Converge Technology Solutions Corp. (CTS) Earnings Call Transcript & Summary

We will now turn the call over to the operator to conduct the voting by electronic poll.

We will now conduct the final poll. Please note that you may only vote if you are a registered shareholder or the duly appointed proxy holder. If you have previously submitted a completed proxy or voting instruction form, you will have already voted in respect of this motion, and we remind you to please not vote again. Regarding the continuance of the company under the Canada Business Corporations Act, please press star 1 to vote for or star 2 to vote against. [Voting]

The poll is now closed.

We confirm that the vote has been carried.

I declare the motion carried and the continuance resolution approved. In a moment, I will turn the call over to the operator to open the lines regarding any other formal business that anyone present wishes to bring to the attention of the meeting. Operator, can you please ask the audience to queue up if they wish to discuss any outstanding matters?

[Operator Instructions] At this time, there are no questions or comments.

If there's no further business to be brought before the meeting, I declare the formal portion of the meeting is terminated. If any shareholder is interested in the exact number of votes cast in favor for or against each of the items of business considered at this meeting, he or she may obtain particulars or inquiry from the secretary of the meeting. I direct the scrutineer's report as to voting on each item be annexed to the minutes of this meeting as a schedule. I would now like to present a corporate update. Please note that you may view the presentation material live via the link provided in the information circular. Further, the material is attainable on the Converge website at converge.com Investor Relations page under the Upcoming Events. So the 3-phase plan that I created in our CTO, Don Cuthbertson's basement in April of 2017, the management team has done a fabulous job of executing against. As you'll recall, I've been presenting this to all of our investors for the past 3 years. Phase 1 was our plan to create a broad brush coverage in Canada and the U.S.; Phase 2, to build out our hybrid IT capabilities; and then Phase 3 was to scale with the goal of hitting all the NFL cities as well as to do -- integrate the back offices and take cost out. The question becomes now, given the fact that we -- in our plan, if we get to another additional $700 million of acquisition revenue, which we kind of target to get to by the end of next year, we'll be at that run rate, $2 billion of annual revenue and $100 million of annual run rate EBITDA. What then next? So I would love to take this opportunity to present to you what our next stages are. So most of you will have seen the practice areas, which really create the core of what a hybrid IT provider, our advanced analytics practice in which we have data scientists on staff, Ph.D. data scientists led by Dr. [ John Goff ]; our cloud services team, which allow us to exist in this public and private cloud environments and create applications that can move to it in containers like Kubernetes from Red Hat and VMWare; our cybersecurity practice of world-class cybersecurity experts to allow when networks are open up to create these new security architectures by which to implement them; and then our digital infrastructure team, which provides the infrastructure behind us. We also have talked during the year about our Managed Services as well as our [indiscernible] focused in on our Converge TrustBuilder platform. I'm going to spend some time today to elaborate further on both of these points. The first is, we intend on separating out our Managed Services and intellectual property financials and corporate structures to provide greater visibility as to their development as they become much more important in the financial impacts of the company. And in our Managed Services, in particular, the offerings around ERP systems such as Infor, SAP and other ERP systems that we can host in our own data centers, allow us, combined by putting applications on public cloud, to introduce services such as managed service desk, managed network, managed security, managed end user and managed trust ecosystem. The trust ecosystem is contained through the development of our Converge TrustBuilder platform. And after I present the overall view, Don Cuthbertson, our CTO, will explain more by what the trust ecosystem is and how Converge's TrustBuilder platform will enhance our Managed Services to provide unique offerings, which will increase the margin and revenue that we obtain. A lot of people will have seen our recurring revenue slide, of which our gross annual recurring revenue is broken down into 3 different buckets: our private cloud or Managed Services piece, our public cloud piece as well as our annual recurring revenue from software subscriptions. The piece that I really want to focus on, and I will throughout 2021, is the expansion of our Managed Services piece, which are 3-year contracts played monthly. This piece, in the past, I have told our shareholders is between 30% to 40% gross profit. With the cost reductions that we have gone through this year and the synergies of making the subscale managed services be one organization across Converge, we have now got these managed services to over 40% gross profit. And we target exceeding 50% of gross profit around these services in 2021, with having a 3-year target goal of having 55% to 60% gross profit on these managed services. Also, given -- we just finished Q3, but the last public quarter that we presented was Q2. In Q2, we had slightly more than $50 million of managed services revenue on an annualized basis. Our target goal would be to double that by Q4 2021. So on an annualized basis, the recurring revenue we have from our managed services would be $100 million in that quarter. The other piece that is really driving our pipeline around managed services is we have some unique capabilities around IBM's platform. So in the '90s and the 2000s, the AS/400 and mini platform were extremely popular that IBM supported. IBM has gone more focused in on software and services, but there is still a great legacy of applications that existed on those platforms. Converge is one of 2 main providers of an i-Series platform in North America, and we now have the unique potential to host i-Series applications, these old AS/400 applications that have been working so well for decades, on our own i-Series applications while moving the data and the rest of their applications onto public cloud providers, such as Google, Amazon, and Microsoft. Because we have this unique service, this allows us to be part of a conversation where we can then offer the Managed Services that I have detailed. So for example, in Q3 of 2020, we had our first engagement with a large northeast retailer, where we had the opportunity to move an ERP application on an AS/400 into our i-Series data center while partnering with a public cloud provider that we would host the data and other applications. There are over 1,600 of these that exist in North America. We currently are onboarding 3 of them. We have qualified 10 of them, and we just have started this program. We're partnering with the ERP vendor to provide an outreach to their installed base. During COVID-19, there has been a dramatic desire to move applications into hosted and cloud-based environments. We also, with one public cloud provider, are presenting in Q4 to 2,000 of their internal client execs and support and sales engineers that are client-facing to make them aware of this combined offering that we have. This is an incredible pipeline that allows us to get in front of customers to provide an opportunity where in the past, we would have provided i-Series hosting. And on average, for this kind of customer, that would be $25,000 a month, which is a good hosted environment. But the opportunity that we have, and I always use CANCOM as my example in Europe, who's done such a great job of this, is to turn this $25,000 a month from each of these customers into $500,000 per month over time. We have such a great installed base. We have such a great sales force that are running these campaigns along with the ERP vendor, and our public cloud vendors provide a company-defining year as we go and starting with hosting then moving to a managed service desk, where we're taking incoming calls where a customer, if something doesn't work, wants to know, is it in our environment or the public cloud environment? And we can triage those calls for them; to provide managed network; to make sure that there is dedicated access and the right kind of bandwidth to the customers' locations; to provide managed security where we are customizing security and intrusion detection around the corporate-defined standards to be provided for them. And then managing their end users in 2 different fashions. One is providing direct support to them around this application but also managing their trust ecosystem, which I'll turn over to Don. This is a tremendous opportunity for Converge in 2021 to have a real impact to leverage this incredible platform that we created in North America. But now also, we are being asked to present these same services in Europe. We've always said that we would not go to Europe while -- until Brexit was decided one way or the other. December 31, 2020, that will happen. We still really don't know what the final outcome is. But then as we get to kind of Q2, that will present an opportunity in Europe for us to present these really niche solutions, and then from that, be able to present our same kind of mid-market hybrid IT solutions that we've been providing so successfully in North America. Now I'd like to turn it over to Don Cuthbertson, our CTO, to explain what a trust ecosystem is and how this is so impactful to our customers. Don?

Thanks, Shaun, and thank you all very much for your time today. As Shaun mentioned, I just wanted to take the opportunity to update everyone on an exciting initiative at Becker-Carroll, a Converge company, in the digital identity space around trust ecosystem. So it was also mentioned in our press release this past May, Becker-Carroll is developing a software toolkit that lets governments and businesses build and manage trust ecosystems. So in this context, trust ecosystems are multidirectional, multi-stakeholder value chains where the experience must also be privacy focused and transparent so that all the members can participate and transact with certainty. These can unlock tremendous value, and there are many types and examples of, what I call, pseudo trust ecosystems like an Airbnb or an Uber, where there's an extra level of kind of safety in numbers or community type of trust with a bit of assumed vetting of the participants that may or may not even be happening. But a stronger parallel for the ecosystems that we envision would be Interac, which really is a Canadian-based trust ecosystem for exchanging money. Back in the '90s, the Canadian FIs rolled out their own peer-to-peer network called Interac to reduce fraud and increase the velocity of transactions. So if you think about a point-of-sale transaction now compared to one before Interac, the difference is quite astounding. Retailers used to use a variety of manual validation techniques, like keeping lists or requiring personal ID to pay in any way other than cash. Now at the point of sale, no personal information is shared between parties, and they can totally rely on and trust the exchange of funds. So Interac has eliminated billions of dollars of fraud, and it's also created billions of dollars in value. And that's the power of a trust ecosystem that can digitally reflect the governance models or business rules and reduce the time it takes for validation. They also provide protection for participants by limiting the need for unnecessary exchanges of personal information. So in the trust ecosystems that we're talking about at Becker-Carroll, rather than money, it's the appropriate verifiable personal data or what they call credentials from someone's digital identity that's being exchanged. With our software, we're providing a way to build trust ecosystems for digital identity. The recent rollout of CERB, Canada's response benefit for COVID, is an excellent example of the impact of reducing validation time and effort on the time of delivery for a service to citizen. So in this case, the government essentially deferred validation to a later time. And we're thankfully able to have citizens receiving benefits in a day where typically it would take months or even years. With the trust ecosystem, you get the time-to-value benefit of a CERB rollout with the required validation and without the 20,000-plus tips about fraud that have come the over 830,000 repayments and any other costs associated with the -- after the fact validation for the benefits that were given out. This -- yes. So this brings me to the kinds of problems that we're tackling today, and public sector is our current focus. Our governments are actively investing in this space. They have complex environments with multiple stakeholders, and they have a problem that we can solve with trust ecosystems. And that is the time, complexity and cost associated with delivering public sector services to their citizens, be it individuals or businesses. So back in -- actually, in 1999, the Throne Speech for Parliament included a commitment, and this is something that hasn't been happened yet. By 2004, our goal was to be known around the world as the government that's most connected to its citizens, with Canadians being able to access all government information and services online at the time and place of their choosing. And as I said, we're definitely not there yet. But at the basic level, to get from being a citizen in need of a service or to make change to an existing service to the one who's receiving the appropriate service, they have to prove that they are who they say they are, it's their identity and that you meet the necessary criteria, the governance. And this is accomplished by government -- by collecting personal information and then validating that information largely manually through the business processes as defined by their governance models. And in the past, and in many cases today, these are slow manual analog processes. And anyone who's attempted to use a government service can attest that it isn't easy, timely or at a place of their choosing. The focus for digital transformation to date in public sector has really been around the collection of data, the digitization of forms and publishing a descriptive content for the programs to make the sign-up easier and more efficient. But little has been done to address the validation, which really is the largest part. And also, little has been done to enable the citizen experience to be less repetitive, which can also cause confusion. Privacy legislation and other rules really limit the information sharing between programs and levels of government, and even when it's possible, often, the capacity to share does not exist. And these are known problems, and we're involved in projects to solve these in the early and proof-of-concept stages, like the verifiable organization network with PSPC. There's a tell-us-once initiative with Treasury Board and ISED with our partner, [ Vivo ]. So the ground is being broken, and we're really excited to be part of these projects, because through this work and involvement with standards organizations like the W3C and DIAC, we see that trust ecosystems have emerged as the solution to significantly reduce the time to value for citizens while also reducing fraud by addressing the validation steps, using technology to connect identity to governance and the business processes. Trust ecosystems address issues around transparency and provide the ability to completely rely on the information that's being shared or requested. So a server or other program managed through a trust ecosystem can rely on the digital identity of the citizen and all of its credentials for effectively instant validation. So how do we do this? Well, Becker-Carroll goes to market with a consultative, collaborative, professional services team that work with the customer to identify and digitally transform the governance models that are used for validation. The touch points and -- for business processes and related systems as well as the desired experience for the citizen are also part of the design. The TrustBuilder software and its various functions, like digital wallets, node creators and credential management, will then be used to create and manage the trust ecosystem itself. This is typically done by the trust anchors or key stakeholders, but we also see scenarios where this is offered as a Managed Service. The software is the glue that connects the apps and applications that manage the programs to the digital wallets and identities and enables the sharing of trusted information. So we're taking a standards and open source-based approach so that we're able to support the broadest possible set of applications as well as custom apps that will emerge in support of digital processes down the road. The software is at the center -- sorry, the software at the center of a trust ecosystem relies on distributed ledger technology, which stores no personal data itself. Rather, stores the definitions of credential what's to be shared, the existence of any relationships between any entities within the ecosystem and the public keys for those relationships. So we're very excited about the expected growth in this area, where 2 of the hottest markets in cybersecurity, trust and digital identity meet and how we can expand Converge's set of managed services and offerings as well as intellectual property. Thank you very much, Shaun. Shaun, back to you for concluding comments.

I'm sorry. Doing that on mute isn't helpful. Thank you, Don. Now we'll be pleased to answer any questions that you may have. We kindly ask that you limit your questions to topics related to today's subject matter and keep questions short and to the point. Questions which were already answered or that are redundant or repetitive will not be addressed. We will answer as many questions as time permits.

[Operator Instructions] We do have a question from [ Curtis Johnson ], an investor.

This is a question for Don in regards to the trust platform. The whole goal of this is to basically increase margin. I think you referred to the fact that professional services need to get involved to sort of engage with the customer to glue these identities to the apps and services. In my experience, professional services can greatly reduce the margin. Is that a concern at all?

Reduce the margin of the overall -- just not sure if you mean overall initiative or the overall -- so I think there's the 2 parts, right? So -- and the -- on the software side, I'm not concerned about the margin. On the professional services side, we see that these are typically in the 30% to 40% range for the kinds of services that we offer. So I think we're in line with Converge objectives for those.

Yes. I wasn't so much concerned with the software.

Yes. So just trying to jump in here. So our gross profit as a company currently stands in the kind of 24% to 25% gross profit range. We've said our targets are in the 30% gross profit range. So both the services portion and the gross profit on our Managed Services are above that. As we have more Managed Services, it will be a good problem to have to try to get our gross profit up to just the Managed Services level and not the PS level. So we haven't reached there yet. It's a goal that we look forward to obtaining.

Got it. And just a follow-on question. It seems like this trust ecosystem, the platform is in its infancy. Do you have sort of paying customers using it now to achieve the goals that you said? Don referred to some proof of concepts. But is that actually rolled out and customers are using it right now?

So we are still in the proof-of-concept stage with government departments for the platform. And we've got the support from them through what's called a [ peak ] program, which we -- in order to get support for the development of the IP, we had to submit a, it was over 180-page proposal that they vetted through, like they hired professional experts from academia, the business or the government to review and challenge our proposal. So -- and of course, we were accepted. And through indirect channels, we've learned that ours was the most exciting proposal that they've received. So while we are not in production yet with customers currently, we're building. These are kind of multiyear projects to build out initially.

And just to add to that, the reason that we're coming to you at this time is we now believe that this is the time for commercialization and add to our managed services. So there will be more focus on this. This has been going on -- we bought Becker-Carroll in 2018. We've continually been developing this platform. Especially due to COVID-19, we view the opportunity really is now. And we'll be focusing on how can we accelerate their growth and revenue through tuck-in acquisitions as well. So as in the stage, we'll be focusing in on some capabilities around tuck-in acquisitions to increase profitability there for TrustBuilder. We'll be looking for additional acquisitions we can do to accelerate the time frame to have meaningful revenue for it in 2021.

There are no further questions in queue.

Well, that's all for today. I would like to thank you all for participating in the business of this meeting and for your interest in the company. Thank you all.

Ladies and gentlemen, this concludes today's conference call. We thank you for participating, and we ask that you please disconnect your lines.