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Operator
The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.
Edgar
Good morning.
Matt
Welcome to the Converge Technology Solutions Corp. Second Quarter 2022 Results Conference Call. All lines have been placed on mute to prevent 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 1-1 on your telephone keypad. Your main hosts for today are Sean 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 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 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 convergence filings with the Canadian Provisional 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 fee cash flow conversion, which are non-IFRS measures and have no standardized meaning. These refer to the Converge's filing of Canadian Provisional Securities Regulators for an explanation and reconciliation to IFRS measures. Thank you. Mr. Shawn Mayne, you may begin your conference.
Sean Main
Thanks, Chris. Good morning, and thank you for attending today's Q2 earnings call. I'm pleased to announce that Converge has reported another record quarter. In what follows, I will provide a business update on the quarter beginning with a brief introduction to Converge for those who are new to our business, a snapshot of our four phase growth strategy plan, and an overview of our year to date acquisitions. Matt Smith will then provide an update on the Converge financials, leading us into a discussion on product and service backlog management, an update on the Converge growing managed services practices, including an update on our IP4G, our IBM Power for Google Cloud solution that we launched and expanded in Q2. And lastly, some closing remarks on the strength of our team and the culture that is behind our growing success. Converge is a software-enabled IT and cloud solution provider focused on delivering industry-leading solutions and services. Our global solution approach delivers advanced analytics, application modernization, cloud, cybersecurity, digital infrastructure, and digital workplace offerings to clients across various industries. Converge supports these solutions with advisory, implementation, and managed service expertise across all major IT vendors, leading with Red Hat and VMware, including the major cloud providers, AWS, Google, and Microsoft, alongside main infrastructure providers, IBM, Cisco, HPE, and Dell. This multifaceted approach enables Converge to address the unique business and technology requirements for all clients in the public and private sectors specifically catering to mid-market demand. Converge identifies as our customer's trusted advisor, bringing together world-class solution and services, helping to reduce cost, increase efficiency, and create competitive advantages. We continue to deliver industry-leading revenue and EBITDA growth as evidenced by Converge financial success over the past few years. resulting in a 49% three-year annual compound growth rate in net revenue and a three-year adjusted EBITDA compound growth rate of 79%. Our tremendous growth is guided by our four-phase approach created in 2017, which the team has done an outstanding job executing. The first phase of our acquisition strategy was to buy a broad based geographical coverage in North America and acquire top tier certifications with all of our vendors to achieve better pricing and rebates. In phase two, we focused on building out our capabilities around hybrid IT, advanced analytics, cybersecurity, managed services, leading to phase three centering around integration of the back office and scale. Upon completing our original three phase plan, the team came together to outline its continuation into phase four, which includes achieving a minimum of 500 million of adjusted EBITDA and at least 5 billion in revenue by the end of 2025. While for the next three years, completing 1 billion annually in acquisition revenue composed of 400 million Canadian of acquisition revenue in North America and approximately 400 million Euro of acquired revenue in Europe. Another key tenant of our phase four strategy is to deepen our services capabilities around managed services, analytics, cybersecurity, and cloud. Year to date, Converge has already acquired 927.7 million of LTM gross revenue and 53.3 million in adjusted EBITDA. through acquisitions in North America and Europe. And we are on track to meet or exceed that billion gross revenue annual target. It is important to step back and to understand how we prioritize our acquisitions and how various acquisitions advance our strategy. We prioritize acquisitions in the order of culture, customers, geography, and finally capabilities. The reason we target relatively smaller companies is because these businesses have had to compete on service levels and technology to win against larger providers who compete based on price. The customer relationships they have developed through this approach is crucial to understand since it is essential in developing our cross-sell strategy. It was Sam Hafar, founder of Computex, who describe it to me that your customers first need to know you, then like you, then trust you before they buy from you. If you compromise quality due to price or hire inexperienced sales personnel, you will not be able to reinforce your position as trusted advisor to the customer when introducing managed services and digital transformation. As many of you know, this is a people business and the strength of Converge is the up to 20 year relationships that have been developed by our salespeople and engineers that allow us to be the customer's trusted hybrid IT partner as they migrate to the cloud. This year, Converge has been executing on an acquisition strategy targeting companies with customers based in the education and healthcare verticals who changed to remote delivery of service during the pandemic, creating managed service opportunities for companies to capitalize on. PDS and TIG expand our customers' footprint in both these verticals in North America. And in Europe, RedNet was already a dominant education provider in three German federated states, expanding organically to four more. Similarly, GFDB is a top-tier education player in an additional six federated states. giving Converge geographical presence in 13 of the 16 federated states, making Converge a go-to partner around education for companies like Intel, Microsoft, and Apple. Equally as important, we also acquire companies for service capabilities. This year, we bolstered our security practice with the acquisition of CBI, adding over 60 security engineers and tripling the revenue for our cybersecurity practice. Rather than expanding organically one engineer at a time, this allows us to acquire pre-built teams of resources that match our culture and avoids the issue of ramp up time to profitability when you hire sales or engineering resources organically. IDX, a systems integrator in Canada with high-end telco and banking integration expertise, is another example of acquiring a great team of experienced engineers who match our culture. These acquisitions allow us to further cross-sell our analytics, cybersecurity, hybrid IT and managed services into our growing customer base. Converge's combination of acquisition growth or inorganic growth combined with our cross-sell or organic growth has resulted in Converge having the highest gross profit growth rate in the IT services space. Gross profit is the metric that most companies in the space use as a level measure of success. When compared to our peers in North America and Europe, no one comes close to the gross profit growth rates that Converge has shown as a public company within the past three years. The fact that Converge not only continues but exceeds these growth rates as a TSX index company is a testament to the fantastic management team at Converge that is able to acquire, cross-sell, and integrate companies smoothly to allow for this excessive profitable growth. With that, I would like to pass the call to Matt Smith to discuss our Q2 financial highlights and successes in further detail.
Chris
Thank you, Sean. As Sean has highlighted, we continue to see robust demand for our products and services, and that has translated to strong year-over-year revenue, gross profit, and adjusted EBITDA growth. In Q2, we grew net revenue 73% to $596.7 million compared to $345.3 million in Q2 last year. And for the first half of 2022, net revenue grew by 75% to $1.1 billion from $655.5 million last year. Q2 product revenue, which includes hardware and software, increased 75% to $491.8 million from $281.3 million over Q2 last year and was $945.2 million for the first half of 2022 compared to $533.8 million last year, an increase of 77%. Our product revenue growth was driven primarily by the acquisitions completed since July 1 last year and due in part to conversion of our Q1 backlog for product that was delivered to customers in the period. Q2 Professional and other services, which includes the net revenue from public cloud resale and product support, increased 61% to $76 million in Q2 from $47.1 million last year. For the first half of 2022, this revenue grew 65% to $146.2 million from $88.5 million in 2021. We attribute this growth primarily to increases in professional services associated with upfront configuration and integration services well as continued growth in our key consulting practice areas including analytics cloud and most notably cyber security which is shauna which as sean has mentioned we bolstered with the acquisition of cbi at the beginning of this quarter in q2 our net revenue for managed services which are long-term contracts increased 71 to 28.9 million from 16.9 million in q2 last year and for the first half of 2022 managed services was $55.3 million compared to $33.3 million in 2021, an increase of over 66%. On an annualized recurring basis, our ARR for managed services at the end of Q2 grew to $115.4 million compared to $67.5 million last year. We are poised to show continued growth in this area in 2022 as backlog is delivered and we realize revenue from trailing managed services over end-user devices. In Q2, despite the number of acquisitions completed, we continue to report positive organic growth as we grew gross revenue organically by 8.5% in Q2 compared to last year. As highlighted on previous calls, we attribute this growth to two key things. One, our ability to seamlessly integrate acquired companies, and two, the strength and breadth of our various practice areas and continued strong demand for digital transformation. For Q2, our gross profit increased 70% to $133.2 million, from $78.2 million for the same period in 2021 and gross profit margin was 22.3% compared to 22.7% in Q2 last year. For the first half of 2022, gross profit increased 66% to $242.2 million from $146 million in 2021 and gross profit margin was 21.1% compared to 22.3% last year. As a reminder, in Q1, Our gross margin percentage was lower due to the impact of recent acquisitions that sell proportionally lower margin hardware, plus the fact that it was a particularly device-heavy quarter. As expected, gross margins grew by 2% in Q2 over Q1, as higher margin software and services made up more of our gross profit. Going forward, as we cross-sell higher margin cloud and managed services to customers of acquired companies, plus our existing customers, including the margin lift associated with trailing services on product backlog, we expect gross margins growth margins to increase. Q2 adjusted EBITDA increased 80% to $39.2 million compared to $21.7 million last year. As a percentage of net revenue, adjusted EBITDA was 6.6% compared to 6.3% in Q2 2021. As a percentage of gross profit, which we believe to be a telling indicator of the company's overall operating efficiency and profitability, adjusted EBITDA was 29.4%, increasing from 27.8% in Q2 last year. For the first half of 2022, adjusted EBITDA increased 70% to $68.8 million compared to $40.5 million last year, and adjusted EBITDA as a percentage of net revenue was 6% compared to 6.2% last year, and as a percentage of gross profit increased to 28.4% from 27.7% last year. As we continue to integrate operations of acquired companies and cross-sell managing cloud services to their customer base and increase their gross profit with higher margin revenue, we would expect our adjusted EBITDA margins to increase over time. Pushing to the balance sheet, we finished the quarter in a strong financial condition with approximately $290 million in available funds from cash on hand and through our ABL facility. Additionally, on July 28th, we announced that we've now moved to a $500 million global revolver credit facility with an uncommitted $100 million accordion feature that would bring the total facility to $600 million, effectively doubling the outgoing ABL facility. In parallel, we also announced the TSX approval of our NCIB that will begin on August 11th, which we believe will be an effective use of our liquidity, where the market price of our common shares may not fully reflect the underlying value of our business. In terms of cash flow, on our Q1 call, we noted that we utilized the strength of our balance sheet and cash generation to purchase directly from OEMs in order to secure supply for customers. which was reflected in our Q1 uses of working capital and cash flow from operations. As expected, in Q2, as we reverted back to our regular purchasing channels, working capital began to normalize and we generated positive cash flow from operations of $26.6 million. We would expect this trend to continue into Q3. In Q2, our adjusted free cash flow, which we calculate as adjusted EBITDA, less recurring capital expenditures and payments of lease liabilities, was $33.8 million, increasing from $18.5 million in Q2 last year. Adjusted free cash flow conversion, which we express as a percentage of EBITDA, was 86% in Q2, increasing from 85% last year. For the first half of 2022, adjusted free cash flow increased to $57.9 million from $33.2 million in 2021, and the conversion percentage was approximately 84% as compared to 82% 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 six 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 turn the presentation back to Sean.
Sean Main
Thanks, Matt. Industry-wide backlog concerns have been at the forefront of recent discussions of which Converge believes we are ideally positioned with top vendor relationships to manage confidently and consistently. Last quarter, Converge reported an increase in product backlog from approximately $350 million at the end of Q4 to $472 million at the end of Q1. And while our reported product backlog has further increased to 507 million this quarter, it is important to note that 375 million worth of Q1 product backlog was delivered in Q2, leaving only 97 million of open orders carried forward from the Q1 backlog, primarily network gear. Throughout the quarter, our sales teams impressively generated an additional $410 million in new product backlog orders, displaying the demand for product as part of our solutions remains strong. Additionally, Converge reported $71 million in Q2 SOW-based services backlog, increasing from $45 million in Q1, with services being a key contributor to our organic growth. We believe the company has managed its backlog proactively through its ability to simultaneously deliver orders while generating unique demand. In Q2, our sales organization continued to execute on our cross-sell initiatives with a focus on driving our software and services offerings. It is important to note that software and services are lower revenue but much higher margin than hardware. and our 8.5% gross revenue organic growth primarily comes from growth in our services. The services organization closed over 45 transactions and closed three large transformational projects of over a million each across multiple solution areas with a focus on analytics, cloud, and cybersecurity. Our Q2 2022 gross invoice recurring revenue increased 32% over the same period last year to $431 million, made up of $114 million of annualized managed services, $105 million of public cloud resale, and $211 million of software subscriptions. The launch of our IBM Power Systems for Google IP4G solution as one of our strategic managed service offerings paid off as we closed over nine transactions in the past quarter, with two of them representing a total contract value over a million of recurring revenue. We also launched an expanded offering in Germany and now have both an AIX and iSeries offering for the Google Cloud platform across North America and Europe. The team will continue to focus on expanding into other locations based on collaboration with Google, and it is an eight-figure revenue opportunity this year. It should be noted that although we experience good growth in our managed services, both traditional and IP4G, our large backlog of managed services is being impacted by network supply chain issues that are delaying onboarding. This backlog is the primary reason for the large increase in our services backlog. As we continue to drive multiple marketing events and campaigns, the team secured 109 net new logos in Q2, continuing our impressive average of over 100 net new logos each quarter that we haven't done business with in the past. We have now hosted over 76 events in the first half with over 1,800 clients attending. The team also launched over 100 campaigns across analytics, cloud, cyber, and managed services, generating the right messaging and helping us continue to drive pipeline across our high value offering. These campaigns into our existing customer base with our differentiated services promote cross-sell, while campaigns into new customers result in net new logos. As Converge continues to expand its clients and offerings, We are honored to be recognized on CDN's top solution provider list, ranking 8 out of 100, along with ranking 36 out of 500 on CRN's 2022 solution provider 500 list, and has recently announced ranking 29th on CRN's 2022 fast growth 150 list. These rankings are in addition to our previously discussed Ingram Micro Awards of 2022 Reseller Partner of the Year and the first 2022 Women in Cloud Female of the Year Award achieved by Rochelle Mann. These recognitions show exceptional growth and leadership at Converge and acknowledge the team's extraordinary efforts within the industry. Expanding on leadership and governance, Dr. Tony Renau was elected to the Converge Board of Directors at the virtual annual general meeting occurring on June 23rd. Bringing over 20 years of international experience as a transformational finance and business leader, guiding companies through inflection points of growth, innovation, technology, convergence, and business integration. Tony served in public and private organizations where she spearheaded capital expansion and acquisitions across North America, Latin America, Europe, and India. With an impressive portfolio of education, Tony holds a master's of business administration, a master's in accounting, a PhD in biophysics and chemistry, and trained in artificial intelligence at MIT. In addition to Dr. Tony Renau joining the board, we continue to look forward to our previously announced appointment of Richard LaCouture as our global CFO, starting his role at Converge at the beginning of next month. Richard joins us from Softcat, where his experience in setting up financial organizations will help us as we set up our European operations, while we will also benefit from his experience in best of class reporting. The recent leadership and board additions will assist in further enhancing the scale and success of our company's vision and ability to achieve the objectives outlined in phase four of our growth plan for continued global expansion. As part of our continued growth and success, we have added to Greg Berard's president title, the title of North American CEO. Greg has been fulfilling this role over the past 12 months as I focus on acquisitions, expansion in Europe, and our capital market strategy. Greg has been a proven leader for us since the acquisition of Lighthouse in 2018 and being our global president since 2019. This change of title will clarify his role to customers, partners, and employees, and allow him to continue to execute on our cross-sell initiatives, integration, acquisitions, and drive the right culture and expectations throughout North America. Our ability to attract and retain talent is because of our company culture, and we believe fundamentals of convergent success are based on our employees playing a pivotal role in strengthening this culture. We continue to offer resources and initiatives for employees to take part in and successfully grow together. In addition to our recurring fitness and health seminars and challenges to our employees' wellness series, put forth a strong focus on mental health awareness with separate seminars for both adults and youth, providing tools and support to reduce the ongoing stigma surrounding mental health problems or crisis. Our Diversity Inclusion Council was an essential part of the company-wide training for human rights practices, respect in the workplace, and highlights our see something, say something mantra with tools on how to avoid being a bystander in the workplace. And in June, we celebrated Pride Month, offering tips for pride with helpful guides to attend a pride parade or event, being an ally, volunteering, and donations, and education on the LGBTQ plus community. Subsequent to Q2, we have enjoyed employee appreciation days with our North American operations enjoying Fridays off during the month of July and launched a monthly postpartum webinar series in support of existing and new parents at Converge. Furthermore, Employees took advantage of the financial wellness opportunities available to them through our employee share purchase program offering a 20% match by Converge, which resulted in approximately $870,000 in ESPP purchasing. Quite simply, Converge's success comes down to its people and its team culture. The phenomenal success Converge has enjoyed over such a sustained period has come from being a meritocracy that rewards the team for executing on our very aggressive growth strategy and vision. The amount that Converge is able to accomplish each quarter wouldn't be possible without this highly talented group that embraces change and trusts each other to execute on their part of acquisitions, cross-sell, and integration. I am so proud to be able to present these financials, which are a symptom of the hard work that these amazing people have put in and their dedication to our vision. And on that note, Chris, can we please open the floor to questions?
Matt
Yes, thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have any questions, please press star 1 1 on your touchtone phone. If you're using a speakerphone, please lift your handset before pressing any keys.
iSeries
One moment for our first question. Our first question will come from Christian Seguro of Eight Capital.
Matt
Your line is open.
Arista
Hi, good morning, Sean, and thanks for taking my questions. The first one I wanted to ask about is on the newly introduced services backlog. You touched on it in the opening remarks, but I was wondering if there's any other context or color you could offer on the metric. And in the growth we saw sequentially, is that driven primarily by hardware delays, or are there any other factors in the backlog growth there?
Sean Main
Yeah, great. Thanks, Christian. So it is just SOW-based services, so statement of work-based services. And yes, a big component was onboarding for managed services, which have been delayed by not being able to get network gear. Network gear is part of any move to the cloud. And part of those onboardings have been delayed, especially in our IP4G solutions because of delays in network year. So, again, it's all SOW-based. It's not the actual any managed services itself. It's just work-based or consulting services-based. And a lot of the backlog has to do with delays on the hardware side.
Arista
Okay, that's helpful. And in terms of sourcing supply, it was a topic that came up last conference call. But is Converge still going direct to OEMs to source product? Has that dynamic changed? And then is there anything on changes in pricing or terms that you'd have us think about going into Q3 here?
Sean Main
Yeah, so we are not doing any of that direct buying that we did in Q1 in order to secure supply. You're seeing on the device side things normalize. What is bad for demand in the consumer and in the gaming space has been very beneficial to the business space. And so we're more normalized on the device side. It's more on the data center side, especially HPE and the networking gear. Arista, Palo Alto, and Juniper, that you're still seeing the longer delays. We kind of see things kind of like they've normalized. One of the comments we'll make is that we have trained our customers to order early. In Q2, we saw some of our customers ordering Q2 for Q4 delivery, which is very uncommon in the past. So some of that open orders backlog was increased because of customers ordering earlier. But we've kind of seen a leveling off and we would start to see improvements in Q4 and moving into next year. Some of our vendors like HPE have warned that some of these problems will persist until mid-year next year, but we're definitely optimistic to see some encouraging signs here in Q4.
Arista
Okay, that's perfect. And then just a follow-on to your response there, Sean. The ordering from customers, it's good that they're getting sort of in the queue early, but do you think, well, when do you think there's any double ordering on their end? And then maybe Do you suspect there could be pull forward of demand or just that these customers are aware of the environment and getting ready for product that they need? Thank you for Q1. How do you think they're thinking about the matter?
Sean Main
So our customers are very different from large enterprise customers because when our customers are buying a solution from us, they're not just buying hardware. They're buying software. services uh hardware there'll be a solution software it's all combined together when you are selling into large enterprise you're selling into the network group or the storage group um and it's just they're decoupled the services are decoupled from the product so this in the mid market you wouldn't see things like double ordering because it's all part of a solution so that's not something we see as far as the pull forward um i guess you could refer to the customers that are of pre-planning i guess you could call a pull forward but again this is not viewed as discretionary spend you saw for the first time the incredible demand in q1 was because people started budgeting in the mid market for work from anywhere and so you've had this incredible demand not viewed as discretionary because of the security flaws in the existing way that they were supporting remote workers. So we saw it budgeted for the first time, and you're really seeing this whole demand, and especially around the network year, the incredible demand, because as you move to the cloud, there's a lot more network here. But yeah, we're seeing tremendous demand for those solutions that I wouldn't necessarily say pull forward in that people are now implementing these strategies to support remote workers.
Arista
That's all helpful, Kailashan. Thanks for taking my questions, and I'll pass the line. Thanks, Christian.
Edgar
Thank you. One moment please for our next question. And our next question will come from Rob Gough of Echelon Partners.
Matt
Your line is open.
spk00
Good morning and congratulations on the quarter. Thanks. It was nice to see the organic growth Could you, for the first question, talk to how you see that organic growth progressing? A component of that would also be in your outlook for the backlog. As you see supply constraints lessening, do you have the internal capacity to draw down on that backlog, or is that likely to be a seasonal thing in Q1 where you do have that capacity?
Sean Main
So, great question. So, we have traditionally always guided to be around 10% gross revenue organic growth. Last year was 9.6. When you see this massive backlog of not just product, but services as well, it means that if you looked at our revenue, that you would expect to see solid double-digit organic growth rates, especially as we bring down some of this backlog in Q4. on both the product and the services side and realize the services side isn't constrained by resources that's concerned constrained by certain products not being available in order to deliver those resources so we've done a great job of through exactly it supporting our growth of managed services through expansion of our group in mexico We've done acquisitions like CBI supporting our security group last year with LPA and Carpe Datum supporting our analytics group. So we've effectively been buying companies to get pre-built teams of people to support our various analytics, cyber, app modernization, and managed services. So really, I think the organic growth question really comes down to if you see some normalization in Q4, you'll have a stronger than our normal 10% gross revenue growth rate for 2022. Okay, thank you.
spk00
And I believe you indicated that the IP4G could be an eight-figure revenue line this year. How do you see that progressing going into 2023?
Sean Main
Oh, yeah, it's a major initiative. This is a very differentiated offering. And these are chunky customer contracts that we're getting, multi-year contracts for us to move their workloads around IBM's i-Series into this partnership that we have with Google. Incredibly lucrative, very differentiated. And when you have them on the IP4G, it gives us the opportunity to upsell our managed services and our other managed offerings such as service desk, managed security, managed network, managed end user. So incredibly important and significant. This is a significant part of our growth strategy around managed services. Obviously, we have a lot going on right now with managed end user around education and healthcare. We've got a lot of the managed services around supporting nurses and teachers. We've got the generic services, but the IP for G1 in particular is driving very specialized growth with a great customer base that will be a core of our managed services growth.
Edgar
Thank you.
Sean Main
Thank you.
Matt
Thank you. And one moment, please, for our next question. Our next question will come from Gavin Fairweather of Cormark. Your line is open.
Gavin Fairweather
Oh, hey, good morning.
Matt
Good morning.
Gavin Fairweather
Just to follow up on the IP4G, I know obviously you've been looking to establish a channel for that offering. If you can just update us on how that channel is functioning, your channel enablement efforts, and whether you think that it's really kind of optimized or whether there's further work to do there.
Sean Main
So I think John Telsch coming over has done an amazing job in getting actually IBM customers sales reps get paid for selling our solution for it. And then the Google channel has also been very supportive of it as well. So I think it's a, again, the thing that we're really constrained on, we have this massive pipeline now has been more on the onboarding side, but this will be a major part of our managed services going forward. And the team internally has done a great job. And I think the partnership on the channel side, as you asked, John Tellish has really added that since he joined a quarter ago.
Gavin Fairweather
That's great. And then maybe just about a fine point on the networking gear discussion. Are lead times now coming in for Cisco?
Sean Main
So, no, they're not. But what they're doing, though, is they'll surprise you. So if you order some networking gear that's given a four- to six-month wait time, it might show up after three weeks. And so it's sporadic, but it has not been – Not better yet. There are signs that we're hearing of things getting better. I think people started, so this really was last Q3, where people would give short lead times, even two to three months, and then deliver much later. I think now that people are expecting longer lead times, they're giving those times and then trying to surprise with shortening them. So I think it's getting better. You're hearing signs, but again, the proof is in the backlog. And so on November the 10th, when we report our Q3, I'll be able to give you a much better view of what we're seeing in Q4. So again, the device side has been more normalized. and you're seeing signs here, but there still is plenty of, it's not a normal situation. Normally our backlog would be under 100 million, probably under 50 million, and it's 507 million and another 70 in services. So it is abnormal, but it is coming better. And again, when I hear announcements like NVIDIA talking about you know, we over forecast demand and gaming and consumer and with AMD and Intel saying the same thing, it means there's a lot of chips around, which there haven't been for a while. And so that can only help the supply chain on the business side.
Gavin Fairweather
That's great. And then maybe just on the NCIB, you know, obviously, you know, you've been an active acquirer. Maybe you can just talk about capital allocation priorities between kind of M&A and continuing your consolidation strategy versus buying background stock and that's it for me. Thank you.
Sean Main
Sure. Well, I mean, at these stock prices, we're not being valued. Like I showed you a slide where we by far have the greatest growth rates of revenue, gross profit and adjusted EBITDA and even as a large company and the market is not recognizing that. So we think it's a great use of, of our capital to, and in the interest of our shareholders, for us to buy our stock back at these levels. We've almost completed our acquisition strategy for this year, which we've stated is a billion, and next year will be more measured in our billion for next year. We were very front-end loaded with our acquisition strategy for this year, but thanks to our revolver and the cash from operations, we're in a great spot to be able to do both.
iSeries
Thank you. One moment for our next question.
Matt
Our next question will come from Divya Goyal, Scotiabank. Your line is open.
Operator
Good morning, gentlemen. Congratulations on the quarter. So my question is around the general discussion around the markets on staffing. So obviously you have acquired a lot of these companies and the employees that come with it. But given some of these supply chain constraints and the backlog increase, what's your take on, you know, how do you plan to handle some of the staffing issues? Do you see recession kind of impacting your potential hires? And then what are your internal utilization rates in general?
Sean Main
Yeah, so first off, we see zero sign of a recession in the hybrid IT and digital transformation space. That when you look at demand, when my backlog gets under a hundred million, people can talk to me about lessening demand. And when you look at the labor market, it is a incredibly scarce resources are these high-end. Lessening demand. And when you look at the labor market, it is a incredibly scarce resources are these high-end cybersecurity cloud services. Like in Germany, there's 80,000 open IT recs. So mid-market companies cannot find someone to manage their network. We have incredible demand from our various practice areas to our staffing group to help companies as this non-discretionary spend of moving them to the cloud, they cannot find the resources. So when you have robust demand and Basically zero unemployment in the sector. I don't see any signs so far of any kind of recession in our space. Not seeing any of that whatsoever. Next year might be different. And I say, watch my backlog, but I've got the opposite problem of an excessive demand. Like realize these quarter numbers, which are superb, came even though my backlog increased. Demand environment is extremely robust.
Operator
That's helpful, Sean. And my next question is, I was looking at the industry mix for your revenues, and it seems like the banking incentive was approximately 26% of the total revenue compared to some of the recent quarters. And similarly, the government mix changed as well. Could you comment on that, please?
Sean Main
So quarter by quarter, you're going to see some differences. So Q2, as we mentioned, is a heavy software quarter. And so the finance, a lot of renewals will happen in Q2, as they will Q4. You're going to see heavier government and education spend in Q1 and Q3. So I think that kind of normalizes. When you look at it on an annual basis, it's more normalized. But quarter to quarter, you'll see a shift.
Operator
Thank you. That's all from me.
Sean Main
Thanks, Edgar.
Edgar
Thank you. And one moment, please, for our next question.
Matt
Our next question will come from David Kwan of TD Securities. Your line is open.
David Kwan
Hey, guys. I guess tying into Gavin's question on cap allocation, that's something I always wanted to focus on as well. Just given where the shares are trading right now, you obviously got the NCIB in place. Would you guys consider something more significant like a substantial share bid now that you've got the larger global credit facility? And then as well, a lot of your shares paid dividend. Is that something that's being considered?
Sean Main
So, our board thought it was appropriate the size of the NCIB that was announced at these levels and so thought that was a good level of capital allocation. We're getting to this stage where we're generating more cash from operations and you saw that conversion rate that Matt was talking about. it only grows from here so as we pass 200 million of adjusted ebitda then it becomes more of the x you cannot use all of that capital in our m a we've said that we target kind of using 250 to 300 million per year in acquiring our billion of acquisition revenue but that's also tiered throughout the year we did it very early this year and then when you look at these quarters especially you'll see in q3 and q4 the cash being generated in addition to the amount that we've had from increasing our revolver credit facility gives us ample room. We're not at the stage yet of looking at a dividend. I do have regular conversations with our top 10 shareholders. and they viewed appropriate in NCIB, but some of them are not fans of a dividend since we have such an acquisition pipeline that we can be using. But I think as you get into 2024, we're generating so much cash as we get closer to our 500 million of adjusted EBITDA, we'll be generating 400 million of free cash flow. And then you'll be, how do you give that back? Is it just buybacks as a dividend? And I'm sure the board will consider that at those times. But right now, we think the NCIB is appropriate. We've got a great use of cash on acquisitions to achieve our growth objectives as stated. And as in future, definitely, I'm sure the board will consider dividend as one of the options as we get to 2024 and beyond.
David Kwan
Thanks, Sean. There's a lot of talk on the call that ate us on the IPFG offering. Just curious, How you see that fitting in relative to any other kind of core solutions and services in terms of kind of the biggest growth potential in the coming years?
Sean Main
It's a really differentiated offering in that it requires a much larger company to have that specialized skill set. And also, they're not, you don't learn AIX in university these days. And so we've got some very specialized resources around it. So as far as having a niche offering, and there's a lot of banks and insurance companies that have a lot of AIX and I-series And that series workloads that we can move into an environment and then provide a really captive audience to provide upselling of our other managed services. As we mentioned, the easiest person to sell managed services to is an existing happy customer. So these are net new logos that we're getting at million dollar chunks. And so to substantially raise our managed services revenue just with iSeries and then to expand it to our other managed services, we think this is a tremendous opportunity and we'll be looking to expand that because, again, there aren't a lot of options. You look at the partnership that we have with Google and it's an exclusive arrangement around this and it's a very compelling offering. So it's a key area of growth for us and we'll be looking to expand it to other geographies as well.
iSeries
That's great. Thanks.
Sean Main
Thanks.
Edgar
Thank you. One moment, please, for our next question.
Matt
And our next question will come from Scott Fletcher of CIBC. Your line is open.
Scott Fletcher
Good morning. I wanted to ask a question on the M&A pipeline. And I understand that you're pretty close to your target already, and so there's probably not going to be a lot of activity for the rest of the year. But first question is, I'm wondering if you're seeing any additional propensity itself in some of these companies given, you know, as they peek around and look at the forward macro outlook. And then the second question is, if you see some of those extra opportunities, are you willing to sort of outspend your target for the year, just especially given the flexibility that the extra credit line might give you? Thanks.
Sean Main
Yeah, so we set our targets by what we think we can comfortably consume. Four to six a year in North America, four to six a year in Europe. And so we're comfortable. We're the only buyer in town right now. And so we're able to get a lot more capabilities, recurring revenue and services for the same discipline prices that we've always had. kind of paid for um but we're not going to accelerate we have a very robust pipeline but they'll um we don't view that they're going to be all snapped up the table by someone else before next year so we're we're happy to take a measured approach into next year we've got some things that we're still um objectives that will clean up this year, but obviously at 930 of our billion target, we're almost there. So you would expect the acquisition activity to definitely slow down here in 2022 and then be more measured during 2023. But this is an incredibly fragmented marketplace. There is no shortage of targets to go after. There's less platforms, but there's very few targets. In our growth strategy, either on services or on customers, So we can definitely have our pick of choosing what to prioritize as I was kind of going through our methodology earlier on the call.
Scott Fletcher
Okay, thanks. That's helpful. And then the second question I have is around cross-selling. So, again, it sounds like the focus is going to be on, you know, getting that cross-sell going in the second half of the year and showing the opportunity there. Is there any sort of new strategies when it comes to cross-selling or any additional metrics that you're looking at, or is it really just keeping – a focus on what you're good at.
Sean Main
So we've been incredibly successful at this and realize the mid-market is very, very different from the large enterprise space. We are the only mid-market, call it VAR IT service provider, that provides analytics resources into the mid-market. And when you look at the resources we have from CBI as well, these are not VAR resources. Our services business is incredibly large. And we're most... You have pure play managed service providers or pure play kind of skill sets. These are very specialized resources in analytics and cybersecurity that our customers in the mid-market really, it's differentiating us from other people that are in the mid-market and helping them on this digital transformation journey. So these are not common skill sets whatsoever in the mid-market. Okay, thanks. Sorry, Scott, the campaigns is the key thing to look at. So when you look at that slide on campaigns that I just presented, that is the core to the strategy of how both to existing customers and net new logos that we get the message out.
iSeries
Thank you.
Matt
Ladies and gentlemen, as a reminder, should you have any questions, please press star one one. One moment, please. Our next question comes from Alan Richardson of Echelon Partners. Your line is open.
Alan Richardson
Sean, I would like you to address the Portage spinoff taking public. Could you address when you think you're going to take it public and whether you would pay a share dividend of a part of your holdings at that time?
Sean Main
Great. It's a great question. So Portage has done several acquisitions this year to get it into a spot where it would be ready to go public. Portage, we did a private financing into last fall to pay for these acquisitions and getting it ready. We're preparing that that option is available to us. And then in September, we'll be making a call on whether we'll go public. or whether we would push that up to next year or whether we would do a financing. We're looking at those options now, but the company is of the size and scale where it's ready to do so. It's got some really specialized skill sets around identity verification. The Notarius acquisition was an incredible one that really adds a great piece of recurring revenue to it. As far as what our intentions are of giving converged owns 53% of portage, and we've always said at the IPO that if we went down that route, that we would provide benefit back to shareholders. Dividing out shares probably would not be the way of going because some of our shareholders wouldn't have the mandate to be able to hold it. As you look at our shareholder base, we've gone from a micro cap to even mid cap and large cap holdings so that it meant that you'd just be putting pressure on your stock. So what we have been talking about at a board level was more if they're going to do an IPO that we would be able to do a secondary offering of some of Converge's shares and provide that as a cash dividend back to the converged shareholder base. But again, these are just discussions that we're having as we're looking at the options. In September, we'll be looking at the markets. Cybersecurity is the one area that's held up, but obviously the markets are not in a great spot. And so we'll be assessing that in September, and we'll be reaching out to the Portage shareholders around that decision as well.
Alan Richardson
Sean, when you speak of M&A activity, Does that include or exclude Portage?
Sean Main
So Portage has done its acquisitions to get it to its phase two. They have a three-phase plan, and we haven't presented that here. I'll let Don be able to present that, but definitely M&A would be part of their phase three, but there's no imminent Portage acquisitions planned. Now it's more about integrating the Terrius with the other acquisitions, 1CRM and and open and vivo into the platform but there's no currently there's no planned acquisitions to do in the in the near term but again converge time near term is this quarter thank you thanks thank you there are no further questions at this time please proceed Well, I wanted to thank you all for everyone for your continued support and participating on the Converge second quarter earnings call. Thank you.
Matt
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect.
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