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

Okay. Good morning, everyone. Good afternoon to everyone listening overseas. Happy to have our third installment of "Coffee and Converge" this morning. We have Greg and Andrew with us. Just up ahead here to this famous slide, everything we say about the past is true, what we say about the future is up to you to decide. That includes last night's press release, where we can take too many questions on that, but we're happy everyone is here and happy everyone had a chance to read it; maybe we'll just get right into it. And with that, I'll turn it over to Converge's CEO, Greg Berard.

All right. Thank you, Lorne. Good morning, everyone. Good morning to those on the webcast. We appreciate you taking the time to be here with us today. As Lorne said, this is our third series of "Coffee and Converge". And today, we're going to talk about application modernization. I have Andrew with me here, and I'll introduce him here in a moment. I thought what I would do today is just start off by talking a little bit about 2024 at a very high level, since this is our first series in 2024. I won't go into many details because we'll be talking to you guys in a couple of weeks for our Q4 earnings call, and we'll talk more about strategy and everything. But I wanted to just reiterate a couple of key points for us as we think about where we need to continue to focus and execute on our company strategy for 2024. And if you think about overall, we talked a lot in 2023 about organic growth. We talked about focusing on cross-sell. We talked about transforming to driving higher-value solutions. And that's not going to change. That's going to continue here in 2024, and we want to continue to make that journey and continue that transformation to driving more professional services, more managed services and really being that end-to-end solution provider for our clients. And that strategy is not going to change. We want to continue to be that trusted adviser that is working with our clients on the front end of a sales cycle, advising them on what's the right solution based on their business requirements, helping them implement and consume that technology. And then obviously manage those as well. So overall, from a strategic perspective, continue that focus on organic growth, continue that focus on operating cash flow. For those that saw the press release, hopefully, that was well received. We won't talk a lot about that today, but we'll probably have a lot of questions on that in a couple of weeks as well. But overall, that's really the focus for the company. We're going to continue to drive the messaging that we've been doing with our clients over the last couple of years and continue to be that end-to-end solution provider for our clients. When you look at the other big thing for 2024, and I know there were already some questions this morning on it is the ERP project and being able to go live on that here in 2024 and drive more automation, more synergies across the entire business. And that's going to help us just continue to optimize the business and continue to be more efficient across the board. And our G&D team have done a great job on that here in the second half of 2023. So let's get into why we're here today. I'm sure there'll be more questions when we open it up to Q&A, but I want to talk about this slide here for a couple of minutes and then turn it over to Andrew to get into the meat of the application modernization practice and some of the projects we're doing with our clients in that space. But I wanted to, again, just reiterate a couple of points. You guys have seen this slide many times, so I won't go through it in detail, but I do want to call out a couple of things. Number one, one of the changes we've made to this slide is we've broken out artificial intelligence from advanced analytics. So for those that were with us for the first session, we talked a lot about our advanced analytics practice and being that end-to-end partner with our customers on their analytics journey. When you think about the transformation of the market over the last couple of months and years, AI, Gen AI, all the conversations we're having with our clients, we wanted to ensure that everybody understood that we have the depth and experience around AI. And we're having more and more conversations with our customers around Gen AI and how that's going to impact all of our practices and how do we drive more solutions across every practice we invest in to have those conversations and be ready to help our customers understand what use cases AI will have and the impact that will drive for their business. So we will continue to make more investments across the board here, but you'll hear us talk a lot about organic growth and investments in AI, in cyber and in Tags' practice of application modernization and cloud and making sure we wrap managed services around all of that as well. As we talk about application modernization today, I just want to make a couple of opening comments. Number one, application modernization is a practice that has synergies across every practice we have, across Converge. When you think about how we get involved in a lot of these conversations, it's going after our Heritage digital infrastructure clients and talking about whether it's IBM mainframe, whether it's a heritage Cisco account. How do we help them modernize their applications, how do we help them on their cloud journey? How do we help them just make sure they containerize some of those apps so it becomes build anywhere, build once, deploy anywhere? So we want to make sure this practice has synergies and integrations with all the other practices. And Tag will talk a little, Andrew will talk a little bit about that. So I'd say Tags a lot. So Andrew Tegnalia, last name is hard to pronounce, I've known him for 15 years. So when I say Tags, that's Andrew. But ultimately, for us, it's really how do we make sure we take the digital infrastructure accounts we have and drive more of the higher-value conversations. How do we take cloud platforms and the business we're doing with a lot of clients on moving them to AWS, moving them to GCP or moving them to Azure and have that application conversation. That's where there's a lot of value add that we can provide our clients, and Andrew is going to talk a lot about that today. So instead of stealing his thunder, I'll just make one last comment here. We will continue to focus on our whole strategy. So that is not changing as well here in 2024. We will continue to roll out new offerings, new capabilities. We have our global sales conference next week down in Florida, and we will be talking about some new offerings and new focus areas that we will roll out for 2024, and we'll talk more about that on our Q4 call. So with that being said, I want to call Andrew up. So for those that don't know, Andrew, Andrew and I have worked together back to 2007. Andrew worked with us at IBM. I brought Andrew to Lighthouse in 2015 when I joined Lighthouse, and he built up our hybrid cloud practice at Lighthouse and then continue to build and drive our Red Hat partnership. So back in 2016, we were 1 of 3 partners introduced into what they call back then the Red Hat Apex program. And we continue to nurture that relationship, continue to build it, and Red Hat continues to be a strategic partner for Andrew in his practice. So we go back a long way. He's done a phenomenal job over the last 7, 8 years building up this practice, and you'll hear a lot about the great wins he had in 2023 and how we continue to invest and build out this practice. So Andrew, over to you.

Great. This is the advanced analytics, but it's still relevant here. So thank you, everybody, for the time. So really, the main goals today are to have an understanding of the main challenges we're solving for our clients, give some clarity on that, review our core capabilities and how we address those challenges that we have with our customers. I'll touch on a few success stories throughout as well, really highlighting the depth of our core partnerships and how we're leveraging the entire ecosystem of these partnerships to position solutions and not necessarily just product-based selling with our clients. And lastly, again, we have a captive audience. We have these deep relationships with our customer base, addressing the organic growth opportunities and as Greg alluded to, the adjacency with the other practices. So those are my goals for this session. Hopefully, we can hit on those, and we'll jump right in. So we'll start with some headlines. And these aren't the headlines that you want to see from your customers. These are, again, technology failures that have been in the news with customers that have continued to compile technical debt, relying on legacy systems across their enterprise. You see things like Britain's post office scandal. There's a TV show. There's a Netflix series based on that right now, as far as the impact that that's had, where an old legacy system actually put post masters in jail. This is the implication some of these technology failures will have. Outdated old IT systems, slow government put taxpayers at risk. This is alluding to an article that was out there in the U.S. from an IRS standpoint, as far as tax refunds and how slow that process is to get your tax refunds from the IRS because their legacy system was built in the 1960s. It's been updated and cobbled together over the years and they spend hundreds of million dollars updating it, but it still has challenges. It's still slow. U.S. flights grounded because engineer accidentally replaced one file with another. This was just about this time last year where every flight in the U.S. was grounded. Major impact, 13,000 flight cancellations just chaos with the airline industry. They have this application called Notice to Air Missions, which essentially does everything, weather data, flight patterns, routes from an airline. If this goes down, the whole airline is going to shut down and that's what happened. And this was an application that had been built in World War II era. It's obviously been updated since. But again, a legacy code base that the folks who develop the application are no longer with the enterprise. So you have an engineer that's in there trying to make changes. It's a complex system. It's been updated and pieced together over the years. There's probably been some components that have been acquired. Someone makes a tuban-prone error down goes a database table down goes the application and to really tie it together, they lacked a true observability strategy that we'll talk about today, which, again, didn't allow them to pinpoint that answer right away. It went down on a Tuesday, it didn't come back up until a Wednesday afternoon, there's impact. It's how many businesses can absorb that impact from a financial, from a reputational standpoint, if those incidents occur. So these are the type of things we're trying to keep our customers out of the headlines with these type of scenarios. So as we talk with our customers, these are the challenges that we're solving is we have conversations on a daily basis. These are things that we're hearing consistently from our customers. I have legacy applications. I have this old code. And really, the problem there is a lack of legacy skills. A lot of the programming languages from the 1960s from the 1970s, they're not finding the engineers that have those skill sets anymore. How do I get to more modern frameworks where there's a development community that can support these going forward because of, again, the nature of these systems being very brittle and cobbled together, they're difficult to upgrade. I'm afraid if I upgrade one piece of it, I'm going to break the whole application. And then I have that issue that we just talked about on the prior slide. Again, whether it's cobbled together IT systems over the year, different acquisitions that have come in, different regimes from an IT environment standpoint, you get these complex IT environments that have a lot of manual processes that are slow, that are error prone. You have that human intervention scenario we just talked about, a lack of automation overall. I know I need to automate, but I don't know where to start. Those are conversations we're having with our customers. Again, this all leads to unreliable applications, which can have outages, which has financial impact, and things that we're trying to solve for. Really just a lack of overall system visibility. I have a lot of tools from a monitoring standpoint, but they're all doing different things. I almost have an alert storm, if you will, where I have so many incidents coming out of me. I don't know where to prioritize those incidents and where to start. So these are the type of challenges, again, as we have conversations with our clients. So why do companies try to modernize. Again, how do we address those challenges? And you have the Gartner definition here, which application modernization services address the migration of legacy to new applications or platforms, including integrating new functionality to provide the latest functions to the business. So that's Gartner's definition in terms of what application modernization is. I have my own spin on it, which I'll touch on in a bit. But really our take on why companies are modernizing, and these are big ones here as far as, again, innovating against competition. We're all consumers, whether that's our mobile banking app, whether that's buying something from a retailer, whether that's processing a claim with a health care, we want fast results. And these companies are constantly trying to evolve, update their systems to get ahead of the pack to drive faster-to-market business functions for their client base. Again, future proofing the investments, actually saw this right here, which is nice. Future-proofing their investments. Greg alluded to build once, deploy anywhere. As companies go down a cloud migration path, they don't want to start from scratch every time they have to roll out or do a migration of their system or the business changes, and they go from on-premise to cloud. They want their application to be built once and the ability to deploy it anywhere. They want consistent outcomes. They want standardization. This is really where automation comes into play to drive out cost, to increase efficiency with how they run their day-to-day operations. And lastly, they want predictive views to avoid those costly outages. So just a level set, I mentioned I have my take on this definition. Really where I feel my team's focus is on helping make our clients' mission-critical systems and the applications and the systems that support those applications, more reliable, more stable, easier to maintain. Really, that's what our team is doing. These companies have made significant investments in their tech stack over the year. We're not looking to throw that out and start from scratch, but really take those foundational components that they have in place and make them more efficient. So how do we do this? So this is our capability slide from an App Mod standpoint. You have our app migrations team, which is focused on refactoring or replatforming customer applications. This is really that topic of adopting those more modern tech frameworks to deliver software functionality to customers, the innovation that comes with it, upgrading core systems for reliability, for the stability for the security we just touched on. And again, moving to modern tech reduces the risk. We talked about the lack of legacy skills in the marketplace. The average age of a COBOL developer is 63 years old. Think of the number of systems that are running from a COBOL standpoint and the retirement just going to continue to build up there. So that's what we're addressing with that migrations. When it comes to IT automation and orchestration, this is all about removing repetitive tasks and manual intervention on a day-to-day operations standpoint. Again, in turn, you're reducing that chance for human error, you're driving efficiency, hopefully, some cost savings along the way. Our integration portfolio with a focus on, again, buzzwords here, APIs and event streaming. This is the ability to securely, reliably connect your systems regardless if they reside in the cloud, on-premise, in a SaaS-based application, your data is everywhere. You need to be able to securely connect those components together to drive real-time business applications for your customers. And I'll come back to that real-time piece. And lastly, observability, intelligent operations. This is, again, improving the overall application performance, but proactively monitoring, managing those core apps and the systems that support them, and really solving incidents quicker. Incidents are going to happen. But we want to be in a place where we're solving those incidents quicker for our customers. The key metrics that we talk about with our clients every day in this space are MTTI or Mean Time To Identification and MTTR or Mean Time To Resolution. If we can help the client drive down those stats when they do have an incident, again, there's revenue impact, as I said, for every minute, there's an outage with the client's application. So Greg touched on our aim capabilities. I'll get into our team structure here in just a moment in terms of how we go to market from a name, advise, implement, manage, the skills that we have on our team. But this is powered by some of our core partnerships here. And again, this is just a handful. You see the hyperscalers, AWS, Google, Azure, constant innovation going on from the hyperscalers right now. Our companies need help adopting these kind of innovative frameworks. We're there with a lot of those migration efforts. Dynatrace is an interesting one. I actually have a handful of team members that are may be tuning in from Las Vegas right now. Dynatrace Perform is happening this week out in Las Vegas. We have a number of folks out there meeting with our customers, meeting with Dynatrace executives to really put our business plan together for 2024, a key partnership for us here going forward. We are a premier partner with Dynatrace. Confluent just also so happens to be out in Las Vegas this week for their sales kickoff. So we have a lot of folks out there from my team building their go-to-market plans with the Confluent reps going after some targeted accounts that we want to go and partner with together. We talked about IBM. I know I talked with IBM about a few of you. That's part of my background. A lot of the companies that we acquired have the IBM background as well, and that continues to be a core part of our business on the App Mod, and we'll touch on some of those wins that we've had in the IBM space. IBM acquired Red Hat, a number of years ago. And they continue to operate as their own company. Greg mentioned my starting up the Red Hat partnership for Lighthouse back in 2015 time frame, where we wanted these original Apex partners. We've received numerous awards and recognition since, their programs have continued to evolve. Last year, they rolled out a new program. It was a pilot at the time in 2023 called Practice Accelerator. And with Practice Accelerator, with Red Hat was focused on was solution creation. They know that they're just selling point products. Their customers are going to tune out. So they're really focused on solution creation. We were specifically recruited as part of this program for their automation pillar. So really IT automation, again, efficiency, doing more with less, removing those repetitive tasks. They looked at our installed base from a networking, from a server standpoint and said, "Hey, this is a company we want to build solutions around our automation competencies around network, cloud, security and overall server automation." So that was something we recruited to be a part of and the first partner in Practice Accelerator. There's 2 of them here, Red Hat and Portworx. Portworx is actually part of Pure Storage, which is another key partner of ours. We were the only partner chosen back in Q4 to kick off a go-to-market campaign, a joint campaign between Portworx and Red Hat really focused on cloud native platform. So platform for mission-critical apps, including the Portworx framework, which is around backup and recovery and data services. And this really follows a key trend with Red Hat where, again, they're leveraging the full ecosystem of INSP partners as opposed to just positioning point products, this whole notion of solution selling, which I'll comment on to with an example here in just a moment. And just to tie it up, I know I could talk about all of these for a while here today. Harness is a newer partnership. This is a modern DevOps or software delivery platform. the promise of DevOps is to build fast, ship frequently when it comes to code. Their founder actually created Harness because of his experience is that app dynamic where they had challenges with new releases, and he saw that firsthand. So we had this concept to come up with this modern platform for DevOps. And the keyword there really is platform. There's a big push for tools consolidation in this space and Harness really provides a comprehensive suite of modules. And Greg talked about how we tie in with other practices that Converge. They have a cloud cost management module, which allows us as companies move to cloud, they want to keep their costs under control. They don't want that sprawl. They want to be able to optimize that, have a FinOps strategy. So they have a cloud cost management module. From a security standpoint, there's this whole notion of shifting security left into the development cycle, introducing that, again, security, while at the same time, letting developers continue to work and innovate not slowing them down, but putting these automated security guardrails in place to really prioritize vulnerabilities that may be uncovered during the software development cycle. So a really good collaboration opportunity for us with our cybersecurity practice. So a little bit on our team structure from an App Mod standpoint. I just touched on some of our core partnerships that we're going to market with in 2024, but we are supporting over 50-plus partners from an ecosystem standpoint, integrating with these multiple technologies, completed over 130 modernization projects successfully in 2023. Again, if you look at it, I mentioned 20 years of experience here. The App Mod team was predominantly formed through the acquisitions of Viacom, Essex Tech and Lighthouse, which for those following along, are very Northeast-centric acquisitions. So we have a very strong customer base in the Northeast. We had a great year, expanding into other regions across Converge, really strong focus on the West and Southeast in 2023. I think, again, if you look at our total landscape of sellers, we did business with just about 120 unique AVs across Converge this year, which really, again, expanded outside of the Northeast. There's still, if we do the math there, considerable opportunity here for us in 2024 to get with the broader converted sales community. But I'm proud of the growth that we have this year. If you look at our team structure, we do leverage, which I think is a unique differentiator for our team here at Converge, an onshore and offshore model for services delivery. This allows us to have that 24/7 managed services approach for some of our key surface offerings. The ones that we're really going to market with, in 2024 around OpenShift, Red Hat's container platform as well as various AI Ops tools, again, that we'll touch on here in a moment. But not only does that allow us the 24/7 managed services support model, but it's cost effective for our clients and it's still very profitable from a Converge standpoint to leverage this offshore model. Where we see forecasted growth. So as we go into 2024, we've touched on some of these already. You guys heard from our analytics group in the last Coffee and Converge session about AI. It's everywhere. Gen AI's the buzzword that everybody is talking about. We're seeing that in different areas from an App Mod focused area standpoint. So one of those as we look at our app migration pillar, if you remember, that's refactoring moving companies to more modern frameworks is leveraging AI to convert legacy code to modern languages. There's tools, commercial tools in place. IBM has watsonx Code Assistant. Red Hat has something called Ansible Lightspeed, which are all AI-based tools to really help drastically improve that acceptance rate or that conversion rate from, again, legacy frameworks to modern frameworks, really just making migrations more efficient is what we're going at here. We're currently working with a fintech company right now, Converge-led services, integrating AI to really intelligently streamline that migration process. So as each conversion takes place, we're learning more. The platform is learning more and being more efficient and really, again, being more precise at every step of the way as we migrate a number of code conversions for them. Again, sticking with the AI theme, AI Ops, we talked about application performance management, observability, intelligent operations the words that we're hearing now is AI Ops. And this is all about leveraging and optimizing the track metrics that these operations teams have to really improve response times. And again, with expanding data velocity with the data volumes that are out there, traditional approaches to monitoring aren't sufficient anymore. This is a data-driven approach for faster decisions, faster resolutions. Again, the metrics I talked about were MTTI or Mean Time To Identification and MTTR or Mean Time To Resolution. So those are key stats that we're driving with our clients every day. Integrating security into the DevOps and SDLC process. Again, cross-sell opportunity with our cyber practice that we're very excited about. Again, if our cyber team has a pen test opportunity, they've identified a vulnerability. Now it's time for the App Mod team to come in and remediate that opportunity and not really remediate what they found them, but then do constant continuous code standing of those applications, static dynamic application testing and really getting that security in place early in the software development life cycle. Again, the important piece, don't slow the developers down, use tools to automate those guardrails, put those guardrails in place, so you have security, but don't slow down the development team. So that's an area, again, that's going to continue to drive not only software for us with the tools like Harness that I mentioned, but professional services opportunities. Adoption of event streaming, as I move over to the other side of the screen here, this is all about connecting data streams from anywhere, on-prem, cloud, really for the ability to build smart real-time applications. And the highlight there really being real-time; A lot of our companies that we see still leverage legacy batch processing where you're getting information overnight or just once a day. We want to be able to enable that real-time integration, take advantage of all that data that's out there. These data streams are coming from all sorts of different places, take advantage of that, funnel your applications with whatever data, different things like that, that if you're a retailer or manufacturer, have access to all of that data by having the secure, reliable approach and partnerships like Confluent that we've established are really going to help from an event streaming standpoint here. As we move through automation, automation of clouds, firewalls, network devices. This is all about efficiency. This is reducing human error. If I'm in a client meeting, I'm off and asking our clients, "What is the one repetitive day-to-day task that you'd never like to see again?" And that often starts a conversation of "I know I want to automate, but I don't know where to start." And that's the question I often pose is, "What is that one repetitive day-to-day task that you never like to see again?" Let's start there. Let's understand that process. Let's eliminate that. Let's introduce automation into the equation. And that's a good advisory piece of where we can start the automation conversation. This provides tremendous cross-practice collaboration. Again, with cloud, security, networking, digital infrastructure; the opportunities there are great for us. More to come on that one, as I highlighted a co-created solution here to close out. But a cloud-native approach; the promise of cloud-native application development is really to enable rapid change to meet those customer demands. That's that innovation we talked about. This is Build Once, Deploy Anywhere. We've heard buzzwords about hybrid or multi-cloud deployments. This is what this bucket is. This is developing by application once and not having to rewrite it should my business change, should I go to AWS? Should I later go to Microsoft? I don't have to make those changes because I've used a cloud-native approach to application development. An approach like this provides flexible, resilient platforms to run modern applications, including a number of AI workloads that are in the marketplace, like watsonx. From a use case standpoint, just going to highlight a few. I know we talk a lot about mid-market and the opportunity there. I did want to highlight some opportunities we have from the state government, a large global investment bank and an IT provider. So this is an existing client of ours. They didn't stay out of the news. So I'll put it that way. So they had an application that incurred a data breach due to a coding error. It was actually a job of vulnerability. It impacted close to 40,000 businesses. The system failed to make timely payments to families, in the news, not a good thing. They also failed an audit with the IRS to adhere to their technology standards of maintaining supported versions of software for these key applications. So we knew that they had spent a lot of money on this application over the years and released it. We didn't want to take the approach of just starting from scratch. Again, making your existing systems more reliable, more stable, easier to maintain, we took the approach of advice first, understand the dependencies that are out there. And let's see if we can come up with that path of least resistance to at least get them to a supported version now to get, again, the IRS technology standards addressed to get the vulnerabilities addressed. If you think about like a house analogy, you're not going to start knocking down walls in a remodel until you have a blueprint in place. So that's what we do with this first phase. And our general approach with the advisory level assessment is to get that blueprint around their current stack and make recommendations and advice from there. So we were able to provide a solution to upgrade that platform. They're now in compliance. They didn't have to rewrite the application. And now we're positioned as a trusted adviser as they move to the cloud. We're in a good place to have that conversation with them. This is a large global investment bank. Again, we talk about why companies are modernizing. They wanted to roll out competitive features faster. They couldn't do that because outdated technology that they had. They had actually outsourced their monitoring to a third party that was incurring some high costs. So again, we work with them, we work with them through the presales process. We proposed IBM's watsonx AI Ops platform in this scenario to really transform their IT operations initiative. We've now deployed that. We start typically with an MVP or a minimum viable product approach, prove that the technology, proved that our approach works and then from there, grow the opportunity and the partnership with that client. So this started as an MVP, we've had SOW 1, SOW 2. With one group, we've moved into other groups, network management, IT operations from here, again, proving our success in the approach with an MVP to prove that this technology works has got us into other lines of business with this particular client. Again, this new modern platform, they've been able to be more proactive in nature as we talked about avoiding those costly outages, overall improved application availability and really bringing that monitoring in-house that is going to save them millions of dollars they estimate over the next few years. Last use case here. This is an existing client of ours, again, another theme, an existing client of ours, came to us with a unique challenge. This was actually the CISO of this enterprise. We talk about collaboration with our cyber team where I have a lack of visibility to the external IP addresses. I have dozens of network vendors. I have 14 data centers globally. It's very time-consuming for me to map all of those IP addresses across my network infrastructure and understand where they're tied to. There's a security exposure there. How can we address that? Leveraging a tool that they already had in Ansible, we were able to provide real-time automated IP address catalog, and we actually worked with our development team to create this custom dashboard, which essentially gave them a single pane of glass to view their entire network inventory in one place. So again, automated visibility to 260,000 IP addresses across 14 data centers globally. I bring up this use case because it got us thinking about the broader opportunity and the network installed base that we have at Converge and again, this practice accelerator program that Red Hat had recruited us for. We told them about this when we got together and they said, we think there's a larger opportunity here. So we started working with the folks as part of this co-created team at Red Hat to really understand what that network management challenge was. So we work with Red Hat, we work with our network engineering and architecture team internally and really understand that networks are typically built and operated very manually. The traditional approach is while manual, are also slow and error-prone. And if you have an environment that has multiple network vendors, Palo Alto, Cisco, Arista, Juniper, it gets even more complex because they have multiple tools to a single thing of identifying, again, the patching updates, the IP addresses, just the general information about this. They have multiple duals to do the same thing or they're tracking it in a spreadsheet. It becomes challenging, it becomes manual. And 48% of organizations we found are still relying on manual data gathering for their networks. There's over 50-plus vulnerabilities every day that these network operations teams are exposed to that have to require panic patching. So in that panic patching mode, that becomes exaggerated even more and some of these errors happen. So we came up with a solution working with Red Hat called Unified Network Automation Platform, which is powered by Red Hat Ansible. So again, to my point about not selling just products, we're selling a solution to a problem that we feel we have with our network installed base to really solve a problem for them to manage that full life cycle of their network infrastructure, especially when you have multiple network vendors in scope. And we have a custom-developed graphic user interface or single pane of glass to present that view. If you look at the right-hand side of the screen, there's a graphic of operations and administration teams being able to have that single view of your network environment, whether it's in an on-prem data center, whether that's in satellite offices, whether those are out of edge locations like retail stores, being able to pull that data automated altogether and address it in one single user interface is a solution that we've come up with, with Red Hat. The nice thing about it is we have our installed base from a network standpoint and our sellers can go position it, but it is also available for Red Hat sellers to sell on their Red Hat ecosystem catalog. So it was published on Red Hat system as something for them to go sell as well. And just to close out, why did Red Hat partner with Converge here. Again, the UNAP solution is now available. This is an announcement that they put out. And again, after seeing the capability and expertise of the Converge team and helping customers to solve their network management problems, we immediately saw an opportunity to create a cohesive joint offering that could be promoted, sold and delivered to many customers on a repeatable basis. So again, this notion of leveraging the ecosystem of tools and again, selling solutions as opposed to products. So that's all I had for slides. And hopefully, there's some questions and some dialogue here. But hopefully, we covered the main goals of, again, what are the challenges we're solving for our clients, what are the core capabilities we're bringing to the table to solve and address those challenges? What are the core partnerships that we're leveraging to do that? And again, really just addressing what I feel is the organic growth opportunities and the adjacency with other practices for us here in 2024. So that's all I have for you folks. Look forward to chatting more and thank you very much.

Greg, a quick question just in between Tags, where do you see the cross-sell being the easiest? Like what products, if it's already there, is it easiest to sell on top of for you?

I think the cybersecurity practice in that DevOps life cycle is an opportunity I'm really excited about this year. Again, we have pen testing as a service opportunities. I'm not sure we're there. There's maybe something over here, sorry about that. Pen testing as a service opportunities for us, which we can then, again, vulnerabilities are identified, we can come in and remediate those right away. I think that's one. Cloud platforms is a really synergistic relationship where companies are moving to cloud to take advantage of these modern frameworks and technologies. So we have to bring that message closer together as an organization in 2024. It's almost App Mod the on-ramp to a cloud migration or vice versa. That conversation has to be happening simultaneously. And then some of the digital infrastructure stuff we just touched on as far as like the networking space is one I'm really excited about this year.

Great. You identified that, you identified that you have over 125 on your team, you talked about your 12 partners. How would your life change if your team was 40? Would you still have those 12 partners? Would you be able to scale back? Or is this a business where you need scale and you need that breadth of partnerships?

So the breadth of partnerships is important. I wouldn't like my team to go down to 40. I'm just saying. But yes, this is an area where, again, from a team standpoint, I see our team expanding here and continue to support our customers, again, with some of these higher scale offerings in the marketplace available to us.

Yes. And I think one of the things that Andrew talked about is the onshore offshore capability as well. So he has resources in India that he can leverage and scale as projects come on board. So the combination of continuing to invest. And as we talked about a few times, is investing in the resources in region. So he will continue to add resources across North America. But from a delivery perspective, combining what we have here in North America, but leveraging the offshore presence in India will allow him to scale as we drive larger and larger projects. There's also a lot of communication internally that we've talked about, about expanding the Mexico presence as well. So you'll see his team and other teams continue to expand the offshore capability to drive that profitability up as well.

All right. I wanted to squeeze a question on the press release last night, which you issued around a surplus of cash flow from operations. So last time you put out a press release just wanted to touch on that briefly. You said that you're expecting quite a high level of cash from operations. I think coming out of inventory, inventory historically at a high level likely coming down. Is that the core driver of that? Or is there some accounts receivable or accounts payment benefit?

Okay. Perfect. Yes, the core driver is working capital and out of working capital, it's inventory. As we went into look at the COVID period, we built up some inventory based on expected demand and we've been rigorous about what processes and policies we have as we buy more inventory. Simple things like any inventory purchase within the company now require both Greg and I to group, the guard is the dollar amount, even if it's a 1 approval. And generally, when you acquire CFO and CEO approval on certain things, you see behavior change. And people come up with creative solutions where all of a sudden, you don't need to buy this inventory anymore.

All right. So sometimes when inventory drops quickly, is that a sign of top line weakness or demand change. Is there anything there that in the press release?

No, there's absolutely no change on that front. As we highlighted in the press release, we're reconfirming our guidance on GP and EBITDA. And there's nothing changed. We're still continuing to see very, very strong demand in the market for our products and services.

Okay. And then you said there's process changes at play there. So there's some durable change. So this isn't a onetime inventory slightly to run at a lower level going forward.

This is a onetime pickup from a cleanup perspective, but this is a sustainable change, something that is ongoing. We're expecting our working capital levels to stay at these going forward, unless there is a strategic reason for doing it unless we get a different order. We collectively make the decision that, yes, it's worthwhile, us taking on additional working capital, we'll make that decision then. But otherwise, these are sustainable changes.

Okay. And the last question, paid said that you're paying down debt significantly quarter-over-quarter is about $100 million. Maybe you just talk about the commitment to debt paydown, if there's any change in your capital deployment priorities? Anything there?

Yes. So our net debt reduced by $100 million quarter-over-quarter and net debt reduced by $50 million compared to last year Q4 over Q4. We're still committed to reducing our debt and continue paying down debt. Obviously, there is a balance between debt reduction, and we also do have a significant amount of acquisition payments that are coming due next year as well, just in the form of contingent considerations and deferred considerations. We're actually just in the process of finalizing our capital allocation strategy for this year, getting Board approval in about a week, I guess, now. And once that's finalized, we'll communicate what the capital allocated strategy looks like on our March 6 earnings release.

Okay. Thanks for that. I was originally going to say no questions about the quarter because of a quiet period because you put out the press release, I thought that was a fair game. A question on the item in front of today is, can you just tell me who wants the IP when one of these, when you finish an App Mod deployment, do you get to carry on any of the IP? Or does that stay your customers problem?

Yes. It's engagement specific. And one of the things that maybe not necessarily IP, but having a repeatable framework and Blueprint for our services engagements is, again, something we treat like IP, where again makes us more efficient, more scalable in our services engagements, where as we continue to evolve these things, they have become repeatable blueprint approaches where it's a repeatable, proven solution approach to solving a problem as opposed to, again, just a point-in-time type of execution. So it is a case-by-case on the IP address, but really our focus is building these repeatable blueprints for services delivery.

But if you develop some AI tool for a client, if there's an application that you're modernizing putting in the cloud, there's not a piece of software, an application that you're able to then take to another client. It's the framework that used to build it.

That's correct.

Okay. Stephanie?

Just curious in terms of the percentage of revenue coming from application modernization right now and the growth rate there. And you mentioned that it's really concentrated in the Northeast. You're expanding the sales team. Just curious if you could give us a bit of an update on what's going on there as well.

We don't provide the breakdown of App Mod revenue or our individual practice revenues, but it is a massive growth area for us, given all the changes we're seeing in the market that Andrew highlighted and working through, and it is one of the most profitable practices well, given that we have leverage of onshore and offshore models.

I'm sorry, just in terms of the Northeast and the expansion into the rest of U.S.

Yes. No, that's definitely an area of organic growth for us, as far as building out our team as well. I mentioned the Northeast centric is because a lot of our sellers are familiar with the team having come from Viacom, Essextech and Lighthouse over the years. I think we've done a really good job expanding into other regions. We really rolled out a simplified message as an App Mod team at the beginning of 2023 and saw a really nice uptake in our engagement level with field sellers across other regions. And as far as expanding our team, I know we're trying to organically grow our team by having more resources out West or in Central as an example. So that is a focus of ours.

It's Gavin from Cormark. A lot of the hyperscalers for a few quarters have been talking about just optimization of legacy platforms that were thrown under the cloud. So maybe you can you just talk about how much interest you're seeing in the pipeline for those type of projects? And what kind of ROIs you can deliver or paybacks on those type of projects?

Yes. I mean that's a huge driver to the first question that got asked that collaboration with cloud platform. And that's a huge driver for customers going that way. Again, we talked about app modernization today. There's the approach of migrate to modernize where companies are lift and shifting their existing workloads to the cloud and then refactoring and replatforming later or there's the vice versa of modernize and then migrate that before. So there are different approaches to it. That's definitely a lot of demand that we're seeing as companies move to the hyperscalers. And to my point of how imperative is for us to be closely aligned with our cloud platforms team and driving that message together. So we're not stopping the conversation at that lift and shift point. We're then getting into that modernization conversation, talking about DevOps, how they get software code out faster, how they continually observe that technology as they move to the cloud. So again, working hand in hand with the cloud platforms team in 2024. It's key for us to not stop that conversation after companies migrate to the cloud, but continue to modernize from there. So that's a huge driver for us this year.

Yes. And Gavin, we'll touch on that a little more on the Q4 call. So we've got our global sales conference next week, where we're launching some changes to our go-to-market strategy around some of those things, which will drive more of that synergy and more of that collaboration between App Mod and cloud. We can talk more about that. The other comment I'll make is we saw some significant growth around our financial operations model within the cloud platforms organization, exactly because of that, helping our clients optimize what they've moved to the cloud and how do they reduce the annual spend they have with some of the cloud providers. But you'll hear more about that on the Q4 call.

We hear a lot about technical debt, large companies that just haven't really embraced digitization. Stories of large Canadian banks running general ledger on COBOL and a basement somewhere. How big is the opportunity for your section of the market? Like when you look at your pipeline, it's just a lot of business coming in? Are companies coming in with intent? Maybe just talk about bringing the level of demand down to something that we can digest.

Yes. I mean I talked on that captive audience that we have. I think in a lot of cases, we're in unique stock because we've been working with those clients and understand those legacy systems. So they're coming to us understanding, again, as I mentioned, you brought up COBOL. The average age of a COBOL developer is 63 years old. It's becoming more and more imperative every year for these clients to migrate and make some of those movements. And I think we're starting to see -- again, I talked about that advisory approach and the blueprint to understanding the foundation before you make some changes. But I think AI is going to continue to really drive that forward and get companies more comfortable taking on that initiative that maybe they were hesitant to in the past because it was a manual lift, where now we have some automation and AI baked in to really do that legacy co conversion with things like watsonx Code Assistant that are available, some of the tools that we've been driving and introducing AI into our migration approach. So again, as some of this automation becomes more prevalent, I think companies are going to be more willing to tackle those initiatives. And maybe they've been just keeping aside. I know it's an issue, but they've been afraid to tackle it because of the scale of it. So I think with automation coming into the fall, we're starting to see more companies from those tables.

But it also feels as though enterprise has been shifting to the cloud for a decade now and perhaps most of the applications have already moved into the cloud in reality, maybe that's not the correct statement. Like are we still just scratching the surface on what needs to be modernized.

Absolutely. When you think about how many applications still reside in the data center, when you think about how many clients are still running heritage systems, whether it's IBM mainframe, whether it's IBM Power, there are a ton of applications still sitting in the data center on-premise that our clients need help with moving to the cloud. So we're still in its infancy. A lot of the larger and more advanced clients have moved some of their key applications to the cloud, but they're still running a lot of heritage apps. When typically clients run thousands of apps in their environment. So they have not moved even 50% of those in most cases. So there's a lot of opportunity here, not just to modernize the apps they have, but then to help them deploy whether it's in the cloud, whether it's in our data centers, whether it's in our managed services organization, the opportunity is significant here.

And another element to the opportunity that might be overlooked as a regression. I think you suggested in your prepared remarks that companies that are unwilling to touch one piece of the system because the system can all break down. And so I mean, how much of the opportunity is just testing and regression of old systems with new systems as you move things forward? Like how many companies are doing things in one big jump forward, everyone is doing the piece now, I imagine.

Yes. I mean that's a big component. And that's the whole promise of again, if I'm getting too technical, tell me. But there's this whole notion of kind of monolithic applications, which is a scenario that you had, which is how companies used to develop apps where all of the components of that application were very tightly coupled together. So if you change one thing, you have to take the whole system down to do that progression testing to make sure they're still interoperable. The whole promise of cloud-native development and computing is this notion of container-based workloads. We're isolating those core functions of an application where I can take one function down and not break the other components. So that's an approach, again, that refactoring of applications that eases that approach that you just touched on, where, again, I don't have to take the whole system down and make these changes if I adopt this more container-based approach, and that's the whole hybrid multi-cloud promise of going that container route.

Can you hear me? This is Kwan from TD Securities. Two questions from my end. So even in this day and age, look, the benefits of app modernization, they're pretty evident. But even now, there are a lot of companies out there who prefer to keep their systems running on legacy platforms, on on-prem, software and whatnot. Could you help us understand like why they're still doing that? And what's the education phase that they go through when you guys come in and talk to them?

Yes. I mean I think part of it is security, part of its governance, having that data close to them as part of the staying on-premise in that scenario, but I still think there's a lot of opportunity for us even if that is their choice to again be more automated, reduce that human error opportunity that's in there. Where can I remove those repetitive tasks to make you more efficient and make your apps more reliable, more stable? And then that whole piece with observability and intelligent operations, again, regardless, our opportunity can be in the cloud, can be in the data center. If you still need to monitor and ensure the health of those applications regardless of where they reside. So again, I still think there's lots of opportunities even if clients do decide to stay on-premise. And maybe, again, we become that trusted adviser in that case to the state government where that's what they chose to do in that scenario. It was again, a point in time, this has got them supported, got them reliable, got them stable. Now if they do go to the cloud later, I feel as though we're in a position to be the trusted adviser to bring them on that journey. But there's still opportunities regardless if they stay in the data center from our perspective.

Yes, because one of the key points that you need to think about, is the ability for them to migrate those workloads. We're not saying they have to migrate into the cloud. But if they decide to choose a new platform, whether that's moving from IBM to HPE or to Dell or to Cisco, we're giving them that opportunity now by modernizing that application to shift anywhere. So the whole concept of build wants to deploy anywhere doesn't necessarily mean we're going to help them deploy to the cloud. It could be just a new platform of their choice. So that's the key aspect. There's still a lot of clients that will run on the IBM mainframe. But they still want to modernize that application that's running on the mainframe today, and we can help there. So our ability to help our clients modernize their apps regardless of the platform of choice is the key growth opportunity.

Yes, that makes sense. And just one question on AI. You spoke a lot about that in the presentation as well. But what's the specific role you think Gen AI, can play in all of this, especially when it comes to code riding and whatnot? Could you speak a little bit more about that?

Yes. No, I think there's a big opportunity there, as far as making developers more efficient in terms of getting code out more frequently. Again, a lot of the platforms we talked about, whether that's Harness or Dynatrace, they have AI and Gen AI baked into their platforms now, again, to drive that efficiency to make their developers, again, ship fast, ship frequently, continuously build those applications and that new functionality. AI is going to play a big role in that. And again, a lot of these vendors that we're partnered with are baking Gen AI into their platforms to take advantage of that opportunity. It makes not only more efficient but more accurate. Again, if you take a conversion, if I have Gen AI baked then, where every time we do a conversion, we're learning more from the last one and being more efficient and more precise as we go along the spectrum of that conversion. So I see it playing a big role. And again, not only our approach to it, but a lot of what these platforms are baking into their core software platforms.

I had a question around the opportunity in the international markets. You characterize a large one in the U.S. with taking your offering across different regions of the U.S. Is that playbook repeatable in Europe or Canada, let's say? Or would you characterize those markets differently?

Yes. So absolutely in Canada. When you think about our practice structure and where we've deployed resources, Canada is part of that strategy. So we look at it from a North American perspective. So Andrew has resources in Canada as well in the U.S., and we'll continue to have that capability. When you look at the European presence, we haven't built up these skills from an App Mod perspective. With that being said, we are putting some focus in Europe on leveraging some of the things we've done around Red Hat around IBM, around some of the other software vendors. So giving them the opportunity to have these conversations with their clients and specifically around UNAP, if you have the ability to have a networking conversation where we do in the U.K. or we do in Germany, then we can drive some of these conversations. More on the software focus first. And then as we start to see success and we build some of that pipeline, we can take some of the resources from a technical perspective and find them in Europe. But upfront for 2024, the focus will be on driving some of the software conversations and growing our software capabilities within both the U.K. and Germany.