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Good morning. My name is Centern, and I will be your conference operator today. At this time, I would like to welcome everyone to the Softchoice Q2 2023 Earnings Conference Call. All lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Friday, August 11, 2023. I would now like to turn the conference over to Mr. Tim Foran, Investor Relations. Please go ahead.
Thank you, and good morning, everyone. Welcome to Softchoice's Q2 2023 Conference Call for the period ended June 30, 2023. A reminder for the purpose of the recording today is Friday, August 11, 2023. I'm joined today by Andrew Caprara Softchoice's CEO; and Jonathan Roiter, CFO. After prepared remarks, we will open it up for analyst questions. Company will make forward-looking statements on our call today that are based on assumptions and, therefore, subject to risks and uncertainties that could cause the actual results to differ materially from those projected. The company undertakes no obligation to update these statements, except as required by law. You can read about these risks and uncertainties in our earnings press release today as well as in our filings with Canadian securities and regulatory authorities. Also, our commentary today will include adjusted financial measures, which are non-IFRS measures. These should be considered as a supplement to and not a substitute for IFRS financial measures. Reconciliations between the 2 and relevant disclaimers can be found in the company's MD&A, which is available on our website. Unless otherwise noted, percentage growth rates that we refer to today are for the identified period ending June 30, 2023, compared to the same period ending June 30, 2022. And finally, please note because the company reports in U.S. dollars, all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I will now turn the call over to Andrew.
Thank you, Tim. Welcome, everybody. In today's call, I'll start by providing highlights of the quarter, an update on the operating environment and progress against our growth strategy. I'll then turn it over to Jonathan for a deeper dive on the financial performance before our Q&A. So starting on Slide #4 for those following online. Q2 was a period of continued growth and execution in our core software and cloud focus areas, which drove strong profit margins and a significant generation of cash flow. Our Software and Cloud Solutions gross profit grew by double digits on a constant currency basis, driven by continued healthy demand for our workplace software, public cloud and security solutions. The double-digit growth in software and cloud was broad-based with all 3 sales channels, SMB, Commercial, and Enterprise coming in at or above 10%.This is really encouraging. It illustrates that spending on mission-critical IT programs for our target mid-market customers continues to be aligned with our core focus areas and that our customers value our differentiated cloud and software services. In line with broader industry trends, our second quarter results were impacted by a decline in hardware sales and certain related professional services as customers postpone some discretionary spend, which disproportionately impacted the results of our enterprise sales channel. Overall, though, this resulted in Q2 gross profit growth of 1.5% in constant currency. Now stepping back at the midpoint of 2023 and taking a year-to-date view. Our performance in H1 2023 was solid with gross profit growth of 7% in constant currency, including 16% in Software and Cloud and 8% in services, partially offset by the 15% hardware decline. As you know, we have a really resilient business with more than 75% of our gross profit now coming from more recurring software and cloud and services solutions and 90% of our customer base are SMB and commercial businesses. So while we expect hardware to remain soft through the back half of 2023, our outlook for healthy organic growth and our EBITDA remains unchanged, and we believe that this softness is temporary. Turning to the drivers of our growth strategy on Slide #5. We continue to grow by increasing the size of our customer base and increasing our wallet share with our customers. In terms of new customer growth, our investments in our sales capacity and through our appeal and grow approach to immediately seed new sellers with the book of business has enabled us to increase our customer base by 3.5% over the prior year. And the investments we've made in technical and specialty sales resources have enabled us to go deeper with our customers, and we've grown our gross profit per customer to $67,000 over the past year, a 3% increase over the prior LTM period. These expanded relationships with customers are achieved in a couple of ways. First, we deliver an exceptional customer experience, driven by a passion for our customers' success and in part by the tools provided to our team as part of our IT-enabled business transformation. Ultimately, this leads to higher customer retention. And then we drive deeper relationships with our customers through our go-to-market strategy and investing in our technical capabilities in the areas where there's significant customer demand, namely digital workplace and collaboration, cloud and security. Turning to Slide #6. Let me share a little bit more about what we're seeing in those 3 focus areas, starting with digital workplace and collaboration. In the second quarter, we had a strong performance with our largest partner, Microsoft at their fiscal year-end. We've had great success transitioning our customers to the cloud solution provider or CSP program, where we can add our value-added life cycle services to help the customers get the best return on their investment. We also have a best-in-class motion to show customers the value of the additional features of Microsoft's advanced E5 offering and to then upgrade them to that suite. This creates services demand to implement these solutions, and then we can attach other supporting software titles that their organizations and people need. Additionally, as more organizations look to avoid data center hardware purchases or delay them, we've seen an increase in demand for VMware cloud software to quickly migrate to the public cloud while maintaining the legacy VMware operating systems. And looking a bit further out, Microsoft and Google will soon launch generative AI additions to their workplace software suites and organizations will look to us for our long-standing trusted expertise in managing thousands of these environments alongside our newer application and data modernization services. And while we can't precisely say when we're going to begin to see the long-term tailwinds that generative AI will provide, we've already begun to develop and implement AI applications within our own environment, building out use cases that we will soon commercialize and roll out. Turning to public cloud, our fastest-growing subsegment within software and cloud. In the second quarter, we added a record number of new cloud customers. This is going to provide a strong pipeline for growth in future years. [indiscernible] as our people help these customers adopt the cloud and increase consumption over time. And there's a few drivers of our growth in public cloud. One, as I've outlined in past calls, the desire by businesses in the current macroeconomic environment to optimize IT spend, including cloud consumption, aligns perfectly with our reduced optimized Innovate or ROI customer success framework. Previously, many new cloud customers were essentially paying for cloud on a credit card, and we have the proven capabilities to help them rain in this spending. This has been a key motion in our acquisition of new cloud customers. Second, our ability to capitalize on these recent tailwinds has been driven by our strategy over the past half-decade to invest in our multi-cloud capabilities, including significantly expanding our technical expertise across all 3 of the top hyperscalers, Microsoft Azure, AWS and Google Cloud. So many SMB and commercial companies are still early on in their journey to migrate and modernize their applications and data, and we have the full suite of services to help them take those critical first steps. And like on the workplace side, to get the most out of the newest generative AI tools, organizations will need help from us to build that modern environment that's necessary for these solutions to operate effectively. Third, our strategic investments in cloud have distinguished us in the eyes of our technology partners who are a major driver of new customer wins for us. Our value to our core cloud partners continues to be recognized. In the second quarter, we received VMware's Cloud consumption award and our application development services partner specialization in Google Cloud Platform's Advantage program. And finally, the rise of cloud marketplaces, which is really where our cloud and sand capabilities intersect, organizations are essentially rewarded for making their software purchases through their hyperscaler platforms by getting reduced cloud consumption costs in return. This has provided an opportunity for us to leverage our ROI framework and our software asset management capabilities to help customers bundle purchases for multiple software titles, including some that we previously were not managing and package them into a broader cloud consumption strategy. And much like we've always done with software, we've proven our value add to customers by helping them navigate the cloud marketplace. Security, the third component within software and cloud, has and we expect will continue to grow very quickly as we increasingly help organizations build a modern security mesh architecture that starts with identity-based security. This is done by integrating solutions from security-focused software partners like Cloud Strike, Palo Alto Networks and Sophos as well as the advanced security capabilities in Cisco's Security Suite and within Microsoft's E5 suite like Azure Sentinel's comprehensive security information and event management solution. And as a complement, we recorded a strong increase in managed security customers. While new and still a small service line, we're examining opportunities to move even more aggressively in this area. And in terms of recognition by our technology partners, during the second quarter, we received Trend Micro's partner in the year in the categories of cloud innovator in Canada, marketplace consulting in Canada and growth partner of the year in the United States. And before turning it to Jonathan, I want to spend a few moments on Slide #7, elaborating on the real enabler of our strategy, our people. Specifically, our ability to recruit, engage and retain a long-tenured team, which is tied clearly to productivity in our industry. As we indicated last year, our recruitment was ahead of target, thanks to the talent acquisition machine that we have in place. I'm pleased to say today that our employee retention, which is already in the top quartile for a sales organization is also well above our target. While this is partially due to the softer tech sector labor market, we believe it also reflects internal initiatives to promote retention, including strong diversity, equity and inclusion initiatives, a competitive compensation structure, flexible work environments, increased health benefits and ongoing training and development opportunities. These initiatives are part of our overall approach to doing business sustainably and responsibly in ensuring that we provide returns for all our stakeholders. More information on this is available in our ESG report, which we recently released and is available on our Investor Relations website. I encourage you to have a look if you haven't already.With that, I'll now turn it over to Jonathan.
Thanks, Andrew. I'll start on Slide #8 with a look at our top line metric, gross profit. Gross profit increased 1.5% on a constant currency basis and declined 0.5% on a reported basis due to the impact of currency fluctuations on our reported results. In Software and Cloud, we saw good growth. On a dollar basis, this was driven by increases in workplace software followed by public cloud and security. On a percentage basis, the public cloud remains the fastest-growing portion. In terms of hardware, the decline was across all channels, though in percentage terms was most notable in enterprise, as Andrew mentioned. The sales decline there was exasperated by associated rebate revenue declines related to the lower volume. In terms of software, this was essentially flat on a dollar basis, following a very strong Q1 2023 and Q4 2022. This was primarily driven by lower volume of legacy partner-led data center-oriented projects in the enterprise channel, offset by strong managed service results and internal professional services growth as a result of continued strong utilization in our growing workplace and public cloud services. In terms of LTM period, which removes certain quarterly volatility, software and cloud and services, both increased by double digits in the LTM period versus the prior LTM and continue to increase within our mix of business. Together, they compromised a record 76% of our overall gross profit in that period versus 72% in the prior period. As seen on Slide #9, on a year-to-date basis, our gross profit growth in constant currency of 7% was very close to the 5-year average of just over 8%. Now to put this into context, it's useful to note that if hardware was even flat in the first half of the year, our gross profit would have been 9% on a reported basis and 11% on a constant currency. Now turning to operating expenses on Slide #8. We provide an overview of our headcount, which comprises the vast majority of our cost structure. As you see, we have increased our sales capacity as well as our sales support resources we provide them by about 6% over the past year. So while the impact of the economy on discretionary hardware purchases has delayed the overall return on these investments, we have significant capacity built in for higher generation of gross profit in 2024. We have funded these strategic hires through gross profit and partially through operational efficiencies by continuously ensuring our cost structure is aligned to the highest growth areas of our business. Looking ahead to H2 of this year, we are planning to accelerate investments in our sales capacity and continued investments in our sales support resources as well as technical capabilities. In terms of the AEs, we now expect to end 2023 with an approximate 6% increase in our frontline sales force, notably in the SMB and commercial channels, including the public sector. This is about an 18% increase since the end of 2021. Now while these investments may seem off-cycle, they reflect: one, the demand we are seeing across our core solutions; two, the historical track of payback and return incremental selling capacity is provided. The payback on each new SMB and commercial [indiscernible] that we've added is about 11 to 14 months. And three, our balance sheet position and operating model, which provides tremendous flexibility to quickly react to changing market conditions. Turning to Slide #11. With second quarter adjusted cash operating expenses coming in roughly in line with the prior year. We finished the quarter with adjusted EBITDA and adjusted EBITDA margin, similarly in line with that same year. As I noted, while we grew our sales force and sales support over the past year, this was offset by realigning our non-quota-bearing workforce towards growth areas as well as prudent expense management. Now turning to the bottom line. This all translates to net income per share on a diluted basis increased to $0.23 from $0.12 in Q2 2022, largely due to foreign exchange gains and lower share count due to the share buyback program, partially offset by higher income taxes. Adjusted EPS on a diluted basis decreased $0.23 from $0.27 in Q2 2022, largely due to higher interest and income tax expense, partially offset by lower share count due to our share buyback program. So now turning to Slide #12. We had another strong Q2 in terms of cash flow with net cash provided from operating activities of $53 million, which we used primarily to return capital to shareholders in the form of dividends and share buybacks as well as repaid debt, which brought our net leverage down to 1 turn. This was predominantly driven by effective working capital management. Adjusted free cash flow on an LTM basis increased 20% to $77 million, driven by a 19% increase in adjusted EBITDA and relatively stable maintenance CapEx and lease payments and as a result of our capital-light business model. During the last 12 months, we've increased our dividend for the second consecutive year as a public company, and we execute on significant share buybacks under our normal course issuer bid. This has led to returning $47 million to shareholders in the last 12 months. Now as it relates to the near-term capital allocation expectations, our priorities remain on internal growth investments as they continue to generate our best return on invested capital and combined with our low leverage, this protects us from macroeconomic risk. Our other priority is paying our increased dividend. Both debt reduction and share buyback remains discretionary use of cash. As I discussed a bit earlier, our healthy leverage position provides tremendous flexibility to continue to make incremental investments in selling capacity and capabilities us together with expected normal seasonal working capital outflows in the third quarter, our near-term focus will be to continue to ensure we maintain this flexibility. As Andrew noted, our target of healthy organic growth in our EBITDA has not changed despite the impact of hardware headwinds. In terms of seasonality of gross profit, we expect the second half of the year to be weighted a bit heavier than the first of the year, consistent with last year, representing around 51% of full-year gross profit. Due to FX and the fact that last year's Q3 was a strong comp as it had 16% growth. This is anticipated to result in Q3 2023 to be relatively stable to last year on a reported basis. Adjusted cash OpEx in Q3 is anticipated to be slightly higher than Q2 before increasing by a couple of million dollars in Q4 for the reasons I outlined. And now I'll turn it over to Andrew for final thoughts and Q&A.
Thanks, Jonathan. As it's our first public call together, I want to extend my welcome to Jonathan on joining Softchoice. He's been a tremendous addition to our leadership team, and I look forward to his ongoing contributions to the growth of our business and to the success of our people. Now to sum it up before we jump into Q&A, we have a resilient business, highlighted by the continued demand for our core software and cloud solutions, which drove strong profit margins and significant generation of cash flow. We continue to execute on our growth strategy. We expect to see that continued healthy demand for our core solutions through the back half of 2023. We're still focused on the industry's fastest-growing subsectors. The market conditions in the first half only reinforced that for us, and we see many new opportunities in cloud, security and workplace software that will provide tailwinds for future growth. We will continue to invest to fuel consistent organic growth. Against this backdrop, we're accelerating investments in growth initiatives to support the strong top-line growth into 2024 and beyond, notably as we will lap the hardware headwinds. And finally, we're proactively managing our cost structure and finding operational efficiencies to fund our growth investments, return cash to shareholders and achieve healthy organic in-year EBITDA growth and margin expansion. With that, I'll turn it over to the operator for Q&A.
Thank you. [Operator Instructions] The first question comes from David Kwan from TD Securities, please go ahead. Your line is now open.
Good morning, everyone. The comments about generating healthy organic EBITDA. I was just wondering if you could provide some more color on that and maybe quantify it. And maybe looking further the P&L as it relates to gross profit, I guess just looking at the commentary that you provided, it seems like it might be a challenge to hit double-digit growth for this year, maybe even on a kind of constant currency basis, but is that still kind of the target maybe looking out beyond 2023?
Hi, David, it's Jon here. Thanks for the question. Yes, I mean, as we started at the higher end at the GP side, the core of our business, software and cloud, our core focus, we certainly are seeing that double-digit growth. There's, as you know, industry-wide, some headwinds on the hardware side. Now what we're seeing is predominantly on the device pieces. So it gives us confidence to believe that as we head into 2024, we could see the return of those purchases. So from a longer-term perspective, our historical growth rates of high single-digit to low double-digit, I don't think anything really changes. Now there could be some volatility and there clearly is some volatility this year on those numbers and achieving those -- that target. Where we have been incredibly focused is ensuring that our expenses are in line with our GP growth. And we've been successful in managing those costs. And I'll say it hasn't been at the expense of adding selling capacity. And as you know, it takes a little bit of time to ramp up our new AEs. So they're really well positioned for 2024. And so I guess your last question around EBITDA. We've had, I think, many years now about 100 basis point improvement in operating leverage. I think that's a solid track record that provides evidence of what the business can do going forward.
I guess given the investments that you're planning to make, including on the AE side, Jon, would it be fair to say that average of, call it, 100 basis points might come in below that this year?
Look, I can't give you exact alliance, but I think it really depends on ultimately how the GP fall out. But to be within the close to that range, I think something that we feel that we're aiming for.
Okay. That's helpful. And then just one question on the Gen AI side. Interesting to hear your comments about some of the investments you're making there and trying to support your vendor partners like Microsoft and Google. Do you see that becoming one of your key practices like hybrid multi-cloud, for example, in the near term? And can you maybe talk about how you see ramping up that team?
Yes, sure, David. It's an interesting conversation at this point as to whether it becomes on par with those or whether it's the natural extension of a lot of what we're already doing in workplace and hybrid multi-cloud. Because if you think about solutions like Microsoft's Copilot for M365, that's really just an extension of what we're already helping customers with in taking and getting the most out of their Microsoft solution suite. And so at this point, we believe that we're actually adding that into the amazing work that we already do to help customers adopt them and get the most value out of the full Microsoft E5 suite. And obviously, you need some different capabilities in order to do generative AI effectively. But unclear whether that makes it its own practice at this point. I think there's a lot of value in making sure that we're connected to what's going on, on that side of things, especially in workplace. On the cloud side, it's a bit of the same story. A lot of the generative AI tools may actually just be extensions of what we're already helping customers do with application development and application modernization, right, leveraging some of these tools to build smarter applications than they were doing before. And then there are other instances where it's probably more clearly a stand-alone generative AI solution. Imagine you create a custom solution to scan all of the data and materials that your marketing team has created so that you can create custom marketing brochures for every prospect that you send information too. That's the kind of thing that's probably more of a stand-alone generative AI solution set. And so I think we're testing and learning the different models right now, and it's probably too early to say exactly how we're going to structure it. But I can tell you, we're looking at all of those ways of helping customers because we just fundamentally believe that this is an opportunity to make organizations so much more productive, but also really it's an opportunity to improve the work lives of so many people by taking a lot of those mundane tasks off their plate and freeing them up to do the work that they're good at and that they love. So -- we think this is a real trend that's going to stick. And so we're starting to make those investments now and more information will come down the road as we get further along into these releases.
That's helpful, Andrew. I guess just a follow-up quick on that is how easy are you finding to find good talent to address this demand?
Well, I think anybody who says that it's really easy to find generative AI talent is lying to you at this point. It's so new, David. But you know what? The interesting thing is there's a lot of work that needs to be done before the customer actually turns on the generative AI model, right? It's -- is your data state ready? Are your applications ready? Is your environment ready to handle this? And so these are all the application and data skills that we've been building within Softchoice for the last 3 years. And so we can go pretty far down the road without needing any new talent actually and helping organizations get this going. And then obviously, we've got the support of our amazing partners, Microsoft, Google, Amazon and others to train and cross-train our people. And obviously, as you'd imagine, there's a lot of folks who are really excited about the opportunity to learn how to do this. So at this point, we're not constrained by talent, and we'll see as we get further down the road.
That's right. Thank you guys.
Thank you. Our next question comes from Martin Toner from ATB Capital Markets. Please go ahead, your line is open.
Thanks so much for the question. Maybe talk a little bit about your willingness to step up buybacks given how underlevered the company is?
Hi, Martin, I'll take that. Look, when we think about our capital allocation strategy or appliance, I mean I think they're quite well defined, right? It begins with continuously investing in our business, and we've shown how we've done that in the first half of the year, and we expect to continue doing that in the back half of the year. That -- with limited CapEx, then our next priority ultimately is the dividend that I referred to. And I think we're quite proud of the track record of having increased it 2 years running. And that leaves us then with the discretionary dollars around leverage and share buybacks. I think where there's a certain level of unprecedented times, I think 10 interest rate increases in an incredibly short period of time. Are we -- is that period done? Are we still going to see a continued rise in interest rates? It leaves us to be a little bit cautious and when we look at our leverage. And so we certainly like where our leverage has come out. It's important to note that Q3 typically is an outflow of dollars. So we have to bear that in mind when we think about where we want our leverage and how active we want to be in the NCIB program in the third quarter. But I think I'd leave you with -- we returned $47 million to shareholders in the last 12 months. And we certainly like the position that we are of a high-growth company with very little -- with a very high return of cash to shareholders.
Thanks very much. Revenue retention was close to 100%. Were there any -- and I'm sure you guys would like to have that number a bit higher. Were there any notable losses in the quarter?
No, it was really tied to the -- just the overall hardware business, Martin. And actually, if you look underneath it, the SMB and commercial revenue retention numbers were stable. It really was just the hardware declines in our Enterprise segment. So it was nothing -- we didn't lose any big customers or anything like that, that has us concerned. I think this is temporary and tied to the decline in spending on those devices.
On hardware, what do you think hardware growth looks like once the macro tailwinds sort of abate?
At least for us, Martin, I can tell you that as Jon mentioned in his remarks, the largest decline is due to client devices. So for us, mainly laptops, right? And so that's not going to last forever, right? Employees are going to need new laptops and organizations are going to hire again, and devices are going to wear out and refresh cycles are going to kick on again. And so I don't think we're going to see this massive rebound and all of a sudden, everyone is going to buy massive numbers of devices at the same time. My opinion anyway, is that we'll kind of go back to the normal refresh cycles that we were on, and I think they just probably got deferred for a year.
Fantastic. Last one for me. Software revenue growth decelerated quite a bit sequentially. I believe it was from 20 down to 10. Can you talk us through the drivers there? And how much is macro, how much is anything else?
Are you referring from Q1, Martin?
Correct.
Yes. So if you remember in Q1, we mentioned that we had a couple of very large deals that helped our number accelerate even faster in Q1. So I think if you look at this over an LTM period, you see that we're kind of in that range of low double-digit average growth. And so it gets a bit lumpy if you're going one quarter to the next quarter just based on a customer makes a large multiyear purchase upfront and then it might help that quarter or hurt that quarter as it did in Q4 of last year. So I wouldn't look at one quarter over another. It's not something that is so stable, like it's not all just a basic consumption where you'd imagine it being stable quarter-on-quarter. But I'd say over the time, we continue to drive that double-digit growth in software and cloud, and I mean we're proud and happy with that.
Great. Thanks so much, I'll pass it on.
Thank you. Our next question comes from Paul Treiber from RBC Capital Markets. Please go ahead, your line is now open.
Thank you so much. Good morning. I just wanted to hone in to generative AI. Obviously, it's been a big industry focus and got a lot of media attention. The -- what type of -- can you just indicate that the type of the size the magnitude of customer interest that you're seeing in new generative AI? And then also your thoughts on -- since it is a new technology, how quickly do you see customers converting from interest to actual deployments?
Well, I think the interest is very high to at least learn about it right now. And it's a bit of the blessing and the curse in our industry when an enterprise IT solution becomes consumerized, right? And the reality is most of us have played with the free version of ChatGPT, and that's true across most of the organizations across North America that people are playing with it and people are trying to use it. And so if you're running an organization, you have to be conscious of the fact that this is probably already in your environment in some way. And so what a lot of organizations are trying to do right now is to understand how it works and how to use it, but also more importantly, to understand what kinds of security, governance, processes and protocols they want to put in place that they can do generative AI properly. Because if you implement the enterprise-grade solution and not the free version, then it's a more contained environment that you can secure and govern with your own rules and your people can use freely within the walls of your own IT environment. So I think right now, there's a lot of work on, am I ready for generative AI? How do I prepare myself, what does that look like? And so that's a lot of the conversations we're having with customers today. And then that's slowly moving into, okay, well, what are those first use cases, right? How do we start to understand where we think we could get a win on the board with generative AI and where we can help our people most by leveraging these technologies? And so we have workshops that are associated with that with helping customers do just that. And we're starting to see some of these conversations take off and turn into these workshops. And so I think it's starting to go, Paul. It's -- I wish I could tell you and predict exactly when it's going to impact the business, but I think it's not something we're expecting to hit us in 2023 for sure. We're hopeful that things start to turn into a meaningful business in 2024 alongside the launch of Google and Microsoft's generative AI solutions for their workplace productivity suites, which honestly haven't even been announced yet, right? We haven't announced the general release of those solutions. So I think it's still into 2024. And hopefully, it really starts to take off at that point. But there's some work that organizations need to do first, and we're very active in helping them prepare for that now.
That's an interesting comment. The -- what are your thoughts or feedback from customers on pricing? Microsoft last month announced pricing of copilot. How are customers thinking about the pricing relative to the potential value it may provide?
Well, I think it -- with it being in such limited release right now, I don't think they have a sense of what the value is. And so I think they're reserving judgment on that at this point, to be honest. I think as it gets closer to full release the details and use cases and the opportunities become clearer for organizations. Then they'll probably have a better sense. Particularly on those -- specifically on the M365 piece, Paul, that I'm talking about there where it's not released yet. But there's actually a lot of other elements that have already been released, right? There's the copilot for GitHub and for Bing Chat enterprise. And there's ways that organizations can use these already for less than what was announced for copilot for M365. And we are seeing people interested in using them at those levels. So I think it's TBD on that specific on the one specific solution suite for Google and Microsoft, but you're seeing adoption and interest on the others.
And switching gears to the cost savings or efficiencies that you saw. Can you just elaborate a little bit more on what you're actually doing to improve the efficiencies of the core business?
Sure. I'll take that, Paul. Look, the reduction in our cash OpEx, really is coming from 2 parts. The first part with the softness that we're seeing in hardware, clearly, our compensation structure has a variable component. And so there's elements there. The other element in terms of where we're leading in, if you will, is what we're doing is we're ensuring that our -- the resources that we have, the support and the technical resources that we have are aligned more towards where the opportunity lies as opposed to where the opportunity once was. And so I can think of some examples, I think we did we discussed in some previous calls in our services side of the business where we realigned some of the resources in our data center look, our legacy data center offering, and realign those resources towards where we see higher growth. And then lastly, it's just discretionary expenses that we're being very thoughtful in making sure that we see the value in the return that we get in spending those dollars.
If I could add one more, I'd say also, our people have really been amazing through this and finding ways to continue to drive new uses of the technology that we've implemented and finding ways to more effectively serve customers in an efficient way. And so a lot of credit to the folks on the ground here at Softchoice, who've really gone and found new ways to serve customers and maintain that high level of service in a world where we have to be careful and cautious on our spend.
Okay. Thanks for taking questions.
Thank you. Our next question comes from Divya Goyal from Scotiabank. Please go ahead, your line is open.
Hello, everyone. Just building on to the discussion of the AI potential, I know it's early stages and the enterprises are still assessing the possibilities there. But even considering the Microsoft Copilot, the GitHub Copilot and in Enterprise discussion or the products that are out there, could you provide some color on the growth in your services business as customers start to adopt more of these Jenny solutions? And do you anticipate your software, hardware and services revenue split to shift as a result of that?
Hi Divya, it's so early. The thing I want to -- I wish I had a great answer for you all on generative AI, but I don't think any of us really know yet. The thing I'll come back to is like the public cloud I know we like to talk about the declining growth rates in public cloud, but I think it was a $65 billion industry in Q2 that grew by $10 billion. So there's just so many companies that are still trying to figure out how to leverage the public cloud and how to move and modernize their applications and data. And really, that's the fuel right now as we add more cloud customers and add more cloud growth and do more services to help customers modernize that modern application and data environment. And so that's going to be the big driver of growth, right? It continues to be the software and cloud story, which then drives the associated services. And absolutely, we're going to look at generative AI. And if you listen to the announcements from our technology partners, they would tell you they think this is going to be huge, and it is going to drive significant amounts of services. But it's also pretty compute-intensive, so it's also going to drive significant amounts of cloud consumption as companies start to activate and use these models. So hard to tell at this point if it's going to cause a mix shift. My guess is it probably won't because it will still drive a lot of consumption. But certainly, there's a large services opportunity there for us.
That's helpful. Just I understand that the front end solutions might come later, but are you seeing increased demand for data management solutions at all? Is that something that you cater to?
Yes. I think there's a lot of organizations who are starting to really think hard about their data in light of these announcements. Right, traditional AI or predictive AI always needed that proper data state. And so there's a lot of organizations that have already started to modernize what they're doing around their data. And I think that, that's a trend that continues. But certainly, I think certainly, we've had more conversations around -- am I ready for this? And is my data ready for this over the last little while? And so it is something that we've been investing in for several years. And so we do have a nice data group within our solutions and services team that can help customers with that now.
That's perfect. And one last question I'll ask broadly on the pricing pressure. So a lot of your software and cloud solutions are to do with licensing last in with services. But are you seeing any specific pricing pressure across specific industries, given the current macro pressure? And do you see more competitors trying to bring the prices down here?
Short answer is no, Divya, not anything significant and meaningful. There's always one-offs, but there's not a trend out there or a significant shift in any one of our business lines, channels or industry segments.
That's helpful. Thank you.
Thank you. Our next question comes from Stephanie Price from CIBC.
Good morning. I wanted to circle back around productivity. It looks like gross profit per executive was down on a year-over-year basis. And obviously, the average number of has increased. Just curious, I mean, how we should think about this? I assume it's an extra-demand environment and new hires taking time to get productive. And then Jonathan also mentioned additional sales hires in 2023. So just if you can talk broadly about AE productivity and what you're seeing in the market. It may you comfortable with adding additional sales hires here.
Sure. Hi, Stephanie, I'll start off and then Andrew, if you have anything to add.
No, I think ultimately, what I've seen about this business is that it's -- you have 2 prongs, right? You add capacity and then you drive our productivity. And so we're in a period right now where we've been adding significant amount of capacity, right? If we go back to the end of 2021 to today, I think we quoted about 18% increase in our AE head count. So it's natural that ultimately, there will be a lower productivity -- we would expect lower productivity as we add at about at a significant rate, our selling capacity. Now we've also been investing in our technical capabilities and the support around those AEs. And so once we land -- once we start developing a customer, then the next step is ultimately figuring out how we keep on adding value to them and grow our book of business with them by the wide range of products that we're offering. And so that's where you see the productivity start to increase. So I think it's -- to sum up, I think we've been significantly investing in adding capacity. That naturally will have an impact on productivity, but we're following up with continuous investments in the technical support that will drive higher, I guess, share of wallet with our customers as we move forward. And just mathematically, obviously, the hardware -- temporary hardware slowdown, we'll lower that number, right, as the hardware rebounds in the coming quarters or year, then that number will naturally rebound as well.
Okay. That makes sense. And then just in terms of the additional hires in 2023, is there a specific area you're focusing on with those new hires? Or how should we kind of think about the new hires going forward?
Yes. Look, I mean, where our focus right now has been in our sweet spot right now in light of what those hardware pressures that are predominantly enterprise or leaner, stronger in the enterprise channel. Our investments have been skewed towards the SMB and commercial channel. I'd also point out that ultimately, U.S. continues to be an incredible focus for us and a contredible opportunity. So ultimately, having additional resources focused on the U.S. market is something that just makes a lot of sense as well.
Okay. Last one for me. Just curious on the services gross profit and maybe just following up on David's question earlier. It seems like gross -- it seems like services is an area that you would be seeing some growth. The gross profit was actually down year-over-year. Just curious the trends that you saw in the quarter and if there was anything one time there.
Thanks, Stephanie, I'm Jon here. I mean I think meaning, again, it's the enterprise and hardware story. So ultimately, what we've seen is not only a reduction in hardware product, but also the associated services that go with it. And that's in the enterprise channel has a heavier influence in the enterprise channel. So look, the services decline ultimately relates to -- closely related to hardware.
We actually had growth in SMB and commercial services in Q2, Stephanie. So it's not a -- we're not sitting here and feeling like the sky is falling. It's pretty targeted and pretty tied to those associated services on the hardware and enterprise. So it's pretty targeted issue in Q2.
Thank you for the color.
Thank you. Our next question comes from John Shao from National Bank. Please go ahead, your line is open
Good morning, guys, and thank you for taking questions. So regarding your commentary on the 2024 hardware rebound. So is this based on certain industry data or forecast? Or is it just based on the behavior of the customers? Any color on that would be great.
Yes, John, I think we started this year by everybody in the industry saying that it will return in the back half of 2023. And I think at this point, everybody is saying, "Well, geez, maybe 2024. So I don't think any of us know for sure. But the fact for us is that it is pretty tied to the workplace devices, which you can only defer spend on for so long. At some point, these devices will break down and you need to refresh them. So -- we believe that, that's likely to be in 2024 because you can only pause those upgrades for so long. But there's no certainty around that, that anybody has in the industry, I think, at this point. But there's enough data points there that would give us a lot of optimism that, that should come back for 2024.
Okay. Thanks for the color. And just a follow-up on hardware. So how much do you still see the supply chain that fuel is not the case anymore?
Sorry, you cut out a little bit, John. I think you were asking about how much the supply chain is still impacting the hardware business. Is that right?
That's right.
Yes. I think there's still pockets of supply chain constraints, but they're certainly lessening quickly. And obviously, in a year of decreased market demand for hardware, it gives the supply chain is an opportunity to catch up, right, which I think is a lot of what we're seeing right now. So we still have some -- we track what we call excess backlog, which is running over our normal rate based on some of these supply chain constraints. That number has come down over the last 18 months, but we still have a little bit in there. But I think we're getting pretty good now. The supply chain is getting to a pretty good place now where it's not something where I think we're significantly limited. Now the question will be how quickly demand comes back. And if it all comes back at the same time, then is the supply chain able to withstand that. And I think that's to be determined. But I know our technology partners are certainly preparing for that already.
Thank you so much.
Thank you. There are no further questions at this time. I will now turn the call over to Andrew. Please proceed.
Well, thanks, everybody, and thanks to everybody who's listened and joined us today, and we look forward to updating you on our continued progress on our Q3 call in November. Have a great rest of your day and a great weekend, everybody.
Thank you. This does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.