Softchoice Corp.
(SFTC-T) C$22.81
Q4/F21: Significant Profitability Gains Ahead Event
Softchoice reported its Q4/F21 results. Click here for our initial take and here for its conference call highlights.
Impact: NEUTRAL
Gaining share in the rapidly growing cloud migration market. Softchoice is one of the leaders in the North American Hybrid Multi-Cloud market, as it has been able to successfully leverage its leading relationships and technical capabilities with the big three cloud vendors (Microsoft, Amazon, and Google) into customer wins and outsized growth.
Its hard work is paying off and leading to market-share gains, with Softchoice's gross public cloud revenue from Microsoft Azure, AWS, and GCP increasing 86% y/y in 2021, an acceleration from the 65% y/y growth in 2020, and roughly double the ~40-50% revenue growth reported by each of the big three cloud vendors.
Strong productivity gains is helping drive organic growth. Gross profit per Account Executive (AE) came in at $751k in F2021, up 27% y/y, albeit against an easier comp, but we note that the two-year CAGR (2019-2021; adjusts for the pandemic) is a solid 9%. Although productivity gains could moderate as new (less productive) AEs are hired, we believe the recent increased pace of new AE hires and ongoing productivity gains of existing AEs should enable Softchoice to generate double-digit organic growth in the coming years.
Management confident about increased outlook; increased focus on returning capital to shareholders. Softchoice increased its F2022 guidance by ~7% for gross profit and Adjusted EBITDA and indicated that it had a high degree of confidence in the outlook, which, along with its strong FCF generation (>$60mm in 2021), also helped lead to a 29% increase in the dividend.
TD Investment Conclusion
We are lowering our target price to C$34.00 (from C$37.00), based on 14.5x (down from 16.0x) our F2023 Adjusted EBITDA estimate. The reduction in our target multiple is due to a decline in peer-group valuations. Softchoice remains our top pick. We believe the valuation gap should narrow as it delivers on the ~40% Adjusted EBITDA growth and margin expansion (~30% vs. ~24% in 2021) implied by its F2022 outlook, and given the increased focus on returning capital to shareholders (vs. repaying debt)