Softchoice Announces Second Quarter 2021 Results

Softchoice Corporation (“Softchoice” or the “Company”) (TSX: SFTC) today announced strong financial results and cash generation for the quarter ended June 30, 2021 (“Q2 2021”). The Company also reiterated its 2022 Outlook provided during its IPO. Unless otherwise noted, all dollar ($) amounts are in U.S. dollars.

“We’re extremely pleased with our continued double-digit growth in the second quarter and the ongoing execution of our organic growth strategy to solidify our position as a leading software- and cloud-focused IT solution provider in North America. Gross profit, our top line measurement, increased more than 15% in Q2 2021 with growth across all of our IT solution types and sales channels, and led by strong double-digit growth in our Software & Cloud and Services offerings, which comprised almost 75% of our gross profit,” said Vince De Palma, Softchoice’s CEO. “Our Adjusted EBITDA grew 17%, as natural operating leverage offset significant investments we are making this year in our technical and sales enablement resources, and cloud strategies.”¹

“Our business continues to experience an acceleration across various cloud productivity and collaboration solutions in line with global business trends, including accelerating growth and adoption of the cloud, increasing demand for remote work capabilities accelerated by the COVID-19 pandemic, and increasing demand for seamlessly integrated software applications and security solutions. In the second half of 2021, we continue to expect strong growth in gross profit driven by improving productivity of our salesforce, the continued ramp up of realization of benefits from Project Monarch, and increasing wallet share with our customers as we broaden the IT solutions we are providing them. With our IPO complete, we plan to increase the size of our salesforce and continue to make investments in our solutions and technical support-capabilities. These investments along with the full realization of benefits from Project Monarch are anticipated to drive continued double digit gross profit growth and Adjusted EBITDA margin expansion in 2022.”¹

“We’re tremendously excited to have completed our IPO on June 1. We are going public at a great time, when the heavy lifting transforming our company has been completed, we are in a strong financial position, we believe secular trends are in our favour, and our growth and margins are expected to accelerate in the future.”

Financial Summary¹

Q2 2021 Financial Results ¹

• Gross Sales – The overall 8.9% growth in Gross Sales in Q2 2021 compared to the same quarter ended June 30, 2020 (“Q2 2020”) was primarily driven by a 17.4% increase in Software & Cloud Gross Sales, largely as a result of increasing customer consumption of cloud solutions, and Services, which increased 9.9% due to growth in professional services. Gross Sales reflects the gross amount billed to customers, adjusted for amounts deferred or accrued, which the Company believes is a useful alternative financial metric to the IFRS measure net sales, as it better reflects volume fluctuations.
• Net sales – Despite increases in Gross Sales and gross profit, net sales declined 2.8% compared to Q2 2020 primarily due to an increase in the mix of Software & Cloud solutions recorded on a netted down basis for accounting purposes (including subscription licenses and cloud solutions). Given the Company’s growing mix of Software & Cloud solutions, which are most impacted by netting down, it has resulted in overall net sales growth trailing Gross Sales and gross profit growth in recent years. The calculation of net sales via net or gross basis has no impact on resulting gross profit.
• Gross profit – Gross profit, Softchoice’s key metric for measuring top-line business performance, increased 15.5% over Q2 2020 driven by growth across all IT solution types (Software & Cloud, Services, Hardware) and sales channels (SMB, Commercial, Enterprise). By IT solution type, the growth in gross profit was primarily driven by Software & Cloud, reflecting the increase in related Gross Sales volumes. By sales channel, the largest contributor to the increase in overall gross profit was Commercial. Currency fluctuations, related to a strengthened Canadian dollar, also had a positive impact on reported Gross profit growth.
• Adjusted EBITDA – The 17.2% increase in Adjusted EBITDA over Q2 2020 was due to the 15.5% increase in gross profit partially offset by a 14.8% increase in Adjusted Cash Operating Expenses primarily related to higher personnel costs and currency fluctuations related to a strengthened Canadian dollar which had a negative impact on operating expenses.
• Net income (loss) – The $21.1 million decline in net income was driven primarily by over $28 million in pre-tax costs related to the IPO transaction and the related capital restructuring which took place concurrently, partially offset by the increase in Adjusted EBITDA.
• Adjusted Net Income – Adjusted Net Income, excluding exceptional items impacting Net Income as well as foreign exchange and certain other items, increased 22.3% largely driven by the growth in Adjusted EBITDA.

Financial Position

The Company is in strong financial condition, with a $275 million revolving credit facility, with approximately $80.4 million in loans and borrowings outstanding at June 30, 2021. Including internally generated cash flows, the Company anticipates having significant resources with which to pursue growth opportunities.

Net debt, equating to loans and borrowings plus lease liabilities less cash-on-hand, was $92.6 million at June 30, 2021 compared to $190.6 million at December 31, 2020, with the decline driven by proceeds from the IPO as well as $44.4 million in net cash flows from operating activities in the six months ended June 30, 2021. The ratio of net debt to Adjusted EBITDA over the last twelve months was 1.3x at June 30, 2021 compared to 2.9x at December 31, 2020.

Dividend

As disclosed in the Prospectus, Softchoice anticipates paying quarterly cash dividends estimated to be approximately C$0.07 per Common Share. The Company’s first cash dividend, which will be for the period from and including the initial public offering closing date to September 30, 2021, is expected to be paid on or about October 15, 2021 to shareholders of record on September 30, 2021 and is estimated to be C$0.093 per Common Share.

Our Outlook ¹

Softchoice reiterated its 2022 financial outlook that was included in its Prospectus (as defined below). For full-year 2022, the Company is expecting:

• Gross Profit of over $300 million, representing a 12% CAGR from 2020 to 2022
• Adjusted EBITDA of $90 million to $100 million, inclusive of ~$25 million of Project Monarch Uplift
• Adjusted Free Cash Flow Conversion of approximately 90%

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’. 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 second-quarter results today, August 13, 2021, at 8:30 a.m. ET.

DATE: Friday, August 13, 2021

TIME: 8:30 a.m. Eastern Time

DIAL-IN: (416) 764-8659 or 1-888-664-6392 (NA Toll Free)

WEBCAST: https://produceredition.webcasts.com/starthere.jsp?ei=1483627&tp_key=9e2c515631

TAPED REPLAY: (416) 764-8677 or 1-888-390-0541, Replay Code 251584 # (Available until August 20, 2021)

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 six-months ended June 30, 2021 (the “Q2 2021 MD&A”), and/or defined in our Prospectus 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 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 Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations for the three and six-months ended June 30, 2021, 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 Q2 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 Legacy Option Plan and the new Omnibus Long-Term Equity Incentive Plan (see Note 10 in the Interim Financial Statements for additional details), 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 Q2 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. 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.

(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 June 30, 2021, $48.3 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 Q1 2021 that were previously classified under non-recurring compensation and other costs; these costs have now been reclassed into IPO related costs for the six months period ended June 30, 2021.

(5) Adjusted EBITDA as a Percentage of Gross Profit is calculated as Adjusted EBITDA divided by gross profit. See “Non-IFRS Measures – Adjusted EBITDA and Adjusted EBITDA as a Percentage of Gross Profit”.

(6) 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”.

(7) 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”.

(8) 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.

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

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

(11) Tax recovery on deferred tax liability as a result of tax rate change due to change from Canadian Controlled Private Company to public company.

(12) 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.

(13) 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”.

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, including among others, net sales, gross profit, expenses, Adjusted EBITDA, Adjusted Free Cash Flow Conversion and operations; (ii) the Company’s expectations regarding industry trends, growth of our addressable market, overall market growth rates and our growth rates and growth strategies; (iii) our ability to maintain a highly predictable and visible net sales outlook; (iv) our business plans and strategies; (v) the continued success of our commercial model; (vi) our expectations regarding growth in our customer base, our ability to retain customers and increase margin per customer; (vii) acceleration in growth of and adoption of new technologies; (viii) our relationship with our technology partners; (ix) our ability to continue to attract and retain talent; (x) our competitive position in our industry; (xi) our intention to declare dividends; (xii) and the long-term impact of COVID-19 on our business, financial position, results of operations and/or cash flows.

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 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.

About Softchoice

Softchoice (TSX: SFTC) is a technology services and 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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