Softchoice Corporation

Good morning. My name is Michelle, and I'll be your conference operator this morning. At this time, I would like to welcome everyone to the Soft Choice Q4 and Fiscal 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, there will be a question and answer session for analysts. If you would like to ask a question during that time, simply press the star, then the number 1 on your telephone keypad. If you would like to withdraw your question, please press the star followed by the number two. As a reminder, today's call is being recorded, and I would now like to turn the conference over to Mr. Tim Foran from Investor Relations. Please go ahead, sir.

Thank you, Michelle. Good morning, everyone. Welcome to SoftChoice's Q4 and Fiscal 2021 conference call for the period ended December 31st, 2021. A reminder that for purpose of the recording, today is Friday, March 4th, 2022. 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 on the company's MD&A, which is available on our website. Finally, please note that because the company reports in U.S. dollars, all amounts discussed today 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 will start on slide four for those following our webcast presentation. In terms of an agenda for this call, I'll first go over some 2021 highlights. And then I'll discuss in more detail some of our growth drivers and execution on our strategy before turning it over to Brian to provide a deeper dive on our financial results and financial outlook. So I'm very pleased to report on an exceptional period of growth and progress for SoftChoice, driven by the successful execution of our strategy and continued strong demand from our customers on their digital transformation journey. During a year, we recorded double-digit growth in gross profit across all of our IT solutions and across our three sales channels in North America, SMB, commercial, and enterprise. Our unique go-to-market approach and the significant investments we have made in our technical and sales capabilities has continued to drive our transformation into a trusted IT solutions advisor to our customers. 2021, we achieved record gross profit per customer and a record revenue retention rate through deeper engagements and the delivery of advanced multi-vendor software and cloud-focused IT solutions that enable superior business outcomes and success for our customers. During the year, we also continued to invest in our team members and achieved strong Team member retention, and we refer to team members, those are our employees. And that was particularly strong, our team member retention in our sales, services, and go-to-market organizations. Our core values and people-first approach have positioned SoftChoice as one of the best employers in the industry. In 2021, we were named a great place to work. for the 16th consecutive year. We are only one of two companies in Canada to have achieved this distinction that many years in a row. Proudly, we also received multiple awards for our commitment to diversity, equity, and inclusion, including for women and LGBTQ equality, as well as our commitment to give back to our communities. I won't go into all the workplace awards we have won, but we have included them in a slide in the appendix of today's presentation. In terms of financial highlights, we generated record gross profit, adjusted EBITDA, and adjusted free cash flow in 2021, which Brian will cover later. The beauty of our asset-light software-focused business model is it drives highly attractive profitability and free cash flow. In 2021, we used our with treasury proceeds from our IPO in June to repay $97 million of loans and borrowings and delevered to 1.2 times 2021 adjusted EBITDA as of December 31st, 2021. And that's compared to 2.9 times at December 31st, 2020. Following our IPO in June, we also initiated a quarterly dividend. We are entering 2022 with significant momentum and in a sound financial position. Given the visibility in our business model and our continued strong performance, we have increased our growth outlook for 2022. Reflecting this anticipated significant increase in profits and cash flow in 2022, we announced today a 29% increase in our quarterly dividend to $0.09 Canadian per common share. We will also commence a buyback program for our common shares under a TSX normal course issuer bid. Turning to slide five, I'll provide a bit more color on the drivers of our gross profit, which is how we and others in our industry measure our top line. For the full year, gross profit increased 20% to a record of $287 million. Software and cloud was again the primary driver of our growth, as can be seen on the chart on the right-hand side of the slide. Our growth in software and cloud was driven largely as a result of strong demand in three solution areas. Our workplace software solutions, including those that power collaboration, our security software solutions, and thirdly, our hybrid cloud software driven by increased public cloud consumption. As it relates to public clouds consumption on slide six, we provide a snapshot of our recent progress in multi-cloud. In 2021, we continued to record very high growth of 86% in combined public cloud growth sales volumes from our three core partners. These include Azure, reflecting our top tier status with Microsoft, and GCP and AWS, where we have been increasing our capabilities significantly over the past few years. These trends evidence the value we provide to these technology partners. These technology vendors are increasingly seeking to partner with SoftChoice as we have strong customer relationships, we have the capabilities to ensure technical integration across multi-vendor solutions, and we have an ability to improve the customer experience and drive enterprise-wide adoption of these technology partners' products. This is one of the reasons why our partners are an important source of customer referrals and leads for us and why they have been co-investing with us to increase our capabilities. For example, in 2021, we secured a multi-year strategic collaboration agreement with AWS to strengthen cloud migration and modernization service offerings which will enable customers to transform and innovate in the cloud with agility. We also recommitted to our joint investment program with Microsoft to further deepen our ability to deliver advanced Azure application and data services and to help customers leverage the advanced security and operational features in Office 365. And subsequent to year-end, we achieved the elite managed services provider designation in the Google Cloud Advantage Program, demonstrating our continued success in enabling cloud transformation at scale with technical expertise in GCP, with whom we were already a premier partner. On top of the progress we made with Microsoft, Google, and AWS, we also received multiple awards from other technology partners as seen on slide seven. These include Cisco's Global Awards for Social Impact and Cisco's America's Security Partner of the Year. We also received Red Hat Solution Provider of the Year and we were also named VMware's Lifecycle Services Partner of the Year. These awards reflect how we have broadened our technology partner relationships in recent years. It also reflects the fact that the market has migrated over time to the areas where soft choice is strongest, that being software-focused IT solutions, including subscription-based services such as public cloud offerings. And the increasingly strategic role of IT within organizations coupled with growing complexity has created significant demand for our holistic IT solutions. To make this real, on slide eight, we provide a couple of soft choice customer examples. Our first customer example on the left-hand side of the slide is a financial services company in New York with global offices. With the ongoing COVID-19 pandemic, as with many businesses, they found themselves shifting to online workloads as the world adapted to a digital landscape. And that created an opportunity to move away from a physical on-premises data center and optimize their workloads with the move to the cloud. After working alongside the customer and determining their specific needs, SoftChoice recommended our proprietary assessment, the Cloud Readiness Review. Our team conducted initial discovery in their environment to analyze results and build recommendations for rationalizing and optimizing a move to VMware Cloud on AWS. This allowed the customer to move much more quickly since they were able to leverage existing VMware skills to rapidly migrate these workloads to achieve exiting their data center on time and on budget. As a result, the customer saw a 40% decrease in cost equating to hundreds of thousands of dollars in savings versus their on-premises environment, while also enjoying the agility of running these applications in the public cloud. They were also able to benefit from funding from our partner, AWS, which helped offset migration costs and allowed them to realize their return on investment from day one. I won't cover the second example on the right-hand side simply for time considerations, but it is a very similar story with an Azure VMware solution. These case examples illustrate the value that our customers get from having one partner who first of all understands the software and licensing opportunity for savings, can consult and design the roadmap across an on-premise and cloud solution, and then can implement that solution with end-to-end ownership. That is the unique ability that we bring to the market. Slide nine provides some detail on the nature of our growth investments in 2021. We expanded our roster of technical experts from 650 to 720. Namely, we increased our cloud specialty sales executives or SSEs and our journey architects that support our account executives. We accelerated investments in certain strategic technology partner relationships and capabilities. And we also implemented a new digital workflow platform for our managed services business, which went live in Q4 of 2021, which improves both the customer and employee experience associated with our managed services offerings. These investments, as you can see, drove a 27% increase in our Salesforce productivity in 2021 to $751,000 of gross profit per account executive. They also allowed us to go far deeper with our customers than ever before. And as you can see on slide 10, that helped us achieve 113% revenue retention and a 27% increase in gross profit per customer. Turning to slide 11, as Gartner notes, staff skills gaps, wage inflation, and the war for talent are pushing CIOs to rely more on third-party firms to pursue their digital strategies. In order to capitalize on the strong market backdrop, we began ramping of our sales force near the end of 2021, as I outlined on our Q3 earnings call in November. As seen on the slide depicted by the black line, we ended 2021 with just under 400 account executives, or AEs, and that was an increase from the end of 2020. We are on track to achieve our stated target of ending 2022 with 423 to 433 account executives. The addition of new AEs represents a highly compelling and accretive investment given the attractive gross profit potential for each new AE based on our historical track record. And so we are hiring AEs for all of our sales channels. Prior to the pandemic, we were growing both our sales force and our customer base in the mid single digit percentages annually. As you can see on the right-hand side of this chart, in 2021, we saw a 4% dip in our customer base stemming from declines driven during the pandemic. The primary reason for that dip, as we discussed on prior earnings calls, is that we paused the ramp in our sales force during the pandemic. But now that we are adding more sales capacity into our system to prospect and win new accounts, We will get back to driving an increase in our customer base, and we see significant opportunities for new customer acquisitions, given the fragmented nature of the market. Q4 and fiscal 2021 gross profit growth included net benefits from Project Monarch, an initiative in which we reengineered our business processes and redesigned our technology architecture, as outlined on slide 12. The project remains on track, and we remain confident in our ability to realize the total anticipated net benefits of Project Monarch in 2022, equating to $25 million of EBITDA uplift, primarily related to top-line gross profit uplift, but also from some OPEX savings and cost avoidance. At this point, let me turn it over to Brian to take a deeper dive through our financial results and our outlook. Great. Thank you, Vince.