Softchoice Announces First Quarter 2023 Results

Gross profit increases by ~11% and Adjusted EBITDA by ~46%, driven by strong growth in Software & Cloud solutions

Softchoice Corporation (“Softchoice” or the “Company”) (TSX: SFTC) today announced its financial results for the first quarter ended March 31, 2023 (“Q1 2023”). Softchoice will hold a conference call/webcast to discuss its results today, May 12, 2023, at 8:30 a.m. ET. Unless otherwise noted, all dollar ($) amounts are in U.S. dollars.

Q1 2023 Summary 1

• Gross profit increased by 10.6% to $74.2 million, from $67.1 million in Q1 2023, driven by a 20.1% or $8.1 million increase in Software & Cloud solutions which more than offset a decline in Hardware sales consistent with industry trends.
• Gross profit was negatively impacted by approximately $2.0 million in the quarter due to the strengthened U.S. dollar, specifically by the translation of gross profit generated in Canada into the Company's reporting currency of U.S. dollars.
  • Gross profit in Q1 2023 increased by 13.6% or $9.1 million in Constant Currency compared to Q1 2022 driven by 23.9% growth in Software & Cloud in Constant Currency.
• Adjusted EBITDA increased by 45.9% to $14.5 million, from $10.0 million in Q1 2022, due to the increase in gross profit, partially offset by a 4.5% increase in Adjusted Cash Operating Expenses.
  • Foreign exchange fluctuations had an immaterial impact on Adjusted EBITDA as the negative impact on gross profit was offset by a similar reduction in Adjusted Cash Operating Expenses.
• Income from operations increased to $9.6 million from $3.8 million in Q1 2022.
• Net income increased to $4.5 million from $3.7 million in Q1 2022.
• Adjusted Net Income increased by 53.5% or $2.5 million to $7.1 million from $4.6 million in Q1 2022, driven by the increase in Adjusted EBITDA.
• Adjusted EPS on a diluted basis increased by 71.4% to $0.12 from $0.07 in Q1 2022 due to the increase in Adjusted Net Income combined with a reduction in the total weighted average number of common shares of the Company (each, a “Common Share”) outstanding, reflecting the Company’s repurchase and cancellation of Common Shares under its Normal Course Issuer Bid (“NCIB”) over the trailing twelve months (“LTM”).

Vince De Palma, Softchoice’s Chief Executive Officer, said:

“We recorded a solid first quarter led by strong growth in our public cloud and software solutions, and continue to prove our value to our customers by helping them enable software-driven transformation and optimize their IT spend.”

Andrew Caprara, Softchoice’s President & Chief Operating Officer, said: 2

"Our investments in selling capacity and technical capabilities and resources helped us continue to grow our customer base, while also creating deeper engagement with existing customers. Our foundation of software, cloud and services was resilient, and our strategic focus on the most in demand solution areas puts us in a strong position to continue taking market share in the future.”

Dividends and NCIB Update 2

• On May 11, 2023, the Board declared a quarterly dividend of Cdn. $0.11 per Common Share for the period from April 1, 2023, to June 30, 2023, to be paid on July 14, 2023, to shareholders of record at the close of business on June 30, 2023. The dividend to which this notice relates is an eligible dividend for tax purposes.
• During Q1 2023, the Company repurchased and cancelled 561,334 Common Shares at an average price of Cdn. $17.61 per Common Share, under its NCIB program.

Supplementary Measures for the LTM period ended March 31, 2023

• Revenue Retention Rate was 105%, illustrating strong sales growth with existing Customers
• Gross profit increased by approximately 9.8% to $319.5 million from the prior LTM ended March 31, 2022, due to:
  • an increase in Customers to 4,799 as at March 31, 2023, an increase of 164, or 3.5%, over March 31, 2022
  • an increase in Gross Profit per Customer for the LTM ended March 31, 2023, to $68,000 from $63,000 for the LTM ended March 31, 2022
• Adjusted Free Cash Flow increased by 28.8% to $76.7 million, or 89% of Adjusted EBITDA, compared to $59.6 million, or 87% of Adjusted EBITDA, in the prior LTM period
  • Adjusted Free Cash Flow was used as follows: (i) approximately 21% was used to pay dividends to shareholders, (ii) 52% was used for share buybacks under the NCIB, and (iii) the remainder was used primarily for cash taxes and interest payments.

Financial Summary1

US$ M except per share amounts, percentages and ratios

Operations

Q1 2023

Q1 2022

Change

%

Change in

Constant

Currency* %

Gross Sales

506.0

466.6

8.5%

 

Net sales

208.8

222.9

(6.3%)

 

Gross profit

74.2

67.1

10.6%

13.6%

Adjusted EBITDA

14.5

10.0

45.9%

 

as a Percentage of Gross Profit

19.6%

14.8%

 

 

Income from operations

9.6

3.8

151.1%

 

Net income

4.5

3.7

21.7%

 

Net income per Diluted Share

$0.08

$0.06

33.3%

 

Adjusted Net Income

7.1

4.6

53.5%

 

Adjusted EPS (Diluted)

$0.12

$0.07

71.4%

 

Cash flow

LTM to Mar. 31,

2023

LTM to Mar. 31,

2022

Change

%

 

Net cash provided by operating activities, excluding change in non-cash operating working capital

50.5

19.7

155.9%

 

Net cash provided by operating activities

37.7

32.6

15.6%

 

Adjusted Free Cash Flow

76.7

59.6

28.8%

 

Adjusted Free Cash Flow Conversion

89%

87%

 

Financial Position, as at:

Mar. 31, 2023

Mar. 31, 2022

 

 

Net debt**

132.5

108.4

 

 

Net debt to Adjusted EBITDA ratio

1.5

1.6

 

 

Gross Sales and Gross Profit by IT Solution Type and Sales Channel

US$ M except per share amounts and percentages

Q1 2023

Q1 2022

Change

%

Change in

Constant

Currency* %

Gross Sales by IT Solution Type:

 

 

 

 

Software & Cloud

364.4

299.0

21.9%

 

Services

27.6

24.7

11.4%

 

Hardware

114.1

142.9

(20.2%)

 

 

 

 

 

 

Gross Profit by IT Solution Type:

 

 

 

 

Software & Cloud

48.4

40.3

20.1%

23.9%

as a percentage of Gross Sales

13.3%

13.5%

 

 

Services

7.9

6.5

21.6%

21.7%

as a percentage of Gross Sales

28.6%

26.2%

 

 

Hardware

17.9

20.2

(11.7%)

(9.5%)

as a percentage of Gross Sales

15.7%

14.2%

 

 

 

 

 

 

 

Gross Sales by Sales Channel:

 

 

 

 

SMB

107.8

92.9

16.1%

 

Commercial

244.5

232.6

5.1%

 

Enterprise

153.7

141.2

8.9%

 

 

 

 

 

 

Gross Profit by Sales Channel:

 

 

 

 

SMB

16.7

15.1

10.3%

12.6%

as a percentage of Gross Sales

15.5%

16.3%

 

 

Commercial

41.0

36.1

13.7%

16.9%

as a percentage of Gross Sales

16.8%

15.5%

 

 

Enterprise

16.5

15.8

4.0%

7.1%

as a percentage of Gross Sales

10.7%

11.2%

 

 

Amounts may not add to total due to rounding

* Q1 2023 in constant currency is translated at the average foreign exchange rate of Q1 2022, which was $0.79 CAD/USD.

** Net debt equates to loans and borrowings plus lease liabilities less cash-on-hand

Quarterly Conference Call

Softchoice’s management team will hold a conference call to discuss our Q1 2023 results today at 8:30 a.m. (ET).

DATE: Friday, May 12, 2023

TIME: 8:30 a.m. Eastern Time

WEBCAST: https://app.webinar.net/Q9adRYERpYk

A link to the webcast will also be available on the Events page of the Investors section of Softchoice’s website at http://investors.softchoice.com. Please connect at least 15 minutes prior to the conference call to ensure adequate time for any software download that may be required to join the webcast. An archived replay of the webcast will be available for 90 days.

DIAL-IN: To join the conference call without operator assistance, you may register and enter your phone number at https://emportal.ink/3mggw3f to receive an instant automated call back. You can also dial direct to be entered to the call by an Operator: 416-764-8659 or 1-888-664-6392, Confirmation # 33864706

TAPED REPLAY: 416-764-8677 or 1-888-390-0541, Replay Code 864706 # (Available until May 19, 2023)

Capitalized Terms

Capitalized terms used in this release and terms we use to describe our IT solution types, including Software & Cloud, Services, and Hardware and sales channels including SMB, Commercial, and Enterprise, as well as other measures such as Customer, Gross Profit per Customer, Revenue Retention Rate, and Constant Currency, are described in the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations for the quarter ended March 31, 2023 (the “Q1 2023 MD&A”), and/or our annual information form dated March 29, 2023 (the “AIF”) filed on SEDAR (as defined below) and available on the Company’s investor relations website http://investors.softchoice.com.

1 Non-IFRS Measures

This news release makes reference to certain non-IFRS measures and other measures. These measures are not recognized measures under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our results of operations from management’s perspective. Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS. We use non-IFRS measures, including “Adjusted EBITDA”, “Adjusted EBITDA as a Percentage of Gross Profit”, “Adjusted Cash Operating Expenses”, “Adjusted Net Income (Loss)”, “Adjusted EPS”, “Adjusted Free Cash Flow”, “Adjusted Free Cash Flow Conversion”, and “Gross Sales”. These non-IFRS measures and other measures are used to provide investors with supplemental measures of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS measures. Our management uses these non-IFRS measures and other measures in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and forecasts and to determine components of management compensation. We also believe that securities analysts, investors and other interested parties frequently use certain of these non-IFRS measures and other measures in the evaluation of issuers. As required by Canadian securities laws, we reconcile the non-IFRS measures to the most comparable IFRS measures. For more information on non-IFRS measures and other measures, see the Q1 2023 MD&A filed on SEDAR and available on the Company’s investor relations website http://investors.softchoice.com

Reconciliations of Non-IFRS Financial Measures

(Information in thousands of U.S. dollars, unless otherwise stated)

Three Months Ended

March 31,

Reconciliation of Net Sales to Gross Sales

2023

2022

Net sales

208,816

222,922

Net adjustment for sales transacted as agent

297,226

243,687

Gross Sales

506,042

466,609

 

Reconciliation of Operating Expenses to Adjusted Cash Operating Expenses

 

 

Operating expenses

64,559

63,226

Depreciation and amortization

(4,741)

(4,873)

Equity-settled share-based compensation and other costs (1)

(160)

(572)

Non-recurring compensation and other costs (2)

(95)

(20)

Business transformation non-recurring costs (3)

(3)

(561)

Non-recurring legal provision (4)

115

(87)

Adjusted Cash Operating Expenses

59,675

57,113

 

 

 

Reconciliation of Income from operations to Adjusted EBITDA

 

 

Income from operations

9,640

3,839

Depreciation and amortization

4,741

4,873

Equity-settled share-based compensation and other costs (1)

160

572

Non-recurring compensation and other costs (2)

95

20

Business transformation non-recurring costs (3)

3

561

Non-recurring legal provision (4)

(115)

87

Adjusted EBITDA

14,524

9,952

Adjusted EBITDA as a Percentage of Gross Profit (7)

19.6%

14.8%

 

 

 

Reconciliation of Net Income to Adjusted Net Income

 

 

Net income

4,537

3,729

Amortization of intangible assets

3,164

3,208

Equity-settled share-based compensation and other costs (1)

160

572

Non-recurring compensation and other costs (2)

95

20

Business transformation non-recurring costs (3)

3

561

Non-recurring legal provision (4)

(115)

87

Loss (gain) on lease modification (5)

4

(209)

Foreign exchange loss (gain) (6)

121

(2,654)

Related tax effects (7)

(848)

(675)

Adjusted Net Income

7,121

4,639

Weighted Average Number of Shares (Basic)

58,058,765

59,512,239

Weighted Average Number of Shares (Diluted)

60,457,312

63,392,680

Adjusted EPS (Basic) (8)

0.12

0.08

Adjusted EPS (Diluted) (8)

0.12

0.07

The following measures are reported on a trailing twelve-month basis only:

Reconciliation of Net Cash Provided by Operating Activities to

Adjusted Free Cash Flow

Trailing Twelve-Months Ended March 31,

2023

2022

Net cash provided by operating activities

37,704

32,611

Adjusted for:

 

 

Share-based compensation and other costs (12)

730

33,361

Non-recurring compensation and other costs (2)

3,900

426

Business transformation non-recurring costs (3)

889

1,861

IPO related costs (9)

–

2,818

Follow-On Offering costs (10)

–

287

Non-recurring legal provision (4)

120

1,801

Realized foreign exchange loss (gain)

11,939

(5,908)

Finance and other expense (13)

275

806

Cash taxes paid, net

9,335

8,378

Cash interest paid

8,604

4,990

Change in non-cash operating working capital

12,835

(12,862)

Adjusted EBITDA

86,331

68,569

Maintenance Capex

(3,769)

(1,895)

IFRS 16 lease payments

(5,877)

(7,123)

Adjusted Free Cash Flow

76,685

59,551

Adjusted Free Cash Flow Conversion

89%

87%

 

 

 

Notes (Refer to the Q1 2023 MD&A for description of the sections with parentheses within these Notes)

(1)

These expenses represent costs recognized in connection with the Company’s legacy option plan and omnibus long-term equity incentive plan, pursuant to which options granted are fair valued at the time of grant using the Black-Scholes option pricing model and adjusted for any plan modifications, and expenses related to RSUs and DSUs (as defined below).

(2)

These expenses include compensation costs relating to severance and other costs comprised of professional, legal, consulting, accounting and management fees that are non-recurring and are sporadic in nature.

(3)

These costs in the trailing twelve-months ended Q1 2022 largely comprised of one-time third-party consulting expenses, personnel costs for dedicated internal resources and software related costs. All non-recurring costs relating to the business transformation initiative were segregated for tracking purposes and are monitored on a regular basis. The costs in Q1 2023, the trailing twelve-months Q1 2023 and Q1 2022 relate to system enhancements post-business transformation. As at March 31, 2023, $51.0 million has been invested in operating and capital expenditures in the business transformation initiative and related system enhancements.

(4)

The Company has settled certain legal claims, without admission of liability or wrongdoing, in respect of U.S. wage and hour disputes and has incurred $2.0 million in expenses for such settlements to date of which $0.3 million was incurred in Fiscal 2022, which are non-recurring in nature. These legal claims were settled in Q2 2022. In Q1 2023, the Company received $0.1 million related to this matter.

(5)

Loss on lease modification recognized in Q3 2021 resulting from the recognition of a sublease receivable for an office space that has been subleased and the corresponding derecognition of a right-of-use asset associated with this space. The gain on lease modification recognized in Q1 2022 because of the derecognition of the lease liabilities related to rental parking as the associated office space has been subleased. The gain on lease modification in Q4 2022 resulting from derecognition of a portion of rental parking associated with an office space.

(6)

Foreign exchange loss (gain) includes both realized and unrealized amounts.

(7)

This relates to the tax effects of the adjusting items, which was calculated by applying the statutory tax rate of 26.5% and adjusting for any permanent differences and capital losses.

(8)

Basic Adjusted EPS is calculated using the weighted average number of shares outstanding during the period. Diluted Adjusted EPS includes the dilutive impact of the stock options in addition to the weighted average number of shares outstanding during the period. See “Non-IFRS Measures and Other Measures – Non-IFRS Measures – Adjusted Net Income (Loss) and Adjusted EPS”.

(9)

In connection with the IPO, the Company incurred expenses related to professional fees, legal, consulting, accounting and compensation that would otherwise not have been incurred and therefore are non-recurring. These costs have been separately identified and adjusted for clarity.

(10)

In connection with the Follow-On Offering, the Company incurred expenses related to professional fees, legal, and accounting fees that would otherwise not have been incurred and therefore are non-recurring. These costs have been separately identified and adjusted above.

(11)

Adjusted EBITDA as a Percentage of Gross Profit is calculated as Adjusted EBITDA divided by gross profit. See “Non-IFRS Measures and Other Measures – Non-IFRS Measures – Adjusted EBITDA and Adjusted EBITDA as a Percentage of Gross Profit”.

(12)

Share-based compensation represents costs recognized in connection with RSUs and DSUs. Included in the trailing twelve months ended Q1 2022, there was $16.9 million relating to Cash-Out Agreements in conjunction with the IPO and $7.7 million relating to Cash-Out Agreements in conjunction with the Follow-On Offering, respectively. Other costs are comprised of the employee investment plan and the long-term profit-sharing plan, which were dissolved in connection with the IPO; and fair value adjustments in relation to existing equity-based arrangements. As a result of the IPO, a $6.1 million fair value adjustment in Q2 2021 and a $0.6 million of related payroll taxes in Q4 2022 were triggered on an existing equity-based arrangement which was dissolved and paid thereafter. See “Share Information Prior to the Completion of the Offering”.

(13)

Finance and other expense refers to interest income on cash, net of non-controlling interest portion of unrecoverable withholding taxes on royalties. Finance and other expenses also includes the cash portion of the gain on lease modification as referenced in note (5) above.

2 Forward-Looking Statements

This news release contains “forward-looking information” within the meaning of applicable securities laws in Canada.

Forward-looking information may relate to our future business, financial outlook and anticipated events or results and may include information regarding our financial position, business strategy, growth strategies, addressable markets, market share, budgets, operations, financial results, taxes, dividend policy, NCIB, operating environment, business plans and objectives. Particularly, information regarding our expectations of future results, performance, growth, achievements, prospects or opportunities or the markets in which we operate is forward-looking information. In some cases, forward-looking information can be identified by the use of forward-looking terminology such as “plans”, “targets”, “expects” or “does not expect”, “is expected”, “an opportunity exists”, “budget”, “scheduled”, “estimates”, “outlook”, “financial outlook”, “forecasts”, “projection”, “prospects”, “strategy”, “intends”, “anticipates”, “does not anticipate”, “believes”, or variations of such words and phrases or statements that certain actions, events or results “may”, “could”, “would”, “might”, “will”, “will be taken”, “occur” or “be achieved”. In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts but instead represent management’s expectations, estimates and projections regarding possible future events or circumstances.

Forward-looking information may include, among other things: (i) the Company’s expectations regarding its financial performance and future market share growth, including among others, organic growth; (ii) the Company’s expectations regarding industry and market trends, growth rates and growth strategies; (iii) the Company’s business plans and strategies; (iv) the Company’s ability to retain customers and increase margin per customer; (v) the Company’s relationship and status with technology partners; (vi) the Company’s growth strategies, future organic growth, and competitive position in the IT industry; (vii) the Company’s dividend program and dividend rates; (viii) the Company’s NCIB program and the purchase of Common Shares in connection with such program; and (ix) the impact of macroeconomic conditions and remote and hybrid work on our business, financial position, results of operations and/or cashflows.

Forward-looking information is necessarily based on a number of opinions, estimates and assumptions that we considered appropriate and reasonable as at the date such statements are made, and are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking information, including but not limited to the risk factors described in our Q1 2023 MD&A and under “Risk Factors” in the AIF. A copy of the AIF can be accessed under our profile on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com and on our website at investors.softchoice.com. There can be no assurance that such forward-looking information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such information. Accordingly, readers should not place undue reliance on forward-looking information, which speaks only as at the date made. Softchoice does not undertake any obligation to update such forward-looking information, whether as a result of new information, future events or otherwise, except as expressly required under applicable securities laws.

About Softchoice

Softchoice (TSX: SFTC) is a software-focused IT solutions provider that equips organizations to be agile and innovative, and for their people to be engaged, connected and creative at work. That means moving them to the cloud, helping them build the workplace of tomorrow, and enabling them to make smarter decisions about their technology portfolio. For more information, please visit www.softchoice.com.

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