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

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.

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

Notes (Refer to the Q3 2022 MD&A for description of the sections with parentheses within these Notes)

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.

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