Converge Technology Solutions Corp.

everyone welcome to the Converge Technology Solutions Corp third quarter 2022 results conference call all lines have been placed on mute to prevent any background noise after the speaker's remarks there will be a question and answer session if you would like to ask a question during this time simply press star then the number one on your telephone keypad if you would like to withdraw your question please press star then the number two Your main hosts today are Sean Main, Chief Executive Officer, and Richard LeCoute, Chief Financial Officer. Before we begin, I am required to provide that forward-looking statement respecting forward-looking information, which is made on behalf of Converge and all of its representatives that are on this call. All statements made on this call will contain forward-looking information. The actual results could differ materially from a conclusion, forecast, or production in the forward-looking information. Certain material factors or assumptions are applied in drawing a conclusion or making a forecast or 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 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 they are 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 have no standardized meanings. Please refer to the Converge's filing of Canadian Provincial Securities Regulators for an explanation and reconciliation to IFRS measures. I would now like to turn the conference over to Mr. Main. Please go ahead, sir.

Thank you, Michelle. Good morning, and thank you for attending today's third quarter earnings call. We recently celebrated the five-year anniversary of Converge's first acquisition. And it's with great pride that I reflect upon the amazing journey that has led to 35 acquisitions in five years and the successful creation of our leading services-led software-enabled IT and cloud solution provider. I would highlight that the numbers we have just announced show that after nine months in 2022, Converge's revenue, gross profit and adjusted EBITDA are larger than they were for the full year of 2021. a testament to both the success of our acquisition strategy and the successful implementation of our cross-sell plan. In what follows, I will provide a business update on the quarter, beginning with a financial summary and a touch point on our recent acquisitions. I will then discuss our customer segmentation and backlog management, and expand with the development of our managed services and solution offerings. Richard LaCouture will then provide a more detailed walkthrough of the third quarter financial results. To wrap up, I'd like to have an update for you on the majority-owned subsidiary, Portage CyberTech. As we celebrate our five-year anniversary, Converge is honored to have secured a top 20 position in the CRN 2022 Triple Crown Award, which identifies top solution provider rankings on all three CRN lists, including the Solution Provider 500, FastGrowth 150, and Tech Elite 250, all of which Converse has secured notable top rankings on. These awards that recognize our growth are an indication of the size and scale that we have achieved implementing our original three-phase plan. You will recall that Converge had the goal of having a presence in every major US city or NFL cities in order to provide an outstanding customer experience in local markets as mid-market companies move to the cloud. I'm pleased to confirm that we now have presence in every NFL city, and last week were recognized by Cisco for selling at least a million of Cisco products in 31 regions across the U.S. and selling their products in 46 states. This demonstrates why we are such a sought-after partner from hybrid IT vendors by being the trusted advisor to mid-market companies across the U.S. I'm also delighted that we have finished our 2022 M&A activity with the acquisition of Stone Group, which marks our entrance to the UK market and not only strengthens our education footprint, but adds the capabilities of a green alternative through the full recycling of IT hardware, which is a key differentiator in the European marketplace. Converge reported a record Q3 highlighted by 85% growth in our professional services, which is made up of our advisory and implementation services, with managed services growing at 53% and total services growing at 71%, compared to our overall growth rate of 64% year-on-year. Our lower revenue but higher gross profit services resulted in an organic revenue growth in the quarter of 5.9%, but 13% growth of our gross profit. We have continued our industry-leading gross profit growth with 67% gross profit growth to $139.7 million on gross revenues of $731 million, which is three times the industry average. Convergence completed 10 acquisitions in 2022, exceeding our billion-dollar target of acquisition revenue by closing nearly $1.2 billion of LPM gross revenue and $66 million of adjusted EBITDA. with acquisitions both in North America and in Europe. It is important to note the different types of acquisitions that we have done, particularly focused on our advisory and managed services. In the past two years, acquisitions like CBI and cybersecurity, New Comp Analytics, LPA and Carpe Datum and Analytics, and IDX and Cloud have differentiated us to our customers and have resulted in our rapid professional services growth. In the same manner, the platform acquisition of Exactly IT and managed services has given us a platform to onboard managed services portions of companies like TIG, PDS, Viacom, and Infinity Systems. These capabilities have meant that we bring broader capabilities to our mid-market customers, and now over half of our sales reps sell three or more of our practice areas into our customers. The company has also continued its European expansion with the UK addition of Stone Group, serving both the public and private sectors, expanding on the previously announced German-based acquisitions of GFDB, allowing us to become a leading education provider in both Germany and the UK. These acquisitions will contribute to enhancing and growing solution offerings and services for our clients in Europe and make us more meaningful to our vendor partners in education like Apple, Intel, and Microsoft. Last quarter, I presented this slide which shows how Converge's combination of acquisitions and organic growth have resulted in three times the average gross profit growth compared to the rest of the IT services industry. In addition to this gross profit growth, it is important to understand how large our services organization is compared to others in the industry. Although these numbers are based on LTM Q2 numbers, The increased growth of our professional and managed services have resulted in nearly 500 million annualized services business, providing a large talent base of technical resources into our customers at a time when our mid-market customers are struggling to find people to help them implement their digital strategies. As mentioned on previous calls, Converge targets acquisitions which have mid-market customer bases that are moving to cloud-based services models. Analyzing our sales for Q3, 24% of our revenue came from healthcare sector, 23% from the technology sector, 16% from government and education, 11% from finance, and 26% from other sectors. It is also important to understand the strong demand environment Converge is selling into. When conducting quarterly business reviews last week with our regional sales managers, they reported no signs of reduction in IT spending in Q4, and particularly in the US saw strong demand continuing into 2023. We also have seen large successes in Germany, where this past quarter we announced that RedNet had secured a 156 million framework contract, Euro framework contract, for a large public sector in Germany, allowing public and local authorities and universities to procure needed technology to modernize education. While this is a digital infrastructure heavy contract, it was another important milestone driving our joint German and European growth strategy and securing notable wins in the education sector. Q3 saw reduction in our backlog for the first time in the past year, with product backlog decreasing from 507 million at the end of Q2 to 433 million at the end of Q3. Where last Q3, some vendors were providing delivery dates in two to three months while not being able to deliver for four to six months, now we see the opposite, where vendors are conservatively providing longer delivery dates but being able to deliver more quickly, since lessening consumer demand has assisted the supply chain available to businesses. And we are expecting the supply chain to get better in Q4 and normalize by the end of Q2 2023. I will now hand over to Richard to go through a more detailed discussion of our financials.

Thank you, Sean. Good morning, everybody. I hope you're all well, and thank you for joining the Converge Q3 earnings call this morning. Before getting into the financials, I just wanted to say that it's great to be sitting here with Sean and talking to you today as a member of the Converge team. I've been really impressed by the Converge team and the people I've met thus far, and I'm excited and proud to now be part of it. What the team has achieved in a relatively short time is remarkable. I could already see the ingredients for further success in IT service provider industry and that has proven itself to be pretty resilient to the challenges posed first by the pandemic and now the economic turbulence that we're currently experiencing. So getting into the financial highlights for Q3 FY22. 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 what is seasonally acquired to quarter, gross revenue of 730 million Canadian dollars was 55% up on Q3 last year. And on a year-to-date basis, gross revenue of $2.13 billion is now up year-on-year by 60%, with the growth driven both from acquisitions and organically. I'll be speaking about organic growth in more detail later, but as displayed on the bottom left of the slide, organic gross revenue growth in Q3 was just under 6%, while organic gross revenue growth on a Q3 year-to-date basis is 12.5%. Net revenue after the IFRS 15 principal agent net down of $603 million Canadian dollars was up 64% year-on-year in Q3 and is 71% above last year on a year-to-date basis. Growth profits, our most important trading performance metric, of $139.7 million was 67% ahead of last year in the quarter and now stands at $381.9 million on a nine-month year-to-date basis, 66% up on last year. As with revenue, year-over-year gross profit growth was driven both by our M&A activity and also healthy organic growth. Organic GP growth in Q3 was 13%, while organic growth at 15% was reported on a Q3 year-to-date basis. Adjusted EBITDA was $31 million in Q3, up 64% on prior year, and the year-to-date adjusted EBITDA is now just shy of $100 million, representing 68% growth over last year. Despite completing on the significant TIG and GFTB acquisitions in the quarter, completed on 1st August, adjusted EBITDA as a percentage of GP was 22.2%, and that was consistent with last year and in line with expectations, given the operating leverage effect that the Q3 holiday season has on turning Q3 GP into EBITDA. as evidenced in our 2021 reported numbers.