Softchoice Corporation

at any background noise. After the speaker's remarks, there will be a question and answer session. 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 star, followed by two. Thank you. I would now like to turn the conference over to Mr. Tim Foran, Investor Relations. Please go ahead.

Thank you, Julie. Good morning, everyone. Welcome to SoftChoice's Q2 2024 conference call for the period ended June 30th, 2024. A reminder that for the purpose of the recording today is Friday, August 9th, 2024. The company will make forward-looking statements in 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. Reconciliation between the two and relevant disclaimers can be found in the company's MD&A, which is available on our investors' website. Unless otherwise noted, percentage growth rates that we refer to today are for the identified period ending June 30, 2024, compared with the same period ending June 30, 2023. 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 Andrew.

Thanks, Tim. Welcome, everybody. I'm joined today by Jonathan Reuter, our CFO. We're pleased to report that in the second quarter, the successful execution of our strategy by our more than 2000 team members delivered very strong financial results and continued progress across our longer term growth drivers, including accelerating customer growth and deepening customer relationships. I'll begin with the financial highlights before going deeper into the underlying operational drivers of this performance. In terms of our top line, we recorded a 13% increase in gross profit in constant currency, driven by a 19% increase in software and cloud and an 11% increase in services. The double digit increase in our gross profit, along with improved operational efficiency, drove a 19% increase in our adjusted EBITDA in constant currency, with margin expanding by approximately 150 basis points. The increase in EBITDA and ongoing execution of our working capital improvement initiatives resulted in a 9% increase in operating cash flow to $58 million in Q2. This enabled us to already reduce net leverage to two turns at June 30th versus the 2.6 turns we were at three months ago, pro forma for the special dividend of $4 Canadian that was paid April 12th. Now turning to our growth strategy and our three strategic pillars, building a world-class culture, growing our customer base, and deepening our customer relationships with our integrated software cloud and services solutions. As I describe these in detail in our past two calls, I'll focus on progress against them on this call. So let's begin with building a world-class culture. As I noted last call, in this quarter we were ranked number nine for large employers and number one amongst TSX listed companies on this year's Best Workplaces in Canada list by Great Place to Work. We're one of only two companies to rank on this list for 19 consecutive years. This is an output and an important sign from our people that we're on the right track. And the inputs are the initiatives that we've undertaken. We've achieved this result by developing a diverse and inclusive culture and investing in our team members' success. We want to make SoftChoice the best place for them at all stages of their career. We've increased diversity across the organization with approximately 41% of the workforce now women and approximately 32% being visible minorities. We're also a place people are proud to work. We again earned a perfect 100% on the 2023-2024 Human Rights Campaign's Corporate Equality Index. And we're committed to environmental sustainability, social responsibility, and governance excellence, the highlights of which can be found in our 2023 ESG report published last week, our third since going public. We've also invested in leadership development, career progression, and digital tools that streamline processes and enable our team members to really focus their time on what matters, delivering an exceptional experience for our customers. The return on these investments is measurable and has clear, tangible benefits to our customers and our shareholders. Our team member retention is above our targets, and the tenure of our frontline sales force is increasing, both of which have a direct impact on value to our customers and overall productivity. It's our exceptional team that drives account growth, which leads me to our second strategic pillar, growing the customer base, which under our land and expand model is a key driver for future growth. The investments we launched this year are bearing fruit. We recorded our best second quarter of net customer growth since before the pandemic, just as we did in Q1 of this year. Customer growth exceeded 5% year over year, more than double the growth rate we recorded in the prior year. And it was our fourth consecutive quarter in which our customer base increased by about 5%. Consistent with our strategic initiatives, this was driven by a very strong U.S.-centric quarter of growth in new customers, an increase in percentage of sales reps that are growing their customer list, and positive progress in our technology and sales enablement efforts. Our success in account growth has been driven by our strategy to expand our frontline Salesforce, which has increased by 20% over the past two years. It also reflects the strong ties with our technology partners, who are a key source of customer referrals for us as they value our mid-market scale, our ongoing investments in enhancing our certifications and capabilities, and our ability to integrate their offerings into complete solutions. As an example, SoftChoice was engaged in Q2 by AWS to design and deliver a modern data platform for a global fashion brand that seeks to transform its business through AI. By using AWS's Redshift data warehouse solution, we're enabling this customer to draw insights and recommendations from data sources that were previously siloed and inaccessible for advanced analytics. And earlier this year, we announced a strategic partnership framework agreement with Microsoft to further enhance our capabilities and capacity to develop, sell, and deliver Microsoft's cloud and digital workplace, AI, and security solutions. I'm pleased to report we've been exceeding the goals contained in that agreement. And tied to this is our recent 2024 Microsoft Scale Solutions Partner of the Year Award in the United States. This means we were the best large-scale partner in Microsoft's largest technology market. We're also a finalist in this category in Canada and a finalist globally, even though we only focus on the US and Canada, evidence of our sheer scale as a leading Microsoft partner. Now, this recognition from Microsoft reflects the leadership position that SoftChoice has achieved across the partner landscape in performance and innovation. But our recognition was not limited to Microsoft and Q2, as we earned awards across all of our categories. In the security space, we were named Sophos Partner of the Year in North America. Our hybrid cloud business was recognized with VMware's Partner of the Year in North America. Achievements in public cloud earned us Google Cloud's Public Sector Partner of the Year in Canada. And the largest client hardware manufacturer in Canada, Lenovo, named Softchoice its Partner of the Year for personal devices. Our ongoing recognition from our partners is evidence of their confidence in our delivery and value add capabilities. And it's those capabilities that not only help us win new customers, but also enable us to deepen customer relationships, which is our third strategic pillar. Our investments in advanced technical capabilities continue to drive deeper relationships and growth in our strategic focus areas, which are secure AI powered cloud and digital workplace solutions. supported by our advanced software asset management methodology and capabilities. In Q2, we returned to a 100% revenue retention rate, with growth in our strategic focus areas offsetting the expected drag from hardware weakness in the industry. Again, the fastest growing portion of our business continues to be public cloud, which reflects the extensive capabilities we've developed in the past half decade across the three major hyperscalers. One area where this has been applied in 2024 relates to the very broad customer demand that's emerged for guidance and solutions stemming from changes that Broadcom has implemented to VMware's technical and commercial strategy. By drawing on our balanced experience across private, public, and hybrid cloud operating models, Softchoice is uniquely capable of guiding customers to the right long-term platform strategy for their applications and data. A recent example includes a New York-based financial institution that we migrated to VMware on AWS four years ago, but is now modernizing their workloads to operate natively on AWS. This will decrease their costs while improving their technical agility and represents a very common example of SoftChoice providing continuous consulting and implementation services over the lifetime of our relationship with that customer. In terms of generative AI, Q2 was really the first full quarter Microsoft Copilot was available to most of our customers. We've established a market leading position in Copilot adoption across the North American mid-market. We now have hundreds of unique customers in build Microsoft Copilot services and a thousand of our customers licensing Copilot. With more and more customers turning to us to help identify value-creating use cases, we're starting to see an accelerated pace of customers move from the pilot stage to production use cases and then enterprise-wide adoption. Therefore, we continue to believe generative AI will be an important tailwind for our future growth prospects. This interest in using Copilot presents ancillary services opportunities for us, beyond just managing licensing in it. in areas such as security and governance and data modernization. One common use case that led to a number of AI projects in Q2 regards the effectiveness that can be gained by sales and customer service organizations through the integration of Copilot for M365. As an example, a technology service provider is working with SobChoice to transform the process that their sales team uses to quickly respond to quote and proposal requests. This required us to work with them to ensure their data environment had been set up appropriately so Copilot can effectively draw on all the data they possess across their knowledge base. We trained Copilot on thousands of their customer proposals that had been created in the past, as well as all of the customer's latest sales and marketing collateral. This enabled Copilot to develop the most rich and informed proposal possible. based on where this customer won similar projects in the past and by leveraging all the effort that had already went into developing their solution messaging. These types of sales process transformations can reduce up to 80% of the time required for customer responses, while significantly increasing the quality of those responses. And such successful adoption by our customers will lead to future work with them to identify and implement more use cases across their organization. The biggest driver of growth for us in Q2 on a dollar basis was workplace software, which is the biggest component of our business and the anchor of our lead sales motion. A typical example of this is a Canadian environmental services company that was introduced to us by Microsoft. Like many customers, they wanted to modernize their cybersecurity strategy by consolidating their tooling through the adoption of a primary security platform and then have that platform managed with the assistance of a specialized services partner. SoftChoice is designing and implementing Microsoft security solutions to meet their objectives and creating the budget for this project by eliminating redundant security software, which is a common outcome of our software asset management services. This is an example of our strategy in action, obtain a new customer by leveraging our Microsoft expertise, proving our value to them through our software asset management and services capabilities, and then leveraging our deep sales and technical expertise to deepen that relationship over time. In moving customers up the stack as a multiplier effect, when we initially bring a new customer on, typically it's an initial sale to manage a software agreement. And while retention is high at 85%, it's a less sticky relationship. However, our go-to-market motion is high touch and aimed at immediately utilizing our software asset management tools and expertise to scan the customer's environment, and identify areas of savings that we can then expand into a services relationship. Ultimately, that services project will reduce the customer's IT spend, but expand our share of it, as we typically earn the management of other software titles in the environment. The benefit to the customer is obvious, and we've now proven ourselves as a trusted advisor. The benefit to us is also clear as customer retention moves into the low 90% range and the margin per customer, essentially the gross profit per customer, increases by 150%. And then the next stage for us is to expand our offering into deeper services and IT solutions. This is where our model really bears fruit. We almost never lose customers utilizing us for these broader IT solutions. And our margin per customer is almost seven times larger per year than when we first obtained them as a product-only customer. As our average customer tenure is now almost 10 years, this process takes time. But this is why the acceleration of our recent customer growth rates and proven ability to go deeper with our customers is so exciting for us in terms of what it means for our future growth. With that, I'll turn it over to Jonathan.