Converge Technology Solutions Corp

TSX:CTS

Earnings Call Analysis

Converge's Record-Breaking Quarter with Strong Growth

Converge Technology Solutions Corp. marked a historic milestone exceeding $1 billion in gross sales, with a 42% year-over-year increase to $1.04 billion in the quarter. Organic growth contributed notably with a 23.6% rise, emphasizing robust demand for the company's offerings. Gross profit climbed by 24.7% to $174.1 million, and adjusted EBITDA saw a 24% enhancement to $124 million from the previous year. Operational discipline enabled a substantial reduction in net debt by $44.3 million and an increase in operating cash flow to $96 million. The leverage ratio improved from 2.24x to 1.84x of LTM adjusted EBITDA. These achievements reflect Converge's commitment to expanding services, improving margins, and efficiently transforming acquisitions into higher-margin operations to bolster long-term shareholder returns.

Impressive Growth Fueled by Strategic Acquisitions and Organic Initiatives

The company delivered a record gross sale of $1.04 billion in the third quarter, marking a substantial increase of 42% compared to the previous year. The commendable performance continued with year-to-date gross sales reaching $2.96 billion, a rise of 39% year-over-year. This leap in growth results from a blend of acquisitions and a slew of organic growth initiatives, which symbolize the strategic expansions and concerted efforts to deepen the company's market impact. Diving into the gross sales organic growth reveals a notable 23.6% for the quarter and 10.8% on a year-to-date basis, indicating a firm root in core business activities apart from acquisitions. A more granular look at product and services division shows products leading the charge with a 26.9% growth while services followed with a solid 17.4% in the same period.

Navigating Market Trends with a Mix of Innovation and Prudent Management

The company reported a GAAP revenue of $710.1 million for the quarter, up by 38% year-over-year, pushing the limits further in terms of market performance. Such impressive revenue growth is attributed to the balance between strategic acquisitions and organic development. A slight decrease in gross profit margin from 27.1% to 24.5% for the quarter was observed, primarily due to a mix of product sales which generally carry a lower margin. Nevertheless, this does not overshadow the overall profitability, evidenced by an increase in gross profit, up by $34.4 million or 25% from the past year. Furthermore, the company presented an adjusted EBITDA of $41.3 million, rising by 33% from Q3 last year, which was a testament to efficient business operations and better cost controls.

Financial Prowess through Robust Cash Flow and Disciplined Investment

The third quarter showcased the company's financial strength with cash provided by operating activities soaring to $96 million, a massive leap from $15 million in the previous year, underscoring the effectiveness of improved receivables and payables processes. This revamped discipline in financial management reiterates confidence in generating meaningful cash throughout 2023 and beyond. As part of a broader capital allocation strategy, the company made decisive steps towards organic growth investments, reducing net debt by $44.3 million and returned value to shareholders through debt repayment and stock repurchase. Also noteworthy is the Board's approval of a dividend payout, reflecting a stable and investor-friendly approach. Capital expenditures were managed wisely, transitioning from large upfront cash outlays to structured leases, indicating a capex run rate of $2.5 to $3 million a quarter moving forward.

Optimistic Outlook Backed by Strong Demand and Strategic Efficiencies

Looking ahead to Q4 2023, the company anticipates gross profits to be between $177 million and $184 million with adjusted EBITDA estimated between $45 million and $47 million, indicative of a predominantly organic growth as the acquisitions stabilize in the background. This forecast is buoyed by strong product demand and planned service growth. The investor can also draw confidence from the organization's aggressive focus on cash operations as part of their bonus targets, ensuring a commitment to financial health and efficiency. Additionally, the free cash flow target is pegged conservatively at 70% of adjusted EBITDA, painting a reliable picture of the company's fiscal strategies. With integration efforts on track in North America and Europe, the company is poised to harness synergies from operations, which will be more visible as the new ERP goes live the following year.

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Converge Earnings Call for the Third Quarter of 2023. As a reminder, all participants are in listen-only mode, and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Lorne Gorber, Converge Investor Relations.

[Lorne Gorber, executive]

Thank you, Jerry, and good morning, everyone. Joining me to discuss Converge's Q3 fiscal 2023 results are Shaun Maine, Group CEO; Greg Berard, Global CEO and President; and Avjitpal Kamboj, Chief Financial Officer. This call is being recorded live at 8 a.m. Eastern Time on November 14, 2023. The press release we issued earlier this morning is available for download, along with our Q3 MD&A, financial statements and accompanying notes, all of which have been filed and available for view on SEDAR+. Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those expressed or implied, and Converge disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The complete safe harbor statement is available both in our MD&A and press release as well as on converge.com. We encourage our investors to read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards, or IFRS. As always, we will discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted. I'll turn it over to Shaun to begin with a high-level overview of the past quarter. Then Greg will expand with some operations highlights, including client examples, and Avjitpal will dive into our Q3 financial performance before we conclude with the Q&A. So with that, Shaun?

[Shaun Maine, executive]

Thank you, Lorne, and welcome to those of you attending today's third quarter call. I would like to begin by providing financial highlights from our record results, which for the first time in our history, exceeded $1 billion in gross sales, supported by significant organic growth, overall demonstrating ongoing demand for Converge's comprehensive set of solutions. Highlights discussed throughout today's call are undeniably linked to the continued demand for Converge's unique set of solutions, including high-performance computing delivered through our end-to-end advise, implement and manage or aim strategy, allowing Converge outperformance peers while acting as a trusted adviser in delivering unified and differentiated solutions to its clients. Let's begin with the main financial highlights from the past record quarter where gross sales grew 42% year-over-year to $1.04 billion. Notably, gross profit performance increased from $139.7 million to $174.1 million or 24.7% year-over-year, while we reported significant third quarter organic growth of 23.6%. A testament to the cash generation characteristics of the IT services space, Converge has continued to strengthen its balance sheet, specifically by reducing the company's net debt by $44.3 million from the previous quarter. In regards to backlog management, for which Greg will provide further details, our product backlog increased by $30 million from the end of the second quarter, demonstrating resiliency and demand. Expanding on financial highlights from a year-to-date perspective, the company's adjusted EBITDA grew 24% year-over-year to $124 million and $167 million in the past year. As mentioned, Converge significantly reduced net debt to a balance of $370.5 million, bringing our net debt to LTM adjusted EBITDA ratio to 1.84, which is under our target 2x ratio. Cash generated from operating activities significantly increased by $8.9 million during the third quarter, bringing the company to $115.1 million of cash generated year-to-date. In addition to using cash to reduce debt, the company also this year made payments for acquisition-related consideration of $95.6 million comprised of $20.8 million of contingent payments, $43.8 million for deferred consideration and $31 million of noncontrolling interest payments for its European acquisitions. Despite economic headwinds, it is ever more evident that the extent to which organizations are designating significant budgets to pressing IT needs in cybersecurity, advanced analytics and overall digital transformation, all of which Converge actively pursues to become a top North American provider. While many industry providers have experienced declines in revenue, our organic growth profile directly demonstrates how the diversification of our offerings to these key areas has made Converge resilient to these trends. This was a key reason why we launched the Coffee and converge series, which spotlights the depth of Converge's fast and unique offerings, which our Global Chief Executive Officer and President, Greg Berard, will expand upon.

[Greg Berard, executive]

Thank you, Shaun. Good morning, everyone. I'm excited to expand on the strategic investments we continue to make in the business, driving the right solutions with our clients and the resulting performance benefits this helped support in Q3. As technology spending priority shift based on the economy or other factors, Converge is there for our clients with our end-to-end portfolio and our trusted adviser status. No matter the macro, organizations are and will continue to designate more significant budgets to key IT solutions, such as those outlined on the following slide. Converge actively engages with our clients, providing thought leadership and leveraging a pool of deep technical expertise across our organization. This was evident in a recent workshop we did for one of our cybersecurity clients. They were interested in understanding how Gen AI could both impact and benefit their business. We facilitated a generative AI design thinking workshop with over 30 employees and identified 124 different use cases across their business. It is workshops like this that will allow Converge to continue to help our clients understand where technology can impact their business. I'll come back to this point with some concrete examples in a moment. As Shaun mentioned, our results highlight the continued success of our practice strategy and the advantages of our end-to-end capabilities. Across the practice areas, we continue transforming the business and continue to focus on executing our aim strategy. The ability for us to advise, implement and manage solutions for our clients continues to be a unique differentiator in the market and a significant driver of success for us in 2023. While others in the market continue to struggle with fulfillment or diversification challenges, our skills and capabilities helped deliver organic growth of over 23% in Q3 and double digit year-to-date. If you recently attended or listened to our Coffee and Converge series, you saw our experts firsthand, diving deeper into our AI, cybersecurity and managed services practice areas. This series has given us the opportunity to highlight how we differentiate ourselves from industry peers, which offer a fraction of our comprehensive aim strategy. We will discuss this more when I highlight some of our recent wins around AI, application development, cloud and high-performance computing. For those of you who are unable to join in person or by webcast, I encourage you to view the recordings of both Coffee and Converge events. They can both be found in the Investors section of our website. All of the metrics highlighted throughout today's call are linked to the continued demand Converge experiences for its unique set of solutions through our end-to-end strategy utilized across all of our practice areas, allowing Converge to deliver unified and repeatable solutions with our strategic partners. We continue to leverage these unique relationships with strategic partners across each practice area and build solutions with AWS, CrowdStrike, Google, IBM, NVIDIA, Red Hat, Tableau and many, many more. As we continue to focus on building high-value solutions with business outcomes that our clients count on, our marketing team has hosted over 160 client-facing events year-to-date with almost 6,000 clients attending, and we launched over 330 campaigns across analytics, cloud, cyber and managed services, which helped us drive our first $1 billion quarter ever and we continue to drive pipeline for Q4 and 2024 across our high-value offerings. Additionally, we've secured 123 net new logos in Q3, continuing our impressive average of over 100 new clients each quarter, resulting in over 338 new logos in North America in 2023. Now let's talk about a few strategic wins that showcase the value we're driving with our clients. This is a great example in the health care space on how our teams are partnering with their clients to drive meaningful business outcomes and are making a difference in the world. Our client needed to build an HPC center of excellence where they can provide cutting-edge, high-performance computing systems and dedicated solution engineers to enable their researchers and data scientists to run large data sets dedicated to cancer research and early detection. The client, along with Dell, NVIDIA, [Indiscernible] and Converge was able to build a state-of-the-art, high-performance compute facility to attract top cancer researchers and doctors from around the world. The ability to run large data queries for oncology imaging creates faster results in detecting cancer cells. Converge was with the client and provided the infrastructure considered to be part of the company's portfolio. These servers are designed for complex compute and AI ML and HPC intensive workloads. They are used by large enterprises and research institutions for tasks such as machine learning, data analytics and scientific computing. Our ability to leverage our data center and data science resources was the key differentiator for us to help our clients. Another great win where we worked with our financial services client to leverage GPU technology for its analytics to drive significant benefits and leveraging the parallel processing power of GPUs for lightning fast data crunching and complex calculations. We helped our clients significantly reduce the time required for risk assessments, portfolio optimization and market analysis. By leveraging Bat data GPU integration, our clients now have the ability to handle massive amounts of real-time financial data more efficiently, enabling quicker decision-making and capturing profitable opportunities faster than their competitors. This solution empowers our clients to gain a significant competitive edge, enhance its investment strategies and achieve superior returns for its clients. A common theme you will continue to see is our ability to combine resources across our organization to drive high-performance clusters around AI workloads in a secure manner. The last one I will discuss is the region of York. Converge initiated a relationship with the region of York in 2017 and established a comprehensive partnership over the last 6 years to become a trusted adviser. The collaboration initially concentrated on tasks such as performance analysis, traffic signal performance and trip assessments. This endeavor utilized data for mobility applications, vehicle health monitoring and while setting standards for data warehousing and business intelligence at the region. Recently, Converge brought together resources from across all of our practice areas and built a strong demonstration in Q3 that showcased our data science, dashboarding, custom application development and data engineering skill sets. As a result, we were awarded a large services contract for the next 3 years to continue to help the region of York. Our team will be focused on business intelligence, data science, data architecture and engineering, cloud architecture and migration, Azure DevOps support and custom application development. This is a perfect example of why Converge is unique in the marketplace and will continue to deliver end-to-end solutions for our clients. We have the technical expertise and thought leadership across the solutions our clients need to ensure we can continue to be their trusted advisers and help them deliver the business outcomes they require. In addition to these great wins and the solid quarter we posted, our product bookings backlog increased in Q3, highlighting the strong demand we continue to see and build with our clients. We entered the start of Q3 with a product backlog of $447 million, and we closed the quarter with $479 million of product backlog. This is a testament to the efforts of our teams, the relationships we have with our clients and strategic partners and the growing share of wallet. Our portfolio and capabilities are differentiators in the market and our results demonstrate that better than any long explanation that Shaun, Avjitpal or I can give. So on that, I will turn it over to Ajit to discuss the Q3 numbers in more detail.

[Avjitpal Kamboj, executive]

Thank you, Greg. Good morning, everyone, and thank you for joining us this morning. I'd like to start off by expressing my thanks to our exceptional team at Converge for their dedication and hard work, which played a pivotal role in achieving the remarkable success we've seen this quarter and the success we see ahead. Your commitment and efforts are truly appreciated. Thank you. my review of the financial results, I will refer to some items that are non-GAAP measures, including gross sales, organic growth and adjusted EBITDA. For detailed descriptions and reconciliations of our GAAP to non-GAAP measures, please refer to our MD&A filed this morning. In the third quarter, we delivered a record gross sale of $1.04 billion, up 42% year-over-year. And on a year-to-date basis, our gross sales were $2.96 billion or an increase of 39% year-over-year. This growth was driven both by the result of our acquisitions completed last year and the solid organic growth initiatives we have put in place. As a reminder, for presentation purposes, product sales includes hardware and software sales and services include managed services, professional services, public cloud solutions and maintenance and support. Total gross sales organic growth for the quarter was 23.6% and 10.8% on a year-to-date basis. Splitting this organic growth between products and services, products gross sales organic growth was 26.9% for the quarter, and services gross sales growth was 17.4% for the quarter. Our product sales growth was largely driven by innovative solutions, including high-performance compute, AI, mainframe, storage and networking and security solutions in North America. This obviously more than offset decline in our end user device sales to public sector and government entities in Canada and Germany. Demand for our solutions remain strong, as shown by growth in our product backlog from Q2 to Q3 this year, as Greg just walked through. On the services side, we continue to deliver solid organic growth. Services organic growth for the quarter was 17.4% compared to Q3 last year, driven by our cross-selling strategy and our services transformation activities. We're continuing to see growth in our high-value services through our Converge consulting platform. GAAP revenue for the quarter was $710.1 million, an increase of 38% year-over-year. Again, the year-over-year increase was driven by a combination of both acquisitions and organic growth. As a reminder, revenue is not the most comparable measure across periods in our industry due to gross net accounting adjustments required under GAAP. Looking at profitability in the quarter. We generated gross profit of $174.1 million during the quarter, representing an increase of $34.4 million or 25% year-over-year. Gross profit margin for the quarter was 24.5% compared to 27.1% in Q3 last year. And on a year-to-date basis, gross profit margin was 25.4% compared to 25.1% last year. The decrease in gross profit margin during the quarter is due to product mix from higher hardware sales during the quarter. And as a reminder, due to gross net GAAP adjustments, hardware sales have lower gross margin presented on a GAAP basis compared to software sales, which are recorded at 100% margin. Again, for comparability, I would like to highlight that a number of acquisitions we completed in the prior year, particularly TIG in the U.S., GFTB in Germany that was completed in July last year, and Stone Group in the U.K. completed in November last year, our high-volume, low-margin businesses with sales primarily to education sector, public sector and government entities. Our strategy to expand services and diversify these businesses to include more commercial sector will yield significantly higher margin expansions over time. Adjusted EBITDA for the quarter was $41.3 million, an increase of 33% from Q3 last year. Including Portage, adjusted EBITDA from Converge business was $41.7 million. Adjusted EBITDA as a percentage of gross profit was 23.7% compared to 22.2% in Q3 last year and 23.7% year-to-date. The increase in adjusted EBITDA as a percentage of GP is driven by the realization of efficiencies in the business and tighter cost controls. While we continue to invest in our overall solutions and services strategy by expanding our sales workforce and attracting high-value consulting talent. Adjusted EBITDA as a percentage of gross profit was also limited due to low margin, high-volume acquisitions I mentioned earlier. These acquisitions have historically operated at very low margins, and it will take time for us to transform these businesses. Turning now to the balance sheet and cash flow. In the quarter, cash provided by operating activity was $96 million compared to $15 million in the prior year. This is mainly due to our renewed discipline with respect to cash and working capital management. The snapback in cash generation this quarter was driven by moving swiftly to implement improved receivables and payables processes across the company with disciplined measures being put in place to better define terms and parameters for our contracts and operating hurdles for our operation. Implementation of these improvements is in progress and will continue. These changes offer confidence in our ability to generate meaningful cash from operating activities for the full year 2023 and beyond. As I previously stated, our conservative target for cash from operating activities continues to be 70% of adjusted EBITDA in the long run, as services become a bigger component of our overall business with days payable in salaries and wages being much shorter than vendors. We continue to invest in organic growth by hiring top talent across the organization to drive the transformation of our business, including cross-selling solutions. During the quarter, we reduced our net debt by $44.3 million, while funding approximately $17 million of acquisition-related payments in the form of contingent consideration deferred consideration from cash we generated from operations. Net debt at the end of the quarter was approximately $307.5 million, resulting in a leverage ratio of 1.84x of LTM adjusted EBITDA to our net borrowings, down from 2.24x a quarter ago or 2023 -- Q2 2023. Our leverage ratio in accordance with our credit agreement is now at 2.55, down from 2.8x a quarter ago. Our credit agreement net debt includes lease liabilities, contingent consideration and deferred consideration and only allows a deduction of $50 million of cash from balance sheet. Our credit agreement leverage ratio would have been 2.2x if the entire cash balance of $105 million is deducted. We have put in a capital allocation plan in place to maximize shareholder returns. Our focus continues to be reinvesting back in our business, our innovations and on completing the integration of previous acquisitions, all in addition to paying down our debt and repurchasing our stock. We are capable of pulling several levers simultaneously with the cash we expect to generate from operations. The balance sheet remained strong with approximately $292 million of readily available capital between our cash on hand and available capacity under our credit facility. As such, in line with our capital allocation strategy yesterday, our Board of Directors approved a $0.01 dividend payable to shareholders of record as of December 13, 2023. For the quarter, this represents a cash outlay of approximately $2 million. During the quarter, we spent approximately $1.6 million in CapEx. If you recall, we communicated in Q2 that we expected our CapEx to be around $7 million to $9 million in Q3 related to our backup and recovery data center in Europe. I'm pleased to share that we were able to turn a majority of the significantly upfront cash outlay into payments over a period of time in the form of leases. We expect our CapEx run rate to be around $2.5 million to $3 million a quarter going forward. Again, from a future capital allocation perspective, we will continue to allocate capital with our previously communicated strategy of organic growth as our #1 priority and secondly, debt reduction and share buybacks; and lastly, acquisitions depending on our share price. In summary, we are implementing new technology and data analytics for our back office. We've improved our cash and treasury management, our resource utilization and overall decision-making is improving across the board and throughout the organization, resulting in great results this quarter. Together with the leadership team, we're laser focused on strengthening the company's reputation and foundation, driving efficiency, fostering a culture of innovation and transparency. Our new ERP program is on track, and we expect Phase 1 to be live with mid-next year. We have a lot to do. And together with the entire Converge team, I'm confident that with their expertise and dedication, we will achieve remarkable results together. Now turning to outlook for the next quarter Q4 2023. We expect gross profit in Q4 to be between $177 million and $184 million and adjusted EBITDA to be between $45 million and $47 million. Given that the last acquisition we did of Stone Group was early November 2022, Q4 will be the first clean quarter with negligible acquisition impact. Therefore, year-over-year growth in Q4 will almost entirely be organic. As I mentioned earlier, we continue to see strong demand across our business and services. And I'm excited about the future as we transform the business and continue to deliver solid results in the future. Again, I would like to express my thanks to the entire Converge team for delivering a solid financial performance this quarter. I will now turn it over to the operator for questions. Operator?

[Operator]

Thank you, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Christian Sgro of Eight Capital.

[Christian Sgro, analyst]

Congrats on a strong cash flow generation quarter. I want to lead there and this question is for Avjitpal, but it's good to see a really strong free cash flow quarter. And you pointed out in the past, there can be puts and takes that can make some muted or more explosive. So as you think about some of the working capital dynamics this quarter, is there anything you'd call out as onetime? Or I think your intro remarks say that some of these trends are sustainable, some of the terms on the receivables payables side are improving. So any other color you could provide there in what we could think about into Q4?

[Avjitpal Kamboj, executive]

Yes, absolutely. And thank you for your question. There was nothing onetime this quarter. What we're putting in the processes and the policies we're putting in, these are sustainable policies and processes. And these will improve and continue to improve as we make our policies more disciplined and our operations more accountable going into 2024.

[Christian Sgro, analyst]

Okay. That's helpful. I have one follow-on on the backlog, and Greg touched on this area. But with the supply chain sort of troubles unwinding, is it a useful sort of metric to think of to judge the Converge business? Would you comment on a normalized backlog? And then, I guess, separately, any color on the composition of the backlog at this point would be helpful as well.

[Greg Berard, executive]

So we've been giving you this detail probably for the last year because it was much more dramatic. Most of the backlog has normalized into kind of that 4- to 6-week territory. The one difference is network gear is still an issue. It's been an issue now for a while. So most other parts, and of course, GPU cards are the other issue. But network gear actually got a little bit worse this quarter compared to there. But most of the other parts are fairly normalized. So really, the increase in backlog is more a function of demand than it is necessarily of more problems. The one thing I'll say though is we don't know what the new normal is. I think we're getting closer to it. Last year, I was too optimistic on what normalization would look like. But the fact that it grew again here is more, I think, demand focused and still there's some issues that persist with the networking side.

[Operator]

Our next question comes from the line of Rob Goff of Etalon.

[Robert Goff, analyst]

Congratulations on a very strong quarter, a tremendous free cash flow. My questions are not that dissimilar. But when you look at the free cash flow generator in the quarter, you suggested that we could see more improvements going forward and that there are structural changes. Could you perhaps address some of the structural changes you put in place and are contemplating looking forward?

[Operator]

Our next question comes from the line of David Kwan of TD Securities.

[David Kwan, analyst]

Hey guys. Just one question on the margin side. So thanks for the commentary as it relates to your expectations as it relates to the 30% adjusted EBITDA margin target over the next 3 to 4 years. Can you provide some color as to how you see yourselves kind of getting there? Is it more back-end loaded given your planned organic growth investments? Or should it be more of a steady progression?

[Greg Berard, executive]

I think there'll be a steady progression starting towards the end of or second half of next year as we transform our business and invest in our capabilities. But at the same time, you'll also see a trough in our back office costs as we implement our new ERP system towards the end of next year. So you should see a steady growth after -- as towards the end of next year and then a steady growth of 30% thereafter.

[David Kwan, analyst]

That's helpful. And I guess on the ERP migration, so it sounds like you're expecting, I think, at least North American migration to be complete by the end of next year. Should we expect that Europe is going to follow suit in 2025?

[Greg Berard, executive]

Correct. So we actually expect our first phase, which is most of North America to be live by mid next year. And then goal is to have all of North America by end of next year, and then Europe will follow very early 2025, like you said.

[Operator]

Our next question comes from the line of Divya Goyal of Scotiabank.

[Divya Goyal, analyst]

So I wanted to actually get a little bit more color in the 2024 trends. I know you briefly discussed it. Just trying to understand what are you truly seeing across the enterprise and the SMB versus commercial clientele for yourself? And considering a potential slowdown with the macro and the geopolitical conditions out there, where do you see things trending for yourselves? And if you could provide us some color on the guidance along with that as well.

[Shaun Maine, executive]

So I'll leave the guidance to Avjitpal. But geographically, you're seeing some real differences. In the U.S., we're seeing strength. And again, as Greg mentioned, we do these quarterly business reviews. And we were talking to one of our regional leaders, and they're saying, Shaun, I talked to all of my OEMs and they're seeing declines. And we're just not seeing that. We keep on asking, are you seeing weakness? Are you seeing weakness? And as Greg said, because of the diversity of our solutions, we are continuing to see that strength in demand, and that is particularly in the U.S. We're also seeing some strength in U.K. not more headwinds in the German marketplace. And in Canada, we've seen some problems, especially around the federal government this year as we talked about the refresh cycle. But the majority of our business in the U.S., we simply have not seen those declines. You hear a lot about headwinds and other people might be experiencing it, but when we do our regional reviews, we continue to see very strong demand.

[Avjitpal Kamboj, executive]

And on 2024 guidance, Divya, we'll provide that guidance as we present our fiscal year 2023 results.

[Divya Goyal, analyst]

And for the Q4 guidance, is that something where you see further upside? Or is there a potential for any downside there? Like can we be confident in the guidance given how the things have been trending over the past few weeks and going forward towards December?

[Shaun Maine, executive]

Where we sit today, Divya, we're very comfortable with the guidance we provided, the range we provided.

[Divya Goyal, analyst]

That's good color. If Shaun or Greg or Avjitpal yourself, could you provide some more color on how the Red Net business is trending in the European market? And what kind of traction do you see in that side of the world right now?

[Shaun Maine, executive]

So in the German marketplace, you've definitely had headwinds on budgets. I mean, not only did you have Ukraine war impacting some things, you've had high inflation and now we've got the situation in the Middle East. So that has an impact. But the education business, it's not just Red Net, GFDB, the indexer that we have there. But those are long-term contracts. The key for us is, as we said our strategy was to get a platform then to expand geographically, but then to get into the commercial sector. And so you'll hear more about think back to Converge in its earlier days where things like getting top-tier certified with our vendors. There's going to be some announcements on broadening the vendor coverage to some of our high-value solutions in Europe that will be coming in the next few weeks. And this is really taking all the things that worked so well that Greg implemented so effectively in North America over there. So it's where we are in North America after buying such capabilities around analytics and cyber is much higher level. The immediate benefit as we get to the commercial sector is leveraging the top with the vendors and the diversity of some of the solutions and the use cases that Greg has been providing that are low-hanging fruit and quick wins. So you'll see in Europe, it's not to the same degree of the solutions that we have in North America. But if you think back to like the Phase I to Phase II kind of growth that Converge went through in kind of 2017 and '18, and that's the journey that we're on in Europe.

[Divya Goyal, analyst]

That's helpful. Just one last question here on the services growth that you discussed just a few minutes ago. Are we talking about more managed services growth? Or does that include the professional services growth as well? And if you could provide some color on the breakdown on those.

[Shaun Maine, executive]

It's a combination, Divya, right? So we grew professional services and managed services, both in the quarter. What we're seeing is when you look at the professional services business, right, again, the device slowdown occurred in 2023, and that impacted some of the professional services we deliver around the devices, but the overall high-value services in our professional services portfolio grew at a faster rate and a higher rate, and we're continuing to see more growth around managed services. And as we talked about at the Coffee and Converge series, we're going to make some tweaks to the overall go-to-market plan on managed services, and we expect to see that continue to grow in 2024.

[Operator]

Our next question comes from the line of Robert Young of Canaccord Genuity.

[Robert Young, analyst]

Hi, a couple of quick ones in interest of time. You said you're holding the organization accountable for cash. I assume that's around receivables, but are you changing anything around the way that the sales force is incentivized, I think it's driven by gross profit now, but is there an adjustment around more focus on cash?

[Greg Berard, executive]

So there's no adjustments as of today to our sales organization. That's something we continue to evaluate and look at. But in terms of holding the organization accountable for cash from operations, everybody -- or majority of the organization has a part of their bonus targets, meeting our corporate cash from operations now.

[Robert Young, analyst]

Okay. And then I was thinking long term, as you think about cash flow from operations conversion to EBITDA, you gave some targets around where EBITDA margins would go as a percentage of gross profit. But conversion this quarter. Where could it go long term if we're thinking about where cash related to EBITDA goes? And then I'll pass the line.

[Greg Berard, executive]

So free cash -- for the short term and the medium term, our target continues to be on a conservative basis, operations -- cash from operating activities, 70% of adjusted EBITDA and free cash flow, which is cash flow operations, minus interest expense, minus our lease payments and minus any CapEx is expected to be 40% of adjusted EBITDA.

[Robert Young, analyst]

Okay, thank you.

[Operator]

[Operator Instructions] And our next question comes from the line of Gavin Fairweather of Cormark Securities.

[Graham Smith, analyst]

This is Graham Smith on for Gavin Fairweather. I'm just sort of curious if you can give a little bit more color on just your broader integration efforts and maybe what sort of typical incremental synergies you're sort of expecting a gain each quarter, especially going into Q4. Thanks.

[Greg Berard, executive]

Yes, I can provide an update. So our North America integration is the fastest integration continues to be on track. As I mentioned on last quarter's call, our front office is primarily integrated our back office as we're working on this new ERP, which goes live mid next year, that's where you'll probably see the biggest synergies and operational efficiencies. We continue to look at how we're going to integrate our European business, given that there are 2 separate restrictions. We are on a path to integrate the 2 businesses, distinct business that we bought in Germany into one Converge Germany. So that's on track as well. I think you'll start to see synergies towards the later end of next year.

[Operator]

And there are no further questions at this time. Therefore, this concludes your conference call for today. Thank you for participating and ask that you please disconnect your lines. Have a great day.