Double-digit constant currency growth in Software & Cloud
gross profit led to strong cash flow generation
Softchoice Corporation (“Softchoice” or the “Company”) (TSX:
SFTC) today announced its financial results for the second quarter
ended June 30, 2023 (“Q2 2023”). Softchoice will hold a conference
call/webcast to discuss its results today, August 11, 2023, at 8:30
a.m. ET. Unless otherwise noted, all dollar ($) amounts are in U.S.
dollars.
Q2 2023 Summary 1
- Strong 10.4% growth in gross profit in Constant Currency in our
Software & Cloud strategic focus area, offset by temporary
industry-wide declines of hardware purchases, resulted in a 1.5% or
$1.3 million increase in gross profit compared with Q2 2022, or a
marginal decline of 0.5% or $0.4 million on a reported basis.
- Balanced and healthy double-digit growth in Software &
Cloud across all channels in Constant Currency.
- Continued resilient Commercial and SMB demand, with the
Enterprise channel being disproportionately impacted by Hardware
solutions which declined at 19.9% in Constant Currency.
- Adjusted EBITDA, benefiting from disciplined expense management
offsetting selling capacity increases, decreased by 0.4% to $24.9
million, from $25.0 million in Q2 2022, with foreign exchange
fluctuations having an immaterial impact.
- Income from operations grew by 3.0% over Q2 2022 to $19.0
million.
- Net income per share on a diluted basis increased to $0.23 from
$0.12 in Q2 2022 largely due to foreign exchange gains partially
offset by higher income taxes, while Adjusted EPS on a diluted
basis decreased to $0.23 from $0.27 in Q2 2022 largely due to
higher interest and income tax expenses.
- Strong cash flow generation led to consolidated net debt of
$88.6M at June 30, 2023 compared with $95.7M a year prior,
resulting in a consolidated net debt to Adjusted EBITDA ratio of
1.0x versus the prior year’s 1.3x.
Andrew Caprara, Softchoice’s Chief Executive Officer, said:
2
“We continued to deliver strong growth in Software & Cloud,
driven by solid customer growth and our ability to provide mission
critical and recurring revenue-generating software and cloud
solutions. Along with our disciplined approach to managing the
business, this enabled us to offset the impacts of the
industry-wide decline in hardware sales. Continued strong growth in
public cloud is driven by increases in our sales capacity, market
demand and our deep technical capabilities. With demand remaining
strong in our strategic focus areas and our key technology partners
introducing transformative technology including generative AI, we
are accelerating investments in our technical and sales
capabilities, which we believe will further drive growth for our
business and success for our customers.”
Jonathan Roiter, Softchoice’s Chief Financial Officer, said:
2
"The second quarter was highlighted by healthy profit margins
driven by prudent expense management and strong cash flow
generation, which was used to return capital to shareholders
through our quarterly dividend and share buybacks, and to reduce
debt. We ended the quarter in a robust financial position with
significant available liquidity and flexibility to continue
enhancing shareholder value. Despite the anticipated continuation
of macroeconomic pressure impacting hardware sales in the near
term, we continue to target healthy organic EBITDA growth due to
continued demand for our core IT solutions and prudent management
of our administrative and variable costs.”
Dividends and NCIB Update 2
- On August 10, 2023, the Board declared a quarterly dividend of
Cdn. $0.11 per Common Share for the period from July 1, 2023, to
September 30, 2023, to be paid on October 13, 2023, to shareholders
of record at the close of business on September 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 Q2 2023, the Company repurchased and cancelled 151,667
Common Shares at an average price of Cdn. $17.92 per Common Share,
under its normal course issuer bid (“NCIB”) program.
Supplementary Measures for the LTM period ended June 30,
20231
- Revenue Retention Rate was 102%, with strong SMB and Commercial
revenue retention consistent with the prior LTM ended June 30,
2022, partially offset by a decline in Enterprise customers revenue
retention resulting from the previously discussed Hardware
declines.
- Gross profit increased by 5.9% to $319.1 million from $301.4
million in the prior LTM ended June 30, 2022, due to an increase
in:
- Customers to 4,830 as at June 30, 2023, an increase of 163, or
3.5%, over June 30, 2022.
- Gross Profit per Customer to $67,000 from $65,000 in the prior
LTM period.
- Adjusted EBITDA increased by 18.6% to $86.2 million from $72.7
million in the prior LTM period.
- Adjusted Free Cash Flow increased by 19.8% to $76.6 million, or
89% of Adjusted EBITDA, from $63.9 million, or 88% of Adjusted
EBITDA, in the prior LTM period.
- Adjusted Free Cash Flow was used as follows: (i) approximately
22% was used to pay dividends to shareholders, (ii) 40% was used
for share buybacks under the NCIB, and (iii) the remainder was used
primarily for cash taxes and interest payments and other
costs.
Financial Summary1
US$ M except per share amounts,
percentages and ratios
Operations
Q2
2023
Q2
2022
Change
%
Change in
Constant
Currency*
%
YTD
2023
YTD
2022
Change
%
Change in
Constant
Currency*
%
Gross Sales
577.3
583.1
(1.0%)
1,083.3
1,049.7
3.2%
Net sales
207.6
254.3
(18.4%)
416.4
477.2
(12.8%)
Gross profit
82.9
83.3
(0.5%)
1.5%
157.1
150.4
4.5%
6.9%
Adjusted EBITDA
24.9
25.0
(0.4%)
39.4
35.0
12.8%
as a Percentage of Gross Profit
30.0%
30.0%
25.1%
23.2%
Income from operations
19.0
18.4
3.0%
28.6
22.2
28.6%
Net income (loss)
14.1
7.8
81.2%
18.6
11.5
61.9%
Net income (loss) per Diluted
Share
$0.23
$0.12
91.7%
$0.31
$0.18
72.2%
Adjusted Net Income
13.9
16.7
(16.8%)
21.0
21.3
(1.5%)
Adjusted EPS (Diluted)
$0.23
$0.27
(14.8%)
$0.35
$0.34
2.9%
Cash flow
Q2
2023
Q2
2022
Change
%
LTM to Jun.
30, 2023
LTM to Jun.
30, 2022
Change
%
Net cash provided by operating
activities,
excluding change in non-cash operating
working capital
18.6
18.4
1.3%
50.8
41.8
21.4%
Net cash provided by operating
activities
53.5
42.6
25.6%
48.6
28.7
69.1%
Adjusted Free Cash Flow
76.6
63.9
19.8%
Adjusted Free Cash Flow Conversion
89%
88%
Financial Position, as at:
Jun. 30, 2023
Jun. 30, 2022
Consolidated net debt**
88.6
95.7
Net debt to Adjusted EBITDA ratio
1.0
1.3
Gross Sales and Gross Profit
by IT Solution Type and Sales Channel
US$ M except per share amounts
and percentages
Q2
2023
Q2
2022
Change
%
Change in
Constant
Currency*
%
YTD
2023
YTD
2022
Change
%
Change in
Constant
Currency*
%
Gross Sales by IT Solution
Type:
Software & Cloud
440.6
399.1
10.4%
805.1
698.1
15.3%
Services
27.6
31.3
(11.7%)
55.2
56.0
(1.5%)
Hardware
109.0
152.7
(28.6%)
223.1
295.6
(24.5%)
Gross Profit by IT Solution
Type:
Software & Cloud
58.4
54.1
7.8%
10.4%
106.8
94.5
13.1%
16.2%
as a percentage of Gross Sales
13.2%
13.6%
13.3%
13.5%
Services
8.1
8.3
(2.2%)
(2.4%)
16.0
14.8
8.3%
8.2%
as a percentage of Gross Sales
29.3%
26.4%
28.9%
26.3%
Hardware
16.5
20.9
(21.2%)
(19.9%)
34.4
41.2
(16.6%)
(14.8%)
as a percentage of Gross Sales
15.1%
13.7%
15.4%
13.9%
Gross Sales by Sales Channel:
SMB
139.1
133.1
4.6%
247.0
226.0
9.3%
Commercial
323.1
310.4
4.1%
567.6
542.9
4.5%
Enterprise
115.0
139.6
(17.6%)
268.7
280.8
(4.3%)
Gross Profit by Sales Channel:
SMB
18.9
18.2
4.2%
5.8%
35.6
33.3
7.0%
9.0%
as a percentage of Gross Sales
13.6%
13.6%
14.4%
14.7%
Commercial
49.3
48.7
1.1%
3.4%
90.3
84.8
6.5%
9.1%
as a percentage of Gross Sales
15.2%
15.7%
15.9%
15.6%
Enterprise
14.7
16.4
(10.3%)
(8.7%)
31.2
32.3
(3.3%)
(1.1%)
as a percentage of Gross Sales
12.8%
11.8%
11.6%
11.5%
Amounts may not add to total due to
rounding
* Q2 2023 and YTD 2023 in Constant
Currency are translated at the average foreign exchange rate of Q2
2022 and YTD 2022, which were $0.78 CAD/USD and $0.79 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 Q2 2023 results today at 8:30 a.m. (ET).
DATE: Friday, August 11, 2023
TIME: 8:30 a.m. Eastern Time
WEBCAST: https://app.webinar.net/eoxMyMW82Eq
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/43hKUcO 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.
TAPED REPLAY: 416-764-8677 or 1-888-390-0541, Replay Code
353068 # (Available until August 18, 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 six-months ended June 30, 2023 and June
30, 2022 (the “Q2 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 Q2 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
June 30,
Six Months Ended
June 30,
Reconciliation of Net Sales to Gross
Sales
2023
2022
2023
2022
Net sales
207,555
254,310
416,371
477,232
Net adjustment for sales transacted as
agent
369,719
328,763
666,945
572,450
Gross Sales
577,274
583,073
1,083,316
1,049,682
Reconciliation of Operating Expenses to
Adjusted Cash Operating
Expenses
Operating expenses
63,972
64,930
128,531
128,156
Depreciation and amortization
(4,428)
(4,897)
(9,169)
(9,770)
Equity-settled share-based compensation
and other costs (1)
(1,527)
(1,142)
(1,687)
(1,714)
Non-recurring compensation and other
costs (2)
1
(2)
(94)
(22)
Business transformation non-recurring
costs (3)
–
(337)
(3)
(898)
Non-recurring legal provision
(4)
–
(235)
115
(322)
Adjusted Cash Operating
Expenses
58,018
58,317
117,693
115,430
Reconciliation of Income from
operations to Adjusted EBITDA
Income from operations
18,960
18,402
28,600
22,241
Depreciation and amortization
4,428
4,897
9,169
9,770
Equity-settled share-based compensation
and other
costs (1)
1,527
1,142
1,687
1,714
Non-recurring compensation and other
costs (2)
(1)
2
94
22
Business transformation non-recurring
costs (3)
–
337
3
898
Non-recurring legal provision
(4)
–
235
(115)
322
Adjusted EBITDA
24,914
25,015
39,438
34,967
Adjusted EBITDA as a Percentage of
Gross Profit (5)
30.0%
30.0%
25.1%
23.2%
Reconciliation of Net Income to
Adjusted Net Income
Net income
14,110
7,788
18,647
11,517
Amortization of intangible
assets
2,825
3,230
5,989
6,438
Equity-settled share-based compensation
and other
costs (1)
1,527
1,142
1,687
1,714
Non-recurring compensation and other
costs (2)
(1)
2
94
22
Business transformation non-recurring
costs (3)
–
337
3
898
Non-recurring legal provision
(4)
–
235
(115)
322
Loss (gain) on lease modification
(6)
–
–
4
(209)
Foreign exchange (gain) loss
(7)
(4,184)
5,862
(4,063)
3,208
Other non-recurring expense (8)
87
–
87
–
Related tax effects (9)
(494)
(1,931)
(1,342)
(2,606)
Adjusted Net Income
13,870
16,665
20,991
21,304
Weighted Average Number of Shares
(Basic)
57,886,682
59,186,978
57,972,248
59,348,710
Weighted Average Number of Shares
(Diluted)
60,235,769
62,850,758
60,321,335
63,012,490
Adjusted EPS (Basic) (10)
0.24
0.28
0.36
0.36
Adjusted EPS (Diluted) (10)
0.23
0.27
0.35
0.34
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
June 30,
2023
2022
Net cash provided by operating
activities
48,605
28,736
Adjusted for:
Share-based compensation and other
costs (11)
1,286
8,410
Non-recurring compensation and other
costs (2)
3,897
191
Business transformation non-recurring
costs (3)
552
1,731
IPO related costs (12)
–
314
Follow-On Offering costs (13)
–
287
Non-recurring legal provision
(4)
(115)
2,036
Realized foreign exchange gain
9,311
3,796
Finance and other expense (14)
(81)
(282)
Cash taxes paid, net
10,576
9,831
Cash interest paid
10,033
4,856
Change in non-cash operating working
capital
2,166
12,800
Adjusted EBITDA
86,230
72,706
Maintenance Capex
(3,847)
(2,016)
IFRS 16 lease payments
(5,803)
(6,791)
Adjusted Free Cash Flow
76,580
63,899
Adjusted Free Cash Flow
Conversion
89%
88%
Notes (Refer to the Q2 2023 MD&A for description of
the sections with parentheses within these Notes)
- 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).
- 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.
- 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 system enhancements
post-business transformation. As at June 30, 2023, $51 million has
been invested to date in operating and capital expenditures in the
business transformation initiative and related system
enhancements.
- 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, 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.
- 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”.
- 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.
- Foreign exchange (gain) loss includes both realized and
unrealized amounts.
- Other non-recurring expense represents costs the Company
incurred in connection with the tax reorganization that occurred at
the time of the IPO.
- 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.
- 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”.
- 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”.
- 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.
- 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.
- 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; 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 Q2 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.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20230811791170/en/
Investor Relations Tim Foran (416) 986-8515
investors@softchoice.com
Press Justin Hane (647) 917-1761
justin.hane@softchoice.com
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