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spk04: Good morning, my name is Joelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Soft Choice Q4 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the two. Thank you. I would now like to turn the conference over to Mr. Tim Foran, Investor Relations. Please go ahead. Thank you, Joelle.
spk09: Good morning, everyone. Welcome to SoftChoice's Q4 full-year 2023 conference call for the period ended December 31st, 2023. A reminder for that, for the purpose of the recording, today is Tuesday, March 5th, 2024. I'm joined today by Andrew Caprera, SoftChoice's CEO, and Jonathan Reuter, CFO. The company will make forward-looking statements on our call today that are based on assumptions and therefore subject to risks and uncertainties that could cause the actual results to differ materially from those projected. The company undertakes no obligation to update these statements, except as required by law. You can read about these risks and uncertainties in our earnings press release today, as well as in our filings with Canadian securities and regulatory authorities. Also, our commentary today will include adjusted financial measures, which are non-IFRS measures. These should be considered as a supplement to and not a substitute for IFRS financial measures. Reconciliations between the two and relevant disclaimers can be found in the company's MD&A, which is available on our investor's website. Unless otherwise noted, percentage growth rates that we refer to today are for the identified period ending December 31st, 2023, compared with the same period ending December 31st, 2022. Also, please note that because the company reports in U.S. dollars, all amounts discussed today are in U.S. dollars unless otherwise indicated. One note for housekeeping, we do have a hard stop on this call today at 925, so we'll have the end Q&A at that time. With that, I'll now turn the call over to Andrew.
spk08: Thanks, Tim. Welcome, everybody. I'm excited to be speaking with you about our 2023 performance before I go into a little more detail on the execution of our strategy and the catalyst for our future growth. At SoftChoice, our purpose is to unleash the potential in people and technology. We unleash that potential in our customers by being relevant to them through the solutions we deliver and our relentless commitment to their success. That creates value for their organizations and their IT teams, which drives growth for them, our partners, our people and our organization. And none of this is possible without the dedication of our team members. So I want to thank everyone at Softchoice for their contributions to the success of our customers and our organization. On slide four, you'll see that in 2023, we delivered record top line gross profit and bottom line profitability. And our asset light model resulted in extremely high conversion of profits to cash flow and exceptional returns for our shareholders. This record performance, coupled with a long track record of consistent execution, validates the strength of our organic growth strategy. We're proud of our accomplishments last year, as we estimate our organic growth rate outpaced major competitors in our markets. Our highly recurring business allowed us to achieve almost 5% gross profit growth in constant currency, while weathering a significant decline in hardware spend industry-wide. During the year, we benefited from previous investments in a larger frontline sales force, which helped drive customer growth of 5% compared with the end of 2022, a growth rate similar to pre-pandemic levels. It's important to highlight that we continued making growth investments last year while significantly growing our adjusted EBITDA margin to 28%. The 190 basis point margin expansion was driven by our continuous focus on creating a more efficient and effective process or effective processes, coupled with the operating leverage recreated in our model, as well as benefiting from a natural currency hedge. Our bottom line net income doubled in 2023. Combined with effective working capital management, this converted into $100 million in operating cash flow, which we used to reduce our leverage by almost a full turn to only 0.4 times and also return $30 million in capital to our shareholders through share buybacks and our quarterly dividends. And looking forward, we're well positioned for future growth. We'll continue to invest in expanding our sales capacity and in the technical capabilities in our strategic focus areas of cloud, digital workplace, and software asset management with our solutions underpinned by cybersecurity. These solutions remain mission critical areas for our customers. And we'll execute our go-to-market motions that have been proven to deepen relationships and expand our business with these customers over time. We have tremendous flexibility to continue our balanced allocation of capital to internal investments that will drive sustainable, profitable growth, while also returning significant capital to shareholders. Our focus remains on doing this organically, as we've generated high returns on invested capital that we believe are best in class. Reflecting confidence in our long-term growth strategy and our ability to generate significant free cash flow, Our board has approved our third annual two cent dividend increase to 13 cents Canadian beginning the first quarter of 2024. Our dividend is now 86% higher than when we first launched it following our IPO in 2021. In addition, and consistent with our capital allocation framework that returns excess capital to shareholders, our board has also approved a special dividend of $4 Canadian per share, which John will provide detail on later in the call. We've also approved the renewal of our share buyback program. Turning to slide five, we again recorded growth in both the US and Canada in 2023 and saw accelerating growth in our core software and cloud solutions and in services, both of which outpaced the average growth of those solution areas versus the prior five years. Together, the two solution areas comprise 78% of our gross profit in the year, compared with 73% last year and 69% in 2017. Software and cloud gross profit increased 13% in constant currency. This is driven by new customer growth and an increased demand from existing customers to make their IT environments more efficient, secure, and primed to drive their business forward. Notably, we continue to see overall growth in our Azure AWS and Google Cloud public cloud revenues, which outpace the average growth of the hyperscalers, suggesting we're continuing to take market share. Our success reflects the co-investments we've made with Microsoft, Amazon, and Google over the past five years to significantly increase our advanced capabilities across all three public clouds. We're creating important outcomes for customers like Atlas Geographic data, We designed a more modern cloud-first architecture and migrated 95% of their workloads from aging and physical infrastructure into Google Cloud, creating a secure, compliant, and powerful platform that's improved the performance and reliability in their data analytics, which is integral to their success. We also delivered strong performance in our workplace solutions, including those built around driving adoption of Microsoft's cloud solution provider program known as CSP, which provides more flexibility and cost saving to organizations compared with enterprise agreements. The potential value of these programs was recently realized by a leading innovator in telemedicine, which is improving access to medical care by connecting specialists to people in remote or underserved areas. This was an account we won in Q1 of last year based on our ability to modernize their collaboration and productivity strategy on Microsoft 365, which was essential for them delivering a high-quality patient experience. And delivering this solution via CSP allowed our customer to dynamically right-size licensing to the constant changes in their user counts and have the support of soft choice as they manage that complexity. All of that, combined with our depth of services, made SoftChoice the obvious services partner to implement this business critical solution. And now the next phase of our engagement with them extends to the public cloud, where we'll standardize their infrastructure services on Microsoft Azure. As it relates to hardware, we did see a slight improvement in the fourth quarter. However, in line with wider industry expectations, we don't expect a material rebound in devices in the first half of the year. And as I noted on our last call, with the strength of our core solutions and some expected easing of hardware declines, we're aiming to return to an overall growth rate closer to the average of recent years. Now, as we look forward, one of our core focus areas of investment is in generative AI. As you know, Softchoice is one of Microsoft's top partners globally, delivering billions of dollars annually in Microsoft-related sales. Since the launch of Copilot for Microsoft 365 in November, we've seen extraordinary customer interest to identify use cases and prepare their IT environments for AI applications. Our Salesforce has been able to convert this AI interest into new business as organizations see our ability to help them realize value in these groundbreaking technologies. We've taken an early leadership position in the customer adoption of Copilot, having transacted the first set of orders via CSP. And we're a leading partner in co-pilot workshop engagement submissions to Microsoft in North America, which is an important leading indicator for co-pilot consumption. It's important to note as well that we rank as one of the leading Microsoft software asset management service providers and Azure cloud partners in North America. We manage eight and a half million seats of Microsoft 365, and we have a brand for optimizing outcomes on the platform. We also deliver thousands of Microsoft assessments annually. The scale provides us with a tremendous opportunity to also become a leader in driving the adoption of Copilot in the North American mid-market. We're collaborating with Microsoft to further enhance our capabilities and capacity to develop, sell, and deliver Microsoft's cloud digital workplace, AI, and security solutions. This collaboration, which is targeted towards co-pilot for M365, Azure adoption for OpenAI implementations, as well as Microsoft security, builds on our long-standing partnership. It's with that co-pilot opportunity, along with the opportunity in Cloud AI, that we launched our AI Solutions team, which will deliver next-generation AI offerings for organizations across the US and Canada. As we help customers identify AI use cases for Copilot, that process becomes a conduit to uncover additional customer needs for broader cloud and workplace AI solutions. It puts us at the center of their AI strategy. Along with that scale and influence, we already have a full suite of consulting, engineering, data and application integration, end-user adoption, and change management services needed for Copilot. As you can see on slide six, the differentiator for us is we've brought these capabilities together into a soft choice methodology for guiding customers through all five stages of a successful co-pilot adoption journey. From planning to assessing, adoption, implementation, and then sustaining an AI solution. We have targeted services to assist the customer in each stage. For example, we recently worked with a large steel producer to identify how Copilot can help increase productivity and improve their margins. Given their business model, they identified workplace technology as the primary area to improve productivity by automating repetitive tasks, specifically in their supply chain, procurement, and HR organizations. However, traditional solutions to do this would have required a level of time and cost that weren't justified. But we demonstrated Copilot's relevant capabilities, followed by the services to assess the environment for technical readiness, integration of Copilot into their existing applications, as well as plans to secure and govern their data so they could transform their processes in a fraction of the time. We then provided the end user enablement services to ensure the adoption from their users. We had two critical advantages in this project. First, we had existing knowledge and influence over their M365 usage. And second, our methodology solved every need that the customer knew would exist in their journey to AI success. Turning to slide seven. While the workplace component of our AI strategy is very much built around Microsoft 365, our cloud AI services are built on our depth of capabilities across all three of the top hyperscalers. Our foundational expertise in application and data modernization, cybersecurity, and our ability to help customers decide the right platform based on their use case and IT environment. One relevance and differentiation in cloud AI is the same as it is with cloud more broadly, which is that we bring the combined expertise and experience in Azure, Google Cloud, and AWS to create significant value with our customers. And as with workplace AI, our well-established consulting practice is key to linking business goals to cloud AI solutions. And we've got the ability to help our customers evaluate and select the right large language models for certain use cases. For example, to build AI into existing applications or to build AI-powered applications from the ground up. We recently worked with a customer that's a digital marketing software company, and they use public data for predictive analytics. Their aim was to utilize a large language model, or LLM, to capture all the public-facing information on a target's website and then automatically build personalized marketing campaigns. But they weren't sure which LLM would work best for their needs. So we helped them do a comparison test of the concept on Azure OpenAI and Vertex AI LLM operating on Google Cloud to compare both models. Because small differences can make huge financial impacts on their business. So the customer has asked us to expand the project into another LLM that we will set up and test, ensuring that the customer builds their application on the most effective generative AI model for their use case. We were their only partner that had both the ability to test multiple language models across multiple cloud platforms, which plays to our unique strength in multi-cloud experience, and the ability to combine a consultative approach with agile engineering capabilities in application and data services to get the test running quickly. With that, I will turn it over to Jonathan to talk more about our 2023 results.
spk11: Thanks, Andrew. I'll start on slide eight. with a look at our top-line metric, gross profit. As Andrew noted, on a full-year basis, gross profit increased about 5% in the current. The primary takeaway being that growth is driven by a 30% increase in software and cloud and a 5% increase in services, which were both higher than the average CAGR in 2017 and 2022, partially offsetting the strong performance of the decline in hardware. In Q4, we were pleased to see a 6% year-over-year increase in sales, driven by an 11% increase in software and cloud, 6% increase in services. Hardware declined 11%, which is the lowest decline for the past five quarters. In Q4, gross profit grew by 1%. The disconnect between gross sales and gross profit growth is that the prior year's period services gross profit benefited from a non-reoccurring $0.7 trillion reduction in cost of sales. recorded in the prior year, including a variable compensation for reversal. Turning to slide nine, we continue to see strong growth in our core software and cloud solutions across each of the SMB commercial and enterprise sales channels. In Q4, enterprise reported the fastest growth in software and cloud. However, overall gross profit in enterprise declined due to greater exposure to hardware than the other channels.
spk13: On a full year basis,
spk11: On a full year basis, we also saw growth in software and cloud across all sales channels. Growth in SMB and commercial was partially offset by enterprise, again, because of its greater exposure to hardware. Reflecting the faster growth in software and cloud, we see the uptick in our recurring and reoccurring growth sales, which increased 54% in 2020 from 59% last year. Turning to slide 10. Adjusted EBITDA increased 11% in 2023, or approximately 9% in constant currency. Adjusted EBITDA margins expanded significantly to 28.1%, 26.2% in 2022. On a constant currency basis, adjusted EBITDA margins could have been 27.4%. This expansion in margins in a lower growth year reflects two things. First, as we previously discussed, it's easy to optimize our processes. Churn has allowed us to reduce admin costs on a set of investments. Here's an example. For the past two years, we've increased the size of our overall sales team by 24% while reducing our admin headcount by 8%. The benefits of an increased sales force in 2023 was a rebound in our customer growth to pre-pandemic levels. The result of this focus is that in 2023, our average headcount surprised the vast majority of our customers only increased by 1% year-over-year, as did our adjusted cash operating expense. Secondly, when process optimization is coupled with the natural operating leverage created by our commercial model, gross profit and growth falls very efficiently to EBITDA. Specifically, when we look back over the last five years, 43% of incremental gross profit has dropped down to adjusted cash. This is why we simultaneously increase the size of our sales, increased by approximately 28%. This leverage can clearly be seen in both gross profit and adjusted EBITDA for average employees increasing year-over-year since 2020. Now, in terms of the specifics of Q4, adjusted EBITDA declined primarily due to the impact of a bonus accrual reversal on office last year. As I noted on the call, this was due to short-term incentives bonus accruals that was reported in Q3 2022 for the year-to-date period. That accrual is essentially reversed in Q4 2022, which resulted in low reported all bets in that quarter. I'll turn to slide 11. In terms of the bottom line, net income per share on bill of the basis in 2023 more than doubled to 78 cents, 35 cents in 2022. And Q4 EPS increased to 32 cents from last year. Adjusted EPS on a diluted basis in 2020 increased 12 percent, 90 percent from 80 cents in 2022, and a few more degrees depending on the 31st. Turning to slide 12. In 2023, I'm incredibly proud of the team's effort to create $100 million of cash flow from offering. We used $100 million to return $30 million in capital to shareholders and reduce our debt by $7 million. We had a very strong year in terms of cash flow generation. We benefited in the period from a couple of items. The first is while tax expenses were $17 million a year, $10 million was paid with the remainder anticipated to be paid early in 2024. Additionally, we reported a higher-than-usual working capital flow of $35 million in 2028 as the team implemented a number of structural improvements to our process. Thanks to our negative working capital model, we continued to anticipate annual inflows of $0.3 but will likely more be in line with the average of the prior five years of about 5%. Our debt reduction results in a net leverage coming in at only 0.4 turns at the end of the year, a low level considering our cash flow profile. We are therefore very pleased that the board has approved our special dividend. As we have minimal debt, we believe it's an effective way to return excess capital to our shareholders. while keeping us in an awful net leverage range Foxy wanted to return. Pro forma, for the special dividend, our net leverage at the end of the year would have been approximately 2.4 times. We therefore maintain our ability to continue our balanced approach for capital allocation, which has been focused on our organic growth investment and progressively increase our quarterly dividend while deleveraging puts. Discretionary cash is available for optimistic share buybacks. We were more active in debt reduction than share buybacks in the past year, as the most common sighted impediment that we have heard from institutional investors interested in becoming shareholders of Stockchoice is that the lack of trading liquidity has created additional friction in the building position. Having sufficient trading liquidity is also a requirement for inclusion in major investments that we hope to follow up on in future years. In terms of M&A, we continue to remain opportunistic, but our focus remains on organic growth. While M&A presents an opportunity for us to accelerate investment and certain impact capabilities, adding those capabilities organically to hiring over time has paid off well for Cheryl. Our return on invested capital, depending on how you calculate it, was in the 40% to 50% range in 2023. So you can see why organic growth is our focus. Turning to slide 11, looking ahead to 2024, while we don't give guidance, we are aiming for top-line gross profit growth to get back closer to the historical average, should hardware pressure ease later in the year, with growth rates rising throughout the year. In terms of Q1, we expect similar seasonality as the average of the past five years, when Q1 gross profit was approximately 22.5% the full-year gross profit. I'll remind you that we obviously don't see the same seasonality in adjusted cash office, which is the delta between gross profit and adjusted dividends. Therefore, for modeling purposes, the run rate for adjusted cash office currently is anticipated to be approximately $63 million. As I noted in the last quarter, as I noted last quarter was our intention, this is because we are excelling in investments in three areas. First, our sales capacity, including our customer acquisition, In terms of AEs, the end of the year ahead of our previous data target. Our comfort level for this was supported by growing customer base and continued demand for our core solutions. Secondly, technical capabilities, including our new AI solutions. And thirdly, our software asset management, or SAM plus offering, is anticipated to have a million dollars listed. As we've done in 2023, we expect to offset some of these growth investments to certain efficiencies and the use of technology to reduce our costs in other areas.
spk08: And now I'll turn it over to John. All right. Thanks, John. In turning to slide 14, I'll provide a quick overview of our priorities, which are aligned to continuing to take market share and accelerating growth. There are three strategic pillars to help us achieve this objective. The first is to continue building a world-class, high-performing culture. It's critical that we continue to invest in the people that deliver an exceptional experience to our customers. So we're focused on developing our leaders, building a team that is diverse and part of an inclusive company, and making SoftChoice a place where people want to stay and build their careers. We measure this by tenure and engagement, for which we've been honored by great places to work for 18 straight years as the best workplace in Canada. Our second pillar is to continue to grow our customer base with an aim to grow our customer base at a faster rate. We're doing this by ramping account acquisition, led by our sales and demand generation team, and continuing to raise the bar on customer experience so that we retain and grow more customers. And our third pillar is to deepen our customer relationships with software asset management and services. This will increase the gross profit per customer. We're doing this by scaling our SAM Plus offering, continuing to capture cloud logos, embedding our core services with more customers, and accelerating the AI adoption in our customers. And ultimately, slide 15 illustrates the benefits of this strategy. Being a trusted advisor to our customers, moving them from product-only customers into those also utilizing our services, and then our broader IT solutions. As you can see, this leads to a significant increase in customer retention. We almost never lose full solutions customers. And we generate a far higher average margin per customer. In 2023, the average margin from an IT solutions customer was almost seven times higher than one only purchasing products from us. So like I said at the outset, this begins with being relevant to our customers with our solutions and our relentless focus on their success. And that creates value for them, which leads to the growth that we aim to continue driving on an ongoing basis for Softchoice. So with that, we can begin Q&A.
spk04: Thank you. Ladies and gentlemen, we will now begin the question and answer session for analysts. In the interest of time, we ask that you limit yourself to one question and one follow-up question. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Paul Treiber with RBC Capital Markets. Please go ahead.
spk10: Thanks very much and good morning. Firstly, starting, the comment that you had on market share gains at hyperscalers is quite positive and encouraging to hear. Why do you think you're gaining so much share with the hyperscalers versus other players that are out there?
spk08: Yeah, hey, Paul, I think there's a few reasons for it. The first is that we believe that our go-to-market motion is extremely relevant for both the hyperscalers and our customers right now. What I mean by that is we've talked a lot about that soft choice ROI approach, right, which is to go in first and look at ways we can reduce unnecessary spend in the environment and find efficiencies that then they can use to invest in optimization services and ultimately innovations. So if you're thinking about it from a customer perspective, many of them were winning a lot of customers who already have some cloud presence, but they're not sure if they're doing it properly. And so they're able to use the services that we can provide to make sure that they've got it optimized. if you think about it from a partner perspective if you're if you're one of the hyperscalers and you're looking for someone to move into a customer somebody's got the capability to really prove that they can drive the adoption of the consumption uh it's where they want to it's the kind of partner that they want to have in there and so we think that our go-to-market motion is relevant to both customers and partners and it's really been a driver of growth for us and we've seen great collaboration with all three of the hyperscalers, uh, in, in, uh, investing in co-investing in that approach.
spk10: And then I guess related to the hyperscale, I was just like the comments on Jenny and, and, um, Microsoft co-pilot are, are really encouraging. Um, it seems though most customers are probably in the experimentation stage. When do you think that, uh, interest will start converting, into material or widespread deployments and then, I guess, widespread or material revenue associated with that?
spk08: Yeah, I think, Tom, I think, Paul, it's a little too early for us to really say at this point in terms of when it's really going to become a huge financial impact. We know it's going to be a tailwind, but at this point, we're thinking it's probably more of a material contributor and more of a medium-term time horizon than a big impact in 2024. And the reason being that a lot of organizations are starting right now, but the way to do AI properly is actually not to just go out and buy it and hope you find the use case, but it's to work with somebody who can actually help you identify and build it around the use cases that drive the most value. So when we do that successfully for customers, they're seeing great ROI on their initial investment and it leads to other phases of work. But as you can imagine, doing that kind of an effort takes a little more time to do it right. I think what we're seeing is a lot of interest to get started with that right now, as I mentioned around the co-pilot readiness assessment submissions to Microsoft. But that's going to take a little bit of time to sort of flow through and turn into activating those use cases.
spk10: Thanks for taking the question.
spk04: Your next question comes from Gavin Fairweather with Cormark. Please go ahead.
spk02: Hey, thanks so much for taking my questions. Maybe just on the commission and referral structure, what have you learned from Microsoft and how they're going to kind of incentivize this option of co-pilot?
spk08: Well, I think, Gavin, it still comes back to the fact that we have a great opportunity with Microsoft CSP in terms of taking full control and responsibility for the customer's environment. Because when we do that, we know that we're able to add a lot more value for the customer because we have more control over that full environment. But it also means that we're able to get compensated for that. I think at this point, there's not really a big change in that when we take more control through CSP, we're able to earn more margin. And as we drive more adoption of these technologies, we earn more incentive on the back end. So it really hasn't changed very much.
spk02: Okay, good to hear. And pretty impressive growth in your AEs kind of later in the year, in 2023, I guess. What gives you confidence in your ability to kind of get returns off of that expanded sales force in the current macro? I mean, is it kind of client conversations, expectations around a device refresh cycle, and maybe just secondarily, like how are you thinking about the level of kind of headcount investment in 24 and what will drive that?
spk08: I think the two big numbers that I would point to, number one is that we grew the customer base by 5%. That's where we were running pre-pandemic, 2017 to 2020. And that's what we expect that we will be able to do going forward. And we've talked a lot about our peel and grow strategy on accounts. And when we win more new customers, we're able to peel some of the underserved customers at the bottom of an AES list and create new territories. That account expansion has been a key component of it. The second thing is that we have also grown our software and cloud business faster than we have in the last few years. And so, you know, in this environment, there's a lot of opportunity still to help customers with this. And when we do help customers, it's that high trust, high touch, high trust, sorry, high touch, high trust kind of relationship, meaning that we do need the account executives to be able to reach these accounts so that we can move them up that stack that I talked about into the full IT solution. So both of those things are still moving in a positive direction. And so could there be macro uncertainty in the next couple of quarters? For sure. But we're thinking about building the capacity into our system so that we can build an organization that's growing by double digits for the next 10 years. So we're still seeing positive trends in our core solution areas. We're still seeing the same return on invested capital for the investments we're making. And so at this point, we see no reason to stop because we think that that growth is still there for us. And the opportunity now Obviously, with Microsoft and AI and Copilot will require us to make sure that we have that level of service for all of our 8.5 million Microsoft seats that we manage. So we want to continue investing. And so at this point, in terms of looking forward, our plans for the year would be kind of getting back to that more normal AE headcount growth rate that we've had in the past. which was around that five-ish percent before the last couple of years where we've been doing catch-up years. But as we did last year, if things are going positively, then we may come back and increase that down the road.
spk02: Thanks so much, and congrats.
spk13: Great, thanks.
spk04: Your next question comes from David Kwan with TD Securities. Please go ahead.
spk05: Hey, guys. I apologize if you address it in the preliminary comments. The audio was a bit patchy for me, but I want to get a better understanding of how you see the gross profit growth this year. It sounded like you expect it to kind of improve as the year progresses. I'm guessing at the very least is hopefully hardware headwinds start to abate. But do you think we could see you guys get back to kind of that double-digit organic growth this year and How do you see that organic growth balancing out between AE additions versus productivity gains?
spk11: Hi, David. Thanks for the question. The first thing I'd start with is when you look at our core offering, one way to look about our short-term and mid-term growth objectives is that software and cloud growth that we saw in this last year. I've been outperforming our historical five-year average, and it was a 13% year-over-year increase this year on classic currency. So we certainly see the ability to move back to some of those higher growth rates that we've seen in the past. There is an industry-wide slowdown on hardware. We think, like the wider industry, that the rebound will the market will start to strengthen over the H2 versus H1. So that's one of the elements that we're watching and that will obviously have an effect on our growth this year. Now, in terms of this coming year, our growth targets are to get back in line with what we've seen over the recent history. And in terms of seasonality year over year, throughout the quarter, excuse me,
spk05: is more in line with the average the last five years so in q1 of the last five years 22 and a half percent of our gp was in q1 no that's helpful thanks thanks john i guess the second question i've got and maybe for you or andrew feel free to jump in um you mentioned i guess that you're targeting a net leverage ratio of about one to three times um And obviously we saw that dip this quarter. I think that helped drive the decision for the special dividend. So looking out, you know, the coming years, if we see similar types of situation where your leverage goes materially below one times and you may be happy with your kind of organic growth investments, you know, is it fair to assume that we could see more special dividends in the future?
spk11: I'll take it, Dave. I think the way to think about it is this. We have this historically consistent capital allocation framework, which is to continuously aggressively invest in our business. And you see that in the growth. And we talk about some of those investments that we're making this year and that we made last year that we think will drive growth going forward. Ultimately, the second element is we aim to progressively increase our quarterly dividend on an annual basis and then bring down our leverage. I talked about M&A. and you know that's not necessarily a priority for us. So that will leave excess capital because we are an asset-like company. We have negative working capital, and I think we've shown the ability to create a tremendous amount of capital or cash over time or in a given year. And so our aim will be to give that back to shareholders. There's multiple different ways we can do that. Special dividend is one way. We are very cognizant, and we've heard from our potential shareholders that while the NCID is an effective tool, it does reduce the float and makes it harder for some prospective investors to get it to soft choice in an efficient manner. And so the special dividend served as a very efficient way to return capital. And we'll look at all options going forward. But what you should take away is that we on purpose laid out and we want to be explicit about the one to three times optimal leverage range and we'll manage ourselves within that. That's great. Thanks, guys.
spk13: Thanks, David.
spk04: Your next question comes from Stephanie Price with CIBC. Please go ahead.
spk00: Good morning. I just wanted to circle back on the AE discussion. It looks like gross profit per AE was down slightly year over year. Should we think about that improving in 2024 as the AEs hired in 2023 ramp up, or could we see kind of similar levels here as you continue to hire?
spk08: Yeah, that's right, Stephanie. We added a lot in the last 18 months, if you even go back to the end of 2022. And so you've got a lot of folks in the more junior end. And so the mix shifts, obviously, pretty significantly to folks with lower average productivity when you bring in so many new people. And so that should shift over time. And the other thing that we also saw last year was just the general headwind in the enterprise segment and specifically around hardware, right? And so if a large section of the largest salespeople have a tougher year, that also is something that would negatively impact that overall average margin for AE. So when you actually look at it, the way that we look at it is honestly not at this total level, It's at the average margin for AE by customer segment by tenure of seller. And I can tell you that those numbers continue to improve over time. And so we're not concerned about that headline number. We think that there's the obvious explanations around the inflow of new folks, as well as the enterprise headwind from last year that will sort of fix itself over time as these folks grow and get more tenures.
spk00: Okay, great. That makes sense. Thanks. And then I just want to touch on net retention as well. Up sequentially, but down a bit year over year. Can you talk a bit about what you're seeing in terms of net retention and how you think about 2024 here?
spk08: It's actually largely the same answer in that the net retention in commercial and SMB was still strong, but in enterprise, because of the headwinds that we had there, it came down and obviously then There's some big customers there, and so that took the overall number down last year. So, again, it's not something where we're concerned that there is this huge shift where we're losing business in all the segments. We're still seeing strength in our core solution areas. It's just a bit of what we've talked about and what many in the industry have talked about, where a lot of large customers are delaying purchases or being a little more – careful about some of the upgrades on hardware and those things right now are a factor in the market, but we believe that those won't last forever and that we'll see that spend start to return as we hopefully get to a place in the next little while where the economy settles in and hopefully interest rates start to ease and that'll hopefully free up some of the spending from those large customers. But again, it's overall not an overall trend that we would say we're concerned about.
spk00: Thanks for the color.
spk13: Thanks, Stephanie.
spk04: Your next question comes from Martin Toner with ATB Capital Market. Please go ahead.
spk06: Hey, folks. Thanks for taking the question. Congrats on some good results. I just would like a little more color on hardware spend by customers. Can you kind of help us understand where they're heads at and why you believe second half is when we'll see some demonstrable improvement?
spk08: Well, let me first say, I don't know if I would say demonstrable improvement yet, Martin. I would say we don't see it happening before the second half is what I would say. I think at this point when we're talking to customers, the budget for capital upgrades is still pretty tight. So if anything, we're hopeful that the interest rate environment and the economic environment create a little more of a favorable place for us in the second half, but I'm not sure I'd be sort of ready to make that call at this point. I think it's still a place where we have this structural issue where many folks bought a lot of devices like laptops through the pandemic, most of which had delayed shipments that only were really released in 2022 and 2023. And so many of them don't need to buy new devices at this point because their users just had a big inflow of upgraded devices. And so I think that'll take a little bit of time. I think we're seeing probably ongoing weakness in things like servers and storage because of the fact that more people are moving to cloud, which is actually a fantastic trend for us. That's our area of strength. And I think that's a part of why we're capturing so much share and growth in the hyperscaler in the public cloud world. And so I think, Martin, all these things kind of come together for us to say we're not seeing it in the first half, second half at the earliest. But I think it's a bit dependent on the environment. But right now, I don't think there's anybody who's feeling like it's a sure thing. The thing I will share, the thing I'll also add, Martin, is the thing that we are hopeful, though, is that we it's not about having it return to significant growth. It's just avoiding another significant decline. So, you know, for us, it's more about for at this point, it's 22 percent of our business. Right. So 78 percent is all of the other solutions that we provide. And so. If we could just keep it flat, then that would be great, because last year our growth rate would have been about 8% in constant currency if we just had flat hardware business. So that's really how we're thinking about it.
spk06: That's great, Collin. Thanks for that.
spk04: That's all for me.
spk06: Thanks.
spk04: Your next question comes from John Cho with National Bank. Please go ahead.
spk03: Yes, good morning, and thanks for taking my questions. Regarding the special dividend, could you maybe give us a brief outline regarding the roadmap to deleverage post the payment and any timeline we should be thinking about?
spk11: Sure, John. Thanks for the question. I think the, you know, your question ultimately is the speed in terms of deleverage. I think we have to just go back to the framework that I laid out. Ultimately, it begins with, you know, what do we believe in terms of our top line growth? and the GP that we can provide. We said that we actually just gave a great number, that 8%, if hardware was just flat, that's what we would have been this last year. I laid out that the $0.43 of every GP dollar flows down to EBITDA over the last five years. And you've seen the great cash conversion that we've had from EBITDA to cash. So those will be the first drivers of ultimately how much capital we have. The second piece, you know, I laid out that it's important to continue to continue progressively increase our dividend on an annual basis. And so there'll be a little bit more cash going out there on a year over year basis, one would think. And then and then our third element, third focus is really to deliver. And so there's a significant amount of capital available. And if you look back at our history, I think we've shown that We've been able to deliver from 2021 till now. Well, this last year, we delivered almost a full term. So in a year span, in 12 months, we delivered almost a full term. Now, will we replicate that over this next year? There's multiple attributes that go into it. If you take a longer horizon, I think in 2021, we were roughly around the pro forma of what we will be at once this dividend is issued. And we got down to 0.4 in about two and a half years, starting from a much lower EBITDA base. So, you know, that kind of gives you a good ballpark, if you will, in terms of how quickly we can do the labor.
spk03: Okay. Thanks for the colors. And the other question I have is, I understand you don't expect hardware to pull strong rebound in the coming year, but how should we think about the AI-related hardware demand, any opportunity on that front?
spk08: Maybe a bit, John, but I think you'll see that that obviously will lag the adoption of AI. I think most organizations are still in the place of they need to prove that they can get the ROI on AI itself and then they'll make the investments in the tool and obviously in the hardware. And so my guess is that we'll see a bit of a lag behind the actual adoption and consumption of AI because Because of the work that needs to be done right now to actually find and build out those use cases, there's a lot of work to be done to prepare and secure the environments for these kinds of solutions. And so I think 2023 was a year of exploration. I think 2024 is a year of readiness and piloting things. And so I'm not expecting AI hardware to have a huge bump in the core customer set. I think everyone's buying NVIDIA chips and people who are building life language models, but if you think about the average sort of S&B commercial customer in North America, I'm not seeing a huge rush for that.
spk03: Okay, thanks.
spk13: I'll pass the mic. Great, thanks.
spk04: Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Divya Goyal with Scotiabank. Please go ahead.
spk07: Good morning, everyone. Thanks a lot for all the color you provided. I actually wanted to double click on this gross profit by sales channel. So there has been a pretty good uptake in terms of the gross profit for the SMB and the commercial segment on a constant currency basis. I wanted to get some color, Andrew and Jonathan, if you could, on the adoption rate of some of these new AI advancements or broader technology advancements across the SMB and commercial segment here.
spk08: I think it's still too early, Divya, to get into anything with any precision at that level of detail. I think we do have, you know, in the hundreds of customers who've signed up for some level of co-pilot, but I would tell you most of them are, you know, have a handful of licenses so that they can try to test it and build a use case.
spk12: So it is really, really, really early days at this point.
spk07: But so this growth that you're seeing is probably coming from the existing technologies. Is that fair to say?
spk08: Yeah, that's right. Like, you know, there's a lot of work to be done on the cloud environments, making sure that we migrate more applications. We deliver services to refactor and modernize the applications that they run. Obviously, you know, the What's going on with VMware has a lot of customers looking at their data centers. Most of the applications and data centers are running on virtual machines. And so it's creating a lot of opportunities for discussion for us to say, what is your strategy long-term? And how do we help you modernize this environment and set yourself up for what you want it to do in the future? And make sure that we're doing that and preparing you to be able to implement AI solutions because you've got your environment properly set up and secured. I think a lot of the conversation has shifted to AI, but we need to remember that there's still tremendous opportunity to help people modernize their collaboration environment, land on a consistent process and consistent tool, and also prepare their applications and data for a more modern environment in the cloud.
spk07: That's helpful. Just building onto the AE discussion that you have, I wanted to get some color. Given your AE growth, have you been seeing increased momentum across your US business? And are there any challenges? And if I may just include the M&A bit here as well, do you anticipate looking at any potential small or large M&A in Latin America at all, given the near-show entailments that we've been hearing about from peers?
spk08: I mean, the short answer is no, we're not looking at any M&A in Latin America. M&A for us is still opportunistic in general, and we're not looking to expand outside of the US and Canada at this point. We believe we have somewhere around a 1% market share in a $300 plus billion a year that's growing in the mid to high single digits, and it's completely fragmented where the top player has less than 10% share. The opportunity for us to execute our strategy and take share here in the U.S. and Canada is great, and we're going to keep our team focused on that. In terms of the U.S., though, you're right in that we've seen growth in both the U.S. and Canada. And you can imagine the market opportunity in the U.S. is far greater than it is in Canada, yet our business is just barely over 50% in the U.S. And so as we look to add AEs and make investments, and as we look to ramp our account acquisition engine, There's a huge emphasis on us making inroads in the US market. And we're going to work hard as a team to increase our presence there. And we've got this great opportunity because we've got the backing of some of the most important technology companies in the United States who believe that we are a trusted partner. And we believe that we are one of the best partners to deliver their solution for customers. And we are going to leverage that as a way for us to make real inroads in the US market. and we're going to make sure that we continue to execute here in Canada. It's important that we have that strong presence here in our home market, and we're going to continue to execute against that. So I think you can imagine as we add AEs, the SKU will be a little more to the U.S. just because of the size of the market opportunity.
spk07: That's great, Keller, and that's all for me. That's all for me.
spk12: Thanks.
spk04: There are no further questions at this time. I will now turn the call over to Andrew. Please proceed.
spk08: Well, thank you to everybody who joined us today. We look forward to updating you on our continued progress on our Q1 call in May. Have a great rest of your day, everybody.
spk04: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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