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Good evening. Welcome to the Converge Technology Solutions Corp. Third Quarter 2020 Results Conference Call. [Operator Instructions]Your main host today are Shaun Maine, Chief Executive Officer; and Carl Smith, Chief Financial Officer.Before we begin, I am required to provide the forward-looking statement, respecting forward-looking information, which is made on behalf of Converge and all of its representatives that are on this call. All statements made on this call will contain forward-looking information. The actual results could differ materially from a conclusion, forecast or prediction (sic) [ 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 and drawing a conclusion or making a forecast or projection, as reflected in the forward-looking information, are contained in Converge's filings with the Canadian provincial securities regulators. Converge does not undertake to update any forward-looking statements. Such statements only speak as of the date made.Today's discussion also refers to adjusted EBITDA, which is a non-IFRS measure and has no standardized meaning. Please refer to Converge's filing of Canadian provincial securities regulators for an explanation and reconciliation to IFRS measures.Thank you. Mr. Shaun Maine, you may begin your conference.
Thank you, Joanna. Good evening, everyone, and thank you for taking time to participate on tonight's call, which will discuss Converge's third quarter 2020 financial results.Converge has dramatically changed the strength of its financial position with our recent activities and achievements. After raising $54.6 million in 2 straight common equity financings and moving to a $140 million ABL facility with an interest rate between 2.5% and 3%, the company now has a strong balance sheet, which positions us well for continued growth.In addition, with integration activities, we have removed over $20 million of annualized costs, as reflected in a sequential decrease of $5.4 million in SG&A from Q2 to Q3. With these Q3 results, Converge now has a trailing 12-month adjusted EBITDA of $49 million. And if you adjust that number to reflect the cost savings from integration on an annual basis, our run rate adjusted EBITDA on a trailing 12 months would be well north of $60 million.The sales in cloud services growth, the integrations, the fundraising and debt refinancing plus the recent acquisitions would be impressive during normal times, but to have the year Converge is having while facing the challenges posed by COVID-19 is all the more remarkable. I want to recognize the Converge leadership team, our employees, our suppliers and our customers for being able to adapt and react so successfully to constantly changing circumstances.During the Q1 and Q2 quarterly calls, I highlighted Converge's powerful position to assist its customer base in navigating the pressing demands of digitization, which have accelerated due to the COVID-19 pandemic. This is strongly demonstrated by our impressive Q3 financial results and accolades such as being recognized by CRN as the fastest growing IT service provider in North America.I could not be prouder of our team as we continue to drive success across our accounts, led by our talented employees and their cross-selling strategies, along with the addition of new employees and customers by way of our most recent acquisition. It is therefore my pleasure to provide you with an operational update on the business and to discuss why we witnessed the level of success we have this past quarter.Since our first acquisition in October of 2017, Converge has been executing its strategy of acquiring 4 to 6 companies per year, which has resulted in our North American platform now comprising 13 subsidiaries. It has been no secret that the acquisition team targets major NFL cities across North America in order to establish a commanding presence across densely populated geographies.Since Texas contains 4 of the top -- of the 10 largest U.S. cities, it has long been a target of Converge, and we are thrilled to finally have a footprint there with the Unique Digital acquisition. Adding a Dell Titanium Partner and with its expertise in the VMware, cloud, data protection, networking and virtualization, it is a great addition to the depth of Converge's practice areas in our central region.A key measure of our success is the amount of recurring revenue the company produces, led by our cloud services. In Q3, our gross annualized recurring revenue was $241 million, up 93% from the $125 million in Q3 2019 and up $36 million or 18% from last quarter. This is made up of $61 million in private cloud and managed services annualized recurring revenue, which are typically on 3-year contracts and paid monthly; $49 million of gross public cloud annualized recurring revenue, which are typically on 3-year contracts and paid monthly; and $131 million of gross software subscriptions, which are typically paid annually.On previous calls, I've also stressed how important it is during COVID to be aware of what sectors a company sells into, given the resiliency of some sectors and the major negative impacts to others. For the first 9 months of 2020, 21% of Converge's revenue has come from the financial sector, 19% from the technology sector, 19% from the government and state, local and education or SLED sector; 16% from health care; and 7% from manufacturing. Of the remaining 18%, no one sector represents more than 4% of our revenue.To further show the diversity of Converge's primarily mid-market customer base, during 2020, 135 of our customers purchased at least 1 million of our products and services, and our top 10 customers represent less than 20% of our revenue year-to-date.As impressive as our sales personnel has been, I must take a moment to equally commend our back-office integration team. I am continually amazed at how they've been able to integrate companies remotely, not missing one deadline of the Phase 3 integration schedule, even with the restrictions placed on them by COVID-19. During Q3, the team integrated our 3 largest U.S. companies, meaning we have completed the integration of 10 back offices with the 2 Canadian back offices scheduled to be integrated on December 1.The $20 million of cost removed from the business in 2020 means a cost savings of $5 million every quarter going into 2021, while streamlining our operations on common systems to better support the business.Also, I'm extremely proud that Converge, a small-cap company headquartered in Canada, was awarded the top spot on the CRN 2020 Fast Growth 150 List, which recognizes the fastest growing technology integrators, solution providers and IT consultants across North America.To be highlighted as the front-runner amongst this elite group of companies, which have demonstrated substantial growth and performance over 2018 and 2019, generating a combined total revenue in excess of $37.8 billion, is an extremely impressive accomplishment for our entire team and shows how much we've achieved in the past 3 years.As the company has continued to advance throughout 2020 despite the overarching challenges and market conditions, similarly, CTS witnessed impressive traction over Q3 with the investment community, raising $55 million in common equity over 2 raises consisting of $20.1 million at $1.62 and $34.5 million at $2.05. Both financing added additional key institutional shareholders to our existing shareholder base and increased liquidity and trading.On that note, I would like to pass the call to our Chief Financial Officer, Carl Smith, to discuss our financials from the quarter.
Thanks, Shaun. Third quarter revenue increased 31% to $189.9 million compared to $144.5 million last year. By industry, the breakdown for the quarter was approximately 25% health care, 19% banking and financial services companies, 17% technology companies and 15% government.For the 9 months ended September 30, revenue increased 39% to $659 million from $473 million last year. Our gross profit for Q3 increased 50% to $52.4 million from $34.9 million last year. Gross profit margin increased to 27.6% compared to 24.1% last year. And for the 9 months ended September 30, gross profit increased to $162 million from $108 million last year.SG&A for the 3 and 9 months ended September 30 was $38.9 million and $128.5 million, respectively, increasing from $29.8 million and $91.1 million for the same period last year. Sequentially, SG&A decreased by over $5 million, reflecting the financial savings of the back-office integrations and the removal of duplicated front-office functions and positions.Adjusted EBITDA for the 3 months ended September 30 increased over 150% to $14.6 million compared to 5.8% last year. Year-to-date, adjusted EBITDA has increased by over 88% to $37.1 million compared to $19.8 million last year.We have stated in the past that we are not a large purchaser of capital assets, and the interest expense is the primary use of cash after adjusted EBITDA. As Shaun discussed, on November 6, we replaced our current ABL with a much lower cost ABL with an interest rate of between 2.5% and 3%. In addition, we paid out the $4 million debenture that had an interest rate of 12% on October 30, and the $5.25 million convertible debenture at 8% was converted at $1 per common share on October 30. As a result of these changes, our interest cost will decrease by over $8 million on an annualized basis.At the end of the quarter, our cash balance was $59.1 million compared to $20.6 million at December 31, and our borrowings were $106.6 million compared to $156.7 million at December 31.On that note, let me pass it back to Shaun.
Thank you, Carl. Looking forward to Q4 and 2021, the company has an impressive backlog of acquisitions that it's looking to complete. In addition to our traditional strategy of buying resellers and turning them into cloud service providers, Converge will look to do tuck-in acquisitions to acquire smaller companies with specialist skills to support our software, analytics and hybrid IT practice areas in various regions.During our AGM in October, I outlined our strategy of using our specializations around IBM to host and provide managed services around the legacy IBM platform applications that are being moved into cloud-based environments. In October, we closed a 5-year $1.3 million managed services contract with a large retailer headquartered in the U.S. Northeast and are actively working on 8 other opportunities of a similar size in partnership with the application provider and the public cloud provider. There are 1,600 customers in North America who potentially could use this solution. And in December, we are presenting the solution to the cloud providers' 2,000 sales executives. We believe this solution could have a material positive impact on our managed services revenue in 2021.Also, in October, we introduced 12 new managed service offerings around managed infrastructure, managed security services and managed end user services, as I outlined at the AGM. These solutions provide for managed services upsell beyond the base offering that we are providing around application managed services. And we are already working on 15 of these opportunities.I really want to thank our 11 BDMs and 13 solution architects for their hard work in developing and supporting these managed service offerings. These solutions are a culmination of our strategy to buy resellers and turn them into cloud service providers. With the platform Converge has and the managed service offerings we are now bringing to market, Converge looks to become a major player in this market, starting in North America and then extending to Europe next year.Operator, I would like to now open the floor to questions.
[Operator Instructions] The first question comes from Kevin Krishnaratne from Eight Capital.
Congrats on good results and also congrats on the accomplishments you made in the quarter. I have a few questions. First, maybe it's a small type of clarification for Carl. Carl, when you look in the financial statements in the back on the revenue breakdown between product and service, when you look at the breakdown from Q2 to Q3, can you just remind us the difference between product and service? The product, I understand, it went down from 175 to 143. I think there's seasonality, but there was a slight decline in the services. Can you just comment on what's embedded in the services line?
Yes. So a few things that are embedded in the services, professional services, which -- and staffing, which could have some seasonality when things are a little bit slower. Our managed services, so our recurring services are in there. And the net margin on maintenance and support that we resell that we don't provide.
Okay. And so the...
Yes, the managed services continue to grow sequentially. Some of the professional services and staffing services were a little bit down. And some of the net maintenance and support, the net amount was a little bit down. But overall, our focus being the managed services, that's continued to grow at a nice pace sequentially.
Okay, great. I figured it was something like that. Because when you look at what you reported in terms of the ARR, the gross ARR, 241, it was 200 in Q2. Thanks for the breakdown there. If I look at the different buckets, the cloud and managed services, the public and software, it looks like the public cloud was relatively flat Q-over-Q. The managed services grew about 15%, but the software was up quite strong. You did $131 million this quarter. I think it was $100 million.So I'm wondering if you can unpack that a little bit better or more for us. What was in there? Are you seeing new customers? Are there new activations that are happening in there? And can you remind us what the gross margin looks like on that type of revenue, because you had a really, really good gross margin performance in the quarter?
Yes. So as I said at the AGM, we just -- I used to say that our managed services were between 30% and 40%. They've now gone over 40%, with our goal by the end of next year getting them to 50% and eventually getting them between 55% and 60%. So it's those private cloud managed services that were hosting applications and providing services around things, that's really our whole future and where we say our goal is to grow our gross profit to 30% and our EBITDA to 9%, it's really going to be driven around that. Our public cloud is useful, but it's -- the margins are kind of in the 10% range. We recognize those on a net basis. So that's just pass-through.Where you make money in public cloud is around the services, our analytics practice, our cyber security practice, our DevOps practice. And then the software piece, we've had a really strong software part. And as you remember, we've really kind of gone software-first. When you enter a company at the software level, especially with, say, Red Hat and VMware, then you're engaging not at the infrastructure level. And therefore, when customers go to make decisions on infrastructure, you can be an advocate in the room. If you're just -- a lot of the companies we buy, they are just infrastructure providers. And so they're never part of those conversations. So the software-first part of our sales is extremely important.And I will say we are a very large reseller of IBM software. With the move that IBM has now made to split the services unit away from the rest of the unit, there's a lot more focus on the channel. We are the second largest IBM partner in North America and really specializing around software. 5 of the companies that we acquired were on the IBM software council. So we've got some real strength there around software, which really leads into this whole hybrid IT focus. Does that answer your question?
Yes, it's helpful. When you're doing a Red Hat assessment or a deployment, is that then -- that is -- that's in software?
That is in software, yes.
Okay. Great. Okay. Awesome. Maybe one, sticking with the managed services. I was excited to hear the strategy that you announced at the AGM. And so you mentioned here one win in Q3 with a retailer at $1.3 million. You've got 8 that are sort of in that same range. So call it, somewhere between $10 million to $12 million annual managed service opportunity. Can you -- how does that -- is that on a gross basis? How does that type of revenue compare to the -- you mentioned $61 million in annualized right now in that number. Is that apples-to-apples there?
Absolutely. That is apples-to-apples. And realize there -- this is just something we've just launched. There are 1,600 of these opportunities in North America. We're doing this in partnership with the software provider and also the public cloud provider. And we're pitching the 2,000 sales exec from the public cloud provider and letting -- there's only 2 people that can do this solution in North America outside of IBM, ourselves and a company called Sirius. And we want to bake off to provide these services. So we have -- it's not like you're looking for 1% of that market. You're looking to dominate that marketplace.And the opportunity we have right now, because so many people had applications put on the old legacy platform, the AS/400s in the '90s and 2000s, which is now called iSeries, there's just not those skills around. The public cloud providers just don't have those skills around iSeries. We have, because we've always provided disaster recovery services on iSeries. So there's just a tremendous opportunity for Converge to be meaningful. As people are looking to move these iSeries-based applications into cloud-based environments that we can use that niche specialization to become part of the conversation, generate real revenue. But as you saw in my AGM presentation, we can take that $25,000 a month up to $500,000 a month if we get the upselling of services right, upselling managed service desks, i.e., callers -- we can triage the problem, is it us, is it the public cloud provider, is it the software, then managed network, managed security and managed end user.And this is the playbook that CANCOM -- I keep talking about following CANCOM as a model that they executed perfectly to get to that 30% gross profit and 9% EBITDA. And so start with the application and really use -- now we have a channel. Like we're a channel for other people. But now the salespeople from the public cloud provider, the salespeople from the software provider, now they're our channel. And this will be meaningful next year. We haven't set exact targets, again, but if you see, we've just got 1 -- there's 8 more. I would expect this to get into the tens of customers, if not hundreds. And so this is a company-defining opportunity.
And yes, so that -- if I look at that win, it was a $1.3 million annual amount, right with this one company?
Sorry, sorry, no, that's a 5-year deal. Over 5 years.
It's a 5-year deal, okay.
Just for hosting -- just for managing the application. There's a whole bunch of other managed services that we'll look to upsell into that customer.
Yes. Okay. Understood. Okay. That makes more sense. Okay. Great. And so yes, it sounds like a really big opportunity. Can you talk about how long you've been working with this particular retailer to -- from sort of initial discussion to booking revenue? And how do you -- how easy is it to sort of -- what's the sales cycle like essentially? And how quickly -- I mean, the opportunities are there. How do we think about how quickly you can scale? Or what type of resources might you need for that?
Q3 opportunity that became Q4 revenue, and there will be other Q4 revenue now. This is a time to market. People are looking to do this now. And that's the reason we're getting involved is because we have the skill sets now to migrate these applications. There's a real push to move these applications on to cloud-based environments, especially because of the security flaws around some things, that people are really kind of accelerating this digital journey as there's -- I guess people can talk about vaccines, but there's are going to be changes in the way people work. And the way that you access these applications will never go back to the way we used to do.And there's such a real move to move these legacy applications that were last on people's road map of how I move to the cloud that are now becoming more prevalent or more here. And we are part of a meaningful part of that conversation. So an ERP system is a core-core system that people need to move, and it has all the data that all the other applications use as well. So I'd say I couldn't be -- this is a start with the application, then move to the cloud services and then upsell your other managed services. It's a tremendous opportunity. Because of our expertise in IBM, we are part of that conversation.
Yes, definitely looking forward to the progress there, Shaun. Maybe just one last one, it's just a clarification again for Carl. I know -- again, going back to that ARR number and the 3 components in there, that's all on a gross basis. I know that the public cloud, you might -- just -- you looked at on a net basis. So I'm just wondering if there's an easy way for us to think. So if you did the $189 million in Q3, how do we think about the revenue related to cloud public and software within that $190 million, just sort of -- just because there's different ways of things being recognized in the revenue number?
Yes. So we haven't really broken that specifically on the maintenance and support and the -- so the public cloud that's netted. But if you take a look at the amounts that we disclosed on the managed services and private cloud, that's not netted. That's all growth revenue. Yes, and that's our high-margin business. And that's our focus. So this quarter, our maintenance and support renewal revenue was higher than what it was last quarter, but the margin was a little bit down.As Shaun mentioned, for us, the key component is to get in there on the software side, because that's where we can influence a lot of decisions. And the recurring revenue on the maintenance and support is really good business. It's something that we do, but it's not necessarily a high-margin business. For us, the high-margin recurring business is the managed services and private cloud.
The next question comes from Steven Li at Raymond James.
First question is on your gross margin, 27.5%. This is a bit higher than previous quarters. Is this a new range going forward? Or were there some higher-margin sales in the quarter?
Yes. So I think you can probably look at our year-to-date number. I mean there's definitely a trend. When we started off we were like in the teens and then we got to the 22s and then went to 24s. Now year-to-date, we're over 25%. So I think you're going to continue to see that growth in that direction towards 30%. That will be a little higher than if you look to our full year financials. But we'll continue to move up as more and more of our revenue comes from higher-margin managed services, software and some of the cloud-based services. So that will continue to be a trend. That's probably a little higher than you will see on an annual basis, but that's the trend we're moving towards.
Okay. So there's -- I mean it's really just as the mix improves, Shaun?
Yes, exactly. It improves, then you'll continue to see that. If you have a really high -- we don't focus on hardware, but if you have a very strong hardware quarter, that might drop down, because the mix is there. But there, you're seeing a heavy mix of services, which really brings up the gross profit percentage.
Okay. That's perfect. And Shaun, on the iSeries win, the contract you mentioned, these are your first one. I'm trying to gauge out of that 61 private cloud, how much is iSeries already? Or this is really early?
So this is really -- this is the first one of that. It's around a very -- an ERP application that is specific to this. So that is -- we've always had iSeries hosted. We also -- in that recurring revenue number, we include some of our VMware offerings, our managed service offerings like VMC on AWS. So some of the VMware ones are in there as well. But this specific opportunity where you're partnering with an application provider to provide cloud-based services with a public cloud provider as well, this is a unique opportunity that there's really 2 providers that can do this and we want to bake off against the other provider. So this is an opportunity.And of course, we can do -- with that application then go to other applications to do the same thing. But to have rubber hit road -- because this is exactly the strategy that you want to focus on. It's very opportunistic that we ran across this. And then we have now a channel. The really neat part for our managed service is, in the past, how would someone know about your managed service? Well, they wouldn't bring it up, because they wouldn't be aware of it. The fact that the software company and the public cloud provider are now going to be bringing us opportunities as a channel for us in addition to our 200-plus sellers, that is pretty amazing situation for us to be in and shows kind of the progress we've made as a company.
Got it. Makes sense. And can you, Shaun, also talk about Unique Digital? How is the integration going? Any early successes you can talk about? And also maybe on the cost side, are there efficiencies to be gained similar to what you did with the 6 acquisitions last year? Or is this one a bit different, given it's a new region?
So we do not touch anyone in Q4. We focus on cross-sell. So unlike -- some people have come to me and said, well, of course, revenue must decline after you buy a company. And I completely disagree with them. Unique Digital, out of the gate, they are a great Dell and VMware partner. But they have no Dell -- sorry, no VMware managed services. So right off the bat, they can sell VMware's managed services that they didn't have access to in the past. They can sell Cisco, they can sell Red Hat to customers that are buying these today. And it's not having them buy them -- having them sell them, they can bring in our practice areas.So Cisco networking is part of every cloud solution. So right in Q4, they are bringing in new opportunities. They will cross-sell Cisco opportunities into their existing customer base, VMware opportunities into their existing customer base in Q4. And so that's the wonderful part about the setup that we've got with these [ processes ]. When you buy a company, you can immediately do the cross-sell. Yes, in the first year, there will be synergies. But Q4, you want to really promote those opportunities to cross-sell, and then we'll get the synergies. Q1 and kind of July, August are the 2 times in the year where you look to do integrations.
Okay. Great. And then a quick one for Carl. The interest savings, you said $8 million. So should I think for next year, like, $8 million to $9 million per year in terms of interest costs?
Yes. You should take my sort of run rate that I was paying in Q3 for the quarter just announced and decrease it between $8 million and $9 million.
The next question comes from Rob Goff at Echelon.
Perhaps if we could dive a little bit deeper into the iSeries. Could you profile those 1,600 companies? Like what percent do you see transitioning? Is this a 3-year transition? And you talked about the parameters of $25,000 and $500,000. Is it 5% you would have the scale to go to that $500,000, just to give us a better sense for the total addressable market or the TAM here?
So it's hard for us to really judge that, because we're just getting going on this. So I know the total addressable market is 1,600. I know that we've done our first one, and we've got a good pipeline. Right now, we're going through our budget cycles for next year. And do we budget 100 or 500 of these opportunities? And the -- usually, when you provide managed services, you first need to prove yourself and then you upsell more managed services. Because these relationships -- these customers do not want to have tons of these kind of relationships. If you provide a quality service to them, they will -- the easiest customer to get in a managed service is an existing customer that you upsell new things to.So this is a major focus for us, a major investment area for us. Again, the profile -- the margin profile, this is everything that we want to become, and we've got this wonderful opportunity. So again, we're only pitching the 2,000 salespeople from a public cloud service provider in December. So to hit exact targets will be difficult. And it will take a while to, first, you'll implement and you'll probably have service desk, where you're taking inbound calls to triage issues will be the first managed service of managed network. Managed security and managed end users are follow-on services. And it will take probably years to get to the whole offering for each of these customers, but each one then becomes -- every time you land one, it becomes a potential customer of the other managed service offerings that you'll be producing.So say, I think quarter-on-quarter -- this is new. So we're announcing -- we announced at the AGM. I'm now telling you, hey, here's our first ones. I think on our April call, we do our Q4 call then, that I'll have a lot more data to provide you on how did the -- both a software provider and the public cloud provider act as a channel, how many opportunities have they brought to the table, and therefore, what's realistic. It's a little early for me to be able to hit marks. But say, I know the total addressable market, how much of that will we get? Well, there's very few people with the skill sets. And so we would look to become a major player in this marketplace.
And would it be fair to suggest that COVID-19 might have had a moderating impact on hardware sales, but it's stimulating service sales, where the margins are?
Absolutely. COVID has had everyone taking a new look at how they do business and looking at where the risks are. As I mentioned, there was a 14,000% increase in cyber security attacks. And that was because everyone went to this new model of working from home, which we had to bypass the usual security mechanisms. And so there are also a lot of the large companies that said, even with the vaccine, we're never going to go back to the way we did things. So it really had this focus and, therefore, accelerated people's planning on migrating applications and the risk of not doing so.And these are different customers than our traditional mid-market customers. These are some large enterprise customers, global -- Fortune 500, Global 2000 customers, which are different from our normal mid-market customer base. But they have these real requirements. But these are very meaty conversations. And like you say, when you look at -- as Carl has been pointing out, really focusing on that $61 million of managed services revenue, could you double that? That's the kind of -- again, we've already been doubling it without having these services. So again, as we go through at our AGM, we'll try to -- in, hopefully, in May this year, not in October, we'll try to guide you a lot more as to kind of the targets we're looking for. But again, there is tremendous demand for these services. There's very few providers. In fact, 2 that can provide it outside of IBM, and therefore, we're really well positioned to take advantage of that.
And one more, if I may. And for Carl, would it be fair to say that the year-over-year efficiency gains to be realized in '21 would be approximately $10 million? Or are you perhaps realizing on them earlier within 2020 such that the year-over-year savings would be modestly below that?
No, you probably say it'd be $10 million. I mean we'll have a -- we'll even have a small amount of future gains that are locked. I would say there wasn't that much of an impact. There wasn't really any impact in Q1, not much of an impact in Q2. The full big impact was demonstrated in Q3, and that's probably a good place to start. And then there might be a little bit of growth in some areas, there might be a little bit of savings, but this is -- this sort of reflects it. So if you look into next year, that would be another $10 million, because we had Q1 and Q2.
The next question comes from Daniel Rosenberg at Paradigm Capital.
This is Sep speaking on behalf of Daniel. Congrats on the growing margins. Just 2 small questions. The first, how should we look at your debt position? And how do you see it moving forward, given the cash position going up?
Sure. I mean our debt position right now, I think we have quite a strong balance sheet. You take a look at where we were at the end of the quarter. We paid off over $10 million since then with the debenture and the convertible debenture. More importantly, we've actually refinanced the ABL to a much, much lower rate. So when I look at our debt position now, we've raised $50 million of cash in equity. We've used that to reduce some high-cost debt, a little over $10 million of reduction there. We've reduced the cost of our borrowings significantly by the interest rate. And we're generating increasing amounts of cash from operations that we can again use to pay down debt for growing the company. So I look at our balance sheet now, and I think it's quite strong. And I think our debt levels are reasonable, and our cost of carrying that debt is much, much lower than what it was.
Okay. And do I gather that you'd be looking at paying down debt in the coming year? Or is that a comfortable positioning based on your cash flows that you're now looking at?
I think we're very comfortable with the cash flows, and sort of the debt level is what it is. If we were to not grow, meaning not acquire companies, then we would just probably be paying down more and more debt. As we do grow, as you know, we do use debt to acquire companies, and we use a combination of cash flow and debt. So our debt may increase, but at the same time, it would increase as a result of growth, and that would increase our cash flow further.
Yes, that makes sense. And speaking of growth through acquisition, we've been looking to -- some of your commentary around acquisitions in Europe and that possibility moving into next year. I'd love to know your insight as to are you looking at companies that are similar size and similar profile as the ones in North America, where you look in Europe and places like U.K. or...
Yes. So the -- we'll start off in Germany and the U.K., and we'll look for companies between 50 million and 200 million of annual sales in pounds and euro in those marketplaces. Europe is a little different. So our strategy in North America, it's much easier to integrate, whereas they have kind of different rules and you have to have a bit of a per country strategy. You can put your admin people in Ireland and kind of have tech resources out of Eastern Europe. But to the mid-market customer base, the 3 markets that you can go for are Germany, the U.K. and France. And France has got some kind of very tricky labor laws. So the smart way of starting it is always the U.K. and Germany. And so that's what we'll look to start there and really differentiate.This iSeries offering, we've been asked to buy our software partner to open up the same service in Europe. So when you're leading with a differentiated service, it becomes much easier to really penetrate a marketplace. And as we said, we'll be waiting till after Brexit, its impact has been decided one way or the other at the end of December. So really kind of Q2 and moving forward, we'll be looking to -- look for multiple targets in both the U.K. and Germany.
The next question comes from Furaz Ahmad from Laurentian Bank.
Most of my questions have been answered. If I just have a quick 2. Just looking at gross margin percentage, I know it increased quite a bit. It's quite impressive. But in your MD&A commentary, you do mention that there were some higher vendor rebates in there. So I was just curious, if you had to break it down, how much of the increase could you allocate to the vendor rebates versus the selling of the higher-margin business?
Carl?
Well, we don't actually break down the amount of rebates specifically. We just made comments, and there's sort of what drives our gross margin as a percentage are recurring. Our managed services, private cloud services is what probably the biggest expansion of our gross margin has been and will be going forward. In addition to rebates that we get as we get -- depending on what we sell, what certifications we have and what certifications -- we've achieved a new one, we may get higher rebates. So I wouldn't specifically -- we don't specifically break down the amount of rebates that we get. We don't specifically break down the margin yet on our managed services other than Shaun has provided you some color on that. And that may be something that we'll look to do going forward.
Yes. And so I think part of the guidance I've given is last year, we did have $10 million of volume rebates on our $687 million of sales or around 1.5%. That's a guide. But you will have -- depending on, as Carl says, different mixes. But if you used 1.5% of revenue as kind of a guide for rebates, in general, that's a good thing to go by. Some different products and software would have higher rebates associated with them, et cetera. But over the year, that 1.5% is probably a good number to use.
Okay. Got it. That's helpful. Yes. Okay. Okay. Great. And then I was also curious just on -- if you could maybe provide some commentary on what organic growth might have been for the quarter without accounting for acquisitions? Is it kind of in net 10%?
Year-on-year, usually the way you do it -- and I think annualized, you'll do that. There was some kind of differences there that, again, we're seeing some real strength coming back in demand in Q4. But July, August is always a difficult time as far as being slow. If you go back and look at last year and the year before, Q4 was, by far, our strongest quarter than is Q1, Q2 and then Q3. And from an earnings perspective, Q3 was very good. But from a revenue side, it tends to be lower, especially because of July and August.So I think you're probably -- on a yearly basis, I think we've kind of guided that gross profit grows annually in the kind of 17% gross profit, which kind of equates to 10% of revenue growth, because usually, we're growing on higher-margin software and services. So I think more -- with the way we view that as more on an annual basis than doing it on just a quarterly basis.
Okay. And it's on track to meet that on an annual basis?
Yes. So yes, we've been tracking right, yes.
The next question comes from Anja Soderstrom from Sidoti.
Congratulations to excellent execution and cleaning up the balance sheet. A lot of good questions asked already. But I'm just curious about this opportunity you talked about the retail customer and the 1.3 million over 5 years for managing the applications, but there are also opportunities to upsell. Sort of what is the -- can you quantify that opportunity? How much that contract could be worth? And I understand there's a lot more opportunity to win new contracts there for you.
Yes. So we're basically making $25,000 a month for the base fleet managing the application. The opportunity is to get that up to $500,000 a month. So that's the CANCOM playbook, right, by first adding managed service desk, managed network, managed security and managed end user. So that's our opportunity. And that will happen over time. That won't happen -- you're not going to start there. But over a couple of year period, you would -- that's the kind of the walk that you do. You start by selling next is you sell managed application, then you sell managed service desk, then managed network, managed security, managed end user. And that you can get up to $500,000 a month on that customer.
Okay. That was helpful. And then also, in terms of acquisitions, you get a good entry into the Texas now. Are you looking to expand more there? Or what are you looking in terms of acquisitions? Is it more geographic reach or further capabilities? So you were talking about smaller tuck-in acquisitions as well.
Yes. So we -- as you know, we took a pause on acquisitions. We've got a really busy pipeline that we're going to try to work through, including when we buy these acquisitions, we buy them as resellers. They don't have a lot of the practice area capabilities. So we introduce them to our practice areas. But we're trying to put more of those resources into the geographical regions, the East, the Center, the Western Canada. We've had really strong practice areas in the Northeast. And so we'll be looking to bring more analytics, more software, more hybrid IT skills through the other regions in addition to acquiring other resellers. In the NFL cities, when you look at the map, if you look at where the NFL cities are, if I don't have an office there, then that's the target.So we're looking for the tuck-in acquisitions to complement our existing areas where we might have the resources, and during COVID-19, it's worked very effectively to be remote. But at some point, this is going to open up and people are going to want to see people in person again and rather than flying your people everywhere, you want to build up a lot of those skill sets into the local regions. So tuck-in acquisitions in regions where we don't have those skill sets and then more of the resellers in the NFL cities where we don't have a presence.
There are no further questions. I will now turn the call back over to Shaun Maine for closing comments.
Great. Thank you. Thank you all for taking the time to join us today to hear why we continue to remain on track for our strongest year yet. I look forward to updating our shareholders again when we announce our next quarterly and annual earnings. Thank you all for joining.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.