Softchoice Corp (CA)

TSX:SFTC

Earnings Call Transcript 2022-Q4

[Operator]

Good morning. My name is Marcella, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Softchoice Q4 2022 Earnings Conference Call. I would now like to turn the conference over to Mr. Tim Foran, Investor Relations. Please go ahead.

[Tim Foran, executive]

Thank you Marcella, and good morning everyone. Welcome to Softchoice's Q4 and fiscal 2022 Conference Call for the period ended December 31, 2022. A reminder for the purpose of the recording today is Thursday, March 9, 2023. I'm joined today by Vincent De Palma, Softchoice's CEO; Andrew Caprara, President and COO; and Yota Skederidis, Interim CFO. 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, are 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. Also, our commentary today will include adjusted financial measures, which are non-IFRS measures. These should be considered as a supplement to and not a substitute for IFRS financial measures. Reconciliations between the two and relevant disclaimers can be found in the company's MD&A, which is available on our website. And finally, please note that the company reports in U.S. dollars, therefore, all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I will now turn the call over to Vince.

[Vincent De Palma, executive]

Thank you Tim, and welcome everybody in today's call. I will start by providing highlights of the year and then for Q4. I'll then pass it to Andrew, who will provide an update on progress against our growth strategy and how we are utilizing our go-to-market strategy to deepen engagements with our expanding customer base. Andrew will then turn it over to Yota for a deeper dive on our financial performance and 2023 capital allocation plans. And then finally, I will wrap it up with an overview of our 2023 priorities before we open it up to analyst Q&A. So I'll start on slide 4 of the presentation for those of you following us online, unless otherwise noted, percentage growth rates that we refer to today are for the identified period of 2022 compared to the prior comparator period in 2021. So first off, we recorded strong results from our operations in fiscal 2022, including approximately 10.5% growth in our top line gross profit on a constant currency basis. In terms of geographic split, the U.S. represented a healthy majority of overall gross profit, reflecting the relative size of the market compared to Canada. Additionally, U.S. growth was slightly higher than in Canada, benefiting from our initiatives to grow our share of wallet in what is a large and growing market. Across the two countries, we estimate that we continue to take market share in 2022 based on our constant currency growth rate being above the healthy growth in IT spend estimated by Gartner. Due to the natural operating leverage in our business model, the increase in our gross profit drove an 18% growth in our adjusted EBITDA and while also offsetting significant growth investments we made during the year. Bottom line profit margins expanded and adjusted net income increased 34%. Our earnings per share also benefited from share buybacks we completed during the year, notably in the second half. After the growth investments we made in the business, our adjusted free cash flow increased 21% in 2022, and we used it to enhance returns to our shareholders. In 2022, we increased our regular quarterly dividend. And today, we announced an approximately 22% increase in this dividend to CAD 0.11 per share from $0.09. Additionally, over the past year, we bought back and canceled 2.9 million of our shares. And today, we announced we will renew our share buyback program.In terms of the demand environment for our core IT solutions, gross profit growth continued to be driven by our software and cloud solutions, notably by strong growth in our public cloud and security software solutions. In 2022, software and cloud comprise about 85% of the growth in our gross profit as organizations continue to leverage the cloud and focus on improving the security of their IT environments. Customer demand for our IT solutions outside of a handful of enterprise customers in Q4, which I will discuss in a minute, was strong across all of our sales channels in 2022. Finally, we executed successfully in 2022 on our growth strategy. We expanded significantly on our frontline sales force. Driven in part by these headcount investments, we increased the size of our customer base. We also continue to invest in sales specialists and technical teams supporting our frontline sales force, and these investments drove record gross profit per customer and a revenue retention rate of 106%. Turning to slide 5, we provide an overview of the fourth quarter of 2022. Specifically, during the quarter, our Q4 growth in constant currency was negatively impacted by a decline in hardware sales reflecting industry trends and not unexpected for us considering the current macroeconomic environment, as we indicated on our last earnings call. We also experienced a decline in sales in December to a handful of our large enterprise customers. They remain important customers for us. However, back in Q4 of 2021, we benefited from some large hardware and software and cloud solution purchases from these customers, which helped drive an exceptional 31% year-over-year increase in gross profit in that period, which created a very tough comp for us in Q4 of 2022. Now offsetting this was continued strong growth across the rest of our customer base. So when you exclude these few enterprise customers that I just referenced, we experienced approximately 10.5% constant currency growth in gross profit across our remaining customer base of almost 4,800 customers. And we experienced healthy growth across all three sales channels and driven by double-digit growth in our software and cloud solutions. Positively, despite less than anticipated gross profit, we continue to drive strong growth in our profitability, including an approximate 19% increase in our adjusted EBITDA and adjusted earnings per share. With that, I'll now turn it over to Andrew.

[Andrew Caprara, executive]

Thanks Vince. As Vince noted, we executed well on our growth strategy in 2022, and we made significant investments during the year that have set us up well to achieve our goal of continued organic growth into the future. Turning to slide 6. You'll see progress against our strategy of driving growth from an internal perspective by increasing the size of our frontline sales force, what we call account executives or AEs. And on the right, their productivity, which we measure as gross profit per account executive. As Vince noted, we ended 2022 with 440 AEs, ahead of our stated target of 423 to 433 AEs, though slightly less than the 452 we had at the end of Q3 2022. This drop though, was expected as we indicated on our Q3 earnings call. Now exceeding our target in 2022 AE heads has put us ahead on achieving our 2023 AE expansion plans. And we hire new AEs, it takes a period of time for them to become productive. So the gross profit per AE in 2022 ended up slightly less than 2021. This is due to the sharp ramp in AEs that we had in 2022, which was a catch-up from our decision not to add net new AEs during the pandemic, where we focused investments more on driving their productivity. Going forward, our expectation remains that we will drive growth through a combination of increased AEs and increased gross profit per AE as we did pre-pandemic. Turning to slide 7. We recorded healthy growth in our customer base in 2022 and record gross profit per customer again in 2022. On the left side of the slide, you'll see the growth in the customer base, which increased in the second half of the year as more of our new AEs reached those higher productivity levels. Growing our sales team allows us to reach more customers and grow our base. In the year, we also expanded our specialized sales support and technical teams to advance our IT solutions capabilities, which helped us go deeper with our customers and drive the increase in wallet share that you can see on the right-hand side of the slide. This really is an exciting representation of our strategy in action. When we grow the number of AEs, we build a larger customer base. We then deliver an exceptional customer experience that creates high customer retention and that our investments in technical capabilities drive deeper engagements with our customers. We had all of this show up in 2022, which also positions us well for strong organic growth in the future. And our ability to drive those deeper engagements with our customers, really is a result of a couple of factors. First, our differentiated capabilities, notably in our core focus areas of hybrid multi-cloud, collaboration and digital workplace, software asset management and IT security. And second, our unique insight-driven go-to-market approach is focused on helping customers reduce their costs, optimize their technology and innovate their businesses. As is well known and well discussed at this point, global macroeconomic conditions have resulted in rising interest rates and inflation. And such increases can contribute to higher cost for our customers who are also facing uncertainty around a potentially slowing economy. And as we noted on our last earnings call, some organizations are responding to the economic uncertainty by looking at ways to cut or avoid costs, including pursuing efficiencies in their IT budgets. While this can present a near-term pressure on gross profit and EBITDA for us, as some customers seek ways to reduce spending or avoid costs, it also presents a great opportunity for Softchoice. In recent months, we've seen demand from our customers to leverage our unique go-to-market approach to help them reduce any unnecessary spend and then set up the remaining technology in their environment in an optimal way for them to achieve the best performance at the lowest cost. On slide 8, we provide an example of this. One of our enterprise customers is a global financial services company. They had an annual cloud consumption exceeding $100 million, but they were struggling to accurately budget and manage their costs. At the same time, the Board recently approved a plan to expand their cloud investment by 300% because it was so critical to their business, but they first needed to get control of their spend. [indiscernible] practice deployed a comprehensive solution to help our customer reduce and optimize their cloud consumption and prepare them for the future. We work closely with the IT team, business owners and executive sponsors. We identified $18 million in annual savings. Our team then built the execution plan to realize it with an immediate in-quarter cost avoidance of $1.9 million. We also help them implement FinOps best practices to operate and govern their cloud environment going forward, which means our customer now has greater confidence in their forecast accuracy and can manage their budgets more efficiently. I mentioned this example because it highlights the depth of our capabilities and because there are so many mid- to upper mid-market organizations with similarly complex needs, these organizations aren't large enough to engage the big system integrators and our depth of capabilities across the top three hyperscalers plus VMware differentiates us from many of our direct competitors within this addressable market. This puts us in a unique position, and we're excited about the value our professional services teams are delivering to our customers. Additionally, from a financial point of view, Undertaking these types of services generates revenue for us, services revenue for us, which helps both counter the impact of decreased cloud consumption fees, but also creating greater customer depth and loyalty. That's why we believe while cloud spend optimization may present near-term pressure, it really is an opportunity for us to differentiate ourselves to our customers and ultimately drive greater lifetime value. Our go-to-market strategy is focused on providing our customers with that holistic vendor-agnostic IT solution set. And the customer passion we have continues to drive us to expand our relationships with our technology partners who work with us because of our technical expertise, our customer-centric approach and our penetration into North American mid-market. In 2022, we continued to co-invest with our strategic partners in expanding our capabilities in their technology solutions. We also continue to bolster our standing with them as a leading North American IT solutions provider. On slide 9, we outlined recent awards and progress that we've achieved within our core IT solution focus areas of hybrid multi-cloud security and workplace solutions. These include recognition from one Palo Alto Networks within the high-growth area for us of security software; two, key cloud business partners, VMware, Azure, AWS, Google Cloud and Intel and three, key long-time partners, Microsoft and Cisco. Recognition of our capabilities by our technologies and partners is important to our business as these partners represent our primary source for new customer acquisition. We often get new customers through them recommending Softchoice to prospects after they've seen our team's capabilities in implementing their solutions with another customer. We're also extremely proud to continue receiving awards for the culture and community that we have with Softchoice. Everything starts with our people delivering exceptional solutions and service to our customers. So this will continue to be critical to our success. I'll now turn the call over to Yota for a deeper dive on our 2022 financial results.

[Yota Skederidis, executive]

Thanks Andrew, and good morning everyone. I'll start on slide 10 with a look at our top line gross profit growth. In Q4, overall gross profit increased by 0.4% with increases in software and cloud and services, offsetting a decline in hardware. For fiscal 2022, overall gross profit increased by 8.8%, driven by 12.2% growth in software and cloud. Reported gross profit was negatively impacted in 2022 by approximately $2.3 million in Q4 and about $4.6 million for the full year due to the strengthened U.S. dollar, specifically by the translation of gross profit generated in Canada into our reporting currency of U.S. dollars. At the current spot rate, foreign exchange would continue to remain a headwind to our reported gross profit for the first three quarters of 2023. On a constant currency basis, overall gross profit in Q4 2022 increased by 3.2% or $2.7 million. For fiscal 2022 on a constant currency basis, overall gross profit increased by 10.4% driven by 14.1% growth in software and cloud. I'll note that gross profit growth surpassed the change in gross sales in Q4 2022 due to the large lower gross profit margin sales recorded in Q4 2021. However, while we see quarterly fluctuations across channels and solutions in gross profit margins as a percentage of gross sales due to mix of solutions sold these even out over the course of the year. As seen on the right-hand side of the slide, on a full year basis, gross profit as a percentage of gross sales was stable at 14.4%, and that stability was similar across each of the IT solutions. Software and cloud gross profit as a percentage of gross sales in fiscal 2022 was relatively the same, up 13% when compared to fiscal 2021. Similarly, hardware gross profit as a percentage of gross sales remained relatively stable at approximately 15%. And services gross profit as a percentage of gross sales was approximately 28% in both years despite some fluctuations in margins through the year, notably in Q3 and Q4. Turning to slide 11, we look at longer-term growth trends in our gross profit. As you can see, 2022 growth in gross profit was a bit higher than the 5-year compound annual growth rate of 8.3%, which includes the decline in 2022 -- sorry, 2020 due to the onset of the pandemic. Growth over the past 5 years has been driven by 10.6% compound annual growth in our software and cloud solutions as these have increased within our mix of business consistent with our strategic focus. We've supported the growth in our core focus areas of hybrid multi-cloud, digital and workplace collaboration, software asset management and security through significant operating investments. As noted on slide 12, our adjusted cash operating expenses have grown at a 6.7% compound annual growth rate since 2017. This increase reflects expansion of our sales and technical team. Partially offset by a reduction in general and administrative staff as we have leveraged our investments in technology to automate many of our processes and be efficient with our headcount. Growth in our adjusted cash operating expenses in fiscal 2022 was a bit lower at 5% versus the 7% historical average, primarily due to one, less variable compensation expense, reflecting lower-than-expected gross profit; and two, a reduction in reported expenses due to the impact of foreign exchange fluctuations, which essentially offset the negative foreign exchange impact on gross profit. Turning to slide 13. The natural operating leverage in our business has enabled our increase in gross profit to offset the growth investments we have made and therefore, increase our profits. Adjusted EBITDA increased 19% in Q4 2022 and 18% in fiscal 2022. As a percentage of gross profit, adjusted EBITDA margin has expanded approximately 1 point a year over the past five years, though not on a straight line basis. There are puts and takes to our margin in any given year. Upward pressure has come from the increase in our gross profit and natural operating leverage within our model. This is offset by the quantum of growth investments we make in any year. Along with anticipated growth investments in 2023, we also expect an increase in variable compensation compared to 2022. In terms of our bottom line, adjusted net income increased by 14% in Q4 2022 and 34% in fiscal 2022, driven primarily by the increase in adjusted EBITDA, partially offset by an increase in income tax expense. Adjusted EPS increased 19% in Q4 2022 and 23% in fiscal 2022, driven by the increase in net income. EPS has also benefited from our share buyback program. Turning to slide 14. Adjusted free cash flow increased 21% in 2022, driven by the increase in adjusted EBITDA and relatively stable maintenance CapEx and lease payments. On the right-hand side of the slide, we outlined what we used adjusted free cash flow for in 2022. Approximately 22% was used to pay our regular quarterly dividend. And approximately half was used to buy back and cancel shares. We entered 2022 armed with a strong balance sheet and more than enough liquidity. Therefore, we have been opportunistic during the downturn in the equity markets to buy back shares. This has increased the equity ownership in Softchoice for our shareholders without any financial cost to them, and we believe we completed these repurchases at value accretive prices. The remainder of adjusted free cash was used primarily for cash interest and taxes. As seen on slide 15, our loans and borrowings increased to approximately $90 million in 2022 due to certain nonrecurring cash costs, notably a onetime Santam unit payment that was required to be paid on the one year anniversary of our IPO. Our interest rate on our debt is approximately 6.5%. We entered 2023 in strong financial position with low net leverage of 1.3x adjusted EBITDA. We also have significant financial flexibility with $186 million in available liquidity through our revolver combined with free cash flow generation. In 2023, our capital allocation priorities are as follows: One, we will continue making organic growth investments in core focus areas. These will predominantly be in our operating expenses paid through our gross profit. However, below adjusted free cash flow, we also anticipate investing a few million dollars in growth capital expenditures, which Vince will go over on the next slide. And two, we have increased our quarterly dividend again to CAD 0.11 per share, approximately 22% higher than the $0.09 it was in 2022. In terms of other discretionary uses, we have renewed our share buyback program and will utilize this opportunistically. In our first year, we bought back 2.9 million shares at an average price of $19 CAD 0.27. Debt reduction is not a near-term priority, but we may visit this if interest rates increase, and we determine reducing debt and by extension our interest expense will be more value accretive than reducing our shares, which also depends on the share price, obviously. Lastly, while our organic growth is our priority as that is where we can generate the best returns, we remain opportunistic in reviewing M&A that could accelerate the development of our capabilities in core focused areas. I'll now pass the call to Vince to wrap up.

[Vincent De Palma, executive]

Thank you Yota. And on slide 16, we provide an overview of our 2023 operational priorities. We continue to target healthy organic growth. This is anticipated to be driven by two factors: first, industry growth rates, Gartner estimates a healthy continued increase in IT spend in 2023 and beyond. And second, we continue to target market share expansion, given our focus on higher-growth IT subsectors within our addressable market and leveraging our go-to-market strategy focused on reducing our customers' IT costs. We will continue to proactively manage our cost structure while maintaining growth investments in core areas to gain market share in future years. In 2023, these investments are anticipated to include expansion of our sales force as well as services that support core IT solutions, including, for example, FinOps and application modernization to enable us to go deeper in the cloud journey with our customers. From a growth CapEx perspective, as Yota noted, we have been investing in our digital capabilities in order to provide our customers with a better online and omnichannel experience. This includes providing them with online self-service capabilities to facilitate easier ordering. In terms of financial outlook, we are not providing specific guidance. Our 2022 guidance stemmed from our IPO, and we have decided not to continue with this approach. This reflects the fact that we don't operate this business on a quarterly basis or even just a one year view. We want the flexibility to make investments in our business if we determine they can drive growth and strong returns, even if the payback period is beyond the next quarter or fiscal year. Now having said that, over the past five years, we have demonstrated our ability to take market share and drive healthy organic growth by expanding our sales force, growing their productivity, expanding our customer base and deepening our engagements and relationships with our customers. This strong organic growth has allowed us to reinvest in our business to drive consistent top line growth while expanding profit margins and delivering significant free cash flow generation. And though it's still early, we have had a good start to 2023 through the first two months of the year. Going forward, we remain focused on driving strong organic growth on a constant currency basis and delivering healthy returns for our shareholders. And with that, I will now turn it over to the operator for Q&A. Operator?

[Operator]

Thank you. Ladies and gentlemen, we will now begin the Q&A session. [Operator Instructions] Your first question comes from David Kwan from TD Securities. Please go ahead.

[David Kwan, analyst]

Good morning. I was curious, obviously, I think there's a lot of people are curious about the guidance for 2023. And thank you for the color in terms of how you're looking at the business going forward, and I guess this is a new policy as well. So maybe can you just talk about what you believe maybe a good kind of medium- to longer-term target for organic growth factoring in AE additions and improving productivity.

[Vincent De Palma, executive]

Yeah, Hi David, it's Vince for sure. So look, demand has been healthy, and we will continue to target market share expansion as we outlined on the call, but we are not setting hard targets, as we discussed on the call. So on a constant currency basis, we're going to still target healthy organic growth. Obviously, our reported gross profit will be impacted by FX, as we outlined on the call. We continue to expect software and cloud to drive growth. Security and public cloud, notably have been great growth drivers for us. As we indicated last quarter on our Q3 call, hardware is where we would expect to see more softness in the event of our, let's say, a harder landing in the economy, but software spend has been, and we expect it to remain more resilient. And while cloud consumption or cloud spending optimization will impact consumption fees, we can offset that through services engagements that help customers identify areas of IT spend savings, as Andrew outlined on the call. And as we do that, we also look to capture more cloud spend of our existing customers and new customers. So that's a great way for us to continue to drive very strong organic growth.

[David Kwan, analyst]

So is it something it sounds like maybe you're taking a similar approach just like a CDW where they talk about, here's where the market is expected to grow, and we expect to grow faster than that. Is that the way we should be thinking about your kind of organic growth profile, at least for this year and maybe years going forward?

[Vincent De Palma, executive]

Yes, that's a good way to think about it. We look at various industry experts out there like Gartner, and they have their models for growth in North America in the sector we play in. And because we expect to continue to capture market share, we should be growing faster than those numbers. And that's what our goal is.

[David Kwan, analyst]

And can you comment on the hiring plans you talked about looking to add more? And I think you're ahead, maybe had a plan a bit for 2023, given how fast you'd hire in 2022 on the AE side. Can you talk about the pace of hiring that you expect for this year?

[Vincent De Palma, executive]

Sure. So yes, we as you noted, we expected to -- and I'll use the midpoint of our, I'll call it, guidance from last year, which would have been 428 AEs, and we ended the year at 440. So that gave us a nice jump start on the year, and we do expect in 2023 to continue to expand our sales force. We are also going to continue to expand the technical talent that supports our sellers to enable us to go deeper with existing customers. We're not going to set any guidance or specific targets as to how large we expect to expand our sales force, but we will be expanding our sales force this year, and we'll be doing that across in all likelihood, all three of our channels, SMB, Commercial and Enterprise.

[David Kwan, analyst]

Would it be fair to assume that if -- it sounds like the expectation that the growth is going to be slower this year that at least the percentage growth in the headcount, particularly AEs is probably less than what we saw last year then?

[Vincent De Palma, executive]

Last year was a catch-up year, right? Because as you recall, in 2020 and 2021, the pandemic year as we made the decision to keep sales force headcount relatively flat. We did start to get back to expanding our sales force in the back half of 2021. And so last year was a catch-up year, where we ended 2021 with 396 AEs and we ended 2022 with $440 million, so that's an increase of 44, which is greater than 10%, right? If you looked at the period from 2017 to 2019, you would have seen us expanding our sales force in the mid-single-digit rates. And we were also increasing sales force productivity in the mid-single-digit rates. And that's what got us to double-digit organic growth from 2017 to 2019. So we got a jump start on 2023. And as you probably could look at sort of what we've done in the past and conclude where we would want to go this year. And so we were expecting to end last year at 428%. We would expect to grow over that. We ended last year at $440 million. We're going to grow that number this year, and continue to drive that growth, which as we pointed out -- as Andrew pointed out in the call, by expanding the AE sales force that allows us to win more new customers by expanding our technical talent, that also allows us to go deeper with existing customers, which is how we expect to drive strong organic growth going forward.

[David Kwan, analyst]

Thanks.

[Operator]

Your next question comes from the line of Deepak Kaushal from BMO Capital Markets. Please go ahead.

[Deepak Kaushal, analyst]

Hi, good morning guys. Thank you for taking my questions. Just a quick question on the commentary around the large customers that had big orders last year and not so big orders this year. Can you give us some more color on the nature of that? Are they pulling back to sustaining levels of spend? Was demand pull for last year? Are they delaying spend this year because of the macro? Just any color on what those large customers are doing and then the dynamics there would help.

[Vincent De Palma, executive]

Yes. Sure Deepak. Thank you for that. So we have experienced sustained demand for our solutions in recent quarters, notwithstanding the handful of enterprise customers we identified, which you're referencing, which I'll get to. Those enterprise are those a few enterprise customers that they're spending in Q4 of '20 -- and actually, it was mostly in December, was a lot less than what it was in 2021 in December of 2021. They still remain important customers for us. And we expect to grow our business with them over time, consistent with our proven model. But occasionally, we do see large orders from customers, notably at the end of the year that may not always repeat in the same quarter or the following year, which can create some modest volatility in our year-over-year growth rates. So that's what we saw in Q4 this year, notably in December with a handful of large enterprise customers that didn't spend at quite the same rate as they did in the same period in 2021, both in hardware as well as in software and cloud spend. So we saw it across. But it was a handful of customers. When you exclude those handful of customers, as we noted on the call, the remaining 4,800 customers grew on a constant currency basis by about 10.5%. So overall, we remain confident in our growth strategy that it's working. We're growing our customer base. We're increasing our gross profit per customer, and we expect that to continue.

[Deepak Kaushal, analyst]

Okay. That's helpful. So was there a common theme for those few customers? Or was it different for a customer, customer base, some hardware and software, some budget cuts on timing? Any additional thoughts there?

[Andrew Caprara, executive]

Hi Deepak, it's Andrew. The common theme with all of them that Vince mentioned was actually that it was an event-based situation. It wasn't like a general pullback on budget. It was that in 2021, they had some sort of strategic initiative or project that resulted in a large bolus, like a large onetime event for purchase because they needed to refresh a data center or they were making big investments into their environment, into their solutions. And so it wasn't, hey, hardware spend is down or, hey, we're seeing a pullback in this area or these types of customers. It was the nature of large enterprise services projects like this where you have peaks and valleys as they go through implementing these kinds of solutions. And what we saw in these very, very small handful was that they all peaked in Q4 of 2021. And through the natural ebb and flow of projects and solutions work with them, we just didn't have the same repeat. And so we -- you can't always predict exactly when those peaks will come depending on the solutions and projects that we're doing with our customers. But there's nothing that has us concerned that this is a long-term problem with those customers or with the enterprise segment in general because as Vince mentioned, the rest of the group still grew in double digits last in Q4.

[Deepak Kaushal, analyst]

Got it. That's helpful. And then a follow-up question. I don't know if you guys have this in your numbers, I haven't gone through all the details yet. But for the year, last year, if we can think at a high level, are you able to give us a split on gross profit by focus area, hybrid cloud versus cloud versus asset management? And then how do I think about cybersecurity? Because you talked about that as underpinning all those three, but that's a growing area. So any color on relative splits and relative growth rates would be helpful.

[Vincent De Palma, executive]

Yes. We don't have that disclosed Deepak at that level of granularity that you're suggesting. What I can tell you is that at the highest level, obviously 85% of our gross profit growth last year came from that software and cloud bucket. And within that, you've hit on the two primary contributors of growth for us. The public cloud business as well as the security business as we've seen significant growth in both of those as our two leading drivers. As you get into our solutions, obviously, we've done a lot of work with the public cloud providers, and we've talked a lot about our deepening in co-investment programs with Microsoft, AWS and Google to really drive our solution sets in those areas. We probably haven't talked as much about the security side, but that's been a really amazing driver for growth as we've invested more into those solution areas over the last couple of years. And that also is a true statement, not just maybe in some of the traditional security software partners that you probably think about or cover or discuss. But it's also a big driver of growth in our Microsoft business. If you think about Microsoft being our largest partner, and there's a lot of value that can be created for our customers by helping them understand the security and operational features of upgrading their regular office license to the E5 level. And so we've got a number of assessments that we do with our customers that helps to understand their security environment as well as their collaboration and productivity environment to show them the value of what a combined solution offering could be. And then we've got these other security partners out there that can supplement where there are gaps. And so leading with security has actually been an important part of our growth over the last couple of years and was one of the fastest-growing segments that we had in 2022.

[Deepak Kaushal, analyst]

Okay. That's helpful. And then my last question, if I may. You mentioned Microsoft there, one of the big public cloud providers, is consumption of that public cloud is seeing some headwinds. How is our partners like Microsoft, Google, AWS, changing their incentive to you guys to change the way cloud is consumed? How should we think about that going forward?

[Vincent De Palma, executive]

Yes. I think so far, the short answer Deepak is there hasn't been a change in that. The focus for the last several years has really been on how do we help customers adopt more of these cloud solutions and features and services within the hyperscaler environment. And so we think that we've built the kinds of capabilities that customers need to first reduce and optimize like I talked about in the example on the call. But then also the advanced services that we've got to really innovate the business and drive large growth in consumption. The example I gave again was a customer who rationalized a little bit of their existing spend, but then they had a budget for 300% more. And we're seeing that quite a bit. And so the hyperscalers are all focused on having the right partners at the table who can actually help to do the services to drive the adoption of their cloud. And we think we're extremely well positioned to be able to do that across the top three public cloud providers.

[Deepak Kaushal, analyst]

Okay. That's very helpful color. I appreciate the detailed responses, and I'll pass on.

[Operator]

Your next question comes from the line of Paul Treiber from RBC. Please go ahead.

[Paul Treiber, analyst]

Thanks so much and good morning. Just a question on the cloud optimization. In the prepared remarks, you mentioned that it was a near-term headwind. Can you quantify the impact of Q4? And then what's your expectation for the impact to 2023?

[Andrew Caprara, executive]

Hey Paul, it's Andrew. I can't quantify that for you on here. But what I would tell you is that it's negligible. And the reason is because we're still adding new cloud customers at a high rate. We're such in the early days of this cloud consumption and cloud adoption within the marketplace. So there are a number of new customers that we're winning every month to -- that would more than offset any optimization decline. So it's not something that we're worried about at this time.

[Paul Treiber, analyst]

Okay. That's helpful. And then just on the mix of hardware in gross profit, it has been declining and obviously, with the mix to software and cloud increasing, do you see the mix of hardware continuing to decline? And then are you proactively reducing your willingness to distribute hardware relative to services, professional services or software in the cloud.

[Vincent De Palma, executive]

So the answer to the last part of your question would be no. I mean hardware is an integral part of the hybrid multi-cloud solutions as well as the workplace and digital solutions we provide to customers. The reason the percentages are moving the way you cited where hardware as a percent of our overall gross profit is going down and software and cloud is going up is simply the fact that software and cloud are growing at much greater rates than hardware sales, right? So we all know hardware sales are, I think Gartner estimates them in the low single digits, and there's certainly near-term pressure on hardware sales in the current macroeconomic environment, but software, cloud, security are still all growing quite robustly. So the change in our overall mix is simply a fact of how fast those solutions are growing in the market. And then, of course, we're gaining market share and growing with those much faster. So that's what the math is. So I would expect that to continue. So I would anticipate you would see software and cloud continuing to be a bigger part of our overall gross profit on a percentage basis and hardware continuing to decline slightly just because of the growth rates of those solutions.

[Paul Treiber, analyst]

Okay. And then just a question on the enterprises. What you saw of enterprises. You commented that there was -- it was related to specific projects that came to a conclusion. Is there a sense that there was through COVID, there was a significant amount of investment. And do you have a sense if it was pull forward or if it's just timing of these investments and as a natural end to it?

[Vincent De Palma, executive]

I think it was more of the latter, right? There were current, there certainly was some customers that when they were concerned about supply -- excuse me, that was easy for me to say. Supply chain constraints back in 2021 that made some decisions to pull some spend forward. But that hasn't really been the case, I would say, through the course of 2022. So what we experienced, as I discussed and as Andrew discussed, was just a handful of enterprise customers who had some big spend in Q4 of 2021. And that didn't repeat in Q4 of 2022. When you exclude those handful of customers, our overall gross profit on a constant currency basis grew by about 10.5%. So we saw robust spend amongst the remaining Enterprise customers and all our Commercial and SMB customers. So there's going to be volatility in any quarter. But in general, we expect growth across all our sales channels, driven by same-store sales as it were with existing customers plus new customer acquisition.

[Paul Treiber, analyst]

And then just lastly, you commented a number of times in the prepared remarks about the demand environment remaining healthy. Could you elaborate on or provide some comment on the feedback you're getting from customers in terms of their purchasing plans for '23 and also how they're thinking about IT spend relative to the macro environment where there is some uncertainty.

[Vincent De Palma, executive]

Yes. So Paul, the IT environment has changed dramatically over the course of time. And most companies that we're dealing with view IT as a strategic ability to improve their employees' experience, to improve their customers' experience to grow their business -- it's not viewed -- IT is not viewed as a cost center that we need to manage down over the course of time. It's used as a lever to improve business performance. And that is particularly true with the areas that we're focused on around workplace experience, which helps with delivering a better employee experience, digital collaboration and workplace with cloud and security, security, obviously being very important to all institutions, but with cloud, helping customers leveraging the cloud to grow their business, to improve their customers' experience. So I'd say IT is much more strategic these days than it had been many years in the past. And so we expect that to give us a robust environment. We are seeing good market demand. I did comment that we've gotten off to a very good start in the first two months of this year. That's two months down, 10 more to go as the year goes on. But we've been off to a good start, and we're seeing robust demand amongst our client base year-to-date.

[Paul Treiber, analyst]

Okay. Thank you.

[Operator]

Our next question comes from the line of Stephanie Price from CIBC. Please go ahead.

[Stephanie Price, analyst]

Hi, good morning. Just building on Paul's question there. I hope you can dig a bit deeper into what you're seeing in terms of 2023 client budgets, specifically the areas you're seeing deeper client demand and also potentially some pullback just given the macro environment.

[Vincent De Palma, executive]

Yes. Hi Stephanie, it's Vince. So, as I think we've alluded to, any pullback would typically be more, I'd say, hardware related. That is obviously the easiest thing for customers to sort of pause on. They could also pause on special projects. But we're seeing resilient demand in the key focus areas we have, software, cloud, digital workplace and collaboration, security. So we're not really seeing pullbacks there. And, but as customers, if they are concerned at all, that would be, hardware would be the natural area that they might consider pulling back on.

[Stephanie Price, analyst]

Okay. That's helpful. And then just on net revenue retention. It's still obviously very healthy, but it did come in a bit below recent highs. Just curious about how you're thinking about net revenue retention in the current environment here?

[Vincent De Palma, executive]

Yes. So I think our overall for the year at 106% was one of the strongest years we've ever had. It did pull back a little bit in Q4 just because of our growth rates in Q4. So but overall, we feel really good about where we finished the year in 2022 at 106%. That's a measure of same-store sales, as you know. So that means the same cohort of customers from a year ago are spending more with us now than they did a year ago, and that's we're growing our wallet share amongst our existing customers. So -- and I think our pre-2022, our average had been sort of in the 104 to 105 range. So we did a little north of that last year. And I think that's a pretty solid number for us.

[Andrew Caprara, executive]

Yes. And just I'll also add quickly, as we talked about on the call, if you sort of -- again, if you exclude those handful of customers, the organic growth in Q4 would have been double digits, which means that the net revenue retention was obviously impacted by those few customers. And so that all ties together, Stephanie. So I think we feel really strongly about the ability to grow with our existing customer base. And then again, if you take out those handful, the numbers have been stronger, obviously.

[Stephanie Price, analyst]

Thank you very much.

[Operator]

Our next question comes from the line of Gavin Fairweather from Cormark. Please go ahead.

[Gavin Fairweather, analyst]

Hey, good morning and thanks for the question. Just on the newer AEs that you added over the course of 2022, maybe you can just discuss how they're generating pipe and how that cohort is performing just given the shifting macro environment?

[Vincent De Palma, executive]

Yes. Gavin, I think there's -- as we talked about on previous calls, how we get new AEs up to speed is essentially that we would, we call it appeal and growth strategy, where we'll take some of the underpenetrated or uncovered accounts within our existing customer base, and we'll give them to the new reps so that they have a little bit of a warm reception as they go into these new customers, but maybe a customer who hasn't gotten the attention that we think we could give them in the past. And so they'll go in there, and they'll be able to work on that customer with them directly and start to grow and expand what we do in that customer base. And then supplementing that, we obviously are always looking to add new customers into the mix. And those folks who have accounts that are maybe a little less time consuming because they're newer and developing them also spend a lot of time prospecting. And the three ways that we generally win new customers are obviously direct prospecting of those new account executives who are now able to make new calls into new customers. But the other two ways is obviously investing in our marketing and our digital demand generation capabilities so that we can generate some interest in demand for them. And thirdly, through our partners, as I mentioned earlier, as they get out there, we really have a focus on having them engage with our -- the representatives of our key partners out in the field, getting to know each other, working together on opportunities and ultimately looking to win new business together.

[Gavin Fairweather, analyst]

Okay. And then just secondly for me, certainly it sounds like you're planning on adding to the sales force and technical team this year. Would it be fair to say that you're kind of entering the year with a certain plan and you might kind of toggle up and down depending on just how the year plays out?

[Vincent De Palma, executive]

Yes. We certainly have a plan, Gavin, to expand our sales force. We certainly have a plan to expand our technical talent. That plan includes expanding our customer base and driving more GP per customer, which is our measure of wallet share. So it's similar to the strategy we've deployed over the last six years, right, grow your sales force, improved sales force productivity, grow your customer base, increase your wallet share, and that's what allows us to drive strong organic growth. And that's what our intentions are for 2023 and beyond.

[Andrew Caprara, executive]

If I could quickly add Vince, sorry Gavin, I think one of the things I wanted to just highlight, over the last five years, we've executed this model and this growth strategy, which obviously, as you've seen in the presentation, has increased our gross profit by about 50%. It's almost doubled our EBITDA and more than doubled the free cash flow. So we do feel like we've got that strategy in place that is working and is taking share in the market, and we expect that strategy to continue to work, and we'll continue to invest similarly as we have over the last five years.

[Gavin Fairweather, analyst]

Okay. Understood. And then maybe just on some of the new digital capabilities that you're rolling out, can you just expand on that a little bit, particularly curious for what kind of role self-serve can play as you interact with your clients as obviously, that could be a lever to drive productivity for you?

[Andrew Caprara, executive]

Yes. That's absolutely part of it, Gavin. So we do have an e-commerce engine right now that our customers can use and a portal for them to come in and get information on their purchases or the products and services that they're using. And we are looking to enhance that, improve that digital experience, improve the number and the amount of options available from a self-serve capability. And really, as we think about moving forward over the next several years as we continue to invest in the digital support of our software asset management and cloud management capabilities. We just view that as a really, really important differentiator for us, and it's something that served us well over the last several years. And we're going to now make further investments on the digital side of it. So that, as you said, more and more customers are looking for ways that they can just do some small adjustments themselves, if they need to add a few users to a license or if they need to make a quick provision of a new software title. So those are the kinds of things that we're working on here in our digital investment is really enhancing that portal and the ability for our customers to do more on their own and to engage with their solutions and understand their solutions with Softchoice in a more deep way.

[Vincent De Palma, executive]

And a wonderful thing about that, of course, is that frees up our sales force to focus on some of the more advanced conversations that we're having with customers. So allowing customers to do self-service for the things that Andrew outlined allows our sellers to not have to be doing that with the customer and instead focus on some of the more transformative conversations we have with our customers.

[Gavin Fairweather, analyst]

That's great. I'll pass the line. Thank you.

[Operator]

Your next question comes from the line of John Cho from National Bank. Please go ahead.

[John Cho, analyst]

Good morning, thanks for taking my questions. So how should I think about your spending behavior -- the spending behavior across your different channels like SMB, mid-market, Enterprise under the current environment? And are they going to fall to a similar pattern? Or do you kind of expect some differences along each group?

[Vincent De Palma, executive]

And I'm sorry, John, you were breaking up a little bit there. Did you say what -- did you say what we're seeing in terms of spending by channel?

[John Cho, analyst]

Yes, that's right.

[Vincent De Palma, executive]

So as we mentioned earlier, the demand has remained very resilient, right? And we've seen over through the course, we had some pressure in Enterprise and particularly in Q4, as we said, with a handful of customers. But if you look at the growth in SMB and Commercial, they actually drove some very strong growth through the course of the year. So I have to -- I don't have those numbers right at my fingertips. But we've seen in aggregate, excluding those handful of Enterprise customers through the course of last year, we saw very strong growth in SMB, Commercial and the remaining Enterprise customer base. And in aggregate, across all three, they grew by 10.5%. We obviously have the data in our presentation here on how it grew by segment. I just don't have those numbers right at my fingertips right now.

[John Cho, analyst]

Okay. So your service segment is a small part of the business, but you do have a good growth in terms of the gross profit there. I'm just curious what's driving that growth and how should I think about your service segment going forward?

[Andrew Caprara, executive]

Yes. So John, as we mentioned, we did make investments in our services, particularly in the multi-cloud services and solutions. And if you remember our Q1 earnings call, we also talked about some of the investments we've made in advanced services personnel. And so it is an important part of our business going forward, and we understand that the business continues to evolve and the ability for us to add value to a solution purchase through the services that we provide is important to our customers, but also our technology partners, as I mentioned before. So we will continue to grow our technical and services personnel, and we'll continue to make investments to grow that number going forward.

[Vincent De Palma, executive]

John, it's Vince. So I just want to give you the numbers you asked for. So I couldn't put my fingertip on them when you first asked, but for 2022 on a constant currency basis, our SMB channel grew by just shy of 26% year-over-year. Our Commercial channel grew slightly over 9% and our Enterprise channel grew by just under 1%. So that was the actual growth rates across all three channels through the course of the year. Sorry, those numbers I quoted were on a constant currency basis, just to be clear.

[John Cho, analyst]

Okay. Thanks. And my last question is, could you provide some color on your sales cycle? Do you see the sales cycle getting longer than before?

[Vincent De Palma, executive]

I would say in the aggregate, no, probably a little more pressure up in Enterprise space where there's a little more scrutiny in deals, more decision-makers and influencers get involved in some of those deals, and that's just the nature of the Enterprise segment. But I would say, across our Commercial and SMB, any given customer, you could have that. But in the aggregate, no.

[John Cho, analyst]

Okay, thanks. I'll pass the line.

[Vincent De Palma, executive]

Thanks John.

[Operator]

Your next question comes from Nick Agostino from Laurentian Bank. Please go ahead.

[Nick Agostino, analyst]

Hi, good morning guys. Just one quick question for me on capital allocation. It looks like obviously, for 2022, dividends and given the increase you're making dividends is certainly a high priority. You also renewed your NCIB. So that seems to be a high priority just and given the fact that you're very active on it in 2022. And I'm just wondering, when I look at your multiple, it looks like you've got an above-industry average multiple within the ITSP space. Any thoughts to be more proactive when it comes to M&A and maybe moving up the priority scale when it comes to tuck-in acquisitions. And if that is becoming more of a priority, has the pipeline changed? Are you guys developing a pipeline? And if so, what areas might you be looking at? That's it. Thank you.

[Yota Skederidis, executive]

We will continue to be opportunistic with M&A, I would say. And as I said on the call, our immediate priorities, as you know, we did increase our dividends from CAD 0.09 per share to $0.11 in 2023, and we did renew our NCIB, and we do expect to utilize it. We may be a little bit more opportunistic on our share buyback this year. We are going to evaluate in the event debt reduction becomes more value accretive. For example, as interest rates continue to rise, we may decide to pay down debt. But I would say that M&A is still something that we will evaluate and continue to evaluate in 2023.

[Vincent De Palma, executive]

And Nick, it's Vince, could you clarify your comment on multiple being high, which multiple are you referring to? Because if you -- I don't know which multiple you're referring to.

[Nick Agostino, analyst]

I'm referring to our EBITDA price value to EBITDA trading multiple, when I look at that compared to some of your other peers, it looks like you've got a better currency. So that's kudos to you guys. Just wondering if you guys plan to use that currency on tuck-in acquisitions.

[Vincent De Palma, executive]

Yes. We probably should take it offline. But when we look at a competitive set of other software-focused IT solution providers and some of the other extended IT solution providers, we feel like our EV per EBITDA multiple sort of right in line with sort of the industry right now. So we probably can take that offline in a call, see if we're using the same comparative set because maybe we're looking at a different set of competitors.

[Nick Agostino, analyst]

Sure. That's all, thank you.

[Vincent De Palma, executive]

Thanks Nick.

[Operator]

[Operator Instructions] Your next question comes from the line of Divya Goyal from Scotiabank. Please go ahead.

[Divya Goyal, analyst]

Good morning guys. So I had a question on the demand discussion that we've had across the Enterprise clients. If you could provide some color on when the consolidation trends that you might have seen across these clients or your existing clients itself? And if you think scale is making a difference there.

[Vincent De Palma, executive]

Hey Divya. In the Enterprise segment, there's always been an element of that, right? Our ability to have sort of these master service agreements with these large Enterprise customers has provided us access to support them across hundreds and hundreds of different vendors basically in our large enterprise customers. So I haven't necessarily seen any trend that's changing there. I think what you're seeing is many of these companies starting to look for opportunities to consolidate within the specific software vendors underneath that. So the example I gave earlier around Microsoft and the ability for us to sell them the more complete package, but that often will allow them to consolidate their software titles down by a few vendors and consolidate more into that one stack. And so obviously, there's been some acquisitions and consolidations within the broader technology ecosystem that's created more of these platform plays like a Microsoft or a Cisco or a Palo Alto or others like that. And we've certainly seen more of our customers evaluating those to simplify the execution and operations to manage these kinds of environments. So we're seeing that happen a little bit, but not necessarily vendor consolidation as much on the sort of the provider side.

[Divya Goyal, analyst]

That's helpful color. And if I can ask you a little bit on the consulting practice for the business. And where exactly does that fit within the managed services versus the software and cloud versus the hardware? And how are you seeing that trend over the past few quarters and going forward?

[Vincent De Palma, executive]

So where you would see the fees like our FinOps engagement that I mentioned in the prepared remarks, that would be in our services business. And so we've got all of our advanced services and professional services teams combined into one unit and all of the fees associated with that show up in that services piece. We do have some assessments, though that we do and life cycle services that we, where we provide value to our customers on an ongoing basis as a value-add for them trusting Softchoice with those purchases. So for example, if you are buying public cloud through Softchoice, you get access to our life cycle service advisers and our assessment services to ensure that we're taking a look at that environment on a periodic basis and helping our customers actually navigate and manage the complexity of understanding their bill, understanding how to attribute costs back to different parts of the business and making sure that they've got control over what they're spending their money on. Those kinds of things would be part of the value add that would be in our software and cloud number, but paid service engagements, consulting engagements, anything like that, those will go up, obviously, in our services number. And sorry, the second part of your question was around trends. That was an important part of our growth going forward, right, is investing in those kinds of services, and we are seeing great uptake in that in the second half of the year, especially. And it's really changing the nature of the relationships that we have with these organizations, right? We're helping one of the largest financial institutions in North America right now with consulting engagement on their Zero Trust security strategy. We're helping them also with FinOps to navigate their spend and understand how to govern and manage their environment. And we're doing that across a few of these different large financial institutions. So these are the kinds of consulting engagements that we're now able to do for our customers that are really broadening the reach that we have within these organizations and opening up a number of tremendous opportunities for us to go deeper with them.

[Divya Goyal, analyst]

Are you seeing the customers spend more and take longer on consulting engagements as they elongate implementation cycles or defer the decision to make sure that the spend is worth the money. Is that something that you're seeing happening across the industry?

[Vincent De Palma, executive]

I'm not seeing -- I don't think I'm seeing that because of the fact that they either need the consulting or they don't. They're not using it to be extra sure. I think what we are seeing is an uptick in our assessment services so that we can properly assess the environment and make sure that we have the right plan in the first place. That's not something that takes months and months and months of consulting though. It's a quick assessment that allows us to help our customer plan properly. And so those are the kinds of things I'm seeing more Divya, more so than consulting projects that require proof before moving forward.

[Divya Goyal, analyst]

That's perfect. Just one last question for Yota on the variable compensation side of things. So that definitely impacted the EPS this time. How can we expect to project the personnel expenses on a go-forward basis with the revenues? What would your best guidance be? And we can discuss it here or off-line as you'd like.

[Yota Skederidis, executive]

So, we could discuss further off-line. But I would say that our Q4 from an adjusted cash OpEx perspective was low when compared to our historical trends, and that was due to lower variable compensation recorded in Q4. So I would say that looking at Q3 2022 is probably a better starting point when thinking ahead of what our cash, our adjusted cash OpEx could look like.

[Divya Goyal, analyst]

Thanks guys. Thank you.

[Operator]

There are no further questions at this time. I'll turn the call back over to Mr. Vince for closing remarks.

[Vincent De Palma, executive]

Okay. This is Vince. Thank you Marcella, and thanks to all listeners and viewers who joined us today. We look forward to updating you on our continued progress on our Q1 call in May. Have a great rest of your day and a great weekend everybody.

[Operator]

This concludes today's conference call. You may now disconnect.