Softchoice Corp (CA)

TSX:SFTC

Earnings Call Transcript 2024-Q2

[Operator]

Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Softchoice Q2 2024 Earnings Conference Call. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Mr. Tim Foran, Investor Relations. Please go ahead.

[Tim Foran, executive]

Thank you, Julie, and good morning, everyone. Welcome to Softchoice's Q2 2024 Conference Call for the period ended June 30, 2024. A reminder that for the purpose of the recording today is Friday, August 9, 2024. The company will make forward-looking statements on our call today that are based on assumptions and therefore, subject to risks and uncertainties that could cause the actual results to differ materially from those projected. The company undertakes no obligation to update these statements except as required by law. You can read about these risks and uncertainties in our earnings press release today as well as in our filings with Canadian securities and regulatory authorities. Also, our commentary today will include adjusted financial measures, which are non-IFRS measures. These should be considered as a supplement to and not a substitute for IFRS financial measures. Reconciliations between the 2 and relevant disclaimers can be found in the company's MD&A, which is available on our investors website. Unless otherwise noted, percentage growth rates that we refer to today are for the identified period ending June 30, 2024, compared with the same period ending June 30, 2023. Finally, please note that because the company reports in U.S. dollars, all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I will now turn the call over to Andrew.

[Andrew Caprara, executive]

Thanks, Tim. Welcome, everybody. I'm joined today by Jonathan Roiter, our CFO. And we're pleased to report that in the second quarter, the successful execution of our strategy by our more than 2,000 team members delivered very strong financial results and continued progress across our longer-term growth drivers, including accelerating customer growth and deepening of customer relationships. I'll begin with the financial highlights before going deeper into the underlying operational drivers of this performance. In terms of our top line, we recorded a 13% increase in gross profit in constant currency driven by a 19% increase in software and cloud and an 11% increase in services. The double-digit increase in our gross profit, along with improved operational efficiency, drove a 19% increase in our adjusted EBITDA in constant currency with margin expanding by approximately 150 basis points. The increase in EBITDA and ongoing execution of our working capital improvement initiatives resulted in a 9% increase in operating cash flow to $58 million in Q2. This enabled us to already reduce net leverage to 2 turns at June 30 versus the 2.6 turns we were at 3 months ago, pro forma for the special dividend of CAD 4 that was paid April 12. Now turning to our growth strategy and our 3 strategic pillars: building a world-class culture, growing our customer base and deepening our customer relationships with our integrated software cloud and services solutions. As I described these in detail on our past 2 calls, I'll focus on progress against them on this call. So let's begin with building a world-class culture. As I noted last call, in this quarter, we were ranked #9 for large employers and #1 amongst TSX-listed companies on this year's best workplaces in Canada List by Great Place to Work. We're one of only 2 companies to rank on this list for 19 consecutive years. This is an output and an important sign from our people that we're on the right track and the inputs or the initiatives that we've undertaken. We've achieved this result by developing a diverse and inclusive culture and investing in our team members' success. We want to make Softchoice the best place for them at all stages of their career. We've increased diversity across the organization with approximately 41% of the workforce now women and approximately 32% being visible minorities. We're also a place people are proud to work. We again earned a perfect 100% on the 2023, 2024 Human Rights Campaign's Corporate Equality Index. And we're committed to environmental sustainability, social responsibility and governance excellence, the highlights of which can be found in our 2023 ESG report published last week, our third since going public. We've also invested in leadership development, career progression and digital tools that streamline processes and enable our team members to really focus their time on what matters, delivering an exceptional experience for our customers. The return on these investments is measurable and has clear tangible benefits to our customers and our shareholders. Our team member retention is above our targets and the tenure of our frontline sales force is increasing, both of which have a direct impact on value to our customers and overall productivity. It's our exceptional team that drives account growth, which leads me to our second strategic pillar, growing the customer base, which under our land-and-expand model is a key driver for future growth. And the investments we launched this year are bearing fruit. We recorded our best second quarter of net customer growth since before the pandemic, just as we did in Q1 of this year. Customer growth exceeded 5% year-over-year, more than double the growth rate we recorded in the prior year. and it was our fourth consecutive quarter in which our customer base increased by about 5%. Consistent with our strategic initiatives, this was driven by a very strong U.S.-centric quarter of growth in new customers, an increase in percentage of sales reps that are growing their customer list and positive progress in our technology and sales enablement efforts. Our success in account growth has been driven by our strategy to expand our frontline sales force, which has increased by 20% over the past 2 years. It also reflects the strong ties with our technology partners who are a key source of customer referrals for us as they value our mid-market scale, our ongoing investments in enhancing our certifications and capabilities and our ability to integrate their offerings into complete solutions. As an example, Softchoice was engaged in Q2 by AWS to design and deliver a modern data platform for a global fashion brand that seeks to transform its business through AI. By using AWS' Redshift data warehouse solution, we're enabling this customer to draw insights and recommendations from data sources that were previously siloed and inaccessible for advanced analytics. And earlier this year, we announced a strategic partnership framework agreement with Microsoft to further enhance our capabilities and capacity to develop, sell and deliver Microsoft's cloud and digital workplace, AI and security solutions. I'm pleased to report we've been exceeding the goals contained in that agreement. And tied to this is our recent 2024 Microsoft Scale Solutions Partner of the Year Award in the United States. This means we were the best large-scale partner in Microsoft's largest technology market. We're also a finalist in this category in Canada and a finalist globally, even though we only focus on the U.S. and Canada, evidence of our sheer scale as a leading Microsoft partner. Now this recognition from Microsoft reflects the leadership position that Softchoice has achieved across the partner landscape in performance and innovation. But our recognition was not limited to Microsoft in Q2 as we earned awards across all of our categories. In the security space, we were named Sophos Partner of the Year in North America. Our hybrid cloud business was recognized with VMware's partner of the year in North America. Achievements in public cloud earned us Google Cloud's public sector partner in the year in Canada. And the largest client hardware manufacturer in Canada, Lenovo, named Softchoice its Partner of the Year for personal devices. Our ongoing recognition from our partners is evidence of their confidence in our delivery and value-add capabilities. And it's those capabilities that not only help us win new customers but also enable us to deepen customer relationships, which is our third strategic pillar. Our investments in advanced technical capabilities continue to drive deeper relationships and growth in our strategic focus areas, which are secure, AI-powered cloud and digital workplace solutions, supported by our advanced software asset management methodology and capabilities. In Q2, we returned to a 100% revenue retention rate with growth in our strategic focus areas, offsetting the expected drag from hardware weakness in the industry. Again, the fastest growing portion of our business continues to be public cloud, which reflects the extensive capabilities we've developed in the past half decade across the 3 major hyperscalers. One area where this has been applied in 2024 relates to the very broad customer demand that's emerged for guidance and solutions, stemming from changes that Broadcom has implemented to VMware's technical and commercial strategy. By drawing on our balanced experience across private, public and hybrid cloud operating models, Softchoice is uniquely capable of guiding customers to the right long-term platform strategy for their applications and data. A recent example includes a New York-based financial institution that we migrated to VMware on AWS 4 years ago, but is now modernizing their workloads to operate natively on AWS. This will decrease their costs while improving their technical agility and represents a very common example of Softchoice providing continuous consulting and implementation services over the lifetime of our relationship with that customer. In terms of generative AI, Q2 was really the first full quarter Microsoft CoPilot was available to most of our customers, and we've established a market-leading position in CoPilot adoption across the North American mid-market. We now have hundreds of unique customers in billed Microsoft CoPilot services and 1,000 of our customers licensing CoPilot. With more and more customers turning to us to help identify value-creating use cases, we're starting to see an accelerated pace of customers move from the pilot stage to production use cases and then enterprise-wide adoption. Therefore, we continue to believe generative AI will be an important tailwind for our future growth prospects. This interest in using CoPilot presents ancillary services opportunities for us beyond just managing licensing in it, in areas such as security and governance and data modernization. One common use case that led to a number of AI projects in Q2 regards the effectiveness that can be gained by sales and customer service organizations through the integration of CoPilot for M365. As an example, a technology service provider is working with Softchoice to transform the process that their sales team uses to quickly respond to proposal requests. This required us to work with them to ensure their data environment had been set up appropriately so CoPilot can effectively draw on all the data they possess across their knowledge base. We trained CoPilot on thousands of their customer proposals that have been created in the past as well as all of the customers' latest sales and marketing collateral. This enabled CoPilot to develop the most rich and informed proposal possible based on where this customer won similar projects in the past and by leveraging all the effort that had already went into developing their solution messaging. These types of sales process transformations can reduce up to 80% of the time required for customer responses while significantly increasing the quality of those responses. And such successful adoption by our customers will lead to future work with them to identify and implement more use cases across their organization. The biggest driver of growth for us in Q2 on a dollar basis was Workplace software, which is the biggest component of our business and the anchor of our lead sales motion. A typical example of this is a Canadian environmental services company that was introduced to us by Microsoft. Like many customers, they wanted to modernize their cybersecurity strategy by consolidating their tooling through the adoption of a primary security platform and then have that platform managed with the assistance of a specialized services partner. Softchoice is designing and implementing Microsoft's security solutions to meet their objectives and creating the budget for this project by eliminating redundant security software, which is a common outcome of our software asset management services. This is an example of our strategy in action, obtain a new customer by leveraging our Microsoft expertise proving our value to them through our software asset management and services capabilities and then leveraging our deep sales and technical expertise to deepen that relationship over time. In moving customers up the stack is a multiplier effect. When we initially bring a new customer on, typically, it's an initial sale to manage a software agreement. And while retention is high at 85%, it's a less sticky relationship. However, our go-to-market motion is high touch and aimed at immediately utilizing our software asset management tools and expertise to scan the customers' environment and identify areas of savings that we can then expand into a services relationship. Ultimately, that services project will reduce the customer's IT spend but expand our share of it as we typically earn the management of other software titles in the environment. The benefit to the customer is obvious, and we've now proven ourselves as a trusted adviser. The benefit to us is also clear as customer retention moves into the low 90% range, and the margin per customer, essentially the gross profit per customer increases by 150%. And then the next stage for us is to expand our offering into deeper services and IT solutions. And this is where our model really bears fruit. We almost never lose customers, utilizing us for these broader IT solutions, and our margin per customer is almost 7x larger per year than when we first obtained them as a product-only customer. As our average customer tenure is now almost 10 years, this process takes time, but this is why the acceleration of our recent customer growth rates and proven ability to go deeper with our customers is so exciting for us in terms of what it means for our future growth. With that, I'll turn it over to Jonathan.

[Jonathan Roiter, executive]

Thanks, Andrew. I'll start with a look at our top line metric, gross profit. In constant currency, gross profit increased 13%, led by strong double-digit growth in our SMB and commercial sales channels, which comprises about 90% of our customer base. Gross profit growth was driven by a combination of our larger customer base and deeper relationships with existing customers. Gross profit growth in Q2 outpaced gross sales due to the benefit of increased and accelerated technology partner incentives that we received in the quarter, reflecting in part our exceedance of our partner targets. During the quarter, we saw the positive impact of the trend by some of our vendors to shift their compensation from rewarding partners simply on the product sales towards incentives based on success at driving adoption and consumption of their products. This aligns perfectly with our approach in 4 major ways. First, our high-touch model that Andrew outlined due to our role as a trusted adviser with advanced service capabilities; second, our commitment to developing advanced capabilities around cloud, workplace, security and AI, which vendors are interested in co-investing with. Third, our mid-market customer focus is a very large segment, where technology vendors are looking for scale partners to lead customer relationships because they don't have the in-house teams to effectively serve the post sales needed of these hundreds of thousands of companies. And finally, our go-to-market model has proven to our partners we could help them gain market share. And this is why regardless of the economic cycle, the vendors want to partner with us to drive adoption and consumption. Along with the essentially subscription-based nature of our software and cloud business, this provides a resiliency to our business, which enables growth in sometimes challenging macroeconomic conditions. The strong growth in our gross profit has continued to enable investments that will fuel our growth in the coming quarters and years. As Andrew noted, we've increased the size of our frontline sales force by 20% over the last 2 years, and that includes a 13% increase over the last 12 months alone. And we've increased our technical experts by 5% over the last 12 months, including members of our AI solutions teams that we launched earlier this year. Our continual focus on improving operational efficiency, including through the provision of digital tools to optimize processes and support our sales team has helped counter these investments. Indeed, our adjusted EBITDA per average employee continues to increase. Adjusted EBITDA increased 19% in Q2 in constant currency, with the increase in gross profit funding growth investments while also driving expansion in EBITDA margin. The increase in EBITDA drove operating income increase of 16%. Adjusted EPS on a diluted basis was $0.27 a share compared with $0.23 in Q2 2023. Net income per share on a diluted basis was $0.20 compared with net income per share of $0.23 in Q2 2023. The decline was primarily due to the impact of unrealized FX recorded net finance costs and higher interest expense. Operating cash flows increased $58 million from $53 million in Q2 2023, driven by increased EBITDA and improved working capital management. On an LTM basis, operating cash flow doubled to $98 million due to increased EBITDA and working capital inflows of approximately $50 million, including $22 million in the first half of this year. We don't expect a significant reversal in the second half, and therefore, full year inflows may look closer to 2023 than the historical average. This reflects the multiple initiatives the teams have been working to unlock value within our balance sheet. After CapEx and lease payments, our focus has been on paying our increased dividends and repaying debt. As Andrew noted, our strong cash flow generated enabled reduction in net leverage to 2 turns at June 30, 2024, from a pro forma 2.6 at March 31, 2024. Now looking ahead, while we don't give guidance, we are continuing to aim our top line gross profit growth to get back closer to our historical average in constant currency as we noted on last call. In terms of seasonality, while H1 historically comprises about 49% of our full year's gross profit, the acceleration of our technology partners incentives into H1 and potential impact of currency means that might be closer to 50% this year. However, our pipeline is strong and includes some potential large deals, which may provide upside as soon as the second half of this year. Q3 gross profit seasonality is anticipated to be similar to the 5-year average, which has been just under 24% of full year gross profit. In terms of adjusted cash OpEx, which is the delta between gross profit and adjusted EBITDA, we're aiming to keep H2 a couple of million dollars lower than H1 through prudent cost management while maintaining our priority growth investments. These investments continue to pay off in key strategic areas in our commercial model. They are driving the accelerated customer growth, clear team member retention and engagement and enhancing our advanced technical capabilities. So in summary, this quarter's performance is clear evidence of the 4 key aspects of our attractive economic model. First, our software and cloud foundation and focus on the fastest-growing IT sectors result in a resilient and reoccurring subscription and consumption-based sales model. This powers a strong overall growth and market share expansion, while offsetting temporary industry-wide declines in hardware and discretionary IT spending in certain pockets. Second, the natural operating leverage of our business, coupled with this management's team focused on driving further efficiencies means a high proportion of incremental gross profit falls down to the EBITDA, while still enabling us to make continued growth investment in our business, including expanding our sales force and in our public cloud generative AI and software asset management capabilities. Third, our organic growth and capital allocation strategy has delivered industry-leading returns on invested capital. The LTM return has been above 50%. And fourth and lastly, our capital light and negative working capital model, which have been actively optimizing over this past year results in significant cash flow that is able to return to our shareholders while operating within our optimal leverage framework and deleveraging quickly. Including share buybacks, we now have returned approximately CAD 390 million in capital to our shareholders in approximately 3 years since our IPO in 2021. And with that, we can begin our Q&A.

[Operator]

[Operator Instructions] Your first question comes from Jim Schneider from Goldman Sachs.

[James Schneider, analyst]

I was wondering if you could maybe comment qualitatively or even quantitatively on the traction you're seeing from CoPilot and your clients in the first quarter of availability broadly speaking. Can you maybe just give us a sense of what percentage of clients have one or more seats and then broadly the penetration within clients of the percentage of seats that being an overall 365 environment that's being equipped with CoPilot.

[Andrew Caprara, executive]

Jim, I mentioned quickly, but we have about 1,000 of our customers licensing some amount of CoPilot from us. So we're talking now double-digit penetration of our customer base. But it's in early stage. So right now, we're talking about companies that are licensing dozens or maybe hundreds of licenses. So there's significantly more opportunity for them to roll it out to their employees. But what we're doing is we're taking a pretty methodological approach to this where we take customers on a journey that starts with making sure that we understand what those first use cases are, and we pilot them appropriately so that we ensure that they get positive ROI on those. I think you're starting to read a little bit in the mainstream press about organizations that are wondering the value. And I'd say that's not happening in our customer base because we're taking them slowly through this journey. We're making sure that we truly understand what the process and the use case is that can be augmented with CoPilot. And then we're designing that custom solution similar to the one I mentioned in the earnings script earlier. So I think we're going to see that accelerating pace now as more and more customers move in to do these services engagements. As I mentioned, we're doing hundreds of those now. And we're starting to see the first wave of those move to broader rollouts. But it will take a bit more time for that to happen. But think of it as around 1,000 buying something, hundreds, starting that services journey and tens actually moving to broader deployments at this point.

[James Schneider, analyst]

And then maybe as a follow-up, Andrew, you made a comment on helping some of your clients who were initially on VMware with AWS move to kind of exclusively AWS-style arrangement. Can you maybe talk about, first of all, is that a broad trend within your client base? Maybe any other clients who are sort of moving away from the VMware solutions. But then the broader trend of sort of this sort of consultative arrangement. How many other kind of situations are there beyond the VMware AWS situation are you sort of engaging with customers in things like this? Because I don't recall you highlighting that at Q4.

[Andrew Caprara, executive]

So I would say, Jim, the changes that have happened with Broadcom and VMware have been well publicized. And I think it's created an opportunity for a lot of organizations to step back and ask themselves what they want in their environment going forward. And I think we're seeing a lot of companies now that are interested in understanding how they could explore setting themselves up with more agility. I mean if you combine that with this potential opportunity around AI that probably requires them to modernize their applications and their data estate. And so they're looking at this as a complete package right now as they should to say, how do I set myself up with a more modern agile IT environment. One of the tools is certainly to look at migrating into a public cloud and then modernizing those applications to run cloud-native just like this customer that we mentioned earlier. And I think we have a lot of customers that are starting to explore that journey right now. Now it's not an easy journey, though. I mean to modernize a lot of the core applications and environment takes time and takes expertise, which in our core mid-market customer, they don't have a lot of that expertise in-house often. So it really presents an amazing opportunity for us to go in there as the trusted partner who understands the top 3 public clouds, has been VMware's partner of the year globally and partner of the year in North America, one of Microsoft's top partners. We understand that whole public hybrid cloud environment and how to step that up optimally, and we've done it now for hundreds of our customers. And so we think we're well positioned to help customers with this journey to that more modern and an agile IT environment.

[Operator]

Your next question comes from Gavin Fairweather from Cormark.

[Gavin Fairweather, analyst]

Congrats on the strong numbers. You called out on the U.S. new account momentum. I'm curious how many of your new AEs are focused on the U.S. market and whether we could see that new account performance strengthen as those newer reps start to mature.

[Andrew Caprara, executive]

Yes. Gavin, you're right that we've -- as we've expanded our sales force, the core focus has been that SMB mid-market size customer. And certainly, we've put more of our focus on the U.S. So I can't give you the exact percentage, but I would tell you that the majority of the adds have been in that U.S. market over the last 2 years because we just view that as an unbelievable opportunity for us. I mean we have great, great opportunity still in Canada, to be honest. I think we're the #2 largest player in Canada, but we still have a lot of opportunity here. But the fact that our business is roughly 50-50 between Canada and the U.S. and the U.S. market being considerably larger than Canada. We have just this amazing opportunity and we have the brand permission and recognition with our partner community to play there. They want us to be bigger players there because of the way that we're driving the adoption of their technologies. And so we're meeting that interest from our partners and customers by putting more folks down in the U.S. right now.

[Gavin Fairweather, analyst]

That's helpful. And then maybe just secondly for me. You've added a lot of AEs and technical experts over the past year or 2. I'm curious to your view on the amount of maybe spare capacity in the system and how you're thinking about investment levels in the quarters ahead.

[Andrew Caprara, executive]

Yes. What we're doing -- so I wouldn't call it spare capacity. What we're doing is we run a pretty quantitative process to look at our territories on a monthly basis and identify where there's opportunities to take, let's say, underserved accounts and provide them to a new AE and add a new territory there. So certainly, we look at where certain reps have not been able to spend as much time with our current customers, but also the other part of it is where we're winning new customers. And so in areas where we're winning new customers rapidly, we can more quickly expand those teams and to add more reps to them. So we do it on a regular basis. So I think we're going to see that continue, and that's why we're putting such an emphasis on growing the customer base because then that allows us to add new AEs even faster as we grow and as we go forward.

[Gavin Fairweather, analyst]

That's great. And then just lastly for me. On the enterprise segment, we've talked a lot in prior quarters around hardware headwinds, but we did see a big reacceleration this quarter in enterprise. So I'm curious if you think that we're at the point where maybe that segment can reaccelerate driven by software and cloud, perhaps regardless of the timing of a refresh cycle and hardware.

[Andrew Caprara, executive]

I mean the reality after 18 months is we're -- the percentage of hardware has lessened in that segment. And so we also have the benefit of lapping that as we go forward, Gavin. But I would say we feel like we're starting to get some momentum back in our enterprise customers around some of these larger projects that we have in the pipeline. So we're optimistic. Obviously, the economic news continues to go up and down in both countries, but we're pretty optimistic that we're starting to see some of these solutions, services and software and cloud solutions opportunities come to fruition in our larger customers. And so that, plus the fact that we're now starting to lap some of the bigger hardware declines, it has us optimistic about that enterprise segment going forward.

[Operator]

Your next question comes from John Shao from National Bank.

[Meng Shao, analyst]

You have a good SMB growth this quarter. So could you just give us an update on that mark and maybe where it's going in the next 12 to 18 months?

[Andrew Caprara, executive]

Yes, it has been its continued good performance to be honest, John. We've seen that SMB segment really be the leader for us over the last couple of years. And there's a couple of things. Number one, I think they've been less impacted by some of the market pressures around efficiency. And so they've maintained a lot of spending in the SMB segment because a lot of that segment realized coming out of the pandemic that they could no longer neglect investments in technology. I mean they needed these kinds of features for their customers in order to compete in their markets. And so they've continued to maintain budgets and spending in technology. The other part of it is we've got an amazing engine in SMB. I mean that's where a lot of our account executive growth has been over the last couple of years. And that team is operating at a really, really high level. They're winning new customers at a fast rate, and they're delivering such great service that we're deepening and going into broader solutions and services conversations with those customers than we ever have before. And I think the third thing is you're seeing that the technology partners are investing in us to go after that market. These are just not areas that they're ever going to be able to reach. They're not going to have the scale to get into SMB, and that's where they really lean into us. And so a lot of the co-investments and go-to-market has been focused on that SMB and commercial segment. So I think all those factors together have us very confident in our SMB business, and we're continuing to invest in it, and we think that's going to continue to grow really nicely for the next while.

[Meng Shao, analyst]

Andrew, you mentioned the partner incentives in the press release. So could you talk about the nature of that incentive and maybe help us to quantify the impact?

[Jonathan Roiter, executive]

Sure, John, I'll take that question. As Andrew referenced, the tech partners view us pretty -- I think, pretty uniquely in the space. I mean, you see it in the share gains that ultimately that we're driving. As being able to reach the SMB and, to a certain extent, the commercial market, the result of which is the structure incentives are really twofold. One, around driving adoption and consumption. And those would be outright incentives that if we hit certain targets, if we hit certain growth rates, we would receive incentives. The second piece is, and probably just as important is the co-investments they make with us. And ultimately, that co-investment drives further growth. So it becomes almost a virtuous circle. In terms of quantifying, I don't think we've ever truly quantified these 2 numbers. So I won't be able to give you the specifics, but it certainly has increased as these tech partners are recognizing more and more of the unique capabilities that we have to reach the market that they just don't have that reach. And I think they recognize that we're pretty unique in our software and cloud go-to-market approach that ultimately drives market share gains for them. And so that's why they're willing to make these co-investments and set out these incentive targets for us.

[Meng Shao, analyst]

Last question from me. On the recent CrowdStrike outage, any impact on your business in terms of your operation, your customers or vendor relationship?

[Andrew Caprara, executive]

There was no impact on our business, John. We did not use the particular tool. So we've got through that fine, and we were able to shift all of our focus to helping our customers. And I have to give a huge credit to our team. I mean we had 2,000 people that mobilized overnight to help our customers and really show the value. And one of our values that Softchoice is having customer passion and it showed because we had people waking up at 4 a.m. to get online to help customers working all day, sleeping a few hours and doing it again the next morning for 5 or 6 straight days. And so I think what you saw was an opportunity for us to really show the value in the marketplace, right? Because the reality is Microsoft and CrowdStrike had no chance of being able to reach that many customers to help them at once. And someone like Softchoice could step in and really be leaned on in a moment where those companies needed us the most, and it was a great opportunity for us to really show our value and to help. And so I think if anything, it only strengthens the position that we have in the market, the position that we have with our customers and with the technology partners who saw how we could step up and help their customers get back online and running so quickly.

[Operator]

Your next question comes from David Kwan from TD Cowen.

[David Kwan, analyst]

Congrats on a great quarter. You mentioned in the remarks and in the press release, key reasons for, I think, some pretty exceptional strong organic growth here. And what is -- seems to be a pretty weak tape. Many of your peers kind of delivering flattish to low single-digit growth in guidance. I think part of it is -- I think maybe they're focused on hardware, but is there anything else that you're seeing that can help reconcile these sharp differences in performance?

[Andrew Caprara, executive]

I think you hit on the biggest one, David, is I think the resiliency of our business model right? When you think about what's going on in the marketplace, we're certainly not immune totally to economic conditions, but the reality is that software and cloud and those kinds of solutions are just stickier and more resilient because the fact is you're not buying the hardware, you still got to renew that software license. So I think, number one, it creates this really high floor for us and stable base in any environment. And so then if we win new customers on top of that, if we win some good new deeper customer relationships, services relationships that you put on top of that high floor, it creates solid growth. And I think that's what we saw and we're seeing so far this year. And I think the other part of it is our model is still standing out with our partners, as John mentioned. And so they're investing more in us than ever before to go after that SMB and commercial mid-market customer who needs this technology desperately right now, but they don't have the ability to implement it themselves. And so we continue to work hard to earn the trust of the technology partners so that they co-invest in developing our capabilities and going to market with us as a preferred partner.

[David Kwan, analyst]

No, that's great color. And then just on customer spending behavior. Did you see any changes as the quarter progressed? I heard some peers kind of talk about increasing weakness, particularly in June. So curious to see if you saw that dynamic.

[Andrew Caprara, executive]

No, we didn't, actually. We saw a pretty steady demand in the quarter. And for us, June is obviously Microsoft year-end. So for us, June is one of our biggest months of the year, and I think our position is we believe the best Microsoft partner in North America shown through in June, and we had a very successful end of year with Microsoft.

[Operator]

Your next question comes from Stephanie Price from CIBC.

[Stephanie Price, analyst]

Congrats on the solid gross profit growth in the quarter. Just hoping you could talk a little bit more specifically what's driving the 18% software and cloud growth, definitely up sequentially in terms of growth. If you give us anything onetime here or anything that we should be thinking about in terms of go forward?

[Andrew Caprara, executive]

No, Stephanie, there's no onetime thing other than as John mentioned, there's a little bit of acceleration in some of the incentives from our technology partners, but it wasn't like a big deal or a couple of big deals in the quarter. I think we still continue to see public cloud being our large fastest-growing area, and we continue to see great success and penetration across all 3 of the top hyperscalers. We saw great demand for Microsoft and workplace solutions in Q2 at their year-end as we do every June and every Q2 as that solution gets more and more penetrated in the market. And as you know, with Microsoft E5, all of a sudden, you're in a cybersecurity conversation. And so we're getting into more and more and deeper cybersecurity conversations and relationships with our customers through that motion. And cybersecurity remains a very high-growth area in the market and certainly for us. So I think we're executing well to help customers across that software and cloud solution area. And I think we are working really closely with our tech partners on some of these co-investment programs and successfully achieving and exceeding targets on those.

[Stephanie Price, analyst]

And then in the prepared remarks, you mentioned a few large contracts that could close and would be upside to the outlook. Just if you could dig into the pipeline a little bit and how to think about those large contracts.

[Jonathan Roiter, executive]

Sure. Thanks, Stephanie. Look, every quarter, every year, there's always -- there can always be these one-offs. But I think what I would -- I think what I'd ask you to kind of take away from my comment is that we continue to see robust demand across our solution space. And as Andrew referenced when he was talking about the enterprise, specifically that channel, that would be the channel that would have, say, a little bit more lumpiness in terms of large contracts. And we like the trend that we're seeing so far. I mean certainly the team is going deeper with our customers. And we like the trend that we're seeing. And ultimately, whether it's the H2 this year or it's 2025, unclear exactly when those will happen, but we certainly like the trajectory that we're seeing across the business. And as Andrew referenced in enterprise, there are some elements that could change the growth rates in the coming quarters and the coming year.

[Operator]

Your next question comes from Martin Toner from ATB Capital Markets.

[Martin Toner, analyst]

Are there any tough comps in the back half of the year that concern you guys about maintaining peak levels of growth?

[Jonathan Roiter, executive]

Thanks, Martin. I really don't think so. I think we had, if you recall, in Q1 and we called it out last year, and we remind obviously, when we had our Q1 results, we refer back to that. But when you look at -- when you look at the second half of this year, that's not the case. I think the only piece that perhaps is last year, our variable compensation when we look at the cost structure, we ultimately came in under our expectations. And so maybe that's the only piece on the cost side. But I don't really see any large -- there really weren't any large deals that we called out last year.

[Martin Toner, analyst]

Do you see any obstacles to growth either in your business or in your partners' businesses, specifically in software and cloud. Are there any -- like do you see anything that puts like a bit of a ceiling on growth?

[Andrew Caprara, executive]

Yes. I think, Martin, there's certainly a lot of uncertainty economically right now. So I think we're -- nobody is immune to that. I think the tech industry is better positioned right now than they were historically just because technology has become more embedded and more often, technology is seen as an enabler to actually drive a more efficient -- create a more efficient company and more efficient operations. And so I think we're going to see some resiliency, but more and more of the economic news in the U.S. these days seems to be trending negatively. And so I don't think any industry is completely immune to that. But saying that, I do come back to the fact that even if you do have that, it's hard to turn off the software that your company is using to run their environment. It's hard to turn off the cloud that's running all the applications that you're using with your employees and your customers. And so I think there's a lot of resiliency in this part of the industry right now that should continue to see that software and cloud growth increase. And then there's this unknown upside on how quickly companies will adopt AI as well as the continued investments in cybersecurity. So I think a lot of those trends are moving in the right direction for us to continue to have that growth going forward.

[Martin Toner, analyst]

You talked a little bit about this, but I'll ask sort of again. Do these results kind of give -- do these results make you change your view on the pace of AE growth? And can you talk a little bit to ability to improve AE productivity from here?

[Andrew Caprara, executive]

Yes. So these don't change our AE growth aspirations. I think we've been going very quickly over the last couple of years, as John said, 20% over 2 years, 13% in the last year. And as we go and add more AEs -- sorry, add more customers and grow the customer base, we'll be able to add more AEs. And so we're going to continue to do that. And we think that's part of what's allowing us to be successful right now. And so we're going to continue to make those investments and grow that base. In terms of productivity for AE, I mean, there's a few things going on there that I just want to call out. We know that the average has gone down. But if you actually look at gross profit or EBITDA per average overall employee at Softchoice, it continues to increase. And so there's a decline in GP per AE. And one is just there's the simple math that software and cloud has increased, but it's been offset by hardware. The second is that when we hire new AEs, it does take time for them to be more productive. And so there is that ramp curve in the AE productivity rate. And so we also -- so we think that those things will, over time -- we've reset the baseline now, I guess, is what I would say, Martin, because the hardware declines and because we've added so many people so quickly. So if we keep adding at the same rate, we should start to see that improve as those folks come up the productivity curve. If we go even faster, we could put pressure on it. If we go slower, maybe the rebound comes even quicker. But at this point, it's really more, to be honest, it's a bit of a mathematical problem, not an operational problem. Operationally, what we're seeing is these people are still ramping at the exact same rate they used to. They're still meeting our productivity curve expectations, and we're still driving accelerated growth from these people. So we're going to continue to do that, and we're not so fussed about the GP per AE metric and how it moves around, given that it's influenced by those other factors.

[Martin Toner, analyst]

Thinking a little longer term, how many years do you think double-digit software and cloud growth can be maintained?

[Andrew Caprara, executive]

Right now, Martin, we think we have about 1% market share in North America. And we think this is the most highly fragmented, fast-growing market that we've seen in a long time. So we believe that, that is our aspiration is to continue to do that for many, many, many years into the future because there's a lot of customers out there who aren't getting the support they need in their software and cloud environment, and we believe we can really help them.

[Operator]

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

[Paul Treiber, analyst]

Just hoping you could speak to sales cycles, what you've seen in sales cycles. There's been a lot of talk about elongated sales cycles in enterprise software. Have you seen any changes in sales cycles? Or do you think your business is a little bit more insulated to that just given the nature of the products that you're selling?

[Andrew Caprara, executive]

I don't think we're insulated. I think the reality, though, is we probably, as an industry, need to stop talking about it as elongated because it's just long now. It started to elongate probably 18 months ago as companies started to be more careful about their spend. And now we all just should accept the fact that there's more scrutiny over purchases. There needs to be proof of ROI. And so we need to make sure that we're providing that for companies so that their teams and their financial teams can make informed decisions. And so that's what we're trying to do now. We know that the sales cycle is going to involve more people than it did 2 years ago or 3 years ago. And that's just a fact of life that I don't see changing over the next couple of years. And so our team is well positioned to address that. We have a number of technical experts on our team to be able to help customers with those kinds of business cases in large purchases. And so we're -- it's not something that we're stressing about. It is the new normal around what these deal cycles will be at this point.

[Paul Treiber, analyst]

That's good color. Just secondly, just on OpEx, the reduced spend in the second half of the year, what are areas where you're saving costs or you see productivity improvements? And then despite the lower cash OpEx expense, it seems like the growth investments -- you're calling for growth investments to increase in the second half. What's the magnitude of the investment increase in the second half do you expect?

[Andrew Caprara, executive]

Sure, Paul, I'll take that question. And that's exactly right. Just if I back out just for a moment, this management team is -- our primary focus is growing the top line, our gross profit. And I think we're showing how we're continuing to gain share and grow faster than the market. One of the ways that we do that is that we ensure that we're continuously investing in differentiating capabilities within the higher growth segments of the wider IT space. So you saw that this year with our investment or -- excuse me, our AI solutions team that we made a significant investment. There's 40, 50 people in that group right now. You're seeing it in our investment in software asset management. And you're seeing it, which drives deeper penetration with our customers, and you seeing the financial results that that creates. And then thirdly, the investments we made on increasing our customer count and now 2 quarters in a row, we effectively have record quarters around that. So to do that, we also want to make sure that our overall cost base is aligned with where the growth areas are. And there are times where throughout the year, we reallocate resources or reduce resources in lower growth areas and areas that ultimately are not providing the return that we would like to see. And so it's just a constant balance of ensuring that we're putting material dollars into our growth investments while ultimately ensuring that our overall cost base doesn't get out of control. And look, you see that in the second half of this year, we're probably going to be up $3 million, $4 million, $4 million, $5 million versus last year from cash OpEx, but that's lower than our H1 when you look in absolute dollars. And that's just because -- just to recap, focus on top line and ensuring that our cash OpEx are aligned with where those growth areas are and where we don't see the growth, we realign the cost structure.

[Operator]

[Operator Instructions] Your next question comes from Divya Goyal from Scotiabank. Sorry about that.

[Divya Goyal, analyst]

Great quarter. I actually wanted to get some more color on the gross margin trajectory. So this quarter, you had a pretty significant gross margin growth. Part of it was driven by the incentives that obviously were accelerated. Trying to understand what should we expect for the remainder of the year when it comes to this gross margin trajectory?

[Jonathan Roiter, executive]

Sure. I'll take that. And just to clarify, when you're saying gross margin, I just want to clarify what margin are you referring to? Gross margin to net sales or gross margin gross sales?

[Divya Goyal, analyst]

Maybe I'm looking at the net sales. But let's talk about the broader gross margin trajectory. Where do you expect it as a percentage of gross sales, actually?

[Jonathan Roiter, executive]

Sure. So as you know, we manage our top line. Our top line is gross profit. And so ultimately, that's how we manage the organization. That's how our team is comped, that's our AEs, that their compensation is all around gross profit. So that really is our top line. We have in the past said that gross sales could give you an indication of volume. But I think we also caveated that by saying, look, there could be a lot of variability in that number. It's actually when you just look at 1 quarter at a time. And so having an LTM is probably the better way of looking at it. Now certainly, in this quarter, there was some deviation off that LTM and 2 factors at play. One, as software and cloud continues to grow versus hardware and the netting down effect plays a bigger role, you're going to see an impact on the margins increasing. You're going to see more impact to the margins. And then the second factor at hand here, and we referenced it in the call, is that the incentives that our vendors are providing for adoption and consumption. The way you got to think about that is it's -- for every $1 of gross profit, it's $1 of net sales, and it's $1 of gross sales. So that's also a factor, and we referenced that it was a little bit higher than historical because of the great work that we're doing at driving that adoption and consumption for our vendor partners and for tech partners. And then in terms of like how to think about gross profit, I just kind of recap what we said in the comments, which is historically, GP was -- H1 was about 49%. We think for H1, and we think in light of what I just kind of referenced, that could probably be a little bit closer to 50% for this year that we're in today.

[Andrew Caprara, executive]

John, I'll just add additionally, the gross sales number can sometimes be impacted by changes in how vendors compensate partners. So for example, if they moved from compensating on an upfront referral fee on the sale and instead provided incentives for successfully driving adoption and consumption, it would reduce that reported gross sales figure, but it also reduces the cost of sales. So ultimately, it has 0 impact on gross profit. It just increases that gross profit as a percentage of sales. And that's why for us, we're just focused on gross profit as the top line.

[Divya Goyal, analyst]

Jonathan, on this, I also wanted to get some more color on the debt and the leverage ratio. So this quarter, it came in at 2x. Could you help us understand what is going to be your working capital trajectory? From what I recall from the past, Q3 has been historically a use of cash quarter. So where should we anticipate the leverage ratio on a go-forward basis?

[Jonathan Roiter, executive]

Sure. And working capital has been a tool in the arsenal, if you will, in being able to drive down our leverage very quickly. And we were what, 2.6% pro forma and we're down to 2%, 90 days later essentially. But you're totally right for seasonality in that working capital. And so Q3 typically is an outflow, while Q4 would be an inflow. In the prepared remarks, I mentioned that last year, we generated close to -- I think it was about $49 million, so close to $50 million of inflows for the full year. I think we're tracking this year around $22 million, $23 million and reference that the historical norm of roughly 5% to 10%, again, won't hold true this year as we aim to be closer to last year's performance because the team continues to do an exceptional job at unlocking value that's within our balance sheet and creating working capital inflows.

[Divya Goyal, analyst]

That's helpful. And one last question that I wanted to understand broadly on your services segment. Do you think there's potential adoption and increased adoption of Microsoft CoPilot, could that create new services revenue and new services opportunity for the company? And that's all for me.

[Andrew Caprara, executive]

Yes. Sure, Diviya. I think we do think that, and we're seeing it already in a couple of different areas. Number one is direct CoPilot services. So as I mentioned, we have hundreds of customers now that are using Softchoice services for paid work to help them design and build those initial use cases and build out those pilots. And so that has exceeded our expectations in H1 in terms of the number of customers that have signed up for that paid service. Then the second way that we can do it off of that is moving into broader rollouts and more use cases. And so these, we think, will be ongoing services relationships with some of these customers to then go do the next waves of the use cases and roll those out for the organization. So we think there's that general sort of build, deploy and then train adoption -- train on adoption services for users to leverage CoPilot. So that's one pool. I think the second pool though, is coming as adjacent services to modernize the applications and the data and make sure that they've got the right security and governance around that. So a lot of organizations right now are implementing Pilot use cases. And then in parallel, they're saying, how do I actually structure my data and applications, so that I can do these other use cases that I think could maybe even be more impactful, but we're not ready for them yet because we don't have the right setup. Our data doesn't talk to each other. Our system isn't secure enough. And so we're doing a lot of services work off of that CoPilot conversation around that data and application of state modernization. So I think that's another area of opportunity for us that's being generated from talking about generative AI solutions.

[Operator]

And there are no further questions at this time. I will turn the call back over to Andrew for closing remarks. Please proceed.

[Andrew Caprara, executive]

Well, thank you, and thanks, everyone, who joined us today. We look forward to updating you on our continued progress in the Q3 call in November. So have a great rest of your day, 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. Thank you and have a great day.