Softchoice Corp (CA)

TSX:SFTC

Earnings Call Transcript 2023-Q1

[Operator]

Good morning. My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to the Softchoice First Quarter 2023 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this call is being recorded on Friday, May 12, 2023.I would now like to turn the conference over to Mr. Tim Foran, Investor Relations. Please go ahead, sir.

[Tim Foran, executive]

Thank you, Jenny, and good morning, everyone. Welcome to Softchoice's Q1 2023 Conference Call for the period ended March 31, 2023.I'm joined today by Vince De Palma, Softchoice's CEO; Andrew Caprara, President and COO; and Yota Skederidis, Interim CFO. After prepared remarks, we will open it up for analyst questions.The company will make forward-looking statements on our call today that are based on assumptions and, therefore, 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 website. Unless otherwise noted, percentage growth rates that we refer to today for the identified period ending March 31, 2023, compared to the same period ending March 31, 2022. Finally, please note that because the company reports in U.S. dollars, all amounts discussed today are in U.S. dollars unless otherwise indicated.With that, I will now turn the call over to Vince.

[Vincent De Palma, executive]

Thank you, Tim, and good morning, everybody.In today's call, I'll start by providing highlights of the quarter. I'll then pass it to Andrew, who will provide an update on the current demand environment and progress against our growth strategy. Andrew will then turn it over to Yota for a deeper dive on our financial performance. And finally, we will open it up for analyst Q&A.So I'll start on Slide 4 of the presentation for those following online. First off, we recorded strong results from our operations in Q1 2023, including approximately 14% growth or $9 million in our top line gross profit on a constant currency basis. Growth was led by software and cloud, which increased 24% or $10 million in constant currency as we continue to prove our value to our growing customer base by enabling their software-driven transformation and optimizing their IT spend. This reflects our software foundation and strategic focus on hybrid multi-cloud, collaboration and digital workplaces, software asset management and security.In terms of the demand environment, we continue to see healthy demand for our core solutions across our SMB and commercial sales channels, which represent about 90% of our customer base. While we saw year-over-year gross profit growth among our enterprise customers, it was slower than in the SMB and commercial channels, which may reflect customers of this size, being more cautious with spending in the uncertain macroeconomic environment. Broadly speaking, though, customer spend in Softchoice's core focus areas remains mission-critical and not discretionary across our target mid-market, and we have, therefore, continued to see healthy demand.Additionally, our services business has benefited from customers seeking to optimize their cloud spend. The strong demand for our software, cloud and services solutions has enabled us to offset the reduction in hardware spend from our customers. The softening of hardware spend was not a surprise as hardware purchases tend to be more discretionary as we outlined on previous calls.Q1 was also a strong quarter for Softchoice's profits. The increase in our gross profit drove growth of 46% in our adjusted EBITDA attributable to the natural operating leverage in our business model, combined with some prudent caution on spending in Q1, while we gauged how the year was starting out. Adjusted net income increased 54% and adjusted EPS increased 71%, faster than bottom line profits due to the beneficial impact of the share buybacks we completed over the past year.On an LTM basis, gross profit increased approximately 12% on a constant currency basis. Adjusted EBITDA increased 26% with the EBITDA margin as a percentage of gross profit increasing to 27% from 24%. I'll note that this margin expansion is the product not only of our operating leverage, but also due to an easier comparable in the prior LTM period due to the acceleration of investments we made in 2021 after a temporary hold during the pandemic in 2020.Adjusted free cash flow increased 29%. And after interest and taxes, we used it to enhance returns for our shareholders through an increased quarterly dividend and the implementation of a share buyback program.I'll now turn it over to Andrew.

[Andrew Caprara, executive]

Thanks, Vince.As Vince noted, the demand environment for our core multi-cloud workplace and software asset management solutions, all underpinned by cybersecurity was resilient in Q1, offsetting the industry declines in hardware. As we've discussed in prior quarters, we believe that our focus on software, cloud and services makes our business more resilient, and we saw that in Q1.On Slide 5, we provide an overview of the latest IT spend forecast by Gartner. As can be seen, while hardware sales are expected to decline as these refresh cycles elongate given the macro headwinds, it's anticipated to be more than offset by solid growth in software, cloud and services as customers continue to look to optimize spend while using digital technology to transform their company's value propositions, increase their revenues and improve their client interactions. Overall, Gartner still estimates IT spend will remain healthy in 2023, and we believe that our strategic focus on the most in-demand solution areas puts us in a very strong position to continue taking market share in the future. We, therefore, plan to continue making investments that will support execution in our strategic focus areas.As seen on Slide 6, over the past 2 years, we've increased the size of our sales team by over 20%. That's a combination of new account executives, which are our frontline sales force as well as the sales specialists that support them. We've also increased our technical resources by 8%. And over the same time frame, we've been able to find efficiencies in other areas of our business due to the IT-enabled business transformation initiative that we undertook. Our technical and sales specialist investments have really been focused on expanding our multi-cloud capabilities, enabling us to go deeper with our customers in areas such as cloud migration, app modernization, FinOps and cybersecurity for that modern hybrid cloud environment.We believe that we are now one of the best solution providers in North America for companies looking for a true partner on their modernization and transformation journey due to the unique combination of skills we have with deep expertise in the Microsoft and VMware workloads that are pervasive in many companies' legacy IT environments, along with the advanced skills that we now have across the top 3 public cloud hyperscalers and the application skills that we've added to the team in recent years.Additionally, over the past 18 months, we've been quietly investing in skills to advance our data and AI capabilities, and we've begun helping customers with these innovative solutions. As an example, we have a financial institution customer in the United States that was buying, packaging and selling mortgage-backed securities. As we all know, reviewing these mortgages for quality is critical. They were only able to get through about 15% of the contracts because the process they ran was so manual. Will we help them build and implement a Google AI system to scan the documents and pull out the relevant information to categorize all of these mortgages and they now have a 100% coverage in reviewing their mortgage agreements. We expect to bolster our cloud application capabilities in future years, and we will also invest in our data and AI capabilities, notably as our strategic vendor partners launched commercially branded products in the generative AI area.Turning to Slide 7 now. You'll see the benefits of the investments we've made in terms of progress against our growth strategy. First, we see that our expanded sales capacity has enabled us to drive growth in our customer base by reaching more customers. We ended Q1 with 4,800 customers, approximately 4% increase over the prior year. And as a reminder, our definition of customer are accounts that are yielding more than $2,000 in gross profit annually for us. That's not from dollar 1. Second, the investments in technical and sales resources have enabled us to go deeper with our customers. Over the last 12 months, we continue to hit records on gross profit per customer.And in fact, in this previous 12 months now, it reached a record $68,000 per customer. So therefore, as we were doing pre-pandemic, we've returned to driving strong organic growth in our gross profit through a healthy balance of increases in our customer base and increases in the gross profit that we generate from each of them. This is our strategy in action. As we grow the number of account executives, we build a larger customer base. We deliver an exceptional experience that creates extremely high customer retention and then we drive deeper engagement through our investments in differentiated technical capabilities and our unique insight-driven go-to-market approach through our holistic vendor-agnostic solutions.From an internal perspective, our increase in gross profit over the past year has been driven by the 15% increase in average account executives compared to the prior LTM period, as you see on Slide 8. The sharp ramp in AEs was a catch-up from our decision not to add net new AEs during the pandemic, a period when we focused investments on driving their productivity. Typically, we've targeted approximately mid-single digit annual increases in our average account executive number. And when we hire these new AEs, it takes a period of time for them to become productive. So the sharp ramp in AEs has driven a lower average gross profit per AE over the past year, but our expectation remains that in the future, we will return to driving our growth through a healthy combination of increased AEs and increased in gross profit per AE as we were doing pre-pandemic.I'll now pass it over to Yota for a deeper dive on our Q1 financial results.

[Yota Skederidis, executive]

Thank you, Andrew, and good morning, everyone.I'll start on Slide 9 with a look at our top line gross profit growth. In Q1, overall gross profit increased by 10.6%. As it relates to currency, reported gross profit was negatively impacted in Q1 by approximately $2 million due to the strengthened U.S. dollar, specifically by the translation of gross profit generated in Canada into our reporting currency of U.S. dollars. At the current spot rate, foreign exchange will remain a headwind to our reported gross profit for the next 2 quarters of 2023. On a constant currency basis, overall gross profit increased by 13.6% or approximately $9 million. On a dollar basis, growth in the period was primarily from increases in software and cloud.The company also benefited from 2 large software-related orders with approximately $3.4 million of gross profit recognized in the quarter. I'll note that the year-over-year growth rate was also benefited from an easier compare in Q1 2022, where we only grew 6%. As a reminder, due to the impact of seasonality, Q1 is our smallest quarter in absolute dollar terms, averaging 22.3% of full year gross profit over the past 4 years. On an LTM basis, which removes the impact of seasonality, gross profit increased 9.8% or 12% in constant currency. Software and cloud was the primary driver of growth, increasing at 14.2% or 16.8% on a constant currency basis.Now turning to Slide 10. We look at longer-term growth trends in our gross profit. As you can see, LTM growth in gross profit was a bit higher than the 2017 to 2022 compounded annual growth rate of 8.3%. Growth over the past 5 years has been driven by double-digit annualized growth in our software and cloud solutions as these solutions have increased within our mix of business, consistent with our strategic focus. The industry decline in hardware sales does present a near-term drag on our gross profit. However, as software, cloud and services now comprise almost 75% of our gross profit, we continue to target healthy organic growth on a constant currency basis.In terms of sales channels, on a dollar basis, our commercial sales channel continues to be the largest driver of our growth, followed by SMB, as noted on Slide 11. Our enterprise channel has been stable in recent periods. As you have heard in previous calls, we have made investments in our enterprise sales capacity. And while we anticipate the current macroeconomic environment to present challenges to this channel in the near term, we remain confident in the long-term potential of enterprise with respect to our growth and profitability. When combined with pressure from the hardware sales decline that I noted and a more difficult comparing Q2 2022 when we grew 14%, our growth in Q2 2023 may, therefore, be more muted.Turning to Slide 12. We outlined our adjusted cash operating expenses, which increased by 4.5% in Q1 2023, reflecting expansion of our sales and technical teams, partially offset by: one, lower SG&A spend as we have been prudent at the beginning of the year to see how customer demand was progressing in the current economic environment. And two, we saw a reduction in our reported expenses due to the impact of foreign exchange fluctuations, which essentially offset the negative foreign exchange impact on gross profit. With healthy demand for our core solutions, we do expect to see adjusted cash OpEx increase in the second quarter by about $4 million. From a combination of, one, investments we have been making, including in our sales capacity and sales support teams; and two, an anticipated year-over-year increase in variable compensation expenses, including accruals for annual bonuses. This expense was low in Q2 2022 as we were below internal targets at the time.Turning to Slide 13. The natural operating leverage in our business has enabled our increase in gross profit to offset the growth investments we have made and therefore, increase our profit. Adjusted EBITDA increased 46% in Q1 and 26% over the last 12 months versus the comparable period. All note that adjusted EBITDA margin in Q1 was higher than the historical average due to strong gross profit and conservatism in our discretionary spend in the first quarter. This is anticipated to be balanced by lower than historical average margins in Q2 due to the pressure on gross profit that I noted and the planned increase in adjusted cash OpEx.In terms of our bottom line, adjusted net income increased by 54% in Q1 2023 and 33% over the last 12 months, driven primarily by the increase in our adjusted EBITDA. Adjusted diluted EPS increased 71% in Q1 2023 and 33% on an LTM basis. This was driven by the increase in net income. Earnings per share also benefited from our share buyback program.Turning to Slide 14. Adjusted free cash flow increased 29% over the last 12 months, driven by the increase in adjusted EBITDA and relatively stable maintenance CapEx and lease payments. On the right-hand side of the slide, we outlined what we used adjusted free cash flow for over the past year, notably an increased dividend and more than half for share buybacks. We have a strong balance sheet and more than enough liquidity. Therefore, we have been opportunistic during the downturn in the equity markets to buy back shares. This has increased the equity ownership in Softchoice for our shareholders without any financial cost to them, and we believe we completed these repurchases at value-accretive prices.I'll now pass the call to Vince.

[Vincent De Palma, executive]

Thanks, Yota.As you know, success is a team effort, and I'm grateful for all the contributions of our team members in creating success for our customers' organizations, their IT professionals and for our own organization. I particularly want to recognize Yota for her many contributions since she agreed to take on the role of Interim CFO in September of 2022. As you know, we will soon be welcoming Jonathan Roiter to Softchoice as our permanent CFO. We're looking forward to Jonathan's contributions to our organization and the value they'll bring to our already strong executive leadership team. That team, along with the rest of our organization, will continue focusing on our operational priorities.We continue to target healthy organic growth, which we anticipate being driven by industry growth and market share expansion, driven by our focus on higher-growth IT subsectors within our addressable market and leveraging our go-to-market strategy focused on reducing our customers' IT costs and optimizing their software and cloud spend. And we continue to proactively manage our cost structure while maintaining growth investments in core areas to gain market share in future years. In 2023, these investments are anticipated to include expansion of our sales force and the technical talent that support our sellers to enable us to continue to grow our customer base and increase our wallet share with our customers. In other words, we have the right team and the right strategy in place for long-term sustainable organic growth.And with that, I am very close to wrapping my last quarterly earnings conference call as CEO of Softchoice. As part of our previously announced and long-planned transition, Andrew will become President and CEO, and I will become Executive Chair of the company following our AGM at the end of May, the latter subject to shareholder approvals. Leading Softchoice has been an exceptional privilege, and I am very excited about the future of our organization under Andrew's leadership. Andrew is a strong, disciplined and people-focused leader with a passion for our customers and our team members. Over the last 6 years, we've worked closely together to develop and execute on our strategy, and I am excited to continue my journey with Softchoice as Executive Chair, partnering with Andrew, the executive leadership team and our Board to see our vision for Softchoice continue to advance.And with that, I will turn it over to the operator for Q&A. Jenny, over to you.

[Operator]

[Operator Instructions] Your first question is from Deepak Kaushal from BMO Capital Markets.

[Deepak Kaushal, analyst]

Great to see strong organic growth in the quarter, and I appreciate all the nuance around constant currency. I just had a question about the 2 large orders that contributed in the quarter. Were these the holdovers from Q4 that you're expecting? Or were these new orders? And what's kind of the thoughts on backlog and how that might be contributing to the outperformance on growth?

[Yota Skederidis, executive]

Deepak, it's Yota. I would say we see large orders like these all the time, so there's nothing unusual with these ones. However, I will note that 2 large ones occurring in Q1, which is our smallest quarter from a seasonality perspective, does skew our results upwards. So we just wanted to highlight them. As far as backlog, no changes, significant changes that we're seeing, Deepak, at this time.

[Deepak Kaushal, analyst]

Okay. Excellent. And then my follow-up, maybe a different tack here. I really love the example on the AI on mortgage-backed securities. Just in the interest of separating the hype from the reality, how much of this AI stuff are you seeing as normal course? Or how much is a lift following all the big announcements for Microsoft and some of the others? Is the hype real? Or is this just normal evolution of AI? What are you seeing from your perspective?

[Andrew Caprara, executive]

Yes. Deepak, I'll take that one. It's Andrew. I think there's been a lot of trends that have come and gone in the industry with a lot of buzz over the last 10 years, at least that I've been in the industry. But this one, I do think really is real because there are just such obvious business use cases for these. And you've started to see that start to form. And I think people are starting to dig in and learn more at this time. I think the buzz was intentional and probably a little bit premature, if I'm being honest. But I do think it's real, and I do think it's coming. And a lot of companies now are were surprised at how quickly it came on and are doing their exploration.And as you'd probably expect in this economy, much of the interest we're seeing from customers is talking about how do you make operational processes more efficient to get more out of their workforce, which is graded aligns perfectly with our ROI, reduce, optimize and innovate go-to-market strategy. But there are also tremendous opportunities to use AI for things like better customer engagement, better demand generation and marketing and better use of data and analytics and insights. So it really is something that's moving very, very quickly, and we're continuing to invest in our data and generative AI capabilities because we see the value of this for our customers, and we do think this is going to be something that does positively impact them, and we want to be there to help them through it.

[Deepak Kaushal, analyst]

Great. I really appreciate that. It helps us kind of separate what's hype and what's real.

[Andrew Caprara, executive]

Thanks.

[Operator]

Your next question is from David Kwan from TD Securities.

[David Kwan, analyst]

I got a question on -- just on the margins for this year. I think consensus is baking in just a slight increase this year, a little bit more material increase for next year. I guess, do you think that -- the Street is being too conservative here in terms of the margin expansion potential for this year, especially in light of the strong start to Q1 -- in Q1 this year. But also, I guess, when I look at the gross profit growth that's kind of being baked in as well, it's comfortably below the 10% target that you guys have, and I think some of that might be just FX related. But I was curious to get your thoughts on that.

[Yota Skederidis, executive]

David, well, as you know, we don't give guidance. Our focus is on investing to drive sustainable profitable organic growth over the long term and delivering long-term returns to our shareholders. We do have good operating leverage, which gives us a lift on margins when gross profit grows at a healthy pace, but margin expansion will depend on the investments that we make over the year. And as we've mentioned, in 2023, we do expect higher expenses from our variable compensation, which we did explain in the last call, and I kind of touched upon it on this call as well. So I believe we've also mentioned on previous calls, margin expansions, not always straight line, increases 1 year, but may decline 1 point or so another year. But typically, over a period of time, we do expect to see margin expansion due to our strong operating leverage.

[David Kwan, analyst]

That's helpful. Secondly, just on the account executives. It was up nicely this quarter to 453, which I think kind of puts you right in the middle of the range of your annual -- I guess I think you're targeting 5% to 7% growth. And I know you talked about the surge last year and kind of taking the midpoint of your target as it may be a better base. So it seems like you're pretty much there just after 1 quarter here. So how should we think about the expected net adds going forward for the rest of this year? And then in terms of kind of general growth investments, is more of the incremental hiring activity going to be more kind of the technical experts in particular, where I think the growth in that group has been slower relative to the account executives and the sales and sales support and management teams?

[Andrew Caprara, executive]

Yes, David, you're right. We did -- we are targeting that kind of 5% to 7% range that we were at -- running prior to the pandemic. And as you indicated, yes, it's probably more from the midpoint of where we thought we'd be last year, and we're kind of around that range now. The only thing I'll remind you is if you remember last year, our AE count can sort of ebb and flow based on the classes that we put out. So we think we've built an amazing training program and an academy for our more junior sellers, let's say, the folks that are earlier in their sales career.And so the way that we do that is actually we run it as a cohort so that we can build a group and comradery and a team for them to learn and grow and run that through our academy, which means that we deploy large classes together at the same time. And so that's why some quarters, you'll see our AE count go up and then some quarters, it will come. It will look like it's coming back down. But it's a bit of the ebb and flow of just how we release our classes into full territories. And so when we share our AE count, we're only sharing those that have been deployed into territory, not the folks still in training, which is why you see that kind of move around a little bit. So yes, we're right around where we thought we'd be, but that may actually pull back a little bit in Q2. We'll see. It depends on how things go and how our hiring and classes costs go. But just to give you some context, it's not necessarily a straight line on that one either just based on how we do it.In terms of where we're investing this year, it will be balanced between the AEs and the technical resources. We are still investing in building out our capabilities around workplace and cloud. And as we've talked about data and AI and security, there are a number of areas that we're investing in as well as the sales support roles, which support our sellers as specialists to go in and help our customers actually configure and decide on how to create these big transformation programs. So it will be balanced between the 2. And I think you'll see that in future quarters.

[David Kwan, analyst]

Sorry, Andrew, just quickly, just to clarify, on the AE side, are you still kind of expecting -- they're targeting that 5% to 7% growth off the 428 last year, even though you're kind of right there right now?

[Andrew Caprara, executive]

Yes. As you said, we haven't given a target, David, but what we said we're expecting to be in that 5% to 7% range. So at this point, that we still expect to be there, but we evaluate it. If we continue to grow and the market continues to be strong for our solutions, then we'll look at continuing to grow our AE count even further. So that's where we are right now, David, and we're being prudent in this market. But I think it was a good start to the year, and we'll definitely monitor that.

[Operator]

The next question is from Paul Treiber from RBC Capital Markets.

[Paul Treiber, analyst]

Just wanted to hone in on your -- the comments you mentioned on the macro environment, and specifically, what you're hearing from your customers and the demand? I think it's obvious that hardware is probably more discretionary. But you mentioned that like enterprise is a little bit more reluctant here. And so the question is -- and I think that's probably reflected the headlines that are out there. But why are you seeing more strength relatively in SMB and commercial? And why aren't they -- why are they still going full ahead in terms of their spending plans here? Like what are you hearing from them?

[Vincent De Palma, executive]

Paul, it's Vince. So it is interesting. I mean, obviously, as I highlighted on the call, we did see growth in our enterprise channel, just not as strong growth as we saw in SMB and commercial. And what we're seeing in SMB and commercial, despite the chatter in the -- about the economy, we're not really seeing the impact of that on them in terms of those customers in our SMB and commercial markets, their demand. So they have not slowed down their IT spend, which is mission-critical for them. They're still trying to use IT as an opportunity to advance their business. It's -- we've talked about it in past calls, how over the years, IT has gone from being a cost center to being a strategic part of the business to advance the company's growth in revenue as well as optimize their operational efficiencies and so forth. So we continue to expect strong growth in our mid-market channel.And we think that will include everything we've talked about on this call around software, cloud, workplace, security, -- and that's going to bode well. We're keeping an eye on the enterprise channel. It seems like it's -- those enterprise customers are being a bit more cautious about their IT spend. It tends to be more hardware focused. It's easier to defer hardware purchases and sweat the existing assets. So we've seen that. The industry has seen that. We'll see whether that turns around in the coming quarters. But we've seen very resilient demand in our SMB and commercial channels year-to-date.

[Paul Treiber, analyst]

And just digging a bit further into the channels and maybe to help us better understand what you're seeing the categories that you mentioned software, cloud workplace and security, do you have a sense for the penetration rates by channel? And is it perhaps enterprise has addressed those areas earlier and is further along the deployment path whereas SMB and commercial is perhaps further behind, and that's why they're still -- you're still seeing strong demand here because they're much earlier in that journey?

[Andrew Caprara, executive]

Well, I would say, Paul, we don't break out publicly what our cloud, software, workplace, security spend is by channel. So that's not a level of detail we go into. I'll put it this way. There's tremendous opportunity in all 3 channels. We have talked about in the past that our market share is in the high-single digits in North America. The largest player out there is in much above that -- sorry, our market share in Canada is in the high-single digits. Our market share overall in North America is hovering around 1%. So I needed to correct that. But the largest player in the industry is probably hovering around 10%-ish. So we have a tremendous opportunity to grow market share. We look at our share of wallet. We've quoted in the past, we think our share of wallet of our existing customers ranges between 14% and 15%. I will tell you that's much higher in the SMB segment and much lower in the enterprise segment. So there is tremendous opportunity for us to grow in all 3 segments. And we do expect, over the long term, all 3 of our channels to continue to drive strong, healthy organic growth.

[Operator]

[Operator Instructions] Your next question is from Martin Toner from ATB Capital Markets.

[Martin Toner, analyst]

Can you look through the unusuals and give us an update on the ramp in AE productivity for this most recent cohort of AEs?

[Andrew Caprara, executive]

I would say, Martin, our -- it's the same as what we've said previously. We're still seeing the ramp on the same curve as our historical averages. As we've talked about, we said with SMB and commercial, they typically start to become productive around that 6-month mark, give or take a couple of months, and you get to sort of a breakeven proposition on the investment that you make there around that 14-ish month mark. So we haven't seen any change to the curve at this point.

[Martin Toner, analyst]

Super. And can you kind of -- can you talk a little bit about how Softchoice should benefit from the robust spending on AI with enterprise mid-market SMB customers?

[Andrew Caprara, executive]

Yes, sure. I think the important thing to remember about generative AI is it's different than the traditional predictive AI models, right. Predictive AI was much more around how do we use our data and train the model to make a decision or a prediction on what the outcome would be. And so a lot of that was very, very, very data focused. The interesting thing about generative AI is it actually is able to, in a way, almost think a little bit more like a person. And so the use cases are much broader, right. You're talking about building it into your applications as its own chatbot or you're talking about having it run processes that would require human decision-making in the past. And so now you're actually not just talking about data and analytics and data projects, but you're actually talking about how do we build this into the applications that we use to serve our customers and to support our people through their processes.And so really, as you think about where Softchoice has been going in the last few years, we've been making really deep investments to help companies modernize their IT environment to take their legacy applications, migrate them into the cloud and then have them use some of these new capabilities from the Microsofts and Googles and Amazons that they build right into their platform to make these applications work better. Well, to me, this is really just an amazing addition to that toolkit to be able to build these into the applications to help our customers operate. And so that's why I think generative AI is different than where we've been talking about data and AI in the past and why I think it's even more suited to what we do to help our customers.

[Operator]

The next question is from Divya Goyal from Scotiabank.

[Divya Goyal, analyst]

Thanks a lot for all the color on the account executive. I was wondering if we can get a little bit more clarity on how has your account executive growth and presence been on a geographic basis? And particularly, if you could provide some color as to how has the penetration been in U.S.? And if you have seen greater progress in one segment versus the other, and I especially ask that because of just the sheer nature of the fragmentation in the services sector across U.S.?

[Andrew Caprara, executive]

Yes. I think your hypothesis that you're probably leading to there, Divya, is right. The market opportunity for us is great in the U.S. We still have tremendous opportunity in Canada. So we are still putting more account executives in Canada. But proportionately, we are putting a little more in the U.S. And in 2022, the U.S. growth for Softchoice was slightly above that in Canada. But we -- you think about the size of the market being 8, 10 plus times bigger in the U.S. That's obviously an area where we're focusing our additional AEs in our headcount expansion to take advantage of that market opportunity.

[Divya Goyal, analyst]

And have you seen better penetration in one segment? Like do you see better penetration in SMB versus mid-market versus enterprise? Or is that still an area of growth? And how have you seen that in Canada?

[Andrew Caprara, executive]

Well, so we've had good penetration across all 3, for sure. We've made investments in all 3 channels, and we've seen growth in all 3 channels. And so we feel pretty good about that. I think in Canada, we obviously have a long and rich history here of almost 35 years now, and we serve some of the biggest companies in Canada. And so we have an opportunity with those companies now to have them see us for what we are today and not what we were 30 years ago, right, not as a VAR and as a reseller, but as a true service and solutions provider. And so every day, every month, every year, we're going deeper and deeper with those customers and helping them with more service-oriented engagements. But we have an opportunity in the U.S. absolutely to win more new enterprise logos. And so that's where we've invested more of our enterprise AE headcount is in the United States to build up those teams and to increase our penetration there.

[Vincent De Palma, executive]

And I'll just, Divya, add on to Andrew's comments there that both Canada and the U.S. grew. I wouldn't spotlight any one quarter's results as indicative of any disparity between the 2 countries. As Andrew pointed out, growth in the U.S. was slightly above Canada's growth rate. As you know, the U.S. is the majority of our gross profit. And as Andrew pointed out, we are dedicating more investment in that market, just given the size of the market, and it's large and it's growing as is Canada, but the U.S. is 8 to 10x the size of Canada. So we're more underpenetrated in the United States compared to our market share in Canada, and therefore, why we're making our investments in sales headcount as well as the sales support resources are more skewed to the U.S., but we are still investing in Canada as well.

[Divya Goyal, analyst]

I suppose I took my follow-up. So I'll wait in line for the next one.

[Operator]

There are no further questions. Sorry, go ahead.

[Divya Goyal, analyst]

Yes. It looks like I have a little bit of face here. So I just wanted to get some color on the vendor consolidation trends as well, actually, given you have such a deep presence in Canada and obviously growing in U.S., have you been seeing when the consolidation trends -- and we've been talking about it over the past few quarters, but how are you seeing that evolving given where the demands have been going?

[Andrew Caprara, executive]

Sorry. And are you asking if customers are consolidating vendors?

[Divya Goyal, analyst]

Yes. And you are benefiting from that or losing on that front?

[Andrew Caprara, executive]

Yes. Certainly, our ability to help customers across an entire suite of solutions with our vendor-agnostic approach is benefiting us, particularly as we get deeper into the services side. It is allowing us to help customers across their entire IT landscape now and really doing that focus on ELM, our enterprise life cycle management part of our software support service that we provide our customers. We -- when you get into a customer and they trust you on some of their biggest contracts, it becomes easier for them to trust you on the long tail. And so our focus certainly is on providing value to our customers every day on the big contracts that we manage for them and hope and try to get them to trust us to do more and more. And so I think the trend is moving more towards vendor consolidation, and it has been for several years. I don't know that it's accelerated in the last year or so. I think that's been going on for quite some time now and certainly something that we have and continue to benefit from.

[Operator]

The next one is from Deepak Kaushal from BMO Capital Markets.

[Deepak Kaushal, analyst]

I know it's Friday and you probably want to get off the call, and we're going to miss you Vince and Yota on the quarterly calls, but I did want to throw in one more. When you think of your services organization, Vince and Andrew, how -- I mean, I don't know if you want to give this color, but managed services versus professional services, what's recurring, what's project based? And what are the relative growth rates? Any kind of color you can give us on how you look at services in your business?

[Vincent De Palma, executive]

Yes. Deepak, what we've sort of said prior that is the only detail I can really give you, it's around half and half between professional and managed services. But even within professional services, we start to distinguish between what we think is a one-off project versus a reoccurring business, which I know when you look at some of our public materials, we talk about recurring and reoccurring and recurring is obviously the managed services. But reoccurring means that we're just in there with these customers every month, every quarter doing different projects on the professional services side.So while we may not own a 3-year monthly contract, we become indispensable in that environment for the capabilities and skills that we bring to that team and the ability to help them do the modernization and transformation that they need to have. So as we think about where we're going, obviously, we're trying to be more programmatic for customers. And sometimes, that means a managed service. And sometimes, it means that we just need to continue to work on that road map that, that customer has. Because especially in a cloud world, being a little more dynamic with what you're working on is important as the business needs change, and there's so much opportunity for us to really help them across a variety of different applications and different business cases or business uses.

[Deepak Kaushal, analyst]

Okay. And is there a relative growth difference or trend between managed versus professional? I mean, is there a trend towards one versus the other that you're seeing in any given channel?

[Andrew Caprara, executive]

Yes. We don't split out the growth rates of management professionals, as you saw or we'll see in the presentation for this call. On an LTM basis, our services business grew approximately 16%. That's on a reported basis. It would be higher probably on a constant currency basis. But we see good growth in both, but we don't split it out between the 2, Deepak.

[Deepak Kaushal, analyst]

Okay. That's fair. I'll leave it at that. And thanks again. We're going to miss you, Vince and Yota on the call. But you'll be in there in the background, we hope. So.

[Vincent De Palma, executive]

We're still here, Deepak.

[Operator]

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

[Andrew Caprara, executive]

Thanks, Jenny, and thanks, everybody, for listening today. We really look forward to updating you on our continued progress on our Q2 call in August. So have a great rest of your day and a great weekend, everybody.

[Operator]

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