Softchoice Corporation

Good morning, my name is Joelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Soft Choice Q4 2023 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 you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the two. Thank you. I would now like to turn the conference over to Mr. Tim Foran, Investor Relations. Please go ahead. Thank you, Joelle.

Good morning, everyone. Welcome to SoftChoice's Q4 full-year 2023 conference call for the period ended December 31st, 2023. A reminder for that, for the purpose of the recording, today is Tuesday, March 5th, 2024. I'm joined today by Andrew Caprera, SoftChoice's CEO, and Jonathan Reuter, CFO. 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 investor's website. Unless otherwise noted, percentage growth rates that we refer to today are for the identified period ending December 31st, 2023, compared with the same period ending December 31st, 2022. Also, please note that because the company reports in U.S. dollars, all amounts discussed today are in U.S. dollars unless otherwise indicated. One note for housekeeping, we do have a hard stop on this call today at 925, so we'll have the end Q&A at that time. With that, I'll now turn the call over to Andrew.

Thanks, Tim. Welcome, everybody. I'm excited to be speaking with you about our 2023 performance before I go into a little more detail on the execution of our strategy and the catalyst for our future growth. At SoftChoice, our purpose is to unleash the potential in people and technology. We unleash that potential in our customers by being relevant to them through the solutions we deliver and our relentless commitment to their success. That creates value for their organizations and their IT teams, which drives growth for them, our partners, our people and our organization. And none of this is possible without the dedication of our team members. So I want to thank everyone at Softchoice for their contributions to the success of our customers and our organization. On slide four, you'll see that in 2023, we delivered record top line gross profit and bottom line profitability. And our asset light model resulted in extremely high conversion of profits to cash flow and exceptional returns for our shareholders. This record performance, coupled with a long track record of consistent execution, validates the strength of our organic growth strategy. We're proud of our accomplishments last year, as we estimate our organic growth rate outpaced major competitors in our markets. Our highly recurring business allowed us to achieve almost 5% gross profit growth in constant currency, while weathering a significant decline in hardware spend industry-wide. During the year, we benefited from previous investments in a larger frontline sales force, which helped drive customer growth of 5% compared with the end of 2022, a growth rate similar to pre-pandemic levels. It's important to highlight that we continued making growth investments last year while significantly growing our adjusted EBITDA margin to 28%. The 190 basis point margin expansion was driven by our continuous focus on creating a more efficient and effective process or effective processes, coupled with the operating leverage recreated in our model, as well as benefiting from a natural currency hedge. Our bottom line net income doubled in 2023. Combined with effective working capital management, this converted into $100 million in operating cash flow, which we used to reduce our leverage by almost a full turn to only 0.4 times and also return $30 million in capital to our shareholders through share buybacks and our quarterly dividends. And looking forward, we're well positioned for future growth. We'll continue to invest in expanding our sales capacity and in the technical capabilities in our strategic focus areas of cloud, digital workplace, and software asset management with our solutions underpinned by cybersecurity. These solutions remain mission critical areas for our customers. And we'll execute our go-to-market motions that have been proven to deepen relationships and expand our business with these customers over time. We have tremendous flexibility to continue our balanced allocation of capital to internal investments that will drive sustainable, profitable growth, while also returning significant capital to shareholders. Our focus remains on doing this organically, as we've generated high returns on invested capital that we believe are best in class. Reflecting confidence in our long-term growth strategy and our ability to generate significant free cash flow, Our board has approved our third annual two cent dividend increase to 13 cents Canadian beginning the first quarter of 2024. Our dividend is now 86% higher than when we first launched it following our IPO in 2021. In addition, and consistent with our capital allocation framework that returns excess capital to shareholders, our board has also approved a special dividend of $4 Canadian per share, which John will provide detail on later in the call. We've also approved the renewal of our share buyback program. Turning to slide five, we again recorded growth in both the US and Canada in 2023 and saw accelerating growth in our core software and cloud solutions and in services, both of which outpaced the average growth of those solution areas versus the prior five years. Together, the two solution areas comprise 78% of our gross profit in the year, compared with 73% last year and 69% in 2017. Software and cloud gross profit increased 13% in constant currency. This is driven by new customer growth and an increased demand from existing customers to make their IT environments more efficient, secure, and primed to drive their business forward. Notably, we continue to see overall growth in our Azure AWS and Google Cloud public cloud revenues, which outpace the average growth of the hyperscalers, suggesting we're continuing to take market share. Our success reflects the co-investments we've made with Microsoft, Amazon, and Google over the past five years to significantly increase our advanced capabilities across all three public clouds. We're creating important outcomes for customers like Atlas Geographic data, We designed a more modern cloud-first architecture and migrated 95% of their workloads from aging and physical infrastructure into Google Cloud, creating a secure, compliant, and powerful platform that's improved the performance and reliability in their data analytics, which is integral to their success. We also delivered strong performance in our workplace solutions, including those built around driving adoption of Microsoft's cloud solution provider program known as CSP, which provides more flexibility and cost saving to organizations compared with enterprise agreements. The potential value of these programs was recently realized by a leading innovator in telemedicine, which is improving access to medical care by connecting specialists to people in remote or underserved areas. This was an account we won in Q1 of last year based on our ability to modernize their collaboration and productivity strategy on Microsoft 365, which was essential for them delivering a high-quality patient experience. And delivering this solution via CSP allowed our customer to dynamically right-size licensing to the constant changes in their user counts and have the support of soft choice as they manage that complexity. All of that, combined with our depth of services, made SoftChoice the obvious services partner to implement this business critical solution. And now the next phase of our engagement with them extends to the public cloud, where we'll standardize their infrastructure services on Microsoft Azure. As it relates to hardware, we did see a slight improvement in the fourth quarter. However, in line with wider industry expectations, we don't expect a material rebound in devices in the first half of the year. And as I noted on our last call, with the strength of our core solutions and some expected easing of hardware declines, we're aiming to return to an overall growth rate closer to the average of recent years. Now, as we look forward, one of our core focus areas of investment is in generative AI. As you know, Softchoice is one of Microsoft's top partners globally, delivering billions of dollars annually in Microsoft-related sales. Since the launch of Copilot for Microsoft 365 in November, we've seen extraordinary customer interest to identify use cases and prepare their IT environments for AI applications. Our Salesforce has been able to convert this AI interest into new business as organizations see our ability to help them realize value in these groundbreaking technologies. We've taken an early leadership position in the customer adoption of Copilot, having transacted the first set of orders via CSP. And we're a leading partner in co-pilot workshop engagement submissions to Microsoft in North America, which is an important leading indicator for co-pilot consumption. It's important to note as well that we rank as one of the leading Microsoft software asset management service providers and Azure cloud partners in North America. We manage eight and a half million seats of Microsoft 365, and we have a brand for optimizing outcomes on the platform. We also deliver thousands of Microsoft assessments annually. The scale provides us with a tremendous opportunity to also become a leader in driving the adoption of Copilot in the North American mid-market. We're collaborating with Microsoft to further enhance our capabilities and capacity to develop, sell, and deliver Microsoft's cloud digital workplace, AI, and security solutions. This collaboration, which is targeted towards co-pilot for M365, Azure adoption for OpenAI implementations, as well as Microsoft security, builds on our long-standing partnership. It's with that co-pilot opportunity, along with the opportunity in Cloud AI, that we launched our AI Solutions team, which will deliver next-generation AI offerings for organizations across the US and Canada. As we help customers identify AI use cases for Copilot, that process becomes a conduit to uncover additional customer needs for broader cloud and workplace AI solutions. It puts us at the center of their AI strategy. Along with that scale and influence, we already have a full suite of consulting, engineering, data and application integration, end-user adoption, and change management services needed for Copilot. As you can see on slide six, the differentiator for us is we've brought these capabilities together into a soft choice methodology for guiding customers through all five stages of a successful co-pilot adoption journey. From planning to assessing, adoption, implementation, and then sustaining an AI solution. We have targeted services to assist the customer in each stage. For example, we recently worked with a large steel producer to identify how Copilot can help increase productivity and improve their margins. Given their business model, they identified workplace technology as the primary area to improve productivity by automating repetitive tasks, specifically in their supply chain, procurement, and HR organizations. However, traditional solutions to do this would have required a level of time and cost that weren't justified. But we demonstrated Copilot's relevant capabilities, followed by the services to assess the environment for technical readiness, integration of Copilot into their existing applications, as well as plans to secure and govern their data so they could transform their processes in a fraction of the time. We then provided the end user enablement services to ensure the adoption from their users. We had two critical advantages in this project. First, we had existing knowledge and influence over their M365 usage. And second, our methodology solved every need that the customer knew would exist in their journey to AI success. Turning to slide seven. While the workplace component of our AI strategy is very much built around Microsoft 365, our cloud AI services are built on our depth of capabilities across all three of the top hyperscalers. Our foundational expertise in application and data modernization, cybersecurity, and our ability to help customers decide the right platform based on their use case and IT environment. One relevance and differentiation in cloud AI is the same as it is with cloud more broadly, which is that we bring the combined expertise and experience in Azure, Google Cloud, and AWS to create significant value with our customers. And as with workplace AI, our well-established consulting practice is key to linking business goals to cloud AI solutions. And we've got the ability to help our customers evaluate and select the right large language models for certain use cases. For example, to build AI into existing applications or to build AI-powered applications from the ground up. We recently worked with a customer that's a digital marketing software company, and they use public data for predictive analytics. Their aim was to utilize a large language model, or LLM, to capture all the public-facing information on a target's website and then automatically build personalized marketing campaigns. But they weren't sure which LLM would work best for their needs. So we helped them do a comparison test of the concept on Azure OpenAI and Vertex AI LLM operating on Google Cloud to compare both models. Because small differences can make huge financial impacts on their business. So the customer has asked us to expand the project into another LLM that we will set up and test, ensuring that the customer builds their application on the most effective generative AI model for their use case. We were their only partner that had both the ability to test multiple language models across multiple cloud platforms, which plays to our unique strength in multi-cloud experience, and the ability to combine a consultative approach with agile engineering capabilities in application and data services to get the test running quickly. With that, I will turn it over to Jonathan to talk more about our 2023 results.