Converge Technology Solutions Corp

TSX:CTS

Earnings Call Transcript 2020-Q1

[Operator]

Good morning. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Converge Technology Solutions Corp. First Quarter 2020 Results Conference Call. [Operator Instructions]. Your main hosts today are Shaun Maine, Chief Executive Officer, and Carl Smith, Chief Financial Officer.Before we begin, I'm required to provide the forward-looking statements reflecting forward-looking information which is made on behalf of Converge and all of its representatives that are on this call. All statements made on this call will contain forward-looking information. The actual results could differ materially from a conclusion, forecast, or projection in the forward-looking information. Certain material factors and assumptions were applied in drawing a conclusion, making a forecast, or projection as reflected in the forward-looking information.Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking information and material factors or assumptions that were applied in drawing conclusions or making a forecast or projection as reflected in the forward-looking information are contained in Converge's filings with the Canadian provincial security regulators. Converge does not undertake to update any forward-looking statements. Such statements only speak as of the dates made.Today's discussion also refers to adjusted EBITDA, which is non-IFRS measures and non-standardized meaning. Please refer to Converge's filings with Canadian provincial securities regulators for an explanation and reconciliation to IFRS measures.Thank you. Mr. Shaun Maine, you may begin your conference.

[Shaun Peter Maine, CEO & Director]

Thank you. Good morning, everyone, and thank you for taking time to participate on today's call, which will discuss Converge's first quarter 2020 financial results and provide an operational update on the business.First and foremost, I hope everyone is remaining safe in these challenging times. As the world deals with the reality of the COVID-19 pandemic, many businesses have faced challenges that are beyond their control. Due in part to our hard work over the last 2.5 years and as a result of our positioning within the market, I am thankful to report that Converge has not experienced the significant negative impact that many others have faced in these difficult times.Our Q1 2020 results are as strong as yet and are a testament to the business we have built and the incredible team we have assembled. Before I get into the details, I would like to personally thank our team for their tremendous work this past quarter. Despite the environment we are in, you have been an instrumental part of our success and I couldn't be more proud of our recent accomplishments. I believe great team shine in difficult circumstances and I have been continually impressed at how this team dealt with adversity in delivering this quarter.As well, our suppliers have been extremely supportive and flexible in working alongside us to ensure that we are still able to deliver at a high level for our customers.So let's take some time to talk about why we witnessed the level of success we did this past quarter. To begin, as a national business with an extensive presence across key U.S. and Canadian markets, we are able to effectively meet the needs of customers across North America. This means that the national platform we've established is well suited to adapt and react to the needs of our customers experiencing varying degrees of COVID-19 impacts across geographies.As well, our team has truly gone above and beyond their regular duties to customers and suppliers to ensure this rapid change in environment has not driven work interruptions for our clients. The most obvious example is to reiterate what I shared on our last quarterly conference call in our Q4 2019. We have seen a significant uptick in sales from products and services that allow our clients, employees to work remotely without significant interruptions.Going back to the beginning of the quarter, in January, we held our national sales meeting in Dallas with all 11 subsidiaries of Converge at the time in attendance. We were able to showcase over 200 of our sales reps to vendors, which I have to admit was remarkable to see the level of commitment and excitement towards Converge that was present throughout the event.Our sales force is tailored to our predominantly midmarket customer base and vendor engagement is key to their success in helping our customers through their digital transformation. It is easy for me to say that we're the foot soldiers on the ground for our vendors, but to witness firsthand the symbiotic relationship between our vendors, our sales teams, and subsequently our customers is truly an unbelievable feat.Another major influence in our success this past quarter is the makeup of our customer base. Approximately 80% of our entire customer base comes from 4 areas: technology companies, government, healthcare, and finance organizations. We're fortunate to have little to no exposure to other industries which have been majorly impacted such as oil and gas or hospitality and tourism. While we're focused on the SMB sector, these are blue-chip industries that had to act swiftly due to coronavirus to continue business operations and adjust accordingly. We have been a direct beneficiary of this trend.Furthermore, the trend that I often speak to regarding SMBs transitioning through their cloud journey has actually been expedited as a result of this changing environment as companies actively push towards moving more of their technology into cloud services to create a more collaborative work environment for employees working remotely. This is further evident in the substantial growth involving our gross annualized recurring revenue base this quarter, which now is approximately $190 million, an increase of approximately 35% quarter-over-quarter.As a reminder, our ARR base consist of private cloud or managed service monthly recurring revenue which are typically on 3-year contracts, public cloud monthly recurring revenue which are also usually on 3-year contracts, and software subscriptions which are annual. In this quarter, our managed service private cloud annualized recurring revenue totaled approximately $52 million or 27%, our public cloud gross revenue totaled $59 million or 31%, and our software subscriptions gross revenue totaled $79 million or 42% of total gross recurring revenue.Having over $100 million of annualized cloud and managed service recurring revenue is a phenomenal achievement for Converge. And $190 million of total gross recurring revenue means we've hit a target that we initially projected we would reach at the end of 2021.Microsoft CEO Satya Nadella stated on his recent Q1 earnings call that 2 years of digital transformation had occurred in 2 months and this is the trend that we are seeing with the increase in the sales of our public cloud, private cloud, and managed services.As we are now in our Phase 3 strategy of finding operating leverage and maximizing use of our resources, more of our gross margin of approximately 23% will drop to the bottom line. I'd like to share an update on the current status of Phase 3, which I mentioned last quarter was to start in the beginning of 2020.We projected that we would eliminate at least $9 million of annualized cost from the business through the integration of the back offices of our 12 acquired companies. In Q1, we eliminated initial $3.5 million in cost and as of May 1 we have integrated 4 of the 12 back offices and are scheduled to complete all 12 by December 1 of this year.In addition to these back-office savings, at the beginning of April, we moved $11 million of annualized cost predominantly from duplicate front office and management positions as a result of the acquired 12 companies, many in overlapping geographies. In this manner, this $20 million of removed cost annualized equals approximately 2% of our Q1 2020 annualized revenue.In addition to this, we demonstrated in 2019 that we generated approximately 1.5% of revenue in volume rebates from our vendors, a level far in excess of what our company has achieved before we bought them. This is the way we acquire a company making 3% EBITDA margins and transform it into an integrated 6.5% EBITDA margin business, with additional upside as more and more revenue shifts to higher-margin software and services.With all this in mind, let's take a further look into the operations of our business and some recent developments this quarter. In January of this year, we acquired PCD Solutions, one of Canada's largest VMware partners and a provider of private cloud solutions. We are incredibly excited to welcome the PCD team to our family and view their outstanding organization as a key component to our success going forward.Prior to our acquisition of PCD, much of our business in Canada had been at the Canadian federal government level. At the beginning of the year, we also organically built a sales and engineering organization in Toronto. With the PCD acquisition and the addition of our Toronto team, we now view ourselves as notable competitors in the Canadian enterprise landscape, as PCD builds out a presence with leading institutions in the Canadian financial sector. Furthermore, combined with PCD, we now have outstanding scale capabilities in both Toronto and Montreal to complement our Ottawa presence, which we believe will enable significant cross-selling opportunities amongst the entire Converge family of companies driving growth in the Canadian market going forward.I would also like to take some time to update you on some recent partnerships and accolades that we have been incredibly proud to announce. Towards the end of April, we announced that Converge had won the Red Hat Rising Star Partner of the Year award. We often talk about our strategic relationship with IBM's Red Hat on these calls. And I'm sure many of you are familiar with our strategy there, particularly with the innovative pre-sales approach we have done in holding Ansible and OpenShift workshops in cities around North America. This remains true, but to be acknowledged by Red Hat publicly is an outstanding accomplishment for our organization and I am thrilled that Red Hat has recognized us with this award.Additionally, we recently announced a partnership with Trek10, expanding our capabilities for Amazon's AWS cloud services. This will only add to our cloud recurring revenue as we add native AWS service skills to our offerings.I'm also pleased to share with you an update on Becker-Carroll, the second Canadian company we acquired in early 2018. Over the past several years, Becker-Carroll has been building a platform for the digital transformation of public sector entities, effectively bringing their products and services online. In a similar fashion that Shopify has offered digital transformation for retail companies, the idea is to bring the same concept for public entities. Branded as our Converge TrustBuilder platform, this product has brought to the forefront of priorities as a result of COVID-19.We are now ready to launch the platform and we believe this has the potential to drive significant growth and value for Converge going forward. Providing this level of transparency and security to our managed service offerings will be a key differentiator for us.In Q1 this year, we completed the financing led by Raymond James for $8.25 million. This added some key institutional shareholders including U.S. institutions to our shareholder base.As we look towards the latter part of the year and the opening up of the economy from its present state of lockdown, we expect to complete further acquisitions while we finish [Audio Gap] our acquisition line remains robust and in an ideal world, we would have continued to make acquisitions at this point in 2020. However, as a result of the COVID-19 pandemic, we are remaining cautious and patient to see the impact of it on our potential targets. We also believe that additional acquisition opportunities will likely arise as a result of the crisis.Finally, before I conclude, I would like to welcome a few key team members we have added lately that we believe will be instrumental in driving growth for Converge as we move ahead. As we previously announced, Carl Smith has joined the team as our new CFO in March. In the short time he has been here, Carl has jumped right into action, has worked alongside senior management to continue implementing our aggressive growth strategy. His prior experience at Espial has already proved a unique insight into growing our software segment of the business. I would also like to congratulate Carl and his team on getting our Q1 results out 2 weeks earlier than originally scheduled.We have also added Cari Hash at the beginning of the year, whom I have had the pleasure of working with before and who has already had a large impact in helping our sales team work with enterprise clients, particularly in the east and central regions. Cari has taken a direct responsibility for managing our core and growing relationship with Cisco. We are very excited to have Cari on board and look forward to leveraging her expertise.Vanita Patel has also joined our team from IBM. Vanita has been working with Converge in helping manage our Red Hat and IBM relationship, and we are grateful that she has now joined Converge. Vanita will be critical in continuing to nurture our relationship with IBM Red Hat, which 1/3 of our revenue is derived from and whose partnership is so important as we implement hybrid IT and multi-cloud solutions.With that in mind, I'll like to pass the call to our Chief Financial Officer Carl Smith to discuss our financials from the quarter.

[Carl Smith, Chief Financial Officer]

Thank you, Shaun. First quarter revenue increased 42% to $241.5 million, compared to $170.6 million last year. By industry, the breakdown is approximately 23% government, 23% banking and financial services, 21% technology and 10% health care. Gross profit increased 47% to $54.8 million from $37.2 million last year and gross profit margin increased 22.7% compared to 21.8% last year. The increase in gross profit margin is due primarily to the company's focus on selling higher-margin software and cloud services.SG&A for the 3 months ended March 31, 2020, were $46.7 million, an increase from $29.6 million last year. The increase in SG&A reflects the additional cost associated with our acquisition strategy and the cost associated with the companies that were required post Q1 of last year. Adjusted EBITDA for Q1 increased to $11 million compared to adjusted EBITDA of $8.5 million last year, an increase of over 29%. As of March 31, the outstanding balance of our accounts receivables and contracts-backed operating line was $156.8 million compared to $156.7 million at December 31. And at the end of the quarter, our cash balance was $26.8 million compared to $20.6 million at December 31.I would like now to open the floor to questions.

[Operator]

[Operator Instructions]. Your first question comes from Kevin Krishnaratne with Eight Capital.

[Kevin Krishnaratne, Principal & Equity Analyst]

I have a question for you on the recurring revenue. Really nice to see a very good sequential jump there. Obviously, there's a lot of moving parts in there. But how do we think about what this might look like going forward? I know it's tough to give guidance. So maybe you could talk about -- I know you mentioned the digital transformation being pulled in, SMBs increasing their migration to the cloud at a higher rate. But with the uptick in acceleration, do you think that was from spend from customers that you expected kind of in, they had budget allocated for migrations in, say, Q2, Q3 and now they're pulling it in? Or are you seeing net new activity maybe from SMBs or even mid-market customers who were on the fence about migrating, something that was coming like next year or the year after and now they're -- they've been stimulated to accelerate? So I'm just kind of wondering what really drove the sequential jump because it was really nice to see.

[Shaun Peter Maine, CEO & Director]

Yes. So it absolutely kind of is all of the above. Definitely, there's a new focus at pulling projects forward that people have had this on their kind of migration path. And now one of the biggest problems people have faced is that when you log in from home, you will have heard that cybersecurity incidents are up 14,000%. And the reason is, is when you're in the office, when you log on to applications, you're -- if you're using Microsoft Active Directory, it validates you and then you're free to use the applications on some access control list. When you dial in from home, you're going in over a VPN. Usually, the security model is, you can't access applications from the VPN. So when you open that up, you've got wide access to all the applications, which is a security nightmare.So the proper way of doing that is through some of these offerings that we've been announcing from VMware on our managed service, such as our VMC on AWS. For example, a large juice manufacturer had a legacy finance application that they had -- we know we have to do this in our roadmap. We were talking to them about facilitating that. It became a priority for them and they've signed a $1.3 million 3-year deal, recurring revenue managed service deal to use VMC on AWS to access that application in a cloud-based manner, a financial application that if you went in over VPNs, you would be opening yourself up to security issues. So we're seeing this kind of across the board in especially our managed service offerings, but you're going to see cloud growth as well. So Microsoft, Amazon and Google are all seeing bigger demands and higher priorities on those services.Our Trek10 partnership around our AWS offering allows us to do more native things, but we had planned to reach this level of recurring revenue by the end of next year. And so to -- it's hard for us to comment on the type of growth that we're seeing. But I'd say, the Microsoft CEO's comments about 2 years of kind of digital transformation in 2 months isn't far off. And we're continuing to see that.We're seeing our customers talk about this being kind of the work at home, it's 5 to 7 months off from coming back to normal. If you think about being in downtown Toronto and getting on an elevator, how are you ever going to social distance? So until there's a vaccine, there's going to be some real new normals for white-collar workers. And so these problems around security issues will remain for remote workers. And the type of solutions that we have on our managed service definitely solve a lot of those security issues. And I think that's why we're seeing that uptick and we continue to see strong demand for those same type of solutions into Q2 as well.

[Kevin Krishnaratne, Principal & Equity Analyst]

And I guess the fact that you are signing up multi-year contracts into the conversation, it's not like -- like, look, this is something that the customers that are signing up, they're obviously looking for a longer term solution. This is not something that -- I mean, again, it's difficult to predict what will happen like a year or 2 from now. But, I mean, you're getting some confidence that this is sort of a new level of normal now.

[Shaun Peter Maine, CEO & Director]

So they were looking to do this anyways. When you heard about Gartner and Forrester talk about most companies were 25% to 30% through their cloud journey, they were on this path. It just wasn't prioritized in the same way. Now because -- and we're just really fortunate. Our infrastructure, we've always had the disaster recovery as a solution offerings, which we've called in the past kind of earthquake insurance in the West Coast and hurricane insurance on the East Coast. But what it means is you can access your applications, your work applications in a secure manner from another location. That includes home. So we already had all of this infrastructure in place. This has just really kind of coincided with a need people have, but they were doing this anyway. This is not -- it's not like once people come back to work, a vaccine is found, they're going to stop this transformation. It's just speeding up a plan that they had in place over a multi-year period.

[Kevin Krishnaratne, Principal & Equity Analyst]

Maybe one for Carl, also related to deferred revenue. If you look on the balance sheet with recurring revenue, the deferred revenue there had a nice jump at the end of Q4 to Q1. What's driving that? How do we think about the amount of recurring in that? Does that relate to multi-period bookings where you -- maybe you're getting? Can you just talk about the type of cash flow that you receive? I know these are, you mentioned, 3-year deals, but they're -- are they priced like annually or is it like a quarterly or monthly, just how do you think about that? And is that a number, the deferred revenue? Can we - do we look to that to continue to kind of look for an indicator on the quality, the magnitude of recurring revenue going forward?

[Carl Smith, Chief Financial Officer]

Sure. So deferred revenue is made up of a couple of things. Certainly, the recurring revenue is a big part of that. We get paid upfront for a number of things. We also -- in any given quarter, we have -- may get paid upfront for a product and when we ship post a quarter and some of that could actually be in deferred revenue. So I think deferred revenue of course in the near term will continue to fluctuate on a quarterly basis. But it is an indicator of a good strong growth in the bickering side.

[Kevin Krishnaratne, Principal & Equity Analyst]

Look, you guys announced a lot of interesting awards and accolades in the quarter that you mentioned. Can you -- the Red Hat Rising Partner one, that intrigues me. It looks like historically there has been some pretty good companies that have won there. So put -- and some good company there looking at prior winners. So I'm just digging a little bit deeper there, like what drives that? Is that that you are driving a certain or a higher level of spend for Red Hat consumption? Is that the type of problems that you're solving? I'm just wondering if you could dig in a little bit deeper into what drove that award. It looks like it was pretty good.

[Shaun Peter Maine, CEO & Director]

Yes. So -- and I must hand all the credit over to Greg Berard, our President. The reason he became President when IBM bought Red Hat was that Greg had a completely different presales model with the practice areas along with these regional workshops. So we've been having these Ansible and OpenShift. So Ansible is Red Hat's management platform, OpenShift their container platform. We hold these workshops in NFL. Well, see we were trying to hit all of the NFL cities where our customers are. And we originally scheduled 25 to 40 customers would come to us to hold these workshops. We ended up being 40 to 70 as they were oversubscribed. And we've done these throughout the various cities that we've been in.And because we target mid-market customers, they will come to you. If you think about how to see 70 customers as we did in Irvine, California, if you had to go out to visit each one of those with a presales engineer, it would take you months and a lot of cost. And the people that went to the -- to see the customer might not be the experts. When we hold these workshops, including our cybersecurity ones as well, we have -- [ EnterTags ] is our Red Hat expert that can be theirs. They're talking to one of the best people on the planet on Ansible and OpenShift.So having that, we're getting a great conversion rate. In this industry, net new logos are very difficult and what Greg's model has allowed is us to have -- when we do our QBRs, I'm seeing every quarter 5 net new logos per company and it's because of this presales model, which I have never seen before. I've been CEO of a large company in this space for 6.5 years. They -- we never had anywhere near these kind of new clients and net new logos.So into the mid-tier where the vendors are not very good about penetrating and having those customers come to you, it has been incredibly successful. So this award is really a recognition of the success we've had in really this mid-tier strategy, which is an uncommon strategy in North America. I've always said that Cancom over in Germany has been kind of the company I look to for how they did it. And they've done these kind of models. But Greg's presales motion combined with that, getting into the mid-tier where you get these wonderful growth of recurring revenue numbers and really, if you're branding yourself as the expert in the multi-cloud environment, because that's really what Ansible and OpenShift do is allow you to exist in this multi-cloud or hybrid world by moving your applications back and forth, then when they go to decide what infrastructure, private cloud, public cloud am I going to use, you're the trusted advisor.In the past the companies we bought, they might have held happy hours, which are great, or baseball games, but you're reviewing your -- the person is selling to you in a very different way, if that's your engagement versus an Ansible or OpenShift workshop. So that's -- it's really a recognition of that presales motion and the amount of net new logos we've been able to bring to Red Hat.

[Kevin Krishnaratne, Principal & Equity Analyst]

Last one from me before I jump back into the queue. I know that you mentioned in the script there, there will be more announcement in the coming weeks. You talked about the TrustBuilder. I mean, anything incremental you could share there? I know that this is something that has been part of Converge's game plan going back to the beginning. But maybe help us think about the market, the size -- maybe the size of the market, what's your opportunity? What's the go-to market strategy? Just how do we think about what it can mean to Converge and also the timing of things? I know it's early, but anything, it could probably be very helpful.

[Shaun Peter Maine, CEO & Director]

So and -- Kevin, you were there a couple of years ago when they were talking about this. The whole concept of trust and privacy at the same time, we keep using examples of people are asked to overshare data all the time, whether it be your ID. I've got daughters that are that are 18 and 20. They go to a bar. A bouncer looking at their ID also sees their address. Well, that guy might have just got out of jail and bad things had happened. Our banks and government always ask us to overshare information. So what Becker-Carroll has driven this framework is around how do you know someone is who they say they are in a trusted manner. And they've been working throughout the last few years with the Canadian Federal Government and the Digital Identification and Authorization Council of Canada in building up this trust framework.And what they've done is, a lot of this has been open source. They've combined into this platform to allow government services to identify citizens. So the big problem we've got now is, most of your municipalities and so the market size for this is really every municipality or provincial government, they are poorly equipped to deal online and be able to identify people; everything from getting a building permit to paying your taxes to your interactions paying a parking ticket. How do you know the person on the other side is who they say they are? So building this trust framework into these offerings around managed services that we can deploy to customers, we'll be announcing some customers quite shortly as well. So this has been something we've been building up over a few years. And because of COVID-19, there's such a demand right now for governments and municipalities to be able to reach out to their -- the citizens, be able to identify them, whether it's a benefit checks or some of the relief that we're kind of experiencing. How do you know it's getting to the right people? And so around identity and trust, this is what this platform is doing. So there will be some announcements coming in the next few weeks around this. Couldn't be prouder though of the team and the developments they've done in getting to this stage.

[Operator]

Your next question comes from Steven Li with Raymond James.

[Steven Li, Director & Equity Research Analyst]

Shaun, to help us frame this story around work from home, for each of your large segments: technology, financials and government, can you can you give us an example of a customer driving working from home with Converge?

[Shaun Peter Maine, CEO & Director]

Sure. So for finance, see, they're -- it's funny how our recent acquisition, PCD, I talked about the juice manufacturer in the West Coast using VMC on AWS. PCD, who is out of Montreal, has a financial customer and they've been developing their private cloud VMC on AWS as well. So the same technologies allowing across our geographies for people to be able to exist in this home environment in a secure way, without adding to the 14,000% increase in cybersecurity attacks we're seeing throughout other sector's technology. We provide a lot of infrastructure to a very well known, say, telepresence maker that you probably all use. And we provide a lot of infrastructure for them. So we're in Silicon Valley. So a lot of our customers are the technology people that provide services to you that you probably use on a daily basis. And so it's funny that -- so they're relying on us to help them kind of help you.In healthcare, we've had some really interesting cases around telemedicine. It's funny how HIPAA compliance was the biggest fear of every hospital group in the States because if you gave away patient data, then they basically would bankrupt the group. And with people needing to offer more remote solutions, we announced our remote patient care solution allowing our frontline workers to do things more remotely to make it more safe for them to be able to do that.And then a government example, government was probably the one industry that was least familiar or it was not a usual business practice to have employees working from home. So the Canadian Federal Government, we have been really helping a lot of their employees who I think only 25% were equipped to work effectively from home, work from home. And they even extended -- the Canadian Federal Government year-end usually is March 31. They extended that budget date for some departments by 3, 4 weeks to allow for spending to assist in working from home. And we've been very instrumental in helping that out as well. So in all of our sectors, our 4 main sectors, those are some kind of examples of how we're helping people out.

[Steven Li, Director & Equity Research Analyst]

Of those spending [ boost ], is it one time or can you see some of these customers becoming top 5 or top 10 customers of Converge?

[Shaun Peter Maine, CEO & Director]

Well, so we have an incredible diverse base. Like we were going through and we were like wanting to make sure that we had the exact sector data, which Carl kind of went through for Q1. And we've got 840 customers that spent at least 100,000 with us. So our customer base, one of the things that has helped us so much is having such a wide and diverse base. But absolutely, when you look at these multi-million dollar solutions that we're doing on recurring revenue 3-year deals and when you're doing that, you're a trusted partner.Some of the companies that we acquired before we bought them were more transactional. They would sell equipment and then leave people be. When you have that ongoing 3-year relationship, you're supporting them. We've got our help desk. We're supplying -- we've got our own data centers. They've got equipment on our premises. There's that interaction that you constantly are helping them. So how you build up, they might have only known us because the acquired company before Converge bought it might have only sold a certain part of our services, right, 6 practice areas, especially analytics, cybersecurity and our cloud. We've got software and asset management, all kinds of offerings that we can now sell into these customers.So the fact that we've got that ongoing dialogue because of these 3-year contracts we're providing services to them, it allows us more opportunities to increase our wallet share. So especially from the -- they would have sold something to them. A lot of customers are coming to us and looking for how do we save cost in this environment. We've got all kinds of ideas on how to restructure their spend and use that to come up with these new models of recurring revenue in remote support of their workers. So it has been a great opportunity for us. But, yes, you're definitely seeing our wallet share grow with those accounts that we've been providing these services to.Some people cannot provide any services now. Some regional players in New York City basically stopped operation. And so being able to support these customers, having them know that throughout the crisis we can be there for them regardless, and providing services has really helped us out. Those are the kind of growth partners that your customers are looking for.

[Steven Li, Director & Equity Research Analyst]

And then I have a question for Carl. So very good cash flow this Q1. What is the profile for the rest of the year for free cash flow? Can free cash flow stay positive in Q2 and Q3, even if seasonally it's a little bit slow, I know, and then another solid quarter in Q4?

[Carl Smith, Chief Financial Officer]

Yes. Thanks, Steven. Yes, I think we can. When we talk about seasonality, we have a very good Q2, Q3, as well as Q1 and then a very strong Q4 generally. I think the COVID-19 impact and just the move generally now to work from home and remote working, and what COVID-19 has done to speed that up I think bodes well for us. So I think on a free cash flow, yes absolutely, I think we can generate it on a quarterly basis.

[Operator]

Your next question comes from Brian Kinstlinger with Alliance Global Partners.

[Brian David Kinstlinger]

Through M&A, you're clearly building a national footprint. Can you talk about some of the most important regions in the U.S. where you lack presence and are looking to expand once your M&A strategy resumes? And then to that end, do you expect smaller regional players will be financially challenged and maybe you'll see much better acquisition prices by the end of 2020?

[Shaun Peter Maine, CEO & Director]

So #1 is we've kind of publicly stated that we're going after all the NFL cities. So if we don't have a presence in an NFL city, we're going there. Texas has been the big one. It has stepped forward to the top 10 population centers in the States. Unfortunately right now, the oil and gas industry has been so impacted that we were looking to do an acquisition there. We're having to push that off until we see the impact that the oil and gas prices, are they zero, $40, negative. Until you get some real stability, it's difficult to continue on that path. But absolutely, I do -- you see, some of the reports I saw Jay McBain from Forrester talking about, there will be a lot of distressed companies in this space, especially these regional ones, out of no fault of their own. Some of these very good companies are exposed to sectors which they've just turned the spending off. But we're very fortunate, the sectors we're exposed to. But if you are like overweight in oil and gas or hospitality or some of the retail, the clothing retailer, let's say, then those companies are really struggling. And so we're absolutely -- we know the channel very well.There's a -- there was when we started 175 companies between $75 million and $200 million of annual sales. We see them all the time at all of our vendor conferences. So there's a great outreach program that we go that if they're looking to do some things that we can be helpful in having them join the family. Like there's a lot of companies that I've seen over the years, "Hey, when you're ready, let us know." So there's a great dialogue going and I do think there's a very different, both employment environment in the U.S. and kind of environment in general from a business side, that the strength is in larger, consolidated players. This was already happening. And so why our distributors and vendors have been assisting us with this strategy is that they want national partners, they want -- if you do a telemedicine solution at the Children's Hospital in Atlanta, they -- that same solution could go to every NFL city. They want a partner to do that with now to talk to 25 partners.So our model, I think, is been effective in the kind of road shows and presales engagements that Greg has instituted, showing that to our mid-market customers we can very -- be very successful getting net new logos. When we bought PCD, we just scheduled a cybersecurity and an Ansible workshop. They just become part of the rotation and they get net new capabilities into those markets. So it's attractive for the people that we're buying. I do see there'll be additional opportunities because of the environment of good companies exposed to kind of tough sectors. And I also see a kind of a different job market. So that organic growth, which probably wasn't an option in pre-COVID-19 in certain markets becomes an option as well. Does that answer your question, Brian?

[Brian David Kinstlinger]

Yes, sure. One more from me. When I look at the March quarter, you generate $11 million of EBITDA and you discuss various items or additional measures and synergies you took. Should we expect to see that EBITDA margin increase to about 2% of the June quarter revenue or is this achievement more likely in the September quarter? I think you used that 2% metric, if I'm not mistaken.

[Shaun Peter Maine, CEO & Director]

Yes, exactly. So what I said is there's $11 million of cost out in the beginning of Q2. So you should see -- expect to see 3 quarters of that hit each quarter. So you'll see Q2, Q3, Q4, 3 quarters of that. And then in our other part, the $9 million of the back-office integration, you saw $3.5 million of Q1. There's still $5.5 million of that to go as quarter-by-quarter we'll announce here's how many of the back offices that have been integrated, but then we'll have that savings. So on an annualized basis, it's kind of that 20 number, but it'll drip feed throughout the year. So you'll have different contributions and obviously, there were some severance impact in Q2 from a cash perspective. But yes, you should expect Q2, Q3, and Q4 to see the impacts of the early April reduction. And then as we integrate, you'll see that number grow as well and impact the SG&A costs on Q2, Q3, and Q4.

[Operator]

Your next question comes from Melissa Prusky with Hampton.

[Melissa Prusky;Hampton Securities Limited]

First of all, congratulations. I mean, you guys have just blown your numbers away. And that was no easy feat in these times. And you're taking advantage of it -- not taking advantage, you've been able to take advantage of a terrible situation and you built the company for that and you executed. So that in itself, truly congratulations. So my question is with regard to the growth and the acquisitions that you had in line. And you always have acquisitions in line, you always have a portfolio of companies you plan on trying to buy and hopefully half of them come through. So you're way ahead of what your targeted number was for revenue and all of that. So my question is with related to the companies to acquire. I assume your pipeline is the same, although some may have dropped out over this. But you just sort of touched on it a bit a minute ago, to be honest. But are you able to, I hate the word take advantage in this case, but take advantage of the COVID-19 and maybe have some companies you didn't think could be in your pipeline, in your pipeline, whether because they've lost so much business or suddenly they're a great acquisition target or anything? Have you seen any change to companies that you could now put into your pipeline? And have you lost any that were in your pipeline over this?

[Shaun Peter Maine, CEO & Director]

So yes, I'll start with the last one. We haven't lost any. We've put some on pause to determine the impact that their exposure to industries have because it's really hard to agree on a price for an asset when it's going through this. The more prudent thing to do, let's wait to see how this plays out. Again looking forward though, we kind of see some disruption, especially for regional players, until a vaccine is found. So as we get more clarity though, we can kind of put -- we now know to put extreme scrutiny on the sectors that their customers are in and the sectors their customers' customers are in. But to your point, Melissa, absolutely there will be companies that weren't in our pipeline that are good companies exposed to wrong sectors, that the longer this goes on for and if there is a second wave, there is opportunities for us to consolidate companies that might not otherwise be available to us. So a great question. And, yes, I do believe there'll be additional opportunities.

[Melissa Prusky;Hampton Securities Limited]

So just on that then, just to go a bit further where you do believe there will be, has anybody from your team, is there anybody in business development who's out there sort of sourcing those companies now, that prove if this happens, this could be there or whatever, so that you're ahead of the curve and maybe first to the table before anybody else sort of does it or you're just going to wait it out and decide later?

[Shaun Peter Maine, CEO & Director]

No, so we see these people all the time. So we are on councils with these people as well. So this is an ongoing dialogue. We're not a financial player. If you're a financial player, you don't have access to the industry. So our vendors, our distributors, we have events. So IBM has councils, software and services councils, where they put you all together. So you're always bumping into other people through this. So we're absolutely in active dialogues with a number of companies to see if, when would be the time. We don't think it's prudent to do quite yet because we don't see the full way out. But next quarter, it might.So I think -- but absolutely, these are active conversations. We've never -- none of our acquisition has come through an auction process. They've all come from personal relationships. So we know them all or the companies we buy often know other companies that we use as the greatest references to find other people to become part of the family. So we do have a great extensive network, all of our people are from the industry. And so those are active conversations all the time.

[Operator]

[Operator Instructions]. There are no further questions at this time. Please proceed.

[Shaun Peter Maine, CEO & Director]

Wonderful. So just wanted to thank you all for taking the time to listen today. We anticipate 2020 being our strongest year ever in spite of the COVID-19 pandemic. I look forward to updating our shareholders again when we announce our second quarter results. Thank you all.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.