This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk13: Good morning, ladies and gentlemen. Thank you for standing by. My name is Michelle, and I will be your conference operator today. Welcome to the Converge earnings call for the second quarter of 2023. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue at any time, you may press star, then the number one, on your telephone keypad. If you require assistance during the conference call, please press star zero for the operator. I would now like to turn the conference over to Lauren Gorber, Converge Investor Relations. Please go ahead.
spk11: Thank you, Michelle, and good morning. Joining me to discuss Converge's Q2 fiscal 2023 results are Sean Main, Group CEO, Greg Berard, President and Global CEO, and Avjit Kamboj, Chief Financial Officer. This call is being recorded live at 8 a.m. Eastern Time on August 9, 2023. The press release we issued earlier this morning is available for download along with our Q2 MD&A, financial statements, and accompanying notes, all of which have been filed with CDAR. Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied, and Converge disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. The complete safe harbor statement is available on both our MD&A and press release, as well as on Converge.com. We encourage our investors to read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards, or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noticed. I'll turn it over to Sean first for opening remarks, then Abhijit will review our Q2 financial performance, after which Greg will offer some operational color, and then we will open it up for questions. So with that, Sean.
spk17: Thank you, Lauren. And to those of you attending today's second quarter earnings call, for today's agenda, I'd like to provide a quick overview of our business strategy with particular attention paid towards our solution practice areas, such as advanced analytics, which has developed materially from the foundations built from key historical acquisitions. These advanced services have led to a record quarter of over $175 million of gross profit and great year-on-year services growth of 33%, 16% of that being organic. I will also speak to the demand environment across geography that we are seeing from our large mid-market customer base, touching on the fact that although we see supply chain improving and our backlog invoicing primarily in the following quarter, we still entered Q3 with $447 million in backlog, showing persistent demand for our products and services. Our CFO, Abhijit Kamboj, will provide his perspective on the company's financial position through an update on the Q2 Converged Financials, along with providing forward-looking statements to what we expect in Q3. Our Global President and CEO, Greg Berard, will then expand on and support these narratives by providing an overview of the recent success stories and operational achievements, such as the growth of our managed service practice. We set out in the last five and a half years to develop a leading software-enabled IT and cloud solution provider, delivering global solutions around advanced analytics, application modernization, cloud cybersecurity, digital infrastructure, and digital workplace offerings to clients across various industries. As we've highlighted on previous calls, Our specific mid-market customer matrix paired with our internal expertise has resulted in Converge successfully growing into a dominant IT solution provider in a fragmented IT service landscape with few scale providers. This scale, combined with skill sets rarely seen in mid-market focused IT service companies, has resulted in numerous industry accolades we've attained throughout the years, along with vast and diverse vendor partnerships. Despite the well-documented slowdown in hardware device demand globally, Converge increased first-half gross sales by 37% year-on-year, showing the success of our advise, implement, and manage strategy. Macroeconomic pressures are driving organizations to make more strategic technology investments, which is why we've shifted our priority to driving accelerated time to value for our customers through digital investment and transformation. According to Fortune Business Insights research, the top areas of increased investment from 2023 to 2030 continue to be cyber and information security at 13.8%, business intelligence data Linux at 21.1%, and cloud platforms at 20%. These areas reflect the need to protect and leverage data, as well as enable agility and scalability in a dynamic environment. One third of those surveyed are increasing investments in artificial intelligence, AI, and nearly a quarter, 24%, in hyper-automation. These technologies have the potential to drive innovation and efficiencies, but without a partner like Converge, require significant resources and skills to implement and manage. Collectively, These realities are driving demand in areas which our core practices are well equipped to manage, especially surrounding our cyber and cloud departments, which you've heard me discuss over the last several quarters. But with all things AI at the forefront and rapidly growing demand from customers around the world, particularly in the US, I'd like to take a minute to expand on the unique advanced analytics practice that we have created. In 2018, we launched the start of our advanced analytics practice by acquiring Lighthouse and Essex Tech, both of which had AI and advanced practices in place, with deep expertise around IBM's Watson platform and a top five Snowflake technology partnership. By combining the technical teams and integrating the data analytics skills of Lighthouse with the AI and application developments of Essex, this gave Converge the ability to be an end-to-end analytics partner and enabled us to build application platforms for our clients. These platforms led us to expand in a few years' time with the purchase of LPA and Carpe Datum in 2021, adding further foundations and new partnerships to our advanced analytics practice. The LPA team brought more resources around AI, business intelligence, and data warehousing. Carpe Datum brought us comprehensive skills around financial performance management and strengthened our partnership with IBM and the Altares platform. Most recently in 2022, we introduced new analytics practices to our Canadian region for further developing our skills around AI and data with the addition of NuComp Analytics, while simultaneously growing our existing partnership with Tableau and Microsoft. As a result of building and developing our now thriving analytics practice, we are proud to have obtained over 100 experienced data engineers to help our customers use AI and analytics tools in their business. We've structured our current advanced analytics practice into multiple revenue streams within the company, which Greg will go into further detail on shortly. Overall, Converge understands that each customer has unique requirements and are in different stages of their data journey. But what they all have in common is a need to know more about their data. Most mid-market customers understand they aren't leveraging or protecting their data as well as they could be. Converge has now developed these practices to infuse a culture of data protection and analytics, one that has built our best-in-class guardrails, policies, and governance, making it a comprehensive solution provider with vast potential for growing revenues. Historically, we have framed our backlog as an indicator of the state of our supply chain in some areas while highlighting that the supply chain still has not normalized to pre-pandemic levels. In regards to the recent quarter, we invoiced over 85% of the pre-existing Q1 backlog throughout the second quarter. Based on new orders in Q2, our backlog was $447 million heading into Q3. Given that $192 million of orders received in Q2 also invoiced in Q2, we generated $560 million of new product orders throughout the quarter, highlighting the strength of demand from our mid-market customers. We continue to see improvements in the supply chain as demonstrated through our Q2 performance. Overall, product demand continues to be strong, highlighting the strength of demand from our mid-market customers for our analytics, cybersecurity, cloud, managed services, and digital infrastructure, along with our digital workplace offerings. I would now like to pass the call to our CFO, Ajit Kamboj, to discuss how our business strategy has resulted in the financial results reporting through the second quarter and first half of 2023.
spk10: Thank you, Sean. Good morning, everyone, and thank you for joining us this morning. After just about 90 days on the job as CFO, my impression is one of commitment. We're executing a very powerful transformation strategy, and we continue to lean into it 24-7. Throughout the quarter, I met colleagues, partners, and customers, and came away feeling confident in our ability. not only by the progress we continue to make, but more importantly, by the opportunities that our ongoing initiatives still represent once we complete our transformation and fully integrate our businesses and capabilities. The team's execution over the last several years has been rapid and unrelenting. Completing the full integration of One Converge is the clearest and the best path forward achieving sustainable and profitable growth. Now is the time for us to complete the investments required and to demonstrate our experience and ability to execute with the results that provide confidence in our future trajectory. The good news is that the recent success on the sales front combined with our customers and partner relationships indicate that we're on the right track. Let me review the financial results for Q2. In my review of the financial results, I will refer to some items that are non-GAAP measures, including growth sales, organic growth, and adjusted EBITDA. For detailed description and reconciliations of our GAAP to non-GAAP measures, please refer to our MD&A file this morning. In the second quarter, we delivered growth sales of 957.2 million, which grew 31% year-over-year with growth sales from services up 33% year-over-year. And on a year-to-date basis, our growth sales were 1.9 billion, resulting in 37% increase year-over-year. This growth was driven by both the results of the acquisitions we completed last year and the organic growth initiatives. As a reminder, for presentation purposes, Product sales includes hardware and software sales, and services includes managed services, public cloud solutions, maintenance support, and professional services. Total organic growth for the quarter was 1.8% and 4.2% on a year-to-date basis. Splitting this organic growth between product and services, product organic growth was negative 4.4% for the quarter, and services organic growth was positive 14.6% for the quarter. As expected, our product growth sales were impacted by decline in hardware sales to the public sector, government entities in Canada and Germany due to decline in COVID-related demand and timing of hardware refresh cycle. On the services side, we continue to deliver solid organic growth. Services organic growth, as I mentioned, for the quarter was 14.6% compared to last year, and that was all driven by our cross-selling strategy and our services transformation activities. Gap revenue for the quarter was $665.8 million, an increase of $150.6 million, or 29% year-over-year. Again, the year-over-year increase was driven by both acquisitions we completed last year and the organic growth. And as a reminder, revenue is not the most comparable measure across periods in our industry due to gross net accounting adjustments. At the end of Q2, managed services ARR was at record high of 152.5 million, representing 32% increase year-over-year or 7.7% increase sequentially from Q1 this year, driven by our strong IP4G expansion strategy. Looking at our gross profit in the quarter, we had record gross profit of $175.7 million during the quarter, representing an increase of $42.5 million or 32% year-over-year. Gross profit margin for the quarter was 26.3% compared to 25.8% in Q2 last year. The increase represents the decline in our hardware sales, which were more than offset by higher software and services sales during the quarter, as software has a higher gross net adjustment. Gross profit as a percentage of gross sales was 18.35% for the quarter. We expect gross profit as a percentage of gross sales to increase as we execute on our cross-selling strategy with higher margin services in the future. I do want to highlight that a number of acquisitions we completed in the prior year, particularly our TIG acquisition in the U.S. and the European acquisitions, are high-volume, low-margin businesses with sales primarily to education sector, public sector, and government entities. Our strategy of services expansion and expansion into private commercial sector for these acquisitions will yield margin expansion in the future, but this will take time to execute. Adjusted EBITDA for the quarter was $41.5 million, an increase of 6% from Q2 last year. Excluding portage, adjusted EBITDA from converged business was $42.7 million, adjusted EBITDA as a percentage of gross profit was 23.6% compared to 29.6% in Q2 last year and 25.9% for full fiscal year 2022. The decrease in adjusted EBITDA as a percentage of gross profit is driven by cost growth in our business despite cost takeouts this year. The overall cost growth is driven by a few key factors. First, increased headcount as we continue to invest in organic growth. Secondly, cost growth driven by increased commissions in proportion to increase in gross profit and higher salaries and wages from merit increases in Q2 tied to general inflationary environment. And lastly, elevated travel and event activities that we were unable to perform during the pandemic. Adjusted EBITDA as a percentage of gross profit decline was also due to low margin, high volume acquisitions completed in the prior year. These acquisitions have historically operated at very low margins. We are in the process of implementing a number of efficiency efforts and cost control measures, including review of our processes to eliminate inefficiencies, upgrading our systems to automating processes, reducing discretionary travel and eliminating any redundant resources. We will start seeing the impact of these cost controls in Q4 of this year and expect to yield higher margins in future quarters thereafter as we grow organically. Let me now comment on some of the key adjustments from net loss before taxes to adjusted EBITDA. Most of these adjustments are non-cash adjustments with the exception of cash interest and certain special charges. Depreciation and amortization expense for the quarter was $26.9 million, an increase of $9.7 million year over year, driven primarily by intangible assets we recognized as part of our acquisition accounting from the acquisitions we completed. Finance expense for the quarter was $10.7 million, an increase of $7.6 million compared to last year due to an increase in net debt of approximately $344 million from Q2 last year and the increase in interest rates over this period. Special charges for the quarter were $13.3 million, an increase of $7.7 million compared to Q2 last year. Included in special charges this quarter is change in fair value of contingent consideration and related fees from acquisitions completed in the prior period of approximately $10 million. There's also severance costs of $2.1 million from reduction in headcount during the quarter and approximately $800,000 related to contingent consideration tied to employment services from acquisitions. Turning now to balance sheet and cash flows, the balance sheet remains strong with approximately $250 million of liquidity or available capital between our cash on hand and available capacity under our credit facility. That debt at the end of the quarter was $352 million and our leverage ratio in accordance with our credit agreement was 2.8 times as of June 30th consistent with that end of Q1. In terms of cash flows, we used $9.6 million in Q2 compared with generating cash flow operations of $26.6 million in Q2 last year. On a year-to-date basis, we generated $19.1 million of cash from operating activities compared to negative $3.8 million in the prior year. The negative cash generation this quarter was driven by use of approximately $40 million in working capital including income taxes. This use of cash in working capital is primarily due to slow payment cycle from customers, completion of certain service projects who defer to revenue from advanced billings in prior years, and purchases of inventories. In Q2, we noticed a number of our long-standing creditworthy clients simply slowing payment cycles, leading to negative cash from working capital. We are moving swiftly to implement improved AR and AP processes across the company with disciplined measures being put in place to better define terms and parameters for our contracts and DSO hurdles for our operations. On the inventory front, the use of cash is primarily driven by our European operations due to seasonality as public sector demand increases significantly in Q3. This inventory allows us to meet that demand. With the changes we're implementing, we remain confident in our ability to generate meaningful cash from operating activities for the full year 2023. Given the size of our gross sales now, we do expect our cash from operating activities to be lumpy from quarter to quarter as simply a few-day movement in one or two large invoice payments could impact our cash from working capital positively or negatively. We internally analyze our cash from operating activities on a six-month or 12-month basis. During the quarter, we also spent $2.1 million in CapEx. We do expect our CapEx for the next quarter in Q3 to be significantly higher as we're investing in building another data center in Europe. we expect our CapEx to be around $7 to $9 million in Q3. We also spent $14.2 million during the quarter in share buybacks under our NCIB and repurchased approximately 4.3 million shares. From a future capital allocation perspective, we will continue to allocate capital with our previously communicated strategy of investment in organic growth as our number one priority, followed by debt reduction and share buybacks And lastly, acquisitions depending on our share price. With that, I am pleased to announce that we will be initiating a new NCIB to purchase up to 19.4 million shares as buying back our shares continues to be the best use of our capital. In summary, together with the leadership team, we are focused on strengthening the company's reputation and foundation, driving efficiency, and fostering a culture of innovation and transparency. both in and out of the company. In doing so, we want to meet and exceed all stakeholder expectations, including customers, investors, and employees, consistently and predictably. We have the right leaders in place, and we will continue to invest in attracting more talent. We have a lot of work to do, and together I am confident that with their expertise and dedication, we will achieve remarkable results together. Now, turning to outlook for the next quarter, Q3 2023. Q3 is generally the lowest quarter seasonally, which is generally at least 10% lower than Q2 due to summer months. However, given the strong pipeline and the backlog and our ongoing sales momentum, we expect gross sales and gross profit to be only 5% to 10% lower than Q2. and adjusted EBITDA margin as a percentage of GP to be largely consistent with Q2. I will now pass it over to Greg Berard to discuss our operations and capabilities.
spk12: Thank you, Abhijit, and good morning, everyone. The key to our recent financial successes originates largely from our cross-sell strategy of driving more solutions, building out the structure of our practices, and our ability to enable our sales organization on our offerings and how they can drive more value and expertise with our clients. Over the past five years, Converge has successfully grown its sales organization to over 500 sellers, helping to build a strong foundation to execute on our overall sales strategy to drive more value into all of our clients. In order to drive more value, the sales teams are supported by over 35 solution specialists, and over 60 presale solution architects in North America supporting all of our high value practice areas. As we continue to focus and transform our business to driving more professional and managed services, our marketing teams hosted 107 client facing events in the first half with over 5,000 clients attending and we launched over 175 campaigns with our OEMs across analytics, cloud, cyber, and managed services, generating the right messaging and helping us drive our largest gross profit quarter ever, delivering $175 million in Q2 and continuing to build pipeline for the second half in 2024 across our high-value offerings. These efforts have helped our reps drive more solutions into their accounts, with 90% of our North American sellers now selling more than one practice area and over 60% of them selling more than four of our practice areas, which is showcased in Q2 by our growth rate of over 33% around our services business. Additionally, we've secured 112 net new logos in Q2, continuing our impressive average of over 100 new clients each quarter To capitalize on these opportunities, we have introduced new internal processes by engaging our business development organization to focus on expanding our footprint in every new account. Their focus is on nurturing the new logos and guiding them to attend the events that we run and exposing them to the full spectrum of the Converge portfolio. As many of you know, we have organized our practice areas to focus on driving solutions around our advisory, implementation, and managed services, which is consistent across all our practices within analytics, application modernization, cloud, cybersecurity, digital infrastructure, and digital workplace, so that all of our clients have consistent customer experiences, which we pride ourselves on. This is also reflected in our above average NPS scores, which currently average over 50 across both our managed services and professional services teams, which is a testament to our strong leadership and delivery expertise. It is important to understand the depth and breadth of all of these practice areas and the deep expertise we bring to our clients. We constantly evaluate the IT landscape to ensure we have the right skills, the right partnerships in place, and we can build the right solutions to meet our clients' growing needs. We continue to invest across our high-value offerings, our practices, our advisory implementation and managed solutions to support the business objectives of our clients and the market. Our team continues to ensure we are collaborating across the practice areas and driving the value end-to-end with our clients, which makes us very unique in the marketplace as we can build solutions by leveraging the talent across all of these teams and we can work with our vendors to build solutions like IP4G. Our ability to talk about our deep data center skills around compute, networking, and storage combined with our software and services skills around analytics, AI, cloud, and cybersecurity is what makes us very unique as a solution provider today. These practices combined now have over 1,500 technical resources globally across our presales and delivery teams. This deep technical talent we have in the organization will continue to differentiate Converge as we drive more value with each of our clients. I would now like to focus on one of these practice areas to give everyone more context on how strong these teams really are and discuss some of the offerings we've been driving with our clients. As Sean discussed earlier, we created our analytics practice in 2018. And many of those key acquisitions mentioned at the beginning of the call brought the skills to support us embedding AI into our solutions for our clients. The Converge Advanced Analytics practice has over 30 years of experience helping our clients achieve business outcomes through emerging technology and data. We have over 100 dedicated experts that work with clients to form strategies, design, develop, deploy, and modernize critical workloads and applications. We focus on four specific areas within our advanced analytics practice. Artificial intelligence and application development, where we really focus on custom application development, virtual agents, data science, gen AI, and large language models. In our business analytics and data visualization segment, the team here focuses on helping our clients around self-service, building custom dashboards, visualization tools, and enterprise reporting. The data platforming and integration team focuses on data pipeline architecture, data integration and governance, data architecture, and data warehousing solutions. And last but not least, our financial and operational performance management team really focuses on helping our clients with forecasting, budgeting, HR planning, and financial reporting. Combining all of these teams truly differentiates us and makes us a world-class advanced analytics organization. At this point, I want to talk a little bit more about AI and what generative AI means to our business and our future. Gen AI is a multi-billion dollar market opportunity that will drive the impact of AI across the economy over the next few years. Converge has deep expertise and experience implementing AI solutions with customers cross-industry. Our go-to-market strategy for the next wave of Gen AI is to deliver secure, private solutions, as well as leveraging the public offerings of our strategic partners, which include IBM, with their launch of the Watson X platform, AWS, Google, and Microsoft. Our technical teams have actually been working with AI since Watson beat Ken Jennings on Jeopardy back in 2011. The volume of sales leads and opportunities with existing and new clients has increased dramatically since we launched our GenAI marketing campaign in June. It also drove one of our largest webinars to date around this topic, Chat GPT and Beyond, Unlocking the Power of Large Language Models. where we had over 250 clients attend. AI workloads require high performance clusters to meet the intent CPU or GPU requirements for our clients. Convergys solution teams have deployed AI high performance clusters in automotive, financial, and healthcare clients in 2023. The combination of our deep infrastructure and networking skills and the partnerships we have in place combined with our AI data architects is what makes Converge unique. One specific use case we recently launched is around leveraging GPU technology for analytics, which can bring substantial benefits to our financial clients. The parallel processing power of GPUs allows for lightning-fast data crunching and complex calculations, significantly reducing the time required for things like risk assessments, portfolio optimization, and market analysis. We have helped a few of our financial clients handle large amounts of real-time data more efficiently, enabling quicker decision making, and capturing profitable opportunities faster than our competitors. Overall, adopting solutions like this will allow our clients to gain a competitive edge, enhance their investment strategies, and achieve superior returns for their clients. Also, as we continue to build out AI solutions with our clients, our partnership with NVIDIA has grown and they are now our fourth largest vendor with over $100 million in gross sales. The feedback from clients continues to be very enthusiastic and we see GenAI continuing to be a major growth area for Converge over the next few years. Converge has a set of offerings to support organizations on generating their AI plan from ideation to creation to production. Most organizations know they need to bring Gen AI into their company, but are not sure where to start. Converge's curated set of jump starts and workshops are purpose-built to find use cases across the business and develop recommendations on how to bring them to life. We wrap all of this up into a workshop centered on design thinking. We pick something to do together, we educate sponsors and executives, we flush out their concerns and risks, and we build a real solution that drives value with our clients. We are excited about all the future opportunities these solutions bring. Our clients continue to choose Converge for our unique ability to provide the full end to end spectrum of cloud, hardware, and software solutions while at the same time leveraging the deep technical expertise required for delivering professional and managed services across our solution areas. We have built a unique set of skills supported by foundational partnerships across analytics, AI, cloud, and cybersecurity, and we will continue to work closely with all of our clients to deliver high-value solutions for their business requirements as we continue to execute on our overall converge strategy. At this point, I will pass the call back to Sean Main to provide brief commentary on portage and closing remarks.
spk17: Thank you, Greg. As highlighted on our last earnings call, we began to break out the Portage financials to offer a better indication to investors of its scale, its rapid growth trajectory, and ultimately its value as it distinguished itself as a digital services platform to Canadian municipal and provincial government organizations. Converge will continue to be an excellent channel partner for a growing product company like Portage and is collaborative in sharing the nuances of its sales strategy blueprint in the meantime. Portage CyberTech has two main business units, its citizen portal and its signature business. Portage has been enjoying great success in Canada with responsible acceleration of digital services and government through its online services platform. With its upcoming 3.0 release, which significantly reduces onboarding costs and reducing onboarding timeframes to as quickly as a quarter as opposed to six to nine months, Vertage will be expanding its sales efforts to the Northeast and North Central US regions, partnering with Converge as Converge partners with its other software vendors. Mortage's signature business continues to attract new customers and its transactional revenue, although somewhat impacted by the downturn in the housing market due to consigno being used to confirm all real estate transactions in Quebec, this has been offset through new customers. In addition to the consistent financial growth we've reported, which is a direct result of implementation and execution of our successful business and sales strategy, we've made meaningful strides related to historical and future investments into our business as discussed on today's call. To further demonstrate our deep expertise, we will be participating in a Capability Days for Investors hosted by SCOTIA on September 13th in Toronto. We will provide more details on this in the coming weeks. Also, today at 1 p.m., you can see the live streaming of the three of us participating in a fireside chat from the CGF Growth Conference here in Boston. And now I'd like to open the floor up to questions. Operator?
spk13: Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star followed by the number two. And if you are using a speakerphone, please lift your handset before pressing any keys. One moment please for your first question. Your first question will come from Christian Skro at 8 Capital. Please go ahead.
spk03: Hi, good morning. My first question may be for Avjit. I just wanted to dig a little bit further into working capital and cash flow generation. You called out some puts and takes, including receivables in Europe. Is your commentary or would your view be that this could normalize in the next quarter through the balance of the year? Do you have some visibility into going from a use of cash to a source of cash, just with some of the things you're seeing in Q3 here.
spk10: Good morning, Christian. As I mentioned on the call, we really look at our cash from operating activities on a minimum of six-month basis or 12-month basis. With all the initiatives we're implementing currently, I am very confident that we will be able to generate a positive cash flow over the next this fiscal year and over the next coming year. Given the large scale of our business now, where gross sales is a very, very high number, very close to a billion dollars, a simple one or two-day movement in large invoices could swing the working capital from one quarter to the next positively or negatively. So I would suggest let's look at a cash flow over a period of time, not on a quarter-to-quarter basis, but I'm very confident we will be able to generate positive cash flows.
spk03: Perfect. One more quick one from myself on the M&A topic. It doesn't seem like the main use of capital at this time, but it's on the list. So my question would be, are you a little bit more open minded to M&A in the back half of the year here and then on what you would buy, maybe an inexpensive hardware centric player or would you go for a capability if you had to buy something right now?
spk17: So right now, there's nothing that makes sense buying besides our own stock because of where our stock price is. So we have a wonderful pipeline of some fantastic acquisitions that we can look to do in the future. I continue to talk to them. But with our stock price being where it is, nothing's a creative. So we will be buying our own stock back instead.
spk03: That's all perfect.
spk06: Thanks, Sean. Thanks for taking my questions this morning.
spk13: Your next question will come from Rob Goff at Echelon. Please go ahead.
spk02: Good morning and congratulations on the quarter. My question would be on the services side where I believe you said that the revenue growth was 14.6%. Could you perhaps give us your perspective on the sustainability there of double-digit services growth?
spk12: Yeah, Rob, it's Greg. Yeah, so 14% was the organic growth rate, 33% overall on the services side. And as we continue to transform all of the organizations we've acquired, we believe that will continue to be a high area of growth for us. We're seeing high demand across all our practice areas and are confident we can continue to execute on that transformation.
spk02: Thank you. And with respect to Portage, could you perhaps give us a fuller picture in terms of are you going to lean into it to grow it more quickly? Would you might consider acquisitions within Portage? and if you could address your ownership stake within Portage and views there.
spk17: Yeah, thanks. So Portage, this 3.0 release is a game changer for Portage. It significantly reduces the timeframe for implementation, and now they're ready for prime time, which is the US. That opens itself up to that kind of growth, well, opens up things. It does not need to do any more acquisitions. Portage has done its acquisitions. It's got the full product set. It's got a signature business, and it's got its citizen portal. And the system portal business in particular with the 3.0 release, I think that just bodes very well for significant growth. So it's a very attractive company in a very significant space. As we've stated, we have a significant stake in the portage business that we'll look to monetize in the future. So, yeah, the big news is the launch of the 3.0 is significant, and they'll be moving into the U.S., partnering with Converge.
spk06: Thank you. Thank you.
spk13: Your next question will come from Jerome DuBray at Desjardins. Please go ahead.
spk15: Hey, good morning. Thanks for taking my questions. First one is on capital allocation. Nice to see the renewal of the share purchase program and doubling the potential buybacks. The question is on the utilization of the program here. We have leverage that's out there. We have working cap contributions that aren't as certain as it might have been in the past. What's your plan for the utilization of NCIB in coming months?
spk10: It's Afjit here. We will continue to utilize NCIB depending on where the share price is. We firmly believe we are significantly undervalued with the current share price where we're at. Depending on where the share price is, we will again continue utilizing it. From a net leverage perspective, as I mentioned, we do expect to generate significant positive cash flows for the full fiscal year. And our strategy, again, depending on where the share price is, will continue to be to reduce down debt or repurchase our stock, including making organic investments into our business.
spk15: Yeah, makes sense. Thanks. And then second one would be on the macro. Any shift in trends you want to call out, maybe on the timing of delayed decision making or something like that? Have we seen a shift, maybe especially in terms of the mid market, which you're more exposed to?
spk17: So very much, it's a great question, is very much geographic dependent. So in Europe, we're very much education focused, so I really can't comment on the commercial sector there. In the U.S., which is by far our largest market, about 70% of our sales there, we've continued to see strong growth, particularly in the services space in most of our regions. We did the QBRs last week. The one area that was outside of that is the Texas marketplace is very much influenced by oil prices. So when oil is under 75 bucks a barrel, IP budgets get hit. So that was the one area of weakness we saw in the U.S. We've talked about device businesses being down globally, but where we saw extreme growth was in high performance. performance clusters around AI workloads. As Greg's mentioned, we've sold over 100 million of NVIDIA so far this year, and that's all around these high performance GPU or graphical processing units that are used a lot in video cards. When you're doing a lot of these real-time analytics, whether it be our finance clients or in automotive or healthcare, you need that high processing power to drive these AI workloads. These were non-budgeted by a lot of the customers, and these are all about time to market, and the fact that we have these range of skill sets not just on the hardware side, but on the analytics side and even algorithms writing all in one shop, we can get you time to market quicker than any other partner can. And so that's really the strength in Q2 around those analytics workloads. That is significant. We've already seen it in Q3 as well with some of our finance customers, that that is important. That's a real trend, and the speed to market is extremely important for our customers. So I think you're going to see that continue around these AI workflows.
spk15: Obviously, mentioning NVIDIA catches some attention. What would you say are the margins on these? Are these qualified as products? And what was the $100 million last year?
spk17: So the $100 million, they went from our 20th vendor to our fourth largest vendor. And that's $100 million so far this year. So it is a significant change. And it's not just NVIDIA. We have other vendors as well that we are... Because right now, if you try to order NVIDIA cards, you're not getting delivery until next year. We have already in the pipeline a lot that are going to be delivered in Q3 and Q4. But for new orders, it's not. And so we have other vendors as well that we're working on these AI workloads. And being able to bring these and get our customers the time to market is important. So it is significant. The margins, these are not price-sensitive.
spk10: On the margin side, we don't disclose margins by vendor or by product.
spk17: Yeah, but say it's not, mid-market is not as price-sensitive as large enterprise. And for these workloads, they're not price-sensitive, it's time-sensitive. So again, unbudgeted and they just need to launch things.
spk16: Great, thank you. Thanks.
spk13: Your next question will come from David Kwan at TD Securities. Please go ahead.
spk04: Good morning, guys. Hey, David. So this may be a question for you, Abhijit, but I guess based on the guidance that you gave for Q3, it seems like it's probably going to be sometime next year at the earliest before your EBITDA margins, at least on LTM basis, kind of return to the levels we saw X-ing last year, roughly about 26%. Does that sound about right?
spk10: That's correct. And that's driven by a few factors as I outlined earlier as well. Biggest one being the acquisitions we completed last year, specifically TIG, which is a very, very large acquisition, along with the European acquisitions. They're very low margin, high volume businesses. So turning those around into high profitability, high margin businesses will take some time.
spk04: Okay, that's helpful. To what extent are these investments for organic growth that seem to have been kind of ramping up at least over the last quarter or two, do you expect to kind of maintain that trajectory? Has a lot of those investments been made or is there still kind of a potential margin headwind from that perspective?
spk10: I would say the investments have largely been made within our North America business, but these investments are still ongoing for our European operations.
spk04: Okay. And there's one more question also on the margin front. So it sounds like you expect that the margins kind of bottoming here, kind of mid-2023 and start to pick up in Q4 and into next year. How should we look at margin expansion going forward?
spk10: I think the margin expansion, as we've been stating over the last quarter as well, is really trying to get to that 10% EBITDA as a percentage of gross sales over the next three to four years. And as we continue to invest in our services business, you will see that margin expansion over the years. It will happen within one or two days. It will take time.
spk04: How about, I guess, relative to gross profit, though? Like, can we see, you know, like 100 basis point increase or, you know, next year?
spk10: Yeah. I'm not going to comment on next year, but over time, yes, you should be able to see actually 100 basis points plus. Our goal is to get closer to that 30%.
spk04: And is that, I guess, dependent on M&A activity as well, I guess?
spk10: No, that's excluding M&A. So if you include M&A, and again, if we start buying businesses that are VAR-type businesses that tend to be low-margin businesses, that will hinder that percentage growth. If we don't do any acquisitions over the next three, four years, we should be able to get to that 30% margin. But if we do acquisitions, depending on which area we do acquisitions in, that may bring that back down, and then we invest in the business to increase that again.
spk16: Right. That makes sense. Thanks, guys.
spk13: Your next question will come from Gavin Fairweather at Cormark.
spk06: Please go ahead. We can hear you, Gavin.
spk13: Apologies, gentlemen. Your next question comes from Stephanie Price at CIBC. Please go ahead. Morning.
spk08: Hi, Stephanie. Maybe this is one for you. I'm just trying to understand the margin commentary just a little bit more. So it sounds like the initial integration of all the M&A has now been basically completed. And now the shift is maybe moving from low margin work to higher margin work. Like, is that how we should think about the margins and what's going on? And has the integration of the M&A now been completed here in terms of the back office? And now we're just moving, you know, the workload to maybe higher margin work. Is that how to think about it?
spk10: Let me comment on the integration side, Stephanie. We have largely completed our sales front office integration in North America. The teams have done a tremendous job, which is in this business, I would say, is probably the hardest integration to do, to bring individuals together from many, many different businesses and be able to cross off. So we're seeing that engine functioning. What we have yet to complete is our back office integration completely and be able to realize efficiencies from our back office integration. And that's what we're currently working on, looking at all our systems, our processes, our policies, and streamlining those systems, processes, and policies to make sure we can integrate as one converge. And that's where combined with our cross-selling strategies that will continue to work within North America with our back office efficiencies will provide those margin expansions. And then with Europe, we haven't really touched Europe in terms of from an integration perspective, both front office and back office. European businesses still largely operate on a standalone basis without any integration.
spk08: Okay. Okay. That's good color. And then as you think about organic growth in the products business, can you talk a little bit about what you're hearing from customers? It sounds like the supply chain is generally improving. Are you getting better visibility from customers in terms of purchasing plants and new products? Or is that visibility kind of the same here? How should we think about that product side of the business at this point?
spk17: So on the hardware side, as well documented, the device side of the business is very depressed due to overbuying during the pandemic. And the refresh cycles in commercial space is about a three-year refresh cycle and government's about five here. So you probably will see depressed levels on the device side of the business. Where you're seeing the real strength is in the data center side, especially around the high compute clusters. Again, there is tremendous demand, and this is causing more backlog issues. So you still have backlog issues somewhat in the networking side, so the Cisco's, the Juniper's, the Palo Alto's. You still have issues there, but like I say, we've got real issues on NVIDIA cards. Now you're waiting until next year. So the high compute clusters that we're delivering to our customers, especially around AI workloads, there is incredible demand for those.
spk06: Okay. Thank you very much.
spk13: Your next question will come from Divya Goyal at Scotiabank. Please go ahead.
spk14: Good morning everyone. I'll just ask one specific question here on this NVIDIA discussion that we've been having on this call. So it's one thing and it's incredible to see how you're entrenched in the sale of hardware but to what extent could you start to convert that into the services side of business as well and or is it there already and if not can we continue to see some material uptake in the revenue as AI picks up and margins as well.
spk17: Yeah, absolutely. It is the services stuff. So the figure that we can give you on the hardware stuff is just a symptom of the services growth around this. When we sell an analytics solution, you're selling a hardware piece. You've got networking pieces, but it's the analytics software. It's the software development group and our analytics group. So it's that the hardware one is just that gives you a real in this market. No one believes anything you say. So that's a metric that you can use to show why our services growth is so robust. And that, yes, you're actually seeing that in the services side. And that's why people are coming to us for these Gen AI solutions and the analytics business is because we have the full end-to-end. If you're just providing hardware, they don't want to talk to you. But we have a very uncommon set of skill sets based on the five analytics acquisitions that we talked about on this call that allow us to have conversation. And it's all about time to market. And it's not just the analytics group. It's also the app dev group. And so this started with our Lighthouse and Essex group, but LPA, Carpe Datum, New Comp Analytics, we have some really uncommon skill sets that are really helping to drive these Gen AI workloads to our customers.
spk14: So on a go-forward basis, given you have such a unique customer base in the mid-market space, do you expect that hardware sales specifically related to Gen AI capabilities to pick up annual service capabilities to pick up as well?
spk17: Absolutely. And we're seeing that not just with those other vendors as well, that this is a rush in the market. There's incredible demand. I cannot understate the demand around these workloads.
spk14: That's a good comment.
spk13: Thank you. Your next question will come from Daniel Rosenberg at Paradigm. Please go ahead.
spk09: Hi, good morning. Thanks for taking my question. I had a follow-up on the cash flow from operations. You mentioned expecting a meaningful pickup. I just wondered if you could directionally square that away compared to last year or the previous year. Just how meaningful should we be thinking about this? Just any color would be helpful. Thanks.
spk10: Yes, so we're still working through on the working capital projections. We'll provide that in the future. But if I look at cash from our operations excluding working capital, we've been consistent around the 85% to 90% cash conversion from adjusted EBITDA to cash from operating activities excluding working capital. As we implement some of these new changes that we are putting in from our cash collections and our AP processes, we do expect a meaningful turnaround in cash from working capital this year. So overall, we still remain very confident that we will have a very positive cash flow this year. But because of the nature of all the acquisitions that have happened last year, comparing it to prior year with the acquisitions becomes tricky.
spk09: Yeah, understood. That's the challenge. Okay, so then moving on to you mentioned some of the wage impacts that kind of are affecting the margin profile. I was wondering how you think about wage inflation, what you're seeing on the front lines as you're hiring some of these highly trained and technical people as you think about that going forward.
spk10: We've seen a stabilization in the market over the last few months now. It's not the same rush that we had in the beginning of the year or late last year. We are seeing more and more resources becoming available. The same wage pressure that was on previously in hiring these technical resources is not there. So we do expect our inflation from wage increases to stabilize over the coming quarters.
spk09: Great. Thanks for taking my questions.
spk06: Thank you.
spk13: Your next question will come from John Hsiao at National Bank. Please go ahead.
spk05: Good morning, guys. Thanks for taking my question. So my first question is I just wanted to drill a little into your service revenue growth this quarter, which is obviously very strong. So which part of your service business is actually driving the strong traction this quarter? And do you see certain areas with strong demand or is kind of like strong demand across the board?
spk12: We see strong demand across the board, right? We're really seeing our entire AIM strategy as we talk about advisory implementation and manage. All of the practice areas are seeing demand. We're seeing pipeline in all those areas. So there's really no one standout. The combination of professional and managed services across all those practice areas is growing. You know, we believe we have the right practice areas and the right focus areas to continue that growth.
spk05: Okay, thanks. The company also reported 112 net new logos this quarter in earnings release. So I'm just curious, what's your definition of new logo? Is there a spending limit for those customers to be recognized in new logo, or is there nothing?
spk12: Yeah, so it's just a net new logo that's buying from Converge for the first time, so we don't set any clip levels. That 112 number is specific to North America, but we don't have any clip levels. It just means it's a brand new client to the Converge organization.
spk10: And just maybe just to add to that, that's generally how all our relationships start.
spk01: They start off small with something, and then they expand into larger and larger deals.
spk16: Okay, thank you.
spk05: My last question is regarding your AI strategy, any capital investment you're going to make to harvest those opportunities?
spk17: So one of the things, so we already made the large investments in our analytic practice. And so what we're looking for is, is there IP that we can be using to further speed up the implementation for our customers and even impacting our organic growth strategy in Europe? So you'll hear more about that in our capabilities day on September 13th that we mentioned that we'll be doing. But yeah, it's a key area of focus and growth, but we've already made a lot of the investments.
spk05: Thank you. I'll pop the line.
spk16: Thanks, John.
spk11: Michelle, we'll have time for one last question.
spk13: Thank you, sir. Your final question will come from Stephen Lee at Raymond James. Please go ahead.
spk00: Hey, Sean, Abhijit. I got a couple of quick questions. I also have one on the cash flow turnaround. For Q3, do we rebound to what we saw in Q1 or this would be too early?
spk10: It'd be too early to tell. Our goal is that given where we're sitting in mid-August, we're hoping to have that turnaround happen within Q3, but if not in Q3, it will definitely happen in Q4.
spk00: Okay, great. And then I want to ask, so we are at the halfway mark for the year. Are you comfortable with EBITDA consensus for the year at 175? And the reason I ask is because it would imply a steep ramp from Q3 to Q4, given where Q3 is being set.
spk10: Thanks, Stephen. We unfortunately do not provide guidance for the full year. We only provide guidance for the next quarter, which we've provided is that our gross profit and gross sales will be approximately 5% to 10% lower than our Q2.
spk00: Okay, that's fair. And those sequential guides have been very helpful. So if I can ask you, historically, what has been that sequential ramp between Q3 and Q4?
spk17: Q4 is by far our strongest quarter, right? So what drives IT budgets is customer budgets and vendor budgets. So Q4 is by far our strongest quarter, and you see a lot of the software renewables there. So historically, Q4 has always been our big blowout quarter.
spk16: All right. Thanks, guys.
spk13: At this time, I will turn the conference back to your hosts for any closing remarks.
spk17: I just want to say thank you for everyone for participating on today's call. We have a live streaming event at the Canaccord Conference today at 1, and we look forward to talking to investors about our capabilities on September 13. Thank you very much. Thank you. Thank you.
spk13: Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your
Disclaimer