is, and that's our key area. And again, we started with this growth. We're going to be giving you, as of Q1, more information, so we do understand it's important for us to provide more granularity around this. Our first attempt was just making sure everyone realized what our gross revenue organic growth rate, and then we'll try to get more on the gross profit side as we move forward as well.
spk11: Okay, all right, great. That would be very helpful in the future. And then just lastly, you know, we have to talk about wage inflation, and I know that you're doing a lot of things in terms of resource allocation to try and perhaps protect against that as well as giving you capacity. But in terms of key technical staff, how are you managing sort of inflationary pressures on wages?
spk00: The most important factor in retention is not financial, it is culture. Financial is very important, and we make sure that we're always evaluating ourselves versus market, and the market definitely has changed. But culture is equally as important when you're retaining staff. So we have not had, say, both on the sales side and the tech side, we have incredible staff retention. And I know our team does a lot, though, to make sure that it's not just about, hey, here's the pay of it, but it's the How's your mental well-being? Are we giving people appropriate breaks and things like that? Are we taking care of them and those sides in addition to having great things to work on? Thomas Volk was using some examples of how in some of our customers' cases, when they try to go in a mid-market company trying to hire an IT person to manage their network, that's not really an exciting growth proposition for a technical resource. Whereas if you're at Converge and you've got several customers that you're delivering network services to, that's much more of an attractive job. So culture is important, but also the kind of work that we're able to provide to these people and the growth opportunities, since we're such a growth company, Good technical people love working with other smart technical people. If you're looking around the room and you're the smartest guy in the room, then you're doing all the work. So they love looking at each other, they love having challenging work as well. So I think culture, the type of work has really helped us. Definitely it's a tighter labor market. If I was trying to grow either our cybersecurity practice or our analytics practice by ones and twos, that would be very hard. Our strategy of buying pre-existing teams and companies, I think, is a much smarter way of growing them. But it's a tighter market. We're very aware of it. But we spend a lot of time on our people and the initiatives around them to make sure there's the right culture and there's the right well-being and environment for them to be productive.
spk08: Ladies and gentlemen, as a reminder, should you have any questions, please press star 1. There are no further questions at this time. Please proceed.
spk00: Thank you to everyone for participating on today's call. It has brought our team great pleasure to discuss the Q4 and financial year results we've attained throughout 2021, and I look forward to updating our shareholders again on our next earnings call. Thank you for your continued support.
spk08: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.
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