Converge Technology Solutions Corp

TSX:CTS

Earnings Call Transcript 2021-Q4

[Operator]

Good morning. Welcome to the Converge Technology Solutions Corp. Fourth Quarter and 2021 Fiscal Year Results Conference Call. [Operator Instructions] Your main hosts 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 with respect to 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 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 gross revenue, adjusted EBITDA, organic growth and adjusted free cash flow and adjusted free cash flow conversion, which are non-IFRS measures and has no standardized meaning. Please refer to Converge's filing at Canadian provincial securities regulation (sic) [ regulators ] for an explanation and reconciliation to IFRS measures.

Thank you. Mr. Shaun Maine, you may begin your conference.

[Shaun Maine, executive]

Thank you. Good morning, and thank you for participating on today's Q4 and 2021 financial year earnings call.

In what follows, I will provide a business update on the fourth quarter and fiscal year beginning with commentary on our earnings success, including our organic growth. And we'll discuss additions to our leadership team who are helping to contribute to such success, along with the reinforcement of the Converge corporate culture through various ESG initiatives.

Furthermore, I will discuss the Converge acquisition strategy in further detail, including commentary on the European expansion, integration successes and the establishment of our subsidiary, Portage CyberTech. Additionally, Matt Smith will provide more detailed commentary surrounding the Converge Q4 and fiscal year financial results.

Reflecting historically for a moment, in 2020, Converge advanced its business strategy by expanding acquisitions into the largest North American cities, while establishing the road map for successfully cross-selling and realized cost synergies through these integration efforts. Throughout 2021, Converge fine-tuned its acquisition strategy towards advancing high-demand practice areas such as cybersecurity, advanced analytics and managed services while simultaneously executing on ERP and PSA integrations.

These combined efforts contributed to a 61% increase in revenue to $1.5 billion for the fiscal year-end December 31. Managed Service revenue increased 33% to $75.9 million. And professional and other service revenue increased 52% to $215.7 million.

Despite the acquisitive nature of Converge, including the 9 acquisitions completed throughout 2021, the company was able to grow gross revenue organically by 9.6% through the various efforts discussed, driven by dedicated work of our employees and leadership team.

Expanding on the Converge leadership team. As recently announced by the company, Converge appointed John Teltsch as our Chief Revenue Officer. And it should be noted that an announcement on a new CFO will be imminent. John is a senior executive who brings more than 40 years of leadership and growth experience to his role and will be invaluable alongside President, Greg Berard, in developing the Converge global strategy, overseeing profit alignment and connecting various revenue-related functions. John joins Converge following a 40-year career with IBM, most recently as General Manager of technology sales across the U.S., Canada and Latin America. And with such an established reputation, we remain enthusiastic for the cutting-edge advantage this will create.

Additionally, earlier in 2021, Thomas Volk and Doris Albiez joined the Converge leadership team to guide the entry into the European market. Doris is a highly experienced executive known as a growth generator and transformational leader who has served in various international roles, while Thomas is a senior executive with unique experience leading global enterprises and mid-market companies in both CEO and officer roles in Europe and the U.S.

Doris and Thomas' efforts were integral to the platform acquisition of REDNET and complementary acquisition of Visucom subsequent to the quarter and will continue to be value-add in shaping the managed services and European strategy in the years ahead.

Here at Converge, we live by being better together and we remain confident that the strong foundation of our corporate culture bodes well for employee retention and recruitment, which is how we have successfully expanded our team while also maintaining high employee morale. Initiatives that contribute to this reality and support employees' wellness include our Women for Women Committee, our diversity and inclusion programs and employee appreciation and awareness resources.

We highly regard our Women for Women empowerment group, which was created to give the identified female population at Converge a voice and time to invest in leadership development, while receiving professional advice from female executives and fellow employees. Women for Women offers informative seminars, public forums, thought-provoking book loves and has plans for a company mentorship program in the future.

Furthermore, Converge aims to be a diverse and inclusive workplace with mindful hiring practices. The diversity and inclusion program at Converge was created from the understanding that our employees are our greatest asset. It is our belief that a bias-free and a diverse work environment not only fosters a culture of equality, but on value across the entire organization.

The DEI council focuses on 2 main components of training and education. Training and education efforts offered our employees and managers a safe space to learn, ask questions and have meaningful conversations about the human experience throughout the year, including topics such as leading an inclusive culture and the glossary of terms.

The rate at which Converge completes acquisitions may be perceived as a potential challenge to a successful integration and a barrier to consistent culture. However, the company strives to create synergies and capture opportunities for adopting meaningful policies, processes and initiatives already in place at the various subsidiaries to positively impact the Converge culture. It should be noted that the acquisition team strategically pursues targets with complementary corporate values and seeks to build from the exemplary ESG policies that put people and the environment first. We are appreciative for the mutually beneficial opportunities to learn from one another.

And at this time, I would like to recognize the humanitarian efforts in Germany, where leadership has taken Ukrainian refugees into their homes at this time of crisis. Exemplary acts such as these demonstrate the proactive leadership and care that the Converge team strives for in all of its undertakings, and we are truly pleased with the portfolio of companies we have built today.

As a reminder, the Converge acquisition strategy is driven by components including culture, customer, geography and capabilities. Through 2021, Converge added 9 additional acquisitions to its portfolio of companies, which devoted particular attention to expanding the capabilities of advanced analytics through the addition of LPA and CarpeDatum; Converge strengthened managed service offerings through the acquisition of ExactlyIT and Vicom; and lastly, advanced customer exposure through a multitude of efforts, including the addition of Dasher, a Silicon Valley-based digital transformation expert.

Overall, the focus when completing a transaction is to deconstruct the organization so to allocate their sales teams to the appropriate regions while driving cross-selling opportunities and navigate the technical experts to their designated practice areas. The accumulation of efforts to date has resulted in over 300 salespeople within the organization, supported by over 700 technical resources.

It is significant to highlight at this point that the company has established a Converge integration team specializing and focusing solely on increasing the pace and scale of acquisition integration across all areas of the business, including culture, finance, IT, sales and operations. During the quarter, the integrations team migrated 5 additional subsidiaries to our designated CRM system, equating to 16 total navigations to date. Furthermore, a new Converge standard ERP system, including automation frameworks development and configurations, was rolled out to 17 subsidiaries to date.

Complementing these efforts, our HR team successfully navigated all Canadian subsidiaries along with 19 U.S. subsidiaries to a common payroll and are targeting the remaining companies by the end of Q3.

On the back of creating the Converge European Advisory Board, Converge completed its platform European acquisition of REDNET, an IT service provider headquartered in Mainz, Germany. Such expansion has greatly increased Converge's ability to serve clients globally and has added an established European management team familiar with operating in key verticals within our customer matrix, including education, health care and government, which are all positioned within stable industries with accelerated IT expenditure needs.

Subsequent to Q4, Converge acquired German-based organization Visucom, a trusted supplier of media devices for the education and public sector directly complementing the core business of REDNET.

With that being said, Converge plans to further expand operations across the U.K. and Northern European region -- the Benelux region, mirroring the North American strategy executed on over the past 3 years. While management continues to diversify its efforts over various regions, the acquisition pipeline for both North America and Europe remains strong, especially given the company's cash flow position.

The company anticipates adding $1 billion of acquisition revenue in each of the next 3 years. And currently, there are 7 transactions moving from LOI to close with 3 in North America to be announced shortly and 4 in Europe, targeting Q2 announcements.

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, executive]

Thank you, Shaun. We are extremely proud of our continued year-over-year revenue growth. In Q4, we grew net revenue 74% to $505 million compared to $289.6 million last year. And on a full year basis, net revenue grew by 61% to $1.5 billion from $948.8 million in Q -- in 2020. Q4 product revenue, which includes hardware and software, increased 71% to $412.9 million from $241.1 million over Q4 last year and was $1.2 million -- billion for 2021 compared to $752.2 million last year, an increase of 65%. Our product revenue growth reflects the impact of the 9 acquisitions completed in 2021 and the overall strengthening of the IT market as COVID restrictions were lifted and demand for Converge's products and services increased.

Q4 professional and other services, which includes the net revenue from public cloud resale and software support, increased 104% to $69.7 million from $34.2 million last year. Year-over-year, this revenue grew 52% to $215.7 million from $141.7 million in 2020. We attribute this to large on-premise projects that required in-person services that had previously been put on hold due to COVID, but started to be implemented in 2021. We expect to see further growth in higher-margin professional and other services in 2022 as supply chain challenges lessen.

In Q4, we grew our managed services, which are long-term contracts, 56% to $22.4 million from $14.3 million in Q4 last year. And for the full year 2021, revenue increased 33% to $75.9 million from $56.9 million in 2020.

On an annualized recurring basis, our ARR for Managed Services at the end of the year grew to $89.5 million compared to $57.2 million last year, including the acquisition of PDS that we announced at the beginning of 2022. We began this year with over $100 million in Managed Services ARR and are poised to show continued growth in this area in 2022 as backlog decreases and devices are delivered to end users, including through our IBM Power managed services offering.

As Shaun highlighted, despite the number of acquisitions made in 2021, we still managed to grow gross revenue organically by 9.6% on a full year basis. We attribute this growth to 2 things: one, our ability to seamlessly integrate our acquired companies; and two, the strength and breadth of our various practice areas. This allows us to execute on cross-selling products and services and expand customers' digital infrastructure.

As a reminder, we calculate organic growth for these companies -- for those companies that Converge has owned for at least 3 months at the reporting date based on their pro forma gross revenue for 2021 as compared to 2020 had we actually acquired them on January 1. We believe that the 3-month rule provides a good representation of the acquisition under Converge ownership, and in doing so, we can begin to evaluate the acquired company from an organic growth standpoint.

For Q4, our gross profit increased 63% to $115.9 million from $70.9 million for the same period in 2020, and gross profit margin was 23% compared to 24% last year. For the full year 2021, gross profit increased 48% to $345.7 million from $233 million in 2020 and gross profit margin was 22% compared to 25%. Last year, our higher gross margin illustrated how we're able to successfully transition the companies we acquire from lower-margin businesses that sell primarily hardware to higher-margin software and services businesses through cross-sell.

For 2021, margins are lower due to the fact that we've acquired dying companies that sell many hardware. However, as we cross-sell higher-margin cloud and managed services to customers on these companies and increase sales to existing customers as they expand their cloud-based IT infrastructure, we expect gross margin to increase.

Q4 adjusted EBITDA increased 48% to $34.7 million compared to $23.4 million last year and increased 55% year-over-year to $94 million. As a percentage of revenue, adjusted EBITDA was 7% compared to 8% last year and unchanged at 6% on a full year basis.

As a percentage of gross profit, or GP, which we believe to be a telling indicator of the company's overall operating efficiency and profitability, adjusted EBITDA was 30% compared to 33% in Q4 last year, but increased to 27% of GP for full year 2021 from 26% in 2020. As we integrate operations of acquired companies and cross-sell managed cloud services to the customer base and increase our gross profit with higher-margin revenue, we would expect these measures to increase over time.

Q4 interest and finance expense was $2.1 million compared to $3.7 million last year; and on a full year basis was $7.8 million, decreasing by approximately $12 million from 2020. These significant savings are largely as a result of our lower-cost ABL facility, which, as we announced in Q4 last year, have been switched from a specialty lender to a syndicate of Canadian banks, including CIBC, Scotiabank and Laurentian Bank. In November 2021, we announced that we upsized this facility from $190 million to $300 million and also added JPMorgan to our syndicated banks.

Shifting to our balance sheet. We finished the quarter in a strong cash position with over $248 million of cash on hand and were undrawn on our ABL with $300 million of borrowing capacity available and are well positioned to continue to execute on our acquisition targets in 2022.

In Q4, our adjusted free cash flow, which we calculate as adjusted EBITDA less capital expenditures and payments of lease liabilities, was $29 million, increasing from $17.5 million in Q4 last year. Adjusted free cash flow conversion, which we express as a percentage of EBITDA, was 84% in Q4, increasing from 75% last year.

On a full year basis, adjusted free cash flow increased to $77.7 million from $45.8 million and the conversion percentage was 83% as compared to 76% last year.

We believe that adjusted EBITDA is a good proxy for cash generation. And as such, adjusted free cash flow conversion is a useful metric that demonstrates the rate at which the company can convert adjusted EBITDA to cash. The increase in these measures for the 3- and 12-month periods is attributable to the company's strong continued adjusted EBITDA growth and effective management of working capital while generally maintaining low CapEx requirements.

And with that, I'll pass the presentation back to Shaun.

[Shaun Maine, executive]

Thanks, Matt. It's important to bear in mind that despite such positive results, our industry has been affected by supply chain disruption, as mentioned on the Q3 call. Bookings, which are orders received from customers that have not been delivered, stood at approximately $250 million at the end of Q3 and was approximately $350 million at the end of Q4 with networking suppliers being most affected.

Given that open orders would have historically been less than $100 million at the end of Q4, there is an additional $250 million of revenue that the company would have had in 2021 with a normalized supply chain.

Given that the company grew its gross revenue by 9.6% organically last year, this means that in 2022, the company should achieve 20% organic growth when the supply chain normalizes. We continue to proactively communicate with our vendors as our sales teams work diligently to provide solutions, solidifying our role as trusted advisers to our customers.

Throughout and subsequent to the quarter, Converge announced achieving 2 notable industry CRN awards, including the Managed Service Provider 500 and the Elite 150 category, which recognizes leading service providers in North America with forward-thinking approaches to managed services helping to change the landscape of the IT channel. And Converge was also featured within the 2022 Tech Elite 250 category, which highlighted Converge as one of the highest achieving solution providers and vendor certifications in North America.

Throughout 2021, Converge achieved a multiple of vendor awards and certifications, including 5 IBM awards, such as the 2021 IBM Beacon Award and Top North American Sell Business Partner of the Year, along with 3 Ingram Micro awards, including CORE Partner of the Year for North America and Cloud Reseller Partner of the Year.

Further significant industry certifications include the AWS Migration Competency status, recognizing Converge's technical proficiency and proven client success with specific focus on cloud migration and hybrid cloud solutions, along with Diamond status with Palo Alto Networks, Elite partner status with Pure Storage and Platinum Partner status with HPE, which is the highest level of partnership within these programs.

These achievements not only reinforce our position within the industry to clients, but also help to strengthen our vendor relationships and reinforce the fact that we are not merely an acquisition player.

Historically, I have discussed various sales strategies, which have continued to drive organic growth and cross-sell opportunities across our advanced analytics, cloud, cybersecurity and managed services offerings. The following list highlights some of the key initiatives we have put in place to achieve our success.

Regarding external efforts, the company has organized multiple demand generation events with our strategic partners, resulting in 196 client-facing events with 32 partners and approximately 5,000 external attendees throughout 2021. And we've continued to provide executive briefings, completing 660 since October 2020.

Internally, management has identified our top 120 accounts and assigned strategic technical advisers to drive more expertise and value with our clients by exposing them to our overall solution areas. And the company has implemented new business development organization, helping to drive 95 net new logos in Q4, bringing the rolling total for 2021 to 393.

Additionally, Converge introduced Salesforce to improve our execution across the sales organization and pipeline management of our high-value services offerings and recurring revenue.

A quick example of how this is equating to more value with our clients includes a recent success case with a retail account, which we introduced deeper analytic skills and resources to despite selling software maintenance to the account historically. Our sales team delivered a data modernization workshop recommending and implementing a new data warehouse solution while creating strategic opportunities around migrating other legacy applications to the cloud.

Wrapping up our discussions, I wanted to expand on the establishment of Portage CyberTech Inc., a cybersecurity-focused SaaS entity formed earlier this year, which enables government and enterprises to securely offer digital services to their citizens and customers, thus better protecting digital identities and trusted data sharing.

Digital identity and security has been a significant concern, and thus, high-growth markets for citizens and organizations across the globe and Portage products enable the ability to expand digital services, streamline trusted data sharing, drive down costs and simplify end customer experiences. Throughout Q4 and subsequent to the quarter, open and 1CRM were added to Converge's existing business units, Becker-Carroll and Vivvo. The combined capabilities of these 4 entities to date have formed a powerful set of tools, branded as Portage Digital Trust Matrix, which can be sold independently to meet customers where they are on their digital transformation journeys.

Upon closing 1CRM, Portage completed Phase 1 of its 3-phase growth strategy and will embark on Phase 2 of their plan, which is to rapidly grow revenues organically and through larger acquisitions. Of note, Portage closed a $35 million private placement this past October to help finance future acquisitions and the ability to utilize Converge's sales force and our strategic partnership will be key to deploying the complete Portage CyberTech SaaS solutions across North America and Europe.

On that note, let me open the floor to questions.

[Operator]

[Operator Instructions] Our first question comes from Kevin Krishnaratne with Desjardins.

[Kevin Krishnaratne, analyst]

Congrats on a good 2021. I'll start off with a smaller one in Europe, perhaps for Matt. Guys, in the disclosures, you gave us the European revenue for the year. Do you happen to have the corresponding EBITDA number for 2021 in Europe?

[Matthew Smith, executive]

No. We're not providing guidance on the European EBITDA, just the revenue today.

[Kevin Krishnaratne, analyst]

And as we -- okay, Matt, as we think, though, going forward into 2022, can you talk about any level of spending or impact to EBITDA and margins there in the region as you're building out, whether that's ramping up sales folks capabilities, partnerships? Is there any -- just trying to get some color on the level of investment outside of the margin profile of entities that you'll be buying in Europe, which I think will come at lower-than-average margins. But is there anything else we can think about in terms of the spending profile as you're ramping up there?

[Shaun Maine, executive]

We are setting up a shared service center in Ireland and that's really going to be focused around the finance function. Our new CFO will be London-based as well. And so the capability side, though, cloud and managed service are global offerings. Analytics and cybersecurity will be separate groups that will leverage each other on an offering side, but will be separate organizations.

So there will be investment as we set up the various practice areas and as we set up the shared service center in Ireland. But we did this very cost effectively when we founded Converge and did this in North America. And you'll kind of see the same approach of not -- of making sure that it's at the appropriate times we make the right investments.

[Kevin Krishnaratne, analyst]

Okay. Okay. Maybe switching to looking forward. We're almost through Q1 here. Can you remind us on seasonality from Q4 to Q1? In this Q4, I think you had by Vicom Infinity, which had a heavy Q4.

As you think about Q1, how do we think about the seasonality? And then on top of that, you've got the layering on of PDS. And then you've got backlog. Anything you can do to help us with sort of the revenue and EBITDA margin profile as we model things out?

[Shaun Maine, executive]

Sure. So Q1 is obviously much smaller than Q4 because most corporates who have calendar year-end spend Q1 on kind of doing their budgets for the year. Saying that, in Q4, we saw extremely high demand and we're continuing to see that into Q1. Obviously, you'll layer PDS on top of that, so when you're comparing Q4 you're going to go down to a normalized Q1 and then kind of add PDS.

With -- on the backlog side, again, we're seeing really high demand, but there are supply chain constraints, especially around network gear. We saw some improvements, especially over in Europe around some of the Dell and Apple supply chains, but we're hearing some worrying things now out of China. So I had anticipated a lot of the supply chain unwinding in Q1, Q2 and Q3 and now I'm not as certain given some of the rumors we've had. I haven't seen anything specifically around that, but you're hearing some things in the marketplace. Again, we communicate very well with our vendors in order to try to anticipate those things. So again, incredibly strong demand for Q1. You would expect to see the backlog still though increasing and then hopefully normalizing throughout the year.

[Kevin Krishnaratne, analyst]

And then the margin in Q4, you were 6.9%. Can you talk about like mix there? I guess PDS comes in at a lower margin. I think Q4 may have seen some benefit from software sales that come in at the end of the year. So again, as we think about the margin profile for Q1, can you help us out there?

[Shaun Maine, executive]

Yes, you're exactly right. So if you look historically, even in Q4 2020, your margin profile in Q4 is helped by, one, larger amount of sales on the same kind of cost base, but also things like software maintenance renewals and software renewals happening. A lot of them happened December 30 and 31, so that definitely assist there. Remember, we bought 9 companies last year. And so when we buy the new companies, they have a gross profit in the teens and around 3% EBITDA. And so then we go through adding rebates, doing the cost rationalization and then cross-sell. And so it just takes a while to get there.

So what you're seeing -- and again, this year, when you're buying $1 billion of revenue, you have to be very aware of the mix of -- we continue to get to 30% gross profit and 9% to 10% EBITDA for the companies we've owned for a while, but the new ones are coming in and need to go through that process.

So the mix is important to look at how much of this is historical revenue versus how much is new, and then you're seeing that. So that percentage is higher in Q4. As we bought up PDS here in Q1, obviously, that's starting at the lower end and it will move up as we add more managed services and streamline things like their service desk, et cetera.

[Kevin Krishnaratne, analyst]

Okay. Got you. Just one last one. Thanks again for the disclosure on the gross revenue, the organic growth as well. I just want to be clear on one thing. The gross revenue for 2021 you disclosed as sort of $2.275 billion. That's the gross revenue pro forma for 2021.

As we think about a starting point for 2022, as we model, is it fair for us to take that number, that gross revenue pro forma, and then net it down by the standard, I think, roughly 15%, 20% to kind of get a pro forma net revenue for 2021 and then use that as a starting point for organic growth for 2022 on top of that number? How do I -- is that correct? Or how do I think about the pieces there?

[Matthew Smith, executive]

Yes. Kevin, that's not an unreasonable approach. Obviously, the gross versus net down can vary based on product mix. But as kind of a general approach, that makes sense.

[Operator]

Our next question comes from Christian Sgro with Eight Capital.

[Christian Sgro, analyst]

The first question I want to ask is on the product side of the business and more specifically on software. If there's supply chain constraints through the first bit of the year here, my question is does software become a bigger mix of revenue? And just wondering what the margin implications would be if you see the impact on gross margin or EBITDA or both.

[Shaun Maine, executive]

Yes. The software is a constantly growing part of our business. Red Hat and VMware are our strategic partners. I think we grew our Red Hat revenue by 100% last year. So that's something that's really important to us, as well as some of our big software offerings such as, in the analytics space, Watson and Snowflake and things like [ Curator ], et cetera. So we -- software is an increasingly important part of what we cross-sell into the companies we buy that have traditionally sold more data center equipment.

On the margin profile, yes, you always have higher margin with the software and services than you do for the hardware. In the mid-market, hardware tends to be in kind of the teens gross profit. Software and services tend to be 30% to 40%. Managed services tend to be 50%-plus gross profit. So definitely, the more software and services you're selling, the higher your gross profit percentage is.

[Christian Sgro, analyst]

Okay. That's helpful. And I'll switch gears over to the Managed Services side of the business. It looks like based on the introductory comments, it's through $100 million Managed Services ARR when you're including PDS. Now would you say the goal of achieving $200 million is intact for the year? Does that depend on supply chain, and say, networking gear coming through? How do you think of the puts and takes this year on the Managed Services side?

[Shaun Maine, executive]

Yes. We're still looking for $200 million as our goal for the end of the year. You're absolutely right, some of the networking gear delays did delay some of the onboarding. We have a very robust pipeline around our initiative with Google around hosting IBM-specific workloads. But in order to do that, you always have to add more networking gear to provide those workloads to the cloud.

And so some of the delays on the networking side, so people like Cisco and Palo Alto and Arista are up to 6 months and so that has delayed the pipeline. We're trying to come up with solutions of doing things like, can we introduce refurb and then later introduce the new gear. So we're working solutions around that. But yes, we are very optimistic that, that will be normalized.

The other thing is that as we acquire this next group of acquisitions, we will be acquiring managed services revenue as part of that. And I believe that we've kind of gone through the strategy for when you're taking that managed services revenue and how you're then increasing its profit profile using what I call the Thomas Volk, 1, 2, 3, of start off by making sure the resources are in the right locations, which is optimized, especially around Mexico and our ExactlyIT operation.

Second is automate those offerings, providing better customer satisfaction through the automation and better margin profiles and then moving in them onto our standard profile. So of that $200 million target, there will be a fair amount of that, that will come through acquisition.

[Christian Sgro, analyst]

Okay. I'll just ask one more question. Also to the back of that, when we think of M&A through the next, say, quarter or so, 7 targets, spread across North America and Europe. When we think about Europe, is it fair to say that the next acquisition there could have more of a managed services component? Does that seem like a strategy right now, given having REDNET and Visucom there?

And then the only follow-on to that is, is there the same opportunity to bring some of the work over to Mexico with the same framework as North America?

[Shaun Maine, executive]

Look, start with the last question first. Absolutely, we have German language skills in our Mexican operation and they are absolutely supporting some of our managed services out of Germany. The -- although the new acquisitions that we're doing in Germany are more to extend the geography to the other federated states. So it wouldn't be a correct assumption to say those new ones in Germany are necessarily focused on managed services. But REDNET obviously can provide that to their customers in the offerings that they'll have.

The platform acquisition in the U.K., you'd expect that platform, like REDNET, would have more management, more managed services. And there's other ones that we'll look to in other places that might have managed services.

But whenever things -- when things have managed services, they're more expensive. And so if you're looking to extend geographies, you're looking more at the customers and more -- and rather than, say, necessarily managed services. Unless -- say PDS, we paid 5.8x of that $16 million of managed services revenue. If we can get those for those reasonable prices, then we'll obviously do that.

[Operator]

Our next question comes from Robert Young with Canaccord.

[Robert Young, analyst]

Maybe first quick one. I don't think there's any impact, but if you could talk about any impact from Eastern Europe, Ukraine, Russia. Are there any second derivative or direct impacts that you see there?

[Shaun Maine, executive]

Yes. First, let me just say it's -- what a crisis, and I really admire our German folks who have really taken Ukrainians into their homes. And so, let's say, you can't ignore that, but also really the compassion of our people and it really kind of shows what our culture is.

But from a supply chain perspective, we don't get things -- supplies from Ukraine and Russia. It disrupts some of the path to some places from -- on the supply chain, but we haven't seen yet a material impact to the supply chain. And unless this tragic incident widens, then I -- we don't see it, but again, there's other things that are happening in places like China around coronavirus and lockdowns that might, but not the Ukraine-Russia conflict.

[Robert Young, analyst]

Okay. And maybe the next place to go would be the backlog. I think you noted that you think you can do 20% organic growth as the backlog normalizes. And so I mean, any help around the timing of that? I know that's hard to understand from your point of view, but probably easier for you than us.

And then the lockdowns in Shenzhen, are there -- is that going to create backlog growth in Q1? Or do you think the backlog will start to wind down in Q1? Any commentary around the timing of the backlog wind-down?

[Shaun Maine, executive]

Sure. So in the network gear companies, we're seeing 6-month ordering delays now. So that means if you're ordering something now, you're looking in Q3. And so that's been the big kind of bottleneck.

We saw improvements on kind of Dell and Apple where, over Christmas time, REDNET was receiving like hundreds of thousands of iPads. So that was getting better. And there were people like IBM that were never impacted. So the network people, that's really where the crux of the problem is now.

With the lockdown in China, so Apple's contract manufacturer, Foxconn, I think it's only impacted iPhones so far and we haven't seen necessarily the impact to iPads yet. But it's a worrying development and so something that we're constantly talking to our suppliers and our OEM partners with to see where that's going. So it's stay tuned.

Demand is off the charts. We have incredibly strong demand. You see our own -- as we move our business to more and more software and services, and particularly our own services, obviously, those are not impacted.

So again, an incredibly strong demand environment. Our team has done a great job of finding ways of getting solutions into customers, but it is challenging. But when that backlog unwinds, there's going to be some big quarters here coming up.

[Robert Young, analyst]

Okay. So it sounds like it didn't unwind in Q1 because the quarter is almost done. Is it -- any likelihood of Q2? Or is this a second half?

[Shaun Maine, executive]

Again, some in Q2. But again, the worrying part is the network part. The network part is definitely of concern.

[Robert Young, analyst]

Okay. And when you look at that $350 million backlog number, is there any risk in that number from double ordering or maybe cancellations if you're not able to get the physical product into your customers' hands? Like how should we think about the that $350 million?

[Shaun Maine, executive]

Yes. Those are firm POs, so no, and especially not into mid-market. Maybe large enterprise, they might have to do some things. But yes, we haven't seen any cancellations of things around that. Again, we do try to find, when at time of ordering, try to find flexible solutions for our customers. But PO cancellation is not something we've seen.

[Robert Young, analyst]

Okay. And then you said that demand is extremely strong. It seems to be the same as some of your peers. At least one peer was talking about acceleration because companies are doing a lot of parallel activities instead of sequential.

And so are you seeing demand accelerate now as you look forward to 2022? Is that part of what gives you the confidence in that organic number you gave us?

[Shaun Maine, executive]

Yes. Demand is absolutely accelerated, and then you look at those initiatives, such as the German government putting EUR 5 billion to digitize education. Education and health care is going through an incredible investment as those 2 industries, which were not well tailored for online delivery of services, are now doing that in both -- with the teachers delivering online education, nurses and doctors delivering online care. There's a new model and a support model that basically we just gave the nurses and teachers, here's Zoom, go teach online. .

And so what -- the service offerings around managing the end users, providing help desk for teachers and nurses, providing managed services and cloud-based solutions, these are all new opportunities that historically were not -- 5 years ago or 3 years ago or even 2 years ago were not being delivered. So that's where the dedicated spend, and again, a lot of it's government spend that is going to fund these new models, we see very strong growth in 2022.

[Robert Young, analyst]

Okay. Maybe last question for me is around the monologue. You talked a bit about transactions that you're going to execute on over the near term. I think you said 7 transactions. You probably get the numbers right, 3 in North America, 4 in Europe. Did you say all of that was in Q2? Or could you just give maybe a little more context?

[Shaun Maine, executive]

No, no. So you would expect to hear the 3 in North America be very soon. So again, we were targeting Q1 for those. And so we do realize there's 10 days left in Q1, so don't book any vacation.

[Operator]

Our next question comes from Stephanie Price with CIBC.

[Stephanie Price, analyst]

I wanted to focus on the M&A integration efforts and that integration team that you mentioned. The press release noted you had about 70% of the companies now on your platform. Maybe you can dig a bit deeper into integration here?

[Shaun Maine, executive]

Sure. So the team -- again, we bought 9 companies last year and 3 this year. The company -- the team has done an amazing job of, in parallel, doing multiple integrations. And this is everything from -- we deconstruct the companies, right? So even employees all go on to the payroll. There's one payroll in the U.S., one payroll in Canada, one payroll in Germany that they get migrated on to. It's their ERP system. It's their professional services ordering tool. It's their quoting system. It's their CRM.

It's all of their systems. And so we're definitely keeping our integration team busy. But we've got a great model of how to migrate them to this common platform, which allows both us to use shared services to support those teams because if you're using different tools and systems, then it's very difficult to log on a different system to support someone, but also for our people to get access to all the capabilities around analytics, cyber, cloud and managed services. So it's absolutely full integration.

[Stephanie Price, analyst]

All right. And just in terms of the tight labor market, just wondering if you could talk about any of the tailwinds and headwinds that you just might have seen from it.

[Shaun Maine, executive]

So we are a very big on team. It's very difficult to build these capabilities through 1s and 2s. So last year, we bought LPA and CarpeDatum, 2 analytics teams that we had partnered with, and really built that team up to 85 people in one of our strongest practice areas.

We've got a very strong cyber team. But one of the acquisitions we'll be making that our largest practice area now. So what we try to do is -- and again, we try to do it for very cost-effective prices, but buy these companies that have prebuilt teams. One thing I commonly say is when you talk to Converge people, you don't hear a lot of Is. You hear a lot of wes in the teams. And buying prebuilt teams to do this is very helpful.

The other thing is because we're migrating a lot of people to our Mexican shared service center around service desk, then that has definitely helped. We've got that to a few hundred, it will get to a few thousand as really scaling up on the managed service and the service desk side.

So I think we've got a little bit of a different approach when it comes to growing. It's much more done through acquisition than necessarily 1s and 2s and organically.

[Operator]

Our next question comes from Rob Goff with Echelon.

[Robert Goff, analyst]

You talked a bit towards this, Shaun. But when you're looking at your organic growth, could you talk to the influence, the various verticals within your mix might be having in terms of government, life sciences and tech?

[Shaun Maine, executive]

Yes. So historically, our 4 strongest verticals are technology, finance, health care and education. And we're seeing a tremendous growth in health care and education, especially around the services and managed services that we're deploying there.

And again, it's because of that new business model. So you're seeing a much higher than traditional organic growth rates in those areas as these new online models need to be supported. And it's becoming much more of a recurring nature and a services and a managed services than it used to be more of a deployment. So that's -- I think education and health care, you'll see a particular focus on our acquisition strategy in 2022 around those verticals.

Again, technology and finance are still very strong. But particularly, the growth rate you're going to see this year organically in health care and education will surpass those.

[Robert Goff, analyst]

Okay. And with respect to the inorganic growth with the prospects of adding roughly $1 billion of revenues, could you talk to what the geographic mix might be in broad terms? What the underlying growth may be associated with these? Is this a 5% to 6% EBITDA margin business on average? And what sort of valuations I should be looking at?

[Shaun Maine, executive]

So traditionally, we've guided that CAD 400 million in North America, EUR 400 million in Europe is really the target and then doing that every year for the next 3 years. And our traditional model is buying them at 3% and here's how we move them to 6% and beyond. There'll be variances in that, like we'll likely do more than both of those targets on a gross revenue basis here in the first half of the year. And some of them might be higher or lower in that margin profile. But those are kind of good guidances.

Again, when you buy companies -- that if you're looking for a platform company that has management, you'll pay more. If they have cloud, you'll pay more. If they have managed services, you'll pay more. If you're looking just to extend the geography of an existing company into other geographies, then you're really buying their customers, then those tend to be less expensive.

So I think those are the variables that kind of go into valuation. And you've seen we've done 28 of these. And they're a good indication of what kind of prices that we've paid. And then, say, larger cloud management and managed services tend to make them more expensive.

[Operator]

Our next question comes from Divya Goyal with Scotiabank.

[Divya Goyal, analyst]

Congratulations on a wonderful quarter and a wonderful year. So I wanted to discuss the organic growth side of things a little bit more. And it -- as listed in the financial statements, it says that once a company has been with Converge for 3 months-plus, you're going to start considering it as an organic growth story and an organic growth side of the business. In a normal acquisition, we would assume a year for this stub and then consider that to be a part of the organic business. So what's the consideration behind it? And how do you see that going forward?

[Shaun Maine, executive]

So again, we're including any company that we've had for at least a quarter because our ability to cross-sell happens immediately, and therefore, you want to capture what we're doing in the first year. Some acquisition companies don't do cross-sell. And so I think they focus in on integration first and then they go cross-sell. So maybe it's more appropriate for them to wait for a year before doing it. But we're seeing cross-selling happening in -- like the first 30 days after we acquired, say, Dasher, I know that Greg was doing executive briefings in at those accounts. So things happen within the first quarter.

So I think looking in at -- it's an appropriate measure to anything that we've had for the quarter that we included in the organic growth calculation. And again, the attempt here is to have apples-to-apples of here's all the gross revenue they would have had a year ago versus all the gross revenue we have today. I think that's an appropriate measure.

[Divya Goyal, analyst]

That's good to know. So from a modeling standpoint, would you say that as you're acquiring companies, instead of us modeling the company for a 1-year stub, a quarter stub would be sufficient and then start reading it as an organic growth story versus an acquired company? Is that how you would recommend us doing?

[Shaun Maine, executive]

I would think so, yes. I mean, again, you should -- I would not be thinking that they're just going to be on the same path as -- yes, the organic growth grows after the first quarter, absolutely.

[Divya Goyal, analyst]

That's great. A second question, can you talk a little bit more about John's hiring and the strategy behind it? And you and I, we briefly talked about it, but if you can provide more color on that side and Converge's story going forward with IBM with John's hiring now.

[Shaun Maine, executive]

Well, I'd say I'm absolutely thrilled that John has joined us. I feel so fortunate to have both Thomas Volk and John Teltsch as part of our company. I think it's a real credit to the team that we've built a company that can attract that level of people. I feel like I have a real mentor in Thomas Volk to help me especially around things like Europe and managed services. And I think now Greg has the same thing in John Teltsch.

John is one of IBM's top executives. His contacts around the globe are tremendous, his knowledge of the channel, he ran worldwide channels for IBM, his ability to help Greg in so many different ways. We are a rapid growth company. We do -- we were having our Board meeting yesterday and I'm looking around the team and it's the integration, it's the cross-sell. It's the acquisitions. It's one heck of a team. And say, adding John and Thomas to this team like -- and John, I can't speak highly enough of him. I make the joke that in 2019, Greg only got me an hour at IBM, I think, with John and I was thrilled for it, right? And now he's our Chief Revenue Officer. I feel blessed to have him on board and we have one heck of a management team.

[Operator]

Our next question comes from Gavin Fairweather with Cormark.

[Gavin Fairweather, analyst]

I wanted to start out on the managed services hub in Mexico. You talked about scaling that up to over 1,000 resources there. Can you just remind us about the labor market, how easy you're finding it to scale up that office? And just basically, any strategies that you're having to find talent in that market.

[Shaun Maine, executive]

Yes. So I really have to give credit to Mohammad who runs the operation down there in Mexico. He's got an outreach program with the universities and college as a training program, they call it Converge University, which is a 4-week training program to make sure that we give the right user experience to our customers.

Net Promoter Score is incredibly important to us. We aim to have over 50 on Net Promoter Score. And having your service desk people understand how to go above and beyond, not just to fulfill demand, but how companies promote you is absolutely essential. So this is a, I would call it, a production line that Mohammad's developed that is a real competitive advantage for us to find out not just to provide a service, but to provide a service with the right user experience for our customers to grow our managed services growth. So it is a key competitive advantage.

[Gavin Fairweather, analyst]

And just staying on the managed services trend. Obviously, exiting '21 with kind of $90 million in ARR, you've obviously got your target for '22 at $200 million and then looking to introduce additional automation. I guess I'm curious, once kind of that scaling and automation is in place, how far along does that get you towards your kind of 25% long-term EBITDA margin target on managed services, which I think had like $1 billion of revenue?

[Shaun Maine, executive]

Yes. Exactly. Our target is by the end of 2025 to have $1 billion of managed services revenue, making 25% EBITDA margins. When you look at CANCOM'S EBITDA margins, and again, I've used always Thomas and what he did at CANCOM's as kind of the model for what I'm trying to achieve, they make 33% EBITDA margins on their managed services. So those 25% margin is definitely achievable.

The key part, as we're saying, is when you're acquiring managed services revenue, is to make sure the resource is in the right location at the right price. Automation is absolutely key for increasing customer satisfaction and reducing your cost before standardizing offerings. Our goal is to get to between 55% to 60% gross profit, and those 3 elements are absolutely essential. ExactlyIT has some tools that we've been implementing as we've migrated different service desks. And this is a key part for -- especially when you're acquiring companies that have existing managed services revenue.

[Operator]

Our next question comes from David Kwan with TD Securities.

[David Kwan, analyst]

Quick question just on the managed services to [ siphon off ] on Gavin and other's questions. Just given what we're seeing in Eastern Europe particularly in Ukraine, I know you've talked about in the past trying to build up your managed services business with an office in Eastern Europe. Just given what's going on there and geopolitical tensions in general, is that something you might look to delay in terms of opening up that managed services center in Eastern Europe and maybe try to leverage your Mexico operations more?

[Shaun Maine, executive]

I see. Absolutely. Great question, David. And so like when -- following what CANCOM had done, they had their shared service center about 40 miles from where the Ukrainian border is. And so we're planning on having not for managed services, but a technical shared service center in Eastern Europe. We very prudently have delayed those plans until we can assess the situation more readily.

So definitely, that's something that we'll be looking to do in the future. But we're definitely looking for the situation to settle down a little bit before we do make those investments.

[Operator]

Our next question comes from Benjamin May with Berenberg Bank.

[Benjamin May, analyst]

And well done on a good quarter. Just a question on the customer base. You talked about cross-selling opportunities. Just curious if you've done any work to sort of put a number besides sort of what share of wallet you have with your customer base and what you think you could get to. So that would be my first question, and then I'll follow up on the next one.

[Shaun Maine, executive]

Sure. And Ben, that's a great question. It's important to understand that we're not taking spend away from another partner. We're moving internal IT spend to spend with us.

So mid-market internal IT organizations are really struggling to put their applications inside of Kubernetes containers from Red Hat and VMware to open up workloads to the cloud, to migrate those things. Our offerings and capabilities are much greater than most people in the IT services space. At our national sales meeting, when you looked at our club trip reps, our top club trip rep, Ben, had $6 million in gross profit. And when we looked at where the gross profit came from, it came from all the various practice areas. And he started the year with $2 million of recurring revenue and gross profit that starts the year off.

But that wallet share is in the offering. So when you look at -- one of the things we -- and what Greg is doing on the 120 top accounts is making sure from analytics, from cyber, from cloud, from managed services and digital infrastructure that we're driving gross profit for all of those areas. When you look at most companies in this space, they don't have an analytics team. They wouldn't have -- some of the other offerings around Workspace, they might not have as well. And so we have a much wider breadth of offerings into our customers, which means our wallet share with our customers is probably much higher than a lot of the traditional IT services players.

[Benjamin May, analyst]

Okay. That's very helpful. And just in terms of cross-sell. When I look at the organic growth figure, which you've kindly provided for the first time now, can we get a sense or any color for how much of that almost 10% organic growth was coming from cross-sell of managed services?

[Shaun Maine, executive]

Well, we cross-sell not necessarily all managed services. But again, when you sell those services, they have higher gross profit but lower revenue. So it's important to understand that hardware has got more revenue, right, and you'll see those. But really, the more impactful ones are really happening. And what we really track internally is the gross profit per practice area that are being generated from each region and that's really the way Greg's managing the business.

So the revenue side isn't as important as the gross profit side is, and that's our key area. And again, we started with this growth. We're going to be giving you as of Q1 more information. So we do understand it's important for us to provide more granularity around this. Our first attempt was just making sure everyone realized what our gross revenue organic growth rate, and then we'll try to get more on the gross profit side as we move forward as well.

[Benjamin May, analyst]

Okay. All right. Great. That would be very helpful in the future. And then just lastly, we have to talk about wage inflation. And I know that you're doing a lot of things in terms of resource allocation to try and perhaps protect against that as well as giving you capacity. But in terms of key technical staff, how are you managing sort of inflationary pressures on wages?

[Shaun Maine, executive]

So the most important factor in retention is not financial. It is culture. Financial is very important. And we make sure that we're always evaluating ourselves versus market, and the market definitely has changed. But culture is equally as important when you're retaining staff. .

So we have not had, say -- both on the sales side and the tech side, we have incredible staff retention. And I know our team does a lot though to make sure that it's not just about, hey, here's the pay of it. But it's the how is your mental well-being? How are -- are we giving people appropriate breaks and things like that? Are we taking care of them at those sites in addition to having great things to work on.

Thomas Volk is using some examples of how, in some of our customers' cases, when they try to go -- in a mid-market company trying to hire an IT person to manage their network, that's not really an exciting growth position for a technical resource. Whereas if you have Converge and you're -- you've got several customers that you're delivering network services to, that's much more of an attractive job. So culture is important, but also, the kind of work that we're able to provide to these people and the growth opportunities. Since we're such a growth company, good technical people love working with other smart technical people. If you're looking around the room and you're the smartest guy in the room, then you're doing all the work. So they love looking each other. They love having challenging work as well.

So I think culture, the type of work has really helped us. Definitely, it's a tighter labor market. If I was trying to grow either our cybersecurity practice or our analytics practice by 1s and 2s, that would be very hard. Our strategy of buying preexisting teams and companies, I think, is a much smarter way of growing them. But it's a tighter market. We're very aware of it. But we -- like we spend a lot of time on our people and the initiatives around them to make sure there's the right culture and there's right well-being -- an environment for them to be productive.

[Operator]

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

[Shaun Maine, executive]

Thank you to everyone for participating on today's call. It has brought our team great pleasure to discuss the Q4 and financial year results we've attached -- attained throughout 2021. And I look forward to updating our shareholders again on our next earnings call. Thank you for your continued support.

[Operator]

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