Gross profit increased by 31% in Q4 2021 and by 20% in Fiscal 2021 driven by strong growth in Software & Cloud and Services
Following record results in 2021, Softchoice updates 2022 outlook and announces 29% increase to dividend and new share buyback program
Softchoice Corporation (“Softchoice” or the “Company”) (TSX: SFTC) today announced its financial results for the quarter and year ended December 31, 2021. The Company also updated its 2022 Outlook and announced a 29% increase to its quarterly dividend and its intention to implement a normal course issuer bid (share buyback). Softchoice’s management team will hold a conference call/webcast to discuss its results today, March 4, 2022, at 8:30 a.m. ET, the details of which are further below. Unless otherwise noted, all dollar ($) amounts are in U.S. dollars.
Commenting on Fiscal 2021 and the Company’s 2022 outlook, Vince De Palma, Softchoice’s President & Chief Executive Officer, said:
“Our unique ability to unleash the potential of people and technology drove exceptional results for Softchoice in Fiscal 2021, including 20% growth in our top line gross profit while using our free cash flow to aggressively reduce debt and initiate a quarterly dividend. We achieved record salesforce productivity during the year through our insight-driven approach with our customers and the investments and initiatives we’ve made to support our strategic focus on delivering advanced software- and cloud-focused IT solutions. We continued to deepen our engagements with customers to help them drive their digital transformation and succeed, resulting in record Revenue Retention Rate of 113%. We are entering 2022 with significant momentum and in a sound financial position. Given the visibility in our business model and our continued strong performance, we have increased our growth outlook for 2022.”
Commenting on Softchoice’s performance in the fourth quarter of 2021 and capital allocation plans, Bryan Rocco, Softchoice’s Chief Financial Officer, said:
“We were pleased to deliver very strong financial results this past quarter including 31% gross profit growth over Q4 2020, driven by significant growth in Software & Cloud and realizing gross profit uplift from our business transformation initiative Project Monarch. Adjusted EBITDA increased 2%, in line with our expectations, as our gross profit growth both funded significant investments in our technical resources, salesforce, and cloud strategies, and offset a $10 million decline in CEWS funding. Our Q4 2021 finish contributed to Softchoice achieving a record Adjusted EBITDA in Fiscal 2021. Our strategic investments as well as the benefits of Project Monarch, position Softchoice to drive significant organic growth and Adjusted EBITDA margin expansion in Fiscal 2022. In order to enhance shareholder returns while maintaining balance sheet strength and flexibility, our Board has also increased our quarterly dividend by 29% to 9-cents (Canadian) per common share and we will commence a buy-back program for our common shares.”
Selected Q4 2021 Highlights
- Gross Sales increased by 20.4% to $634.3 million from $526.7 million in Q4 2020, driven by a 32.4% increase in Software & Cloud solutions.
- Net sales increased by 11.6% to $258.2 million from $231.4 million in Q4 2020, driven by double-digit growth in Software & Cloud and Services solutions. Similar to previous quarters and recent years, Gross Sales growth exceeded net sales growth due to an increase in the mix of Software & Cloud solutions within total Gross Sales, which is primarily recorded on a net basis for accounting purposes.
- Gross profit increased by 31.1% to $85.8 million, from $65.4 million in Q4 2020, driven by growth in all IT solution types and sales channels.
- Adjusted EBITDA increased by 1.8% to $26.5 million, from $26.0 million in Q4 2020, with the $20.4 million increase in gross profit partially offset by a $19.8 million increase in Adjusted Cash Operating Expenses, driven by the decrease in CEWS ($10.3 million in Q4 2020 versus $nil in Q4 2021), growth investments made by the Company in Q4 2021, and higher variable compensation tied to gross profit performance.
Selected Fiscal 2021 Highlights
- Gross Sales increased by 15.0% to $2.0 billion from $1.7 billion in Fiscal 2020, driven by a 23.7% increase in Software & Cloud solutions.
- Revenue Retention Rate increased to the highest level of 113% in Fiscal 2021, compared to 94% in Fiscal 2020, illustrating strong growth with existing Customers.
- Net sales increased by 7.9% to $903.1 million from $836.8 million in Fiscal 2020, driven by growth in all IT solution types.
- Gross profit increased by 20.4% to $287.0 million, from $238.3 million in Fiscal 2020, driven by double-digit growth in all IT solution types and sales channels.
- Adjusted EBITDA increased by 5.5% to $69.1 million, from $65.5 million in Fiscal 2020, with the $48.7 million increase in gross profit partially offset by a $45.1 million increase in Adjusted Cash Operating Expenses, driven primarily by the decrease in CEWS ($14.0 million in Fiscal 2020 versus $0.7 million in Fiscal 2021), growth investments made by the Company in Fiscal 2021, and higher variable compensation tied to gross profit performance.
Selected 2021 Business Highlights
- Made significant growth investments in our technical resources, salesforce, and cloud strategies.
- Recipient of Microsoft Surface Velocity Partner of the Year, which acknowledges the highest level of revenue growth in the channel.
- Leveraged recognition as VMware’s Lifecycle Services Partner of the Year to expand VMware Cloud market share, by accelerating the migration of traditional on-premise environments into Amazon Web Services (“AWS”), Microsoft Azure, and Google Cloud Platform (“GCP”).
- Recipient of Red Hat Solution Provider Partner of the Year, which represents the leadership we have demonstrated in using software-defined tools to manage environments across private or public cloud.
- Recipient of the U.S. Rising Star Partner of the Year by AWS for strong pace of growth.
- Secured a multi-year partnership with AWS to strengthen cloud migration and modernization service offerings which will enable customers to transform and innovate in the cloud with agility.
- Honoured with the Social Impact Partner of the Year – Global and Americas Security Partner of the Year at the Cisco Partner Summit 2021, which recognizes the commitment of Softchoice to create success for customers’ organizations, their IT professionals, and our communities.
- Subsequent to year-end, the Company achieved the elite Managed Services Provider designation in the Google Cloud Advantage Program, demonstrating the Company’s continued success in enabling cloud transformation at scale with technical expertise in GCP.
The Company ended 2021 in strong financial condition, with approximately $211 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 $66.8 million in loans and borrowings outstanding as at year end. Net debt, equating to loans and borrowings plus lease liabilities less cash-on-hand, was $85.9 million at December 31, 2021 compared to $190.6 million at December 31, 2020, with the decline driven by proceeds from the IPO as well as net cash flows from operating activities in 2021. The ratio of net debt to 2021 Adjusted EBITDA was 1.2x at December 31, 2021 compared to 2.9x at December 31, 2020.
On March 3, 2022, the Company’s Board (the “Board”) of Directors approved a 29% increase in quarterly cash dividends to Cdn. $0.09 per common share (each, a “Common Share”), from Cdn. $0.07 per Common Share. As such, the Company has declared a cash dividend (the “Dividend”) in the amount of C$0.09 per Common Share of the Company for the period from January 1, 2022 to March 31, 2022, payable as of April 14, 2022, to shareholders of record at the close of business on March 31, 2022. The Dividend to which this notice relates is an eligible dividend for tax purposes.
On March 3, 2022, the Board approved the commencement of a normal course issuer bid (“NCIB”) through the facilities of the TSX and/or alternative Canadian trading systems to purchase and cancel up to 3,018,528 of the Company’s Common Shares, representing approximately 10% of the public float of 30,185,282, during the twelve-month period commencing March 8, 2022 and ending March 7, 2023.
The Company intends to enter into an automatic purchase plan to be effective on March 8, 2022 with a designated broker which will allow for the purchase for cancellation of Common Shares, subject to certain trading parameters, by its designated broker during times when the Company would ordinarily not be active in the market due to applicable regulatory restrictions or self-imposed blackout periods. Outside of these periods, the Common Shares will be repurchased by the Company at its discretion under the NCIB.
Our Outlook 1
Softchoice is revising its 2022 financial outlook that was originally included in its Prospectus (as defined below) and reiterated November 12, 2021. For full-year 2022, the Company is now expecting:
Our outlook is based on certain assumptions and factors (including those relating to our view of the drivers of, and expectations related to, our anticipated growth), including the key assumptions and factors set out in the Prospectus under ‘Our Outlook’. Assumes an average U.S.$ / C$ exchange rate of 0.79 in Fiscal 2022. For important information on risk factors, refer to “Forward Looking Information Disclaimer” later in this news release.
Quarterly Conference Call
Softchoice’s management team will hold a conference call to discuss our fourth quarter and full year 2021 results today, March 4, 2022, at 8:30 a.m. ET.
DATE: Friday, March 4, 2022
TIME: 8:30 a.m. Eastern Time
DIAL-IN: 416-764-8659 or 1-888-664-6392, Confirmation # 63207280
TAPED REPLAY: 416-764-8677 or 1-888-390-0541, Replay Code 207280 # (Available until Mar. 11, 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 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 twelve-months ended December 31, 2021 (the “Q4 2021 MD&A”), and/or defined in our Prospectus (as defined below) 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 Q4 2021 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 Q4 2021 MD&A for description of the bolded items and 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. Included in Fiscal 2021, there was $16.9 million relating to certain payments made in connection with extinguishment of certain equity-based entitlements (the “Cash-Out Agreements”) in conjunction with the IPO. In addition, $7.7 million relates to Cash-Out Agreements in conjunction with the Follow-On offering. 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. As a result of the IPO, a $6.1 million fair value adjustment was triggered on an existing equity-based arrangement which was dissolved thereafter. See “Share Information Prior to the Completion of the Offering”.|
|(2)||These expenses include compensation costs relating to severance and a one-time accrual recorded in Fiscal 2020 associated with the set-up of a new corporate vacation policy. Other costs are 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 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. As at December 31, 2021, $49.2 million has been invested in operating and capital expenditures for Project Monarch. 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 three months ended March 31, 2021 that were previously classified under non-recurring compensation and other costs; these costs have been reclassified into IPO related costs in Fiscal 2021 year to date adjusted amount.|
|(5)||In connection with the Follow-On Offering, 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.|
|(6)||The Company has settled certain legal claims, without admission of liability or wrongdoing, in respect of U.S. wage and hour disputes and has provisioned $1.7 million for such settlements, which are non-recurring in nature.|
|(7)||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”.|
|(8)||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”.|
|(9)||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”.|
|(10)||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 in the June 2021.|
|(11)||Non-controlling interest portion of unrecoverable withholding taxes on royalties. Non-controlling interest was eliminated at the time of the IPO.|
|(12)||Loss on lease modification recognized in three months ended September 30, 2021 (“Q3 2021”) as a result the recognition of a sublease receivable for an office space that has been subleased and the corresponding derecognition of a right-of-use asset associated with this space.|
|(13)||Loss on disposal of property and equipment recognized in Q4 2021 as a result of the disposal of assets related to a subleased office space which is non-reoccurring in nature.|
|(14)||Foreign exchange gains (losses) includes both realized and unrealized amounts.|
|(15)||Tax recovery on deferred tax liability as a result of tax rate changes.|
|(16)||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.|
|(17)||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”.|
|(18)||Share-based compensation represents costs recognized in connection with repurchases of stock options from terminated employees. Included in the trialing twelve months ended Q4 2021, there was $16.9 million relating to Cash-Out Agreements in conjunction with the IPO and $7.7 million relating to Cash-Out Agreements in conjunction with the Follow-On Offering. Other costs are comprised of the employee investment plan and the long-term profit-sharing plan, which were dissolved in connection with the IPO; and fair value adjustments in relation to existing equity-based arrangements. As a result of the IPO, a $6.1 million fair value adjustment was triggered on an existing equity-based arrangement which was dissolved thereafter. See “Share Information Prior to the Completion of the Offering”.|
|(19)||Finance and other expense (income) refers to interest income on cash, and payments received from employees for parking, net of non-controlling interest portion of unrecoverable withholding taxes on royalties.|
|(20)||Lease payments in Fiscal 2021 included a one-time early lease termination payment of $0.5 million.|
1 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, 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 Q4 2021 MD&A and under “Risk Factors” within the Company’s final initial public offering prospectus dated May 26, 2021 (the “Prospectus”). A copy of the Prospectus 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, Gross Profit growth, Adjusted EBITDA, Adjusted EBITDA to Gross Profit margin and Adjusted Free Cash Flow Conversion, for Fiscal 2022. Key underlying drivers for our forecast, particularly related to Gross Profit and Gross Profit growth, include: (i) the expected growth of our addressable market; (ii) the expected growth of our salesforce and improvements of our salesforce productivity; and (iii) the expected growth in our customer base and wallet share amongst existing customers. 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 to Gross Profit margin 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 along with uncertainties that 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.
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