Softchoice Corporation

Good morning. My name is Sinta and I'll be your conference operator today. At this time, I would like to welcome everyone to the Softchoice Q2 2023 earnings conference call. All lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, August 11, 2023. I would now like to turn the conference over to Mr. Tim for an investor relations. Please go ahead.

Thank you. Good morning, everyone. Welcome to SoftChoice's Q2 2023 conference call for the period ended June 30th, 2023. Reminder, for the purpose of the recording, today is Friday, August 11th, 2023. I'm joined today by Andrew Capera, SoftChoice's CEO, and Jonathan Reuter, CFO. 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. Unless otherwise noted, percentage growth rates that we refer to today are for the identified period ending June 30, 2023, compared to the same period ending June 30, 2022. And finally, please note, 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 Andrew.

Thank you, Tim. Welcome, everybody. In today's call, I'll start by providing highlights of the quarter, an update on the operating environment, and progress against our growth strategy. I'll then turn it over to Jonathan for a deeper dive on the financial performance before our Q&A. So starting on slide four for those following online. Q2 was a period of continued growth and execution in our core software and cloud focus areas, which drove strong profit margins and significant generation of cash flow. Our software and cloud solutions gross profit grew by double digits on a constant currency basis, driven by continued healthy demand for our workplace software, public cloud and security solutions. The double-digit growth in software and cloud was broad-based, with all three sales channels, SMB, commercial, and enterprise, coming in at or above 10%. This is really encouraging. It illustrates that spending on mission-critical IT programs for our target mid-market customers continues to be aligned with our core focus areas, and that our customers value our differentiated cloud and software services. In line with broader industry trends, our second quarter results were impacted by a decline in hardware sales and certain related professional services, as customers postponed some discretionary spend, which disproportionately impacted the results of our enterprise sales channel. Overall, though, this resulted in Q2 gross profit growth of 1.5% in constant currency. Now, stepping back at the midpoint of 2023 and taking a year-to-date view, Our performance in H1 2023 was solid with gross profit growth of 7% in constant currency, including 16% in software and cloud and 8% in services, partially offset by the 15% hardware decline. As you know, we have a really resilient business with more than 75% of our gross profit now coming from more recurring software and cloud and services solutions. And 90% of our customer base are SMB and commercial businesses. So, while we expect hardware to remain soft through the back half of 2023, our outlook for healthy organic growth in our EBITDA remains unchanged, and we believe that this softness is temporary. Turning to the drivers of our growth strategy on slide 5, we continue to grow by increasing the size of our customer base and increasing our wallet share with our customers. In terms of new customer growth, Our investments in our sales capacity and through our peel and grow approach to immediately seed new sellers with a book of business has enabled us to increase our customer base by 3.5% over the prior year. And the investments we've made in technical and specialty sales resources have enabled us to go deeper with our customers, and we've grown our gross profit per customer to $67,000 over the past year, a 3% increase over the prior LTM period. These expanded relationships with customers are achieved in a couple of ways. First, we deliver an exceptional customer experience driven by a passion for our customers' success and in part by the tools provided to our team as part of our IT-enabled business transformation. Ultimately, this leads to higher customer retention. And then we drive deeper relationships with our customers through our go-to-market strategy and investing in our technical capabilities in the areas where there's significant customer demand, namely digital workplace and collaboration, cloud and security. Turning to slide six, let me share a little bit more about what we're seeing in those three focus areas, starting with digital workplace and collaboration. In the second quarter, we had a strong performance with our largest partner, Microsoft, at their fiscal year end. We've had great success transitioning our customers to the Cloud Solution Provider, or CSP, program, where we can add our value-added lifecycle services to help the customers get the best return on their investment. We also have a best-in-class motion to show customers the value of the additional features of Microsoft's advanced E5 offering and to then upgrade them to that suite. This creates services demand to implement these solutions, and then we can attach other supporting software titles that their organizations and people need. Additionally, as more organizations look to avoid data center hardware purchases or delay them, we've seen an increase in demand for VMware cloud software to quickly migrate to the public cloud while maintaining the legacy VMware operating systems. And looking a bit further out, Microsoft and Google will soon launch generative AI additions to their workplace software suites and organizations will look to us for our long-standing trusted expertise in managing thousands of these environments alongside our newer application and data modernization services. And while we can't precisely say when we're going to begin to see the long-term tailwinds that generative AI will provide, We've already begun to develop and implement AI applications within our own environment, building out use cases that we will soon commercialize and roll out. Turning to public cloud, our fastest growing subsegment within software and cloud. In the second quarter, we added a record number of new cloud customers. This is going to provide a strong pipeline for growth in future years as our people help these customers adopt the cloud and increase consumption over time. And there's a few drivers of our growth in public cloud. One, as I've outlined in past calls, the desire by businesses in the current macroeconomic environment to optimize IT spend, including cloud consumption, aligns perfectly with our Reduce, Optimize, Innovate, or ROI customer success framework. Previously, many new cloud customers were essentially paying for cloud on a credit card, and we have the proven capabilities to help them rein in this spending. This has been a key motion in our acquisition of new cloud customers. Second, our ability to capitalize on these recent tailwinds has been driven by our strategy over the past half decade to invest in our multi-cloud capabilities, including significantly expanding our technical expertise across all three of the top hyperscalers, Microsoft Azure, AWS, and Google Cloud. So many SMB and commercial companies are still early on in their journey to migrate and modernize their applications and data. And we have the full suite of services to help them take those critical first steps. And like on the workplace side, to get the most out of the newest generative AI tools, organizations will need help from us to build that modern environment that's necessary for these solutions to operate effectively. Third, Our strategic investments in cloud have distinguished us in the eyes of our technology partners, who are a major driver of new customer wins for us. Our value to our core cloud partners continues to be recognized. In the second quarter, we received VMware's Cloud Consumption Award and our application development services partner specialization in Google Cloud Platform's Advantage program. And finally, the rise of cloud marketplaces. which is really where our cloud and SAM capabilities intersect. Organizations are essentially rewarded for making their software purchases through their hyperscaler platforms by getting reduced cloud consumption costs in return. This has provided an opportunity for us to leverage our ROI framework and our software asset management capabilities to help customers bundle purchases for multiple software titles, including some that we previously were not managing, and package them into a broader cloud consumption strategy. And much like we've always done with software, we've proven our value add to customers by helping them navigate the cloud marketplace. Security, the third component within software and cloud, has and we expect will continue to grow very quickly as we increasingly help organizations build a modern security mesh architecture that starts with identity-based security. This is done by integrating solutions from security-focused software partners like CloudStrike, Palo Alto Networks, and Sophos, as well as the advanced security capabilities in Cisco's Security Suite and within Microsoft's E5 Suite, like Azure Sentinel's comprehensive security information and event management solution. And as a complement, we've recorded a strong increase in managed security customers, While new and still a small service line, we're examining opportunities to move even more aggressively in this area. And in terms of recognition by our technology partners, during the second quarter, we received Trend Micro's Partner of the Year in the categories of Cloud Innovator in Canada, Marketplace Consulting in Canada, and Growth Partner of the Year in the United States. And before turning it to Jonathan, I want to spend a few moments on slide seven, elaborating on the real enabler of our strategy, our people. specifically our ability to recruit, engage, and retain a long-tenured team, which is tied clearly to productivity in our industry. As we indicated last year, our recruitment was ahead of target, thanks to the talent acquisition machine that we have in place. I'm pleased to say today that our employee retention, which was already in the top quartile for a sales organization, is also well above our target. While this is partially due to the softer tech sector labor market, We believe it also reflects internal initiatives to promote retention, including strong diversity, equity and inclusion initiatives, a competitive compensation structure, flexible work environments, increased health benefits and ongoing training and development opportunities. These initiatives are part of our overall approach to doing business sustainably and responsibly in ensuring that we provide returns for all our stakeholders. More information on this is available in our ESG report, which we recently released, and it's available on our investor relations website. I'd encourage you to have a look if you haven't already. With that, I'll now turn it over to Jonathan.