Converge Technology Solutions Corp

TSX:CTS

Earnings Call Transcript 2021-Q2

[Operator]

Good morning. Welcome to the Converge Technology Solutions Corp. Second Quarter 2021 Results Conference Call. [Operator Instructions] Your main host today are Shaun Maine, Chief Executive Officer; and Matt Smith, Interim Chief Financial Officer.Before we begin, I am required to provide the forward-looking statements, 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 the call will contain forward-looking information. The actual results could differ materially from the 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 the 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 filing of the 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]

Thanks, Ema. Good morning, everyone, and thank you for participating on today's Q2 earnings call. At our AGM in June, I had the opportunity to discuss the trajectory of our company as we enter into a new phase of growth. Today, I am honored to provide an update on our record Q2 financials, which reaffirmed the fact that we are on track to execute the company's 3 Phase plan by the end of 2021.In my follows, I will provide a business update on the quarter, beginning with commentary on our successful entry into the European market and I will outline other significant accolades achieved over the past quarter. As a reminder, the new phase of growth the company enters will be dedicated to growing the company from $2 billion in annual revenues to $5 billion in annual revenues over an approximate 4-year period, which will depend heavily on our European strategy and growing our Managed Services offerings.Keeping that in mind, Converge closed its first European acquisition last week, marking the 23rd acquisition announced over the past 4 years. Located in Mainz, Germany REDNET AG is an IT Services Provider specialized in serving education, health care and government public sector, providing detailed advice, economic planning, smooth logistics and fast service to clients.Acquiring REDNET was truly a momentum statement for the company as we set our sights on expanding into the European markets, allowing us to service clients on an international scale.During Q2, Converge announced strategic changes to our Senior Management and Board members, including the addition of Doris Albiez to the European Advisory Board, along with Thomas Volk and Darlene Kelly to the Converge Board of Directors.Doris is a highly experienced Executive, who has served in various global roles, leading international teams at IBM and Dell Technologies. Additionally, Thomas Volk is a notable and highly respected Senior Executive with unique experience leading Global Technology Enterprises in mid-market companies. These additions along with Darlene's years of financial and operational experience within the industry have all proved invaluable to the development of our European strategy and the optimization of our business outlook.Converge's achievements are the direct result of our employees and their collective efforts. I can confidently say that we are thrilled with these additions to the team and their perspectives. In addition to our recent acquisitions in Europe, Converge announced 4 additional North American acquisitions through Q2. At the beginning of the quarter, we announced Dasher Technologies, an exceptional Enterprise Networking and Cybersecurity IT service provider with a fantastic mid-market customer base on the West Coast. Dasher is the fifth largest HPE partner in North America and has been awarded multiple HPE awards, including the recently announced HPE 2021 North American SMB Partner of the Year.Complementing our recent North American and global efforts, Converge closed the acquisition of ExactlyIT, a next-generation Managed IT Service Provider headquartered in North Carolina with operational offices in Mexico, which brings a key competitive advantage in both cost to delivery and access to high-quality cloud, cybersecurity and managed services engineers and experts.ExactlyIT not only advances the company's solutions offerings with comprehensive knowledge in Google Cloud Services, Cybersecurity Services and SAP Managed Services but also brings valuable clients of various sizes across multiple industries, including Fortune 500 companies and multibillion-dollar international enterprises in North America and Europe.Finally, to wrap the quarter up, Converge announced the signing of a definitive agreement to acquire both Vicom Infinity, a world-class IBM Mainframe Solutions provider and Infinity Systems Software, which has been a leading supplier of software and services for IBM platforms more than 20 years. These transactions are expected to close at the end of this month.As many of you have noted, Converge is extremely meticulous in the execution of its activism strategy. Every subsidiary discussed has resulted in value-add for the business, whether that'd be employee expertise and the delivery of top-notch solutions to advance our managed service efforts, a powerful customer base in various regions to complement our cross-selling initiatives or strong vendor relationships to secure Converge's position as an industry leader.Time and time again, we've announced the addition of subsidiaries who have trusted relationships with our customers and vendors. And this has been validated with the ongoing awards we continue to secure.During Q2, Converge received 5 IBM awards, including the 2021 Beacon award, top American -- top North American cell 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 pack for data and the winner of the IBM Business unit Excellence award for PROTECT Digital trust.Additionally, the company upgraded its status with multiple partners, including achieving Titanium status with Intel, Diamond status with Palo Alto networks and Elite status with pure storage. The accumulation of industry and partner awards has undoubtedly advanced Converge's reputation with both our customers and our partners, allowing us to run our business more effectively while delivering solutions to our clients.Reaffirming this sentiment, Converge has ranked within the top 50 of CRN's 2021 solution provider list and the subsequent to this quarter was ranked 14th on the 2021 fast growth 150 list, recognizing the fastest-growing North American Technology Integration Solution providers and IT consultants. As highlighted on previous calls, one of the key reasons Converge has been able to position itself for ongoing success has been due to integration and the cross-selling efforts.Greg Berard, our President has implemented 2 key features that enable cross-selling, customer technical workshops and executive briefings. In Q2, Converge held 66 customer-facing events, hosting approximately 1,500 external attendees. Primarily as a result of this, Converge has 121 net new logos in the second quarter. Additionally, since the beginning of 2021, we have hosted 446 executive briefings initiated by approximately 170 different Converge sales reps, which helps drive 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 the remainder of the year and 2022, while allowing our new acquisitions to immediately cross-sell analytics, DevOps, Cybersecurity and Cloud and Managed Services. Analyzing our sales for Q2, 17% of our revenue came from the technology sector, 24% from government and education, 24% from finance, 13% from health care and 6% from retail.Regarding recurring revenue, in Q2 2021, our gross annualized recurring revenue was $327.9 million. This is made up of $67.5 million of managed services annualized recurring revenue, which are typically on 3-year contracts paid monthly, $88.8 million of gross public cloud annualized recurring revenue, which are typically on 3-year contracts and paid monthly and $171.6 million of software subscription support, which are typically paid annually.On that note, I would like to pass the call to our Interim Chief Financial Officer, Matt Smith to discuss our financials in further detail.

[Matthew Smith, Interim CFO & VP of Finance]

Thank you, Shaun. Second quarter revenue increased 52% to $345.3 million compared to $227.8 million last year. Product revenue, which includes hardware and software increased 60% to $281.3 million from $175.3 million over last year, primarily due to the impact of acquisitions completed in the second half of 2020 and first half of 2021 and reflects the overall strengthening of the IT market as companies begin to increase spending now that COVID vaccines have begun to be rolled out.Managed Services, which among as going forward. On an annualized basis, our Managed Services at the end of the quarter was over $67 million. Professional and other services, which include professional and staffing services and the net revenue from public cloud resale and software support increased 22% to $47.1 million from $38.6 million last year, technology sector, 24% from government, 17% from technology and 13% from health care.For the 6 months ended June 30, revenue increased 40% to $655.5 million from $469.4 million in 2020. Product revenue increased 46% to $533.8 million from $365.7 million over last year, primarily due to higher hardware sales to the Canadian government and the impact of acquisitions. Managed Services revenue increased 21% to $33.3 million from $27.4 million last year and professional and other services revenue increased 16% to $88.5 million from $76.3 million last year.Gross profit for Q2 increased 43% to $78.2 million from $54.5 million last year. Gross profit margin was 22.7% compared to 24.1% last year. As expected, we saw gross margin grow by approximately 1% sequentially from Q1 2021, which was a particularly hardware concentrated quarter.For the 6 months ended June 30th, gross profit increased 33% to $146 million from $109.7 million in 2020. Gross profit margin for the 6 months was 22.3% compared to 23.4% over the same period in 2020. The gross margin decrease in the 3 and 6-month periods was due to the impact of recent acquisitions that sold primarily hardware. As we cross-sell higher-margin cloud and managed services to customers of recently acquired companies and increased sales to existing customers as they expand their cloud-based IT infrastructure, we expect gross margins to increase.SG&A for the 3 months ended June 30, 2021 was $57.6 million, increasing from $44.2 million in the same period last year. For the 6 months ended June 30th, SG&A was $107.3 million compared to $89.6 million last year. As a percentage of sales, SG&A made up 17% and 16% for the 3 and 6 month periods respectively compared to 19% for the same period last year, which reflects the integration savings over the last 12 months, which cumulatively have been over $28 million on an annualized basis.Adjusted EBITDA for the 3 months ended June 30th increased 86% to $21.7 million compared to adjusted EBITDA of $11.6 million last year. As a percentage of revenue, adjusted EBITDA was 6.3% compared to 5.1% last year. For the 6 months ended June 30th, adjusted EBITDA increased 80% to $40.5 million from $22.5 million last year and was 6.2% of revenue compared to 4.8% for 2020.In the near-term, our EBITDA percentage reflects the impact of recent acquisitions, which have lower EBITDA margins when we acquired them and more than double within the first year as we integrate operations and cross-sell managed and cloud services to their customer base. Interest and finance expense for the quarter was $1.7 million compared to $5.3 million last year.For the 6-month period, interest and finance expense was $4.1 million as compared to $10.8 million last year. These significant savings are a direct result of lower interest costs on our ABL, which as we announced in Q4 last year had been switched from a specialty lender to syndicate of Canadian banks including CIBC, Scotiabank and Laurentian as well as interest savings as a result of us paying off higher non-ABL debt.At the end of the quarter, total cash was $125 million. Total borrowings were $51.2 million. And we had approximately $140 million of borrowing capacity under the ABL. Shaun mentioned on August 5th, we announced the acquisition of REDNET for approximately EUR96 million. On a pro forma basis, including REDNET, our borrowings, collaterals, accounts receivable and inventory far exceeds our current ABL limit and we will seek to increase our deadlines going forward.Thank you and I'll pass the call back over to Shaun.

[Shaun Peter Maine, CEO & Director]

Thanks, Matt. It brings me great pleasure to be delivering these quality results on today's call. We have always aimed to execute and extend beyond our stated objectives and our team will do everything in its power to continue doing so. One thing I would like to note above our results for Q2 is that they do not include the revenue or EBITDA of our Vicom Infinity and Infinity Systems acquisitions, which were announced at the end of the quarter and we'll be closing this month.These 2 businesses generated revenue and adjusted EBITDA of 54.6 and $3.9 million, respectively in Q2 and we look forward to including these contributions in future quarters. On our previous earnings calls, I discussed the overwhelming support we secured in the markets over 2020 as a result of our business results, which helped us raise over $100 million in equity through a series of oversubscribed bought deal financings. Similarly, during the first half of 2021, Converge added an additional $86.5 million at $4.85 per share and $172.5 million to $7.80 per share, more than doubling our 2020 efforts.This has added new valuable institutional investors to the existing Converge shareholder base. And it has also been accretive to existing holders growing their positions and has helped advance acquisition capital position us for our European expansion. Converge is an aggressive growth company. And I'm incredibly proud of the fact that our team has delivered ongoing record quarterly results while also delivering a stellar price performance. To have opened the quarter at $5.30 per share and closed the quarter at a share price of $10.22 is truly remarkable. And we've seen significant upside in Q3 as well, which is extremely gratifying and a validation of our strategy we have believed in passionately since the company's formation.On that note, let me open the floor to questions.

[Operator]

[Operator Instructions] We will now take our first question from Kevin Krishnaratne from Desjardins Securities.

[Kevin Krishnaratne, Research Analyst]

Good quarter. A lot of moving pieces to think about FX, M&A. Are you able to provide, even if it's just a rough estimate, what the organic constant currency growth would have been in the quarter?

[Matthew Smith, Interim CFO & VP of Finance]

Yes. So that as you noticed, when you do 4 acquisitions in a quarter and you had COVID impacting you last year, those are moving targets. What we try to do is have people focusing on the gross profit percentage to kind of indicate what the mix growth is. But as we say, revenue is probably not the best indicator of our growth as the higher-margin cloud and managed services have a much higher gross profit percentage. So not -- again, given last year, Q2 was actually weaker than Q1 last year, we had $227 million versus $241 million in Q1. This quarter versus -- we had $350 million versus -- $351 million versus $310 million. So you will see obviously a much stronger growth this year. And part of that is COVID and part of it is the strength of the U.S. economy.

[Kevin Krishnaratne, Research Analyst]

Okay. Maybe switching more on to the acquisition of REDNET, congrats on the entry into Europe. When I think about Converge when you started 4 years ago in the first platform acquisition there Corus360, that was a good asset that had the key vendor relationship. It also came with some data centers disaster recovery. So I'm wondering if you can just talk a little bit more about the asset in REDNET, what else you acquired there? Any thoughts about the data center strategy there, if you want to start -- as you start to think about hosting managed services there. So I guess I'm getting -- have questions around either the CapEx considerations. And then, as you ramp-up there in the region, and you just talked about the hiring plans you may have on key management roles and other employees to support the growth there?

[Shaun Peter Maine, CEO & Director]

Super. Yes. So we've been making investments in preparation for the REDNET acquisition, but it's a fantastic acquisition. Doris is known by Revisal, the CEO there for over 30 years and she will be running all of Germany for us. So when we do subsequent acquisitions in Germany, they all report into the REDNET Management Team. And REDNET is a special asset. What they've been able to do in education is unique. In that they have a lot of cloud-based services allowing. So basically during the pandemic, as people know, we let our teachers down, we got our kids down because there's -- they just weren't equipped with the tools they needed to do online learning. And so the German government said, okay. We lost a year of learning. We can't let our university students and high school and government school kids down. So they've put EUR5 billion into digitizing education in Germany.And what REDNET has done is they were a leader in this space. They've got over 40% market share in the 3 of the federal states that they're in, in providing cloud-based services for online learning, but also very uniquely a teacher help line. They've actually staffed teachers to provide IT support, but also to help those teachers deliver online learning and curriculum, et cetera. And this model has been extremely successful.So back to your data center question, when we have 11 data centers in North America, we provide more of an OpEx model than a CapEx model. In that, we -- all of our contracts are usually 3 to 5 years with customers around our managed services. And what we'll do is we will lease equipment to make it not a CapEx expense versus an OpEx expense. So you'll have seen our CapEx is in the $3 million to $4 million kind of range per year. And that's because we operationalized it as opposed to having it as Capex. So do those answered your questions, Kevin?

[Kevin Krishnaratne, Research Analyst]

Yes. Okay. That's helpful. Thanks Shaun. Moving forward as well on two M&A that you made in the quarter, you mentioned that the Vicom Infinity. That sort of -- I believe that rounded out your IBM product set. Correct me if I'm wrong with adding mainframes. Does that sort of fill out your -- are you pretty much now able to offer the full spectrum of IBM product? And so, can you talk about what that acquisition will be -- means to you in terms of cross selling? Does that potentially give you opportunities to win slightly bigger deals just given mainframe versus midrange? And then, lastly, can you just give us an update with your standing of IBM? Obviously, you've -- you're a lead there with taking home multiple awards as you highlighted. But you've got another private competitor out there that I think historically has had a bit more spend on IBM. Where are you now? You've talked about kind of approaching them. Just if you could give us an update post this acquisition.

[Shaun Peter Maine, CEO & Director]

Yes, super. So yes, really pleased about the Vicom Infinity acquisition. It does renter the profile. We were having to use partners to bring in that skillset. It's a very high-margin business. It's a chunkier business and really focused on Q2 and Q4, but it's an exceptional part. And what it means is that we can fully engage IBM as they move to much more channel friendly model, much more like the Red Hat model, which is 80% of the channel. IBM historically has been 15% of the channel. They're really aggressively pursuing channel partners. And to their lead partners and yet Sirius is the -- still the largest revenue. But I will happily note that we won 5 awards at the IBM Conference, and they won 3. We're definitely receiving a lot of accolades for our mid-market penetration.So our business model and our ability to sell in mid-market is unusual. You structure yourself differently, buying smaller companies who happen to have younger sales forces, which are hunters and not farmers, like large enterprise account, means that we are really well situated. And with Greg Berard's mechanisms of workshops to engage customers. And yet we've talked about the marketing event. We have been -- the net new logos, 121.25 is insane, right? I'd have to congratulate the team on their outreach and the partners realized that. I've noted in the past that it seems like every one of our partner account managers from the vendors, not just IBM have either bought a new house or been promoted. And that's just a sign of how successful Converge has been in implementing our mid-market strategy. So yes, absolutely IBM is really important partner, especially on the software side, their cloud packs with Red Hat, the hybrid IT model and rounding up the portfolio with Vicom Infinity means that we can engage even further with the IBM team.

[Operator]

We will now take our next question from Rob Young from Canaccord.

[Robert Young, Director]

The thing that jumped out to me was the services strength in the quarter, a little ahead of where I expected. And so, I was hoping you could add to some of the prepared comments around the strength there, 121 new customers. Is that mostly related to services? And is it market improvements reopening in the U.S. or would you attribute it more to the go-to-market you talked about in the model -- in the prepared comments or like any other comments there would be really helpful, understanding that strength.

[Shaun Peter Maine, CEO & Director]

Great, Rob. So 2 comments I'll make is, first, I guess, on the general market, we have seen a strengthening but also the engagement model that we initiate is quite different than most companies. And I've got to give it to Greg, the marketing team, the way that we do an outreach. But I'll also say, having a world-class Cybersecurity team, you might have heard about the various ransomware attacks that when a mid-market company, they get hacked, and they turned to their IT group, and they just don't know what to do. And so having that world-class team, we can come in, we can triage a problem. We can see what the data has been exposed and then come up with solutions for securing their data on an ongoing basis. Those become the most loyal customers.And so we have unique skillsets into the mid-market. Most people focus in on the large enterprise space, like CGIs or the Accenture, the people with the PHD data scientists are quite rare and world-class cybersecurity groups. And so, having these skillsets, these mid-market companies are just thrilled to see us when we can bring in these kind of capabilities. We buy companies that are digital infrastructure companies. We transform them into these hybrid and managed service providers. And those capabilities, I think, really have helped us. And yes, the -- showing in that net new logos number is definitely is an indication of how we're doing.

[Robert Young, Director]

Okay. Lots of great color. And then, Just a couple more. The choice of REDNET as your entry point into Germany. Maybe it seems as though they're really highly exposed to some education spending in Germany. And so, if you could just talk about maybe the near-term opportunity from that and just broadly the choice of REDNET. What qualities make it well suited to a beachhead in that country?

[Shaun Peter Maine, CEO & Director]

Yes. So I mean what a prized asset. This -- we competed with 31 private equity companies. And Barbara chose us, not because we were the highest bidder, but because she knew she could grow the fastest with us. I mean, the fact that she went from $138 million a year last year, it will be EUR250 million this year to EUR350 million next year, all done organically. EBITDA going from $7 million last year to $16 million this year to EUR24 million next year of organically. And that's because of the unique model they have in education. They've got 3 to 5-year contracts in the 3 federated states that they exist in expanding to 7.We're looking to expand them further through acquisitions to really bring her unique model. Also, we're looking for some of the things they do to cross-pollinate here in North America. We have a great education space up in Canada as well as down in Texas. And so, we're really focusing on that model of cloud-based teaching and infrastructure along with a teacher helpline, the earnings that she has really all come from the services side. And so, fantastic model, really a prized asset. I could not be more happy to really announce ourselves in Europe and to brand ourselves with such an outstanding company.

[Robert Young, Director]

Okay. Great. And then, last a modeling question. I'll ask Kevin's question different way. The contribution from Dasher and Exactly, is that the -- once it gets through IFRS accounting, sometimes those numbers can shrink a bit. And I was just wondering, any guidance around what the contribution was in Q2 to help us model that going forward. And then, on the Vicom Infinity, the $54 million in Q2 relative to $106 million trailing 12 months. I'm trying to understand that big jump in one quarter relative to the trailing 12 months, those 2 modeling pieces would be really helpful for me. And then I'll pass the line.

[Shaun Peter Maine, CEO & Director]

Yes, sure. So on the first one, so realized currency also, like when you talk about year-on-year growth, currency had a $35 million impact Q2 last year versus this year. So you had currency in COVID and therefore, with the acquisitions, it's not necessarily straightforward to do that, but we will come back to you with that. On the second piece, the Vicom Infinity, they're very chunky. So these big deals end up happening in Q2 and Q4. So you would expect in Q4 to have some very chunky deals and realized the channel. When you have 350 salespeople that they didn't have before, it means there's just so many more -- this is the magic of Converge. When you buy a company that has capabilities and there's so many more sellers, that's where you're seeing the jump. So even after we announced -- after we had the partnership, we announced to our sellers that they are becoming part of the family. So that will have a market impact on them. You wouldn't expect to see a lot in Q3 from them, but you'll definitely see a big jump in Q4.

[Robert Young, Director]

Right. So that's more like $108 million run-rate versus the $106 million, should we just be thinking of Q2 and Q4 as big quarters and then not much in Q1 or Q2?

[Shaun Peter Maine, CEO & Director]

Yes.

[Operator]

We will now take our next question from Christian Sgro from Eight Capital.

[Christian Sgro, Research Analyst]

REDNET in Europe is going to be a meaningful revenue contributor going forward. I'm just thinking about the seasonality about selling into the German public sector. Would they follow an ordinary government spending calendar or is there anything you'd point out on the REDNET side that way?

[Shaun Peter Maine, CEO & Director]

Yes. So education tends to be during the holidays is when they do their biggest implementation. But as they moved to more of these recurring revenue managed services, it flattens out. But July, August and therefore, the Christmas holidays, Easter holidays, they tend to do implementations in the education sector when the kids aren't in school. So from a seasonality perspective, yes, you would think Q3 and Q4 are quite big. Q1 tends to be a little bit lighter.

[Christian Sgro, Research Analyst]

That's super helpful. I'll add one more question in Europe. One probably others are waiting to ask, but sort of what's next? So with REDNET in Germany and some of the operations already existing in Europe, what sort of asset when you think about the landscape now, would be complementary in terms of geography or strategy?

[Shaun Peter Maine, CEO & Director]

Yes. So we're an aggressive growth company and you should not be surprised that we'll be pursuing other acquisitions in Germany to expand to other federated states. I think REDNET has very clearly demonstrated leadership in the education sector. So the quicker we can gain the presence, feet on the street in all those federated states, the quicker they can grow. I mean that growth that we've announced is not with synergy or that's without the Converge effect. And so, we will absolutely look to aggressively grow there. Also, we've been very clear that the U.K. market is a highly attractive market. We'll be looking to add a platform acquisition in the U.K., followed on by tuck-ins there. So the priority is it's easier and more quick to close more of those tuck-in acquisitions, which expand geography than it is for the platform. So REDNET, we worked on for a very long time, thrilled with it. And so, it might take a little longer to do the platform one in the U.K. But as you know, we've got 4 companies in Q2. We're an aggressive growth company. And yes, we'll be absolutely looking to expand in Europe.

[Christian Sgro, Research Analyst]

That's very helpful. I'm just going to ask one more on the modeling side for myself as well. As we think about the cash build into the back half of the year, could you talk about sources and uses of working capital, things to think about into Q3, Q4?

[Shaun Peter Maine, CEO & Director]

So we -- the acquisition of Vicom on December 31st kind of changed our balance sheet that we hadn't had the opportunity to transform their payment terms. So the free cash flow numbers you would have seen in Q4 and Q1 because of acquisitions, it hadn't worked its way through the system. We showed, I think, 22 -- over $22 million of free cash flow in Q2. And you would expect that number to increase, especially since because of chip shortages, we've had to build inventory levels to support customers to secure supply. As that normalizes, you'll see a much more normalized supply chain and therefore impacting our free cash flow. This is an incredibly cash flow focused company. We generate great cash working capital as a source of funds, not a use of funds, and you'll see that trend increase and continue in Q3 and Q4.

[Operator]

We'll now take our next question from Rob Goff from Echelon.

[Robert Goff, MD & Head of Research]

Actually 2 questions if I may. Could you talk about the pacing of software renewals within the quarter? I know that sometimes there are ebbs and flows about that. And as a second question, could you talk to some of your expectations for exit rate revenues on the managed services?

[Shaun Peter Maine, CEO & Director]

Absolutely. So you're absolutely right. So when you do software renewals, usually, they're multiyear deals. And so, you'll see them come. Like last year, Q2, we had a lot that were 2 year deals, so you'll see them again next year. So it probably wasn't as high on the software subscriptions, but you'll definitely see those increase and especially in Q4. On the exit rate, so yes. We're still targeting $100 million of managed services recurring revenue by the end of this year. One of the leading indicators of managed services revenue is our services revenue. So when you do an onboarding of a customer, you need to transform them from their existing state into our data centers to provide that managed services. That's a 3 to 6-month time frame. So when you see our services numbers grow, that's usually a leading indicator of what more managed services and recurring revenue are coming. And we're comfortable with that $100 million on an annualized basis in Q4 is still our target.

[Robert Goff, MD & Head of Research]

And if I may slip one more in. You talked about the new logos. Could you talk to the revenue traction build associated with adding a new logo?

[Shaun Peter Maine, CEO & Director]

Yes. So when you go in and provide like a hybrid IT solution, we start with Red Hat and VMware. They don't -- they're not huge revenue generators. But what they allow you to do is be in the room and be the advocate when the customer is deciding of where to put those workloads. Do they go on to the public cloud and Microsoft Azure is the best one for windows workloads and front office applications, GCP and AWS are better for back office and Unix ones or does it go in our managed service, if it needs to be customized to your data center. But unless you're in the room, you can't -- if you have -- if you're just talking to the infrastructure people, that decision has already been made that it's going on-prem. So that's why these net new logos, especially leading with Red Hat and VMware is so important to get us in front of the application people. So these net new logos and whether it'd be from the security side or the Red Hat and VMware side to get in front of those people really helps us to grow that cloud and managed services business. So that's the key part of the strategy.

[Operator]

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

[Shaun Peter Maine, CEO & Director]

Thank you to everyone for participating on today's call. It has 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 when we announce our Q3 results and thank you for your continued support.

[Operator]

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