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spk12: Thank you for standing by. This is the conference operator. Welcome to the Converge earnings call for the third quarter of 2023. As a reminder, all participants are in listen only mode and the conference is being recorded. After the call, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Lorne Gorber, Converge Investor Relations. Please go ahead.
spk00: Thank you, Jerry, and good morning, everyone. Joining me to discuss Converge's Q3 fiscal 2023 results are Sean Main, Group CEO, Greg Berard, Global CEO and President, and Abhijit Kamboj, Chief Financial Officer. This call is being recorded live at 8 a.m. Eastern Time on November 14, 2023. The press release we issued earlier this morning is available for download along with our Q3 MD&A, financial statements, and accompanying notes, all of which have been filed and available for view on 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 both in 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 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 noted. I'll turn it over to Sean to begin with a high-level overview of the past quarter. Then Greg will expand with some operations highlights, including client examples. And Abhijit will dive into our Q3 financial performance. before we conclude with the Q&A. So with that, Sean.
spk06: Thank you, Lauren. And welcome to those of you attending today's third quarter call. I would like to begin by providing financial highlights from our record results, which for the first time in our history, exceeded a billion dollars in gross sales, supported by significant organic growth, overall demonstrating ongoing demand for Converge's comprehensive set of solutions. Highlights discussed throughout today's call are undeniably linked to the continued demand for Converge's unique set of solutions, including high-performance computing delivered through our end-to-end advise, implement, and manage, or AIM strategy, allowing Converge to outperform its peers while acting as a trusted advisor in delivering unified and differentiated solutions to its clients. Let's begin with the main financial highlights from the past record quarter where gross sales grew 42% year-over-year to $1.04 billion. Notably, gross profit performance increased from $139.7 million to $174.1 million, or 24.7% year-over-year, while we reported significant third-quarter organic growth of 23.6%. A testament to the cash generation characteristics of the IT services space, Converge has continued to strengthen its balance sheet, specifically by reducing the company's net debt by $44.3 million from the previous quarter. In regards to backlog management, for which Greg will provide further details, our product backlog increased by $30 million from the end of the second quarter, demonstrating resiliency in demand. Expanding on financial highlights from a year-to-date perspective, the company's adjusted EBITDA grew 24% year-over-year to $124 million and $167 million in the past year. As mentioned, Converge significantly reduced net debt to a balance of $370.5 million, bringing our net debt to LTM adjusted EBITDA ratio to 1.84, which is under our target two times ratio. Cash generated from operating activities significantly increased by 80.9 million during the third quarter, bringing the company to 115.1 million of cash generated year-to-date. In addition to using cash to reduce debt, the company also this year made payments for acquisition-related consideration of 95.6 million, comprised of 20.8 million of contingent payments, 43.8 million for deferred consideration, and $31 million of non-controlling interest payments for its European acquisitions. Despite economic headwinds, it is ever more evident that the extent to which organizations are designating significant budgets to pressing IT needs in cybersecurity, advanced analytics, and overall digital transformation, all of which Converge actively pursues to become a top North American provider. While many industry providers have experienced declines in revenue, our organic growth profile directly demonstrates how the diversification of our offerings to these key areas has made Converge resilient to these trends. This was a key reason why we launched the Coffee and Converge series, which spotlights the depth of Converge's vast and unique offerings, which our Global Chief Executive Officer and President, Greg Berard, will expand upon.
spk15: Thank you, Sean. Good morning, everyone. I'm excited to expand on the strategic investments we continue to make in the business, driving the right solutions with our clients and the resulting performance benefits this helped support in Q3. As technology spending priorities shift based on the economy or other factors, Converge is there for our clients with our end-to-end portfolio and our trusted advisor status. No matter the macro, organizations are and will continue to designate more significant budgets to key IT solutions such as those outlined on the following slide. Converge actively engages with our clients, providing thought leadership and leveraging a pool of deep technical expertise across our organization. This was evident in a recent workshop we did for one of our cybersecurity clients. They were interested in understanding how GenAI could both impact and benefit their business. We facilitated a generative AI design thinking workshop with over 30 employees and identified 124 different use cases across their business. It is workshops like this that will allow Converge to continue to help our clients understand where technology can impact their business. I'll come back to this point with some concrete examples in a moment. As Sean mentioned, our results highlight the continued success of our practice strategy and the advantages of our end-to-end capabilities. Across the practice areas, we continue transforming the business and continue to focus on executing our AIM strategy. The ability for us to advise, implement, and manage solutions for our clients continues to be a unique differentiator in the market and a significant driver of success for us in 2023. While others in the market continue to struggle with fulfillment or diversification challenges, our skills and capabilities help deliver organic growth of over 23% in Q3 and double-digit year-to-date. If you recently attended or listened to our Coffee and Converge series, you saw our experts firsthand diving deeper into our AI, cybersecurity, and managed services practice areas. This series has given us the opportunity to highlight how we differentiate ourselves from industry peers, which offer a fraction of our comprehensive AIM strategy. We will discuss this more when I highlight some of our recent wins around AI, application development, cloud, and high-performance computing. For those of you who are unable to join in person or by webcast, I encourage you to view the recordings of both Coffee and Converge events. They can both be found in the investor section of our website. All of the metrics highlighted throughout today's call are linked to the continued demand Converge experiences for its unique set of solutions through our end-to-end strategy utilized across all of our practice areas, allowing Converge to deliver unified and repeatable solutions with our strategic partners. We continue to leverage these unique relationships with strategic partners across each practice area and build solutions with AWS, CrowdStrike, Google, IBM, NVIDIA, Red Hat, Tableau, and many, many more. As we continue to focus on building high-value solutions with business outcomes that our clients count on, our marketing team has hosted over 160 client-facing events year-to-date with almost 6,000 clients attending, and we launched over 330 campaigns across analytics, cloud, cyber, and managed services, which helped us drive our first billion-dollar quarter ever, and we continue to drive pipeline for Q4 and 2024 across our high value offerings. Additionally, we've secured 123 net new logos in Q3, continuing our impressive average of over 100 new clients each quarter, resulting in over 338 new logos in North America in 2023. Now let's talk about a few strategic wins that showcase the value we're driving with our clients. This is a great example in the healthcare space on how our teams are partnering with their clients to drive meaningful business outcomes and are making a difference in the world. Our client needed to build an HPC center of excellence where they can provide cutting edge, high performance computing systems and dedicated solution engineers to enable their researchers and data scientists to run large data sets dedicated to cancer research and early detection. The client, along with Dell, NVIDIA, Weka, and Converge, was able to build a state-of-the-art, high-performance compute facility to attract top cancer researchers and doctors from around the world. The ability to run large data queries for oncology imaging creates faster results in detecting cancer cells. Converge was with the client and provided the infrastructure considered to be part of the company's portfolio. These servers are designed for complex compute and AIML and HPC intensive workloads. They're used by large enterprises and research institutions for tasks such as machine learning, data analytics, and scientific computing. Our ability to leverage our data center and data science resources was the key differentiator for us to help our clients. Another great win where we worked with our financial services client to leverage GPU technology for its analytics to drive significant benefits and leveraging the parallel processing power of GPUs for lightning-fast data crunching and complex calculations. We helped our clients significantly reduce the time required for risk assessments, portfolio optimization, and market analysis. By leveraging vast data GPU integration, Our client now has the ability to handle massive amounts of real-time financial data more efficiently, enabling quicker decision-making and capturing profitable opportunities faster than their competitors. This solution empowers our client to gain a significant competitive edge, enhance its investment strategies, and achieve superior returns for its clients. A common theme you will continue to see is our ability to combine resources across our organization to drive high-performance clusters around AI workloads in a secure manner. The last one I will discuss is the Region of York. Converge initiated a relationship with the Region of York in 2017 and established a comprehensive partnership over the last six years to become a trusted advisor. The collaboration initially concentrated on tasks such as performance analysis, traffic signal performance, and trip assessments. This endeavor utilized data for mobility applications, vehicle health monitoring, while setting standards for data warehousing and business intelligence at the region. Recently, Converge brought together resources from across all of our practice areas and built a strong demonstration in Q3 that showcased our data science, dashboarding, custom application development, and data engineering skill sets. As a result, we were awarded a large services contract for the next three years to continue to help the region of York. Our team will be focused on business intelligence, data science, data architecture and engineering, cloud architecture and migration, Azure DevOps support, and custom application development. This is a perfect example of why Converge is unique in the marketplace and will continue to deliver end-to-end solutions for our clients. We have the technical expertise and thought leadership across the solutions our clients need to ensure we can continue to be their trusted advisors and help them deliver the business outcomes they require. In addition to these great wins and the solid quarter we posted, our product bookings backlog increased in Q3, highlighting the strong demand we continue to see and build with our clients. We entered the start of Q3 with a product backlog of 447 million, and we closed the quarter with 479 million of product backlogs. This is a testament to the efforts of our teams, the relationships we have with our clients and strategic partners, and the growing share of wallet. Our portfolio and capabilities are differentiators in the market, and our results demonstrate that better than any long explanation that Sean, Abjit, or I can give. So on that, I will turn it over to Abjit to discuss the Q3 numbers in more detail. Thank you, Greg.
spk01: Good morning, everyone, and thank you for joining us this morning. I'd like to start off by expressing my thanks to our exceptional team at Converge for their dedication and hard work, which played a pivotal role in achieving the remarkable success we've seen this quarter and the success we see ahead. Your commitment and efforts are truly appreciated. Thank you. 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 descriptions and reconciliations of our GAAP to non-GAAP measures, please refer to our MD&A file this morning. In the third quarter, we delivered record growth sales of $1.04 billion, up 42% year-over-year. And on a year-to-date basis, our growth sales were $2.96 billion, or an increase of 39% year-over-year. This growth was driven both by the result of our acquisitions completed last year, and the solid organic growth initiatives we have put in place. As a reminder, for presentation purposes, product sales includes hardware and software sales, and services includes managed services, professional services, public cloud solutions, and maintenance and support. Total growth sales organic growth for the quarter was 23.6% and 10.8% on a year-to-date basis. Splitting this organic growth between products and services, products growth sales organic growth was 26.9% for the quarter and services growth sales growth was 17.4% for the quarter. Our product sales growth was largely driven by innovative solutions including high performance compute, AI, mainframe, storage and networking and security solutions in North America. This obviously more than offset decline in our end-user device sales to public sector and government entities in Canada and Germany. Demand for our solutions remains strong as shown by growth in our product backlog from Q2 to Q3 this year as Greg just walked through. On the services side, we continue to deliver solid organic growth. Services organic growth for the quarter was 17.4% compared to Q3 last year driven by our cross-selling strategy and our services transformation activities. We're continuing to see growth in our high-value services through our converged consulting platform. Gap revenue for the quarter was $710.1 million, an increase of 38% year-over-year. Again, the year-over-year increase was driven by a combination of both acquisitions and organic growth. As a reminder, revenue is not the most comparable measure across periods in our industry due to gross net accounting adjustments required under GAAP. Looking at profitability in the quarter, we generated gross profit of $174.1 million during the quarter, representing an increase of $34.4 million, or 25% year-over-year. Gross profit margin for the quarter was 24.5% compared to 27.1% in Q3 last year, And on a year-to-date basis, gross profit margin was 25.4% compared to 25.1% last year. The decrease in gross profit margin during the quarter is due to product mix from higher hardware sales during the quarter. And as a reminder, due to gross net gap adjustments, hardware sales have lower gross margin presented on a gap basis compared to software sales, which are recorded at 100% margin. Again, for comparability, I would like to highlight that a number of acquisitions we completed in the prior year, particularly TIG in the US, GFDB in Germany, that was completed in July last year, and Stone Group in the UK completed in November last year, are high volume, low margin businesses with sales primarily to education sector, public sector, and government entities. Our strategy to expand services and diversify these businesses to include more commercial sector, we yield significantly higher margin expansions over time. Adjusted EBITDA for the quarter was $41.3 million, an increase of 33% from Q3 last year. Including portage, adjusted EBITDA from converged business was $41.7 million. Adjusted EBITDA as a percentage of gross profit was 23.7% compared to 22.2% in Q3 last year, and 23.7% year-to-date. The increase in adjusted EBITDA as a percentage of GP is driven by the realization of efficiencies in the business and tighter cost controls, while we continue to invest in our overall solutions and services strategy by expanding our sales workforce and attracting high-value consulting talent. Adjusted EBITDA as a percentage of gross profit was also limited due to low margin, high volume acquisitions I mentioned earlier. These acquisitions have historically operated at very low margins and it will take time for us to transform these businesses. Turning now to the balance sheet and cash flow. In the quarter, cash provided by operating activity was $96 million compared to $15 million in the prior year. This is mainly due to our renewed discipline with respect to cash and working capital management. The snapback in cash generation this quarter was driven by moving swiftly to implement improved receivables and payables processes across the company, with disciplined measures being put in place to better define terms and parameters for our contracts and operating hurdles for our operations. Implementation of these improvements is in progress and will continue. These changes offer confidence in our ability to generate meaningful cash from operating activities for the full year 2023 and beyond. As I previously stated, our conservative target for cash from operating activities continues to be 70% of adjusted EBITDA in the long run as services become bigger component of our overall business with days payable in salaries and wages being much shorter than vendors. We continue to invest in organic growth by hiring top talent across the organization to drive the transformation of our business, including cross-selling solutions. During the quarter, we reduced our net debt by $44.3 million while funding approximately $17 million of acquisition-related payments in the form of contingent consideration, deferred consideration from cash we generated from operations. Net debt at the end of the quarter was approximately $307.5 million resulting in leverage ratio of 1.84 times of LTM adjusted EBITDA to our net borrowing, down from 2.24 times a quarter ago or 2023, Q2 2023. Our leverage ratio in accordance with our credit agreement is now at 2.55, down from 2.8x a quarter ago. Our credit agreement net debt includes lease liabilities, contingent consideration, and deferred consideration and only allows a deduction of $50 million of cash from balance sheet. Our credit agreement leverage ratio would have been 2.2 times if the entire cash balance of $105 million is deducted. We have put in a capital allocation plan in place to maximize shareholder returns. Our focus continues to be reinvesting back in our business, our innovation, and on completing the integration of previous acquisitions. all in addition to paying down our debt and repurchasing our stock. We are capable of pulling several levers simultaneously with the cash we expect to generate from operations. The balance sheet remains strong, with approximately $292 million of readily available capital between our cash on hand and available capacity under our credit facility. As such, in line with our capital allocation strategy yesterday, our Board of Directors approved a one-cent dividend payable to shareholders of record as of December 13, 2023. For the quarter, this represents a cash outlay of approximately $2 million. During the quarter, we spent approximately $1.6 million in CapEx. If you recall, we communicated in Q2 that we expected our CapEx to be around $7 to $9 million in Q3 related to our backup and recovery data center in Europe. I'm pleased to share that we were able to turn majority of this significantly upfront cash outlay into payments over a period of time in the form of leases. We expect our CapEx run rate to be around $2.5 million to $3 million a quarter going forward. Again, from a future capital allocation perspective, we will continue to allocate capital with our previously communicated strategy of organic growth as our number one priority and secondly, debt reduction and share buybacks, and lastly, acquisitions depending on our share price. In summary, we're implementing new technology and data analytics for our back office. We've improved our cash and treasury management, our resource utilization, and overall decision-making is improving across the board and throughout the organization, resulting in great results this quarter. Together with the leadership team, we're laser-focused on stressing the company's reputation and foundation, driving efficiency, fostering a culture of innovation and transparency. Our new ERP program is on track, and we expect phase one to be live mid-next year. We have a lot to do, and together with the entire Converge team, I'm confident that with their expertise and dedication, we will achieve remarkable results together. Now, turning to Outlook for the next quarter, Q4 2023. We expect gross profit in Q4 to be between $177 million and $184 million, and adjusted EBITDA to be between $45 million and $47 million. Given that the last acquisition we did of Stone Group was early November 2022, Q4 will be the first clean quarter with negligible acquisition impact. Therefore, year-over-year growth in Q4 will almost entirely be organic. As I mentioned earlier, we continue to see strong demand across our business and services. And I'm excited about the future as we transform the business and continue to deliver solid results in the future. Again, I would like to express my thanks to the entire Converge team for delivering a solid financial performance this quarter. I will now turn it over to the operator for questions. Operator?
spk12: Thank you. We will now begin the question and answer session. Should you have any questions, please press star followed by one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order that they are received. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, please lift your handset before pressing any keys. Our first question, comes from the line of Christian Scrooge of 8 Capital. Please go ahead.
spk16: Hi, good morning, and congrats on a strong cash flow generation quarter. I want to lead there, and this question is for Avjeet, but it's good to see a really strong free cash flow quarter, and you pointed out in the past there can be puts and takes that can make some muted or more explosive. As you think about some of the working capital dynamics this quarter, is there anything you'd call out as one time, or I think your intro remarks stated that some of these terms are sustainable, some of the terms on the receivables, payables side, you know, are improving. So any other call you could provide there in what we could think about into Q4?
spk01: Yeah, absolutely. And thank you for your question. There was nothing one time this quarter. What we're putting in, the processes and the policies we're putting in, these are sustainable policies and processes. And these will improve and continue to improve as we make our policies more disciplined and our operations more accountable going into 2024. Okay.
spk16: That's helpful. Ask one full one on the backlog and Greg touched on this area, but you know, with the supply chain sort of troubles unwinding, is it a useful sort of metric to think of to judge the converged business? Would you comment on a normalized backlog? And then I guess separately, any color on the composition of the backlog at this point would be helpful as well.
spk06: So we've been giving you this detail probably for the last year because it was much more dramatic. Most of the backlog has normalized into kind of that four to six week territory. The one difference is network gear is still an issue. It's been an issue now for a while. So most other parts And then, of course, GPU cards are the other issue. But network gear actually got a little bit worse this quarter compared to there. But most of the other parts are fairly normalized. So really the increase in backlog is more a function of demand than it is necessarily of – more problems. The one thing I'll say, though, is we don't know what the new normal is. I think we're getting closer to it. Last year, I was too optimistic on what a normalization would look like, but the fact that it grew again here is more, I think, demand-focused, and still there's some issues that persist with the networking side.
spk16: That's all great to hear. Thanks for taking my questions.
spk12: Our next question comes from the line of Rob Goff of Echelon. Please go ahead.
spk13: Thank you very much, and please let me echo Christian's congratulations on a very strong quarter and tremendous free cash flow. Thank you. My questions are not that dissimilar, but when you look at the free cash flow generator in the quarter, you suggested that we could see more improvements going forward and that there were structural changes. Could you perhaps address some of the structural changes changes you've put in place and are contemplating looking forward?
spk01: Yeah, absolutely. So within this quarter, what we saw was the turning of our negative working capital from the last quarter. So you saw a massive spike this quarter, but I think it's best to look at on a year-to-date basis. When we, some of the structural changes that we're making is just putting more discipline in our contracts, how our contracts are structured, what terms we're offering. how we look at our payables, how we look at our vendor payables. It's throughout the entire organization looking at from our entire cash cycle process, whether it's payables or receivables, and holding the entire organization accountable for that cash.
spk13: Okay. Thank you. And you did talk to the strength of the hard work. Could you perhaps dive a little bit deeper there in that we're seeing peers like SoftChoice and CDW with 20% down year on year? Can you talk to your pockets of strength that they don't have?
spk15: Yeah, absolutely, Rob. So I think it ties to our ability to have conversations around high-performance compute, AI, and other areas, right? So you're seeing a a shift in the market where devices were down significantly for most of our competitors. But when you look at the high-value solutions we're driving and the data center technologies that drives along with it, that's why you're seeing the growth from us, right? It's the combination of building out those high-value solutions with the platforms.
spk08: Thank you. Thanks, Rob.
spk12: Our next question comes from the line of Stephanie Price. of CIBC. Please go ahead.
spk09: Hi, good morning. Congrats on the leverage as well and just wanted to get your thoughts on capital allocation as leverage is now under your two times target on a non-bank debt basis. How should we think about use of cash here? Is share of purchase still the focus or do you kind of think about M&A as you start to get that leverage ratio down?
spk01: Yeah, so our capital allocation strategy remains the same, Stephanie. Number one is to continue investing in our organic growth internally with our hiring of our sales teams and our high-value individuals on the consulting side. Secondly, as you mentioned, now that we're below 2x, we will be looking to expand more on our NCIB and providing a return to our shareholders through an expanded NCIB And thirdly, we'll continue to pay down debt. And lastly, we'll probably go back on the acquisition path as our share price recovers and the market becomes more attractive.
spk09: Okay, thank you. And then also wondering about the overall demand environment. How much visibility here do you have in fiscal 24? And what are clients talking about as we approach year-end? Is there still... a little bit of hesitancy just given the overall macro environment or our clients looking to spend as we head into fiscal 24?
spk15: Yeah, so we have a very close eye on that, right? We do monthly business reviews and quarterly business reviews with our entire organization, and we continue to see demand be healthy. I think as we sit through the conversations with our teams, the diversification that we bring to the table is the key differentiator for us. So as spending priorities shift, Our ability to shift with our clients, whether it's around more focus on AI or more focus on cyber, our end-to-end portfolio gives us the ability to continue to diversify with our clients and make sure we're helping them build the solutions that they need for 2024. So pipeline and demand continues to be healthy for us across the board.
spk09: Great. Thank you very much.
spk15: Thank you.
spk12: Our next question comes from the line of Jérôme Debray of JTJDA. Please go ahead.
spk05: Hey, good morning. Thanks for taking my questions. The first one is on the margins of project where your full strategy is deployed, where you have the more end capabilities that are very much... integrated and implemented maybe some regions in the northeast of the U.S. What type of margins are you seeing there so we can see where the whole business might be going down the road? Are we talking well in the teams there?
spk01: I can take that. The way we look at our business, I won't comment on region by region internally. I look at our long-term targets. Our long-term target of getting to 30% of adjusted EBITDA percentage of GP still remains a target, and that's what we're driving towards. If we were to take out some of the noise between the low-value businesses, we see a very, very clear path to getting to that 30%. But given the amount of revenue we bought from these low-value, low-margin businesses, It will take us some time to get there, which is the target that we've been communicating to the market of sort of three to four years. But we see a very, very clear path to getting to the 30% income margin.
spk05: Thanks. And just maybe kind of similar that was asked, but in terms of working cap, you talked about assessing it on the year-to-date basis and going forward. But just to see what you're expecting in the very near term, are you expecting any quick reversals, or are we back to kind of normal that we should be expecting with the transition towards services?
spk01: Yeah, so I'd say this quarter was the reversal from the prior quarters. Our target of 70% of EBITDA being converted to cash from operating activities remains intact, and that's what we're driving towards. And like I mentioned in my remarks, that is a conservative target that we've set. We expect to overachieve that, but that's the target that we're marking towards for now.
spk05: Okay, and then last one for me. We were talking about a U.S. deployment of Portage in the last couple of quarters. Still on the near-term roadmap?
spk06: Yes, so... What Portage, they launched their 3.0 release, which is channel-ready because they've productized enough of the offering that it can be implemented in three to six months. And Converge obviously has a very strong channel. So the next stage for Portage is U.S. sales, and they have been engaged with our sales channel in the U.S. as we do with other product companies as well. But Converge has a very strong footprint into municipalities, and there are active conversations, including some states are having CIO summits with Portage hosting those. So the next big stage of growth for Portage, they've done a great job in Canada, is to the U.S., and that's being facilitated by Converge.
spk08: Thank you.
spk11: Our next question comes from the line of John Hsiao of National Bank.
spk12: Please go ahead.
spk03: Good morning, guys, and thanks for taking my question. So on hardware, do you think we're going to see the hardware spending rebound potentially in 2024, given the time of year and the current refreshment cycle?
spk06: So there's two different, when you say hardware, it's very different in that we're experiencing very high demand around high performance compute. When people talk about hardware decline, they're talking about devices because too many people, I guess, overbought during the pandemic. And then the laptop, quote unquote, device refresh cycle is around three years in private enterprise and about five years in government. But one of the things, just a data point, our Canadian business is does a lot of its business out of Ottawa with the federal government. And a year ago, they were competing for around 11,000 devices, where this year it's five times that. So we are going to see a normalization in devices as that is a data point, but not to the, again, government was very poorly equipped for work from home because working from home was not a general business model that governments had. They were forced into that by the pandemic, which means there was a large kind of flux of refresh where you'll come to that. So I think you'll see it get, according to Gartner and other people like that, better next year, and then I think you'll see it more normalized going forward. But as far as hardware sales, the high-performance compute is the reason that our numbers might look different from people that are focused on devices.
spk03: Okay, got it. Microsoft recently released the pricing of CodePilot, so maybe just share with us you know, the type of conversation you're having there with customers as well as their level of interest at this point.
spk15: Yeah, so I'll jump on that. Lots of conversations with clients around, I'll say, the AI platforms across all the cloud platforms. platforms today. So we're having conversations with Microsoft, AWS, Google, IBM, et cetera. A lot of interest. Not a lot of movement right now around the Microsoft tool, but we are actively piloting some things internally, testing it. So we're ready to have those conversations and ready to help our customers implement it when they're ready. But I would say late 2024, you'll see more traction there.
spk03: Okay. Thank you. I popped the line.
spk12: Our next question comes from the line of David Kwon of TD Securities. Please go ahead.
spk02: Hey, guys. Just one question on the margin side. So thanks, Adi, for the commentary as it relates to your expectations as it relates to the 30% adjusted EBITDA margin target over the next three or four years. Can you provide some color as to how you see yourselves kind of getting there? Is it more back-end loaded? given your planned organic growth investments, or should it be more of a steady progression?
spk01: I think it'll be a steady progression starting towards the end of or close second half of next year as we transform our business and invest in our capabilities. But at the same time, you'll also see a drop in our back office costs as we implement our new ERP system towards the end of next year. So you should see a steady growth towards the end of next year, and then it steady grows to 30% thereafter.
spk02: That's helpful. And I guess on the ERP migration, so it sounds like you're expecting, I think, at least North American migration to be complete by the end of next year. Should we expect that Europe is going to follow suit in 2025?
spk01: Correct. So we actually expect our first phase, which is most of North America, to be live by mid-next year. and then goal is to have all of North America by end of next year, and then Europe will follow very early 2025, like you said.
spk08: Great, thanks.
spk11: Our next question comes from the line of Divya Goyal of Scotiabank.
spk12: Please go ahead.
spk10: Good morning, everyone. So I wanted to actually get a little bit more color in the 2024 trend. I know you briefly discussed it. Just trying to understand what are you truly seeing across the enterprise and the SMB versus commercial clientele for yourself? And considering a potential slowdown with the macro and the geopolitical conditions out there, where do you see things trending for yourselves? And if you could provide us some color on the guidance along with that as well.
spk06: So I'll leave the guidance to FG. But geographically, you're seeing some real differences. In the U.S., we're seeing strength. And again, as Greg mentioned, we do these quarterly business reviews. And we were talking to one of our regional leaders, and they're saying, Sean, I talked to all of my OEMs, and they're seeing declines. And we're just not seeing that. We keep on asking, you know, are you seeing weakness? Are you seeing weakness? And as Greg said, because of the diversity of our solutions, we are continuing to see that strength in demand. And that is particularly in the U.S. We're also seeing some strength in the U.K., More headwinds in the German marketplace, and in Canada we've seen some problems, especially around the federal government this year as we talked about the refresh cycle. But the majority of our business in the U.S., we simply have not seen those declines. You hear a lot about headwinds, and other people might be experiencing it, but when we do our regional reviews, we continue to see very strong demand.
spk01: And on 2024 guidance, Divya, we'll provide that guidance as we present our fiscal year 2023 results.
spk10: And for the Q4 guidance, is that something where you see further upside or is there a potential for any downside there? Like, can we be confident in the guidance given how the things have been trending over the past few weeks and going forward towards December?
spk01: Where we sit today, Divya, we're very comfortable with the guidance we provided, the range we provided.
spk10: That's good color. Sean or Greg or Jit yourself, could you provide some more color on how the red net business is trending in the European market and what kind of traction do you see in that side of the world right now?
spk06: So in the German marketplace, you've definitely had headwinds on budgets. I mean, not only did you have Ukraine war impacting some things, you've had high inflation, and now we've got the situation in the Middle East. So that has an impact. But the education business, it's not just RedNet, it's GFDB, the extra that we have there, but those are long-term contracts. The key for us is, as we said, our strategy was to get a platform, then to expand geographically, but then to get into the commercial sector. And so you'll hear more about think back to Converge in its earlier days where things like getting top tier certified with our vendors. There's going to be some announcements on broadening the vendor coverage to some of our high value solutions in Europe that will be coming in the next few weeks. And this is really taking all the things that work so well that Greg implemented so effectively in North America over there. So it's, where we are in North America after buying such capabilities around analytics and cyber is much higher level. The immediate benefit as we get to the commercial sector is leveraging the top tier statuses with the vendors and the diversity of some of the solutions and use cases that Greg's been providing that are low hanging fruit and quick wins. So you'll see in Europe, it's not to the same degree of the solutions that we have in North America, but think back to, yeah, like the phase one to phase two kind of growth that Converge went through. in kind of 2017 and 18, and that's the journey that we're on in Europe.
spk10: That's helpful. Just one last question here on the services growth that you discussed just a few minutes ago. Are we talking about more managed services growth, or does that include the professional services growth as well? And if you could provide some color or the breakdown on those. Sure.
spk15: It's a combination, Divya, right? So we grew professional services and managed services. both in the quarter. What we're seeing is, when you look at the professional services business, right, again, the device slowdown occurred in 2023, and that impacted some of the professional services we deliver around the devices, but the overall high-value services in our professional services portfolio grew at a faster rate and a higher rate, and we're continuing to see more growth around managed services. And as we talked about at the coffee and converged series, you know, we're going to make some tweaks to the overall go-to-market plan on managed services, and we expect to see that continue to grow in 2024.
spk10: That's helpful. Thanks, everyone.
spk15: Thank you.
spk12: Our next question comes from the line of Robert Young of Canaccord Genuity. Please go ahead.
spk14: Hi. A couple of quick ones in the interest of time. You said you're holding the organization accountable for cash. I assume that's around receivables, but Are you changing anything around the way that the sales force is incentivized? I think it's driven by gross profit now, but is there an adjustment around more focus on cash?
spk01: There's no adjustments as of today to our sales organization. That's something we continue to evaluate and look at. But in terms of holding the organization accountable for cash from operations, everybody or majority of the organization has part of their bonus targets meeting our corporate cash from operations now. Okay, thanks.
spk14: And then I was thinking long-term, as you think about cash flow from operations conversion to EBITDA, you're giving some targets around where EBITDA margins would go as a percentage of gross profit. But conversion this quarter, where could it go long-term if we're thinking about where cash related to EBITDA goes? Then I'll pass the line. Okay.
spk01: For the short term and the medium term, our target continues to be on a conservative basis. Cash from operating activities, 70% of adjusted EBITDA, and free cash flow, which is cash from operations minus interest expense, minus our lease payments, and minus any capex, is expected to be 40% of adjusted EBITDA.
spk14: Okay.
spk08: Thank you. I'll pass the line. Thanks, Rob.
spk12: As a reminder, should you have a question, please press star followed by one. And our next question comes from the line of Gavin Fairweather of Cormark Securities. Please go ahead.
spk04: Hi there. This is Graham Smith on for Gavin Fairweather. I'm just sort of curious if you can give a little bit more color on just your broader integration efforts and maybe what sort of typical incremental synergies You're sort of expecting a gain each quarter, especially going into Q4. Thanks.
spk01: Yeah, I can provide an update. So our North America integration is the fastest integration that continues to be on track. As I mentioned on last quarter's call, our front office is primarily integrated. Our back office, as we're working on this new ERP, which goes live mid-next year, that's where you'll probably see the biggest synergies and operational efficiencies. We continue to look at how we're going to integrate our European business, given that they're two separate jurisdictions. We are on a path to integrate the two businesses, distinct businesses we bought in Germany into one convert Germany, so that's on track as well. I think you'll start to see synergies toward the later end of next year.
spk08: It's very helpful. Thanks. And that's good for me. Thank you. Thank you.
spk12: And there are no further questions at this time. Therefore, this concludes your conference call for today. Thank you for participating and ask that you please disconnect your lines.
spk08: Have a great day.
spk10: The conference is no longer being recorded.
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