Softchoice Corporation

Good morning. My name is Kelsey and I will be your conference operator today. At this time, I'd like to welcome everyone to the soft choice Q1 2022 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 the analysts. If you'd like to ask a question during this time, simply press star then the number one on your telephone keypad. If you'd like to withdraw your question, please press the star followed by the two. Thank you. Brian Rocco, SoftChoices CFO, you may begin your conference.

Great. Thank you, operator, and good morning, everyone. Welcome to SoftChoices Q1 2022 conference call for the period ended March 31st, 2022. A reminder that for the purpose of today's recording, today is Thursday, March 12th, 2022. I'm joined today by Vince De Palma, SoftChoice's president and CEO, and Andrew Caprera, our COO. After prepared remarks, we'll 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 filing with Canadian security 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 today are in U.S. dollars unless otherwise indicated. With that, I will now turn the call over to Vince.

Thanks, Brian, and welcome, everybody. I look forward to speaking with you today about our financial performance and operational highlights and to answer your questions. I'll start on slide four. I want to start by summarizing our Q1 performance and our full-year outlook. Our Q1 billings growth of 11% is in line with our GP outlook of over 11.5% for the full year 2022. demonstrating the underlying strength in the business. We will explain in a minute why that did not translate into double-digit gross profit growth. We are ahead of schedule in our investment in sales and technical sales talent that fuel our organic growth strategy, showing the robustness of our ability to attract and retain talent, and setting us up for strong performance in the remainder of the year. though resulting in a short-term negative impact to our EBITDA as these resources get onboarded and move towards productivity. And we have a robust sales pipeline as we enter Q2. Due to these factors and the fact that we remain on track in realizing the full $25 million of net benefits from Project Monarch, we are therefore reaffirming our 2022 outlook and restating our expectation noted on our last call that our growth rates will progress through the year as we realize the benefit of our investments. So now let's dive a little bit deeper into the Q1 results. In terms of our top line gross profit, although software and cloud grew 11%, our gains here were partially offset by lower growth in hardware due to global supply chain constraints as well as a decline in services gross margin, resulting in an overall 6% gross profit growth in Q1. Additionally, I want to share two specific factors that impacted gross profit by approximately $3 million in the quarter. We do not anticipate these to reoccur, and they do not impact our full-year growth outlook. First, volumes were impacted by slowing provincial public sector spending in Canada. along with volume declines with a small number of customers in our enterprise channel. The latter impacted by timing of certain multi-year software renewals. Second, services gross profit declined due to accelerated additions to areas of our services engineering team. As I stated earlier, we are ahead of schedule in our talent investments that fuel our organic growth strategy. Following multiple quarters of solid growth in services billings, we needed to hire more people to staff the projects we have won, as well as part of our strategy to increase our advanced services delivery capabilities. The flip side of that success is a short-term drag on our gross profit, since these resources are accounted for in our cost of sales. However, due to the backlog of projects already booked, and in progress, along with strong double-digit growth in services billings in Q1, as well as a healthy pipeline, we expect to see these investments accelerate gross profit growth in the back half of 2022. Below gross profit, Q1 was impacted by higher cash operating expenses of just under $4 million, but these are investments that are anticipated to pay off in the back half of 2022. First, we were incredibly successful in ramping our sales and technical sales team members in Q1 at a faster pace than anticipated, including making fantastic progress on hitting our target recruitment of account executives, which I will describe in detail in a couple of slides. Second, we incurred certain personnel costs that were accelerated into Q1, including commissions related to elevated billings in strategic focus areas that yield higher commission rates. And lastly, there were some timing issues with certain operating expenses that should reverse in the remainder of the year. The combination of the above impacts to our gross profit and increased op-ex resulted in adjusted EBITDA being flat year over year, excluding wage subsidies received in 2021. However, we remain confident in our full-year outlook as Q1 is a very small seasonal quarter from an EBITDA perspective, and the underlying drivers of our Q1 performance that I just described do not lower our expectations for the remainder of the year. In terms of operational highlights, over the past year, the increase in our sales support and technical sales resources has driven record customer engagement, with our gross profit per customer increasing 21% over the prior LTM period. Continued high customer retention and increased engagement drove a 112% revenue retention rate, which we are very pleased with. and our gross profit per account executive increased 25% over the prior LTM period, which is the highest in the company history. In terms of capital allocation, along with our growth investments, we have been active in our share buyback program since its launch in March. Additionally, in Q1, we announced a 29% increase in our quarterly dividend, to nine cents Canadian, which was paid in April. And today we declared the same dividend for the Q2 period to be paid in July. The increased return of capital to shareholders reflects the expected significant increase in our cash flows in 2022 included in our outlook. In 2022, we continue to generate recognition within our industry and beyond, as noted on slide five. This is a credit to the depth and breadth of our capabilities and our culture of excellence, which enables the success of our customers' organizations, their IT teams, and our people. For example, we have been working with a large financial institution to help them solve for a matrix and siloed cloud spend across their divisions, each with competing priorities and programs exacerbated by misalignment between the business, operations, and IT. Our solution, designed by our FinOps practice within our digital acceleration business unit, included a better operating model and optimized workflows, which helped our customer avoid $5 million in cloud costs. Outcomes like this exemplify our purpose for unleashing the potential of people and technology. When it comes to the latter, in Q1, we built on our Google Premier Partner status by earning the Elite Managed Services Provider, or MSP, designation in the Google Cloud Partner Advantage Program, which recognizes our success in enabling cloud transformation at scale with technical expertise in Google Cloud Platform and is validated by real-life customer engagements. We continue to grow our technical expertise and partner certifications, including across the three major hyperscalers. We're already a top-tier partner for Microsoft Azure and an Azure Expert MSP. And through our strategic collaboration agreement with AWS, we expect to achieve a similar MSP designation with them in the future. Subsequent to quarter end, we were also named VMware's Global Partner of the Year, which is an incredible distinction we achieved for delivering the most value and impact to our customers by utilizing VMware to deliver on-prem to cloud migrations. As you may recall, on our last earnings webcast, we provided some case studies of how we help customers move to the cloud using VMware solutions. When it comes to our people, so far in 2022, we have received two prestigious workplace recognitions. We were named a Best Workplace in Canada by the Great Place to Work Institute for the 17th consecutive year based on feedback from our people and an in-depth review of our culture and employment practices. And we once again received the perfect score on the Human Rights Campaign's Corporate Equality Index and were named the best place to work for LGBTQ equality. SoftChoice's recognized brand and culture combined with our strategic focus on advanced IT solutions have allowed us to stand out in a competitive labor market as evidenced by our successful recruiting. To provide some detail on our recruiting success, on slide six, we outline where we have been making growth investments in our team members. As you can see on the left-hand side of this slide, since the end of 2020, when we saw customer spending rebound, we have ramped investment in our technical capabilities, including adding almost 100 technical experts that support our account executives. You can also see that we have added almost 15 members to our sales team, including 20 additional sales support and 28 more account executives, more on the latter in a bit. These additional sales and technical sales resources continue to drive record Salesforce productivity, with our gross profit per account executive reaching $761,000 over the last 12 months, a 25% increase over the prior LTM period, which you can see on the right-hand side of the slide. The increase in resources has also continued to drive record customer engagement by providing our sales team with the capabilities to go deeper with our customer base. As outlined on slide seven, our LTM gross profit per customer reached a record $63,000. And our revenue retention rate on an LTM basis was 112%, reflecting both high customer retention and increasing sales to existing customers. Beginning in the second half of 2021, we began to ramp our account executives, the sales team members who quarterback relationships with our customers. And we made 13 net additions in 2021, as can be seen on slide 8. In Q1 of this year, we accelerated this ramp and added another net 15 AEs in the first quarter alone. We ended the quarter with 411 account executives and are therefore ahead of plan on achieving our target of reaching 423 to 433 AEs by the end of 2022. These new account executives are still ramping up their books of business, and so their contribution is negative to EBITDA in the beginning months. But this will be an exciting accelerant to the growth in our customer base and correspondingly gross profit as they become productive later in 2022. I'll now turn it over to Brian for a deeper look at our financial results and our outlook. Brian?