Softchoice Corp (CA)

TSX:SFTC

Earnings Call Transcript 2021-Q2

[Operator]

Good morning. My name is Pam, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Softchoice Q2 2021 Earnings Conference Call. [Operator Instructions]Mr. Tim Foran, from Investor Relations, you may begin your conference.

[Tim Foran]

Thank you, Pam, and good morning, everyone. Welcome to Softchoice's Q2 2021 Conference Call. A reminder that this call is being recorded Friday, August 13, 2021. Joining us today are Vincent De Palma, Softchoice's President and CEO. Vince is joined today by Bryan Rocco, Softchoice's CFO; and Andrew Caprara, COO. 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. And finally, 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 R. De Palma, CEO, President & Director]

Thanks, Tim, and welcome, everybody, and thank you for joining us today. We're tremendously excited to be hosting our first earnings call as a newly public company. I want to start by thanking our investors for their confidence in Softchoice, our management and our team. We are going public at a great time when the heavy lifting transforming our company has been done, we are in a strong financial position, secular trends are in our favor and our growth in margins are expected to accelerate. The additional exposure afforded us by being public provides tremendous opportunities to further the Softchoice brand and attract more customers and quality personnel. And while we are keenly focused on organic growth, which is self-funded by our internal cash flows, being public can also potentially facilitate M&A opportunities in the future that it could improve or extend our solutions offering. Beyond completion of the IPO on June 1, we are also pleased with our second quarter results, including continuing double-digit growth and ongoing execution of our organic growth strategy to solidify our position as a leading software and cloud-focused IT solution provider in North America. Gross profit, which is how we and others in our industry measure topline performance, grew more than 15% over Q2 of 2022, driven by a 16% increase in our software and cloud solutions and an 18% increase in our services offerings, a key focus areas as they align with the fastest-growing areas within the IT industry. Software, cloud and services comprise almost 75% of our gross profit in Q2. The remainder of our gross profit was from hardware, which grew at over 12%. Adjusted EBITDA grew 17% due to the natural operating leverage in our financial model and as we started to receive the initial benefits from Project Monarch, which is our transformative business process and technology architecture reengineering initiative that went live in 2020. We estimate Project Monarch will provide $25 million in incremental annual run rate EBITDA by the end of next year and realizing the full extent of these benefits is a key focus for our business, and we are on track with this plan. As we indicated in our IPO, our adjusted EBITDA margin expansion will be constrained in 2021 due to investments we are making this year to increase our technical resources to support our multi-cloud offering and growth strategy. Additionally, with the IPO complete, we will be ramping up hiring of our sales force, which we expect will drive growth in our customer base and wallet share as well as our gross profit and adjusted EBITDA in 2022 and beyond. Net loss in Q2 of 2021 of $13 million was due to over $28 million in pretax nonrecurring costs related to the IPO and concurrent capital restructuring of the company. Excluding extraordinary items, our adjusted net income was approximately $12 million. We are currently in a very healthy financial position. Strong operating cash flow along with the proceeds from our IPO enabled us to reduce our debt significantly and close the quarter with net leverage of 1.3x our trailing 12 months adjusted EBITDA and that compares to approximately 2.9x at the end of 2020. I'll go over our growth strategy in a few minutes, and Bryan will then provide a deeper overview of our second quarter results. However, for those new to our story, I want to start by providing a high-level overview of Softchoice and discuss why, while I'm quite pleased with our Q2 results, I am even more excited for the next phase of our journey as a company. So I ask that those of you that participated in our IPO road show and/or who have read our IPO prospectus, to please bear with me as I will quickly run through background on Softchoice, which I know some of you are familiar with from those meetings, but then I will give everyone an update on how we're doing on the 4 key pillars of our organic growth strategy. For those of you who may not be familiar with us, Softchoice is a leading software and cloud-focused IT solutions provider in North America. And by that term IT solutions provider, what we mean is that we guide companies through their digital transformation journeys. Specifically, we work with our customers to help design, build, implement and integrate multi-vendor solutions. Our revenue and margin are generated from the sale and implementation of these solutions, which include software and cloud, managed and professional services and hardware. Over the last 12 months, our gross sales have been over $1.8 billion, which we believe places us among the leading software-focused IT solutions providers, specifically in our target market of midsized companies who typically have between $500,000 and $50 million in addressable IT spend. We have generated more than $250 million in gross profit over the past year, despite the initial impact of COVID on some customer spending and the temporary anticipated disruption from the launch of Project Monarch in Q3 of 2020. The significant majority of our business is from software, cloud and services. We provide holistic IT solutions, and our unique foundational focus on software along with the massive technical expertise we have across multiple clouds and software platforms differentiates us from other providers in this space in the North American market.Another critical differentiator is our insight-driven approach with our customers. We do not simply look to sell products or address a customer's perceived issues. What we do is, we challenge the customer to contemplate new perspectives and offer insights that often lead to better business outcomes for our customers and deeper engagements and additional sales for Softchoice. For each customer, we spend time and resources, learning their IT needs, their pain points and vulnerabilities. Then our team of highly skilled technical experts and account executives work together to design and implement optimized IT solutions. For us, of course, that customer success translates into high customer retention, an increasing share of their IT spend and a steady increase in our recurring and reoccurring business. Over the past 3 calendar years, we have averaged over 100% revenue retention on a net basis. In other words, our customers come back to us week after week, month after month, year after year to continue to procure from us to help them with their digital transformation journeys. Approximately 55% of our revenues are generated in the United States and 45% in Canada. Our 1,800 team members provide coverage in 26 physical markets across North America, which are strategically located in the highest growth areas. The span of our geographic coverage serves as a key competitive advantage in 2 ways: first, it helps us secure customers as our footprint provides us with the ability to service customers from multiple locations, thus improving our delivery of meaningful, memorable and high-touch experiences; second, our geographic coverage offers a sales distribution advantage that attracts leading technology vendors towards partnering with Softchoice. As a software-focused IT solutions provider, we have an asset-light model which provides highly attractive profitability, return on capital and free cash flow metrics. Over the past year, our free cash flow conversion percentage has been approximately 90%, which we measure as adjusted EBITDA less maintenance CapEx and lease payments. Given our free cash flow profile, we intend to start providing a quarterly dividend to shareholders as we outlined in our IPO.Our total addressable market, which is based on the customer segments we currently target and also excludes IT solutions we don't focus on, is exceptionally large at nearly $300 billion. And given our $1.8 billion in gross sales, we only control approximately 1% of the overall market, which leaves us with substantial growth opportunities in this highly fragmented market. The overall IT industry is expected to grow at about a 5% CAGR, but our addressable market is expected to grow at about an 8% CAGR. However, we are targeting share expansion and organic growth in the double digits due to our focus on and alignment with the highest-growing subsectors of the IT industry, namely hybrid multi-cloud, digital workplace and collaboration and software asset management. Our business continues to experience an acceleration across various cloud productivity and collaboration solutions in line with global business trends, including accelerating growth in adoption of the cloud, increasing demand for remote work capabilities, which were accelerated by the COVID-19 pandemic and increasing demand for seamlessly integrated software applications and security solutions. We enable hybrid multi-cloud solutions and ensure that those hybrid environments are secure for our customers. We're at the center of our customers' multi-cloud journey with expertise in AWS, Microsoft Azure, Google Cloud and many of the critical enabling technologies from partners like VMware, Red Hat and others. We then enable collaboration in digital workplaces to ensure that the employees of our customers can collaborate securely from anywhere in the world on any device at any time. And finally, we wrap all of these solutions in a rigorous and highly orchestrated software asset management approach that helps our customers maximize their investments and keep in compliance with these complex software agreements. We have been on a journey to strategically shift our business from a predominantly product-only supplier to a trusted IT solutions provider. And what that means is that we are delivering more advanced solutions and/or assisting customers with strategic technology transformations like the adoption of public cloud. And when we do that, our gross profit per customer increases almost 7x, and our customer retention reaches best-in-class levels. So now let me give you an update on our growth strategy and our 4 organic growth levers that enable us to sustainably grow our gross profit double digits on an organic basis. Our first growth pillar is a two-pronged approach to grow our sales force and improve sales force productivity. To the first part, we have a proven blueprint for hiring, training, developing and retaining our people and investing in our sales force to drive growth. Historically, we have consistently grown our sales force by adding account executives, or AEs for short, at about a 6% CAGR, though we have the capacity to grow faster than that. Historically, we have also improved our sales force productivity as measured by LTM average gross profit per AE by an 8% CAGR through various sales enablement initiatives, better sales tools and training and increasing sales force tenure. Due to COVID, we prudently decided to implement a hiring freeze on new AEs and focus investments on driving sales force productivity. While that reduced slightly our average AE headcount over the past year, it was more than offset by an increase in sales force productivity to the highest levels we've seen in several years. This improvement in sales force productivity is the combined result of secular trends driving growth in our solutions, measures we have initiated through Project Monarch to improve the customer and employee experience and investments I noted in our technical and sales enablement resources and cloud strategies. These include investments in our hybrid IT specialty sellers, cloud technical experts and managed services, including our managed cloud practice. And with customer spending resuming and the IPO complete, we intend to resume hiring new account executives, and we remain on track to add 40 to 50 new AEs from 2020 to 2022. Our second growth pillar is focused on our customer base. We have a similar two-pronged approach here to driving double-digit organic growth. Historically, we have grown our average LTM customer base at about a 6% CAGR from 2017 to 2019, and we have increased our wallet share by a 4% CAGR as illustrated by our LTM gross profit per customer. We have seen customer spending increase in 2021 and increases in wallet share of our customers, measured as gross profit per customer, benefiting from our investments in sales enablement that I mentioned as well as secular trends driving increasing adoption of the cloud, remote work and collaboration, software asset management and security solutions. As you'll hear from Bryan in a bit, we have seen growth in gross profit from all 3 of our customer segments in 2021. This has offset a natural dip, which we expect to be temporary, in our average LTM customers as we are now seeing the full impact on our customer counts from the pandemic over the past 12 months. The pandemic has impacted all customer segments, but SMB had the biggest customer decline as the pandemic put more pressure on smaller businesses. As a reminder, the SMB segment represents about 40% of our customer base in 2020, but about 20% of our gross profit. And what that means in real terms is that a small number of customers have reduced spending and have fallen below our threshold of what we categorize as a customer, although they often remain an active account with us, but buying at lower amounts. We expect to get back to growth in our customer base in future years as we ramp up hiring for our AE sales force in the second half of 2021 and into 2022 and beyond. The third pillar of our growth strategy is on expanding our relationships with our technology partners. We serve as a critical link between our customers and our technology partners. On the one side, we are the trusted partner to our customers to help evolve and deliver their digital transformation, a requirement accelerated by COVID-19. On the other side, we are equally critical to our technology partners who don't have large enough direct sales and services teams, particularly in the SMB and commercial segments. Playing that critical role in the industry has enabled us to build very strong partnerships with almost all of the major tech companies, including Microsoft, Google, AWS, VMware, Veeam, Cisco and IBM, to name just a few, as well as emerging and disruptive technology partners. We have built co-investment strategies with some of those critical partners, particularly in our high-growth solution areas like public cloud, where these partners provide funding for us to build our capabilities and expand our capacity. In 2021, we have made significant growth investments in our technical and sales enablement resources and our cloud strategies, and we remain very excited about the potential these programs have going forward. Our success has been recognized by our partners who ultimately rely on us to drive adoption of their products with customers. So far this year, we have leveraged our recognition as VMware's life cycle services Partner of the Year to expand VMware Cloud market share by accelerating the migration of traditional on-premise environments into AWS, Azure and GCP. We have also received the Red Hat Solution Provider Partner of the Year, which represents the leadership we have demonstrated in using software-defined tools to manage environments across private or public cloud. And we have been the recipient of Microsoft's Surface Velocity Partner of the Year, which acknowledges the highest levels of revenue growth in the channel. The fourth and final pillar of our growth strategy is Project Monarch. In 2020, we launched the largest, most meaningful business transformation initiative in Softchoice's history. We took the challenges we had faced in our employees' and customers' experience, and we transform them into opportunities for our business. The way we did that was we reengineered our business processes, and we redesigned our technology architecture and we invested nearly $50 million in our business over the last 2 years. Our redesign is anticipated to result in a broad set of benefits equating to $25 million of EBITDA uplift in 2022, primarily related to topline gross profit uplift, but also from some OpEx savings. And these benefits fall primarily into 3 categories: first, through improved and much greater use of data analytics and through a new configured price quoting tool, we've given our sellers much better information to maximize gross profit percentage by aligning pricing amongst our sales force; second is procurement savings. Again, through better data analytics and better tools, we're able to lower our cost of goods sold, particularly those products and services we buy through distributors. Finally, process streamlining and automation is anticipated to result in certain operating expense savings. Through the first half of 2021, we remain confident in our ability to capture the full annualized benefits of Project Monarch over the course of the next 12 to 18 months. So in summary, we will continue to execute on these 4 growth pillars to drive double-digit organic growth. And as I stated at the outset, while I'm quite pleased with our Q2 results, I am even more excited for the next phase of our journey as a company. And at this point, let me turn it over to Bryan to take us through the financials.

[Bryan Rocco, Chief Financial Officer]

Great. Thank you, Vince. So all of what Vince reviewed leads to what is a highly attractive financial profile of double-digit topline gross profit growth, increasing margins from operating leverage and high free cash flow conversion. Similar to events for new investors. I'll provide some background and historical context on each of our key financial metrics before reviewing Q2 and year-to-date performance. From 2017 to 2019, we recorded a double-digit organic growth CAGR in gross profit, which is how we measure our topline performance. Our growth in gross profit was interrupted in 2020, driven by COVID-19 and the temporary anticipated disruption of Project Monarch in Q3. In 2021, we have achieved double-digit growth in gross profit in both Q1 and Q2. In Q2 2021 gross profit increased more than 15% over Q2 2020. By IT solution type, the increase in gross profit was led by software and cloud, which increased by more than 16%, reflecting increasing customer consumption of cloud solutions, a strong Microsoft year-end in Q2, acceleration across various cloud productivity and collaboration solutions and increased volumes of subscription software sales across various vendor partners. Software and cloud comprised 64% of our total gross profit during the quarter, which is a 50 basis point increase over Q2 2020. Gross profit from services grew 18% in the quarter, driven by professional services project activity and margins and with just over 9% of our total GP. Finally, gross profit from hardware increased more than 12% and was over 26% of the total GP. The increase was primarily a result of an increase in average sales margins and vendor incentives. Gross profit also grew across all sales channels. On an absolute basis, growth was primarily driven by the commercial channel, which increased by 19% in Q2 2021 and represented 58% of our Q2 2021 gross profit. Gross profit from enterprise customers in Q2 2021 increased 4% with growth muted as Q2 2020 was a strong comparator given how resilient the Enterprise segment was during the onset of the pandemic. However, on a year-to-date basis, gross profit from Enterprise segment was up 8%. Enterprise gross profit was 23% of Q2 total GP. And finally, gross profit in the SMB channel increased by 20% in Q2 2021 and was 19% of total GP. So on a year-to-date basis, gross profit is up 13%, in line with our outlook for over 12% annual growth CAGR from 2020 to 2022. And this is an acceleration on the 10% growth CAGR we had from 2017 to 2019, as I mentioned earlier. So although gross profit is our top line metric, we do also report gross sales, which is essentially the gross amount billed to customers as well as referral fees and adjusted for amounts deferred or accrued. We believe it is a useful alternative financial metric to the IFRS measure, net sales, as it better reflects volume fluctuations. In line with gross profit, gross sales increased at a 10% CAGR from 2017 to 2019 before being essentially flat in 2020. Positively, overall gross sales have increased approximately 9% in Q2 and year-to-date 2021, with the growth rate below gross profit growth due to a strong comparison in Q2 for the Enterprise segment that I mentioned earlier. In Q2, specifically, software and cloud gross sales increased 17%, largely as a result of the increased volumes in the same area as benefiting gross profit, and services gross sales increased 10% due to growth in professional services. These offset an 11% decrease in hardware sales, which was driven by a few factors. So firstly, it was partly a reflection of a strong Q2 2020 driven by a surge in customer hardware spending related to COVID-19. As well, the global supply chain shortages for microchips and glass persisted through the first half of 2021. Finally, there's been a shift in demand away from on-premise hardware-based infrastructure solutions towards cloud-based services, a trend that we believe is likely to continue. So despite the 9% increase in gross sales, reported net sales decreased by 3%, but this is a result of an increase in the mix of software and cloud solutions recorded on a netted down basis for accounting purposes. This includes subscription licenses and cloud solutions. Now I'll just give you an example of what I mean by netting down, which is also included in the appendix of our earnings webcast presentation. So in the past, let's say, we sold a customer an on-premise software license. So for example, a data center software license for $100 gross sales with an $85 cost of sales to us. We would record $100 gross sales and $100 net sales and then be left with $15 of gross profit after subtracting cost of sales. Now this year, we sold that same customer a SaaS solution, so for example, O365 for the same $100 gross sales and same $85 cost of sales. Per IFRS, this SaaS solution is accounted for on a netted down basis, so our non-IFRS gross sales is still $100, but our IFRS net sales is recorded as $15 after subtracting the cost of sales. But the gross profit ends up the same at $15 as net sales is equal to gross profit. So in the second instance, on an IFRS basis, our net sales declined 85% with that customer this year, even though we invoiced them the same amount and made the exact same gross profit. Given the company's growing mix of software and cloud solutions, which are most impacted by netting down, it has resulted in overall net sales growth, trailing gross sales and gross profit growth in recent years. Obviously, though, the growth in software and cloud is a positive for us and the focus of our strategy. And this is one of the reasons why we measure our topline performance by gross profit rather than net sales. So now shifting gears to operating profitability. Our adjusted EBITDA and cash generation has performed even better than gross profit in recent periods. The combination of gross profit growth along with our scalable business model drove a 21% adjusted EBITDA CAGR from 2017 to 2019, with margins as a percentage of gross profit increasing from 20% to 27% over that timeframe. Adjusted EBITDA growth slowed in 2020 driven by COVID and the launch of Project Monarch in Q3. This was partially offset by $14 million in government-directed wage subsidies via CEWS recorded in the second half of 2020 that enabled us to avoid reducing headcount and retain key employees, positioning us for a quick return to double-digit growth in 2021, and that's exactly what occurred. In Q2 2021, we generated $21 million in adjusted EBITDA, a 17% increase over Q2 2020, driven by the 15% increase in gross profit along with operating leverage within our business. On a year-to-date basis, adjusted EBITDA was $31 million, an increase of 19%, with margins expanding to 23% from 22%. Historically, H2 has had slightly higher margins than H1. Partially offsetting our operating leverage, our growth investments we've been making in our technical and sales enablement resources and cloud strategies. As noted, we will also be increasing our AEs in H2 2021, which typically has an 11- to 14-month payback period, and we will also continue making investments in sales enablement initiatives. These growth investments will mitigate our margin expansion in 2021. We anticipate they will drive gross profit growth and an acceleration in our adjusted EBITDA in 2022 and beyond. So as a reminder, the CEWS benefits that we received in H2 2020 will impact our reported adjusted EBITDA growth rates in H2 of 2021 and mask underlying progress to an extent. As for our cash flows, we review adjusted free cash flow on an LTM basis. This grew at a 25% CAGR from 2017 to 2019, which is faster than adjusted EBITDA due to our asset-light model as we add relatively fixed lease payments and low maintenance CapEx requirements, which has consistently delivered increasing free cash flow conversion. Over the past 12 months, adjusted free cash flow increased 27% over the prior year LTM period to approximately $63 million or 90% of our adjusted EBITDA over the past year. As it relates to net income, we recorded a net loss of $13 million in Q2 and $15 million in year-to-date, driven by more than $28 million in pretax nonrecurring costs related to our IPO. Excluding these IPO costs and certain other items, our adjusted net income was $12 million in Q2 and $15 million year-to-date. I will note that reconciliations of our non-IFRS measures are available in our MD&A. So we're entering the public markets with a simplified capital structure post IPO and a strong financial position. We have significant liquidity to fund our growth initiatives provided by our positive free cash flow and supported by a $275 million revolving credit facility with approximately $80 million of outstanding loans and borrowings at June 30, 2021. Our net leverage was 1.3x LTM adjusted EBITDA at the end of Q2 2021 compared to approximately 2.9x at the end of 2020. This reduction was from positive year-to-date operating cash flows as working capital inflows more than offset the nonrecurring cash costs related to the IPO. It was also due to the treasury offering proceeds from the IPO that were used to repay debt. We benefit from a negative working capital profile in most years, though the larger inflow that we saw in H1 of 2021 is in part due to a rebound from an unusual outflow in 2020. Going forward, we will use our anticipated free cash flow to pay our debt interest, taxes and initial dividends, which we intend to be approximately CAD 0.07 each quarter, but about CAD 0.093 for our first dividend, which is expected to be paid on October 15 as it covers the period from June 1 to September 30. Beyond that, we have various options for capital allocation that we are considering. Our initial priority is continued debt repayment and then potentially other ways to return capital to shareholders. Our growth strategy is entirely organic as the best return on investment for us now is further increases in our sales force. However, we will also consider M&A that would expand our technical capabilities in high-growth areas.So on the heels of our strong Q2 today, we reiterated our 2022 outlook that we provided as of the date of our prospectus, which reflects the impact of the strategic investments we're making in 2021 as well as the meaningful benefits of Project Monarch. We anticipate gross profit will grow at a CAGR of over 12% from 2020 to 2022, which will result in gross profit dollars exceeding $300 million in 2022. We expect our adjusted EBITDA to gross profit margin will increase to around 30% in 2022, resulting in our adjusted EBITDA outlook of between $90 million to $100 million. This margin improvement is anticipated to be driven by operating leverage in our business model as well as the realization of expected Project Monarch benefits of approximately $25 million. And consistent with recent years, we expect to achieve a very high free cash flow conversion rate of approximately 90%. So in closing, we are quite pleased with our performance in the second quarter with more than 15% growth in gross profit, 17% growth in adjusted EBITDA, 90% adjusted free cash flow conversion and $38 million in cash flow from operations, despite approximately $28 million in nonrecurring costs. Our focus in H2 will be on continued execution, investments in sales enablement and hiring of AEs and realizing benefits from Project Monarch. Along with our capital structure, these position us well to deliver against our 2022 outlook. And with that, I will turn it over to the operator for Q&A. Operator?

[Operator]

[Operator Instructions] Your first question comes from David Kwan with TD.

[David Kwan, Analyst]

Congrats on the first quarter, good results. I wanted to talk to you, I guess, about Monarch. I guess you're coming up to the first year from the launch. I'm just wondering, what are maybe some of the key things that you kind of learned over the last year? Has there been any kind of changes that you've had to make or to the kind of business process systems that's come up? Or is it -- has been kind of how you'd expected it to go for the first year?

[Vincent R. De Palma, CEO, President & Director]

Yes. So Project Monarch has 3 aspects to it in terms of the actual implementation and realization of the benefits. So certainly, we -- while we replaced a lot of our back office technology infrastructure, the real driver of Monarch is around process redesign, improving streamlining, automating business processes for a better employee experience and a better customer experience. And of course, with that, all of our 1,800 people had to get accustomed to new processes, and there was a shift in roles and responsibilities between sales people and between people that support our sellers. So all of that is a massive change management undertaking, which we were very cognizant of throughout the Project Monarch implementation and continue to be focused on. So there are the normal bumps along the way as you implement something of this magnitude, particularly in Q3 of last year when we went live. And what we stood up, David, was what we call centers of excellence, and we did that late last year, and they've been continuing to operate. And they are typically cross-functional teams, but they'll have a certain focus, whether that be a sales focus on how do we streamline the quoting process, how do we streamline the renewal process, how do we better even streamline other processes that our sellers and some people that support them undertake. Or it could be a COE stood up for operations, the people that are helping us enter orders and fulfill the orders that are -- that we have sold to customers. And so we are continuously enhancing both processes and systems as we go through this. And I would tell you that as we sit here halfway through 2021, we are on plan with the implementation of Monarch, and we are very confident in our ability to capture our benefits as we've discussed, which we believe will amount to at least $25 million of EBITDA uplift in 2022.

[David Kwan, Analyst]

That's helpful. And can you maybe talk about what some of the feedback has been from your employees, maybe both positive and negative? And to the extent, from a customer standpoint -- I don't know what metrics you might look at in terms of kind of customer satisfaction. Obviously, we're seeing it in the numbers, which is nice. But any kind of color you can provide from that standpoint?

[Vincent R. De Palma, CEO, President & Director]

Yes. No, it's -- I'll give you an example. So we -- through our enablement, better data analytics, better processes around pricing, we made changes in terms of how we set pricing. I think I've explained to people in the past that pre-Monarch, our pricing was determined by each individual seller. And now with the best information they had available, which -- what has this customer paid for it in the past and maybe asking their colleagues what they think they should price a specific deal at. But now through better data analytics and a configure price quoting tool, we're arming sellers with better information to be smarter about how to price these deals, and we're actually giving them better information based on what customers -- not just their customers, but all our customers pay for certain SKUs, if you will. And so that takes some getting used to, right? We stood up what's called the deal desk, which was a new process where deals have to go through a centralized function -- deals over a certain dollar threshold. And that was initially met with some resistance, but when the sellers realize that helped them improve their gross profit percentage, and therefore, their commissions, they get very excited about it. So initial reticence and then amazing acceptance, particularly as you publicize wins that occur because of this better data analytics, the configure price quoting tool and the deal desk. I can give you similar examples in other functional areas, but that would be an example. So sometimes you get a bit of an initial, boy, this is a massive process change, new systems, new ways of doing business. And then it's like a new golf swing after you've taken a lesson with a coach, and after you practice a little bit and get used to it, it tends -- you tend to start hitting the ball down the fairway a little bit better. So our people are really excited about the information where they're arming them with as well as the ability to leverage this data desk to get better special discounting, special pricing that they would otherwise have been unaware of.

[David Kwan, Analyst]

Makes sense. On the employee side, obviously, it's a pretty tight labor market right now. Can you talk about -- you're looking to add 40, 50 AEs through the end of next year. Just how easy it is for you to try to find kind of good talent, whether it's for the AEs or even some of the more technical positions? I think, particularly in the cloud and virtualization space, it's kind of tough there. I've heard there are shortages for some of the certifications like VMware.

[Vincent R. De Palma, CEO, President & Director]

Yes. So one of the things I mentioned in the last year is, while we paused a bit on the hiring of AEs, we essentially kept our headcount relatively flat in terms of our sales force. We actually made investments in our people that support technical resources, that support our sellers, and we did quite well in attracting those people and increasing that headcount. So we have a great reputation in the marketplace as a company as measured by the many awards we get. For example, for us being a best workplace in Canada for 16 years in a row and a Best Workplace for Women and Best Workplace for Inclusion and a whole bunch of other awards we've received. And we -- so with that reputation, we have a great ability to attract people. We have a great talent acquisition team that is in constant hiring mode. And so we do not anticipate any issues in expanding our sales force, as I discussed on this call, as well as continuing to grow the technical resources that support our sellers. And as I think I mentioned, we have a proven blueprint for hiring, training, developing and retaining our people and investing in our sales force and the technical support resources that support them to drive growth. And so we are very confident that we will be able to grow our capacity by increasing our sales force through the back half of this year and well into 2022. And as we said, we should increase our sales force by about 40 to 50 account executives over the course of time through the end of 2022. And commensurate with that, we are continuing to invest in our technical resources like hybrid IT AEs or cloud technical experts that support our sellers when they get into these deep conversations with customers about their cloud journey or their digital workplace and collaboration strategy.

[David Kwan, Analyst]

And one last question for Bryan. On the gross profit growth, was up nicely this quarter, but I think there was some benefit from FX. Could you tell me what the constant currency growth was?

[Bryan Rocco, Chief Financial Officer]

Yes. So we don't report constant currency in our MD&A. What I will say is, on an FX basis, we're relatively hedged. So we have -- Vince noted at the start, 45% of our net sales is from Canada, 55% U.S. And then obviously, we're based in Toronto. So net-net on a currency basis at the EBITDA level, we're relatively hedged. We do see a benefit from a strengthening of the Canadian dollar when you look at gross profit in isolation, and in the quarter, it was around $3 million benefit.

[Operator]

Your next question comes from Gavin Fairweather with Cormark.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Congrats on the strong results. I thought I'd start out on the hardware side. I thought the gross profit growth was pretty good, despite some chip shortages that were out there, and I know that those were I think particularly acute at Cisco. So I guess I'm just curious, how much gross profit you think maybe slipped on that dynamic, and whether you see an opportunity to catch that up in the back half?

[Bryan Rocco, Chief Financial Officer]

Yes. So Gavin, so you nailed it. And if you look at our business, so as a reminder, we are predominantly software, cloud and services. That's around 70% of our business. So around 30% of our GP comes from hardware. We definitely saw some impact of the global supply chain issues on chips and glass as well in the quarter, but just given the weighting and mix of our business, it didn't have a material impact. It could potentially be a tailwind for us going forward, but to be honest, in Q3, I don't expect conditions to recover. It's probably quarters down the road or longer.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Got it. And then just on the proserve side. I think one of the byproducts that we're hearing about of the tight labor market has been some rising rates in terms of the hourly rate charged to clients. Curious how you're kind of managing that? Are you looking to move through some rate increases? And do you see that dynamic being accretive to your margins there on your proserve revenue?

[Andrew Silvio Caprara, Chief Operating Officer]

Gavin, this is Andrew Caprara. I would say, on the professional services side, we're obviously always monitoring the market in both Canada and the U.S., and our team is always evaluating that. I would say, there is not a wholesale change that we've got planned on professional services rates, but we're obviously constantly keeping track of what's going on in the market and adjusting as we go forward. And you're right, as things get tighter out there for a lot of folks, it's tighter for these organizations to hire their own people. And so that drives up the demand in professional services. So we will continue to monitor that as we go.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Okay. And then maybe just a bit of a housekeeping question for Bryan, before I pass the line. Just on the working cap, you referenced the big inflow this quarter. Can you help us understand how much of that was a reversal from the 2020 dynamics that you saw and maybe permanent versus kind of how the seasonality typically flows over the course of the year for you?

[Bryan Rocco, Chief Financial Officer]

Yes. So we did have a large inflow from working capital, over $40 million in each of Q2 and year-to-date, and part of it was seasonality. But I would say, it's mostly attributable to where we exited last year. So we had excess working capital, primarily in AR at the end of 2020. And as we work through, there were some expected disruption from Project Monarch as we work through that in Q2. I think our working capital is in a pretty good spot. And so you will not see a similar working capital inflow in H2 of this year. So I would say, H1 was unusual. We'll likely see an outflow in Q3, and then that will be offset by a similar inflow in Q4. But if you look at it from a go-forward modeling basis, we've shared a few tidbits of guidance along the way of looking at it as a percentage of net sales. It tends to be in kind of the 3% to 5% range or looking at 2018 and 2019, those are more kind of normal years for working capital. 2020 was unusual because we have that outflow, but in 2018, 2019, we had on average around a $15 million inflow from working capital as our business was growing at double-digit rates.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Great. Congrats on all your progress.

[Operator]

Your next question comes from Martin Toner with ATB Capital.

[Martin Toner, Analyst]

Congrats on some good numbers out of the gate here. Okay. The first question on the rate of AE addition. Is there a certain pace you need to go at in order to achieve 2020 goals?

[Vincent R. De Palma, CEO, President & Director]

Did you say 2020 goals? Or...

[Martin Toner, Analyst]

Sorry, 2022 gross profit goals.

[Vincent R. De Palma, CEO, President & Director]

Yes. As I think I may have mentioned -- well, historically, we've grown sales force by about a 6% CAGR, but we do have the capacity to grow faster than that. And what our plan calls for us to increase our account executive, or AE, headcount from 2020 to -- ending 2020, I should say, to 2022 by 40 or 50 AEs. And that would be in line with the outlook that Bryan summarized at the end of his comments during the call.

[Martin Toner, Analyst]

Okay. Super. And the weak performance in Enterprise. Was that unusual? And would you expect Enterprise to grow at a materially different rate than the other 2 customer types?

[Bryan Rocco, Chief Financial Officer]

Yes. So good question. What we saw in Q2 for Enterprise was we had a tough year-over-year compare. So flash back a year ago in Q2, Enterprise was our top-performing segment or channel on a GP basis, and it grew at a pretty healthy rate in Q2 of last year. And so what we had this year was, it was a tougher compare. But going forward, we don't provide guidance or outlook by channel, but what I will say is, Enterprise is a really important part of our growth engine. We do see a tremendous amount of opportunity both in Canada in the Enterprise segment as well as in the U.S., where, as we noted during the road show, we launched our U.S. Enterprise segment a few years ago, and that continues to be a growth engine for us going forward.

[Operator]

[Operator Instructions] Your next question comes from Nick Agostino with Laurentian Bank.

[Nick Agostino]

Yes. So just looking at your, I guess, the prepared script when it comes -- you highlight Microsoft as being a nice contributor in the quarter and certainly, your largest partner thus far. Can you maybe talk a little bit about your second largest partner, Cisco, as far as maybe the areas of traction they've been seeing in the quarter, and maybe some of the areas of traction that you're seeing from them post quarter? Any commentary you could provide there would be great.

[Andrew Silvio Caprara, Chief Operating Officer]

Yes. Nick, I would say, with Cisco what we've started to see is a bit of a revitalization on some of the collaboration technologies. I think they've done some really nice things in the last 6 to 12 months to really reinvigorate the WebEx platform. And obviously, as more and more organizations have needed to use these kinds of platforms, I think they're starting to gain some momentum within our customer base on the collaboration side. And then secondarily, I think we've had a lot of strength with the Cisco Security products. Particularly as we think about our strength in software licensing, we've really gained a lot of traction with the enterprise agreements around the Cisco Security Suite, and we've been able to bundle those quite nicely for a lot of customers to create a really nice integrated security package for them around the Cisco solution. So I'd say, those are 2 of the bigger areas for us. Certainly, I'd say, not as strong on the network side over that time frame, just given that a lot of office environments were not very active. And so the investments moved more to the tools that would help with virtualization and security and things that were delivered remotely and especially, things that were delivered by us through software licensing.

[Nick Agostino]

P Okay. Great. That was great color. And then if we look at -- obviously, over the years, you've done a great job of diversifying away from Microsoft. Obviously, Cisco has been coming up through the channels. Can you talk about some of your other partners that you have as far as maybe which other one is over the last year or year-to-date or even in Q3 is really starting to, I guess, gain even more momentum than some of your other partners? Or maybe if there's specific products that you could point to where you're seeing an abnormal growth rate that we should be monitoring?

[Andrew Silvio Caprara, Chief Operating Officer]

Yes. Nick, I would say, for us, that hybrid cloud story is really, really attractive to the partner community because of the capabilities and services that we now have to be able to really help customers adopt these technologies. And so what we bring to the table is a really great strength, not only on the public cloud side, but also on the on-prem side, given that we're one of VMware's largest partners in North America. And so the strength that we've got and the number of virtual machines that we have under management across North America is really attractive right now because the VMware cloud solutions and the ability to easily move VMware into any of the 3 public clouds that we've got real strength in, is a really, really exciting opportunity for us. And we've started to gain some great traction with VMware, but also with Google and AWS in doing some larger -- and Microsoft in doing larger customer migrations of the VMs that are sitting in a data center because there's a lot of customers who are sitting there saying, I got it. I'm remote, and I don't want to upgrade my data center right now. I need to do a quick evacuation. Well, quickly moving the VMs into one of the public clouds is right now a really nice, elegant and simple solution for them and then they can come back and do the hard work later. So that VMware anchor around the public cloud strength that we've got in Microsoft, AWS and Google is a really exciting opportunity, and we think one that's starting to really gain some traction for us, and we think will be a part of our growth going forward.

[Nick Agostino]

Okay. Great. And congrats on the quarter and good luck going forward.

[Operator]

There are no further questions at this time. Please proceed.

[Vincent R. De Palma, CEO, President & Director]

Okay. Well, thank you, everybody, for joining us for our first quarterly earnings call. I want to send a special thank you to the Softchoice team, who continued to execute in Q2 and focus on our customers with no disruption from our IPO. We are excited about our ongoing progress in the business and prospects for the years ahead, and we look forward to sharing more with you as we move forward. Thank you, everyone.

[Operator]

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.