Softchoice Corp

F:90Q

Earnings Call Analysis

Organic Growth as the Primary Focus Amid Market Headwinds

The company's steadfast commitment to organic growth amidst economic uncertainties sets the tone for its strategic undertakings. With an impressive return on invested capital in the 40% to 50% range for 2023, their approach seems to have paid off for shareholders. Despite not offering explicit guidance, the aspiration is to navigate the historical average for top-line gross profit growth. This forecast hinges on the hypothesis that hardware purchase pressures could dissipate in the latter part of 2024, engendering an upward trajectory in growth rates. Such anticipation is based on typical seasonality patterns, with Q1 gross profit historically around 22.5% of the full year's gross profit.

Strategic Pillars—Expansion and Customer Retention

A three-pronged strategy underscores the company's roadmap to success. The first being an aggressive push to inflate their customer base, with the goal of outpacing their current acceleration. This is purported to be orchestrated by augmenting account acquisition and elevating customer experiences to bolster retention and foster growth. Their second strategic move is to deepen customer relationships through enhanced software asset management and services, aiming to enrich the gross profit per customer by scaling offerings such as SAM+, securing more cloud logos, interlacing core services with a broader customer base, and hastening AI adoption among said customers. The efficacy of this plan is evidenced by a stark retention rate among customers who have transitioned to full solutions offerings.

Dividend Growth and Prudent Leverage Management

The narrative shifts to shareholder value with plans to incrementally raise the quarterly dividend annually and draw down leverage, keeping M&A aspirations tempered. With Softchoice's negative working capital and asset-light business model, the surplus capital generated is primed for distribution to shareholders, offering an array of methods including special dividends. The commitment to an optimal leverage ratio of 1 to 3x delineates the company's conservative fiscal strategy aimed at striking a balance between rewarding shareholders and maintaining financial agility.

Employee Productivity as a Lever for Margin Improvement

The company has recognized a demographic tilt towards junior employees which, while initially dilutive to average productivity, presents a vector for margin uplift as tenure and experience accrue within the workforce. Parallel to this is acknowledgement of the strains faced by the Enterprise segment due to a downturn in hardware sales. However, they contend that a granular analysis by customer segment and seller tenure portrays a sanguine trend over time, assuaging concerns around the broader margin impacts.

Resilience in Core Business Segments Despite Enterprise Challenges

Though setbacks in the Enterprise segment, attributed to postponed hardware purchases and heightened caution in upgrades, have impacted net retention, strength in commercial and SMB segments appears undimmed. This dichotomy underscores resilience in core solution areas, reaffirming the business's tenacity against sector-specific challenges.

Hardware Pressure Relief Tied to Second Half Optimism

Progress on alleviating hardware pressures isn't anticipated to materialize before the second half of the year. This is partly due to customers' capital upgrade budgets remaining constrained, coupled with a recent influx of device upgrades that dampens near-term demand. However, this downturn is somewhat mitigated by strong growth in hyperscaler and public cloud sectors, which align with the company's proficiencies. In a scenario where hardware sales remained flat, the company would have posted an 8% growth in constant currency last year, signifying hardware's relative weight in overall performance.

Maintaining Robust Balance Sheet Amid Dividend and Deleverage Plans

Looking forward, the company aspires to maintain its financial robustness through an interplay of growing top-line revenue, prudently increasing dividends, and aggressively reducing leverage. With a historical pattern of nearly full deleveraging within a span of a year and a protracted view of deleveraging from a previously low EBITDA base over 2.5 years, the company seems poised to preserve capital availability for strategic maneuvers.

AI Hardware Demand—Beyond Just Exploration

With regard to AI developments in hardware, the company signals a tactical patience, speculating that a tangible uplift in demand from the mainstream market remains on the distant horizon. The year 2023 was labeled as an exploratory phase for AI, with 2024 positioned as a period of readiness and pilot projects, indicating that any significant surge in AI hardware uptake lies beyond the immediate future.

Focus on North American Markets with No Current M&A in Latin America

Externally, the aim is to refine the scope of expansion and acquisition, with the clear exclusion of Latin American markets from the current M&A activities. The focus is stoutly on organic growth within the U.S. and Canada, leveraging a nominal market share in a richly fertile and fragmented marketplace ripe for share gains. This strategy is underscored by strong growth in both countries and the greater market potential in the U.S. given its size and the company's existing foothold.

AI Advancing on Existing Technologies in SMB and Commercial Segments

While AI is on the enterprise's radar, current growth is predominantly driven by the existing technologies, particularly in the SMB and commercial segments. The company underscores the strategic imperative of cloud adoption and the modernization of legacy environments, which provides a foundation on which future AI solutions can be effectively deployed.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Softchoice Q4 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Mr. Tim Foran, Investor Relations. Please go ahead.

[Tim Foran]

Thank you, Joelle, and good morning, everyone. Welcome to Softchoice's Q4 Full Year 2023 Conference Call for the period ended December 31, 2023. The reminder of that for the purpose of the record today is Tuesday, March 5, 2024. I'm joined today by Andrew Caprara, Softchoice's CEO; and Jonathan Roiter, CFO. The company will make forward-looking statements on our call today that are based on assumptions and, therefore, are subject to risks and uncertainties that could cause the actual results to differ materially from those projected. The company undertakes no obligation to update these statements, except as required by law. You can read about these risks and uncertainties in our earnings press release today as well as in our filings with Canadian securities and regulatory authorities. Also, our commentary today will include adjusted financial measures, which are non-IFRS measures. These should be considered as a supplement to and not a substitute for IFRS financial measures. Reconciliations between the 2 and relevant disclaimers can be found in the company's MD&A, which is available on our Investors website. Unless otherwise noted, percentage growth rate that we referred to today are for the identified period ending December 31, 2023, compared with the same period ending December 31, 2022. Also, please note that because the company reports in U.S. dollars, all amounts discussed today are in U.S. dollars, unless otherwise indicated. One note for housekeeping. We do have a hard stop on this call today at 9:25. So we'll have the Q&A at that time. With that, I'll now turn the call over to Andrew.

[Andrew Caprara, executive]

Thanks, Tim, and welcome, everybody. I'm excited to be speaking with you about our 2023 performance before I go into a little more detail on the execution of our strategy and the catalyst for our future growth. At Softchoice, our purpose is to unleash the potential in people and technology. We unleashed that potential in our customers by being relevant to them through the solutions we deliver and our relentless commitment to their success. That creates value for their organizations and their IT teams, which drives growth. For them, our partners, our people and our organization. And none of this is possible without the dedication of our team members. So I want to thank everyone at Softchoice for their contributions to the success of our customers and our organization. On Slide 4, you'll see that in 2023, we delivered record top line gross profit and bottom line profitability. And our asset-light model resulted in extremely high conversion of profits to cash flow and exceptional returns for our shareholders. This record performance, coupled with a long track record of consistent execution, validates the strength of our organic growth strategy. We're proud of our accomplishments last year as we estimate our organic growth rate outpaced major competitors in our markets. Our highly recurring business allowed us to achieve almost 5% gross profit growth in constant currency while weathering a significant decline in hardware spend industry-wide. During the year, we benefited from previous investments in a larger frontline sales force, which helped drive customer growth of 5% compared with the end of 2022, a growth rate similar to pre-pandemic levels. It's important to highlight that we continued making growth investments last year while significantly growing our adjusted EBITDA margin to 28%. The 190 basis point margin expansion was driven by our continuous focus on creating a more efficient and effective process for effective processes coupled with the operating leverage we created in our model as well as benefiting from a natural currency hedge. Our bottom line net income doubled in 2023. Combined with effective working capital management, this converted into $100 million in operating cash flow, which we used to reduce our leverage by almost a full turn to only 0.4x and also returned $30 million in capital to our shareholders through share buybacks and our quarterly dividends. And looking forward, we're well positioned for future growth. We'll continue to invest in expanding our sales capacity and in the technical capabilities in our strategic focus areas of cloud, digital workplace and software asset management with our solutions underpinned by cybersecurity. These solutions remain mission-critical areas for our customers. And we'll execute our go-to-market motions that have been proven to deepen relationships and expand our business with these customers over time. We have tremendous flexibility to continue our balanced allocation of capital to internal investments that will drive sustainable, profitable growth while also returning significant capital to shareholders. Our focus remains on doing this organically as we've generated high returns on invested capital that we believe are best in class. Reflecting confidence in our long-term growth strategy and our ability to generate significant free cash flow, our board has approved our third annual $0.02 dividend increase to CAD 0.13 beginning the first quarter of 2024. Our dividend is now 86% higher than when we first launched it following our IPO in 2021. In addition, and consistent with our capital allocation framework that returns excess capital to shareholders, our Board has also approved a special dividend of CAD 4 per share, which John will provide detail on later in the call. We've also approved the renewal of our share buyback program. Turning to Slide 5. We again recorded growth in both the U.S. and Canada in 2023 and saw accelerating growth in our core software and cloud solutions and in services, both of which outpaced the average growth of those solution areas versus the prior 5 years. Together, the 2 solution areas comprised 78% of our gross profit in the year compared with 73% last year and 69% in 2017. Software and cloud gross profit increased 13% in constant currency. This is driven by new customer growth and an increased demand from existing customers to make their IT environments more efficient, secure and prime to drive their business forward. Notably, we continue to see overall growth in our Azure AWS and Google Cloud public cloud revenues, which outpaced the average growth of the hyperscalers, suggesting we're continuing to take market share. Our success reflects the co-investments we've made with Microsoft, Amazon and Google over the past 5 years to significantly increase our advanced capabilities across all 3 public clouds. We're creating important outcomes for customers like Atlas geographic data. We designed a more modern cloud-first architecture and migrated 95% of their workloads from aging and physical infrastructure into Google Cloud, creating a secure, compliant and powerful platform that's improved their performance and reliability in their data analytics, which is integral to their success. We also delivered strong performance in our workplace solutions, including those built around driving adoption of Microsoft's cloud solution provider program, known as CSP, which provides more flexibility and cost savings to organizations compared with enterprise agreements. The potential value of these programs was recently realized by a leading innovator in telemedicine, which is improving access to medical care by connecting specialists to people in remote or underserved areas. This is an account we won in Q1 of last year based on our ability to modernize their collaboration and productivity strategy on Microsoft 365, which was essential for them delivering a high-quality patient experience. And delivering this solution via CSP allowed our customer to dynamically rightsize licensing to the constant changes in their user counts and have the support of Softchoice as they manage that complexity. All of that, combined with our depth of services, made Softchoice the obvious services partner to implement this business-critical solution. And now the next phase of our engagement with them extends to the public cloud where we'll standardize their infrastructure services on Microsoft Azure. As it relates to hardware, we did see a slight improvement in the fourth quarter. However, in line with wider industry expectations, we don't expect a material rebound in devices in the first half of the year. And as noted on our last call, with the strength of our core solutions and some expected easing of hardware declines, we're aiming to return to an overall growth rate closer to the average of recent years. Now as we look forward, one of our core focus areas of investment is in generative AI. As you know, Softchoice is one of Microsoft's top partners globally, delivering billions of dollars annually in Microsoft-related sales. Since the launch of CoPilot for Microsoft 365 in November, we've seen a extradites and prepare their IT environments for AI applications. Our sales force has been able to convert this AI interest into new business as organizations see our ability to help them realize value in these groundbreaking technologies. We've taken an early leadership position in the customer adoption of CoPilot, having transacted the first set of orders via CSP. And we're a leading partner in co-pilot workshop engagement submissions to Microsoft in North America, which is an important leading indicator for Copilot consumption. It's important to note as well that we rank as one of the leading Microsoft software asset management service providers and Azure cloud partners in North America. We managed 8.5 million seats of Microsoft 365, and we have a brand for optimizing outcomes on the platform. We also delivered thousands of Microsoft assessments annually. This scale provides us with a tremendous opportunity to also become a leader in driving the adoption of Copilot in the North American mid-market. We're collaborating with Microsoft to further enhance our capabilities and capacity to develop, sell and deliver Microsoft's cloud digital workplace, AI and security solutions. This collaboration, which is targeted towards Copilot for M365, Azure adoption for open AI implementations as well as Microsoft Security builds on our long-standing partnership. It's with that Copilot opportunity, along with the opportunity in Cloud AI that we launched our AI solutions team, which will deliver next-generation AI offerings for organizations across the U.S. and Canada. As we help customers identify AI use cases for CoPilot, that process becomes a conduit to uncover additional customer needs for broader cloud and workplace AI solutions. It puts us at the center of their AI strategy. Along with that scale and influence, we already have a full suite of consulting, engineering, data and application integration, end user adoption and change management services needed for Copilot. As you can see on Slide 6, the differentiator for us is we've brought these capabilities together and through a soft choice methodology for guiding customers through all 5 stages of a successful Copilot adoption journey from planning to assessing, adoption, implementation and then sustaining an AI solution. We have targeted services to assist the customer in each stage. For example, we recently worked with a large steel producer to identify how Copilot can help increase productivity and improve their margins. Given their business model, they identified workplace technology as the primary area to improve productivity by automating repetitive tasks, specifically in their supply chain, procurement and HR organizations. However, traditional solutions to do this would have required a level of time and costs that weren't justified. But we demonstrated Copilot's relevant capabilities, followed by the services to assess the environment for technical readiness, integration of Copilot into their existing applications as well as plans to secure and govern their data so they could transform their processes in a fraction of the time. We then provided the end user enablement services to ensure the adoption from their users. And we had 2 critical advantages in this project. First, we had existing knowledge and influence over their M365 usage. And second, our methodology solved every need that the customer knew would exist in their journey to AI success. Turning to Slide 7. While the workplace component of our AI strategy is very much built around Microsoft 365, our cloud AI services are built on our depth of capabilities across all 3 of the top hyperscalers, our foundational expertise in application and data modernization, cybersecurity and our ability to help customers decide the right platform based on their use case and IT environment. One relevance and differentiation in cloud AI is the same as it is with cloud more broadly, which is that we bring the combined expertise and experience in Azure, Google Cloud and AWS to create significant value with our customers. And as with Workplace AI, our well-established consulting practice is key to linking business goals to cloud AI solutions. And we've got the ability to help our customers evaluate and select the right large language models for certain use cases, for example, to build AI into existing applications or to build AI-powered applications from the ground up. We recently worked with a customer that's a digital marketing software company, and they use public data for predictive analytics. Their aim was to utilize a large language model or LLM, to capture all the public-facing information on a target's website and then automatically build personalized marketing campaigns, but they weren't sure which LLM would work best for their needs. So we help them do a comparison test to the concept on Azure OpenAI and VERTEX AI LLM operating on Google Cloud to compare both models because small differences can make huge financial impacts on their business. So the customers then asked us to expand the project into another LLM that we will set up and test, ensuring that the customer builds their application on the most effective generative AI model for their use case. We were their only partner that had both the ability to test multiple language models across multiple cloud platforms which plays to our unique strength in multi-cloud experience and the ability to combine a consultative approach, which -- with agile engineering capabilities in application and data services to get the test running quickly. With that, I will turn it over to Jonathan to talk more about our 2023 results.

[Jonathan Roiter, executive]

Thanks, Andrew. I'll start on Slide 8 with a look at our top line metric, gross profit. As Andrew noted, on a full year basis, gross profit increased by 5% in cost currency, the primary takeaway being that growth is driven by a 3% increase in software and cloud and a 5% [indiscernible] which were both higher than the average CAGR in 2017 and '22. Partially offsetting the strong performance in prepares is the decline in hardware. In Q4, we are pleased to see a 6% year-over-year increase for sales, driven by an 11% increase in software and cloud, 6% in free services. Hardware declined 11%, which is the lowest decline for the past 5 quarters. The prior year's period services both profit benefited from a nonrecurring $0.7 million reduction in cost of sales recorded in the prior year, including a variable compensation forevers. Turning to Slide 9. We continue to see strong growth in our core software and cloud solutions, commercial and Enterprise sales. In Q4, Enterprise recorded the fastest growth in Software and Cloud. However, overall gross profit in Enterprise declined due to the great exposure to hardware than the other channels. On a full year basis, -- on a full year basis, we also saw growth in software and cloud across all sales trends. Growth in SMB and commercial was partially offset by Enterprise, again because of its greater exposure to hardware. Reflecting the faster growth in software and cloud, continue to the uptick in our recurring and reoccurring gross sales, which increased to 54% in 2021 from 59% last year. Turning to Slide 10. Adjusted EBITDA increased 11% in 2023 or approximately 9% constant currency adjusted EBITDA margins expanding significantly to 28.1% to 26.2% 2022. On a constant currency basis, adjusted EBITDA margins would have been 27%. This expansion in margin a low growth in a lower growth year reflects 2 things. First, as we previously discussed, we continue to optimize our process. Churn has allowed us to reduce [indiscernible] of set investment -- as an example, for the past 2 years, we increased the size of our overall sales team by 24%, while reducing our average headcount by 8% and the benefits of an increased sales force in 2022 with a rebound in our customer growth to prepandemic levels. The result of this focus is that in 2023, our average headcount comprise the vast majority of our cost only increased by 1% year-over-year, as did our adjusted cash operating expense. Secondly, when process optimization, coupled with the natural operating leverage created by our commercial model, gross profit growth a very addition to EBITDA. Specifically, when we look back over the last 5 years, 43% of incremental gross profit has dropped down to adjusted EBITDA. This is why we simultaneously increase the size of our sales ex by approximately $0.28. We've seen both gross profit and adjusted EBITDA per average employee incentive on accruals was reported in Q3 2022 for the year-to-date period. That accrual was essentially reversed in Q4 2020, which resulted in low reported OpEx in that quarter. Now turning to Slide 11. In terms of the bottom line, net income per share on a diluted basis in 2021 more than doubled to $0.785 in 2022. And in Q4, EPS increased to $0.32 from last year. Adjusted EPS on a diluted basis 2022 increased 12% to 90% from $0.80 and degree to 31%. Turning to Slide 12. In 2023, I'm incredibly proud of the team's effort to create $100 million of cash flow a -- we used $100 million to return $30 million in capital to shareholders and reduce our debt by 7. We had a very strong year in terms of cash flow generation. We benefited in the period from a couple of -- the first is while tax expenses were $17 million in the year, $10 million was paid with the remainder anticipated early in 2021. Additionally, we reported a higher-than-usual working capital flow of $35 million in 2020 as the team implemented a number of structural improvements to our process. Thanks to our negative working capital model, we continue to at annual inflows when will likely more be in line with average of the prior 5 years of about 5 to -- our debt reduction in net leverage coming in at fully 0.4 turns at the end of year, a low level considering our cash flow profile. We are therefore very pleased that the core has approved our special dividend. As we have -- as we have minimal debt, we believe it's an effective way to return excess capital for shareholders while keeping up on an awful net leverage rate oxy wanted to return. Pro forma for the special dividend, our net leverage at the end of the year would have been approximately 2.4x. We, therefore, maintain our ability to continue our balanced approach towards capital allocation. We have been focused on our organic growth investments and progressively, and progressively increased our quarterly dividend while deleveraging put -- Discretionary cash is available for opportunistic share buybacks. We were more active in debt reduction and share buybacks in the past year as the most common site impediments that we have heard from institutional investors interested in becoming shareholders workplace, but the lack of creating liquidity has created additional frick building position. Having sufficient trading liquidity is also a requirement for inclusion in major that we hope all for in the future years. In terms of M&A, [indiscernible], but our focus remains on organic growth. While M&A presents an opportunity for us to accelerate investment burden and at capabilities, adding those capabilities organically hiring over time has paid off well for our shareholders. Our return on invested capital, depending on how you calculate it, was in the 40% to 50% range in 2023. So you can see why organic growth is our focus. Turning to Slide 11. Looking ahead to 2024. While we don't give guidance, we are aiming for top line gross profit growth to get back closer to the historical average, should hardware pressure ease later in the year, with growth rates rising throughout the year. In terms of Q1, we expect similar seasonality as the average of the past 5 years when Q1 gross profit was approximately 22.5% for the full year of gross profit. I'll remind you that we obviously don't see the same seasonality in adjusted cash off, which is the delta between gross profit and adjusted EBITDA. Therefore, for modeling purposes, a run rate for adjusted cash of currently anticipated to be approximately $63 million. As I noted last quarter, as I noted last quarter was our intention, this is because we are excelling investments in 3 areas to [indiscernible]. First, our sales capacity, including our customer acquisition, -- in terms of end of the year ahead of our previously stated target. Our comfort level for this was supported by a growing customer base and continued demand for our core solutions; secondly, technical capabilities, including our new AI solutions team. And thirdly, our software asset management SAM+ offering is anticipated to have a $1 million of both. As we've done in 2023, we expect to offset some of these growth investments through certain efficiencies and the use of technology to use our costs in other areas. And now I'll turn it over to Andrew.

[Andrew Caprara, executive]

All right. Thanks, John. And turning to Slide 14, I'll provide a quick overview of our priorities, which are aligned to continuing to take market share and accelerating growth. There are 3 strategic pillars to help us achieve this objective. The first is to continue building a world-class, high-performing culture. It's critical that we continue to invest in the people that deliver an exceptional experience to our customers. So we're focused on developing our leaders, building a team that is diverse and part of an inclusive company and making Softchoice a place where people want to stay and build their careers. We measure this by tenure and engagement for which we've been honored by -- great Places to Work for 18 straight years as the best workplace in Canada. Our second pillar is to continue to grow our customer base with an aim to grow our customer base at a faster rate, -- we're doing this by ramping account acquisition led by our sales and demand generation team and continuing to raise the bar on customer experience so that we retain and grow more customers. And our third pillar is to deepen our customer relationships with software asset management and services. This will increase the gross profit per customer. We're doing this by scaling our SAM+ offering, continuing to capture cloud logos, embedding our core services with more customers and accelerating the AI adoption in our customers. And ultimately, Slide 15 illustrates the benefits of this strategy. Being a trusted adviser to our customers, moving them from product-only customers into those also utilizing our services and then our broader IT solutions. As you can see, this leads to a significant increase in customer retention. We almost never lose full solutions customers, and we generate a far higher average margin per customer. In 2023, the average margin from an IT solutions customer was almost 7x higher than on only purchasing products from us. So like I said at the outset, this begins with being relevant to our customers with our solutions and our relentless focus on their success. And that creates value for them, which leads to the growth that we aim to continue driving on an ongoing basis for Softchoice. So with that, we can begin Q&A.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session for analysts [Operator Instructions] Your first question comes from Paul Treiber with RBC Capital Markets.

[Paul Treiber, analyst]

Firstly, starting, the comment you had on market share gains at hyperscalers is quite positive and encouraging to hear. Why do you think you're gaining so much share with the hyperscalers versus other players that are out there?

[Andrew Caprara, executive]

Paul, I think there's a few reasons for it. The first is that we believe that our go-to-market ocean is extremely relevant for both the hyperscalers and our customers right now. What I mean by that is we've talked a lot about that Softchoice ROI approach, right, which is to go in first and look at ways we can reduce unnecessary spend in the environment and find efficiencies that then they can use to invest in optimization services and ultimately innovation. So if you're thinking about it from a customer perspective, many of them -- we're winning a lot of customers who already have some cloud presence, but they're not sure if they're doing it properly. And so they're able to use the services that we can provide to make sure that they've got it optimized. And if you think about it from a partner perspective, if you're one of the hyperscalers and you're looking for someone to move into a customer, somebody who's got the capability to really prove that they can drive the adoption of the consumption is where they want to -- is the kind of partner that they want to have in there. And so we think that our go-to-market motion is relevant to both customers and partners, and it's really been a driver of growth for us. And we've seen great collaboration with all 3 of the hyperscalers in investing and co-investing in that approach.

[Paul Treiber, analyst]

And then I guess related to the hyperscalers, the comments on Gen AI and Microsoft CoPilot are really encouraging. It seems though most customers are probably in the extermination stage. When do you think that interest will start converting into material or widespread deployments? And then, I guess, widespread of material revenue associated with that?

[Jonathan Roiter, executive]

Yes. I think, Paul, it's a little too early for us to really say at this point in terms of when it's really going to become a huge financial impact. We know it's going to be a tailwind. But at this point, we're thinking it's probably more of a material contributor in more of a medium-term time horizon than a big impact in 2024. And the reason being is a lot of organizations are starting right now, but the way to do AI properly is actually not to just go out and buy it and hope you find the use case, but it's to work with somebody who can actually help you identify and build it around the use cases that drive the most value. So when we do that successfully for customers, they're seeing great ROI on their initial investment and it leads to other phases of work. But as you can imagine, doing that kind of an effort takes a little more time to do it right. And so I think what we're seeing is a lot of interest to get started with that right now. As I mentioned, around the Copilot readiness assessment submissions to Microsoft. But that's going to take a little bit of time to sort of flow through and turn into activating those use cases.

[Operator]

Your next question comes from Gavin Fairweather with Cormark.

[Gavin Fairweather, analyst]

And maybe just on the commission and referral structure. What have you learned from Microsoft and how they're going to kind of incentivize as option of Copilot.

[Jonathan Roiter, executive]

Have a great opportunity with Microsoft CSP in terms of taking full control and responsibility for the customers' environment. Because when we do that, we know that we're able to add a lot more value for the customer because we have more control over that full environment, but it also means that we're able to get compensated for that. And so I think at this point, there's not really a big change in that when we take more control through CSP, we're able to earn more margins. And as we drive more and more incentive on the back end. So it really hasn't changed very much.

[Gavin Fairweather, analyst]

And a pretty aggressive growth in your AEs kind of later in the year in 2023. I guess what gives you confidence in your ability to kind of get returns off of that expanded sales force in the current macro. I mean, is it kind of client conversations, expectations around the device refresh cycle? And maybe just secondarily, like how are you thinking about the level of kind of head count investment in '24 and we will drive that?

[Jonathan Roiter, executive]

I think the 2 big numbers that I would point to. Number one is that we grew the customer base by 5%, right? That's where we were running pre-pandemic 2017 to 2020. And that's where what we expect that we will be able to do going forward. And we've talked a lot about our appeal and growth strategy on accounts. And when we win more new customers, we're able to peel some of the underserved customers at the bottom of an AEs list and create new territories. So that account expansion has been a key component of it. The second thing is that we have also grown our software and cloud business faster than we have in the last few years. And so in this environment, there's a lot of opportunity still to help customers with this. And when we do help customers, it's that high test, high trust -- sorry, high touch, high trust kind of relationship, meaning that we do need the account executives to be able to reach these accounts so that we can move them up that stack that I talked about. And so both of those things are still moving in a positive direction. And so could there be macro uncertainty in the next couple of quarters for sure. But we're thinking about building the capacity into our system so that we can build an organization that's growing by double digits for the next 10 years. So we're still seeing positive trends in our core solution areas. We're still seeing the same return on invested capital for the investments we're making. And so -- at this point, we see no reason to stop because we think that, that growth is still there for us. And the opportunity now, obviously, with Microsoft and AI Copilot will require us to make sure that we have that level of service for these -- all of our 8.5 million Microsoft seats that we manage. So we want to continue investing. And so at this point, in terms of looking forward, our plans for the year would be kind of getting back to that more normal AE headcount growth rate that we've had in the past, right, which was around that 5-ish percent before the last couple of years where we've been doing catch-up years. But we'll -- as we did last year, if things are going positively, then we may come back and increase that down the road.

[Operator]

Your next question comes from David Kwan with TD Securities.

[David Kwan, analyst]

I apologize if you addressed in the preliminary comments that the audio was a bit patchy for me, but I want to get a better understanding of how you see the gross profit growth this year. It sounded like you expect it to kind of improve as the year progresses. I'm guessing at the very least is hopefully hardware headwinds start to abate. But do you think that we could see you guys get back to kind of that double-digit organic growth this year? And how do you see that organic growth balancing out between a addition versus productivity gains?

[Jonathan Roiter, executive]

The first thing I'd start with is when you look at our core offering, one way to look about our -- our short-term and mid-term growth objectives. -- that software and growth -- software and cloud, excuse me, growth that we saw in this last year. It's been outperforming our historical 5-year average, and it was a 13% year-over-year increase this year on constant currency. So we certainly see the ability to move back to some of those higher growth rates that we've seen in the past. There is an industry-wide slowdown on hardware. We think like the wider industry, that's the rebound the market will start to strengthen over the H2 versus H1. So that's one of the elements that we're watching and that will obviously have an effect on our growth this year. Now in terms of this coming year, our growth targets are to get back in line with what we've seen over the recent history. And in terms of seasonality year-over-year throughout the quarter, excuse me, it's more in line with the average of the last 5 years. So in Q1 over the last 5 years, 22.5% of our GP was in Q1.

[David Kwan, analyst]

I guess the second question I've got and maybe for you or Andrew, feel free to jump in. You mentioned, I guess, that you're targeting a net leverage ratio of about 1 to 3x. And obviously, we saw that dip this quarter. I think that helped drive the decision for the special dividend. So looking out in the coming years, if we see a similar type of situation where your leverage goes materially below 1x and I may be happy with your kind of organic growth investments. Is it fair to assume that we could see more special dividends in the future?

[Andrew Caprara, executive]

I'll take it, Dave. I think the way to think about it is this, we have this historically consistent capital allocation framework, which is to continuously aggressively invest in our business, and you see that in the growth. And we talked about some of those investments that we're making this year and that we made last year that we think will drive growth going forward. Ultimately, the second element is we aim to progressively increase our quarterly dividend on an annual basis and then bring down our leverage. I talked about M&A, and you know that's not necessarily a priority for us. So that will leave excess capital because we are an asset-light company. We have negative working capital, and I think we've shown the ability to create a tremendous amount of capital for cash over time, we're in a given year. And so our aim will be to give that back to shareholders. There's multiple different ways we can do that. Special dividend is one way. We are very cognizant and we've heard from our potential shareholders that while the NCIB is an effective tool, it does reduce the float and makes it harder for some prospective investors to get into Softchoice in an efficient manner. And so the special dividend served as a very efficient way to return capital, and we'll look at all options going forward. But what you should take away is that we on purpose laid out and we want to be explicit about the 1 to 3x optimal leverage range, and we'll manage ourselves within that.

[Operator]

Your next question comes from Stephanie Price with CIBC.

[Stephanie Price, analyst]

I just want to circle back on the AE discussion. It looks like gross profit per AE was down slightly year-over-year. Should we think about that improving in 2024 as the AEs hired in 2023 ramp-up? Or could we see kind of similar levels here as you continue to hire?

[Jonathan Roiter, executive]

Yes. That's right, Stephanie. We added a lot in the last 18 months, if you even go back to the end of 2022. And so you've got a lot of folks in the more junior end. And so the mix shift is obviously pretty significantly to folks with lower average productivity when you bring in so many new people. And so that should shift over time. And the other thing that we also saw last year was just the general headwind in the Enterprise segment and specifically around hardware, right? And so if a large section of the largest salespeople have a tougher year, that also is something that would negatively impact that overall average margin per AE. So when you actually look at it, the way that we look at it is honestly not at this total level, but it's at the average margin for AE by customer segment by tenure of seller. And I can tell you that those numbers continue to improve over time. And so we're not concerned about that headline number. We think that there's the obvious explanations around the inflow of new folks as well as the Enterprise headwind from last year that will sort of fix itself over time as these folks grow and get more tenured.

[Stephanie Price, analyst]

And then I just want to touch on net retention as well, up sequentially, but down a bit year-over-year. Can you talk a bit about what you're seeing in terms of net retention and how you think about 2024 here?

[Jonathan Roiter, executive]

It's actually largely the same answer in that the net retention in commercial and SMB was still strong. But in Enterprise because of the headwinds that we had there, it came down. And obviously then, there are some big customers there, and so that took the overall number down last year. So again, it's not something where we're concerned that there is this huge shift where we're losing business in all the segments. We're still seeing strength in our core solution areas. It's just a bit of what we've talked about and what many in the industry have talked about where a lot of large customers are delaying purchases or being a little more careful about some of the upgrades on hardware. And those things right now are a factor in the market, but we believe that those won't last forever and that we'll see that spend and start to return as we hopefully get to a place in the next little while where the economy settles in and hopefully, interest rates start to ease and that will hopefully free up some of the spending from those large customers. But again, it's overall not an overall trend that we would say we're concerned about.

[Operator]

Next question comes from Martin Toner with ATB Capital Markets.

[Martin Toner, analyst]

I just would like a little more color on hardware spend by customers. Can you kind of help us understand where they're heads at and why you believe second half is when we'll see some demonstrable improvement.

[Andrew Caprara, executive]

Well, let me first say, I don't know if I would say demonstrable improvement yet, Martin, I would say we don't see it happening before the second half is what I would say. I think at this point, when we're talking to customers, the budget for capital upgrades is still pretty tight. So if anything, we're hopeful that the interest rate environment and the economic environment create a little more of a favorable place for us in the second half, but I'm not sure I'd be sort of ready to make that call at this point. I think it's still a place where we have this structural issue where many folks bought a lot of devices, like laptops through the pandemic, most of which had delayed shipments that only were really released in 2022 and 2023. And so many of them don't need to buy new devices at this point because their users just had a big inflow of upgraded devices. And so I think that will take a little bit of time. I think we're seeing probably ongoing weakness in things like servers and storage because of the fact that more people are moving to cloud, which is actually a fantastic trend for us. That's our area of strength. And I think that's a part of why we're capturing so much share and growth in the hyperscaler in the public cloud world. And so I think, Martin, all these things kind of come together for us to say we're not seeing it in the first half, second half at the earliest, but I think it's a bit dependent on the environment. But right now, I don't think there's anybody who's feeling like it's a sure thing. The thing I'll also add, Martin, is the thing that we are hopeful, though, is that we -- it's not about having a -- so for us, it's more about -- at this point, it's 22% of our business, right? So 78% is all of the other solutions that we provide. And so if we could just keep it flat, then that would be great because last year, our growth rate would have been about 8% in constant currency if we just had flat hardware business. So that's really how we're thinking about it.

[Operator]

Your next question comes from Meng Shao with National Bank.

[Meng Shao, analyst]

Regarding the special dividend, could you maybe give us a brief outline regarding the road map to deleverage post the payment? And any time line we should be thinking about?

[Andrew Caprara, executive]

Sure, John. Thanks for the question. I think the -- your question ultimately is speed in terms of deleverage. I think we have to just go back to the framework that I laid out. Ultimately, it begins with what do we believe in terms of our top line growth and the GP that we can provide. We said that we -- [indiscernible] gave a great number that 8%, if hardware is just flat, that's what we would have been this last year. I laid out that about $0.43 of every GP dollar flows down to EBITDA over the last 5 years. And you've seen the great cash conversion that we've had from EBITDA to cash. So those will be the first drivers of ultimately how much capital we have. The second piece, I laid out that it's important to continue to progressively increase our dividend on an annual basis. And so there'll be a little bit more cash going out there on a year-over-year basis, one with thing. And then our third element, third focus is really to delever. And so there's a significant amount of capital available. And if you look back at our history, I think we've shown that we've been able to delever from 2021 until now -- well, this last year, we delevered almost a full turn. So in a year span in 12 months, we delevered almost a full turn. Now we will replicate that over this next year, there's multiple other multiple attributes that go into it. So if you take a longer horizon, I think in 2021, we were roughly around the pro forma of what we will be at once this dividend is issued. And we got down to 0.4 in about 2.5 years, starting from a much lower EBITDA base. So that kind of gives you a good ballpark, if you will, in terms of how quickly we can dedelever.

[Meng Shao, analyst]

And the other question I have is, I understand that you don't expect hardware to pull strong rebound in the coming year, but how should we think about the AI-related hardware demand? Any opportunity on that front?

[Jonathan Roiter, executive]

Maybe a bit, John, but I think you'll see that, that obviously will lag the adoption of AI. I think most organizations are still in the place of -- they need to prove that they can get the ROI on AI itself, and then they'll make the investments in the tool and then obviously, in the hardware. And so my guess is that we'll see a bit of a lag behind the actual adoption and consumption of AI because of the work that needs to be done right now to actually find those -- find and build out those use cases. There's a lot of work to be done to prepare and secure the environments for these kinds of solutions. And so I think 2023 was a year of exploration. I think 2024 is a year of readiness and piloting things. And so I'm not expecting AI hardware to have a huge bump in the core customer set, right? I think everyone is buying in media chips and people who are building life language models. But if you think about the average sort of SMB commercial customer in North America, I'm not seeing a huge rush for this.

[Operator]

[Operator Instructions] Your next question comes from Divya Go with Scotiabank.

[Divya Goyal, analyst]

I actually wanted to double-click on this gross profit by sales channel. So there has been a pretty good uptick in terms of the gross profit for the SMB and the commercial segment on a constant currency basis. I wanted to get some color, Andrew, and Jonathan, if you could, on the adoption rate of some of these new AI advancement or broader technology advancements across the SMB and commercial segment here.

[Andrew Caprara, executive]

I think it's still too early, Divya, to get into anything with any precision at that level of detail. I think we've -- we do have in the hundreds of customers who signed up for some level of Copilot. But I would tell you, most of them are -- have a handful of licenses so that they can try to test it and build a use case. So it is really, really, really early days at this point.

[Divya Goyal, analyst]

But so this growth that you see is broadly coming from the existing technologies? Is that fair to say?

[Andrew Caprara, executive]

Yes, that's right. Like there's a lot of work to be done on the cloud environment, making sure that we migrate more applications. We deliver services to refactor and modernize the applications that they run. Obviously, what's going on with VMware has a lot of customers looking at their data centers. Most of the applications in data centers are running on virtual machines. And so it's creating a lot of opportunities for discussion for us to say what is your strategy long term? And how do we help you modernize this environment and set yourself up for what you wanted to do in the future and make sure that we're doing that and preparing you to be able to implement AI solutions because you've got your environment properly set up and secured it. So I think there's a lot of -- there's still some -- I think a lot of the conversation has shifted to AI, but we need to remember that there's still tremendous opportunity to help people modernize their collaboration environment, will land on a consistent process and consistent tool and also prepare their applications and data for a more modern environment in the cloud.

[Divya Goyal, analyst]

Just building on to the AE discussion that you have. I wanted to get some color, given your growth, have you been seeing increased momentum across your U.S. business? And are there any challenges? And if I may just include the M&A bit here as well, do you anticipate looking at any potential small or large M&A in Latin America given the near show entailments that we've been hearing about from peers?

[Andrew Caprara, executive]

I mean the short answer is no, we're not looking at any M&A in Latin America. We're still -- M&A for us is still opportunistic in general, and we're not looking to expand outside of the U.S. and Canada at this point. We believe we have somewhere around a 1% market share in a $300-plus billion a year, that's growing in the mid- to high single digits, and it's completely fragmented where the top player has less than 10% share. So the opportunity for us to execute our strategy and take share here in the U.S. and Canada is great, and we're going to keep our team focused on that. In terms of the U.S., though, you're right in that we've seen both -- growth in both the U.S. and Canada. And you can imagine the market opportunity in the U.S. is far greater than it is in Canada, yet our business is just barely over 50% in the U.S. And so as we look to add AEs and make investments and as we look to ramp our account acquisition engine, there's a huge emphasis on us making inroads in the U.S. market, and we're going to work hard as a team to increase our presence there. And we've got this great opportunity because we've got the backing of some of the most important technology companies in the United States who believe that we are a trusted partner, and we believe that we are one of the best partners to deliver their solutions for customers. And we're going to leverage that as a way for us to make real inroads in the U.S. market. And we're going to make sure that we continue to execute here in Canada, right? It's important that we have that strong presence here in our home market, and we're going to continue to execute against that. So I think you can imagine as we add AEs, the SKU will be a little more to the U.S. just because of the size of the market opportunity.

[Operator]

There are no further questions at this time. I will now turn the call over to Andrew. Please proceed.

[Andrew Caprara, executive]

Well, thank you to everybody who joined us today. We look forward to updating you on our continued progress on our Q1 call in May. So have a great rest of your day, everybody.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.