Softchoice Corp (CA)

TSX:SFTC

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Softchoice Q2 2022 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mr. Tim Foran, Investor Relations. Please go ahead.

[Tim Foran]

Thank you, Pam, and good morning, everyone. Welcome to Softchoice's Q2 2022 Conference Call for the period ended June 30. A reminder that for purpose of the recording today is Friday, August 12, 2022. I am joined today by Vincent De Palma, Softchoice's President and CEO; Bryan Rocco, 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 the 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 two and relevant disclaimers can be found in the company's MD&A, which is available on our website. 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 Vincent De Palma.

[Vincent De Palma, executive]

Thank you, Tim, and welcome, everybody. Before we begin the review of our second quarter results, we also announced today that Bryan Rocco, our CFO, has made the decision to resign after 5 years with Softchoice. Bryan will be with us for the next month to assist with the transition of responsibilities. We have appointed Yota Skederidis as Interim CFO and have engaged an executive search firm to identify a permanent CFO. Yota is a chartered professional accountant and has been with Softchoice for more than a decade.

Prior to this role, she served as our VP of Financial Reporting and tax since 2018. Yota's experience with Softchoice, her industry knowledge, and extensive financial background make her well positioned to serve as our interim CFO, and we have full confidence in our entire finance team and expect the transition to be seamless. I do want to take a moment to thank Bryan, who is right here to my left in our conference room here in our headquarters, but I want to thank him for his contributions to Softchoice on behalf of the company. Over the past 5 years, he has played an important role in helping us prepare and execute on our strategic transformation, complete our initial public offering on the TSX, and guide us through a successful first year as a public company. We wish him all the best in the next stage of his professional career.

In today's call, I will start by providing highlights of the second quarter, followed by an overview of the current demand environment, and we will review progress on our go-to-market strategy and growth strategy. I will then pass it to Bryan for a deeper dive on our financial performance and outlook before opening it up to analyst Q&A. I will start on Slide 4 of the presentation for those following online. Our Q2 highlights are as follows: we recorded healthy financial results in the quarter and strong year-over-year growth. Our performance was driven by strong growth in our software and cloud solutions, notably in our strategic focus areas, including public cloud consumption and SaaS software. Our gross sales increased 16%, driving a 14% increase in our gross profit, which is how we measure our top line.

Adjusted EBITDA increased 20%, adjusted earnings per share increased 23%, and we recorded significant free cash flow in the quarter, which was used to continue our share buyback program, pay our increased dividend, and reduce debt. Customer demand has been resilient across our target mid-market channels despite inflation, rising interest rates, and recessionary concerns. Fundamentally, CIOs continue to prioritize IT investments to increase the flexibility, agility, and security of their businesses as well as to deliver the digital experiences to their customers and that their people demand, as well as to adapt to market conditions. Our people and our insight-based go-to-market strategy continue to drive customer success and expanded relationships.

In Q2, we recorded an increase in customer retention and engagement, which combined to deliver record revenue retention. Finally, we continued to make solid progress on our growth strategy. In Q2, we continued to add new account executives. And as a reminder, those are the frontline sales force that quarterback relationships with existing customers and who also seek new customers. Through successful hiring and strong retention, we are well ahead of our schedule of achieving our end-of-year target for our expanded sales force. As these new account executives ramp up the productivity curve, the investments we are making in them in 2022 positions us well for future growth.

Additionally, we recorded a sequential increase in our customer base in the second quarter. It is great to see the growth in our customer base moving back to a positive trend as we started to ramp our sales force as we outlined in our strategy and on previous earnings calls. Additionally, we remain on track to realize the net benefits from Project Monarch as discussed in detail on past calls. As I mentioned, we continue to see a robust demand environment for IT solutions. Gartner market data continues to project healthy growth in global IT spend, driven by digital investments, including in software, cloud, and security. This is expected to offset an anticipated reduction in certain hardware spend this year as customers pulled forward spending on devices in the second half of last year. And our software foundation and differentiated capabilities in the hybrid multi-cloud, digital workplace and collaboration, security, and software asset management positions us well to continue to expand our market share within our core mid-market.

In the second quarter, gross sales across our SMB commercial and enterprise channels grew double digits. Our increase in gross profit was driven by the commercial and SMB channels, where our customers typically have significant IT requirements but lack the in-house technical expertise to design and implement IT solutions. As a reminder, these 2 channels comprise approximately 90% of our customer base and about three-quarters of our gross profit. We experienced some gross margin compression in the enterprise channel in Q2, driven by the mix of solutions sold, resulting in gross profit being essentially flat year-over-year. Demand in the enterprise channel is remaining robust. However, we saw a decline in spend with a few of our larger customers for reasons specific to those companies, M&A disruption was one example, but we have not seen a broad decline in spend across the channel or any concerns about recession.

While enterprise customers comprise around 10% of our customer base, the channel makes up about one-quarter of our gross profit. We don't have significant customer concentration as our top 10 largest customers or about 10% of our gross profit. However, volatility in spend among larger customers can impact our gross profit results in any given period, but more so our EBITDA as the channel has relatively high margins due to the scale and efficiency of solutions being sold.

I-Solution type sales of software and cloud solutions continued to be the primary contributor to our growth in Q2. Software and cloud represented more than 70% of the increase in overall gross profit with the remainder split relatively equally between our services and hardware solutions. Growth from our Azure, AWS, and GCP public cloud solutions continues to be a strong contributor to our growth. We estimate that in Q2, we continued to take market share from competitors as growth in consumption of these solutions by our customers continued to exceed the substantial growth reported by the hyperscale scalers globally. SaaS software was also an important contributor to our gross profit growth in Q2. We have discussed some public cloud case studies on prior calls.

So today, I would like to share with you a story from our workplace business. At their core, our workplace technology solutions enable our customers' employees to be engaged, connective, and creative, so that they love where they work and how they work. When this happens, our customers can attract and retain the talent they need to grow and thrive. We support this by planning, securely deploying, and managing the right devices and collaboration platforms, and we provide our customers with data-driven insights to understand the impact of their investments and make better business decisions.

One of these customers is a North American life sciences company that helps pharmaceutical and biotechnology companies accelerate R&D for life-saving therapeutics. Our customer has a very aggressive growth strategy with multiple laboratory acquisitions in the last 2 years. However, these M&A events pose their own challenges. While they can accelerate growth, they are very complex and they are disruptive to people and culture with acquired workers often having 2 to 3x the attrition rate of regular workers in year 1. We helped them solve this business challenge by creating repeatable integration strategies to accelerate and de-risk future acquisitions.

We began with the day 1 experience for new employees, ensuring that they are equipped securely with the right devices, the right access, as well as with training and adoption for corporate systems and collaboration platforms. Factored into that is ongoing work on security, identity management, and device management. And because we manage their Microsoft and Cisco licensing, we could provide them with insights on employee engagement and insights that Fed opportunities like the consolidation of 9 separate phone systems and harmonization of their Microsoft and Cisco environment.

As you can see, our differentiated capabilities enable our customers to succeed and while diversifying their spend with us and driving revenue. In this case study, we helped our customers consolidate spend, optimize their environment, upgraded their Office 365 licenses, engaged our services organization, and with every new employee onboarded through M&A, we generate additional revenue. All of this is because of our strategy and our people who are passionate about customer success. Our talent investments, which we outlined in detail on our last quarterly call, are critical to our go-to-market strategy as they enable us to go deeper with our customers. Our ability to provide holistic vendor-agnostic solutions and our insights-driven approach is what allows us to be a trusted adviser to our customers.

This, in turn, has been driving increased customer retention and higher margin per customer. These combined to drive record revenue retention rate of 113% as recorded on an LTM basis. Our expanded relationships with our customers is also evidenced by the record gross profit per customer of $65,000 that we generated over the trailing 12-month period. Increased wallet share has been the driver of growth since the advent of the pandemic. Our customer base has also increased this year as we began to see the initial returns on our investments from our expanded sales force, which I will detail on the next slide.

Looking forward, we expect to see gross profit growth driven by a combination of new customers and expanded relationships with existing customers, as it was pre-pandemic. From an internal perspective, our growth strategy is similarly based on contributions from an expanded sales force and increased sales force productivity measured as gross profit per account executive. Increased productivity has been the driver of growth in recent years as we have surrounded our AEs with a deep bench of technical experts and specialty sales team members. We recorded record gross profit per account executive $771,000 over the LTM period. We also resumed expansion of our AE sales force in the latter part of 2021 and are now well ahead of our targeted expansion. We ended Q2 with 424 account executives and our target was to reach 423 to 433 by the end of 2022. The acceleration in our growth investments in 2022, both our AEs, as well as in our sales specialists and technical teams have been due to faster-than-anticipated hiring, combined with strong employee retention.

In a very competitive labor market, we are proud of our ability to attract and retain key talent and are confident that these individuals will allow us to continue to grow the business in future periods. That said, this presents a near-term drag on our earnings as these people move up the productivity curve, and we temporarily have a higher cost structure than planned. We expect to achieve relatively modest operational efficiencies in certain areas in the second half, which will help counter some of the increased workforce costs. However, we remain committed to the expansion of our frontline sales force as it is a key part of our long-term growth strategy. With that, let me turn the call over to Bryan Rocco.

[Brian Rocco, executive]

Great. Thank you, Vince. And I will start on Slide 10 with a look at our top line gross profit and year-over-year growth. Overall, gross profit increased 14% driven by growth in our software and cloud solutions, primarily as a result of higher gross sales volumes. Hardware also contributed to gross profit growth despite ongoing supply chain constraints that continue to impact hardware sales. While our software focus mitigates these supply chain challenges, we are not immune in our gross profit and EBITDA in 2022 are impacted. However, the situation has stabilized, though we do not foresee our supply-constrained backlog and hardware reversing in 2022. Finally, growth in our professional services also drove an increase in services gross profit in Q2. By sales channel, Q2 growth was driven by the commercial and SMB channels for the reasons that Vince already outlined. We continue to expect growth across all channels in the future driven in part by our ongoing investments and additions of AEs in all 3 channels.

As seen on Slide 11, our growth in gross profit was driven by a similar 16% increase in our gross sales, which is how we measure customer volumes. Similar to prior periods, growth was driven by our software and cloud solutions. Now, turning to Slide 12, adjusted EBITDA increased by 20% to $25 million from $21 million in Q2 of 2021. Our $4 million of growth was due to the $10 million increase in gross profit, partially offset by a $6 million increase in our adjusted cash operating expenses, and this increase was due to higher personnel costs driven by higher headcount related to the growth investments that we have made. Adjusted free cash flow was 88% of adjusted EBITDA over the LTM period or approximately $64 million. Over the past year, after interest and taxes and some nonrecurring costs, free cash flow was used to initiate and then increase our quarterly dividend to our shareholders and undertake our ongoing share buyback program.

In Q2, we repurchased and canceled approximately 700,000 shares or just under 25% of the 3 million shares we are allowed to purchase and cancel under our NCIB. We ended Q2 2022 in a strong financial condition, with approximately $200 million in available funds from cash on hand and through our $275 million revolving credit facility. Including internally generated cash flow, we anticipate having significant resources with which to pursue growth opportunities and enhance shareholder returns.

Now turning to our outlook on Slide 14. So today, we reiterated our top line gross profit growth outlook for 2022, which is for over $320 million in gross profit, equating to greater than 11.5% organic growth over fiscal 2021. We have reduced our EBITDA margin expectations to approximately 25% to 28% of gross profit from approximately 30% previously. Free cash flow conversion is anticipated to be approximately the same as previously stated, at around 90% of adjusted EBITDA. The reduction in EBITDA margin is due to 2 factors. So, number one, our gross profit guidance has been for over $320 million, which incorporated usual conservatism.

We now expect to be much closer to $320 million. We have achieved less gross profit than anticipated from the enterprise channel due to a slower-than-expected ramp in strategic territorial expansion areas and a reduction in spending from a few of our largest customers as outlined by Vince. This gross profit carries a high EBITDA margin, and therefore, it has a larger impact on our EBITDA expectations. Therefore, we are taking a more cautious view of the relative contribution to gross profit from certain areas of our business, which carry higher EBITDA margins. Secondly, the lower-than-expected gross profit means that we do not expect to offset our increased growth investments within this fiscal year. These are notably in added headcount, which continues to be faster than planned in Q2.

We have been opportunistic in the current environment in hiring to expand our sales force and technical resources and have been running about 30 team members above our internal plan by the end of Q2. These are important, high-impact investments, including in advanced services, public cloud capabilities and sales capacity, and we did not want to delay them. We have also seen some isolated cost pressure in pockets of our organization due to the inflationary environment, including the cost of some of these strategic new hires. Combined, this has resulted in a higher cost structure than envisioned. In short, the capacity for higher growth has been built into the business through accelerated growth investments, but the returns on these investments in terms of higher GP growth have been slower to materialize.

However, while the near-term impact these investments are an important accelerant to our growth in 2023 and beyond. So, the EBITDA margin range reflects prudent conservatism given the current macro environment as well. Now in terms of cadence, we anticipate low double-digit growth in gross profit in Q3 before moving into low to mid-teens in Q4. Adjusted cash OpEx at less seasonality, and we expect an incremental $2 million or so of cost in each of Q3 and Q4, reflecting our recent investments.

So, to sum it up, despite the near-term impact on EBITDA margins, we continue to drive double-digit organic growth. Our talent investments are positively impacting our customers and our business, and we are confident in our organization's ongoing ability to continue driving sustained, profitable growth. Now before moving to Q&A, I just want to end today's call with a personal note. So, as Vince noted, I have made the decision to leave Softchoice. I have been with the company for 5 years as of July, and after taking the company public, guiding it through its first full year as a public company, it seemed like a natural time for me to step away. This was not an easy decision. I remain incredibly excited about the future for Softchoice. I am very proud of what we have achieved since 2017, and it's been an honor to work with Vince, Andrew and all the exceptional talent on Softchoice's leadership team and across the company. I especially want to extend my appreciation to the finance and operations teams that reported up to me. And with that, I will turn it over to the operator for Q&A.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session for analysts. [Operator Instructions]. Your first question comes from David Kwan with TD Securities.

[David Kwan, analyst]

I was wondering how much of the reduction in the adjusted EBITDA margin guidance for this year can be attributable to kind of things you talked about, namely the accelerated growth investments versus the cost pressures on wage inflation versus the business mix that you talked about, Vince, as it relates to, I guess, the enterprise customers.

[Brian Rocco, executive]

Yes. David, it's Brian here. So those are the reasons. We are not going to go through and quantify each of them. What we did was, obviously, we are halfway through the year. Q2 was an important quarter for us. We produced solid results as we looked out at the balance of the year and updated our forecast, we took a prudent level of conservatism just given the combination of all of those factors, and so, as we talked about on the call today, we are pleased with the investments that we have made. We think they are great for the long-term prospects of the business, but it does represent a drag on in-year EBITDA.

And when you combine that with the other factors that we outlined and you just noted, including we are seeing some inflationary pressures, we are seeing pressures of demand in some of our higher-margin areas of business-like enterprise, we factored that all into the model, and that is really how we got to our updated guidance. We reiterated over 320, but we will see lower margins this year as EBITDA as a percentage of gross profit.

[David Kwan, analyst]

Thanks Bryan for the color on that. I guess just that relative contribution and taking a more cautious view, it sounds like it's mostly dynamic in the enterprise space for you guys, but is there anything else? And just obviously, what's going on or at least concerns from a macroeconomic perspective. Like are you seeing signs like maybe some IT solution projects getting pushed out or sales cycles in any?

[Vincent De Palma, executive]

David, it is Vince. The short answer is no. We are seeing very robust demand in our SMB customers, our commercial customers, as well as our enterprise customers. As we pointed out, the enterprise miss, if you want to call it that, was mainly due to the fact that there were a handful of large enterprise customers for various reasons. I cited one going through an M&A event, whose spend was a lot less this year than we would have anticipated. We expect that to rebound given these are customers that we are going deeper and deeper with all the time.

They just because of their individual circumstances hit a pause, and then we have been doing a territorial expansion, particularly in the United States with our enterprise team and those account executives have not ramped as quickly as we would have expected, but the overall demand environment, the market environment, is still strong in the enterprise space, and it is still strong in SMB and commercial. So, we are very confident we're not seeing any slowdown in spend. CIOs are fundamentally still, not just the CIOs, the CEOs and the business leaders are still focused on driving growth, getting the competitive advantage, giving their employees a better workplace experience, and they're investing in IT to make all of that happen.

[David Kwan, analyst]

Thanks for the color there, Vince. Just 2 more questions. One, you had a good slide last quarter just on the headcount and kind of the breakdown of the headcount, so I was wondering if you could provide that number for Q2, including kind of what the breakdown was or at least what the net increase, it sounds like in terms of the account executives, the techies and kind of the sales support management roles?

[Vincent De Palma, executive]

Yes. So, Brian quoted that at the end of Q2, so as of June 30, we were 30 headcount ahead of our internal plan, right? And I also pointed out, we gave guidance that by the end of the year would be at 423 to 433 account executives, and we are already at 424. So, we are well ahead of that plan. So, the plan would have called to be somewhere lower than 424. We ended last year at 396, so you can extrapolate between 396 and 424 and figure out what the midpoint is, and that's probably not far off where our plan would have said. So, we are ahead of plan there, and we also have expanded in various pockets of our sales support resources like our cloud sales specialists, as well as in technical experts in our public cloud business focused on GCP, AWS and Azure. So as of August 11, we have approximately slightly north of 2,000 total team members or employees. That is versus 1,984 earlier this year.

[David Kwan, analyst]

Okay. And last question, just on a related note, what are the hiring plans for the balance of the year given that, I guess, you are ahead of plan? Should we expect hiring to slow down? Or do you expect to remain consistently ahead of plan?

[Vincent De Palma, executive]

Yes. So, we are continuing to invest in this business. We have increased our headcount year-over-year, I will say by over 100 or so team members, and that would have been at the end of June of this year. We are always looking for opportunities to drive operational efficiencies, just like any business does, right? Continuous improvement, improving spans of control, and all that kind of good stuff. We are going to maintain our guidance for the AE headcount to be somewhere in that 423 to 433 range. I do not think we will go above the high end of that range, but we are very proud of the fact we are able to retain our people because of a great culture and a great work environment we have, as well as attract new talent, and then on the technical side, there are certain areas that because we're ahead of plan, we are fully staffed, and there are some areas that will probably make some additional hires because we see the demand in the marketplace, and so we are going to be very strategic about that.

So exactly where we ended up at the end of the year is probably not far off of where we are at the end of Q2, but it could be a little bit even higher. As we think forward to 2023, what investments we are going to make in the back half of this year to make sure we continue to drive double-digit organic growth next year will be something we will be working on in the coming weeks and months.

[David Kwan, analyst]

All right, thanks for the color guys and good luck Bryan.

[Operator]

Your next question comes from Brian Essex with Goldman Sachs.

[Brian Essex, analyst]

Bryan Rocco, I was wondering if you maybe you could dig in. You mentioned in the prepared remarks the strong performance.

[Andrew Caprara, executive]

Brian, this is Andrew. I would say that is definitely the leading motion, right? As these organizations have come through the pandemic, many of them have needed to revamp how they serve their customers and how they work for their employees. And so, they have moved many of their applications into the cloud environment, and now we are starting to think about how do they leverage some of the cloud-native tools to actually enhance and improve those applications, so they can add new features. So, as we have invested in these advanced capabilities that high-impact investments that Vince and Brian talked about, a lot of them are going deeper into that cloud transformation with our customers.

So, investing in things like application development and application modernization, and transformation of data and AI systems and datasets. These are all areas that we've gone deeper, and so, when we talk about the growth in software and cloud, it really is 3 things. I mean, first is just winning more and more new customers because of the fact that we have really advanced managed services to help them govern, optimize, and manage their cloud environments across the top 3 public clouds that we span Google, AWS, and Azure.

The second area is that we are going deeper with services, and as we add more and more features into these applications, they do consume more public cloud, and so we do have a natural increase in the consumption of cloud within our existing customers or the customers that we bring into management on Softchoice, and then the third thing that we see right now is the reality of the supply chain constraints on the hardware side is we have seen an uptick in customers who were starting to look more aggressively at data center evacuations, or at least more aggressively at needing to move some of their applications into a cloud environment due to the lack of hardware availability, and so, we have been helping a lot of customers with that. And our strength is VMware's top partner globally this year plays a strong role in that because many of these applications are sitting on the virtual machines in the data center. We are one of the market leaders in helping organizations move these virtual machines into the public cloud.

[Brian Essex, analyst]

Got it. Super helpful color, thank you, and maybe just a quick follow-up, maybe a little bit more detail on your headcount and hiring process. It's great to see that you've kind of improved retention. Outside of better retention, what would drive, I guess, accelerated hiring. Maybe if you could give us a little bit of insight into your process there and how maybe better traction on the hiring side manifests itself and then results in the kind of higher onboarding that you have seen this quarter?

[Vincent De Palma, executive]

Brian, it's Vince. So great question, and one of the things we pride ourselves on is our culture, and as we pointed out on past calls, we have been voted a great place to work in Canada for 17 consecutive years. We are 1 of only 2 companies that has that designation in Canada. We're a best workplace in the U.S., best workplace for inclusion, best workplace to use, best workplace for giving back. We are best places to work for LGBTQ+ and equality in 2022, again. We got an award from Cisco for our Global Social Impact Partner of the Year in 2021. We just have an amazing reputation in the marketplace, and as I pointed out on past calls, we have an awesome talent acquisition team who are out there all the time recruiting, developing relationship with prospective new team members, as well as our frontline leaders.

I got to give all of them the credit too. They partner, we do not just ask the talent acquisition team to do this. Our frontline leaders are also responsible to being continuous recruiting mode too, because they know their demands of their teams are going to go up. So, between our reputation, the focus of our people leaders and the focus of our talent acquisition team, we have been able to do a great job of attracting people into our entire organization, whether that be the sales force, the technical individuals that support our sellers, as well as all the people in our respective corporate functions.

[Operator]

Your next question comes from Paul Treiber with RBC Capital Markets.

[Paul Treiber, analyst]

Last quarter, you provided billings growth, and I thought it was a healthy metric to give. How does billings growth this quarter compare against last quarter? And maybe if you do not give the numbers, just can you speak to the momentum there?

[Brian Rocco, executive]

Paul, it is Bryan Rocco here. So good question. Last quarter, like we provided billing information because there were some anomalies, especially in our services business, where our rev-rec reported gross profit and gross sales and net sales numbers, we are lagging some of the billings activities as we had some projects that booked and billed that had not been recognized, and so, we only pointed out because it was an anomaly. In most periods, our billings are very closely aligned to the gross profit numbers and even the gross sales numbers that we report out, and that would have held true again, and so, we got back to kind of normal times in Q2, and so that's the reason why we didn't. So, if you recall last quarter, we talked about, especially as services billings number. And then if you look at in Q2 of this year, we produced healthy rev-rec gross profit in our services business as a result of those billings from Q1.

[Paul Treiber, analyst]

Okay. That's good to understand the dynamic there. Just going back to the macro, and I mean obviously, your comments are very positive on the demand environment and the demand that you are seeing, but there are larger vendors out there are just talking about elongation of sales cycles, some softness in the sectors. What do you think that you are benefiting from that is probably more company-specific, that is probably not maybe reflected in some of what the larger vendors are seeing because there are areas in their businesses that are perhaps slower growing?

[Vincent De Palma, executive]

Paul. So, I take us back to the strategic focus of this company has been when we started on this transformation over 5 years ago to focus on the highest growth areas in the IT solutions industry, and those being cloud, workplace and digital collaboration being #2, and #3 being software asset management. And of course, security is embedded in all 3 of those things. So, because we have focused on the highest growth areas in the IT industry, and as Andrew pointed out, customers are looking to figure out how to leverage the cloud, how to get a competitive advantage, how to evacuate a data center and move into the cloud, do that in a way that is cost effective with the right governance, the right security and so forth, tremendous demand there.

Digital workplace as companies return to the office. It is not the same office as it was pre-pandemic, and we all experienced it where we are in hybrid calls where there is half or 40% of the people in a conference room and the other 50% or 60% are remote, and how does that environment work? So, that's increased demand for our workplace and collaboration solutions and with remote workers, the heightened awareness around security, right, has really taken off because you got to make sure companies need to make sure they have the right security in place with workers working not only in office, but remotely. So, customers are always looking to figure out how to best leverage their investment in their software assets, as well as their hardware assets, but we have an intense focus on software asset management and trying to help them save money by eliminating redundancies and help them make sure they're driving the right adoption of those solutions and that their employees are getting the benefit of all the investments they made to improve collaboration and productivity. So, I think it's fundamentally that we are focused on the highest growth areas within the IT industry.

[Andrew Caprara, executive]

If I could add, Vince, just quickly, Paul. I would also add that we are very confident in the investments we have made and the strategy we have that we are winning and taking share. So, while the numbers for those manufacturers or partners of ours, may be challenged. The reality is we have invested in the kinds of services that customers need right now. We have built out the life cycle services around a modern work and an Office 365, and the Microsoft, Cisco stacks around collaboration to help customers truly adopt to the technology and manage their entitlements and manage their licenses and customers are seeing the value in that.

And we're one of the only partners in North America that has the strength across all 3 public clouds to be able to help a customer manage a multi-cloud environment, which is increasingly common, and so we believe that the investments we are making are the right ones and that they're taking share, and we are putting up, as you saw, 15-ish-% GP growth in the quarter, all organically, right, which we believe is a positive trend and a positive sign that we're doing the right things, and customers are seeing that value.

[Operator]

Your next question comes from Divya Goyal with Scotiabank.

[Divya Goyal, analyst]

Congratulations on the good quarter and excited for you, Bryan, here. My question comes around something that has been discussed here a few times already, but on the account executive count, so you indicated that you have resumed expansion of account executives. Could you provide some color on the breakdown of these account executives? And if there is a segment-wise kind of growth that you are seeing in SMB versus commercial versus the enterprise side, given your indication of slowdown on the enterprise side of things.

[Vincent De Palma, executive]

Divya, it's Vince. So, the short answer is we are making AE headcount investments in all 3 channels: SMB, commercial, and enterprise. So, there is no slowdown, and we see robust demand in all 3 of those segments, and so, we are being very strategic and making sure we are increasing headcount in all 3 segments. So that is the short answer to that question.

[Divya Goyal, analyst]

That's good to know. So, in terms of your -- sorry, I lost my question here. But let me move on to my next one for now. So, could you provide some color on the recurring revenue given you have recorded such a strong organic growth for the company?

[Brian Rocco, executive]

I couldn't hear your question, Divya. Can you repeat it, please?

[Divya Goyal, analyst]

Yes. I was just wondering if you could provide some color on the recurring revenue given you have -- given the company has recorded such strong organic growth on a year-over-year basis.

[Brian Rocco, executive]

Yes. So, I think in our prospectus and other materials, we quoted a number that around 55% of our business is recurring plus reoccurring, and just given our focus on software, cloud, and services, and the growth that we've seen there that we continue to trend and move up a bit higher on that number, and so that provides us with a base as we do go into some uncertain macroenvironment potentially, and so we do have a base of business that protects us there. And so also related to that number, I know you were not touching on that side, and I will point out 113% net revenue retention, and so we continue to be at record levels. And so, the majority of our business, the vast majority of it comes from selling into our existing, long-standing customer base. So, our customers have been with us on average for 9-ish years, and they continue to buy from us kind of quarter after quarter, week after a week, and year after year, and so those are really 2 key pillars of the stable recurring revenue in our business.

[Divya Goyal, analyst]

That's helpful, Bryan, thank you. So just going back to my stopping question, would you guys also be able to -- and I think you did briefly comment on it -- could you comment on the utilization rates? Do you report them? And then I know Vince has mentioned a few times that the demand environment looks very strong, but with the ongoing broader macroeconomic weakness that we are seeing across some of the software companies and the technology sector do you anticipate go next year a little bit of attrition to run? Or do you see the headcount growth to continue strongly in the next few quarters into 2023?

[Vincent De Palma, executive]

Yes. So, we have been just launching on our 2023 fiscal planning, and so we do not have any specific numbers we're going to report on in terms of what we expect to do, but I think just given our overall strategy to drive continuous double-digit organic growth. To do that, we will continue to make the appropriate investments in our sales force and our technical experts that support the sellers as well as in the corporate functions that support all of those people. So, we do not have a specific number we are going to talk about, but we will be making the appropriate strategic investments in head count and in capabilities to be able to drive consistent double-digit organic growth. You asked about utilization. I will turn it to Brian, but I don't believe we are reporting any utilization numbers externally.

[Brian Rocco, executive]

Yes, that's correct.

[Operator]

Your next question comes from John Shao with National Bank.

[Meng Shao, analyst]

I remember at IPO, the company gave a breakeven time line for nearly higher AEs. So, given the current market environment, any updates on that pipeline or any plan to potentially accelerate?

[Vincent De Palma, executive]

John, I think we had a little noise here. I think the question was around timeline to hire AEs.

[Brian Rocco, executive]

Breakeven time that you talked about on the roadshow.

[Vincent De Palma, executive]

Yes. I would say no real change there in our SMB and commercial segments. We quoted that in SMB, we usually see breakeven in that 12- to 14-month window, and I would say that's probably pretty consistent. They ramp they get very productive depending on the AE at the 3-month mark or the 6-month mark or the 9-month mark, but the breakeven in aggregate at the 12 to 14 months. We see a similar trend in commercial. I would say in enterprise, as I've mentioned on the call, we've done an expansion of that team. That expansion has been targeted towards the U.S., and we have seen a slower productivity ramp with some of those AEs.

And the reason for that, just to give you a little color, is that in our SMB commercial, and even in our enterprise business, when we increase our sales force, we use appeal and growth strategy, which means we peel off some existing lower spending customers from one AE, give it to a new account executive, and then they go deeper with those existing customers who may have been spending less with us than their addressable spend would indicate they should be spending with us, and as it turns out in the expansion in the U.S., in our enterprise business, when we've done targeted territorial expansion, we've put AEs in some territories where there were not any existing enterprise accounts to give them, and so they were essentially hunters, and so that takes a little longer time to ramp, and I think that's what we're experiencing in the U.S.

The AE additions in the enterprise channel in Canada and in other parts of the U.S., where we have accounts, we can peel off of them are doing quite well. It is just in some of those territories were expanded with enterprise, where we did not have some accounts to peel off and give to those new AEs. But overall, no real degradation in our breakeven for our sales additions.

[Meng Shao, analyst]

Okay. That's great color Vince, and on inflationary environment, how many of your IT vendors have actually increased their solution price this year? And if that's the case, how should we think about the impact on your gross margin? Also, would you expect any pushback from your clients?

[Vincent De Palma, executive]

So, that is the standard thing that often happens every year with our -- particularly on the hardware side, and obviously you have seen some of them increasing even more than normal. The reality is it does not really impact our margins at all because essentially what they will do is they will increase the price -- the list price to the customer and increase the cost to partners like us proportionally, and so everything kind of moves up together. And at this point, I think customers are resigned to the fact that this is happening in the current macroeconomic environment. And so, they're planning accordingly for that. And we have not necessarily seen a change there other than what you have probably read about or heard about when you hear some of the hardware manufacturers speak, but it is not having a materially different impact on our business.

[Operator]

[Operator Instructions] Your next question comes from Martin Toner with ATB Capital.

[Martin Toner, analyst]

Just to clarify, the business mix that is driving the guide down is weaker enterprise?

[Brian Rocco, executive]

Yes. For the most part, I mean, if you look at even our Q2 numbers, we drove really high growth in SMB and commercial, and then the enterprise business on a GP basis was, I'll call it flattish. So not the double-digit growth that we expect and we try to drive in the organization and Vince outlined kind of the reasons or drivers of that. And so, it was that and then combined with the fact that our enterprise business, just given the nature of it, and the efficiency and plan sizes within that business, it does carry out a higher EBITDA margin than our SMB, for example, which is on the other end of the spectrum, and so that was the main kind of mix reason. And then, of course, we outlined a handful of other reasons that we included in our reforecast that resulted in the 25% to 28% EBITDA margins, sorry.

[Martin Toner, analyst]

Great. So, to make guidance, the year is quite back-half weighted, and so, I guess that kind of implies that project and monitor benefits are also back-half weighted. Q3 is a step up in a seasonally weak quarter and Q4 is a big EBITDA step-up in your busiest quarter. Can you talk to the confidence of achieving those step-ups required to hit your guidance?

[Brian Rocco, executive]

Yes. So, we spent a lot of time going through and kind of reforecasting our business in the back half of the year. We touched on a bit of the seasonality, like Q1 is our smallest quarter. Q2 is our second biggest quarter. Q3 is in between those, and then Q4 is our biggest quarter, and there is operating leverage in our business. So, we talked about it on the call, our adjusted cash off at mild seasonality in that based on kind of variable compensation and a few other factors. But for the most part, it is flattish from quarter-to-quarter.

And so, when you see kind of higher GP in quarters like Q2 and Q4, the EBITDA margins and the EBITDA growth does come out kind of more prominently, and so just given the investments that we have made factoring in kind of the environment that we are seeing, some of the pressures we're seeing, some of the upsides that we are seeing, that is how we got to kind of reiterating the top line. I think Vince mentioned and I mentioned as well, we are seeing robust demand and CIOs and CEOs are still investing in their business. We have made our investments. We have added kind of the sales capacity and the productivity investments. We are seeing a slightly lower ramp on them. And so that's why we're seeing kind of a slight downgrade on the EBITDA margin.

[Martin Toner, analyst]

Thanks a lot for that, Brian. Last question for me. Should we expect the pace of buybacks in Q3 to increase or decrease relative to Q2?

[Brian Rocco, executive]

Sorry, Martin, could you repeat it, was it about the buyback?

[Martin Toner, analyst]

Yes. Should we expect the pace to increase from here or decrease?

[Brian Rocco, executive]

Yes. So, we have been active with our NCIB program and you can go on study and see kind of what our activity has been from basically month to month. And our plan is to continue to be active, at levels that make sense for the company. We noted on the call, in the quarter, we did about 25% of what we are allowed to do for the year, and you would have seen kind of our level of activity on a monthly basis. And so, our plan is to continue to be active there.

[Martin Toner, analyst]

Okay. And so, the philosophy on buybacks to be more fairly consistent rather than opportunistic?

[Brian Rocco, executive]

Yes. So, our approach has been at levels that management and the Board feel kind of makes sense and it is an accretive investment for the company is where we have been active. And so, we are as you know, like we are a high free cash flow generating business. We talked about our 88% free cash flow conversion. We have got very little maintenance CapEx. We pay a dividend, which we increased and that leaves us with a significant amount of cash flow to enhance shareholder value. So, in Q2, we have been using that for buybacks on an opportunistic basis during the quarter, and we'll continue to take that approach.

[Martin Toner, analyst]

Great. That's all for me. Thanks. I appreciate those answers.

[Operator]

Your next question comes from Nick Agostino with Laurentian Bank Securities.

[Nick Agostino, analyst]

I guess, Vince, just trying to understand maybe reconcile here, when I think about the commentary you guys provided a very healthy demand environment over the course of Q2 into Q3, stabilizing hardware market, as you guys pointed out. I think in the past calls, you said that you were going to start to increase your spending in the second half of the year. It looks like you have done it ahead of that one quarter ahead. I'm just trying to understand why you pulled it forward given that you are seeing demand aside, you were seeing the contraction specifically within the enterprise. So, from a matching perspective, what kind of drove the decision to spend even though your enterprise customers were contracting?

[Vincent De Palma, executive]

I just want to clarify 2 things. I do not know that we ever said that we would have the investments be back-half loaded. We sort of make investments at a pretty steady clip through the course of the year, right? So that's that. Secondly, at the end you said you see we have not seen reduced demand among our enterprise customers. We have seen a handful of customers reduce their spend that had an impact on us, and it was because of factors unique to those companies like an M&A transaction, but the overall enterprise base, we're still seeing robust customer demand, and then the other thing, which we've talked about is we've seen slower anticipated ramp in our enterprise AEs in the United States where we have gone into new territories where they didn't have an existing customer base to go after.

So, now just back to your question, the fundamental reason why we are 30 headcount over our internal plan at the end of Q2 is that we have done a really good job on employee retention, and we have done an incredible job of hiring people and there are a couple of areas where we said, look, this is great talent and it is a very competitive labor market, and we're going to make the strategic decision to ramp our sales force and our technical experts faster than we had originally planned because people are critical to the success of our business, to the success of our company, to the success of our customers, and so, we're not going to slow down or that in the first half of this year just because of our internal plan. We made strategic decisions to say we're keeping the talent, and we're finding the talent, let's hit the accelerator on that, so we did. And we are not going to pare back on that strategy, right?

We are always going to look for operational efficiencies and be prudent of our cost management in the business. But this is -- our organic growth strategy is based on us increasing our sales head count and increasing our sales force productivity, increasing the number of customers we serve, and going deeper with all our customers, and that comes down to having the right talent in place. So, we are very proud of what we achieved in each one in terms of the talent we have been able to add to this company, which positions us for a strong second half, as well as a good start to 2023.

[Nick Agostino, analyst]

Okay, thanks for that color. Just maybe following on, on that, just from your conversations with those clients that are, I guess, tightening up their budget spend in the short term, is there any specific projects or areas of the market that the tightening is happening? Is it a case of you've seen it from a security perspective or is it cloud deployments that you are tightening on, anything of that nature that we can look at a certain market segment of spend that they're tightening from a thematic perspective? And also, from your conversations or maybe your sense, when do you anticipate that spend to possibly come back? Is it a case of just given your guidance, should we expect it to be back in the first half of next year over the course of next year? Maybe just a little bit of color on that front.

[Vincent De Palma, executive]

Yes. Sure, Nick. So, I would say these are not really postponed projects. As I said, it is just a few customers going through corporate changes that have impacted their IT spend in 2022, and then again, it is with a handful of customers, and there's no one category, cloud or workplace or software security that we're seeing any slowdown in demand even amongst our broader base of enterprise customers, as well as commercial and SMB customers. I will say the miss in the first half of the year in our enterprise business is probably not going to recoup in the back half of this year, but at the same time, we typically generate increased sales from our existing customers. We have very high customer retention in our enterprise business, and we would expect to return to growth with our customers. So, look, there is going to be volatility in any given quarter. And we typically expect growth across all of our sales channels, SMB commercial and enterprise, driven by the same-store sales as it were with existing customers, plus with new customer acquisitions.

[Nick Agostino, analyst]

Okay. And just one last question. Just for stabilization on the hardware side. Can you just remind us, is your hardware backlog? Was it a $7 million drag, if you will, on your gross profit? Or has that number changed?

[Brian Rocco, executive]

Nick, it is Brian here. So just as a reminder, yes, we are software and cloud focused and software cloud services represent 70% of our business, 30% is hardware. We have quoted in the past that our constrained hardware backlog stated in gross profit terms was around $7 million, and I think we reported that number at the end of Q1, we stayed there. So that's why we said the environment has stabilized. So, we did not see in quarter additional growth in that constrained backlog, but it has not released yet, and so, the other part of the script today was we do not expect it to release in 2022. It will release at one point and it will be a tailwind for us at one point, but when we look at the environment out there and there are some pluses and minuses, some pockets of improvement, but some pockets where things have actually managed to get slightly worse or even just [indiscernible]. At one point, that will release, it's probably for 2023 at this point.

[Nick Agostino, analyst]

Okay thanks for that and Bryan, all the best on your next chapter.

[Operator]

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

[Vincent De Palma, executive]

Well, thank you, Pam, and thanks to the listeners and viewers who joined us today. We look forward to updating you on our continued progress on our Q3 call in November. Have a great rest of your day and a great weekend, everybody.

[Operator]

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