Softchoice Corporation

Good morning. My name is Ivo, and I'll be your conference operator today. At this time, I would like to welcome everyone to the SoftChoice Q3 2024 earnings conference call. Should you need operator assistance during the call, please press star zero for the operator. I would now like to turn the conference over to Mr. Tim Foran, Investor Relations. Please go ahead.

Thank you. Good morning, everyone. Welcome to SoftChoice's Q3 2024 conference call for the period ended September 30th, 2024. A reminder for the purpose of the recording, today is Friday, November 8th, 2024. 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 a supplement to, 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 investors' website. Unless otherwise noted, percentage growth rates that we refer to today are for the identified period ending September 30th, 2024, compared with the same period ending September 30th, 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 third quarter, we again delivered industry-leading double-digit organic growth, continuing our strong performance through the year. This growth reflects the strength of the recurring and growing SaaS and cloud gross profit in our business model, the diversity of our product offering and customer base, and our ongoing ability to gain market share. This market share expansion has been driven through accelerated customer growth and from increasing margin per customer, stemming from our software and cloud-focused business, supported by our services capabilities, which ultimately differentiates us in the North American mid-market, and also from the accelerated investments we've been making in our digital offering, our expanded frontline sales force, and our technical experts. I'll begin with the financial highlights before going deeper into the underlying operational drivers of the performance. We recorded a 10% increase in constant currency in our top-line gross profit, driven by double digit growth in software and cloud and in our supporting services. Adjusted EBITDA growth of 2% in the quarter was due to strong gross profit growth, partially offset by higher variable compensation and our growth investments. And as expected, adjusted EBITDA margin has been stable year to date as compared to 2023 due to the growth in our gross profit alongside the investments to support our growth opportunities. It's consistent with our prior commentary that this year would be one with increased growth investments so we can accelerate market share expansion in our strategic focus areas, including workplace software, cloud, security, and AI in future years. In short, our performance through the first nine months of 2024 gives us increased confidence in meeting our objectives this year of taking market share and returning our overall top-line growth rate closer to our historical average, despite this lower demand environment in certain pockets. Now turning to our growth strategy, during the year, we've scaled investments across our three strategic pillars, which I've described in detail in past calls. The first is building a world-class culture. In 2024, I'm very proud that our investments have resulted in even greater team member engagement and retention. For us, this drives increased productivity per team member. For our customers and vendor partners, this drives higher satisfaction, evidenced by our increased customer retention and revenue retention rates, as well as new customer wins due to referrals from our vendor partners, which in turn leads to our second strategic pillar, growing our customer base, which under our land and expand model is a key driver for our future growth. And in Q3, we expanded our customer base by more than 4% and by 5% now in the last 12 months. Success we are seeing growing our customer base has been driven by our renewed focus on expanding our frontline sales force. In fact, over the past three years, following a pandemic-related pause, we've increased our account executives by 43%. And this includes an 18% increase over the past year alone, as we continue to leverage our Peeling Bro account management strategy to bring on new sellers to expand our customer base and deepen our presence in market, particularly across the United States. The combination of this Salesforce expansion along with our customer prospect pipeline gives us confidence that we'll continue our customer growth in Q4. Our customer acquisition engine also reflects strong ties with our technology partners, who are still a key source of customer referrals for us, as they value our mid-market scale, our ongoing investments in enhancing our certifications and services capabilities, and our ability to integrate their offerings into a complete solution for our shared customers. It's those capabilities that not only help us win new customers, but also enable us to deepen our 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, supported by our advanced software asset management methodology and capabilities. In Q3, our revenue retention rate returned to 105%, reflecting increased customer retention and growing spend with our existing customer base across all sales channels. This 105% rate is also in line with the average of the five years prior to 2023, reflecting the high recurring revenue aspect of our business model. Now, turning to some operational developments in Q3, During the quarter, we launched an initiative to enhance our technology and services proposition. On September 19th, we launched our SAMplus Hub, a new self-serve, centralized, and intelligent subscription software management tool that we've developed internally for our customers and which is the result of the growth CapEx we've invested in this year. It's part of our previously announced launch of SAMplus, a suite of software asset management solutions and services to subscription-based licensing. Since launching the portal, more than 1,000 customers have already actively been using it to optimize their software spend, and we expect significant increases in the near future. This tool differentiates us in the market by providing an unmatched level of insight into a customer's software and cloud environment and enhances our acknowledged software asset management expertise, which we leverage as our lead motion to become a trusted advisor for our customers. It solves the number one concern for CIOs within our mid-market customer base, that the environment has become too complex to manage internally, and their software and cloud spend is growing rapidly, but a significant portion is going to waste. For our customers, the Hub creates the ability to reduce software licensing costs by comparing actual software usage against their purchased subscriptions, and then instantly commanding the recommendations that the Hub generates to right-size the quantities or rationalize software to fit the titles. And for SoftChoice, the Hub creates additional software revenue opportunities by incentivizing customers to consolidate more of their software titles and spend through the Hub because those customer benefits can't be fully realized if the software spend isn't managed by SoftChoice. In short, their overall spend may be reduced, but we expect to gain a bigger share of it. The SAMplus Hub is also serving as a valuable customer acquisition tool as businesses seek to utilize it to optimize their spend. For example, we recently landed a leading satellite communications provider that was struggling to effectively track and manage all of their software, and they felt that their current IT solutions partner was falling short in providing that expected value. We presented our SAM plus assessments and introduced the new hub, which the customer described as, quote, incredible and exactly what we need. That value enabled us to immediately sign them on as a client as they purchased a large cybersecurity software agreement through us. In the first half of 2025, we plan on releasing updates with advanced functionality, including AI-generated agent support for the ongoing management of subscriptions and the ability to conduct more complex modeling scenarios for modernizing a customer's licensing strategy. Helping our customers optimize their software and cloud spend builds trust with them and opens up the opportunity for more transformational services and solutions. Because in general, our customers have significant IT requirements, but they lack that in-house technical expertise to deal with all of the current challenges. These challenges include things like the vast majority of IT decision makers right now looking to invest in automation and AI, but there's a significant lack of skills and of technology adoption. Additionally, while generative AI spend is anticipated to grow by some estimates at 50% or more annually over the next few years, Almost all cybersecurity professionals are bracing for increased AI-enabled threats. One of the biggest challenges that many organizations struggle with is identifying which problem to solve first. This leads to a cycle of addressing symptoms rather than the root causes. We bring the expertise at SoftChoice to help them cut through the noise and provide them with a logical roadmap that not only reduces complexity and cost, but also optimizes their technology and gets them to the ultimate desired endpoint using technology to innovate their business. Now, while we often talk about our resilient software and cloud business, a key to doing this is by providing critical services for our customers, leveraging our approximately 1,000 technical and vendor experts, which is about half of our team members now. And our services are focused on five centers of excellence for our customers. One, security, which underpins everything we do. Two, modern infrastructure, which is integral to the success of getting to that endpoint of innovation. Three, our collaboration and productivity services help drive an engaged workforce. Four, with applications and data, we help customers transform their relationship with their customers and drive business growth by effectively leveraging data. And five, we have a dedicated and expanding AI consulting and engineering team. And as it relates to the latter, we now have approximately 1,300 co-pilot customers, including hundreds that have purchased co-pilot consulting or integration services from SoftChoice. In cloud AI, we continue to drive success, leveraging our expertise across all three of the major hyperscalers. For example, we just won a large project with a technology company that provides software for the utilities industry to enable their end-user customers to reduce consumption and become more carbon efficient. StopChoice will be implementing the AI data platform, AWS Glue, to ingest a significant amount of data from various sources so that consumption trends can be monitored and used to learn what drives efficiency. We then leverage GenAI to automatically prescribe recommendations to consumers that will have the greatest effect on lowering their consumption. StopChoice is both consulting on the business process for generating recommendations from AWS Glue as well as modernizing the customer's core application to be able to be integrated with AWS Glue. Now, as it relates to our broad services capabilities, while software and cloud comprises the bulk of our gross profit, our growth in this services area is driven by the value our advanced service capabilities provide to our customers and our vendor partners. Over the past few years, this has been critical to help us evolve with the changing requirements of our vendor partners. We're looking to capture market share by partnering with large-scale IT solution providers in the mid-market, those that have the advanced cloud and services capabilities to drive growth in consumption-based agreements. This has enabled us to diversify our business through our services and through the breadth of our offerings in partnerships with hundreds of vendor partners, which combined comprise the significant majority of our gross profit. It also includes driving significant revenue growth for Microsoft, our largest partner, building on a decades-long relationship. This, in turn, has resulted in higher gross profit for us and increased incentives from Microsoft due to our success. In recent years, we've achieved this by driving customers to upgrade more to M365E5, to utilize Microsoft's security platform, to increase Azure consumption, more recently to develop use cases for Copilots, and to leverage the features and flexibility of Microsoft's cloud solution provider or CSP licensing vehicle. One way we're doing this is through customer immersion experiences, or CIEs, which we have been doing in partnership with Microsoft. Through these, we facilitate hands-on sessions that allow participants to test drive Microsoft Office 365 solutions in a live environment focused on security, productivity, and privacy, compliance, and M365 co-pilot. For example, we recently provided a CIE around security and compliance for a large mining corporation. While we did not manage their Microsoft licensing, we had re-architected their SharePoint on a project basis last year, so we were already a trusted advisor. Following the CIE, the customer selected our professional services team to implement Defender for Office 365, realizing savings in their security spend and simplifying their cybersecurity management. Additionally, based on the in-depth knowledge and experience we provided, which they described as unique among channel partners they've worked with, they moved their CSP licensing under our management, an example of our services driving software and cloud sales for us. This customer is now also scoping further services projects for even more SharePoint-related services and for us to manage their cloud environment. Additionally, they've provided us referrals for other organizations within their industry. We've had a phenomenal year in CIEs in 2024, having provided almost 2,000 through September, which generates significant additional revenues. We also have a very high retention rate of customers that have had a CIE, and it has been an important customer acquisition channel for us. Over the past half decade, we've also invested significantly in building up our capabilities around Microsoft CSP. Our CSP revenue increased more than 50% in 2023 and is anticipated to increase by approximately 25% in 2024. This evolution has been aligned to Microsoft's multi-year transition to encouraging the use of CSP licenses for the SMB and mid-market rather than enterprise agreements, for which they have been reducing referral fees for channel partners. As a background, Microsoft introduced CSP to ensure their small and mid-sized customers were being provided tailored support by channel partners to select, adopt, and manage their vast array of technologies. The CSP vehicle offers these customers more flexibility in how new products are purchased with shorter commitment periods and no enterprise-wide conditions. And with CSP, SoftChoice manages the customer relationship directly, including providing post-sale service, with further incentives provided by Microsoft to drive the adoption and use of their products. This is opposed to solely earning a referral fee on an enterprise agreement. For Softchoice, as a leader in the mid-market with significant in-house services capabilities, the CSP licensing vehicle has accelerated our market share expansion. This is because our solution strengths are tailored to the advantages of CSP, including use case planning, adoption services, customer success programs, and the self-serve control that we provide customers via the SAMplus Hub. CSP has been the main driver of the healthy growth in our Microsoft Cloud and Workplace businesses and driven related professional and managed service engagements for us. For example, Softchoice recently enabled the Canadian Oil and Gas Company to consolidate their security strategy on M365E5. Our services are being used to implement E5 to govern user access control, endpoint security, and data protection. This will enable the customer to decommission non-Microsoft security tools that were previously providing that functionality. Through this process, again, the customer also transitioned to CSP at the expiration of their EA through SoftChoice. SoftChoice built the business case for this expansion of SIPend via our SAMplus consulting services, and the customer chose CSP because they needed our integrated services to deploy, manage, and support adoption of the new technology. With the sharp rise in CSP licensing, EA fees for us have been declining as a portion of our business for a number of years. And working with Microsoft, we've already implemented motions to further accelerate the transition of our small and mid-sized customers whose EA contracts come up from renewal in 2025 to CSP. And with that, I'll turn it over to Jonathan.