SFTC Softchoice Corporation

Gross profit increases by 16% and Adjusted EBITDA by 35% driven by strong growth in Software & Cloud solutions

Softchoice reiterates 2022 outlook, announces Q4 dividend, and provides update on share buybacks

Softchoice Corporation (“Softchoice” or the “Company”) (TSX: SFTC) today announced its financial results for the quarter ended September 30, 2022 (“Q3 2022”). Softchoice will hold a conference call/webcast to discuss its results today, November 10, 2022, at 8:30 a.m. ET. Unless otherwise noted, all dollar ($) amounts are in U.S. dollars.

Q3 2022 Summary

• Gross profit, the Company’s top line measurement, increased by 16.2% to $75.8 million driven by 23.0% growth in its Software & Cloud IT solutions over the same quarter in 2021.
• Adjusted EBITDA increased by 35.5% to $15.3 million as gross profit increased by $10.6 million, which was partially offset by an increase in Adjusted Cash Operating Expenses of $6.6 million, driven primarily by increased salaries and benefits due to higher headcount and the continued expansion of salesforce and sales productivity investments, which we expect to continue to yield benefits in Fiscal 2022 and beyond.
• Reported gross profit was negatively impacted by just under a million dollars in the quarter, and just over $2.0 million on a YTD basis due to the strengthened U.S. dollar, specifically the translation of revenues generated in Canada into the company's reporting currency of U.S. dollars. However, reported Adjusted Cash Operating Expenses were reduced by approximately the same amount due to the same foreign exchange fluctuations resulting in an immaterial impact to reported Adjusted EBITDA.
• Income from operations increased by 37.1% to $6.3 million due primarily to the same factors impacting Adjusted EBITDA.
• Net loss of $8.0 million was driven by a $12.1 million loss in foreign exchange, largely unrealized related to revaluation of U.S. denominated debt held by our Canadian legal entities, offsetting the increase in income from operations.
• Adjusted Net Income increased by 59.9% to $8.7 million, or $0.14 per diluted share, due primarily to the increase in Adjusted EBITDA.
• During the quarter, the Company repurchased and cancelled 645,103 Common Shares pursuant to its normal course issuer bid.
• On November 9, 2022, the Board declared a quarterly dividend of Cdn. $0.09 per Common Share for the period from October 1, 2022 to December 31, 2022, to be paid on January 13, 2023 to shareholders of record at the close of business on December 31, 2022.
• Customers grew to 4,718 at September 30, 2022, an increase of 80 versus December 31, 2021.
• Revenue Retention Rate increased to 116% in the trailing 12 months (“TTM”) ended September 30, 2022, compared to 108% in the TTM ended September 30, 2021, illustrating strong sales growth with existing Customers.

Commenting on Q3 2022, Vince De Palma, Softchoice’s President & Chief Executive Officer, said:

“We recorded a strong third quarter of organic growth driven by continued demand for our Software & Cloud IT solutions in our public cloud, security and workplace portfolios. Our growth investments continued to drive deeper customer engagements, resulting in record revenue retention and gross profit per customer as well as growth in our total number of customers.”

Financial Summary1

US$ M except per share amounts and percentages

Q3 2022

Q3 2021

Growth %

YTD 2022

YTD 2021

Growth %

Gross Sales

544.6

426.4

27.7%

1,594.3

1,365.4

16.8%

Net sales

222.1

199.0

11.6%

699.3

644.9

8.4%

Gross profit

75.8

65.2

16.2%

226.2

201.2

12.4%

Adjusted EBITDA

15.3

11.3

35.5%

50.2

42.6

17.9%

as a Percentage of Gross Profit

20.2%

17.3%

 

22.2%

21.2%

 

Income from operations

6.3

4.6

37.1%

28.6

(7.5)

NMF

Net income (loss)

(8.0)

(2.2)

NMF

3.6

(17.3)

NMF

Net income (loss) per Diluted Share (attributable to the Owners of the Company)

$(0.14)

$(0.04)

NMF

$0.06

$(0.37)

NMF

Adjusted Net Income

8.7

5.5

59.9%

30.0

19.8

51.6%

Adjusted EPS (Diluted)

$0.14

$0.09

55.6%

$0.48

$0.36

33.3%

 

 

 

 

 

 

 

US$ M except per share amounts and percentages

Q3 2022

Q3 2021

Growth %

YTD 2022

YTD 2021

Growth %

Gross Sales by IT Solution Type*:

 

 

 

 

 

 

Software & Cloud

380.8

282.1

35.0%

1078.9

913.3

18.1%

Services

25.6

24.2

6.0%

81.7

74.9

9.0%

Hardware

138.2

120.2

15.0%

433.8

377.1

15.0%

 

 

 

 

 

 

 

Gross Profit by IT Solution Type*:

 

 

 

 

 

 

Software & Cloud

49.1

40.0

23.0%

143.6

123.1

16.6%

as a percentage of Gross Sales

12.9%

14.2%

 

13.3%

13.5%

 

Services

5.2

6.9

(24.3%)

19.9

20.9

(4.5%)

as a percentage of Gross Sales

20.3%

28.4%

 

24.4%

27.9%

 

Hardware

21.4

18.4

16.7%

62.6

57.2

9.5%

as a percentage of Gross Sales

15.5%

15.3%

 

14.4%

15.2%

 

 

 

 

 

 

 

 

Gross Profit by Sales Channel*:

 

 

 

 

 

 

SMB

17.1

14.4

19.0%

50.4

40.0

26.0%

Commercial

40.6

35.9

13.0%

125.4

114.3

9.7%

Enterprise

18.0

14.9

21.0%

50.3

46.8

7.3%

* Amounts may not add to total due to rounding

Operating Environment

Global macroeconomic conditions have resulted in rising inflation and interest rates and therefore higher costs. Price increases by our technology partners don’t materially impact our gross profit as the Company has the ability to pass through those increases to customers. However, such increases can contribute to higher customer costs. Some organizations are responding to the economic uncertainty by pursuing efficiencies in their IT budgets. This can present both near term pressure on our revenue and EBITDA margins as some customers seek ways to reduce their spending, but also an opportunity to leverage our go-to-market strategy focused on reducing our customers’ IT costs, including by optimizing software licensing and cloud spending, as a method to open the door to more and deeper engagements with customers in the future. While the Company has experienced sustained demand for its solutions in recent quarters, we will remain vigilant should the situation change in the future. The Company continues to proactively manage its cost structure while maintaining growth investments in core areas with the aim of continuing to gain market share in future years.

Our Outlook2

The Company reiterated its financial outlook for the fiscal year ending December 31, 2022, based on its results for the nine months ended September 30, 2022 and current expectations and provided additional details in respect of exchange rate impacts on the financial outlook. The Company’s guidance, initially provided March 4, 2022 and revised August 12, 2022, assumes an average U.S.$/C$ exchange rate of 0.79 in Fiscal 2022. While not impacting underlying growth on a constant currency basis, the strengthened U.S. dollar, if sustained through the fourth quarter, is anticipated to have a negative impact on reported gross profit results but an immaterial impact on Adjusted EBITDA as a Percentage of Gross Profit and Adjusted Free Cash Flow Conversion. See “Forward-Looking Statements” below for details on assumptions underlying our financial outlook.

 

Fiscal 2022 Outlook

(Assumes an average U.S.$/C$ exchange rate of 0.79 in Fiscal 2022)

Gross profit

>$320 million (>11.5% growth over Fiscal 2021 on a constant currency basis)

 

Adjusted EBITDA as a Percentage of Gross Profit

~25% to 28% margin

(Inclusive of ~$25 million of Project Monarch Uplift)

Adjusted Free Cash Flow Conversion

Approximately 90%

The outlook above constitutes forward-looking information within the meaning of applicable securities laws and is based on a number of assumptions and risks described under the heading “Forward-Looking Statements” of this press release. The Company’s outlook also constitutes "financial outlook" within the meaning of applicable securities laws and is provided for the purposes of assisting the reader in understanding the Company's financial performance and measuring progress toward management's objectives and the reader is cautioned that it may not be appropriate for other purposes.

Financial Position

The Company ended Q3 2022 in strong financial condition, with approximately $129 million in available funds from cash on hand and through its $275 million revolving credit facility. Including internally generated cash flows, the Company anticipates having significant resources with which to pursue growth opportunities and enhance shareholder returns.

The Company had approximately $145.9 million in loans and borrowings outstanding at the end of Q3 2022. Net debt, equating to loans and borrowings plus lease liabilities less cash-on-hand, was $164.3 million at the end of Q3 2022. The quarter end ratio of net debt to Adjusted EBITDA for the trailing twelve-months ended September 30, 2022 was 2.1x compared with 1.3x at June 30, 2022, with the increase due to cash generated by operating activities being offset by cash outflows from non-cash working capital of $61.4 million in Q3 2022 largely the result of the timing between collections on trade receivables due in part to the Canadian banking holiday on September 30 and payments on trade payables, driven by the typical seasonality of our business.

Dividend

On November 9, 2022, the Board declared a quarterly dividend of Cdn. $0.09 per Common Share for the period from October 1, 2022 to December 31, 2022, to be paid on January 13, 2023 to shareholders of record at the close of business on December 30, 2022. The Dividend to which this notice relates is an eligible dividend for tax purposes.

Quarterly Conference Call

Softchoice’s management team will hold a conference call to discuss our third quarter 2022 results today at 8:30 a.m. (ET).

DATE: Thursday, November 10, 2022

TIME: 8:30 a.m. Eastern Time

DIAL-IN: 416-764-8659 or 1-888-664-6392, Confirmation # 19726494

WEBCAST: https://app.webinar.net/yLdoJ9EJ8Dw

TAPED REPLAY: 416-764-8677 or 1-888-390-0541, Replay Code 726494 # (Available until November 17, 2022)

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.

Capitalized Terms

Capitalized terms used in this release, including Project Monarch, and terms we use to describe our IT solution types including Software & Cloud, Services, and Hardware and sales channels including SMB, Commercial, and Enterprise are described in the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three- and nine-months ended September 30, 2022 (the “Q3 2022 MD&A”), and/or defined in our annual information form dated March 29, 2022 (the “AIF”) filed on SEDAR 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 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 2022 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

2022

2021

2022

2021

Net sales

222,084

199,009

699,316

644,891

Net adjustment for sales transacted as agent

322,550

227,417

895,000

720,475

Gross Sales

544,634

426,426

1,594,316

1,365,366

 

Reconciliation of Operating Expenses to Adjusted Cash Operating Expenses

 

 

 

 

Operating expenses

69,430

60,566

197,586

208,630

Depreciation and amortization

(4,823)

(5,424)

(14,593)

(16,140)

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

(715)

(498)

(2,429)

(29,180)

Non-recurring compensation and other costs (2)

(2,941)

(163)

(2,963)

(682)

Business transformation non-recurring costs (3)

(465)

(334)

(1,363)

(1,074)

IPO related costs (4)

–

(235)

–

(2,992)

Non-recurring legal provision (5)

–

–

(322)

–

Adjusted Cash Operating Expenses

60,486

53,912

175,916

158,562

 

 

 

 

 

Reconciliation of Income from operations to Adjusted EBITDA

 

 

 

 

Income (loss) from operations

6,329

4,618

28,570

(7,450)

Depreciation and amortization

4,823

5,424

14,593

16,140

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

715

498

2,429

29,180

Non-recurring compensation and other costs (2)

2,941

163

2,963

682

Business transformation non-recurring costs (3)

465

334

1,363

1,074

IPO related costs (4)

–

235

–

2,992

Non-recurring legal provision (5)

–

–

322

–

Adjusted EBITDA

15,273

11,272

50,240

42,618

Adjusted EBITDA as a Percentage of Gross Profit (6)

20.2%

17.3%

22.2%

21.2%

 

 

 

 

 

Reconciliation of Net (Loss) Income to Adjusted Net Income

 

 

 

 

Net (loss) income

(7,958)

(2,214)

3,559

(17,323)

Amortization of intangible assets

3,236

3,281

9,674

9,779

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

715

498

2,429

29,180

Non-recurring compensation and other costs (2)

2,941

163

2,963

682

Business transformation non-recurring costs (3)

465

334

1,363

1,074

IPO related costs (4)

–

235

–

2,992

Non-recurring legal provision (5)

–

–

322

–

Related party debt interest (7)

–

–

–

1,737

Subordinated debt interest (7)

–

–

–

446

Interest expense on accretion of non-interest-bearing notes (8)

–

–

–

120

Extinguishment of deferred financing fees (9)

–

–

–

1,621

Unrecoverable withholding taxes (10)

–

–

–

1,035

Loss (gain) on lease modification (11)

–

1,184

(209)

1,184

Foreign exchange loss (gain) (12)

12,080

4,044

15,288

(1,680)

Tax recovery on deferred tax liability (13)

–

–

–

(2,863)

Other non-recurring expense (14)

930

–

930

–

Related tax effects (15)

(3,696)

(2,075)

(6,302)

(8,185)

Adjusted Net Income

8,713

5,450

30,017

19,799

Weighted Average Number of Shares (Basic)

58,719,796

59,070,380

59,136,768

51,366,389

Weighted Average Number of Shares (Diluted)

61,736,048

63,447,117

62,153,020

55,743,126

Adjusted EPS (Basic) (16)

0.15

0.09

0.51

0.39

Adjusted EPS (Diluted) (16)

0.14

0.09

0.48

0.36

Notes (Refer to the Q3 2022 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). Other costs relate to the employee investment plan and the long-term profit-sharing plan, which were dissolved upon the completion of the IPO, and fair value adjustments in relation to existing equity-based arrangements. See “Share Information Prior to the Completion of the Offering”.

(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 as they primarily relate to costs incurred in connection with shareholder distributions.

(3)

These costs in Fiscal 2020 and Fiscal 2021 relate to the implementation of Project Monarch, which were largely comprised of one-time third-party consulting expenses, personnel costs for dedicated internal resources and software related costs. All costs relating to Project Monarch were segregated for tracking purposes and are monitored on a regular basis. The costs in YTD 2022 relate to system enhancements after the implementation of Project Monarch. As at September 30, 2022, $51.2 million has been invested in operating and capital expenditures for Project Monarch and related system enhancements. See “Summary of Factors Affecting Performance – Business Transformation (Project Monarch)”.

(4)

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. There were $253 of IPO related costs which were incurred in Q1 2021 that were previously classified under non-recurring compensation and other costs; these costs have been reclassified into IPO related costs for the nine months period ended September 30, 2021.

(5)

The Company has settled certain legal claims, without admission of liability or wrongdoing, in respect of U.S. wage and hour disputes and incurred $2.0 million in expenses for such settlements, of which $0.3 million was incurred in YTD 2022, which are non-recurring in nature. These legal claims were settled in Q2 2022.

(6)

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”.

(7)

Related party and subordinated debt interest was settled at the time of Offering. For additional details see “Related Party Transactions”, “Subordinated Debt Information” and “Share Information Prior to the Completion of the Offering”.

(8)

This represents the expense relating to the accretion of the present value of the non-interest-bearing notes recognized over the term of the notes. These notes were settled at the time of Offering. See also “Related Party Transactions”, “Subordinated Debt Information” and “Share Information Prior to the Completion of the Offering”.

(9)

As a result of the refinancing, the unamortized balance of the deferred financing fees on the former revolving credit facility and term credit facility of $1,621 were extinguished.

(10)

Non-controlling interest portion of unrecoverable withholding taxes on royalties. Non-controlling interest was eliminated upon the IPO of the Company.

(11)

Loss on lease modification recognized in Q3 2021 as a result of the recognition of a sublease receivable for an office space that has been subleased and the corresponding derecognition of a right-of-use asset with this space. 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.

(12)

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

(13)

Decrease of deferred tax liability recorded on undistributed earnings from foreign jurisdiction due to change of tax rate applicable as the Company status changed from Canadian Controlled Private Company to public company.

(14)

Other non-recurring expense represents costs recognized in Q3 2022 relating to hardware devices stolen by a third-party purporting to be a customer. The Company is working with law enforcement and our insurance providers to recover the loss.

(15)

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. The comparative period has been reclassified due to a change in tax impact on adjusted items.

(16)

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”.

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, budgets, operations, financial results, taxes, dividend policy, NCIB, business plans and objectives. Particularly, information regarding our expectations of future results, performance, 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 outlook, including among others, net sales, gross profit, gross profit growth rates, expenses, Adjusted EBITDA, Adjusted EBITDA to Gross Profit margin, Adjusted Free Cash Flow Conversion, operations, the number of account executives and employees, organic growth and Adjusted EBITDA margin expansion; (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 programs; and (ix) the long-term impact of COVID-19 on our business, financial position, results of operations and/or cash flows; (x) M&A opportunities; and (xi) the materialization of the expected benefits of Project Monarch.

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 2022 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.

In addition to the forward-looking information cautions described above, the outlook set forth herein includes Gross Profit, Adjusted EBITDA as a Percentage of Gross Profit and Adjusted Free Cash Flow Conversion, in each case, for Fiscal 2022. Key underlying drivers for our forecast include: (i) the expected growth of our addressable market; (ii) the expected growth of our salesforce and improvements of our salesforce productivity; (iii) the expected growth in our customer base and wallet share amongst existing customers; and (iv) our view of the drivers of, and expectations related to, our anticipated growth as well as certain cost management measures and operational efficiencies we expect to realize. A significant portion of the increase in Gross Profit and Adjusted EBITDA for Fiscal 2022 is attributable to the procurement savings, pricing margin improvements, and business growth and reduced revenue leakage and expected net workforce efficiencies anticipated to result from Project Monarch. To the extent that these underlying drivers and benefits are not realized as expected, our Gross Profit, Adjusted EBITDA, Adjusted EBITDA as a Percentage of Gross Profit and, as a result, our Adjusted Free Cash Flow Conversion, during the relevant period will be adversely affected. The underlying assumptions relating to future results are inherently uncertain and are subject to significant business, economic, financial, regulatory, market and competitive risks, including risks that our initiatives or projects (including Project Monarch) do not result in the growth and increase in efficiencies anticipated, and could cause actual results to differ materially. If we do not achieve the anticipated results, we may modify or discontinue certain of our other planned business initiatives. In light of the foregoing, investors are urged to put these statements in context and not to place undue reliance on them.

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/20221110005432/en/

Investor Relations Tim Foran (416) 986-8515 investors@softchoice.com

Press Justin Hane (647) 917-1761 justin.hane@softchoice.com