TSX:SFTC - Post Discussion
Post by
retiredcf on May 13, 2022 9:01am
Final TD
Softchoice Corp.
(SFTC-T) C$18.42
Q1/F22: Playing the Long Game Event
Softchoice reported its Q1/F22 results. Click here for our initial take and here for its conference call highlights.
Impact: NEUTRAL
Staffing up to meet strong customer demand. Softchoice has added 146 employees (net) since the end of 2020 (up ~8%), with all but one of these additions being AEs (+28), Technical Experts (+97), or Sales Support/Management (+20). Nearly half (+65) joined this quarter, including 15 AEs and 47 Technical Experts.
Softchoice is ahead of its hiring plans, with the hiring surge in Q1/22, driven in part by several quarters of strong Services billings growth and a robust pipeline that includes some large transformational projects that are much larger than it has taken on historically. However, there is a near-term profitability headwind as Softchoice ramps its services engineering team, given there is a lag from when new hires join to when revenue gets recognized (i.e., when projects start and milestones are achieved). This caused Services gross margins to drop to 26.2% in from 29.3% last year.
In addition, with more direct (AEs) and indirect (Technical Experts) sales personnel onboard earlier in the year and ahead of plan, we believe it puts Softchoice in a better position to hit its F2022 guidance, as these new employees should become more productive sooner and thus have a greater impact on the full-year results.
Not managing quarter-to-quarter. Management could have curtailed hiring activity to avoid the near-term profitability drag and help it "make the quarter." However, it would have likely meant it missing out on attractive revenue streams that could potentially generate more value in the long term relative to the near-term cost savings from not hiring. We have increased confidence in management, as it chose to focus on long-term value-creation, even though it was at the expense of near-term profitability that helped lead to the missed quarter and resulting in a significant drop in the share price yesterday. We believe (patient) shareholders will be rewarded and remain confident that Softchoice will still achieve its F2022 guidance (similar to management).
TD Investment Conclusion
We are lowering our target price to C$32.00 (from C$34.00), based on 13.0x (down from 14.5x previously) our F2023 Adjusted EBITDA estimate
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