Softchoice Corporation

Good morning. My name is Pam, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Soft Choice Q2 2022 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 at any time during this call you require assistance, please press star zero for the operator. I'd now like to turn the conference over to Mr. Tim Foran, Investor Relations. Please go ahead.

Thank you, Pam, and good morning, everyone. Welcome to SoftChoice's Q2 2022 conference call for the period ended June 30th. Reminder that for purpose of the recording today is Friday, August 12th, 2022. I'm joined today by Vincent 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 today are in U.S. dollars unless otherwise indicated. With that, I will now turn the call over to Vince De Balma.

Thank you, Tim, and welcome, everybody. Before we begin the review of our second quarter results, We also announced today that Brian Rocco, our CFO, has made the decision to resign after five years with SoftChoice. Brian will be with us for the next month to assist with the transition of responsibilities. We have appointed Yoda Skateridis as interim CFO and have engaged in an executive search firm to identify a permanent CFO. Yoda is a chartered professional accountant and has been with SoftChoice for more than a decade. Prior to this role, she served as our VP of Financial Reporting and Tax since 2018. Yoda's experience with SoftChoice, her industry knowledge, and extensive financial background make her well-positioned to serve as our interim CFO. And we have full confidence in our entire finance team and expect the transition to be seamless. I do want to take a moment to thank Brian, who is right here to my left in our conference room here in our headquarters. But I want to thank him for his contributions to SoftChoice on behalf of the company. Over the past five years, he has played an important role in helping us prepare and execute on our strategic transformation, complete our initial public offering on the TSX, and guide us through a successful first year as a public company. We wish him all the best in the next stage of his professional career. In today's call, I will start by providing highlights of the second quarter, followed by an overview of the current demand environment, and we will review progress on our go-to-market strategy and growth strategy. I will then pass it to Brian for a deeper dive on our financial performance and outlook before opening it up to analyst Q&A. And I will start on slide four of the presentation for those following online. Our Q2 highlights are as follows. We recorded healthy financial results in the quarter and strong year-over-year growth. Our performance was driven by strong growth in our software and cloud solutions, notably in our strategic focus areas, including public cloud consumption and SaaS software. Our gross sales increased 16%, driving a 14% increase in our gross profit, which is how we measure our top line. Adjusted EBITDA increased 20%. Adjusted earnings per share increased 23%. And we recorded significant free cash flow in the quarter, which was used to continue our share buyback program, pay our increased dividend, and reduce debt. Customer demand has been resilient across our target mid-market channels despite inflation, rising interest rates, and recessionary concerns. Fundamentally, CIOs continue to prioritize IT investments to increase the flexibility, agility, and security of their businesses, as well as to deliver the digital experiences that their customers and that their people demand, as well as to adapt to market conditions. Our people and our insights-based go-to-market strategy continue to drive customer success and expanded relationships. In Q2, we recorded an increase in customer retention and engagement, which combined to deliver record revenue retention. Finally, we continued to make solid progress on our growth strategy. In Q2, we continued to add new account executives, And as a reminder, those are the frontline Salesforce that quarterback relationships with existing customers and who also seek new customers. Through successful hiring and strong retention, we are well ahead of our schedule of achieving our end-of-year target for our expanded Salesforce. As these new account executives ramp up the productivity curve, the investments we are making in them in 2022 positions us well for future growth. Additionally, we recorded a sequential increase in our customer base in the second quarter. It's great to see the growth in our customer base moving back to a positive trend as we started to ramp our sales force, as we outlined in our strategy and on previous earnings calls. Additionally, we remain on track to realize the net benefits from Project Monarch, as discussed in detail on past calls. As I mentioned, we continue to see a robust demand environment for IT solutions. Gartner market data continues to project healthy growth in global IT spend, driven by digital investments, including in software, cloud, and security. This is expected to offset an anticipated reduction in certain hardware spend this year as customers pulled forward spending on devices in the second half of last year. And our software foundation and differentiated capabilities in hybrid multi-cloud, digital workplace and collaboration, security, and software asset management positions us well to continue to expand our market share within our core mid-market. In the second quarter, gross sales across our SMB commercial and enterprise channels grew double digits. Our increase in gross profit was driven by the commercial and SMB channels, where our customers typically have significant IT requirements but lack the in-house technical expertise to design and implement IT solutions. As a reminder, these two channels comprise approximately 90% of our customer base and about three-quarters of our gross profit. We experienced some gross margin compression in the enterprise channel in Q2, driven by the mix of solutions sold, resulting in gross profit being essentially flat year over year. Demand in the enterprise channel is remaining robust. However, we saw a decline in spend with a few of our larger customers for reasons specific to those companies. M&A disruption was one example. but we have not seen a broad decline in spend across the channel or any concerns about recession. While enterprise customers comprise around 10% of our customer base, the channel makes up about a quarter of our gross profit. We don't have significant customer concentration, as our top 10 largest customers are about 10% of our gross profit. However, volatility in spend among larger customers can impact our gross profit results in any given period, but more so our EBITDA as the channel has relatively high margins due to the scale and efficiency of solutions being sold. By solution type, sales of software and cloud solutions continue to be the primary contributor to our growth in Q2. Software and cloud represented more than 70% of the increase in overall gross profit, with the remainder split relatively equally between our services and hardware solutions. Growth from our Azure, AWS, and GCP public cloud solutions continues to be a strong contributor to our growth. We estimate that in Q2, we continue to take market share from competitors as growth and consumption of these solutions by our customers continue to exceed the substantial growth reported by the hyperscalers globally. SAS software was also an important contributor to our gross profit growth in Q2. We've discussed some public cloud case studies on prior calls. So today, I'd like to share with you a story from our workplace business. At their core, our workplace technology solutions enable our customers' employees to be engaged, connective, and creative so that they love where they work and how they work. When this happens, our customers can attract and retain the talent they need to grow and thrive. We support this by planning, securely deploying, and managing the right devices and collaboration platforms. And we provide our customers with data-driven insights to understand the impact of their investments and make better business decisions. One of these customers is a North American life sciences company that helps pharmaceutical and biotechnology companies accelerate R&D for life-saving therapeutics. Our customer has a very aggressive growth strategy with multiple laboratory acquisitions in the last two years. However, these M&A events pose their own challenges. While they can accelerate growth, they are very complex and they are disruptive to people and culture. with acquired workers often having two to three times the attrition rate of regular workers in year one. We helped them solve this business challenge by creating repeatable integration strategies to accelerate and de-risk future acquisitions. We began with the day one experience for new employees, ensuring that they are equipped securely with the right devices, the right access, as well as with training and adoption for corporate systems and collaboration platforms. Factored into that is ongoing work on security, identity management, and device management. And because we manage their Microsoft and Cisco licensing, we could provide them with insights on employee engagement, and insights that fed opportunities like the consolidation of nine separate phone systems and harmonization of their Microsoft and Cisco environments. As you can see, our differentiated capabilities enable our customers to succeed while diversifying their spend with us and driving revenue. In this case study, we helped our customers consolidate spend, optimize their environment, upgraded their Office 365 licenses, engaged our services organization, and with every new employee onboarded through M&A, we generate additional revenue. All of this is because of our strategy and our people who are passionate about customer success. Our talent investments, which we outlined in detail on our last quarterly call, are critical to our go-to-market strategy as they enable us to go deeper with our customers. Our ability to provide holistic, vendor-agnostic solutions and our insights-driven approach is what allows us to be a trusted advisor to our customers. This, in turn, has been driving increased customer retention and higher margin per customer. These combined to drive record revenue retention rate of 113% as recorded on an LTM basis. Our expanded relationships with our customers is also evidenced by the record gross profit per customer of $65,000 that we generated over the trailing 12-month period. Increased wallet share has been the driver of growth since the advent of the pandemic. Our customer base has also increased this year as we began to see the initial returns on our investments from our expanded sales force, which I will detail on the next slide. Looking forward, we expect to see gross profit growth driven by a combination of new customers and expanded relationships with existing customers as it was pre-pandemic. From an internal perspective, our growth strategy is similarly based on contributions from an expanded sales force and increased sales force productivity, measured as gross profit per account executive. Increased productivity has been the driver of growth in recent years as we have surrounded our AEs with a deep bench of technical experts and specialty sales team members. We recorded record gross profit per account executive $771,000 over the LTM period. We also resumed expansion of our AE Salesforce in the latter part of 2021 and are now well ahead of our targeted expansion. We ended Q2 with 424 account executives and our target was to reach 423 to 433 by the end of 2022. The acceleration in our growth investments in 2022, both of our AEs, as well as in our sales specialists and technical teams, has been due to faster than anticipated hiring combined with strong employee retention. In a very competitive labor market, we are proud of our ability to attract and retain key talent and are confident that these individuals will allow us to continue to grow the business in future periods. That said, this presents a near-term drag on our earnings as these people move up the productivity curve, and we temporarily have a higher cost structure than planned. We expect to achieve relatively modest operational efficiencies in certain areas in the second half, which will help counter some of the increased workforce costs. However, we remain committed to the expansion of our frontline sales force as it is a key part of our long-term growth strategy. With that, let me turn the call over to Brian Rocco.