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

Good morning, ladies and gentlemen, and welcome to the Converge Technology Solutions Conference Call. [Operator Instructions] Also note that this call is being recorded on Thursday, June 23, 2021. And now, I would like to turn the conference over to Converge's CEO, Shaun Maine. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. I would like to welcome you all to this Annual General Meeting of the Holders of Common Shares of Converge Technology Solutions Corp. My name is Shaun Maine, and I am the Chief Executive Officer and a Director of Converge. This meeting of Converge shareholders is called pursuant to the notice of meeting dated May 20, 2021. This year, to proactively deal with the ongoing public health impact of COVID-19 and to mitigate risks to the health and safety of our communities, shareholders, employees and other stakeholders, the meeting is being held as a completely virtual meeting via teleconference. The people who will be speaking today are not all in the same physical location. For this reason, I may pause from time to time to allow coordination from the different locations. I will also pause at certain points during the meeting to provide an opportunity for you to vote. Following the formal portion of the meeting, there will be a management presentation and a question-and-answer period. The materials for the presentation can be viewed live at the Adobe meeting link provided in the Management Information Circular. As in past years, we expect that the vast majority of all votes have been casted in advance of the meeting by proxy. That said, registered shareholders and duly appointed proxy holders will be allowed to vote via teleconference at the meeting in accordance with the instructions to be provided. I will preside as Chair of the meeting. And with the consent of the meeting, I hereby appoint Carl Smith to act as a secretary of the meeting. Computershare Investor Services, Inc. is the transfer agent for Converge and is represented today by Vanessa Lee. With the consent of the meeting, I hereby appoint Vanessa Lee of Computershare to act as scrutineer for this meeting. The scrutineer will report on the shareholders present or represented by proxy at the meeting and compute the votes received. The secretary has advised me that the notice of meeting calling this meeting, together with the management information circular describing the business of the meeting and the form of proxy were sent to each shareholder of Converge on May 25, 2021. Accordingly, with the consent of the meeting, I will dispense with reading the notice of meeting. As this is a virtual-only meeting conducted via teleconference, a roll call has now been taken, and all participants have been registered electronically. In accordance with the Canadian Business Corporations Act, registered shareholders and proxy holders present by teleconference are deemed to be present at the meeting. Only registered shareholders and proxy appointees present at the meeting shall be entitled to vote on matters put forth before the meeting. The scrutineer has provided me with the preliminary report regarding shareholders' attendance at the meeting. The scrutineer's report shows that there are 255 holders of shares present or represented by proxy at this meeting who hold, in aggregate, approximately 60,062,951 shares -- of the outstanding shares, which represents approximately 36% of the outstanding shares of Converge entitled to vote at this meeting. We thank our shareholders for this excellent vote turnout for this meeting. I declare that the requisite quorum is present, and I declare the meeting to be properly called and constituted for the transaction of business as set out in the notice of meeting. I direct that the affidavit of mailing received from Computershare Investor Services, Inc. and the scrutineer's report on attendance be annexed to the minutes of the meeting. To ensure that each of the votes is appropriately recorded, all matters being voted on at this meeting will be put to the meeting by way of electronic poll. The operator will provide instructions on how to vote before each electronic poll is taken. Votes will be counted, and each shareholder and proxy holder will be entitled to 1 vote for each share held by such shareholder or represented by proxy. As a reminder, if you have voted your shares prior to the meeting, please do not vote again. Further, in order to expedite the meeting, I have requested that Carl Smith move the formal motions, and I will therefore call on him at the appropriate time. The audited financial statements of Converge and the auditors' report thereon for the fiscal year ended December 31, 2020, were sent to the shareholders that requested such documents and are available under Converge's profile at www.sedar.com. The next item of business is the election of directors to serve from the close of this meeting until the close of the next Annual Meeting of Shareholders or until their successors are elected or appointed, unless such office is earlier vacated in accordance with Converge's bylaws. Converge has received consent in writing from each of the following nominees of management: Shaun Maine, Thomas Volk, Brian Phillips, Nathan Chan, Ralph Garcea and Darlene Kelly. Further information regarding these directors is contained in the management information circular provided in connection with this meeting. Under Converge's advance notice policy, shareholder nominations for director must be made not less than 30 nor more than 50 days prior to the date of the Annual Meeting of Shareholders. The Corporate Secretary has informed me that no further nominations of directors were made in accordance with Converge's advance notice policy. As there are no further nominations, I declare nominations closed. May I have a motion that the aforementioned 6 nominees of management be elected as directors of Converge Technology Solutions Corp. to serve from the close of this meeting until the close of the next Annual Meeting of Shareholders of Converge or until their successors are elected or appointed, unless such office is earlier vacated in accordance with Converge's bylaws?

My name is Carl Smith, and I so move.

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

We will now conduct the first poll. Please note that you may only vote if you are a registered shareholder or their 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 election of directors, please press star 1 for or star 2 to withhold. You will have 10 seconds to cast your vote. [Voting]

Voting is now closed.

And Vanessa, can you look to confirm if the vote has been carried?

Yes. We confirm that the vote has been carried.

Thank you. I now declare that the following 6 persons having received the greatest number of votes are hereby declared elected as directors of Converge to serve from the closing of this meeting until the close of the next Annual Meeting of Shareholders of Converge or until their successors are elected or appointed, unless such office is earlier vacated in accordance with Converge's bylaws. So those are Shaun Maine, Thomas Volk, Brian Phillips, Nathan Chan, Ralph Garcea and Darlene Kelly. We will now proceed with the appointment of the auditors of Converge. May I have a motion that Ernst & Young LLP be appointed as auditors of Converge to serve until the closing of the next Annual Meeting of Shareholders of Converge or until its successor is duly appointed at such remuneration as may be fixed by the Board of Directors, and the directors are authorized to fix such remuneration?

My name is Carl Smith, and I so move.

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

We will now conduct the second poll. Please note that you may only vote if you are a registered shareholder or their 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 appointment of the Converge auditors, please press star 1 to vote for or star 2 to withhold. You will have 10 more seconds to cast your vote. [Voting]

Voting has now ended.

We confirm that the vote has been carried.

Thank you, Vanessa. I declare the motion for the appointment and remuneration of the auditors carried. We will now proceed with consideration by shareholders of an ordinary resolution, the full text of which is set forth in the management information circular, to approve the long-term incentive plan of the company as described in the management information circular. To be effective, the LTIP resolution must be approved by a majority of the votes cast by the shareholders present or represented by proxy at this meeting. May I have a motion that the LTIP resolution be passed?

My name is Carl Smith, and I so move.

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 their duly appointed proxy holder. If you have previously submitted a completed proxy or voting instruction form, you will have already voted in respect to this motion, and we remind you to please not vote again. Regarding the approval of the long-term incentive plan, please press star 1 to vote for or star 2 to vote against. You now have approximately 10 seconds before closing of the poll. [Voting]

Polling has now been closed.

We confirm that the vote has been carried.

I declare the motion carried and the LTIP 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] And at this time, sir, we have no one in queue.

If there's no further business to be brought before the meeting, I declare that the formal portion of the meeting is terminated. If any shareholder is interested in the exact number of votes cast in favor or against each of the items of business considered at this meeting, he or she may obtain particulars on inquiry from the secretary of the meeting. I direct that 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 provide a corporate update. Please note that you may view the presentation material live via the link provided in the management information circular, meetingconnectsales.adobeconnect.com/converge-agm. Again, that's meetingconnectsales.adobeconnect.com/converge-agm. Furthermore, the material is obtainable on the Converge website at convergetp.com/investor-relations under Upcoming Events. So I'm very proud to go through this presentation today. As I detailed on our Q1 call, Converge has had an incredible year during the most trying of circumstances. And I'm really happy to give a shout-out to our employees who have -- last year, during 2020, we entered the year with a wonderful set of capabilities with a highly levered balance sheet. We then proceeded to cross-sell, integrate the 12 companies we had. We moved to a more cost-effective ABL at 2.5%. We raised close to $200 million and acquired 5 companies. And it's a testament to the dedication of our employees that when you look at our financials, you couldn't tell there's a pandemic going on. I'm so proud to represent our company and to be the spokesperson, really, for all they achieved. Quarter after quarter, we showed tremendous growth. The numbers continue to track -- a fact that we're really proud of the fact that we've grown our adjusted EBITDA by 90% every year that we've been around and continue on that trajectory, which is a truly remarkable feat and that's both organic and inorganic growth. But the real difference for a company like Converge from a consolidation strategy, and yesterday, we announced our 20th acquisition, is the fact that we continually win Tier 1 awards. Recently at IBM Think, we won 5 awards, including IBM Partner of the Year, Red Hat Partner of the Year. Yesterday, one of our subsidiaries, Dasher, won HP Partner of the Year. We continue to get recognition. And so for the fastest-growing IT service provider in North America, to do such a good job on cross-selling and integrating, to produce numbers that grow at 90% adjusted EBITDA a year but also to get that kind of recognition, it truly is an incredibly special company. So as I mentioned, when you look at our financials, since we were started, so we have only been around since the end of 2017. And every year, we've grown our adjusted EBITDA by over 90%. So if we were to continue on that trajectory, that means, this year, you know the management team was very proud of this, is gunning for $115 million. And that means that we'll be well over $200 million a year after. And so that's what that kind of earnings growth means. And again, it's a combination of a lot of things. But the cross-sell, the integration, the -- supercharged by acquisitions is really what the team has really excelled at, even during the most challenging trading conditions like COVID-19. One of the things that we really achieved last year was strengthening our balance sheet. As I'll go through, we buy companies traditionally with working capital and debt. I don't require any equity to buy companies. It means that we were very quickly able to buy a lot of companies, but I entered last year with about 5x leverage on my balance sheet, something that -- although we can operate very comfortably, public company shareholders do not like that kind of leverage on the balance sheet. So last year, through a series of financings and continuing this year, we have raised $367.6 million in a series of accretive raises going from February last year to $1.30 through August last year to $1.62; in September, $2.05; in November, $3.45; in January, $7.50 earlier this month. And I really have to thank our investment bankers and our analysts who have supported us along the way. Carl and I have done a lot of work with them, and Carl has done a tremendous job around this. But this has really given us an incredibly strong balance sheet. First, it allowed us to move our ABL to -- from over 9% down to 2.5%, which we'll see -- last year, we paid over $20 million of interest. We'll pay less than half that this year. And so that was very meaningful but also gives us the flexibility to go in and execute our business plan. As we go from acquiring in North America to also acquiring in Europe, we've got this incredibly strong balance sheet to support us. And again, you see in the Converge share price performance, I must say, as a CEO, it's certainly nice going into an AGM on 52-week highs, given the 1.5 years that we just had, which, really, the lagging indicator of our performance was our share price. And so even now, our share price is just beginning to catch up to our 90% earnings growth rate that we've been demonstrating. And again, there's a -- it's because I -- when we founded this company and -- with Gord and with Don, we put our own friends and family into the earlier round. And so I must say that I'm so proud to reward our shareholders that backed us from day 1 with this, and the best is yet to come. So to remind people, our acquisition strategy is that we take hardware-centric VARs and turn them into cloud and managed service providers, and the reason we do that is you can buy them much more cost effectively this way. You have people like [indiscernible] going around and buying resellers that have 90% resell and then 10%, say, cloud revenue for 9 to 10x. We're able to buy 100% VARs with no recurring revenue at 5x. And therefore, our standard model for $100 million of revenue is that we have an average 3% EBITDA margins. We pay around $15 million of purchase price per $100 million of revenue, and we've structured the deals to make them -- would not require equity to be kind of 50% to 60% upfront and the rest through a 3-year earnout. And we buy these companies, cash-free, debt-free with normal working capital and therefore use our ABL to finance their invoice and inventory to fund the upfront payment and use their products through the earnout. So we don't require equity. And then once we've bought them, we move their EBITDA from 3% to 4.5% through volume rebates, which is the way the vendors like Cisco and IBM and Ingram reward larger players. And then we take 2% of cost out from duplication in the operations, moving them from 3% to 6.5%. And then through the higher sale of cloud and managed services, we can get the gross profit up to 30% and their EBITDA up to 9%. And so the team now, 20 times, has accomplished this in North America and done just an incredible job. And when you look at the effect of what you're paying when you move -- if you're buying them with that working capital, moving them from 5% to -- from, sorry, 3% up to 6.5% EBITDA, it means you're paying it back from 2 to 2.5x. So our guidance is in North America that we buy 4 to 6 a year. We bought 2 at the end of 2017, 4 in 2018, 5 in 2019, 5 in 2020 and 4 so far this year. In addition to our 4 to 6 a year in North America, we've indicated that we'll start acquiring companies in Europe very soon. My target goal was 2 by the end of Q2. And we're right there now. We haven't closed anything yet. But we're definitely working on that, and you should expect some things there soon. But this is a very maintainable pace in North America for the next few years that we look to augment with the European acquisition strategy as well. As I mentioned, we do things that -- 2 things that are -- most people find incredibly hard. That's cross-sell and integrate. And in addition to taking $20 million of cost out through integration last year, we took $8 million out so far this year, and there's more to come with our ERP migrations. And again, because of our mid-market customer base, you can move an ERP system with a mid-market customer base in a quarter, and you can do multiple at the same time. Whereas if you have large enterprise customer base, in my former life this would take years. Our team has done an incredible job of doing this very smoothly. And if I had started the year last year and we were trying to see how we would do this remotely, it brought questions. And the team has been so effective doing this, even though everyone's been remote. So congratulations to the team. I got to say I'm a little nostalgic because Slide 10, our 3-phase plan, I've had in our investor deck for -- since we started. So I created this plan in Don Cuthbertson, our CTO's basement in April of 2017. And this incredible team has executed against this plan. As you recall, Phase 1 was create a broad-based geographical coverage in Canada, U.S.; Phase 2, build up all those capabilities around hybrid IT; and Phase 3, scale and remove and integrate the back offices. And the target of getting to $2 billion of run rate revenue and $100 million of EBITDA, we're on track to achieve by the end of this year with acquisitions. And so the question is, what next, but also, I really would like to thank Gord McMillan, who, although stepping down as Chair, will continue to help with acquisitions; and Don for the creation of the journey. And then the new players that we add, you see Thomas and Darlene being added to the Board. We've announced some additions like Julianne Belaga as our Chief Legal Officer; and Shubo Rakhit is helping us out, feels that we can get to this next phase of growth. So I'll talk a little bit to people about how our plan is to go from $2 billion to $5 billion in run rate revenue from 2022 to 2025. So our goal is to get to $2 billion at the end of this year and in the next 4 years to get that from $2 billion to $5 billion. And the way we're going to do that is continue to acquire in North America around $400 million of acquisition revenue annually, acquire the same kind of number in Europe but in euro. So that will get you to about CAD 1 billion of acquisition revenue a year. The other big thing, and you really saw it during our Q2 and Q3 last year when we weren't acquiring companies, is that we'll be moving these companies much more to software and services, particularly in managed services. And so I'll go through this, but the goal is by the end of 2025 to get our EBITDA to 10% of revenue or $500 million of EBITDA from the over $100 million that we'll have at the end of this year to $500 million by the end of the year. And the managed services component of this will be extremely important. Managed Services, we're targeting 55% to 60% gross profit on Managed Services by then with 25% EBITDA margins. And we're targeting -- 20% of our revenue will come from Managed Services or $1 billion will be Managed Services, so essentially half of your EBITDA from Managed Services and half in the rest of the business. In doing so, that will take our mix of products and services from software and services going from today kind of 45% to 60% and from our hardware revenue from 55% to 40%. Some people have asked me about the value of the hardware revenue and especially the networking piece is incredibly important. And the reason is if you don't provide that piece like the consultancies, [indiscernible] centers, then you're introducing someone else into your account to provide those services. Especially in the mid-market, we're looking to provide a total holistic solution to our customers. And as we're providing the whole solution, that really helps. It also -- as you know, we get an incredible support around campaigns, market development funds, rebates from our vendors and their assistance in our plan. And even while we're successful with them in doing this, if we don't have that component, we miss that partnership and that ability to enter market funded by our vendors. And so that has been very helpful and will continue to be helpful in the future. So we've talked a little bit about our expansion into Europe, and we have people who have really told about is that we'll be starting off in U.K. and Germany. And that the -- in subsequent phases, we'll be looking to go to what I affectionately referred to as the beer-drinking countries were Benelux, Nordics, U.K., Ireland, Germany and U.K. and wait till later to do the "wine drinking" countries which are a little more difficult to integrate. Really, you want to start off with Germany and the U.K. because they have a large enough mid-market to be able to really use the same strategy that we've been using in North America. A little bit different on the playbook would be there are certain things in country that have to be there. So each time we buy a platform in a country, we will leave -- especially the sales, marketing and engineering, kind of the first one, we won't get the synergies. Whereas the 2 to 10, you will. And we'll look to put admin support out of Ireland and technical support out of Eastern Europe, although logistics centers will be in country. Again, I must have the help and thank Tom Volk, who is our new Chairman, for his assistance in coming up with this. The relationships that I have with the vendors and our targets in North America, Doris and Thomas have in Europe. Doris Albiez, who is on our Supervisory Board, who has been fantastic in contacting companies that she's worked with for the last 30 years in developing the pipeline of acquisitions we have in Germany, in particular, but across Europe. The playbook also will continue to use our lead with kind of Red Hat and VMware in order to make -- get from the more product side over to the software side to really move to managed services. And I feel that our journey to managed services, which I've always referred to as kind of the pot of gold at the end of the rainbow, will be much more direct in Europe than it is in North America due to capabilities and maturations. And that will be following the same kind of strategy of leveraging our partners, especially on the software side, both from the application side and the cloud side. So this has been a really exciting phase of growth for us. Definitely, North America, we'll continue to do the same. There's no lack of focus there, but it's running so smoothly that we feel very capable of adding this leg to it. We beefed up our management team to be able to do this. We'll even be looking to potentially do -- exploring a listing on the London Stock Exchange later this year to kind of help and support this growth but really feel we have the team in place. And so this, I believe, is the end of the management presentation. What I'd like to do is to give the -- we now turn to a Q&A session, and I'll make -- so Carl Smith and Thomas Volk as well as myself, you can feel free to direct questions to any of us, if you have the various questions.

[Operator Instructions] And your first question will be from Kevin Krishnaratne at Desjardins.

Great plans that you have to scale up the business. I'm curious on the Managed Services. You mentioned of the $5 billion target, 20% of that or $1 billion would be Managed Services. Can you talk about how much of that growth do you expect to be organic versus M&A? In Europe, you talked to the fact that the Managed Services landscape might be a bit more mature. So would -- how do we think about where that $1 billion growth from? Is that organic versus M&A? I'd just love to hear your thoughts there.

Yes. This will be primarily driven organically. The acquisition we did of ExactlyIT yesterday was in order to provide capabilities as well as a lower cost base for people like service desk people. You've got a greatly reduction in the cost base to support your customers in Managed Services, but this will be primarily driven organically. Companies that you buy that have existing managed services tend to be very expensive. That's not our model. We have a customer acquisition model where we buy them and add services to them. So that will primarily be on our organic growth strategy.

Got it. And so can you maybe talk about the plans that you might have centered around ExactlyIT and just your managed services sort of organization, if you will, in terms of the acquired hiring or R&D and staffing that you might be thinking about over the near term?

Absolutely. So they provide -- they will be a global service. But really, what I've always aspired to is to sell into the market like Softcat does but provide managed services like CANCOM does. And as you'll recall from calls I've had throughout the years, I used to point to Thomas and say, "He is the gold standard. Look what he's doing with Managed Services." So the wonderful part now is we have the architect of that as our Chair and available to us a couple of days a week. So the playbook will be Thomas' playbook on Managed Services, And that is getting in front of customers, delivering services. And as Thomas says, the easiest customer to upsell managed services is an existing customer. So in -- the things that are motivating the ExactlyIT folks is around Net Promoter Score, where we're targeting initially a Net Promoter Score of 30. This is when your customers are giving you feedback on how you're doing. Apple has a 22. Initially, we're trying to get to 30 and eventually 50 Net Promoter Score, which is kind of a gold standard as far as service goes. We'll be looking for them to move the EBITDA percentage on our Managed Services initially from an 18% up to 25%. So really, the focus of that will be having the tools and processes which they've developed and the cost base. So Mohammad in -- down in Mexico has a wonderful relationship with the universities and the colleges where they've got a production line of bringing new people in as we grow and scale and then embedding people like Kevin as the business development manager, the presales organization, like our process areas in North America, which we'll duplicate in Europe as well. So really, I feel so fortunate to have Thomas available to us to guide us through this strategy. It would be -- all the things that we've done to date, as I've done in the past, this is something -- both Europe and Managed Services is something that Thomas has demonstrated an incredible ability to execute on. And so having him there will be very viable to us.

Your next question will be from Robert Young at Canaccord.

If I could just dig deeper into your statement just a couple of seconds ago about you plan to sell into the market like Softcat and layer on managed services like CANCOM, if I paraphrased you correctly there. The comparison with Softcat is interesting. I think, as I understand, they're more levered towards software. So does that imply you're going to shift the business more towards -- the VAR business more towards software. And just to take that conversation one step further, maybe if you can talk about the organic growth opportunities that are in the VAR business before you start to layer on managed services, if there are any there.

Well, this is what Greg has been doing, right? So you look at -- we have the highest net new logos in the industry. We had 71 in Q4. We had 80 in Q1. What Greg has been incredible about is the cross-sell. And what it is, is a software-led, Red Hat, VMware, IBM software. We grew our IBM software by 23% organically, where all the other top providers were declining. And Greg comes out of IBM's software group. Lighthouse before we bought them had 60% software sales. We had taken them from 2014 at 5% software sales to 60% software sales when we bought them in 2018. So I really have to give credit to Greg for the software first. And software is a meaningful part of our sales. It's been between 20% and 25% last year. So software is -- in our financials, we talked about product. Product is both hardware at around 15% and software between 30% to 40%. So an incredible amount of our profitability today comes from software, and that will only grow over time. In addition to our services, our professional services, our analytics, and cybersecurity and DevOps and our Managed Services, but software is an incredibly important part of what we do today and will continue to be so going forward.