Softchoice Corp (CA)

TSX:SFTC

Earnings Call Transcript 2021-Q3

[Operator]

Good morning. My name is Miranda, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Softchoice Q3 2021 Earnings Conference Call. [Operator Instructions] Mr. Tim Foran from Investor Relations, you may begin your conference.

[Tim Foran]

Thank you, operator, and good morning, everyone. Welcome to Softchoice's Q3 2021 conference call for the period ended September 30, 2021. A reminder that, for purposes of recording, today is Friday, November 12, 2021. Joining us today are Vince 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 2 and relevant disclaimers can be found in the company's MD&A, which is available on our website. And finally, please note that because the company reports in U.S. dollars, all amounts discussed today are in U.S. dollars, unless otherwise indicated.With that, I will now turn the call over to Vince.

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

Thanks, Tim, and welcome, everybody. Thank you for joining us today. I am pleased to report on a strong quarter of progress for Softchoice in Q3, including: first, strong customer engagement for our IT solutions, and that was reflected in our 108% net revenue retention as well as gross profit per customer rising 15% to $57,000 over the last 12 months; secondly, we recorded sales force productivity, one of the highest that we've had in certainly the 5 years I've been here and maybe in our history, with gross profit per account executive increasing 17% to $694,000 over the same time frame. We also continue to make growth investments in our technical resources and sales productivity as well as our cloud strategy, and continued realization of the benefits of Project Monarch, notably in our top line gross profit. Bryan will provide a deeper dive on our financial results, but I will go over some highlights. Gross profit, which is how we and others in our industry measure top line performance, increased 24% over Q3 2020 to $65 million, driven by double-digit growth across all of our sales channels. Within our IT solutions, the increase in gross profit was led by 25% growth in our Software & Cloud solutions and 23% growth in our Services offerings, our key focus areas, as they align with some of the fastest-growing sectors within the IT industry. Software, Cloud and Services comprised approximately 72% of our gross profit in Q3. Our increase in gross profit was driven by a 21% increase in our gross sales to $426 million, which we believe is a better measure of customer volumes than net sales. This was led by a 34% increase in Software & Cloud gross sales. Adjusted EBITDA declined 14% due to the impact of foreign exchange as well as increased operating expenses stemming from our ramp of sales productivity investments to drive growth and certain nonrecurring professional fees incurred to support the implementation of a new digital workflow platform for our Managed Services offering. Additionally, in Q3 of 2020, we received $3.7 million in government wage subsidies, which offset reported expenses versus none received in Q3 of 2021. We continue to benefit from strong adjusted free cash flow, which was 88% of our adjusted EBITDA over the past year. Given our strong financial position and free cash flow generation, we were pleased to pay our first quarterly dividend on October 15, 2021. Our continued double-digit growth in 2021 has been driven by our clear strategic focus on hybrid multi-cloud, digital workplace and collaboration and software asset management solutions, all underpinned by security. During Q3, we continued to execute on this strategy through an insight-driven go-to-market strategy that drove increased customer engagement and net revenue retention. We also made more investments to bolster our technical and sales capabilities. This execution enabled us to capitalize on ongoing trends in the IT industry, which include the accelerating adoption of the cloud, the increase in remote work and a higher demand for seamlessly integrated software applications and security solutions due to the increasing complexity of IT environments and the proliferation of workloads across connected devices. So now let me give you an update on our growth strategy and our 4 organic growth levers that enable us to sustainably grow our gross profit double digits on an organic basis. Our first growth pillar is our 2-pronged approach to grow our sales force and improve sales force productivity. In Q3, our LTM sales force productivity reached historically high levels of $694,000 of gross profit per account executive, and that represented a 17% increase compared to the prior LTM period. The increase is the combined result of secular trends driving growth in our solutions, measures we have initiated through Project Monarch to improve the customer and employee experience and investments in our technical resources, sales productivity and our cloud strategies. These include investments in our hybrid IT specialty sellers, cloud technical experts and managed services, including our managed cloud practice. Turning to our sales force growth. We saw an expected 5% decline in the average LTM account executives to 384 AEs versus the prior LTM period, and that was driven by 2 primary factors. First, at the onset of the pandemic in 2020 and the uncertainty that the pandemic presented at that time, we made a decision to hold our AE headcount relatively flat. By the end of 2020, the economy and our results were improving, but things were obviously still uncertain. However, with increasing demand from our existing customers in the first half of 2021, we made the decision to focus our 2021 investments on driving sales force productivity rather than adding selling capacity. And during 2021, we held off on increasing our AE headcount. With that said, though, our customer spending has remained strong, and we have recently increased hiring new AEs to increase our sales force headcount and are continuing our investments in sales productivity. So we, therefore, expect to end 2021 with more account executives than the 383 we started with at the beginning of the year, and we remain on track to add 40 to 50 new AEs from the end of 2020 to the end of 2022. Our second growth pillar is focused on our customer base. We have a similar 2-pronged approach here to driving double-digit organic growth. We have seen customer spending increase in 2021 and increases in wallet share of our customers. Our gross profit per customer, measured on an LTM basis, reached $57,000, a 15% increase over the prior LTM period. This growth has been driven by our investments in sales productivity that I mentioned earlier and increasing adoption of the cloud, remote work and collaboration, software asset management and security solutions. As you'll hear from Bryan in a bit, we have seen growth in gross profit from all 3 of our customer segments in 2021. This has offset a natural 3% dip, which we expect to be temporary in our customers, stemming from declines driven during the pandemic. So what that means in real terms is we've had a small number of customers that have reduced spending. And though they often remain an active account with us, their spending fell below our threshold of what we categorize as a customer. We expect to get back to growth in our customer base in future periods as we ramp up hiring of our sales force in Q4 2021 and into 2022 and beyond. The third pillar of our growth strategy is expanding our relationships with our technology partners. We have been on a journey to strategically shift our business to becoming a trusted IT solutions provider to all our customers. This means that we are delivering more advanced solutions and/or assisting customers with strategic technology transformations, like the adoption of public cloud. We have built very strong partnerships with almost all of the major tech companies, including Microsoft, Google, Amazon Web Services, VMware, Veeam, Cisco and IBM, to name just a few, as well as emerging and disruptive technology partners. We have also built co-investment strategies with some of those critical partners, particularly in our high-growth solution areas like public cloud, where these partners co-invest to build our capabilities or expand our capacity. In fact, last month, we announced a multiyear agreement with Amazon Web Services, or AWS, to build on Softchoice's cloud expertise and develop new capabilities so that organizations can transform and innovate in the cloud. AWS has seen the deep capabilities that we can bring to customers in the cloud and has chosen us to be part of an exclusive group of partners to help drive significant growth in the coming years. Working together, Softchoice and AWS will create solutions for organizations to launch, migrate, modernize and scale workloads on AWS even faster and fully realize the value of the cloud. Through this collaboration, we will rapidly scale our AWS services-oriented team of solution architects to help customers design and optimize their AWS environments. Additionally, we will grow our team of AWS sales specialists and our operations and service delivery team members, who will help customers properly implement and manage business-critical AWS solutions with speed and agility. The fourth and final pillar of our growth strategy is Project Monarch. As we discussed on our Q2 earnings call, Project Monarch was an initiative where we reengineered our business processes and redesigned our technology architecture and invested nearly $50 million in our business from late 2018 to the early part of this year. Our redesign is anticipated to result in a broad set of benefits, equating to $25 million of EBITDA uplift in 2022, primarily related to top line gross profit uplift, but also from some OpEx savings. These benefits fall primarily into 3 categories: first, through improved and much greater use of data analytics and through a new configure, price, quoting tool, we've given our sellers much better information to maximize gross profit percentage by aligning pricing amongst our sales force. Year-to-date, we are performing better than we planned in gross profit uplift from better pricing. Second is procurement savings. Again, through better data analytics and better tools, we're able to lower our cost of goods sold, particularly purchases through distributors. We are projecting these savings to be on plan for 2021. Finally, process streamlining and automation is anticipated to result in certain net operating expense savings, most of which will accrue to us in 2022. These benefits will offset certain incremental costs related to Project Monarch that were added to support the business, including a new master data team, a deal desk, an enhanced strategic sourcing team and contract specialists. The project remains on track, and we remain confident in our ability to realize the total anticipated net benefits of Project Monarch in 2022. At this point, let me turn it over to Bryan to take a deeper dive through our financial results and our outlook.

[Bryan Rocco, Chief Financial Officer]

Great. Thank you, Vince. And I'll start with our top line measurement, gross profit, which has returned to double-digit growth in each quarter of 2021. In Q3 2021, gross profit increased 24% compared to Q3 of 2020, with broad-based strong performance across all our solution types and channels. By IT solution types, the increase in gross profit was led by Software & Cloud, which increased by 25%, reflecting increasing customer consumption of cloud solutions. Software & Cloud comprised 61% of our total gross profit during the quarter, which is a 40 basis point increase over Q3 of 2020. Gross profit from our Managed and Professional Services grew more than 23%, driven by increased project activity and margins. Services was over 10% of our total company GP in Q3. Finally, gross profit from Hardware increased more than 22% and was over 28% of total company GP. The increase was primarily a result of an increase in average sales margins due to mix of sales by channel. Gross profit also grew across all of our sales channels. On an absolute basis, growth was primarily driven by the Commercial channel, which increased by more than 28% in Q3 of 2021 and represented 55% of our total company gross profit. Gross profit in the SMB channel increased by 20% and was 22% of our total company GP. And finally, gross profit from Enterprise customers increased by more than 17% and was 23% of our total company GP. I will note that the faster rate of growth in our gross profit in Q3 compared to the 13% we recorded in the first half of the year was partially due to a weaker-than-usual Q3 of 2020, which was impacted by the pandemic, as well as the anticipated disruption to our sales from the launch of our project Monarch back in Q3 of 2020. The launch of Monarch in Q3 of 2020 required us to train our workforce on the new technology, tools and processes we had implemented. However, this was a critical investment that has benefited us this year. And as Vince outlined, Monarch is anticipated to deliver significant returns in future years. Currency fluctuations primarily related to a strengthened Canadian dollar also had a positive impact on our gross profit, though this was offset at the expense line, as I will discuss in a moment. On a year-to-date basis, gross profit is up more than 16%, driven primarily by the same factors as Q3. Now turning to our gross sales, which is essentially the gross amount billed to customers as well as referral fees and adjusted for amounts deferred or accrued. It does not include imputed revenue. We believe gross sales is a useful alternative financial metric to the IFRS measure than net sales as it better reflects volume fluctuations. Gross sales increased by 21% in Q3, driving the gross profit increase that I just described. On an absolute basis, the increase was primarily due to Software & Cloud sales, which grew 34%. Software & Cloud comprised approximately 2/3 of our total growth sales in Q3. Services gross sales increased by 14% and comprised approximately 6% of total company gross sales. And finally, Hardware gross sales increased by 1%, with sales continuing to be negatively impacted by global supply chain shortages that have persisted through the majority of the year. As demand continues to outweigh supply, as expected, that supply constraints will continue in the near term. Hardware was approximately 28% of our total gross sales in the quarter. On a year-to-date basis, gross sales have increased 13%, driven by a 20% increase in Software & Cloud sales. Software & Cloud comprised approximately 67% of total gross sales, thus far, in 2021 compared to 63% in the same period in 2020. The increase of Software & Cloud within our mix of business is a positive for us and the focus of our strategy. However, due to the netting down impact under IFRS on our Software & Cloud gross sales, it has resulted in net sales growing at a slower rate than gross sales and gross profit. Net sales increased 17% in Q3 and 7% year-to-date. It also skews the relative weightings of our solutions at the net sales line. So for example, Software & Cloud comprised only 37% of total net sales in Q3, whereas it was more than 60% of our gross sales and gross profit, which in our view, is a more accurate reflection of the contribution to our business. And for those of you new to Softchoice, I provided a detailed overview of the impact of netting down on our Q2 earnings call webcast, which is available on our IR website. A slide in our appendix to today's webcast presentation also has an overview of this. So of course, all of this is accounting and have no impact on our ultimate gross profit. And this is one of the reasons why we measure our top line performance by gross profit rather than net sales. Okay. Shifting gears to our operating profitability. Adjusted EBITDA declined by $1.8 million in Q3 due to an increase in operating expenses for the reasons Vince noted earlier, including FX, our investments and nonrecurring costs. As a reminder, we received $3.7 million of government wage subsidies in Q3 of 2020 versus nil in Q3 of 2021. Adjusted net income increased by 40% to $5.6 million from $4 million in Q3 of 2020 as the prior year included a higher income tax expense due to timing differences. Net loss increased by $1.3 million to $2.2 million in Q3 of 2021 as growth in our operating income was offset by an increase in nonoperating expenses, including a $3.9 million unrealized loss on FX. I will note that reconciliations of our non-IFRS measures are available in our MD&A. As for our cash flows, we review adjusted free cash flow on an LTM basis. And over the past 12 months, adjusted free cash flow increased 21% over the prior LTM period to approximately $60 million or 88% of our LTM adjusted EBITDA. Now turning to our balance sheet. Our net leverage at September 30 was 1.9x our LTM adjusted EBITDA compared to approximately 2.9x at the end of 2020. The increase in our net leverage compared to June 30 was due to timing-related working capital movements offsetting positive operating cash flows during Q3. We benefit from a negative working capital profile and continue to expect that we will see a healthy working capital inflow for the full year 2021. As we typically use cash as it comes in to pay down our revolver, we therefore expect to see a reduction in our total debt and net leverage by the end of this year as well. We have significant liquidity, and we expect to use our positive free cash flow to fund our growth, notably our investments in our sales force and sales productivity resources, as well as pay our dividend and repay debt. In terms of nonrecurring cash commitments, just a reminder that we will have a onetime cash payment of approximately $14 million in Q2 of 2022 related to our pre-IPO of phantom shares. Subsequent to quarter end, we completed a bought deal offering of common shares, primarily comprised of a secondary offering. This did not result in a material increase in our fully diluted shares of approximately 64 million. However, it did result in a significant increase in our free flow market cap calculation used by S&P and others to determine inclusion in various indices. Now looking ahead to Q4, our target remains to achieve double-digit year-over-year growth in gross profit. We expect seasonality to remain relatively consistent with historical periods, with Q2 and Q4 being our largest quarter, with Q4 generally being a little over 27% of our full year gross profit. In terms of expenses, adjusted cash OpEx in Q3 2021 was $54 million. However, about $1 million of that related to nonrecurring costs related to the implementation of a new digital workflow platform for our Managed Services business, which has now gone live. As noted on the last call, full year 2021 EBITDA margins and operating leverage will not be representative of our normal business model. This is for a few reasons. First of all, the flushing out of 2 subsidies received last year, which offset expenses, including the $3.7 million I noted in Q3 of 2020 and there was also $10.3 million in Q4 of 2020; secondly, nonrecurring investments in our Managed Services platform in 2021; and then number three, the reigniting of investments in 2021 following a pause during the pandemic. So given our strong performance year-to-date, today, we reiterated our 2022 outlook. This outlook reflects the impact of the strategic investments we're making in 2021 as well as the meaningful benefits from Project Monarch. We anticipate over 12% CAGR in gross profit growth between 2020 and 2022, which will result in gross profit dollars exceeding $300 million in 2022. We expect our adjusted EBITDA-to-gross profit margin will increase to around 30% in 2022, resulting in our adjusted EBITDA outlook of between $90 million to $100 million. This margin improvement is anticipated to be driven by the operating leverage in our business model as well as the realization of expected project Monarch benefits of approximately $25 million. And consistent with recent years, we expect to achieve a very high adjusted free cash flow conversion rate of approximately 90%. So in closing, we're quite pleased with our performance, thus far, this year with 16% growth in our gross profit, enabling significant sales productivity investments to drive growth in 2022 and beyond. And our focus going forward is on a few things: so number one, continued execution; number two, investments in additional account executives and sales productivity resources to drive double-digit top line growth; and finally, realizing the full benefits from Project Monarch to accelerate our growth and margins. And with that, I will turn it over to the operator for Q&A. Operator?

[Operator]

[Operator Instructions] Your first question today will be coming from David Kwan from TD.

[David Kwan, Analyst]

So you've seen a net acceleration here in the gross profits. You're within, I think it was 11% in Q1, 15% in the last quarter and 24% now this quarter. Yes, how much of that, I guess, for at least this quarter, do you think is driven by kind of the strong demand you're seeing in some of your key end markets like hybrid multi-cloud versus maybe possibly seeing some of the realized benefits from product Monarch following the launch last year? And also maybe how much of that was maybe coming from the stronger Canadian dollar?

[Bryan Rocco, Chief Financial Officer]

Yes. David, it's Bryan here. So yes, I would say the majority of the growth is driven by the underlying fundamentals. So we're a Software & Cloud-focused IT solutions provider, and we are investing and we have made -- we've doubled down our investments this year in sales productivity to drive continued growth in those areas. So the majority of that is just continued execution against our strategy. And you're right, the growth has accelerated as you look at, at the quarter, it's going from 11% to 15% to 24%, gave a little bit of indication of what seasonality would look like for the year. So the 24% did benefit from what was a weaker Q3 of last year. In terms of the other components that you mentioned, Project Monarch, Vince went through in the script, we still are on track. And we've seen some great progress in many of the areas, including the areas driving gross profit increases. We aren't giving specific metrics on kind of how much that contributed to the growth this quarter, but all I will say is we're on track there. In terms of FX, so you got to look at it 2 ways. So at the GP line, we do benefit from a strength in Canadian dollar. So around, call it, 40% to 45% of our net sales, depending on what period you look at, are from Canada. And so strength in Canadian dollar kind of helps increase the gross profit. In the quarter, that was -- it was around $1 million or so. So it ends up being around 2 points on gross profit. However, overall, it did hurt us at the EBITDA line as our headquarter and many of our costs are based here in Canada. And so overall, at the EBITDA line, FX hurt us by a little under $1 million.

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

And David, the only thing I would add to that, this is Vince, is we are seeing customer demand just continue to increase around the major solution areas we're focused on, particularly around adoption of the cloud. digital workplace and collaboration and software asset management and, of course, security. So the secular trends in our industry are helping. And as Bryan pointed out, our execution with our sales force and all the technical resources that support our sales force and all the other people that support all of them has been very strong. And we are seeing benefits from Project Monarch in our gross profit uplift for sure.

[David Kwan, Analyst]

No, that's very helpful in terms of the color there. And Bryan, you kind of preempted my next question just on the EBITDA side. You talked about, I guess, on the FX, some of the impacts there. And then just to confirm that I heard it correctly, just the nonrecurring professional fees related Managed Services, because it sounds like that was $1 million. And then can you quantify -- I guess, do some of these increased investments that you're making to help drive kind of stronger growth probably particularly in hybrid multi-cloud?

[Bryan Rocco, Chief Financial Officer]

Yes. So the nonrecurring charges, it primarily relates to professional fees and our Managed Services platform investment. And you got the number right, it was a little less than $1 million in the quarter, and we've now gone live with that project. In terms of the investment this year. So year-to-date, the investments have focused on sales productivity or sales enablement. So those include things like hybrid cloud SSEs. So they're partners with our account executives who go in to customers and look at kind of what the customers' cloud strategies are and how do we help drive adoption of the cloud. And so they're partners to the AEs. They don't get included in our AE headcount. Where you see the benefit of that is at the sales productivity level. And so Vince noted earlier that GP per AE reached $694,000 on an LTM basis, which is a record high for us. And that's where you're seeing kind of the benefits of those investments.

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

Yes. And so, again, the only thing I'll add there, David, as Bryan said, we've been making investments in sales productivity enablement through those type of resources, including journey architects and others, and our sales specialists like the hybrid cloud specialists. And as I alluded to in our discussion here, we have resumed ramping of our sales force. And so we do expect to end the year at a higher place than we started the year. And we are still targeting to have 40 to 50 more AEs by the end of 2022 than we had in 2020. So that's another investment because it does take sales people time to ramp. And so we're now starting to do that again.

[David Kwan, Analyst]

Would you say that the investments that you're making, I guess, not at the level kind of the support that helps drive the productivity? Was that elevated this quarter versus prior quarters? Or was anything unusual from that standpoint?

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

I would say, nothing unusual from quarter-to-quarter, so it's sort of a steady ramp. I mean, there could be minor differences quarter-to-quarter. And yes, again, what I would say is, our sales model, our account executives, they're the quarterback, right? They own the account relationship with our customers, but then they leverage the sales specialists when the conversations get deeper around these very technical solutions. And then we bring in even more technical people, whether they be journey architects or principal architects or engineers. So the ramping of all those resources occurs sort of as a steady motion as we see demand increasing quarter-to-quarter.

[Andrew Silvio Caprara, Chief Operating Officer]

David, it is Andrew Caprara here. I'll just quickly add. You remember the conversation we had earlier in the year about some of these investments, like our investments in Google Cloud and cloud services more broadly. And those were accelerated growth investments that we approved coming into 2021. And as you can imagine, we started hiring at the beginning of the year, and those people were hired as time went on. And so what we can tell you is that we've got more of them in Q3 than we had in Q2 and more of them in Q2 than Q1, just as we started to ramp those teams on specialty sales and these cloud specialists that support our sales organization to support our customers.

[David Kwan, Analyst]

That's great color. And then just last question, just given the ongoing IT supply chain issues that seem like they're going to persist here for probably much of the next year, potentially longer than that. Are you hearing from customers that this may be playing a role in their plans to accelerate their cloud migration plans?

[Andrew Silvio Caprara, Chief Operating Officer]

Yes. I'll take that one, too, David. And absolutely, I think what you're finding is a few different things. One is when customers are thinking about resiliency coming out of the pandemic, right, a lot of the conversation around resiliency is how do I make sure that I have consistent operations. And when you're thinking about having consistent operations and backing up your environment, in the old world, a lot of times, that was in the data center. And I think that is one of the most fundamental shifts we're seeing now towards cloud is that these solutions are almost always being looked at as a public cloud solution. And the reason is twofold: one is the hardware constraints; but secondarily, it just makes more sense. And we've all learned our lesson that when nobody can go to the office, having your backup in an office is probably not the best idea. And so I think that's one of the trends that we're seeing around the adoption of public cloud, particularly in more of the SMB and Commercial segments, where they didn't already have that. I think you get up in Enterprise, a lot of those sophisticated solutions were already there. And then the second thing is you are seeing customers making this decision now, right? They've got hardware in the data center that is coming up for end of life, and they're having to make a decision on whether to try to find new hardware or to start looking at the cloud. And certainly, the supply chain constraints are forcing the conversation to be had more aggressively about which applications and workloads can be run in a public cloud, where you've got availability to do that at almost instantly. And so I think that's been a very positive for us with the consumption of public cloud solutions. But also, we've seen really nice growth in our public cloud services, so Professional and Managed Services, as more and more organizations need a help to do that.

[Operator]

Your next question will come from Paul Treiber with RBC Capital.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

I just wanted to follow up on the question in regards to the supply chain environment. Have you seen lead times on hardware products push out or increase? And then what's your sense on how long that would persist? And then while it is driving a long-term, I guess, adoption of the cloud, what is it -- are there any impacts in the short term to -- the demand spending that you're seeing from customers?

[Bryan Rocco, Chief Financial Officer]

Yes. Paul, it's Bryan. Good question. So we definitely have seen -- so as a reminder, 70% of our business is software, cloud, services; 30% is hardware. So we're not as -- we're not immune from it, but we're not as susceptible as some of the other peers out there with more hardware focus. So we definitely -- with that said, we definitely did see an impact in Q3, where lead times were pushed out. And it's in the papers almost every day. So I think customers know about it, expect it. They're trying to plan for it because they still do need devices, and they have become accustomed to expecting longer lead times. Demand is still strong. And so what has happened is we've seen kind of shipments being pushed out, and we did have that impact in Q3 -- Q2 as well, where, I think, on the call, we talked it was a couple of million dollar impact on GP. In Q3, it would have been similar. And so that was a bit of a headwind for us in the quarter. If we're in a normal supply chain environment, our GP would have likely been higher by a couple of million dollars. With that said, it is all just timing. And those devices, supply chain issues will be resolved at one point. I don't have a crystal ball, so I don't know exactly when it will be. We're not planning for everything to get back to normal in Q4 of this year, for example. Everything we're seeing and hearing is that it will flow through into next year.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

And is there -- like do you sell -- or do you -- have you seen an impact on bundled offerings? Or do customers buy things on a bundled basis, so if the hardware is delayed, then that's effectively pushing out the software purchase as well?

[Andrew Silvio Caprara, Chief Operating Officer]

Yes. I'll take that one, Paul. This is Andrew. And not really, I think what we're seeing on the customer behavior side is them getting more thoughtful and planning ahead more where they do need the hardware. I think you're seeing them acknowledge that there will be constraints and buying things further ahead than they had probably done in the past just to ensure that they get it around the right time line. But typically, we're not seeing whole projects slow down because, typically, there's movements on a strategic initiative that the customer needs to make, or they've got a compelling event or a deadline like a need to do something with end-of-life and end-of-support hardware, where you're taking a big security risk if you just pump that project down the road. So it's really not resulting in solutions being delayed. I think you're seeing things done maybe -- we're putting together these solutions a little more in pieces but -- where some of the development in public cloud side might start earlier, whereas we'll plan for implementing the hardware part of that solution 3, 4, 5 months down the road. But I think customers are starting to get smarter at planning ahead on their hardware purchases.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

That's helpful. Just a last one for me. Could you speak to the Services business, in particular, utilization and pricing? And I imagine, with the demand environment, both utilization -- or utilization is up. Is -- are you able to push through pricing increases there? And then how do you think about capacity in light of just the tight labor market?

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

Yes. So it's Vince. Thank you, Paul. So in terms of the Services business, the demand has been incredibly robust. We have seen a real spike in the demand for both our Professional Services and our Managed Services, particularly around managed cloud and the associated implementation of cloud solutions, which affects our professional service engineers who help our customers with that migration. So that business is very robust. We're very pleased with our utilization. And then what we're able to do is we have Softchoice team members who are members of our team on the Professional Services team or the Managed Services team, but we will supplement our Professional Services with other partners when we see demand spike and we need to bring in more resources quickly, and then we will slowly ramp our own resources up over time. So we do a mix of our own internal resources, supplemented by partners, to meet the customer demand. And so it's been -- it was a good quarter, and it's been a good year in that regard.

[Operator]

Your next question will be coming from John Shao from National Bank.

[Meng Shao, Associate]

I just have a quick question on the modeling. Can I say the $46 million personnel expense to be a normalized run rate, assuming there's no further headcount increase? I know there will be, but I'm just trying to get a sense of the normalized run rate. And to what extent should I model or if I should model any pressure from the wage inflation?

[Bryan Rocco, Chief Financial Officer]

Yes. So John, good question. So for Q3, like our run rate for adjusted cash OpEx, we disclosed it was around 40 -- sorry, $54 million of total adjusted cash OpEx, and that includes the G&A part. And there is around $1 million of nonrecurring professional fees in the G&A part. So looking at Q3, I would say, on the personnel side, is it's a pretty good run rate to use -- sorry, for the personnel to use for Q4. And on wage inflation -- sorry, on wage inflation, Vince can speak to this better than me. But overall, I think we've done a really good job on kind of retaining our talent. And we haven't seen like huge wage inflation this year. So again, looking at the run rate personnel cost, I'd say, for Q4 and beyond, I wouldn't -- I think the run rate in Q3 is pretty reflective.

[Meng Shao, Associate]

Okay. I think you mentioned the Managed Services offering in the press release and also in an earnings call. Could you just give us a bit more color on how we should look at the growth trajectory of that Managed Services business? And in terms of the capability to perform that services, are you looking to just bolt that capacity in-house or potentially to acquire from outside?

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

Yes. So there's a couple of different parts to that question, John, so I'll try and dissect it a bit. So as I said, in response to Paul's question, the demand for services, both professional and managed, and I'll focus on managed, has been very strong, particularly on managed cloud solutions. We also have other advanced solutions around the data center that will get married with that, and we have advanced solutions around collaboration and things like Office 365 and user help desk and other things. So demand has been very strong for Managed Services. And so we are meeting that demand with our own resources. So we increased our team members' size in our Managed Services business as demand increases, as necessary. We're also getting the benefit of scaling that business. So as it grows, the GP is growing at a faster rate than the OpEx that we're adding to that business. In terms of the acquisition side of that question, we have nothing material to report on that front. But we continue to look for opportunities where we could add advanced capabilities to our business, particularly around the cloud, particularly around AWS, GCP and Azure. And those types of acquisitions could be advanced capabilities, where you're getting really advanced people to do data modernization, application monetization, application development and things of that nature, and you're buying technical talent. So that could be something we do down road and that would be a use of all the cash we generate. Obviously, the first thing we're doing is paying down our debt and paying our dividend, but that could be another use of cash somewhere down the road.

[Operator]

Your next question comes from Martin Toner with ABT (sic) [ ATB ] Capital Markets.

[Martin Toner, Analyst]

Congrats on a good quarter. My -- first question is, given where the growth is, mostly Software, is the percentage of your business that one could think of as recurring or near recurring going up?

[Bryan Rocco, Chief Financial Officer]

Yes, absolutely. So in the marketing materials from the IPO, we disclosed kind of recurring plus reoccurring revenue. And some of the commentary around that is -- I think we took a very conservative approach on how we came to that kind of 55% recurring plus reoccurring revenue. But Software and Services are the 2 biggest drivers of that. So as you continue to see our Software mix grow, that is a recurring part of our business, and that mix of recurring plus reoccurring would also grow. And that's a strategic focus of our business as well.

[Martin Toner, Analyst]

Great. And next question is on customers. Commercial -- the Commercial customers kind of came back with the most ferocity. Can you comment on just the other 2 customers and where you kind of see them in terms of returning to normal spending levels as we come out of COVID?

[Andrew Silvio Caprara, Chief Operating Officer]

Yes. Martin, it's Andrew. I'd say we did see the Commercial one come back, as you say, and lead at 28%, but we still saw 20% growth in SMB and 17% in Enterprise. So we really saw great growth across all 3 of our major customer segments. And I'd say each of them has come back at this point, and they're focused on slightly different things. I think as you're in the lower end of SMB and Commercial, I think you'll see a lot of organizations going through what we talked about earlier was the resiliency phase, right? So they're looking at security. They're looking at resiliency in their operations. And then as you talk about some of the larger organizations, what you're seeing is a lot more of the more advanced application work. So how do they start to leverage the public cloud to actually use it for innovation. And so I had a conversation just the other day with a very senior application owner at a 70,000-person organization. He's got an amazing development team in-house, but they're inexperienced with how to leverage the public cloud to build an application that's cloud-native, how to secure it, how to govern it so that the costs don't get out of control and best practices for how to run that application on a cloud environment for their customers who need to access it. And so these are the kinds of services and solutions that we can provide to those kinds of customers in this environment. So overall, great progress across all the segments. Slightly different nuances and the kinds of conversations that we're having, but really all centered on how do they start to secure and transform their businesses in this new environment. And a lot fewer conversations we're having now about how do you help us survive. We're really moving into that innovation and growth phase of the conversation.

[Martin Toner, Analyst]

Great. Last thing, why did the AE LTM number go down a bit sequentially?

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

Yes. So Martin, it basically -- as I said, when COVID hit in March of 2020, none of us knew what that was going to mean for customer demand. We ended up putting a lot of the investments we intended to make in the business on hold. We just hit the pause button, right, to be judicious until we really got a better understanding as 2020 played out, what it meant for customer demand. So part of that was we paused on the ramping of our sales force, and we essentially held our sales force headcount flat through 2020. So the average number for 2020, I believe, was 404 AEs, but we actually ended the year with 383 account executives. And so as we got into -- we saw demand from customers start to increase in Q4 of last year, and that continued through the first 3 quarters of this year. So in the early part of 2021, we made the decision that, rather than step on the accelerator and ramping sales headcount, where we were going to make our investments was on the sales productivity and enablement resources, which are the specialty sellers that work with our AEs and the journey architects that work with our AEs to have these conversations with our customers. So we essentially, earlier this year, made the decision. Let's hold sales headcount relatively flat, which we have, and let's put our investments in the support resources that help improve sales force productivity. More recently, given how strong demand has been, we have made the decision to begin ramping our sales force headcount. And so we do expect to end this year higher than we began the year. And as we've said, our goal is to add 40 to 50 more AEs by the end of 2022 than we had in 2020.

[Martin Toner, Analyst]

Perfect. So -- and how long does it take to ramp AE hiring? It doesn't sound like it takes that long.

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

Not really. We do not have issues in hiring sales or technical support resources because -- for a number of reasons. We have a great talent acquisition team that is always in recruiting mode. And we really have that proven blueprint for finding, attracting, hiring, training, developing and retaining our people. And secondly, we do have a great reputation in the marketplace, as can be attested to many of the awards we've won around great places to work, for numerous awards and other awards we won. So we have a fabulous reputation. And because of the investments that we make in our people, that helps us as well with what we would say is team member or employee retention. So we do not have major issues or challenges in hiring. And so we're very confident in our ability to ramp our sales force and increase our sales force headcount as well as continue to invest in sales support resources.

[Operator]

Your next question will come from Gavin Fairweather with Cormark.

[Gavin Fairweather, Analyst of Institutional Equity Research]

I thought we'd start out on the new AWS agreement. Obviously, you have an existing kind of AWS business that kind of predates this new agreement, but you're ramping your technical investments in sales resources kind of tied to AWS. So I guess, I'm curious, what's changing from the AWS side in terms of marketing programs or leads, and whether you view this new agreement or partnership as something which can lead to an acceleration in your AWS growth?

[Andrew Silvio Caprara, Chief Operating Officer]

Yes. I'll take that, Gavin. It's Andrew. I think you're right. We've had an AWS practice for 6 years now. And I think what we've seen is that we've done a nice job there. But really, over the last 18 months, the partnership has started to really reinvigorate itself. And that's through joint alignment between our team and the AWS team. And I think as AWS moves more into the sweet spot of where we help a lot of organizations get a handle on their IT infrastructure and the application owner management and data management, that's the area where it really starts to hit our sweet spot. So we've really started to make some traction over the last 12 months with our AWS business. And so now this is an opportunity for us to jointly double down. So to your point, this isn't just an investment program, right, to go hire a few more people. This is a real -- it's called a strategic collaboration agreement. And it really is a strong agreement between our 2 organizations that we see a great opportunity to help customers better with this solution. We see it on our side, and obviously, AWS sees it in Softchoice and what we've already done in the market. And so it will include ramping our delivery and presales organization around AWS so that we can go and serve more customers. But it will -- you will also see more joint marketing initiatives and joint collaboration with the AWS team and Softchoice teams going forward. So more to come on that in terms of details, but you're thinking about it the right way that this is a bigger program. And this, in a lot of ways, is not the only one. We launched that one a month ago, but we've also been doing similar kinds of efforts with Microsoft over the last couple of years. And obviously, our strength in Microsoft and in Azure has -- we talked about a lot as we were going through the IPO process. And we still remain one of the largest Azure partners in North America. And the strength we've got in Canada, obviously, is top notch. So we've done a lot going jointly to market with Azure. We've really started to get traction with Google over the last 12 months, and I think you can expect more to come there in the coming quarters, and now taking that next step with AWS. So this really is the next step in cementing us as that true multi-cloud solution provider, and our aspiration of being the preeminent one across these 3 clouds in North America.

[Gavin Fairweather, Analyst of Institutional Equity Research]

That's great. And then just secondly, for me, and I'm kind of going back to your prospectus then go public materials. And I'm kind of thinking that the ratio between your AEs and your technical or specialty sales bench was roughly kind of 50-50. I might be a little bit off there. But do you see that ratio kind of changing going forward? And can you provide any detail in terms of the change in size of your technical or specialty sales bench?

[Andrew Silvio Caprara, Chief Operating Officer]

Yes. What I would tell you is, as we sell more services, we are going to continue to hire professional services engineers and technical resources. And we're going to do that at the rate at which we can meet the customer demand for these kinds of services. And so we've talked about adding 40 to 50 more AEs by the end of 2022. I can't tell you -- I hope that we add more technical resources than that because that means that our Professional Services and Managed Services business is really booming and taking off, as obviously, those are utilization-based businesses. And so the resource deployment on those is done very methodically and in line with customer demand. And we really are trying to drive that outsized customer demand in our services, particularly around cloud. So I don't have a great answer for you. We don't have a model for that one that can perfectly predict whether that's going to be 1:1. But if it's not, it's because we're doing so well on our Services business that we just need more and more engineers to serve our customers.

[Operator]

[Operator Instructions] Your question would be coming from Nick Agostino from Laurentian Bank Securities.

[Nick Agostino]

I guess, a couple of questions for me. First, when you look at your business overall, I guess, year-to-date, considering the partner influences -- obviously, we know Microsoft is a strong partner for you guys. You've mentioned Google, AWS, Azure. But just thinking about all of your IT solutions that you provide, are there any other customers worth -- or sorry, partners that are worth commenting, where you're starting to get more and more wallet share and doing more and more business with them? And if that's the case, just the reasons why there might be standouts.

[Andrew Silvio Caprara, Chief Operating Officer]

Yes. Nick, I'll say, obviously, you've covered the ones that there's been a lot of focus on. The other part of our cloud solution is the hybrid part of the hybrid cloud, right? It's not just about the public cloud hyperscalers. We're also helping customers integrate all of that because we know that pretty much every organization still has an on-premise part of that solution. And so within that, I would say we've been very focused at expanding our partnership with VMware as the centerpiece of that solution. Because some of the VMware cloud foundations and cloud solutions really act as that conduit for customers to be able to take the applications that they've got currently in a data center and more easily move it. And we're starting to see some great success with migrating applications in a simple way with the VMware solution. And so really, really great partnership that we have with VMware as well. And we've been doing some of the similar joint go-to-market and joint investments and growing our capabilities with VMware, similar to what we've done with the hyperscalers. Beyond that, I would say, obviously, we've got hundreds of other partners, but there's probably -- the other -- the regular other partners that you think about on the software side, the folks like Red Hat, Adobe and others like that, that we've got really great strategic relationships with. And then on the hardware side, certainly, we've got amazing relationships with our friends at Cisco, right? And the Cisco solution is an interesting one as they evolve more to a software motion because of the fact that, that really moves right into our sweet spot. And I think Cisco has recently talked about roughly half of their business is moving towards enterprise agreements. They're getting just about to half. Particularly as you think about what we're great at, we've got Cisco as one of our strongest partners on the hardware side. And really, over the last couple of years, the growth that we've seen with Cisco on the collaboration, the security and the EA and package -- software-related services from Cisco has been fantastic. So we're really excited about the relationship that we've got there and continued investment in that partnership.

[Nick Agostino]

That's great color. Just one last one for me, just back on the hardware side of things and the whole supply chain issues. Obviously, the demand side of the equation, I think, with the supply chain is not going to disappear. It's -- I think you guys have already said, it's just getting deferred and more so into 2022. Question is, are you seeing or are there any concerns that because of those deferrals, are any of your customers may be sourcing hardware from other competitors, where the relationships with those partners might be tighter? Is there any risk of sales loss on the hardware side because of that? And I'll leave it there.

[Andrew Silvio Caprara, Chief Operating Officer]

Not at this point. I mean we're not seeing anybody get any competitor of ours getting -- jumping the queue and getting direct access. I think that would be a very detrimental blow to partnerships from these technology providers who have to handle managing relationships with hundreds of us. And if they start prioritizing a couple of partners, that's obviously not going to be in their best interest. And so I think, at this point, we're all facing the same supply chain constraints. And so -- and obviously, distribution plays such a role in actually managing the delivery of all of this hardware. And so, at this point, we're not seeing anyone able to jump the queue. And so therefore, we're not seeing any shift in customer behavior from one partner to another because of availability.

[Operator]

There are no further questions at this time. Tim, you can please go ahead.

[Tim Foran]

Thanks very much for joining us today. We appreciate the ongoing support for Softchoice, and we look forward to updating you on our next conference call next year. Thanks. Bye.

[Operator]

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