Softchoice keeps “Outperform” rating with ATB Capital

ATB Capital Markets analyst Martin Toner is sticking with Softchoice Corp (Softchoice Corp Stock Quote, Charts, News, Analysts, Financials TSX:SFTC) after the Canadian IT solutions provider recently delivered its third quarter financials. In a report to clients on Thursday, Toner kept an “Outperform” rating on the stock, saying Softchoice’s third quarter missed on revenue but was a beat on earnings.

Toronto-based Softchoice, which designs, procures, implements and manages IT environment solutions, reported third quarter sales of $222.1 million, up 11.6 per cent year-over-year, and adjusted EBITDA of $15.3 million compared to $11.3 million a year earlier. The Q3 featured a net loss of $8.0 million, with the company saying the loss was prompted by a $12.1 million loss in foreign exchange which was largely unrealized and related to a revaluation of its US-denominated debt. (All figures in US dollars except where noted otherwise.)

Management maintained its previously-stated full-year 2022 guidance, calling for gross profit of more than $320 million, adjusted EBITDA as a percentage of gross profit of between 25 and 28 per cent and adjusted free cash flow conversion of about 90 per cent.

“We recorded a strong third quarter of organic growth driven by continued demand for our Software & Cloud IT solutions in our public cloud, security and workplace portfolios,” said Softchoice President and CEO Vince De Palma in a Thursday press release.

“Our growth investments continued to drive deeper customer engagements, resulting in record revenue retention and gross profit per customer as well as growth in our total number of customers,” he said.

Looking at the Q3 results, Toner said the $222.1 million in net sales was below his forecast at $233.0 million as well as the consensus estimate at $224.8 million, while adjusted EBITDA at $15.3 million was better than his call at $12.7 million as well as the Street at $12.6 million. Gross margin at 13.9 per cent came in a little under Toner’s estimate at 14.3 per cent.

Digging down, Toner said Softchoice’s Q3 gross profit at $75.8 million was up 16.2 per cent year-over-year, with Software and Cloud IT Solutions making up the biggest contribution to that increase, growing by 23.0 per cent year-over-year to $49.1 million.

On management’s guidance, Toner said holding steady is itself a positive in the current climate.

“Maintaining guidance in the face of currency headwinds is a de-facto raise on gross profit but not on Adjusted EBITDA. The strong beat on gross profit and adjusted EBITDA, as well as showing all-important operating leverage, is a good result, in our opinion, despite the Company not raising guidance,” Toner wrote.

With his maintained “Outperform” rating, Toner also maintained a C$27.00 price target, which at the time of publication represented a projected one-year return of 58 per cent.