Converge Technology Solutions Corp

TSX:CTS

Earnings Call Transcript 2021-Q1

[Operator]

Good evening. Welcome to the Converge Technology Solutions Corp First Quarter 2021 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 am required to provide the forward-looking statement respecting 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 or assumptions are applied in drawing a conclusion or making a forecast or a 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 a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in Converge's filings with the Canadian provincial securities regulators. Converge does not undertake to update any forward-looking statements. Such statements only speak as of the date made. Today's discussion also refers to adjusted EBITDA, which is a non-IFRS measure and has no standardized meaning. Please refer to the Converge's filings with Canadian provincial securities regulators for any explanation and reconciliation to IFRS measures. Thank you. Mr. Shaun Maine, you may begin your conference.

[Shaun Peter Maine, CEO & Director]

Thank you, Kian. Good afternoon, everyone and thank you for participating on today's Q1 Earnings Call. I recently had the opportunity to discuss the transformative year Converge experienced in 2020 executing on our Phase III objectives of cross-sell, acquisitions and integrations, strengthening our balance sheet and reducing our interest costs. I'm honored to provide an update on how that momentum has successfully carried us into the New Year, resulting in historic Q1 results yet again. In what follows, I will provide a business update on the quarter and conclude with commentary on our European expansion. I'd like to begin by once again thanking all of our employees and customers, who continued to drive our success, despite the various challenges we continue to face at the societal level. Let me start by congratulating our team on winning 5 IBM awards at IBM, IBM's Annual Partner event, which we announced earlier today. In addition to winning a 2021 IBM Beacon award, Converge has been named the top North American sell business Partner of the Year, the top North American IBM and Red Hat synergy Partner of the year. The winner of the IBM Data and AI Business Unit Excellence Award for Cloud Pak for data and the winner of the IBM Business Unit Excellence Award for Protect Digital Trust. It was the most awards won by any IBM partner and shows how significant our position is in Hybrid IT and cloud enabling software in North America. With IBM splitting its organization into 2 on July 1, it will become even more reliant on partners like Converge, following the model that Red Hat has commercialized so successfully, especially into mid-market accounts. Let me note that all of this progress, you'll hear about today and the fantastic numbers the company continues to deliver quarter after quarter, as a result has happened despite the global pandemic and the disruption it is caused.I am so proud of our management team and our family of companies in the way they have not only used exceptional customer service to implement hybrid IT solutions for our customers, despite these disruptions, but also how we've been able to bring together our unique capabilities to provide solutions that will help us all get back to a more normal life.Converge recently issued a press release discussing our partnership with Lucira Health, a medical technology company focused on the development and commercialization of transformative and innovative infectious disease test kits. Our involvement with the launch of the Lucira checkered test kit, which is the first FDA-EUA authorized single use over the counter molecular diagnostic test kit for COVID -19, which can be self-administered by individuals at home is something I'm incredibly honored to be able to speak about today.Citizens around the globe have been facing extremely difficult circumstances. And for the Converge team to help drive a solution which fosters a trust ecosystem that securely transfers data to both users and governing bodies is a significant step forward in helping the economy reopen while empowering general awareness. Our Dr. John Goff was there to watch this technology be rolled out at Philadelphia 70 sectors. And we hope that it continues to drive us closer to safer interactions for travel, work and social events. Additionally, this development was the perfect embodiment of how Converge differentiates itself from other IT solution providers, by combining our world-class analytics practice, our DevOps practice and our expertise in digital identity and trust ecosystems to quickly deliver what we hope will be the first of many solutions that help us get our lives back closer to what they once were. On our previous earnings call, I discussed the overwhelming support we secured in the market over 2020, which helped us raise over $100 million in equity through a series of bought deal financings. In Q1, Converge added another $86.5 million at $45 per share through a bought deal offering, adding valuable institutional investors to our existing shareholder base, while also improving our balance sheet and providing further acquisition capital. Converge is an aggressive growth company and the strengthening of our balance sheet along with our graduation to the TSX on February 11 allows Converge to not only continue on its stated path to annually acquire 4 to 6 companies in North America but also set us up to expand this strategy to Europe this year.At the beginning of the year, Converge acquired CarpeDatum an analytics specialist consultancy that extends key analytics capabilities to our West Coast and Central regions in the U.S. Our analytics practice continues to be a key differentiator for Converge in our mid-market customer base and the CarpeDatum acquisition adds more world-class talent to this group of exceptional data scientists. In February, Converge announced its second acquisition in Texas with Network and Security specialist Accudata Systems, which adds key capabilities around Cisco, VMware, Palo Alto and Dell. I mentioned at the time of this acquisition that Accudata was impacted by its exposure to the oil and gas sector in 2020, where over 30% of its historical revenue had come from. We structured the transaction that paid Accudata for its performance in 2020, while providing optionality for the resumption of the oil and gas sector to more normal activity.Although this sector lags oil prices before making investments, the sustained higher oil and gas prices of 2021 has the industry displaying green shoots of growth and we expect IT spend to grow in Texas in the second half of 2021 as a result of these developments.After the quarter end, we made our largest acquisition to date Dasher Technologies, an exceptional enterprise networking cybersecurity IT service provider in mid-market customers on the West Coast. I personally started working on this acquisition 4 years ago before Converge completed its very first acquisition. And I'm thrilled to add one of HPE's major U.S. partners, their 2018 Partner of the Year to the Converge family. One of the reasons Converge was named as the fastest growing IT service provider in North America by CRN in 2020 is the fact that we exceled at 2 things other acquirers often struggle with, cross-sell and integration. Greg Berard, our President has implemented 2 key features that enabled cross-selling, customer technical workshops and executive briefings. Unlike large enterprise customers, mid-market customers will come to you and we have been extremely successful partnering with our vendors to run vendor funded technology events, both in person and online around our hybrid IT capabilities. In Q1, Converge held 33 customer facing events and had 634 external attendees, primarily as a result of this Converge had 80 net new logos in Q1.These are customers that we are selling our products or service to for the first time, which is an extremely impressive number. Also, especially with newly acquired companies, our sales reps hold executive briefings with our customers, where one of our senior executives explains the breadth of Converge's capabilities and solutions to the customer, who usually brings along their executives for these briefings. Since the beginning of Q4 of 2020, we have now held 359 executive briefings initiated by a 127 different Converge sales reps. And this results in the cross-sell of our higher margin cloud and managed services, along with our professional services. These executive briefings are building a large pipeline for 2021 and allowing our new acquisitions to immediately cross-sell analytics, DevOps, cybersecurity and cloud and managed services.As impressive as our cross-sell was in Q1, I was blown away with our integration team being able to integrate all 12 of our original acquisitions and removed $20 million of cost last year, while being limited to doing this remotely due to COVID-19. This year, we have already removed over $8 million of front office and management duplicate cost, which will be seen in our Q2 numbers and have a schedule to integrate the back offices of our 7 new acquisitions this year.When analyzing why our team is so successful at integrating companies, when so many other struggle? I point to 2 key reasons for the success. The first is structural, the day after acquisitions our finance operations inside sales, HR and IT people report up to a single organization run by our COO Rory Reid. This allows a single organization to determine the best ways to support our sales reps in the most cost-effective efficient manner. The other is the fact that we have mid-market customers who do not have EDI interchange with our acquisitions ERP systems. Meaning an ERP migration can take place in the quarter rather than multiple years. Still it is impressive to watch this well-oiled machine that is our integration team in operation. In addition to the cost savings from integration, Carl will highlight the $3 million in interest cost savings in one quarter alone compared to Q1 of 2020 that we realized by moving our asset-backed lending facility to CIBC paying an interest rate between 2.5% and 3%.Analyzing our sales for Q1, 25% of our revenue came from the technology sector, 22% from government and the state, local and education sector, 13% from Finance, 12% from health care, 9% from retail and 6% from manufacturing. The rise of purchasing from retail, particularly in the Northeast is a leading indicator of activity opening up and a trend that we expect to continue this year.Also in Q1, 59 of our customers' spend at least $1 million on our products and services. On the recurring revenue side, in Q1 of 2021, our gross annualized recurring revenue was $305 million. This is made up of $65 million of managed service annualized recurring revenue, which is typically on 3-year contracts and paid monthly, $76 million of gross public cloud annualized recurring revenue, which are typically on 3-year contracts and paid monthly and a $164 million of software subscription support, which are typically played annually.On that note, I would like to pass the call to our Chief Financial Officer, Carl Smith to discuss our financials in further detail.

[Carl Smith, Chief Financial Officer]

Thank you, Shaun. First quarter revenue increased 28% to $310.2 million compared to $241.5 million last year. Product revenue, which includes hardware and software increased 33% to $252 million from $190 million last year, primarily due to higher-device sales to the Canadian government and the impact of acquisitions.Managed services, which are long-term contracts increased 21% to 16.4 and $30.5 million last year, primarily due to organic growth in our managed and cloud services to our customers. On an annualized basis, our managed services at the end of the quarter was over $65 million. Professional and other services, which include professional and staffing services and the net revenue from public cloud resale and software support increased 10% to $41 million from $37 million last year. And as Shaun mentioned, by industry, the breakdown was 13% from financial, 22% from government, 25% technology and 12% health care. Our gross profit for Q1 increased 24% to 67.8 and $54.8 million last year. Gross margin was 21.9% compared to 22.7% last year. Our gross margin percentage decrease was due to a combination of high-device sales of the Canadian government, which is lower margin but high volume and the impact of recent acquisitions that sell primarily hardware. We expect our gross margin percentage to again increase in Q2 as government sales would make up a smaller percentage of revenue and the new acquisitions start showing the benefits of higher rebates and sales of higher margin managed services and professional services. SG&A for the 3 months ended March 31, 2021 was $49.6 million, up from $45.2 million in the same period last year. SG&A for the quarter reflected the impact of the $28 million annualized savings that we announced midway through last year. And as a result, the 15% of our sales compared to 19% in FY20.As Shaun mentioned, we continue to look for efficiencies and overlap as require companies. In Q1, we reduced our cost by another annualized $8 million. Adjusted EBITDA for Q1 increased 70% to $18.8 million compared to $11 million last year. On a percentage basis, our adjusted EBITDA was 6.1% compared to 4.6% last year. The interest and finance expense for the quarter was $2.4 million compared to $5.5 million last year. This was a savings of $3.1 million and was a direct result of the lower cost from ABL, which we announced in Q4 with search from a specialty lender to a syndicate of Canadian Banks including CIBC, Scotia and Laurentian, as well as interest savings as a result of paying off some higher interest non-ABL debt. At the end of the quarter, total cash was $118 million including $50 million is held separately for the acquisition of Dasher which we announced on April 1. Borrowings were $142.2 million compared to $139.2 million on December 31, 2020. And on that note, I'll pass the call back to Shaun.

[Shaun Peter Maine, CEO & Director]

Thanks, Carl. As we look forward, we are going to complete my original 3-phase plan for Converge by the end of 2021. The next phase will be the growth of the company from $2 billion in annual revenue to $5 billion in annual revenue in approximately a 4-year period. This plan will rely on our European expansion and growth in our managed services. And I will be outlining these plans at our AGM on June the 23rd. With that being said, I would like to open the floor to questions.

[Operator]

[Operator Instructions] Your first question comes from Rob Young from Canaccord Genuity.

[Robert Young, Director]

I'd like to start with your view on where organic growth in 2021 can go in context, particularly in the product side, in context with the expectation for better IT hardware spend and digital transformation. And then, also taking into consideration this chip shortage which is impacting some of the hardware side of the business. I don't know if that's going to have an impact on your business? If you could give us a view on where organic growth may go in product that would be helpful.

[Shaun Peter Maine, CEO & Director]

So Rob, as you know, product for us is a combination of hardware and software. And on the software side last year during the pandemic, we grew by 23% on the software side. We would expect to increase that. As an industry, last year, the IT industry shrunk by 3.5%, enterprise software most analysts have it growing at 8.5%. We're a lot further ahead of that selling into the mid-market will spike that's a growth. On the product side, the high kind of have numbers in the 7%, again will be much higher than that as well. And just to make the comment, when you look at year-on-year comparisons, you go back to last year. In Q1, a lot of people pulled hardware spend and software spend into Q1, because they were afraid of supply chain disruption in Q2. So last year, if you look at our financials, our Q1 was 241, I believe our Q2 was around 227. Here this year, you're back to a more of a normal buying pattern, where Q2 should be stronger than Q1. And then, by comparison that much stronger again. So combined with the very, a stimulant U.S. environment, I made the comment about some industries that were hard hit are now starting to invest heavily preparing for opening, you would expect extremely robust spending across the whole IT services sector. And as the fastest growing IT service provider in North America, you would expect us to grow that much quicker. Does that helped to answer your question Rob?

[Robert Young, Director]

The chip shortage, is that something that you think has an impact on your business at all?

[Shaun Peter Maine, CEO & Director]

So we're hearing about some delays in certain product lines as a larger provider and we take priority. And usually where you see that happened more is on large enterprise customers, which we have less up. So it's something we're monitoring very closely. And again, we had, when during the pandemic, when people had difficulty sourcing products, we were always top of the line and we always found a way to get it done. So we -- our customers did not suffer and because of that service level, I think we've built a lot of loyalty during the pandemic in the same way, where there are chip shortages, we will always have priority and we'll find a way to get to our customers. We are hearing about lengthier delays on normal shipments, but where we need to find things and expedite we can. But again, I think it will probably hit the people in the kind of large enterprise sector more than the mid-market.

[Robert Young, Director]

And then, I know, you don't give guidance on this. But I was hoping you could give little bit a bit of color on the cadence of EBITDA margins through the year, because couple large acquisitions at the beginning of the year and Dasher has better EBITDA margins I think than the VAR in general. But you've got a lot of VAR revenue falling into the business at the front end and so I was hoping you could give a sense of how you see that playing out through the year and then I'll pass the line.

[Shaun Peter Maine, CEO & Director]

Yes. So a couple of things. There is, remember rebates have immaterial impact 1.5% of sales of volume rebates and the day after sorry the 30 days after we acquired a company, they'll be top tier certified and therefore realizing that, so you start that clock. And then, recall that, we just talked about $8 million of cost savings in Q1. And you recall last year, in Q2, with the cost out and then you saw the impact in Q3. So on EBITDA margins, the synergy impact will be felt and you'll see that next quarter and you'll see it more dramatically in Q3 as our back-office integration also takes place to add to that. But also recall, the executive briefings. I was on our QBR calls on Friday and Monday listening to these companies that we've only had for a quarter or less than a quarter. And with Dasher, for a month.

[Robert Young, Director]

Can you talk about the executive briefings bringing in our senior executives that know the breadth of our services, because there is no way a new acquisition with know them and then bringing in cross-selling, analytics, cybersecurity, DevOps and managed services into their existing accounts. That's the really impressive part. So again that we are giving the stats on here are the numbers. And they are throughout all the regions and meaningful into those top customers of all of those acquisitions. So you would absolutely expect to see dramatic improvements as we go through the year. The nice part of last year, because we didn't acquire any companies in Q2 and Q3, you really saw the lift through the cost out in the rebates and the cross-sell. You'll see, we've been very front-end focused in our acquisitions this year. And so, as you go Q2, Q3, Q4, you will see the exact same walk.

[Operator]

Your next question comes from Kevin Krishnaratne from Desjardins.

[Kevin Krishnaratne, Research Analyst]

A few questions for you, on managed services. So I think you mentioned growth 21% year-over-year. I'm wondering if you can give us an update on the I-series service, any update there. I think you started that early days at the end of last year. I'm wondering where you're at this point in time and what you see how you see that evolving this year?

[Shaun Peter Maine, CEO & Director]

So Kevin, great. It's a really differentiated service and thank you for mentioning it. Though we started off with a large retailer in the Northeast as our first on boarded customer, who one thing that we're seeing is demand is extremely high. To get these larger customers on board, it is taking longer than we had anticipated in that they with especially with COVID, some of the restrictions on access in the migration has been difficult. We definitely expect that to accelerate as the U.S. has opened up and we're already seeing that into Q2. So in Q1, it wasn't as dramatic as we had hoped as we kicked things off kind of last Q3 and Q4. But as the year progresses, I would definitely see, because demand is very high. There are, as you know, only IBM series and ourselves can provide these services. And we're definitely in a predominant position there along Google and in ford to offer that especially around the in force solution and it's a differentiated service and it's something we're leading in Europe as well. But the one factor that delays the recurring revenue piece is the on-boarding piece, which is professional services, but that has taken longer than I had anticipated for it originally.

[Kevin Krishnaratne, Research Analyst]

You mentioned a lot of great metrics in terms of the cross-selling, all of different executive tech workshops that you're offering. Can you talk us about the share of wallet, so if you acquire a company and then within a month you're cross selling? You have any way of giving us an example or a rough estimate of the amount of IT budget spend at your end customers that you're expanding, i.e. did Dasher maybe only had 5% of the IT budget now, with the cross selling, they're able to double that to 10%. I'm just drawing out some numbers there. But if anything you can provide us with any color there in terms of budget expansion would be helpful.

[Shaun Peter Maine, CEO & Director]

So one of the things is the very first step that we try to do is change the in gained page, for if you're selling infrastructure only into an account is to get to the application developers, because if you're going to have a cloud conversation or managed service conversation it's not with the infrastructure people, it's too late and that's why we always lead with Red Hat and VMware. So the most effective things that we do are things like do a Software Asset Management Audit because we know we can save money to people on licenses or the workshops that have been so successful around things like Ansible and OpenShift Red Hat's Kubernetes implementation or around VMware's Managed Services to get to the application developers because who we're competing with are the internal IT groups.It's not an external provider that's providing these things. It's, they're trying to do it with our internal IT groups and they are not well equipped to do this. So by leading with DevOps and then your part of the conversation when they go to look to deploy it, public cloud, private cloud, drone managed service, whereas if you're in talking to the Infrastructure group, it's only after the application guys have decided this is going to be in our data center, but it gets passed to them. So you would never have that conversation. So by have an executive briefing, the infrastructure guy that they're selling into usually brings his boss along because our sales rep is bringing their boss along. So that's kind of mirroring it. And it's really the boss that you know what, you have all these capabilities. I wasn't aware of that you need to talk to our software application group or our software asset management group. And that's really the meaningful. So it doesn't start off with a immediately multimillion dollar contracts, because a lot of the software sales and the DevOps sales, professional services, you start with licensing. But it changes the engagement and then that's where you lead to the conversations around cloud and professional services around analytics and cybersecurity and DevOps to keep that wallet share going and more software sales. So that kind of leading you down the path. It's not as easy to kind of say, hey, same-store sales grew by 2x. It's more how you engage the account with who and then how it builds from there, does that helpful Kevin?

[Kevin Krishnaratne, Research Analyst]

That's helpful to understand the process. I know, it's a little bit more complex than we think. So thanks for all that color. One more from me just on M&A. You did highlight that quite well. While we've seen that you've got here in North America. I'm wondering as you contemplate Europe, how much of that process can be a leverage there? You talked about the plugging into the ERP system mid-market it kind of makes sense. How do we think about any potential nuances there as you move into Europe on that model?

[Shaun Peter Maine, CEO & Director]

Great question. So we spent a lot of time on this. The first company let's say it's in Germany, there won't be the same synergies in that country. It will be acquisition 2 to 10, that will have the synergies, because per country in the front office side, there are things that have to be done in country. The back office, the Cory Reid our CPO is of Ireland will be having our back office shared service center, out of Ireland for Europe and that will be shared through multiple countries. But you will not see the same efficiencies that we get in North America through these acquisitions that I'm talking about. You won't see with the first acquisition in country, but you will in the subsequent ones.

[Operator]

Your next question comes from Rob Goff from Echelon Capital.

[Robert Goff, MD & Head of Research]

Perhaps I would follow up on the European acquisitions. You're talking to the efficiencies on the first purchase. Could you also talk to whether or not the working capital savings are available to you in Europe as they are in North America?

[Shaun Peter Maine, CEO & Director]

Yes. Another great question. So yes, they are. There are some different dynamics. And one of the biggest growth areas currently in Europe is in government and government unlike the U.S., government more like Canada includes healthcare and schools and therefore post pandemic there's a lot of government funding into these areas. And so, we're starting off with companies that are more feeding into those sectors. Unlike Canada, the U.S., those sectors don't tend to pay as timely. And so there is very important to match the working capital terms. And this is where the wonderful partnership that we have with Ingram Micro has been extremely helpful as we've moved our payment terms to 75 days and the same kind of arrangements available to us in Europe, that really solved some of the problems that are faced by some of these companies in having to use working capital for expansion, where that isn't an issue for us. So absolutely able to use them and they are -- I would think extremely valuable to government customers.

[Robert Goff, MD & Head of Research]

And secondly, the working capital. And perhaps, Carl, could you talk to the sources and uses within working capital for you and what you may be looking ahead this year?

[Carl Smith, Chief Financial Officer]

So normally, working capital for us is a really significant source of cash. In Q1, you've noticed that it wasn't that was kind of a one-off. We won a really large contract with the Canadian government for devices, great contract. But for that, we had to actually procure the devices directly from the OEM and it had payment terms of 45 days rather than the typical 75 days that we get out of Ingram. And then, large part of that was delivered view the end of the quarter and some of it's still an inventory that was delivered early in Q2.For this quarter, I actually had my working capital being a use of funds, which typically to source. I'd expect that Rob to completely normalize in Q2 and we'll go back to generating significant amounts.

[Operator]

Your next question comes from Steven Li from Raymond James.

[Steven Li, Director & Equity Research Analyst]

Carl, just on that last question. So that large contract, so you can procure that from Ingram that gives you 75 days?

[Carl Smith, Chief Financial Officer]

We got this Steven, this is the combined new contract that we won, with the procure from the OEM. As you know with Northern like selling in the Canadian government specifically, it is really a Q1 heavy quarter. And it was a really strong quarter for us. So great on the revenue, great adding to my EBITDA. But it did use up very temporarily some cash on my working capital. So that will all normalize by Q2.

[Steven Li, Director & Equity Research Analyst]

And the front office, the cost that's been taken out the $8 million. So this is from Q1 base like Q1'21 cost base?

[Carl Smith, Chief Financial Officer]

Yes.

[Shaun Peter Maine, CEO & Director]

Yes, its Q1 '21 cost base. So yes, this is in addition to everything that we did in 2020. This is brand new from the new acquisitions that have been brought onboard.

[Steven Li, Director & Equity Research Analyst]

And then, Carl, I know you gave the gross ARR. Do you have the Annualized Net Recurring Revenue as well for the quarter?

[Carl Smith, Chief Financial Officer]

For the managed services, I gave as about $65 million. The total net Annualized Recurring Revenue was probably around $120 million.

[Steven Li, Director & Equity Research Analyst]

$120 million, okay.

[Carl Smith, Chief Financial Officer]

I'd like to get back to you a little later on. But its significantly higher than what it was in Q4.

[Operator]

Your next question comes from Gavin Fairweather from Cormark Securities.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Look, so I just wanted to touch space on the Think conference obviously a pretty big deal for IBM and I know and involved in that ecosystem from my reading of it the headlines seems to be that they're doubling down on cut of channel Cloud Parks and AI maybe you could just discuss kind of any incremental takeaways or opportunities that you walked away from that maybe we do for you.

[Shaun Peter Maine, CEO & Director]

Yes. So you've pointed out to the real ones so realize that Red Hat was 80% through the channel, IBM, and this is partially because of some issues they had in years past, we're only 15% through the channel. And they're really trying to address that part of it is getting rid of the direct sales force in particularly into mid-market, but also is aggressively investing in the channel that means giving accounts that they used to have direct to channel partners. We are, as you see, we grew our software revenue by 23% last year. So Cloud Paks AI everything that's really important to IBM is really important to us. And on the software side, we make great margins. And it's, they have great products that we're selling into their led by the Red Hat Solutions.So it's a great partnership for us, it is really meaningful. This split because again IBM used to compete with the channel. This will be meaningful as more the Red Hat management moves into the top Shares at IBM embracing the channel and David Rose, who runs channels is committed to getting that 15% up to 60% and last year they try some things but again they tended to get a little bit in their own way. This split on July 1 is extremely meaningful and partners like ourselves, like we are extremely well-positioned. No one controls our channel more than IBM you registrations are meaningful as far as margins go and therefore to be the predominant player for IBM is such the software side in North America will be a real windfall for us in 2021.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Congrats on all the awards at the conference and also on a great quarter.

[Operator]

Your next question comes from Suthan Sukumar from Eight Capital.

[Suthan Sukumar, Principal]

The first question I had was on the managed services side. Good to see another quarter of steady consistent growth in can talk to you guys have talked at length about this being a key growth area for the business. Aside from the I series opportunity. How are you investing in this opportunity further from an organic standpoint and what expectations do you have for growth this year?

[Shaun Peter Maine, CEO & Director]

So we stated that we want to get our managed services revenue up to an annualized rate of 100 million by the end of this year, but it's a key area of investment and that's organically that's acquisition that even bringing on people with experience to our Board is a major as we said the pot of gold at the end of the rainbow is managed services. So this will drive significant EBITDA margins that are recurring repeatable high margin revenue. So it's an area of a great investment. We'll be talking a lot more in detail about this on at the AGM on June 23rd, as we kind of map out our next 3 and 4 years. But yes for this year, the target is $100 million of managed services revenue by the end of the year on an annualized basis.

[Suthan Sukumar, Principal]

And you've, you guys touched on some of the success you're having with analytics in the mid-market. What are the key capabilities and expertise do you see as relevant in the mid-market and something that you would look to fold in either via kind of building in-house or through on that?

[Shaun Peter Maine, CEO & Director]

So I loved, I mean those are things. Do you realized it's, this is how unique Converges is? We get pitch on hold, I know you buy resellers you sell it. When you look at, we have our own IP around trust ecosystems and identity. You have your analytics piece to recognize things like barcodes and individuals, you've got your DevOps people writing applications to do this quickly in response to a need around a real high growth area and then enabling cloud to store data and records to enable a managed service to manage this on behalf of our customers, those capabilities are so was just such a wonderful use case to think of how different that is then the companies you see around, I know Softchoice has been making some noise around the companies just don't have the capability to deliver those kind of solution the CGI as the world they absolutely do but they only focus on the kind of the large enterprise space to have these capabilities in the this nimble to deliver those kinds of solutions. It's just a wonderful use case of the kind of things. The ways we're helping our customers by combining these capabilities which are rare, but you do not see data scientists grow trees that is not a skill set. You can get into the mid-market and by us, not just having them but embedding them into solutions that have all the other areas, that's much more like a systems integrator of CGI but to do it cost effectively into the mid-market, by the way, our sales force can introduce us into accounts. I mean, to find these opportunities. That's to me the real differentiator for Converge.

[Suthan Sukumar, Principal]

And so it sounds like you will continue to be looking out for kind of key capabilities here to kind of layer into the mix?

[Shaun Peter Maine, CEO & Director]

Yes, on our managed services. So we are there was no, no other provider was providing verification of any offered as a super job on the identity space but we partner with them to provide that the verification piece and that was really the missing piece where we find gaps that our main providers cannot provide and especially as it is required for our managed services in this case it was building trust ecosystems that we will invest in our own IP and technology.

[Suthan Sukumar, Principal]

And the last question from me is, I guess if an M&A to want to touch on the European opportunity. Can you touch on how large is the pipeline of targets that you're looking at now and. And what is the evaluation environment. Also, it look like now compared to what it was last quarter.

[Shaun Peter Maine, CEO & Director]

Yeah. So again, we met with 64 companies in Germany create this Whitelist 16 have under NDA and are working to close acquisitions this quarter extremely impressed by the quality of companies that were coming about with and they need to thank our vendor partners are IBM partners or Red Hat partners, a VMware partners and our own ecosystem and Ingram for helping to introduce us to these, I got to say that source LBOs has done a super job again. She has been in the channel in Germany for 35 years. So she knows these companies extremely well, but again the quality and the growth of some of these companies, especially the ones providing services into the government space. Metals, Healthcare, Education. Yeah, it's very impressive and again although we say we'd like to get them under 6 times. We're still working to get the same valuations that we get in North America. Again, I haven't closed anything yet, so. And so I do feel that will be the basis, but we're looking to do that at this quarter. The latest at the beginning of next quarter, but it's going very well, had some tremendous company that I'm really excited by what Europe is going to run.

[Operator]

Your next question comes from Anja Soderstrom from Sidoti.

[Anja Marie Theresa Soderstrom, Senior Equity Research Analyst]

Congratulations on another great quarter. And if you can just talk a little about that, large government contract you had in the first quarter, it was a sudden insulated contractor or is there more to come there that might keep the hardware elevated or how should we think about that?

[Shaun Peter Maine, CEO & Director]

So it is the government just tends to spend more in Q1. Yeah. Thrilled to get that, those deals. The opportunity when you have device sales is can we add managed end user sales to those. So as by themselves device sales aren't that interesting high volume kind of lower margin and, but if we can add managed service to that they will become. But really it's a very heavily Q1 focused around the government spending pattern here in Canada, but you'll see the majority of that. So again it's something that didn't exist a year ago that we've added around the government and especially, I think this is, we are looking at more longer-term. A lot of the work from home initiatives and how they're enabling things refreshes. So definitely took advantage of that, but really the opportunity for us is how can we add a lot of managed services around those end point devices, but it's a Q1 focusing on here.

[Anja Marie Theresa Soderstrom, Senior Equity Research Analyst]

And this Managed Services is some upsell that comes later then or?

[Shaun Peter Maine, CEO & Director]

Correct, correct. So when you have those, it's something that we're working on in some of the European targets that we're going at our offering These And so, as part of our overall trying to get managed services in their every aspect of our business, that's the key one where some of these targets that we're looking to acquire in Europe already doing this can we offer those to our Canadian customers as well.

[Anja Marie Theresa Soderstrom, Senior Equity Research Analyst]

And then also you have a really good playbook for North America in terms of acquisitions and you're very familiar with the competitive landscape here and everything, but what do you expect from Europe. In terms of a different landscape or different culture or how you how you sort of embracing that?

[Shaun Peter Maine, CEO & Director]

That's a different culture. But the one thing I was shocked at so Dasher has bought a 100 companies, there, the major player there in Germany. And so I thought they would have picked over the German market. But when you go, you find out that that was its top 12 and therefore no companies in the mid-market between $7200 million of annual euro annual spend, want to be bought by backlog because they're going to become a second-class citizen and can come out, they lost their CEO last Q1, they haven't been on a growth path. So I was amazed at how wide open the opportunity was for us to acquire quality companies in Germany Absolutely There is a different culture and rather than having the fast talking Canadian talking to them having doors, I'll be as we've known them for Five years is much more effective as an introduction to gain comfort because the same way. I know the North American ones, she knows the German ones, I am quite more familiar with the UK marketplace But the German ones Doris has done a fabulous job in getting us some real quality companies that are into our pipeline.So yes, it's different it culture is different. The way we approach it. The playbook is different in Europe. In North America but also will be looking to add experienced European executives to our Board and our management team. Because like you say, we've all done this many times ourselves. So we will be looking to add people that have done this before, to our management team and Board as well as we expanded to Europe. The opportunity is tremendous. This year, it's great targets, but we'll be looking to a definitely add to our skill sets here around that as we move forward. Okay. And you're talking about adding Executive. I know you have the European Advisory Board. Can you just give us some, some color on the This is tremendous this year, great targets, but we'll be looking to a definitely add to our skill sets here around that as we move forward.

[Anja Marie Theresa Soderstrom, Senior Equity Research Analyst]

And you're talking about adding Executive. I know you have the European Advisory Board. Can you just give us some, some color on the composition of that and what do you expect from that?

[Shaun Peter Maine, CEO & Director]

And so can you just give me until the AGM. So at the AGM. I'm going to. I've got a lot of exciting announcements to make. So if I. I'll give you that will be the teaser and June 23rd will be our AGM, if you can give me till then I can make a proper announcement.

[Anja Marie Theresa Soderstrom, Senior Equity Research Analyst]

Looking forward to the AGM I might cancel my Netflix till then. And in terms of Lucira Health partnership, has that opened any other doors for you since you announced like has that led to other? and

[Shaun Peter Maine, CEO & Director]

Absolutely. So into Canadian government sources as well as through that partnership, the credibility that's given us. So we have a wonderful tool kit called a TrustBuilder toolkit that other SI Global SIs can used, but showcasing these capabilities to other partners or other solutions that we're providing. I mean, Lucira has a great partners obviously expanding that relationship and not just to stadiums and to sports stand, but to other venues and concerts and there's all kinds of different marketplaces that we're looking to first in the states, which is really ahead of the game as far as using these over in Europe, there tends to be some reluctance to using COVID passports to gain access. But in U.S., it's definitely there. Canada is just I guess further behind as far as the vaccine programs, but I'm sure there'll be those opportunities and what the credibility that's given us has been, as part of conversations that otherwise being validated has been very meaningful. So I mean again, this is a real pressing problem. But it's not just the technology and IP that we own, it's the capabilities around it, like when you have all those different pieces, when you realized just to recognize a barcode that's our analytics guys have stuff off the shelf to go. Yeah. Here is, this will compare it to look at that have that software development piece and the technology piece and the hosting piece, the Cloud piece, there's a lot of pieces you put together to from one of these solutions, it really showcase how wide the capabilities can have. So yes, because of the credibility of that thought, it means that there's a lot more doors that opened for us.

[Operator]

[Operator Instructions] Your next question comes from Daniel Rosenberg from Paradigm Capital.

[Daniel Rosenberg, Analyst]

I had a quick question around the managed services opportunity within the core customer base. As well outside of the -- you mentioned 80 new logos and you're off course acquiring a bunch of new relationships as you expand. But other customers you have, let's say, from a year ago or 2 years ago, has the opportunity been cross has cross selling occurred fully in terms of what managed services offering they can buy or how much more of that customer wallet share is there for you to capitalize on in the future?

[Shaun Peter Maine, CEO & Director]

Yes. So it's a tremendous path. It does take longer to get managed services accounts. So usually you start somewhere else and get there. And in fact the best managed services customer to sell into is one that you already provide a great service into. So it is, there is a slower burn to get there, but it's by having the capabilities and start with even service desk. So they really the upsell on our iroris hosting first, then it's service desk where we triage problems. Is it us is a Google is it in 4, then it's managed network? You need that high bandwidth between all of us like you get on your Internet let us provide that for you.And it's managed security making sure there's no intrusion at the same high-level security you have internet versus in across the wider area network. And then this managed end user, but that's all build and it's a multi-year build. So it's I wish it was a lot quicker, we're very impatient company, but there is a slow burn in grow this we will be making a lot of investments in this area that we'll be announcing in the following quarters at the AGM to really accelerate this growth. But there is, it's not the same at a pace that you get with the software which you can be much quicker.We lead in there, we're Hybrid IT capability, but on the managed services side, there is a longer progression and there's also as I was mentioning the Kevin before the migration of services and managed services does take longer to get to the recurring revenue piece. So again, tremendous opportunity, not as quick as some of the other things we do.

[Daniel Rosenberg, Analyst]

And then, as it relates to surfacing that opportunity, could you speak to retaining that talent and attracting talent, what that employee market looks like as you look out there today and the opportunity we see ahead and being able to service it?

[Shaun Peter Maine, CEO & Director]

Yes. So we are really fortunate, especially on the managed services side that we have managed not soft like really strong key capabilities that in the right regions, where other not as competitive. When you bought 19 companies and we had, we've acquired 11 data centers. So we're consolidating them back to 5. You can choose areas where other not as competitive. We are with our -- a lot of our consolidation has come from with these small companies have put all their staff where their front office is. And when you buy 4 companies in New York, and you buy a bunch in California, well, guess what? Those are the most expensive place in the planet. So that's probably not where you want to host a lot of your datacenter staff, which also, there is a cost arbitrage and then there's also the competition. Although I will say the availability of talent pre-COVID and post-COVID are dramatically different in that, sorry post-COVID is still going on of course. But as things open up and that the job market, we had negative 4% tech employment, which means you basically had to steal someone from a job to get them to another job. And in particularly in New York and California being the worst environments for that. Whereas because of the dislocation, just in certain sectors, some really good people ended up being dislocated. And therefore, it did provide more of a cushion in the job market to find good people. So I think again on the managed services side, I'd say different story when you're looking at some high-end data scientist and Cybersecurity people, etcetera. From the managed services side, we haven't had those issues.

[Operator]

Your next question comes from Nick Agostino from Laurentian Bank of Canada.

[Nick Agostino]

I guess 2 questions on my part. First on the Lucira, given I think Shaun, you mentioned that you're -- you touching many, many parts of that potential I guess validation process. Is there something different in the business model here as to how you're going to recognize revenue? Is it just on a piecemeal for devices or when the solution is download or installed, are you getting paid will little bit on transactions? Just any color there that might differentiate this opportunity versus your more traditional ITSP opportunities?

[Shaun Peter Maine, CEO & Director]

So really this brought to you there a lot of capabilities, all started off really PS led go solve the customer's problem, help people be able to use it is to get back to stadiums. Now, as we're expanding, we're looking into build this into much more of a managed service, to say great this works. Now, how do you make this work an over time? How can you reuse those for that path for not just for getting into a sports stadium but into different events? So widening it out, service levels, etcetera. So definitely started PS-heavy, now moving to what are the and working with Lucira Health to provide how is this a managed service, what are the other things we can do? But we started with the solution in mind, which is always the way we approach things and then look how do we expand that to much more of a recurring revenue and offering service and expanding that service, but started off with a solution in mind.

[Nick Agostino]

But is there opportunity for to get paid per transaction?

[Shaun Peter Maine, CEO & Director]

There absolutely is and so that as you offered as a managed service. So it started off just PS engagement. But there's all kinds of things, the management of this amount of data is extreme and therefore it lends itself to cloud, because that's where you store all your unstructured data. So one of our largest customers 23 and this data. So this I don't view is such a different kind of solution that you see. I've got all this unstructured data and then what are the useful things you do with it, so but yes, started off, solved the problem and then build up that recurring revenue model within managed service, but that's not where it started, that's where it gets too.

[Nick Agostino]

And then, the second question for Carl. Just looking at your gross margin for the quarter, 21.9%. I recognized it was hardware heavy because of the large government contract. Can you maybe just give us a sense what a more normalized quarter what the gross margins would have been, has a quarter have been more normalized in terms of the mix?

[Carl Smith, Chief Financial Officer]

So if you look at sort of last year, kind of a good gauge because we hadn't been doing many acquisitions. Last year our Q1 was our lowest gross margin and that will be again this year. We would expect Q2, Q3, Q4 to trend up. We have acquired a number of companies. So our gross margin probably won't be as high on a quarterly basis this year. this year initially that was last year, but tending towards Q4 would be back to where it was.

[Nick Agostino]

But just trying to understand how much that hardware contract depressed the Q1 gross margins, do you have any color on that?

[Carl Smith, Chief Financial Officer]

At least by percentage.

[Operator]

There are no further questions at this time. I'll now turn it back to Shaun Maine.

[Shaun Peter Maine, CEO & Director]

Thanks, Carl. And thank you to everyone for participating on today's call. It's been my pleasure updating you on the undeniable momentum that has carried us into yet another successful quarter. I look forward to updating our shareholders again at our AGM and thank you all for your continued support. Good Night.

[Operator]

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