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Good morning. Welcome to the Converge Technology Solutions Corp. Second Quarter 2022 Results Conference Call. [Operator Instructions] Your main host for 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 provisional 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 the Converge's filing of Canadian provisional securities regulators for an explanation and reconciliation to IFRS measures. Thank you. Mr. Shaun Maine, you may begin your conference.
Thanks, Chris. Good morning, and thank you for attending today's Q2 earnings call. I'm pleased to announce that Converge has reported another record quarter. In what follows, I will provide a business update on the quarter, beginning with a brief introduction to Converge for those who are new to our business, a snapshot of our 4-phase growth strategy plan, and an overview of our year-to-date acquisitions. Matt Smith will then provide an update on the Converge financials, leading us into a discussion on product and service backlog management and update on the Converge growing managed services practices, including an update on our IP4G, our IBM Power for Google Cloud solution that we launched and expanded in Q2. And lastly, some closing remarks on the strength of our team and the culture that's behind -- is behind our growing success. Converge is a software-enabled IT and cloud solution provider focused on delivering industry-leading solutions and services. Our global solution approach delivers advanced analytics, application modernization, cloud, cybersecurity, digital infrastructure and digital workplace offerings to clients across various industries. Converge supports these solutions with advisory, implementation and managed service expertise across all major IT vendors, leading with Red Hat and VMware, including the major cloud providers AWS, Google and Microsoft, alongside main infrastructure providers IBM, Cisco, HPE and Dell. This multifaceted approach enables Converge to address the unique business and technology requirements for all clients in the public and private sectors specifically catering to mid-market demand. Converge identifies as our customers' trusted adviser, bringing together world-class solution and services, helping to reduce cost, increase efficiency and create competitive advantages. We continue to deliver industry-leading revenue and EBITDA growth as evidenced by Converge financial success over the past few years, resulting in a 49% 3-year annual compound growth rate in net revenue and a 3-year adjusted EBITDA compound growth rate of 79%. Our tremendous growth is guided by our 4-phase approach created in 2017, which the team has done an outstanding job executing. The first phase of our business strategy was to buy a broad-based geographical coverage in North America and acquire top-tier certifications with all of our vendors to achieve better pricing and rebates. In Phase 2, we focused on building out our capabilities around hybrid IT, advanced analytics, cybersecurity, managed services, leading to Phase 3 centering around integration of the back office and scale. Upon completing our original 3-phase plan, the team came together to outline its continuation into Phase 4, which includes achieving a minimum of $500 million of adjusted EBITDA and at least $5 billion in revenue by the end of 2025. While for the next 3 years, completing $1 billion annually in acquisition revenue composed of CAD 400 million of acquisition revenue in North America and approximately EUR 400 million of acquired revenue in Europe. Another key tenet of our Phase 4 strategy is to deepen our services capabilities around managed services, analytics, cybersecurity and cloud. Year-to-date, Converge has already acquired $927.7 million of LTM gross revenue and $53.3 million in adjusted EBITDA through acquisitions in North America and Europe, and we are on track to meet or exceed that $1 billion gross revenue annual target. It is important to step back and to understand how we prioritize our acquisitions and how various acquisitions advance our strategy. We prioritize acquisitions in the order of culture, customers, geography and finally, capabilities. The reason we target relatively smaller companies is because these businesses have had to compete on service levels and technology to win against larger providers who compete based on price. The customer relationships they have developed through this approach is crucial to understand since it is essential in developing our cross-sell strategy. It was Sam Haffar, Founder of Computex, who described it to me that your customers first need to know you, then like you, then trust you before they buy from you. If you compromise quality due to price or higher inexperienced sales personnel, you will not be able to reinforce your position as trusted adviser to the customer when introducing managed services and digital transformation. As many of you know, this is a people business and the strength of Converge is the up to 20-year relationships that have been developed by our salespeople and engineers that allow us to be the customer's trusted hybrid IT partner as they migrate to the cloud. This year, Converge has been executing on an acquisition strategy targeting companies with customers based in the education and health care verticals, who changed the remote delivery of service during the pandemic, creating managed service opportunities for companies to capitalize on. PDS and TIG expand our customers' footprint in both these verticals in North America. And in Europe, REDNET was already a dominant education provider in 3 German federated states expanding organically to 4 more. Similarly, GfdB is a top-tier education player in an additional 6 federated states, giving Converge geographical presence in 13 of the 16 federated states, making Converge a go-to partner around education for companies like Intel, Microsoft and Apple. Equally as important, we also acquire companies for service capabilities. This year, we bolstered our security practice with the acquisition of CBI, adding over 60 security engineers and tripling the revenue for our cybersecurity practice. Rather than expanding organically one engineer at a time, this allows us to acquire prebuilt teams of resources that match our culture and avoids the issue of ramp-up time to profitability when you hire sales or engineering resources organically. IDX, a systems integrator in Canada with high-end telco and banking integration expertise is another example of acquiring a great team of experienced engineers who match our culture. These acquisitions allow us to further cross-sell our analytics, cybersecurity, hybrid IT and managed services into our growing customer base. Converge's combination of acquisition growth or inorganic growth, combined with our cross-sell or organic growth, has resulted in Converge having the highest gross profit growth rate in the IT services space. Gross profit is the metric that most companies in the space use as a level measure of success. When compared to our peers in North America and Europe, no one comes close to the gross profit growth rates that Converge has shown as a public company within the past 3 years. The fact that Converge not only continues but exceeds these growth rates as a TSX Index company is a testament to the fantastic management team at Converge that is able to acquire, cross-sell and integrate companies smoothly to allow for the successive profitable growth. With that, I would like to pass the call to Matt Smith to discuss our Q2 financial highlights and successes in further detail.
Thank you, Shaun. As Shaun has highlighted, we continue to see robust demand for our products and services, and that has translated to strong year-over-year revenue, gross profit and adjusted EBITDA growth. In Q2, we grew net revenues 73% to $596.7 million compared to $345.3 million in Q2 last year. And for the first half of 2022, net revenue grew by 75% to $1.1 billion from $655.5 million last year. Q2 product revenue, which includes hardware and software, increased 75% to $491.8 million from $281.3 million over Q2 last year and was $945.2 million for the first half of 2022 compared to $532.8 million last year, an increase of 77%. Our product revenue growth was driven primarily by the acquisitions completed since July 1 last year and due in part to conversion of our Q1 backlog for product that was delivered to customers in the period. Q2 professional and other services, which includes the net revenue from public cloud resale and product support, increased 61% to $76 million in Q2 from $47.1 million last year. For the first half of 2022, this revenue grew 65% to $146.2 million from $88.5 million in 2021. We attribute this growth primarily to increases in professional services associated with upfront configuration and integration services as well as continued growth in our key consulting practice areas, including analytics, cloud and most notably cybersecurity, which, as Shaun has mentioned, we bolstered with the acquisition of CBI at the beginning of this quarter. In Q2, our net revenue from managed services, which are long-term contracts, increased 71% to $28.9 million from $16.9 million in Q2 last year. And for the first half of 2022, managed services was $55.3 million compared to $33.3 million in 2021, an increase of over 66%. On an annualized recurring basis, our ARR for managed services at the end of Q2 grew to $115.4 million compared to $57.5 million last year. We are poised to show continued growth in this area in 2022 as backlog is delivered and we realized revenue from trailing managed services over end-user devices. In Q2, despite the number of acquisitions completed, we continue to report positive organic growth as we grew gross revenue organically by 8.5% in Q2 compared to last year. As highlighted on previous calls, we attribute this growth to 2 key things: one, our ability to seamlessly integrate acquired companies; and 2, the strength and breadth of various practice areas and continued strong demand for digital transformation. For Q2, our gross profit increased 70% to $133.2 million from $78.2 million for the same period in 2021 and gross profit margin was 22.3% compared to 22.7% in Q2 last year. For the first half of 2022, gross profit increased 66% to $242.2 million from $146 million in 2021, and gross profit margin was 21.1% compared to 22.3% last year. As a reminder, in Q1, our gross margin percentage was lower due to the impact of recent acquisitions that sell proportionately lower margin hardware plus the fact that it was a particularly device heavy quarter. As expected, gross margins grew by 2% in Q2 over Q1 as higher margin software and services made up more of our gross profit. Going forward, as we cross-sell higher-margin cloud and managed services to customers of acquired companies, plus our existing customers, including the margin lift associated with trailing services on product backlog, we expect gross margins -- growth margins to increase. Q2 adjusted EBITDA increased 80% to $39.2 million compared to $21.7 million last year. As a percentage of net revenue, adjusted EBITDA was 6.6% compared to 6.3% in Q2 2021. As a percentage of gross profit, which we believe to be a telling indicator of the company's overall operating efficiency and profitability, adjusted EBITDA was 29.4%, increasing from 27.8% in Q2 last year. For the first half of 2022, adjusted EBITDA increased 70% to $68.8 million compared to $40.5 million last year, and adjusted EBITDA as a percentage of net revenue was 6% compared to 6.2% last year and as a percentage of gross profit increased to 28.4% from 27.7% last year. As we continue to integrate operations of acquired companies and cross-sell managed and cloud services to their customer base, and increase their gross profit with higher margin revenue, we would expect our adjusted EBITDA margins to increase over time. Pushing to the balance sheet. We finished the quarter in a strong financial condition with approximately $290 million in available funds from cash on hand and through our ABL facility. Additionally, on July 28, we announced that we've now moved to a $500 million global revolver credit facility with an uncommitted $100 million accordion feature that would bring the total facility to $600 million, effectively doubling the outgoing ABL facility. In parallel, we also announced the TSX approval of our NCIB that will begin on August 11, which we will believe -- which we believe will be an effective use of our liquidity where the market price of our common shares may not fully reflect the underlying value of our business. In terms of cash flow, on our Q1 call, we noted that we utilized the strength of our balance sheet and cash generation to purchase directly from OEMs in order to secure supply for customers, which was reflected in our Q1 uses of working capital and cash flow from operations. As expected, in Q2, as we reverted back to our regular purchasing channels, working capital began to normalize and we generated positive cash flow from operations of $26.6 million. We would expect this trend to continue into Q3. In Q2, our adjusted free cash flow, which we calculate as adjusted EBITDA less recurring capital expenditures and payments of lease liabilities, was $33.8 million, increasing from $18.5 million in Q2 last year. Adjusted free cash flow conversion, which we expressed as a percentage of EBITDA, was 86% in Q2, increasing from 85% last year. For the first half of 2022, adjusted free cash flow increased to $57.9 million from $33.2 million in 2021, and the conversion percentage was approximately 84% as compared to 82% 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 6-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 turn the presentation back to Shaun.
Thanks, Matt. Industry-wide backlog concerns had been at the forefront of recent discussions of which Converge believes we are ideally positioned with top vendor relationships to manage confidently and consistently. Last quarter, Converge reported an increase in product backlog from approximately $350 million at the end of Q4 to $472 million at the end of Q1. And while our reported product backlog has further increased to $507 million this quarter, it is important to note that $375 million worth of Q1 product backlog was delivered in Q2, leaving only $97 million of open orders carried forward from the Q1 backlog, primarily network gear. Throughout the quarter, our sales teams impressively generated an additional $410 million in new product backlog orders displaying the demand for product as part of our solutions remains strong. Additionally, Converge reported $71 million in Q2 SOW-based services backlog, increasing from $45 million in Q1, with services being a key contributor to our organic growth. We believe the company has managed its backlog proactively through its ability to simultaneously deliver orders while generating unique demand. In Q2, our sales organization continued to execute on our cross-sell initiatives with a focus on driving our software and services offering. It is important to note that software and services are lower revenue, but much higher margin than hardware. And our 8.5% gross revenue organic growth primarily comes from growth in our services. The services organization closed over 45 transactions and closed 3 large transformational projects of over $1 million each across multiple solution areas with a focus on analytics, cloud and cybersecurity. Our Q2 2022 gross invoice recurring revenue increased 32% over the same period last year to $431 million, made up of $114 million of annualized managed services, $105 million of public cloud resale and $200 million -- $211 million of software subscriptions. The launch of our IBM Power Systems for Google IP4G solution as one of our strategic managed service offerings paid off as we closed over 9 transactions in the past quarter, with 2 of them representing a total contract value over $1 million of recurring revenue. We also launched an expanded offering in Germany and now have both an AIX and i-Series offering for the Google Cloud platform across North America and Europe. The team will continue to focus on expanding into other locations based on collaboration with Google, and it is an 8-figure revenue opportunity this year. It should be noted that although we experienced good growth in our managed services, both traditional and IP4G, our large backlog of managed services is being impacted by network supply chain issues that are delaying onboarding. This backlog is the primary reason for the large increase in our services backlog. As we continue to drive multiple marketing events and campaigns, the team secured 109 net new logos in Q2, continuing our impressive average of over 100 net new logos each quarter that we haven't done business with in the past. We have now hosted over 76 events in the first half with over 1,800 clients attending. The team also launched over 100 campaigns across analytics, cloud, cyber and managed services, generating the right messaging and helping us continue to drive pipeline across our high-value offering. These campaigns into our existing customer base with our differentiated services promote cross-sell, while campaigns into new customers result in net new logos. As Converge continues to expand its clients and offerings, we are honored to be recognized on CDN's top solution provider list ranking 8th out of 100, along with rankings 36 out of 500 on CRN's 2022 Solution Provider 500 list and has recently announced ranking 29th on CRN's 2022 Fast Growth 150 list. These rankings are in addition to our previously discussed Ingram Micro Awards of 2022 Reseller Partner of the Year and the first 2022 Women in Cloud Female the Year Award achieved by Rochelle Manns. These recognitions showed exceptional growth and leadership at Converge and acknowledge the team's extraordinary efforts within the industry. Expanding on leadership and governance, Dr. Toni Rinow was elected to the Converge Board of Directors at the Virtual Annual General Meeting occurring on June 23 bringing over 20 years of international experience as a transformational finance and business leader, guiding companies through inflection points of growth, innovation, technology, convergence and business integration. Toni served in public and private organizations where she spearheaded capital expansion and acquisitions across North America, Latin America, Europe and India. With an impressive portfolio of education, Toni holds a master's in business administration, a master's in accounting, a Ph.D. in biophysics and chemistry, and trained in artificial intelligence at MIT. In addition to Dr. Toni Rinow joining the Board, we continue to look forward to our previously announced appointment of Richard Lecoutre as our Global CFO, starting his role at Converge at the beginning of next month. Richard joins us from Softcat, where his experience in setting up financial organizations will help us as we set up our European operations, while we will also benefit from his experience in best-of-class reporting. The recent leadership and Board additions will assist in further enhancing the scale and success of our company's vision and ability to achieve the objectives outlined in Phase 4 of our growth plan for continued global expansion. As part of our continued growth and success, we have added to Greg Berard's President title, the title of North American CEO. Greg has been fulfilling this role over the past 12 months as I focus on acquisitions, expansion in Europe and our capital market strategy. Greg has been a proven leader for us since the acquisition of Lighthouse in 2018 and being our global president since 2019. This change of title will clarify his role to customers, partners and employees, and allow him to continue to execute on our cross-sell initiatives, integration, acquisitions, and drive the right culture and expectations throughout North America. Our ability to attract and retain talent is because of our company culture, and we believe fundamentals of Converge's success are based on our employees playing a pivotal role in strengthening this culture. We continue to offer resources and initiatives for employees to take part in and successfully grow together. In addition to our recurring fitness and health seminars and challenges to our employees' wellness series put forth a strong focus on mental health awareness with separate seminars for both adults and youth, providing tools and support to reduce the ongoing stigma surrounding mental health problems or crisis. Our Diversity Inclusion Council was an extensional part of the company-wide training for human rights practices, respecting the workplace and highlights our see something, say something mantra with tools on how to avoid being a bystander in the workplace. And in June, we celebrated Pride month offering tips for Pride with helpful guides to attend a Pride parade or event being an ally, volunteering and donations and education on the LGBTQ+ community. Subsequent to Q2, we have enjoyed employee appreciation days with our North American operations enjoying Fridays off during the month of July and launched a monthly postpartum webinar series in support of existing and new parents at Converge. Furthermore, employees took advantage of the financial wellness opportunities available to them through our employee share purchase program offering a 20% match by Converge, which resulted in approximately 870,000 in ESPP purchasing. Quite simply, Converge success comes down to its people and its team culture. The phenomenal success Converge has enjoyed over such a sustained period has come from being a meritocracy that rewards the team for executing on our very aggressive growth strategy and vision. The amount that Converge is able to accomplish each quarter wouldn't be possible without this highly talented group that embraces change and trust each other to execute on their part of acquisitions, cross-sell and integration. I am so proud to be able to present these financials which are a symptom of the hard work that these amazing people have put in and their dedication to our vision. And on that note, Chris, can we please open the floor to questions.
[Operator Instructions] Our first question will come from Christian Sgro of Eight Capital.
The first one I wanted to ask about is on the newly introduced services backlog. You touched on it in the opening remarks, but I was wondering if there's any other context or color you can offer on the metric. And then the growth we saw sequentially, is that driven primarily by hardware delays? Or are there any other factors in the backlog growth there?
Yes. Great. Thanks, Christian. So it is just SOW-based services, so Statement of Work-based services. And yes, a big component was onboarding for managed services, which have been delayed by not being able to get network gear. Network gear is part of any move to the cloud. And a part of those onboardings have been delayed, especially in our IP4G solutions because of the delays in the network gear. So again, it's all SOW-based. It's not the actual -- any managed services itself. It's just Statement of Work-based, consulting services based, and a lot of the backlog has to do with delays on the hardware side.
That's helpful. And in terms of sourcing supply, it was a topic that came up last conference call, but is Converge still going direct to OEMs to source product? Has that dynamic changed? And then is there anything on changes in pricing or terms that you'd have us think about going into Q3 here?
Yes. So we are not doing any of that direct buying that we did in Q1 in order to secure supply. You're seeing on the device side things normalize. What is bad for demand in the consumer and in the gaming space has been very beneficial to the business space. And so we're more normalized on the device side. It's more on the data center side, especially HPE and the networking gear, so Cisco, Arista, Palo Alto and Juniper, that you're still seeing the longer delays. We kind of see things, kind of, like they've normalized. One of the comments I'll make is that we have trained our customers to order early. In Q2, we saw some of our customers order in Q2 for Q4 delivery, which is very uncommon in the past. But -- so some of that open orders backlog was increased because of customers ordering earlier, but we've kind of seen a leveling off. We would start to see improvements in Q4 and moving into next year. Some of our vendors like HPE have warned that some of these problems will persist until midyear next year. But we're -- definitely I'm optimistic to see some encouraging signs here in Q4.
That's perfect. And then I'll ask just a follow on to your response there, Shaun. The order in from customers is good that they're getting sort of in the queue early, but do you think -- well, won't you think there's any double ordering on their end? And then maybe do you suspect there could be a pull forward of demand? Or just that these customers are aware of the environment and getting ready for product that they need in Q4 or Q1? How do you think they're thinking about the matter?
So our customers are very different from large enterprise customers because when our customers are buying a solution from us, they're not just buying hardware, they're buying services, hardware, there'll be a solution software. It's all combined together. When you are selling into large enterprise, you're selling into the network group or the storage group. And it's just they're decoupled -- the services are decoupled from the product. So this in the mid-market, you wouldn't see things like double ordering because it's all part of a solution. So that's not something we see. As far as the pull forward, I guess you could refer to the customers that are preplanning, I guess, you could call pull forward. But again, this is not viewed as discretionary spend. You saw for the first time, the incredible demand in Q1 was because people started budgeting in the mid-market for work from anywhere. And so you've had this incredible demand not viewed as discretionary because of the security flaws in the existing way that they were supporting remote workers. So we saw it budgeted for the first time, and you're really seeing this whole demand and especially around the network gear, the incredible demand because as you move to the cloud, there's a lot more network gear. But yes, we're seeing tremendous demand for those solutions that I wouldn't necessarily say pull forward in that people are now implementing these strategies to support remote workers.
And our next question will come from Rob Goff of Echelon Partners.
Congratulations on the quarter. It was nice to see the organic growth increase on the quarter. Could you, for the first question, talk to how you see that organic growth progressing? And a component of that would also be in your outlook for the backlog. As you see supply constraints lessening, do you have the internal capacity to draw down on that backlog? Or is that likely to be a seasonal thing in Q1 where you do have that capacity?
Yes. So great question. So we have traditionally always guided to be around 10% gross revenue organic growth. Last year was 9.6%. When you see this massive backlog of not just product but services as well, it means that if you looked at our revenue that you would expect to see solid double-digit organic growth rate, especially as we bring down some of this backlog in Q4 on both the product and the services side. And realize the services side isn't constrained by resources. That's constrained by certain products not being available in order to deliver those resources. So we've done a great job of -- through exactly IT supporting our growth of managed services, through expansion of our group in Mexico. We've done acquisitions like CBI supporting our security group last year with LPA and CarpeDatum supporting our analytics group. So we've effectively been buying companies to get pre-built teams of people to support our various analytics, cyber app modernization and managed services. So really, I think the organic growth question really comes down to, if you see some normalization in Q4, you'll have a stronger than our normal 10% gross revenue growth rate for 2022.
Okay. And I believe you indicated that the IP4G could be an 8-year on revenue line this year. How do you see that progressing going into 2023?
Yes, it's a major initiative. This is a very differentiated offering and these are chunky customer contracts that we're getting, multiyear contracts for us to move. Their workload is around IBM's i-Series into this partnership that we have with Google. Incredibly lucrative, very differentiated. And when you have them on the IP4G, it gives us the opportunity to upsell our managed services and our other managed offerings such as service desk, managed security, managed network, managed end user. So incredibly important and significant. This is a significant part of our growth strategy around managed services. Obviously, we have a lot of going on right now with managed end user around education and health care. We've got a lot of the managed services around supporting nurses and teachers. We've got the generic services, but the IP4G one in particular is driving very specialized growth with a great customer base that will be a core of our managed services growth.
Our next question will come from Gavin Fairweather of Cormark.
Just to follow up on the IP4G, I know obviously you've been looking to establish a channel for that offering. Maybe can you just update us on how that channel is functioning, your channel enablement efforts and whether you think that it's really kind of optimized or whether there's further work to do there?
So I think John Teltsch coming over has done an amazing job in getting -- actually IBM sales reps get paid for selling our solution for it. And then the Google channel has also been very supportive of it as well. So I think it's a -- again, the thing that we're really constrained on, we have this massive pipeline now, has been more on the onboarding side, but this will be a major part of our managed services going forward. And the team internally has done a great job, and I think the partnership on the channel side, as you ask, John Teltsch has really added that since he joined a quarter ago.
That's great. And then maybe just about a fine point on the networking gear discussion. Are lead times now coming in for Cisco?
So, no, they're not. But what they're doing, though, is they'll surprise you. So if you order some networking gear that's given a 4- to 6-month wait time, it might show up after 3 weeks. And so it's sporadic, but it has not been -- not better yet. There are signs that we're hearing of things -- all things getting better. I think people started -- because this really was last Q3, where people would give short lead times, even 2 to 3 months and then deliver much later. I think now that people are expecting longer lead times, they're giving those times and then trying to surprise with shortening them. So I think it's getting better. You're hearing signs. But again, the proof is in the backlog. And so on November 10 when we report our Q3, I'll be able to give you a much better view of what we're seeing in Q4. So again, the device side has been more normalized, and you're seeing signs here, but there still is plenty of -- it's not a normal situation. Normally, our backlog would be under $100 million, probably under $50 million, and it's $507 million and another $70 million in services. So it is abnormal, but it is coming better. And again, when I hear announcements like NVIDIA talking about we over forecast demand in gaming and consumer, and with AMD and Intel saying the same thing, it means there's a lot of chips around, which haven't been for a while. And so that can only help the supply chain on the business side.
That's great. And then maybe just on the NCIB. Obviously, you've been an active acquirer. Maybe you can just talk about capital allocation priorities between kind of M&A, continuing your consolidation strategy versus buying back your own stock? And that's it from me.
Sure. Well, I mean, at these stock prices, we're not being valued, like I showed you a slide where we, by far, have the greatest growth rates of revenue, gross profit and adjusted EBITDA and even as a large company, and the market is not recognizing that. So we think it's a great use of our capital to and in the interest of our shareholders for us to buy our stock back at these levels. We've almost completed our acquisition strategy for this year, which we've stated $1 billion. And next year will be more measured in our $1 billion for next year like we were very front-end loaded with our acquisition strategy for this year. But thanks to our revolver and the cash from operations, we're in a great spot to be able to do both.
Our next question will come from Divya Goyal of Scotiabank.
Congratulations on the quarter. So my question is around the general discussion around the market on staffing. So obviously, you have acquired a lot of these companies and the employees that come with it. But given some of the supply chain constraints and the backlog increase, what's your take on how do you plan to handle some of the staffing issues? Do you see recession kind of impacting your potential hires? And then what are your internal utilization rates in general?
Yes. So first off, we see 0 sign or recession in the hybrid IT and digital transformation space that when you look at demand, when my backlog gets under $100 million, people can talk to me about lessening demand. And when you look at the labor market, it is incredibly scarce resources are these high-end cybersecurity cloud managed services. Like in Germany, there's 80,000 open IT recs, so mid-market companies cannot find someone to manage their network. We have incredible demand from our various practice areas to our staffing group to help companies as they -- this nondiscretionary spend of moving them to the cloud, they cannot find the resources. So when you have robust demand and basically 0 unemployment in the sector, I don't see any signs so far of any kind of recession in our space, not seeing any of that whatsoever. Next year might be different and I say watch my backlog, but I've got the opposite problem of an excessive demand. Like realize these quarter numbers, which are superb, came even though my backlog increased. Demand environment is extremely robust.
That's helpful, Shaun. And my next question is, I was looking at the industry mix for your revenues. And it seems like the banking and FinSA was approximately 26% of the total revenue compared to some of the recent quarters. And similarly, the government mix changed as well. Could you comment on that, please?
So quarter by quarter, you're going to see some differences. So Q2, as we mentioned, is a heavy software quarter. And so the finance or other the renewals will happen in Q2 as they will in Q4. You're going to see heavier government and education spend in Q1 and Q3. So I think when you -- that kind of normalizes, when you look at it on an annual basis, it's more normalized, but quarter-to-quarter, you'll see shift.
Our next question will come from David Kwan of TD Securities.
I guess tying in to Gavin's question on capital allocation, that was something I really wanted to focus on as well. Just given where the shares are trading right now, you obviously got the NCIB in place. Like would you guys consider something more significant like it's [ chance for us ] for a bid now that you've got the larger global credit facility? And then as well, a lot of your peers pay dividend. Is that something that's being considered?
So our Board thought it was appropriate the size of the NCIB that was announced at these levels. And so I thought that was a good level of capital allocation. We're getting to the stage where we're generating more cash from operations and you saw that conversion rate that Matt was talking about. It only grows from here. So as we passed $200 million of adjusted EBITDA, then it becomes more of the -- you cannot use all of that capital in our M&A. We've said that we target kind of using $250 million to $300 million per year in acquiring our $1 billion of acquisition revenue, but that's also tiered throughout the year. We did it very early this year. And then when you look at these quarters, especially you'll see in Q3 and Q4 the cash being generated in addition to our -- into our -- the amount that we've had from increasing our revolver credit facility gives us ample room. We're not at the stage yet of looking at a dividend. I do have regular conversations with our top 10 shareholders and they viewed appropriate an NCIB, but some of them are not fans of a dividend since we have such an acquisition pipeline that we can be using. But I think as you get into 2024, we're generating so much cash as we get closer to our march to our $500 million of adjusted EBITDA, we'll be generating $400 million of free cash flow. And then you'll be, how do you give that back, is it just buybacks, is it dividends. And I'm sure the Board will consider that at those times. But right now, we think the NCIB is appropriate. We've got a great use of cash and acquisitions to achieve our growth objectives as stated. And as in the future, definitely, I'm sure the Board will consider dividend as one of the options as we get to 2024 and beyond.
There's a lot of talk on the call today just on the IP offering. Just curious how you see that fitting in relative to kind of the other kind of core solutions and services in terms of kind of the biggest growth potential in the coming years?
It's a really differentiated offering in that it requires a much larger company to have that specialized skill set. And also they're not -- you don't learn AIX in university these days. And so we've got some very specialized resources around it. So as far as having a niche offering, and there's a lot of banks and insurance companies that have a lot of AIX and i-Series and z-Series workloads that we can move into an environment and then provide a really captive audience to provide upselling of our other managed services. As we mentioned, the easiest person to sell managed services to is an existing happy customer. So these are net new logos that we're getting at $1 million chunks. And so to substantially raise our managed services revenue just with i-Series and then to expand it to our other managed services. We think this is a tremendous opportunity and we'll be looking to expand that. Because again, there aren't a lot of options. You look at the partnership that we have with Google and this is an exclusive arrangement around this, and it's a very compelling offering. So it's a key area of growth for us. And we'll be looking to expand into other geographies as well.
And our next question will come from Scott Fletcher of CIBC.
I wanted to ask a question on the M&A pipeline. And I understand that there's -- you're pretty close to your target already. And so there's probably not going to be a lot of activity for the rest of the year. But first question is I'm wondering if you're seeing any additional propensity itself in some of these companies, given as they peak around and look at the forward macro outlook? And then the second question is, if you see some of those extra opportunities, are you willing to sort of outspend your target for the year, just especially given the flexibility that the extra credit line might give you?
Yes. So we set our targets by what we think we can comfortably consume, 4% to 6% a year in North America, 4% to 6% a year in Europe. And so we're comfortable. There are -- we're the only buyer in town right now, and so we're able to get a lot more capabilities, recurring revenue and services for the same disciplined prices that we've always kind of paid for. But we're not going to accelerate. We have a very robust pipeline, but they'll -- we don't view that there are going to be all snap up to the table by someone else before next year. So we're happy to take a measured approach to the next year. We've got some things that we're still -- objectives that we'll clean up this year. But obviously, at $930 million of our $1 billion target, we're almost there. So you would expect the acquisition activity to definitely slow down here in 2022 and then be more measured during 2023. But there -- this is an incredibly fragmented marketplace. There is no shortage of targets to go after. There's less platforms, but there's very few targets. In our growth strategy, either on services or on customers, we can definitely have our pick of choosing what to prioritize as I was kind of going through our methodology earlier on the call.
That's helpful. And then second question I have is around cross-selling. So again, it sounds like the focus is going to be on getting that cross-sell going in the second half of the year and showing the opportunity there. Is there any sort of new strategies when it comes to cross-selling or any additional metrics that you're looking at? Or is it really just keeping a focus on what you're good at?
So we've been incredibly successful at this and realize the mid-market is very, very different from the large enterprise space. We are the only mid-market, call it, VAR IT service provider that provides analytics resources into the mid-market. And when you look at the resources we have from CBI as well, these are not VAR resources. Our services business is incredibly large. And we're most -- you have pure play, managed service providers or pure play kind of skill sets. These are very specialized resources in analytics and cybersecurity that our customers in the mid-market really is differentiating us from other people that are in the mid-market and helping them on this digital transformation journey. So these are not common skill sets whatsoever in the mid-market. Sorry, Scott, the campaign is the key thing to look at. So when you look at that slide on campaigns that I just presented, that is the core to the strategy of how both to existing customers and net new logos that we get the message out.
[Operator Instructions] Our next question comes from [ Alan Richardson ] of Echelon Partners.
Shaun, I would like you to address the Portage spin-off taking public. Could you address when you think you're going to take it public and whether you would pay a share dividend of a part of your holdings at that time?
Great. And again, it's a great question. So Portage has done several acquisitions this year to get it into a spot where it would be ready to go public. Portage, we did a private financing into last fall to pay for these acquisitions and getting it ready. We're preparing that, that option is available to us. And then in September, we'll be making a call on whether we'll go public or whether we would push that out to next year or whether we would do a financing, we're looking at those options now. But the company is of the size and scale where it's ready to do so. It's got some really specialized skill sets around identity verification. The Notarius acquisition was an incredible one that really adds a great piece of recurring revenue to it. As far as what our intentions are of giving -- Converge owns 53% of Portage, and we've always said at the IPO that if we went down that route, that we would provide benefit back to shareholders. Dividend out shares probably would not be the way of going because some of our shareholders wouldn't have the mandate to be able to hold it. As you look at our shareholder base, we've gone kind of from a micro-cap to even mid-cap and large-cap holdings, so that it meant that you'd just be putting pressure on your stock. So what we have been talking about at a Board level was more if they're going to do an IPO that we would be able to do a secondary offering of some of Converge's shares and provide that as a cash dividend back to the Converge shareholder base. But again, these are just discussions that we're having as we're looking at the options. In September, we'll be looking at the markets. Cybersecurity is the one area that's held up, but obviously, the markets are in -- not in a great spot. And so we'll be assessing that in September, and we'll be reaching out to the Portage shareholders around that decision as well.
Shaun, when you speak of M&A activity, does that include or exclude Portage?
So Portage has done its acquisitions to get it to its Phase 2. They have a 3-phase plan, and we haven't presented that here. I'll let the -- Don be able to present that. But definitely, M&A would be part of their Phase 3. But there's no imminent Portage acquisitions planned. Now it's more about integrating Notarius with the other acquisitions, 1CRM and Open and Vivvo into the platform. But there's no -- currently, there's no planned acquisitions to do in the near term. But again, Converge time near term is this quarter.
There are no further questions at this time. Please proceed.
Well, I wanted to thank you all for everyone for your continued support and participating on the Converge second quarter earnings call. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines, and have a great day.