Softchoice Corporation

Good morning. My name is Miranda and I will be your conference operator today. At this time, I'd like to welcome everyone to the soft choice Q3 2021 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 for the analysts. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, Please press star, then the number two. Thank you. Mr. Tim Foran, from Investor Relations, you may begin your conference.

Thank you, Operator, and good morning, everyone. Welcome to SoftChoice's Q3 2021 conference call for the period ended September 30th, 2021. A reminder that for purpose of the recording, today is Friday, November 12th, 2021. Joining us today are Vince DePalma, SoftChoice's President and CEO, Brian Rocco, CFO, and Andrew Caprera, COO. After prepared remarks, we will open it up for analyst questions. 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 website. And finally, please note that because the company reports in U.S. dollars, All amounts discussed there are in U.S. dollars, unless otherwise indicated. With that, I will now turn the call over to Vince.

Thanks, Tim, and welcome, everybody. Thank you for joining us today. I am pleased to report on a strong quarter of progress for SoftChoice in Q3, including, first, strong customer engagement for our IT solutions, and that was reflected in our 108% net revenue retention, as well as gross profit growth. per customer rising 15% to $57,000 over the last 12 months. Secondly, we recorded Salesforce productivity, one of the highest that we've had in certainly the five years I've been here and maybe in our history, with gross profit per account executive increasing 17% to $694,000 over the same timeframe. We also continue to make growth investments in our technical resources and sales productivity, as well as our cloud strategy and continued realization of the benefits of Project Monarch, notably in our top line gross profit. Brian will provide a deeper dive on our financial results, but I will go over some highlights. Gross profit, which is how we and others in our industry measure top line performance, increased 24% over Q3 2020 to $65 million, driven by double-digit growth across all of our sales channels. Within our IT solutions, the increase in gross profit was led by 25% growth in our software and cloud solutions and 23% growth in our services offerings, our key focus areas as they align with some of the fastest growing sectors within the IT industry. Software, cloud, and services comprised approximately 72% of our gross profit in Q3. Our increase in gross profit was driven by a 21% increase in our gross sales to $426 million, which we believe is a better measure of customer volumes than net sales. This was led by a 34% increase in software and cloud gross sales. Adjusted EBITDA declined 14% due to the impact of foreign exchange, as well as increased operating expenses stemming from our ramp of sales productivity investments to drive growth, and certain non-recurring professional fees incurred to support the implementation of a new digital workflow platform for our managed services offerings. Additionally, in Q3 of 2020, we received $3.7 million in government wage subsidies, which offset reported expenses versus none received in Q3 of 2021. We continue to benefit from strong adjusted free cash flow, which was 88% of our adjusted EBITDA over the past year. Given our strong financial position and free cash flow generation, we were pleased to pay our first quarterly dividend on October 15th, 2021. Our continued double-digit growth in 2021 has been driven by our clear strategic focus on hybrid multi-cloud, digital workplace and collaboration, and software asset management solutions, all underpinned by security. During Q3, we continued to execute on this strategy through an insight-driven go-to-market strategy that drove increased customer engagement and net revenue retention. We also made more investments to bolster our technical and sales capabilities. This execution enabled us to capitalize on ongoing trends in the IT industry, which include the accelerating adoption of the cloud, the increase in remote work, and a higher demand for seamlessly integrated software applications and security solutions due to the increasing complexity of IT environments and the proliferation of workloads across connected devices. So now let me give you an update on our growth strategy and our four organic growth levers that enable us to sustainably grow our gross profit double digits on an organic basis. Our first growth pillar is our two-pronged approach to grow our Salesforce and improve Salesforce productivity. In Q3, our LTM Salesforce productivity reached historically high levels of $694,000 of gross profit per account executive, and that represented a 17% increase compared to the prior LTM period. The increase is the combined result of secular trends driving growth in our solutions, measures we have initiated through Project Monarch to improve the customer and employee experience, and investments in our technical resources, sales productivity, and our cloud strategies. These include investments in our hybrid IT specialty sellers, cloud technical experts, and managed services, including our managed cloud practice. Turning to our Salesforce growth, we saw an expected 5% decline in the average LTM account executives to 384 AEs versus the prior LTM period, and that was driven by two primary factors. First, at the onset of the pandemic in 2020 and the uncertainty that the pandemic presented at that time, we made a decision to hold our AE headcount relatively flat. By the end of 2020, the economy and our results were improving, but things were obviously still uncertain. However, with increasing demand from our existing customers in the first half of 2021, we made the decision to focus our 2021 investments on driving Salesforce productivity rather than adding selling capacity. And during 2021, we held off on increasing our AE headcount. With that said, though, our customer spending has remained strong, and we have recently increased hiring new AEs to increase our Salesforce headcount and are continuing our investments in sales productivity. So we therefore expect to end 2021 with more account executives than the 383 we started with at the beginning of the year, and we remain on track to add 40 to 50 new AEs from the end of 2020 to the end of 2022. Our second growth pillar is focused on our customer base. We have a similar two-pronged approach here to driving double-digit organic growth. We have seen customer spending increase in 2021 and increases in wallet share of our customers. Our gross profit per customer measured on an LTM basis reached $57,000, a 15% increase over the prior LTM period. This growth has been driven by our investments in sales productivity that I mentioned earlier and increasing adoption of the cloud, remote work and collaboration, software asset management, and security solutions. As you'll hear from Brian in a bit, we have seen growth in gross profit from all three of our customer segments in 2021. This has offset a natural 3% dip, which we expect to be temporary, in our customers stemming from declines driven during the pandemic. So what that means in real terms is we've had a small number of customers that have reduced spending, and though they often remain in active account with us, their spending fell below our threshold of what we categorize as a customer. We expect to get back to growth in our customer base in future periods as we ramp up hiring of our sales force in Q4 of 2021 and into 2022 and beyond. The third pillar of our growth strategy is expanding our relationships with our technology partners. We have been on a journey to strategically shift our business to becoming a trusted IT solutions provider to all our customers. This means that we are delivering more advanced solutions and or assisting customers with strategic technology transformations like the adoption of public clouds. We have built very strong partnerships with almost all of the major tech companies, including Microsoft, Google, Amazon Web Services, VMware, Veeam, Cisco, and IBM, to name just a few, as well as emerging and disruptive technology partners. We have also built co-investment strategies with some of those critical partners, particularly in our high-growth solution areas like public cloud, where these partners co-invest to build our capabilities or expand our capacity. In fact, last month we announced a multi-year agreement with Amazon Web Services, or AWS, to build on SoftChoice's cloud expertise and develop new capabilities so that organizations can transform and innovate in the cloud. AWS has seen the deep capabilities that we can bring to customers in the cloud and has chosen us to be part of an exclusive group of partners to help drive significant growth in the coming years. Working together, SoftChoice and AWS will create solutions for organizations to launch, migrate, modernize, and scale workloads on AWS even faster and fully realize the value of the cloud. Through this collaboration, we will rapidly scale our AWS services-oriented team of solution architects to help customers design and optimize their AWS environments. Additionally, we will grow our team of AWS sales specialists and our operations and service delivery team members, who will help customers properly implement and manage business-critical AWS solutions with speed and agility. The fourth and final pillar of our growth strategy is Project Monarch. As we discussed on our Q2 earnings call, Project Monarch was an initiative where we reengineered our business processes and redesigned our technology architecture and invested nearly $50 million in our business from late 2018 to the early part of this year. Our redesign is anticipated to result in a broad set of benefits, equating to $25 million of EBITDA uplift in 2022, primarily related to top-line gross profit uplift, but also from some OpEx savings. These benefits fall primarily into three categories. Through improved and much greater use of data analytics and through a new configure price quoting tool, we've given our sellers much better information to maximize gross profit percentage by aligning pricing amongst our sales force. Year to date, we are performing better than we planned in gross profit uplift from better pricing. Second is procurement savings. Again, through better data analytics and better tools, we're able to lower our cost of goods sold, particularly purchases through distributors. We are projecting these savings to be on plan for 2021. Finally, process streamlining and automation is anticipated to result in certain net operating expense savings, most of which will accrue to us in 2022. These benefits will offset certain incremental costs related to Project Monarch that were added to support the business, including a new master data team, a deal desk, an enhanced strategic sourcing team, and contract specialists. The project remains on track, and we remain confident in our ability to realize the total anticipated net benefits of Project Monarch in 2022. At this point, let me turn it over to Brian to take a deeper dive through our financial results and our outlook.