Softchoice Announces Third Quarter 2023 Results

Strong third quarter profit driven by healthy demand for core Software & Cloud solutions and prudent cost management

Softchoice Corporation (“Softchoice” or the “Company”) (TSX: SFTC) today announced its financial results for the third quarter ended September 30, 2023 (“Q3 2023”). Softchoice will hold a conference call/webcast to discuss its results today, November 9, 2023, at 8:30 a.m. ET. Unless otherwise noted, all dollar ($) amounts are in U.S. dollars.

Q3 2023 Summary 1

• Continued Constant Currency double digit gross profit growth in Software & Cloud and strong Services performance drove an overall 4.3% or $3.2 million increase in gross profit or a 3.3% or $2.5 million increase on a reported basis.
• Operating leverage and cost containment drove an increase in Adjusted EBITDA of 48.8% to $22.7 million, or 29% of gross profit, from $15.3 million, or 20% of gross profit, in Q3 2022.
• Income from operations grew by 188.6% over Q3 2022 to $18.3 million, driving an increase in Net income per share on a diluted basis to $0.14 from $(0.14) in Q3 2022 and Adjusted EPS on a diluted basis to $0.23 from $0.14 in Q3 2022.
• High cash conversion delivered LTM cash flow from operating activities of $96.2 million which was used to return $39 million of capital to shareholders through quarterly dividends and share buybacks and reduce net debt by approximately $63 million, resulting in net leverage decreasing to 1.1x at September 30, 2023 versus 2.1x the prior year.

Andrew Caprara, Softchoice’s Chief Executive Officer, said: 2

“We continued to successfully deliver on our growth strategy in the third quarter. We grew our customer base, driven by the increased capacity and tenure of our sales teams. We also increased our average gross profit per customer by supporting our salesforce with advanced technical and specialty sales expertise to drive deeper engagements and deliver higher-margin and stickier IT solutions. Demand from mid-market customers for our mission-critical solutions has remained robust, translating into strong growth in the number of public cloud customers, more zero-trust security engagements, and our customers adopting more advanced workplace software packages, all of which provide a pipeline for more recurring revenue. Additionally, we see great potential for generative AI in the coming years, and we continue to engage with our customers to help them prepare their IT environments and implement Microsoft Copilot and Google’s Duet AI.”

Jonathan Roiter, Softchoice’s Chief Financial Officer, said: 2

“We delivered solid top line gross profit growth in the third quarter driven by our resilient Software & Cloud focused business model despite industry-wide temporary weakness in hardware purchases, which we expect to lap in 2024, as well as a difficult comparator in Q3 2022 which benefited from large Software & Cloud sales to Enterprise customers. Combined with prudent expense management and lower variable compensation, this drove strong profit growth and margin expansion. We ended the quarter in a robust financial position with significant flexibility to enhance shareholder value through a balanced allocation of capital to growth investments and returning capital to shareholders. Due to the sustained customer demand we are experiencing for our core solutions, we are currently investing to increase our sales capacity significantly by the end of the year.”

Dividends and NCIB Update 2

• On November 8, 2023, the Board declared a quarterly dividend of Cdn. $0.11 per Common Share for the period from October 1, 2023 to December 31, 2023, to be paid on January 12, 2024 to shareholders of record at the close of business on December 29, 2023, representing an approximate 22% increase over Q3 2022. The dividend to which this notice relates is an eligible dividend for tax purposes.
• During Q3 2023, the Company repurchased and cancelled 51,336 Common Shares at an average price of Cdn. $15.13 per Common Share, under its normal course issuer bid (“NCIB”) program.

Supplementary Measures for the LTM period ended September 30, 20231

• Revenue Retention Rate was 94%, with SMB and Commercial revenue retention continuing to trend above 100%, offset by a decline in Enterprise revenue retention driven by a decline in gross sales in that channel related to the decline in hardware sales as well as some large, lower gross margin Software & Cloud sales recorded in the prior LTM period.
• Gross profit increased by 3.1% to $321.5 million from $312.0 million in the prior LTM period, due to an increase in:
  • Customers to 4,938 as at September 30, 2023, an increase of 220, or 4.7%, over September 30, 2022.
  • Gross Profit per Customer to ~$67,000 from ~$66,000 in the prior LTM period.
• Adjusted EBITDA increased by 22.1% to $93.7 million from $76.7 million in the prior LTM period.
• Adjusted Free Cash Flow increased by 24.3% to $84.7 million, or 90% of Adjusted EBITDA, from $68.1 million, or 89% 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) 25% was used for share buybacks under the NCIB, (iii) 25% for cash taxes and interest payments, and (iv) the remainder primarily to reduce debt.

Board Update

The Company is pleased to announce the appointment of John MacIntyre to its Board of Directors. Mr. MacIntyre is co-founder and Partner at Birch Hill Equity Partners. “I’m excited to join Softchoice’s Board and look forward to contributing to its continued growth and delivery of long-term shareholder value,” said Mr. MacIntyre. Prior to Birch Hill, he co-founded the Canadian mid-market Private Equity Group within TD Capital. Mr. MacIntyre currently serves on the Board of TD Bank and Sport Maska Inc., the parent company of CCM Hockey, and previously served as Chair of HomeEquity Bank. Mr. MacIntyre will replace Felix-Etienne Lebel as Lead Independent Director of Softchoice’s Board and chair of the corporate governance and nominating committee of the Board. The Board wishes to thank Mr. Etienne-Lebel for his service on the Board.

Financial Summary1

US$ M except per share amounts, percentages and ratios

Operations

Q3 2023

Q3 2022

Change %

Change in Constant Currency* %

YTD 2023

YTD 2022

Change %

Change in Constant Currency* %

Gross Sales

522.6

544.6

(4.1%)

 

1,605.9

1,594.3

0.7%

 

Net sales

182.2

222.1

(18.0%)

 

598.5

699.3

(14.4%)

 

Gross profit

78.2

75.8

3.3%

4.3%

235.4

226.2

4.1%

6.0%

Adjusted EBITDA

22.7

15.3

48.8%

 

62.2

50.2

23.7%

 

as a Percentage of Gross Profit

29.0%

20.2%

 

 

26.4%

22.2%

 

 

Income from operations

18.3

6.3

188.6%

 

46.9

28.6

64.0%

 

Net income (loss)

8.4

(8.0)

NMF

 

27.0

3.6

658.6%

 

Net income (loss) per Diluted Share

$0.14

$(0.14)

NMF

 

$0.46

$0.06

666.7%

 

Adjusted Net Income

13.6

8.7

56.4%

 

34.6

30.0

15.3%

 

Adjusted EPS (Diluted)

$0.23

$0.14

64.3%

 

$0.59

$0.48

22.9%

 

Cash flow

Q3 2023

Q3 2022

Change %

LTM to Sep. 30, 2023

LTM to Sep. 30, 2022

Change %

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

16.7

2.5

568.1%

65.0

36.6

77.5%

Net cash provided by operating activities

(11.2)

(58.9)

NMF

96.2

6.2

1,454.5%

Adjusted EBITDA

 

 

 

93.7

76.7

22.1%

Adjusted Free Cash Flow

 

 

 

84.7

68.1

24.3%

Adjusted Free Cash Flow Conversion

 

 

 

90%

89%

 

Financial Position, as at:

Sep. 30, 2023

Sep. 30, 2022

Consolidated net debt**

101.7

164.3

Net debt to Adjusted EBITDA ratio

1.1

2.1

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

 

 

 

 

 

 

 

 

Q3 2023

Q3 2022

Change %

Change in Constant Currency* %

YTD 2023

YTD 2022

Change %

Change in Constant Currency* %

Gross Sales by IT Solution Type*:

 

 

 

 

 

 

 

 

Software & Cloud

394.4

380.8

3.6%

 

1,199.5

1,078.9

11.2%

 

Services

27.9

25.6

8.7%

 

83.0

81.7

1.7%

 

Hardware

100.3

138.2

(27.4%)

 

323.4

433.8

(25.5%)

 

 

 

 

 

 

 

 

 

 

Gross Profit by IT Solution Type:

 

 

 

 

 

 

 

 

Software & Cloud

53.2

49.1

8.3%

9.7%

160.0

143.6

11.4%

14.0%

as a percentage of Gross Sales

13.5%

12.9%

 

 

13.3%

13.3%

 

 

Services

7.9

5.2

51.4%

51.2%

23.8

19.9

19.5%

19.4%

as a percentage of Gross Sales

28.3%

20.3%

 

 

28.7%

24.4%

 

 

Hardware

17.2

21.4

(19.9%)

(19.7%)

51.5

62.6

(17.7%)

(16.5%)

as a percentage of Gross Sales

17.1%

15.5%

 

 

15.9%

14.4%

 

 

 

 

 

 

 

 

 

 

 

Gross Sales by Sales Channel*:

 

 

 

 

 

 

 

 

SMB

140.9

107.5

31.1%

 

387.9

333.5

16.3%

 

Commercial

261.1

265.6

(1.7%)

 

828.7

808.6

2.5%

 

Enterprise

120.5

171.5

(29.7%)

 

389.2

452.3

(13.9%)

 

 

 

 

 

 

 

 

 

 

Gross Profit by Sales Channel:

 

 

 

 

 

 

 

 

SMB

19.1

17.1

11.3%

14.4%

54.7

50.4

8.4%

10.7%

as a percentage of Gross Sales

13.5%

15.9%

 

 

14.1%

15.1%

 

 

Commercial

43.0

40.6

5.7%

5.5%

133.3

125.5

6.2%

7.9%

as a percentage of Gross Sales

16.5%

15.3%

 

 

16.1%

15.5%

 

 

Enterprise

16.2

18.0

(9.8%)

(8.2%)

47.4

50.3

(5.7%)

(3.5%)

as a percentage of Gross Sales

13.5%

10.5%

 

 

12.2%

11.1%

 

 

Amounts may not add to total due to rounding

* Q3 2023 and YTD 2023 in Constant Currency are translated at the average foreign exchange rate of Q3 2022 and YTD 2022, which were $0.77 CAD/USD and $0.78 CAD/USD, respectively.

** Consolidated 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 Q3 2023 results today at 8:30 a.m. (ET).

DATE: Thursday, November 9, 2023

TIME: 8:30 a.m. Eastern Time

WEBCAST: https://app.webinar.net/YNG0grox8P1

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/45eaWyH to receive an instant automated call back. You can also dial direct to be entered into the call by an operator: 416-764-8659 or 1-888-664-6392.

TAPED REPLAY: 416-764-8677 or 1-888-390-0541, Replay Code 954157 # (Available until Nov. 16, 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 the three and nine-months ended September 30, 2023 and September 30, 2022 (the “Q3 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 Q3 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

September 30,

Nine Months Ended

September 30,

Reconciliation of Net Sales to Gross Sales

2023

2022

2023

2022

Net sales

182,153

222,084

598,524

699,316

Net adjustment for sales transacted as agent

340,406

322,550

1,007,351

895,000

Gross Sales

522,559

544,634

1,605,875

1,594,316

 

Reconciliation of Operating Expenses to Adjusted Cash Operating Expenses

 

 

 

 

Operating expenses

59,975

69,430

188,506

197,586

Depreciation and amortization

(2,203)

(4,823)

(11,372)

(14,593)

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

(930)

(715)

(2,617)

(2,429)

Non-recurring compensation and other costs (2)

(1,323)

(2,941)

(1,417)

(2,963)

Business transformation non-recurring costs (3)

–

(465)

(3)

(1,363)

Non-recurring legal recovery (provision) (4)

–

–

115

(322)

Adjusted Cash Operating Expenses

55,519

60,486

173,212

175,916

 

 

 

 

 

Reconciliation of Income from operations to Adjusted EBITDA

 

 

 

 

Income from operations

18,267

6,329

46,867

28,570

Depreciation and amortization

2,203

4,823

11,372

14,593

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

930

715

2,617

2,429

Non-recurring compensation and other costs (2)

1,323

2,941

1,417

2,963

Business transformation non-recurring costs (3)

–

465

3

1,363

Non-recurring legal (recovery) provision (4)

–

–

(115)

322

Adjusted EBITDA

22,723

15,273

62,161

50,240

Adjusted EBITDA as a Percentage of Gross Profit (5)

29.0%

20.2%

26.4%

22.2%

 

 

 

 

 

Reconciliation of Net Income (Loss) to Adjusted Net Income

 

 

 

 

Net income (loss)

8,353

(7,958)

27,000

3,559

Amortization of intangible assets

590

3,236

6,579

9,674

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

930

715

2,617

2,429

Non-recurring compensation and other costs (2)

1,323

2,941

1,417

2,963

Business transformation non-recurring costs (3)

–

465

3

1,363

Non-recurring legal (recovery) provision (4)

–

–

(115)

322

Loss (gain) on lease modification (6)

–

–

4

(209)

Foreign exchange loss (gain) (7)

3,553

12,080

(511)

15,288

Other non-recurring expense (8)

–

930

87

930

Related tax effects (9)

(1,120)

(3,696)

(2,462)

(6,302)

Adjusted Net Income

13,629

8,713

34,619

30,017

Weighted Average Number of Shares (Basic)

58,509,606

58,719,796

58,153,336

59,136,768

Weighted Average Number of Shares (Diluted).

59,298,269

61,736,047

58,941,998

62,153,019

Adjusted EPS (Basic) (10)

0.23

0.15

0.60

0.51

Adjusted EPS (Diluted) (10)

0.23

0.14

0.59

0.48

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 September 30,

2023

2022

Net cash provided by operating activities

96,242

6,191

Adjusted for:

 

 

Share-based compensation and other costs (11)

1,712

8,403

Non-recurring compensation and other costs (2)

2,279

2,969

Business transformation non-recurring costs (3)

87

1,862

IPO related costs (12)

–

79

Follow-On Offering costs (13)

–

287

Non-recurring legal (recovery) provision (4)

(115)

2,036

Realized foreign exchange loss

4,846

7,838

Finance and other (income) expense (14)

(1,226)

277

Cash taxes paid, net

10,272

11,274

Cash interest paid

10,847

5,073

Change in non-cash operating working capital

(31,264)

30,415

Adjusted EBITDA

93,680

76,704

Maintenance Capex

(3,287)

(2,416)

IFRS 16 lease payments

(5,702)

(6,179)

Adjusted Free Cash Flow

84,691

68,109

Adjusted Free Cash Flow Conversion

90%

89%

 

 

 

Notes (Refer to the Q3 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 restricted share units (“RSUs”) and Deferred share units (“DSUs”) (as defined below). Beginning in Q3 2023, these expenses include the employer match contributions to the ESPP.

(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)

All non-recurring costs relating to the business transformation initiative were segregated for tracking purposes and are monitored on a regular basis. The costs relate to the implementation and system enhancements for the business transformation. As at September 30, 2023, a total of $51 million has been invested to date 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)

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”.

(6)

The gain on lease modification recognized in Q1 2022 as a result of the derecognition of the lease liabilities related to rental parking as the associated office space has been subleased.

(7)

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

(8)

Other non-recurring expense include costs the Company incurred in Q2 2023 in connection with the tax reorganization that occurred at the time of the IPO and costs recognized in Q3 2022 relating to hardware devices stolen by a third-party purporting to be a customer.

(9)

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.

(10)

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”.

(11)

Share-based compensation represents costs recognized in connection with RSUs and DSUs (as defined below). Included $7.7 million relating to Cash-Out Agreements in conjunction with the Follow-On Offering that occurred in Q4 2021. As a result of the IPO, 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”. Beginning Q3 2023, these expenses include the employer match contributions to the employee stock purchase plan.

(12)

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.

(13)

In connection with the Follow-On Offering that occurred in Q4 2021, 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.

(14)

Finance and other expense refers to interest income on cash, the cash portion of the gain on lease modification as referenced in note (6) above and other non-recurring expenses.

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; (ix) the impact of macroeconomic conditions and remote and hybrid work on our business, financial position, results of operations and/or cashflows; and (x) the use, adoption, integration and growth of AI tools, products, services and solutions.

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 Q3 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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