Softchoice Corp (CA)

TSX:SFTC

Earnings Call Transcript 2024-Q1

[Operator]

Good morning. My name is Ludi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Softchoice Q1 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Tim Foran, Investor Relations. Please go ahead.

[Tim Foran, executive]

Thank you, Ludi and good morning, everyone. Welcome to Softchoice's Q1 2024 Conference Call for the period ended March 31, 2024. A reminder for the purpose of the recording, today is Wednesday, May 8, 2024. 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 investor website. Unless otherwise noted, percentage growth rates that we refer to today are for the identified period ending March 31, 2024, compared with the same period ending March 31, 2023. 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 Andrew.

[Andrew Caprara, executive]

Thanks, Tim, and welcome, everybody. I'm also joined today by Jonathan Roiter, our CFO. In our first quarter, we continued to execute our strategy, driving both positive financial results for the quarter and progress on our longer-term growth drivers. We've recorded a healthy 9% increase in software and cloud gross profit and a 3% increase in total gross profit. This increase, combined with prudent cost management drove a 4% increase in our adjusted EBITDA and a 10% increase in our operating income. Organic growth strategy is continuing to generate a very high return on invested capital that we believe is best-in-class and is producing market share gains versus competitors. Driven by strong operating cash flow generation over the past year, we ended the quarter in an excellent financial position with only 0.7 turns of net leverage, almost a full turn less than a year ago. We have tremendous flexibility to continue our balanced allocation of capital to internal investments that are going to drive sustainable profitable growth while also returning significant capital to shareholders. Consistent with that approach, post Q1 in April, we paid our regular quarterly dividend, which has been increased by 18% over 2023 and is now 86% higher than when we first launched it following our IPO in 2021. We also issued a special dividend to our shareholders of CAD 4 per share or more than CAD 240 million. Including share buybacks, we've now returned more than CAD 385 million in capital to shareholders since our IPO in 2021. Now let's turn to our growth strategy and our 3 strategic pillars, which I've shared with you in the past. They are building a world-class culture, growing our customer base, and deepening our customer relationships with our integrated software cloud and services solutions. Now beginning with building a world-class culture. Culture is critical for us because our customers place a lot of trust in our team members to help them succeed. Our high-performing, highly engaged and long-tenured team is a clear differentiator within our target U.S. and Canadian mid-market. And our people are a critical reason that our average customer tenure is now almost 10 years. Engagement and tenure, including in sales and technical roles will become ever more important to our customers as they deal with the increasing complexity of their IT environments and the rapid release of new technology that they need to evaluate and incorporate. In April, we were ranked #9 for large employers and #1 among TSX-listed companies on this year's best workplaces in Canada list by Great Places to Work. This is an achievement that I'm very proud of. In fact, we're 1 of only 2 companies to rank on this list for 19 consecutive years. And it's our exceptional team that drives account growth, which leads me to our second strategic pillar, growing our customer base. We recorded our best first quarter of net customer growth since 2019, driven by strong new account growth and increased customer retention and satisfaction, and customer growth has returned to pre-pandemic levels of about 5% year-over-year. And importantly, that new account growth was broad-based across all sales channels. To give you an example of how we're winning new customers. We're helping one fast-growing U.S.-based marketing technology company supercharge the productivity of their workforce, which has grown rapidly from 500 to 1,500 employees over the last 2 years. Microsoft referred them to us after their existing partner couldn't help them integrate Microsoft 365 into their critical business processes. But we analyzed their strategy and their operating model, we designed and delivered an integration plan tailored to each persona group in the business, setting the stage for even more future work, including the copilot initiative. Our success in account growth was also driven by our strategy to expand our frontline sales force, which has increased by 12% over the past year and over 35% since our IPO. It also reflects strong ties with our technology partners, who are a key source of customer referrals for us as they value our mid-market scale, our ongoing investments in enhancing our certifications and capabilities and in our ability to deliver integrated solutions. In the first quarter, we announced a strategic partnership framework agreement with Microsoft to further enhance our capabilities and capacity to develop, sell and deliver Microsoft's Cloud and digital workplace AI and security solutions. We also received the 2024 Google Cloud Public Sector Partner of the Year Award for Canada and were named VMware GEO Partner of the Year for all of North America by VMware by Broadcom. Our ongoing recognition from our partners illustrates the deep relationships we've built with them, their confidence in our delivery and value-add capabilities and their consideration of Softchoice as a preferred IT solutions provider. And it's those capabilities that enable us to deepen our customer relationships, which is our third strategic pillar. In the first quarter, our investments in advanced technical capabilities continue to drive these deeper relationships and growth in our strategic focus areas, which are secure AI-powered cloud and digital workplace solutions, supported by our advanced software asset management methodology and capabilities. Notable drivers of growth in Q1 included continued success in our cloud solutions, both in having more customers trust us to help them manage their cloud spend after procuring it through us and also through our data and application modernization solutions that help customers build more agile IT environments. These in turn run more workloads in the cloud and increase consumption. This is especially needed with the SMB and commercial customer segments where many customers need and value that critical expertise. Additionally, we saw strength in our Microsoft Workplace Solutions business as more customers leverage the E5 solution suite, which allows us to not only right size their overall software spend, but also to do the services to implement solutions in areas like cybersecurity and data and analytics, areas that are especially important in preparing to take advantage of the power of copilot AI. For example, this quarter, we helped one Canadian chemical manufacturer understand the impact of CoPilot on end user productivity. Like many companies, their CIO had a transformation agenda but with not a matching budget. However, we used our asset optimization assessment, which is part of our software asset management portfolio to identify redundant software spend, which we eliminated by standardizing on Microsoft 365, enabling the customer to use those savings to fund the CoPilot project. And as I noted on our last call, customer demand for generative AI has been rapidly accelerating, and we've taken a leadership position here as measured by the volume of consulting engagements that prepare customers for CoPilot adoption and with a number of customers already using our services being well ahead of our internal target. However, the financial benefit is currently still small as customers are only using a limited number of Copilot licenses, while we're helping them identify use cases and prepare their IT environment before a broad Copilot rollout. We're encouraged with the broad spectrum of use cases that we're proving out with the customer -- with our customers that will lead to wider and deeper customer adoption in the future. With the launch of our AI solutions team in Q1, our focus is on moving customers from Gen AI planning and pilot phases into more complex and long-term transformation programs. As an example, our AI solutions team recently helped one well-known industrial organization based in Southern Ontario, reduce their operating costs and improve business processes by using AI to make their HR, procurement and supply chain more efficient. However, our customers first ask was simply to help them save money by downgrading from Microsoft E5 to E3. But we showed them how E5 and Copilot could help their teams. We worked with Microsoft to get deployment vouchers for E5 security and Copilot services, and this led to them renewing their E5 and purchasing Copilot licenses. And both of these are prime examples of how we help our customers through our deep licensing knowledge and our deep services capabilities. This ability to help customers fund CoPilot through other software rationalization solutions is a significant differentiator that we have over pure-play service providers. With respect to AI application services, our strength as a leader in hybrid multi-cloud solutions is a great advantage. Getting the most out of AI requires a complex bridge between the power of the new AI model with the data and applications that already exist in the customers' IT environment for which we are uniquely positioned to help. And we keep adding and developing talented people to help customers build solutions on these amazing large language models. We're enabling a major Canadian university to improve public health outcomes by analyzing and predicting the effectiveness of intervention programs from around the world by building a cloud-native platform on AWS to ingest and analyze massive amounts of data from research institutions globally. This will then fuel their research and produce more data-driven and proven recommendations. What you see in all of our customer examples are a couple of important things. The first is that customers often come to us with a challenge and sometimes what they believe the solution is. We are able to help them step back, understand the bigger picture and then create a personalized solution using our proven and repeatable methodologies. And 2, that through our engagement on 1 or 2 areas of a customer's IT environment, we earn their trust to deliver value at scale, which is obviously beneficial to them, but also to our partners and to us. With that, I'll now turn it over to Jonathan.

[Jonathan Roiter, executive]

Thanks, Andrew. I'll start with a look at our top line metric, gross profit. Gross profit increased 3%, driven by 9% growth in software and cloud. This was an encouraging result because, as we noted in our Q1 call last year, that quarter benefited from 2 very large software orders, equating to approximately $3.4 million on $31 million in gross sales. Excluding these orders, the company's gross profit would have increased 8%, driven by 18% growth in Software and Cloud Solutions led by strong growth in our SMB and commercial sales channels, which comprises about 90% of our customer base. Gross profit growth was driven by a combination of our larger customer base, which has increased 5% over the past year and increased sales of our software and cloud solutions to our customers. Our increase in gross profit continued to enable growth investments. Over this past year, we have increased, 1, the size of our frontline sales force by 12%. The SMB channel continues to be an area of strength, and we're leaning into that by expanding our sales force there; and 2, increasing our technical experts by 4%, including members of our AI solutions team that Andrew previously spoke about. Adjusted EBITDA increased 4% in Q1, with margins expanding slightly to just under 20% as increases in team members were offset by lower variable compensation and a reduction in administrative expenses as we continue to optimize our processes and further our agility. Operating income increased 10% due to the increase in EBITDA and lower amortization expense. Higher unrealized foreign exchange losses and deferred tax expenses offset the increase in operating income and resulted in a net loss per share on a diluted basis of $0.02 compared with net income per share of $0.08 in Q1 2023. During the quarter, we recorded a $3.5 million deferred tax expense related to withholding tax in the U.S., stemming from the repatriation of capital into Canada. In terms of modeling on a full year basis for 2024, we currently expect our overall IFRS tax rate to be just a bit over the average of the past 2 years of approximately 30%. This higher deferred tax expense resulted in adjusted EPS on a diluted basis of $0.07 compared to $0.12 last year. LTM operating cash flow, which strips out the seasonality of our business increased to $93 million from $38 million in the prior LTM period, driven by higher EBITDA and working capital inflows. Our Q1 operating cash flow was impacted by a $10 million tax payment, about $9 million higher than Q1 of last year. This was timing related and reflects the catch-up on the 2023 taxes that I flagged on our last call. After CapEx and lease payments, cash over the past year was used primarily to repay debt and pay our quarterly dividends. Now looking ahead, while we don't give guidance, we are continuing to aim our top line growth profit growth to get back closer to the historical average. However, we are not expecting a significant easing in the hardware pressures this year. In terms of Q2, we expect similar seasonality as the average of the past 5 years with Q2 gross profit approximating approximately 26% of full year gross profit. In terms of adjusted cash OpEx, which is a delta between gross profit and adjusted EBITDA, we're expecting a couple of million dollars more of variable compensation in Q2 than Q1. Turning back for a moment on the impact of the industry-wide decline in hardware spend. Hardware is only 20% of our business, so we have significantly less exposure than our competitors in North America. However, the postponement of discretionary purchases, notably by large companies, does impact our overall performance. In terms of the timing of a rebound, we believe our customers are taking time, perhaps due to the expectations of higher interest rates for a longer environment or they're looking to future-proof their business for the next round of hardware purchases. Therefore, we're not expecting a significant turnaround in the near term, but do expect hardware expenditures to resume as organizations realign their hardware purchases to the adoption of AI. And this is just not related to laptops. Following the need to develop unique use cases for AI and their businesses, the most common need we're helping customers to prepare for AI is by assessing and remediating the environment that will be required. While we remain prudent in our cost, we don't plan to stop or reverse any priority growth investments to counter hardware pressures on our top line, which we expect to be temporary. This is because our investments are paying off in key strategic areas in our commercial model. They are driving higher customer growth, higher customer retention and satisfaction and greater team member potential and engagement, all of which are important drivers of our future growth. These investments are also enhancing our advanced technical capabilities to enable us to capture catalysis for future growth, including advanced cloud services and generative AI as well as security and workplace, including the Windows 11 upgrade cycle. So as we eventually lap near-term pressures on discretionary spend, we expect to benefit from the combination of our larger customer base and execution on our proven go-to-market motion to deepen relationships and expand our business with customers over time. And now with that, we can begin our Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Gavin Fairweather with Cormark.

[Gavin Fairweather, analyst]

Maybe just to start on the expanded Microsoft partnership. It sounds like you'll be adding some more resources to help aid the growth of that business. I'm curious if anything changes from the Microsoft end in terms of maybe joint go-to-market initiatives or commission structures, et cetera?

[Andrew Caprara, executive]

Gavin, so it is a pretty comprehensive program. It's not just, I would say, a cost program. So it includes Microsoft, continuing to make co-investments in Softchoice, which we've talked about in the past. And this one is a little bigger than what we've had in the past, which is fantastic because it's an acknowledgment by both Microsoft and Softchoice that this opportunity around AI and security right now is pretty game changing, and we want to make sure that we have the ability to take advantage of it. So there is an investment that's going to be made in our technical team, and we've already started with the creation of our AI solutions team that we mentioned.The second part of it is some more joint go-to-market initiatives. And so we actually have had a series of CoPilot roadshows across North America throughout Q1 and already going into Q2. We've had representation from Microsoft's Global President in the small and medium corporate division at our event, and he spoke on behalf of Microsoft and talked about the great advantages that they have in a customer working with a partner like Softchoice. And so there's a lot of that joint marketing that's going on right now, and we're doing a lot together in markets to raise awareness on how to leverage Copilot and other AI capabilities, but also trying to get customers to understand those practical first use cases because that's the critical step in them actually moving towards adoption instead of just interest. And then I think third thing is there is great field alignment that's coming from this. I mean, Microsoft is not doing this with everybody. And so the organizations that are in this program are really at a big advantage in getting access and connection with the Microsoft field team. And then from there, it's on us to execute. And it's on us to be so indispensable to those Microsoft sellers that they look to Softchoice first when a customer has a need. But all we can ask for, for Microsoft, is that partnership and that alignment and their support to open those doors. And we're confident now that we've got the people and the talent and the capabilities to take advantage of that and really be a leader in AI and security with Microsoft.

[Gavin Fairweather, analyst]

And then just secondly, on the Enterprise segment, obviously, there's been hardware pressures, which we've been talking about, I guess, some big software orders last year. But I guess if you strip that out, what are you seeing in kind of the underlying demand trends in that segment across the different spend categories?

[Andrew Caprara, executive]

I think it hasn't really changed that much, Gavin. I think there's still cautiousness in large enterprise customer spend right now. And so we have a few examples where we've really been able to bring real holistic solutions, and these projects are still happening. So it's not completely frozen. It's not a shutdown in enterprise. But I would say there's still cautiousness in that customer base, and we're seeing just the continued growth in our SMB and commercial segments right now that's consistent with where we were in 2023.

[Gavin Fairweather, analyst]

And then just lastly for me on cloud, can you just give us an update on how things are going with AWS and GCP. I mean, obviously, you'll be making some more investments to kind of broaden out your cloud business with some hyperscalers which aren't Microsoft. So just curious if you're kind of seeing the benefit from those investments and kind of capturing share with some above-market growth rates there.

[Andrew Caprara, executive]

Yes. I think if you look at our overall cloud business, Gavin, it's about 6.5x higher than it was in 2019. And part of that is certainly from Microsoft Azure. But I would tell you the rate of new logos or new customer cloud environments that we're managing for AWS and Google has been fantastic over the last couple of years. And so that's a big part of our, let's say, our growth dollars in cloud, a lot of that's coming from the great expansion of our relationships with AWS and Google.And as you know, we've got a strategic collaboration agreement with AWS that's launched over the last couple of years, which has been just a really big leap forward, I would say, in helping us build out our own capabilities to serve customers in the AWS environment. And we've had several of those kinds of smaller versions of that with Google as well. So we're pretty happy with where we are right now across all 3 of the top hyperscalers as well as with VMware. I know there's a lot of change that's happening there, but the reality is a lot of customers are looking at what are they going to do with their VMware environment and the ability for us to walk in as the expert in VMware and Google, Microsoft, Google Cloud, Microsoft Azure and AWS really puts us at an advantage as customers are thinking about building out their long-term kind of application and data strategy.

[Operator]

Your next question comes from the line of Stephanie Price with CIBC.

[Stephanie Price, analyst]

Jonathan, I wanted to drill down on your comment that you expect gross profit to be close to historical, which you reiterated, I guess, you said the same thing last quarter. I think historical has been around 8% versus 3% this quarter. And then you also mentioned that you think the hardware delay is going to be pushed out a year. Just curious about what the drivers for gross profit growth here are for the rest of the year that kind of give you confidence in getting back up to that historical gross profit level?

[Jonathan Roiter, executive]

Thanks, Stephanie, for sure. As we planned out this year, we knew -- and ultimately, when we built our plan, we knew that Q1 had some significant difficult comps, if you will, to overcome as there are some large multiyear deals that we had last year. So we're well -- our plan built in a lower growth rate at the beginning of the year and progressively get stronger as we go through the year and in the quarters.And if we look at the underlying aspects of our business, SMB grew 24% quarter-over-quarter, a lot of strength there. software and cloud, a lot of strength. Andrew just has laid out how big our cloud business has grown over the last 4, 5 years. That growth is continuing. And ultimately, the hardware comps become easier as the year progresses. So the ability to comp last year's performance gets easier as last year -- as the year progresses through the year. So overall, we still feel that we can get closer to that historical growth rate and will be progressively taking place as we go through the quarters of 2024.

[Stephanie Price, analyst]

And then, Andrew, maybe one for you. You mentioned market share gains versus competitors in your prepared remarks. Just curious if you could talk a little bit about what you're seeing in the competitive environment at this point?

[Andrew Caprara, executive]

I think, Stephanie, when we look at the organic growth rates of our public competitors that we can see here in North America, when you isolate the North American business, I'd say we are -- we believe that even at 3%, we've been growing at a faster rate than what has been reported so far this quarter. And certainly, even as you look throughout 2023, where we grew 4.7% in constant currency and many were flat to down a little bit last year.And I think that's a function of our -- the resiliency of a software and cloud-focused business model. As we've said many times, our business is impacted by hardware, right? We came into 2023 with hardware being about 28% of our business, and now it's 20%. But the reality is the inverse of that is a very resilient software cloud and services business. So you may not -- you may put off some discretionary capital spend, but you're still going to have to renew the software that your business uses to operate. And so that resiliency is what is contributing to the difference, and I think that's highlighting the difference in our business model versus many of our competitors in North America.

[Operator]

Your next question comes from the line of David Kwan with TD Cowen.

[David Kwan, analyst]

On the cloud side, we saw a more positive commentary coming out of the big 3 hyperscalers in particular, just--

[Andrew Caprara, executive]

Did we lose David? We can't hear anything.

[Operator]

And while we're waiting for that -- our next question will be Martin Toner from ATB Capital Markets.

[Martin Toner, analyst]

Congrats on some big numbers here in SMB. So the delta between SMB and enterprise in terms of growth is quite large. Any like -- can you maybe talk to us a little bit about when that pressure on enterprise might abate. What your view on SMB growth going forward is? Can one improve and the other be sustained?

[Andrew Caprara, executive]

Yes. Martin, thanks. I think we've talked in the past few calls about the investments we're making in our sales force and that we talked even today about the magnitude of the increase in sellers over the last year. And as we said, a lot of that is focused on the SMB end of the market and somewhat in commercial. And it's because the market opportunity there, we think, is fantastic for us right now.These are areas where customers have increasingly high technology needs because they need to be able to compete with bigger players, but they don't have the technical capabilities in-house. And so this is an area where we're able to come in and really offer that complete end-to-end solution for them from the selection of the technology through to helping them with the services to implement it and the ongoing management. And so this is an area where our partners are also looking to us to play a major role because they don't have the reach to get to those customers. And you're talking about a market with, we think, over a couple of hundred thousand potential prospects that could use Softchoice services. And so we're pretty bullish on continuing to invest in the SMB segment and adding a lot more capacity and capability to serve those customers and continue to grow that business at a really high rate. As for when the enterprise segment will turn around, I think we're hopeful that we start to see the easing of interest rates as the year goes on, although that time frame seems to continue to get pushed back. But hopefully, that starts to ease some of the pressures on some of these larger public companies in our enterprise segment and starts to free up some of the ability for them to take it to execute on more of these kinds of programs, potentially looking at some of the hardware upgrades that may be necessary for them to modernize their environment and prepare for AI. And so we're hopeful that we start to see that come back this year over the next couple of quarters. But I think when we talk about those enterprise customers, we're a little dependent on the market conditions to really have them feel free to spend on these kinds of transformations and programs.

[Martin Toner, analyst]

What makes you comfortable talking about hardware not improving for the rest of the year?

[Andrew Caprara, executive]

I think because we're feeling like we've been talking about it coming in 6 months for probably 12 or 18 months now. And at some point, I think we need to acknowledge that there's an economic element to this where if the cost of borrowing remains high, then organizations are going to be more reluctant to invest in really large capital purchases. And so I think at this point, until we start to see real signs of it, I think we're going to be cautious about it. If it comes back earlier, we would be happy to be wrong.

[Martin Toner, analyst]

Got you. And what is the impact of a Windows upgrade cycle in different parts of your business?

[Andrew Caprara, executive]

There are a couple of tailwinds for the laptop and device side of the hardware market, and that's certainly the biggest one. There's a lot of talk about how AI can also improve or speed up the refresh cycle for hardware. And that's true for users who actually will need the power of a stronger machine to run these kinds of models. But we do think Windows 11 is probably the bigger driver as organizations will need to make sure that their machines can run -- have the power and feature set to run and maximize Windows 11.So we think that, that will be a tailwind for the refresh cycle on hardware. But again, we just don't think it's going to be -- it's not going to come in a wave all at once, we don't think. We think it will be a bit more of a continual cycle over the next kind of 12 months or so.

[Martin Toner, analyst]

And does that Windows upgrade cycle make the pressure of hardware worse because, I mean, people have a reason to defer?

[Andrew Caprara, executive]

Sorry because what? I missed the last part.

[Martin Toner, analyst]

Because like waiting for the upgrade cycle gives people a reason to defer therefore creating pent-up demand.

[Andrew Caprara, executive]

Maybe. But I think at this point, a lot of folks have started down the journey of evaluating how to make that migration and upgrade to Windows 11, and there's a lot of reasons that you'd want to be on Windows 11, if you're starting to take advantage of Copilot and some of the AI capabilities. So I think these things will work together to actually drive the adoption of Windows 11. So there's a chance people could wait, but I think that's probably more true 12 months ago than it is now.

[Operator]

Your next question comes from the line of David Kwan from TD Cowen.

[David Kwan, analyst]

Can you hear me now?

[Andrew Caprara, executive]

We can.

[David Kwan, analyst]

Not sure what happened last time. On the cloud side, we saw the big 3 hyperscalers comment this quarter that they're seeing a pickup in cloud migration activity. I think in combination with the tailwinds you're seeing from Gen AI is helping drive that rebound in the cloud growth. Are you seeing a similar dynamic in your business, particularly as it relates to the cloud mitigation activity that kind of the cost authorization focus that we've seen over the last year plus is really abated and more focused -- customers focusing on migrating more workloads to the cloud.

[Andrew Caprara, executive]

Yes, David, I think so. I would say we're in a period now where it has created what I believe will be an ongoing awareness of cost optimization in the cloud. So we were in a period where nobody thought of it, and were just investing and building on the cloud as fast as they could. And then we had that reset where everybody kind of came back down and said, hey, we need to take advantage, and we need to look at this and we need to make sure that we're doing this the right way.And I think now we're just going to be in a period of, let's say, perpetual cost optimization and people are just going to be more conscious of what they're spending. But I would say the big reset cycle is probably behind us at this point, and we are seeing increases in cloud consumption in our customer base. I know there's been talk about AI driving the cloud consumption in some of the hyperscalers, particularly in Microsoft results. I think we're not yet seeing that hit our business. And when you dig into the Microsoft top track around AI in their results, there was a lot of mention of Fortune 500 companies. It was something like 65% of Fortune 500 companies are using Azure Open AI. And as you know, our customer set is a little more down market, more in that sweet spot of SMB and commercial. And so that sort of leading edge on AI in the Fortune 500 is starting to trickle down into the mid-market and SMB space, but it takes a little bit longer. They don't have quite the same level of resources in-house to be able to do it. And so these are the kinds of things, though, that we're perfectly suited to help them with. It's just not really showing up as a big, big driver in our business at this point, but we're pretty confident that this will come. And as we've said before, we're not building it as a big FY 2024 driver, but we definitely think there's tailwinds over the next 3 to 5 years as more and more companies take advantage of this.

[David Kwan, analyst]

And then on the Gen AI side, I know you talked about the formally or setting up the AI solutions team there. Can you talk about the availability of AI or Gen AI skilled labor? Has this been a bottleneck for you in terms of growing that part of your business?

[Andrew Caprara, executive]

Well, I'll tell you, we have an amazing team with hundreds of engineers already, David, who are all extremely excited to get cross-trained on this area. And so we've been able to hire and bring in people with these kinds of capabilities, but we've also been able to take advantage of the amazing people we already have on our team who are excited to learn these new skills and already have a deep understanding of how to manage a cloud environment, whether it be Microsoft, Google or Amazon.And so we're rapidly training up our own team. I think when you think about our role in the AI ecosystem and particularly when you think about our focus on copilot AI as a starting point, a lot of what we're doing there is not really building on a large language model. We're helping customers identify use cases using things like Copilot Studio and Microsoft Fabric integrated into their existing systems and processes. And then we've got the adoption and change management skills already on staff to be able to help them learn how to use the system to do what they need to do in those processes. And so there's a lot of the capabilities that we already have in-house to do this. And in our area -- not areas that we're struggling to attract talent in. I think where you're going to see tightness in the labor market around AI is really the folks who can build on these language models because that skill is still pretty rare in an area where we need to -- as a country or as North America, we need to develop more and more talent to be able to do these things because they're going to be so prevalent over the next few years. But that is a small part of our AI business at this point is really that front-end AI large language model developer. And so there's plenty of opportunity for us to help organizations develop on AI right now with the folks we have and more and more getting trained every day.

[Operator]

Your next question comes from the line of John Shao from National Bank.

[Meng Shao, analyst]

The company has been steadily increasing the AE headcount. So my question is for the new hires over the past 2 years, how should we think about their productivity level relative to their potential? Is this something that are tracking according to plan? Also, it would be great if we can get an update on the current hiring environment.

[Jonathan Roiter, executive]

Sure, John. I'll take that. Thank you. When we look at our -- the growth in our AE that Andrew talked about -- the majority of that growth is happening in the areas of our business are growing more rapidly within SMB and commercial. The payback associated with the AEs really hasn't changed. In fact, we're really starting to see the benefits of growing that head count. This last quarter, we grew our customers. I think by 5%, which is the fastest growth rate in customers since 2019. That's directly related to the growth in the AE headcount that we've been putting in.So ultimately, there really hasn't been a change in our economic model, and we're starting to bear the fruits of planting those seeds of investing in AEs last year. We're now starting to see that benefit trying to work its way through. The second part of your question around how to think about as their tenure growth. Ultimately, why our #1 growth pillar is having that world-class culture is the longer our AEs or the longer our people stay with us, ultimately, the more productive they are. And we're seeing continued growth in our tenure. Our retention rates are essentially at all-time high. So we feel very confident that the investments that we've made in the AEs last year and continue to make this year, we'll continue to hit the thresholds of payback that they historically had, if not even be stronger than that. And then in terms of hiring, we're really not having any difficulty, quite frankly. We have a really strong brand in Canada. We leverage that brand. As you know, a lot of our SMB workforce could service the U.S. and be based out of Canada. So we certainly leverage that. And then our growth in the U.S. has been allowing us to attract really quality candidates that grow with -- that start young, if you will, start their first or second professional job and ultimately stay with us because they see the potential for their careers and the growth aspects available to them.

[Meng Shao, analyst]

So Jonathan, could you maybe give us an update on the plan to delever the balance sheet post the special dividend payment? Any time line we may think about?

[Jonathan Roiter, executive]

Sure, John. Look, when we issued our special dividend and when we thought about our special dividend, we looked -- historical performance has been always a great benchmark in terms of what go-forward could look like. And that historical benchmark essentially would suggest it's about 2, 2.5 year delever to get back to where we were before.Now that was with lower EBITDA. And I would say with working capital management practices that maybe are not as, I don't know, as strong as they are today. So there's certainly been improvements there. So if you look historically, it was about 2.5 years to fully delever. That was at a lower EBITDA and with different working capital management practices. So one could believe that it will be less time to delever going forward than the historical past.

[Meng Shao, analyst]

And lastly, on AI. It seems a lot of work has been done on the Microsoft Copilot side. But how about the rest of the vendors given that they're all having their AI products? Is that a priority for Softchoice?

[Andrew Caprara, executive]

Well, we did put a lot of emphasis on Copilot because of the fact that we have such an opportunity there, given that we already manage 8.5 million seats of licenses of Office 365. And so that's often where a lot of organizations are also starting their AI journey because they're already running Microsoft 365 and thinking that that's the best opportunity for them to start.And from there, we've got the opportunity to help understand what those use cases are. And sometimes those use cases are solved by Copilot, but many times, they're not. And they need other kinds of AI capabilities to actually support the environment. And so we don't just have Copilot. We've been building out capabilities across Azure Open AI. We have already helped customers on AWS as well as Google. So we're building across the large language models on all 3 of the top hyperscaler platforms. So that's a big focus for us to be able to come in and help agnostically across any model and any cloud so that customers have that one person that they can look to. And then the other half of AI is that AI is being built into pretty much every SaaS application at this point. And so we've got the technical focus on our team to help customers understand what's going on with all of their other software titles, what new features and releases are being released that they could take advantage of, and we're helping them along that journey as well. So it really is a bit of a 3-pronged approach, John. There's the Copilot and workplace AI solutions. There's the building off of the language models within the hyperscalers. And then the third is helping customers organize and leverage the new capabilities in their SaaS applications.

[Operator]

And that is all the questions we have from our analysts. I'd like to turn it back to Andrew Caparo for closing remarks.

[Andrew Caprara, executive]

Great. Well, thank you, and thanks to everyone who joined us today. We look forward to updating you on our continued progress on our Q2 call in August. So have a great rest of your day, everybody.

[Operator]

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.