Release Date: August 09, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Softchoice Corp (SFTCF, Financial) reported a 13% increase in gross profit in constant currency, driven by a 19% increase in software and cloud and an 11% increase in services.
- The company achieved a 19% increase in adjusted EBITDA in constant currency, with margin expanding by approximately 150 basis points.
- Operating cash flow increased by 9% to $58 million in Q2, enabling a reduction in net leverage to two turns from 2.6 turns three months ago.
- Softchoice Corp (SFTCF) was ranked number nine for large employers and number one amongst TSX listed companies on this year's Best Workplaces in Canada list by Great Place to Work.
- The company recorded its best second quarter of net customer growth since before the pandemic, with customer growth exceeding 5% year over year.
Negative Points
- The company noted that the economic news continues to be uncertain, which could impact future growth.
- There was a decline in net income per share on a diluted basis to $0.2 compared with $0.23 in Q2 2023, primarily due to the impact of unrealized FX recorded net finance costs and higher interest expense.
- The gross sales figure can be impacted by changes in how vendors compensate partners, which may reduce the reported gross sales figure.
- The company acknowledged that the sales cycle has become longer and involves more scrutiny over purchases, which could impact the speed of closing deals.
- Softchoice Corp (SFTCF) faces potential challenges in maintaining its growth rate due to the economic environment and the need for continuous investment in growth areas.
Q & A Highlights
Q: Can you comment on the traction you're seeing from Copilot among your clients in its first quarter of availability?
A: We have about 1,000 customers licensing some amount of Copilot, indicating double-digit penetration of our customer base. However, it's still early, with companies licensing dozens or hundreds of licenses. We're taking a methodical approach, ensuring positive ROI by piloting use cases before broader rollouts. Currently, hundreds of customers are starting services engagements, with tens moving to broader deployments.
Q: Are you seeing a trend of clients moving away from VMware solutions to AWS, and how broad is this trend?
A: The changes with Broadcom and VMware have led many organizations to reassess their IT environments. We're seeing interest in migrating to public clouds and modernizing applications for agility and AI readiness. This journey requires expertise, which many mid-market customers lack in-house, presenting an opportunity for us as a trusted partner with deep knowledge of public and hybrid cloud environments.
Q: How many of your new account executives (AEs) are focused on the U.S. market, and could new account performance strengthen as these reps mature?
A: The majority of our new AEs have been added in the U.S. market over the past two years, reflecting the significant opportunity there. While we still see growth potential in Canada, the U.S. market is considerably larger, and our partners are keen for us to expand there due to our success in driving technology adoption.
Q: How are you managing the capacity of your sales and technical teams given recent expansions?
A: We regularly review our territories to identify opportunities for new AEs and ensure current customers are well-served. This involves quantitative analysis to balance resources and address areas of rapid customer growth. We aim to continue expanding our teams in line with customer growth.
Q: Given the recent acceleration in enterprise segment growth, do you think this segment can reaccelerate driven by software and cloud, regardless of hardware refresh cycles?
A: The percentage of hardware in the enterprise segment has lessened, and we are optimistic about the momentum in larger projects within our pipeline. We are starting to see solutions and services opportunities come to fruition, which, combined with lapping hardware declines, makes us optimistic about future growth in the enterprise segment.
Q: Can you provide an update on the SMB market and its growth outlook over the next 12 to 18 months?
A: The SMB segment has been a leader for us, driven by continued technology investments post-pandemic and our strong account executive growth. Our technology partners are also investing in us to reach this market, which they cannot serve directly. We are confident in the continued growth of our SMB business.
Q: Can you elaborate on the nature of partner incentives and their impact on your financials?
A: Partner incentives are structured around driving adoption and consumption, with outright incentives for hitting growth targets and co-investments that drive further growth. These incentives have increased as tech partners recognize our unique capabilities in reaching the market. While we haven't quantified these incentives, they significantly contribute to our financial performance.
Q: Did the recent CrowdStrike outage impact your business or customer relationships?
A: The outage did not impact our business as we do not use that tool. Our team mobilized to help customers, demonstrating our value and strengthening our market position and relationships with technology partners.
Q: Did you notice any changes in customer spending behavior as the quarter progressed?
A: We saw steady demand throughout the quarter, with June being particularly strong due to Microsoft's year-end. Our position as a leading Microsoft partner contributed to a successful end of the year.
Q: What is driving the 18% growth in software and cloud, and is there anything one-time in nature?
A: The growth is driven by strong demand for public cloud, Microsoft workplace solutions, and cybersecurity. There were no significant one-time deals, although there was some acceleration in partner incentives. Our execution in these areas and co-investment programs with tech partners are key drivers.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
