CIBCEQUITY RESEARCH
May 12, 2022 Earnings Update
SOFTCHOICE CORPORATION
Hiring Investments Pressure Margins; Guidance Reiterated
Our Conclusion
Despite a soft quarter—due in part to the timing of hiring investments and
revenue recognition—Softchoice reiterated its 2022 guidance on the strength
of its billing and backlog activity, sustained demand for cloud and services
offerings, and the contribution from Project Monarch. While we view
Softchoice as well positioned to benefit from accelerating demand for cloud
and digital solutions and a tight IT labour market, the weak Q1 is a concern,
especially given the volatile macro environment. We have recalibrated our
forecasts based on Q1 results and the reiterated guidance, with forecast
EBITDA margins 120 bps below the guidance target as a measure of
conservatism. We retain our Outperformer rating and reduce our price target
from C$31 to C$26 as we take our target multiple from 16x to 12.5x, in line
with peers.
Key Points
Q1/22 Results Soft, But 2022 Guidance Maintained: Softchoice reported
gross profit of $67.1 million, roughly 4% below consensus ($70 million) and
7% below our estimate ($72.1 million). Adjusted EBITDA of $10.0 million was
$6 million below consensus and our estimate ($16.0 million). Adjusted
EBITDA as a percentage of gross profit was 14.8%, 800 bp below consensus
expectations of 22.9%. Commenting on the weaker-than-expected margins,
management highlighted $3 million in non-recurring impacts to gross profit in
the quarter from slowing Canadian public sector spending and a ramp up in
Services engineering staff to service the strong billings activity, up double
digits in the quarter. Operating expenses were also impacted by $4 million of
spending on accelerated hiring and increased sales commissions, spending
that management anticipates a payback on by the second half.
EBITDA Expected To Be Back-half Weighted: Softchoice reaffirmed its
2022 financial outlook of >$320MM in gross profit with adjusted EBITDA
margins of ~30%, implying $96 million of EBITDA for the full year. Adjusted
EBITDA is expected to be back-half weighted, with two-thirds of annual
EBITDA falling in the second half given standard seasonality and the return
on hiring investments made in the first quarter. To put that seasonality in
context, second-half EBITDA contributions in 2020 and 2021 were 60% and
55%, respectively. As newly hired account executives ramp up and
enterprise contracts come up for renewal, we do expect sequential
improvements in gross profit and EBITDA.
Sales Team Investments Progressing: Softchoice is tracking ahead of its
account executive (AE) hiring plan, adding 15 AEs in Q1/22 to reach a total
of 411 after adding 13 for the full year in 2021. Project Monarch is driving
additional productivity amongst AEs, with gross profit per AE up 25% on a
TTM basis and up slightly from year-end 2021. Total customer count was
down slightly Q/Q, but LTM net dollar retention remained strong at 112% as
gross profit per customer increased.