2007 softchoice annual reportm.softchoice.com/files/pdf/about/2007-annual-report.pdfsoftchoice 2007...

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Annual report 2007

http://www.softchoice.com/?ref=annual_report

Softchoice is a leading North American provider of IT solutions and services. With a network

of more than 40 local sales offices supported by five regional call centers, we manage

the technology needs of almost 18,000 small, mid-market, enterprise and public-sector

organizations across Canada and the United States. Our focus on delivering strategic IT advice

to customers in person has contributed to consistent above-market growth. In 2007, revenues

increased to US$777.1 million, while earnings grew by 38 percent. We are proud of our

success. In achieving our goals, we’re making a difference for our customers, our investors,

our employees and the communities we support.

Who we are

01 Financial highlights Exceeding our objectives 0204 A culture of growth Making a difference 0608 Reaching higher Chairman’s message 1012 2007 President’s letter Financial review 16

Softchoice 2007 Annual Report 1

* All figures have been restated into U.S. dollars and are unaudited.

(In thousands of U.S. dollars except per share amounts) 2007 2006

Revenue $ 777,082 $ 703,237

EPS (basic) $ 1.27 $ 0.93

Cash flow from operations 35,064 11,470

Return on equity 29.4% 28.4%

(In thousands of U.S. dollars except per share amounts) 2007 2006 2005 2004* 2003*

Revenue $ 777,082 $ 703,237 $ 639,482 $ 477,935 $ 390,793

Gross profit as a percentage of revenue 16.1% 14.0% 12.7% 13.3% 12.0%

Gross profit per customer $ 7.8 $ 6.6 $ 5.4 $ 4.5 $ 3.8

Net earnings $ 21,997 $ 15,930 $ 13,108 $ 9,731 $ 3,118

2007 Financial highlights

0

100

200

300

400

500

600

700

800

03* 04* 05 06 07

391

478

639 7

03

777

Revenue per Calendar Year(in millions $ US)

03* 04* 05 06 07

Gross profit as a percentage of revenue(%)

12.0 1

3.3

12.7 1

4.0

16.1

0

5

10

15

20

0

100

200

300

400

500

600

700

800

03* 04* 05 06 07

Gross profit per customer(in millions $ US)

3.8 4

.5

5.4

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5000

10000

15000

20000

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03* 04* 05 06 07

Net earnings per calendar year(in millions $ US)

3.1

9.7

13.1

15.9

22.0

11% growth in Reported Revenue 15% increase in Gross Profit as a Percentage of Revenue

18% expansion in Gross Profit per Customer

38% growth in Net Earnings

Softchoice 2007 Annual Report2 Softchoice 2007 Annual Report 3

Exceeding our objectives2Relentless ExecutionAt the core, achieving our objectives is about a well-defined

strategy supported by rigorous execution and an exceptional

team. It’s also about never losing sight of the cornerstone

of our success: serving as local trusted technology advisors

in more than 40 markets across North America. Today we

are the fifth-largest Microsoft Large Account Reseller (LAR)

in the U.S., number one in Canada and growing strong. We

have also diversified our revenues with the introduction of

hardware solutions and services, increasing this business to

US$231 million in less than five years. With one of the lowest-

cost operating models in our industry, we continue to focus

on the fundamentals of customer value to meet our goals

and accelerate our growth.

Doing More for CustomersThrough our recent acquisitions, we are now able to offer

comprehensive solutions that address the entire technology

life cycle – from IT assessments and solution design to

procurement, staging, implementation and disposal. We

are also positioned to deliver this broad range of services to

customers across North America – from the small business

with a few hundred workstations to enterprise or institutional

customers with thousands. By increasing the scope and

scale of our business, we’re enhancing our core expertise

in helping customers reduce the cost and complexity of

making a sound IT investment.

years ago we laid out an aggressive five-year growth strategy to

double our Total Revenue including Imputed Revenue,* grow our

share of the U.S. software licensing market to 10 percent and

diversify our revenue base by offering customers a wider breadth of

products and services. Through strong organic growth – and three

successful acquisitions – we now expect to meet these goals by

the end of 2008, almost two years ahead of plan. (* See “Use of Non-GAAP Measures” in the Management’s Discussion and Analysis for a description of Total Revenue, including Imputed Revenue.)

4845 15

525-year C

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Microsoft E

nterprise A

greement license fees

5-year Compounded Annual Growth Rate (CAGR) for revenues

5-year CAGR for hardware revenues

5-year CAGR for earnings


265

90percentage of custom

ers w

ho say Softchoice is

customer focused**3

times Softchoice has been named Canada’s Top Solution Provider

dogs that come to work at Softchoice on a regular basis

950A culture of growthBuilding a High-Performance TeamOffering a truly unique corporate environment, the tools

to do great work and the opportunity for rapid career

advancement are just the first steps in ensuring Softchoice

remains a destination for top talent. In 2007, we continued

to strengthen our team by delivering training programs

that address the unique needs of employees across our

organization. We also remained focused on identifying and

developing our future leaders. Over the past year the entire

Softchoice management team completed an extensive

training program designed to develop individuals in the

areas of personal leadership, team leadership and coaching.

Our efforts are yielding results. With strong management

and a growing business, 88 percent of our people tell us

they’re proud to be a part of Softchoice.*

Delivering ResultsFor the third year in a row, Softchoice was recognized as

One of Canada’s Best Workplaces in a research study

commissioned by the Globe and Mail, one of the country’s

most respected news publications. This award is a

tremendous honor and affirms our belief that when people

are fully engaged in an organization, they give it the

energy that enables exceptional performance. In 2007,

16 percent of our employees received a promotion, including

the appointment of two new vice presidents. Our focus

on being an employer of choice is also making a difference

to our customers. Based on the service we provide,

84 percent tell us they would gladly recommend Softchoice

to a friend or business partner.*

people and growing. We strive to be an employer of choice because

we recognize our business is ultimately powered by the skill and

energy of our people. As a result, we foster a culture that places a

premium on personal and professional development. Our belief is

that having the best-trained team with the best possible tools allows

us to punch above our weight in competing for customers, attracting

investors and recruiting great people.

times Softchoice has been named One of Canada’s Best Workplaces

89percentage of em

ployees w

ho say Softchoice is a

fun place to work*

* 2008 Best Workplaces in Canada Softchoice Employee Survey

** 2007 Annual Softchoice Customer Survey


800,000 lbs100

7,500

90

percentage of Softchoice’s sales offices participating in fundraising activities in 2007

number of children expected to use Softchoice-funded computer labs annually

reduction in yearly CO2 emissions resulting from Toronto office lighting system retrofit

percentage of employees w

ho feel good about S

oftchoice’s philanthropic efforts.*

3,500 Making a difference

Bridging the Digital DivideThe potential for technology to transform education and

improve prospects for future employment is enormous.

Nowhere is this more important or more needed than in third-

world countries where limited access to computers creates a

barrier to learning new skills. Through Softchoice Cares, our

people have rallied to the cause, aligning the focus of our

business with our philanthropic efforts. In 2007, our employees

hosted dozens of fundraising activities, engaging industry and

local business partners to get involved. In partnership with

grassroots organizations like Room to Read, we used these

funds to establish three new computer labs in Laos, Nepal

and Cambodia, with seven more slated for completion before

the end of 2008. Thanks to our people, thousands of students

now have a powerful incentive to stay in school and lay the

foundations for a promising future.

Creating a Greener FutureCultivating environmentally responsible business practices

represents both a significant challenge and a big opportunity.

In 2007, we retrofitted our Toronto headquarters with energy-

efficient lighting systems. This undertaking will reduce our

carbon emissions by more 800,000 pounds and save roughly

$40,000 in energy costs each year. At the beginning of 2008

we affirmed our commitment to environmental responsibility

with the appointment of a full-time Sustainability Manager.

Through this role we will seek opportunities to create a

more sustainable business while helping our customers

to do the same. Looking ahead, we believe that green

technologies have reached a tipping point. With growing

public awareness, and with cost no longer a barrier to

adoption, we are working closely with industry partners

to help organizations identify solutions that make just as

much sense for business as they do for the environment.

volunteer hours and more than 50 fundraising activities later, our

people continue to make a difference. In 2007, the Softchoice team

donated its time, passion and energy to give people living in less

fortunate communities around the world hope for a brighter future.

As we set our sights on becoming one of the largest IT companies

in our sector, our commitment to corporate responsibility and to

sharing our success is stronger than ever.

* 2008 Best Workplaces in Canada Softchoice Employee Survey


50,0

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Softchoice TechCheck assessment services delivered in 2007

5Reaching higherDeveloping Superior Customer RelationshipsThe foundation for sustained growth is establishing

customer trust. Our network of more than 40 local sales

offices gives us an unmatched ability to do exactly this.

Working with customers in person continues to represent

a distinct competitive advantage for Softchoice. It is also

the best way to help organizations solve complex business

challenges. To meet the day-to-day demands of IT, we

will continue to offer the highest-quality service in the

industry through our five regional call centers. With a newly

enhanced website offering best-in-class search, asset

management tools and instant access to live online

help, we’re giving customers more reasons than ever to

choose Softchoice.

Solution-FocusedWe recognize that as software becomes more powerful,

infrastructure solutions and services have also become

an increasingly important consideration for our customers.

Through our recent acquisitions we have transformed

our strategic value in the marketplace. From assessing

opportunities to reduce expenditures and limit risk to being

able to support even the most complex implementations,

we are well placed to help organizations leverage the power

of IT to drive their business strategy.

years from now we expect to triple the size of our business, placing

Softchoice among the very top solutions and services providers in our

industry. It is an ambitious plan. Then again, we have always set the bar

high. With clarity of purpose, a keen focus on customer value and a

sound financial footing, we are well positioned to achieve our ambitions.*

Delivering Cost AdvantageMore than ever, customers need a partner capable of

providing the best solutions at the best price possible.

Softchoice delivers both. Continuous investments in our

supply chain and order processing systems continue to drive

new levels of efficiency in our business, ensuring we remain

among the lowest-cost providers in our industry.

This focus is also raising the standard of service we

provide our customers. Electronic access to more than 30

warehouses allows our people to make real-time decisions

to expedite deliveries anywhere in North America. We’re

also leveraging the capabilities of our distribution partners to

provide a variety of services, including imaging, configuration,

asset tagging and more.

115 Percentage increase in Web traffic since the re-launch of www.softchoice.com

* This paragraph includes forward-looking information. See “Caution Regarding Forward-Looking Information” in the Management’s Discussion and Analysis.


chairman of Softchoice’s Audit Committee, is the president

and a director of Manvest Inc., a Calgary-based private-

equity investment company.

Financially, 2007 was a successful year for Softchoice.

With the completion of two acquisitions, and a third at the

beginning of January 2008, it was also a transformational

year for the Company’s growth and development. The

details of these transactions have been well documented

in news releases and analyst reports. What is not as well

understood is the process that preceded each of these

successful acquisitions. Each candidate had to meet a series

of strict qualification criteria. On a couple of occasions we

reviewed acquisition opportunities that passed all of these

tests but did not bring them to a conclusion because the

terms could not be justified based on the expected return

to our shareholders. By sticking to a disciplined process,

even when the deal was on a very tight timeline, as was the

case of the NexInnovations acquisition, Softchoice has been

able to invest wisely in a series of strategic acquisitions that

perfectly complement our existing business model.

In my experience, one of the factors that leads to

disciplined acquisitions is the degree of alignment between

management compensation and the creation of durable

shareholder value. Maintaining and strengthening this

alignment is a top priority for the Softchoice board. Last

year we implemented a long-term incentive plan (LTIP) that

reinforces the alignment between the responsibilities of

management and the expectations of shareholders. Unlike

an option-based incentive plan where there is little downside

risk for the option holder, the Softchoice LTIP requires all

participating executives to maintain a financial investment

in the ownership of Softchoice shares. It awards additional

shares in the Company to eligible employees based on long-

term performance objectives in proportion to those shares in

the Company that the eligible employee already owns.

Focused incentives combined with experienced

leadership and disciplined decision-making contribute

to long-term success in any business that has tough

competitors and thin margins. When markets are predictable

and growing, these ingredients may seem less important; but

when markets change course, the value of these skills and

this culture becomes very evident.

While the overall market outlook for 2008 and beyond

remains cautiously optimistic, I believe that Softchoice is very

well equipped to seize opportunities across its chosen market

segments and to deliver on the new ambitious growth targets

that management has set for itself.

Sincerely

Lawrence G. Tapp

Chairman

3Chairman’s messageShareholders see the results of this success in many forms

– from the published endorsements of independent financial

analysts to the receipt of their quarterly dividends. But most

importantly, they see it in the appreciation of Softchoice’s

share price over time.

Of course, the Board of Directors sees this success

from a slightly different perspective. In our oversight role, we

evaluate management’s business plans and consider the

different choices from which a course of action is plotted.

We hear the debate about the alternatives and are engaged

directly in the decision-making process. To be effective

in this role, the Board taps into the diverse experience of

its members, who bring more than 150 years of collective

technical, business, financial and public-sector wisdom to

the boardroom table.

In addition to David MacDonald, the Company’s President

and CEO, and me, the Softchoice Board is well served by the

following group of seasoned business leaders. Kevin Francis

is president and CEO of CenterBeam, a North-American-

managed IT services provider based in San Jose, California,

and is the former president and CEO of Xerox Canada.

William Linton is the Vice President of Finance and CFO of

Rogers Communications Inc. and the former president and

CEO of Call-Net Enterprises Inc. Robert Luba is the president

of Luba Financial Inc. and has served as president and CEO

of Royal Bank Investment Management Inc. and president

of Crown Life Insurance Company. Frank Potter, chairman of

Softchoice’s Human Resources and Corporate Governance

Committee, is chairman of Emerging Markets Advisors Inc.

and has a background in international banking in Europe,

Asia and the United States. Allan Reesor has served as

the chief information officer for several of Canada’s largest

companies, including General Foods (Kraft), Canada Packers

(Maple Leaf Foods) and TNT Canada. William Robinson,

areas characterized Softchoice’s financial performance in 2007: the

continued delivery of record earnings, stronger margins and improved

productivity. The management team and the employees of Softchoice

are deserving of the credit, especially when a company achieves this

kind of consistent performance year after year, well in excess of the

growth rates of its peer group.


Two years ago we laid out three corporate growth

objectives: achieve parity between software and hardware

sales, increase our share of the North American software

licensing market to 10 percent and double our Total Revenue,

including Imputed Revenue.† We said we would do this

within five years. We knew that our unique customer-centric

business model and focus on building depth within accounts

would get us a long way toward achieving our goal. At the

same time, we knew that selective acquisitions would be

instrumental in accelerating our reach across key product

and customer segments. They would also be pivotal in

building new services capabilities to increase our strategic

value in the market.

In October of 2007 we seized the opportunity to acquire

the Technology Solutions and Professionals Services

division of NexInnovations, a leading provider of advanced

infrastructure solutions to Canadian mid-market, public-

sector and enterprise organizations, many of which are

among Canada’s most respected companies. Three months

later, on January 3, 2008, we acquired Optimus Solutions,

a U.S.-based infrastructure solutions company with almost

identical capabilities and market focus.

There is enormous opportunity here. These two

transactions represent a significant expansion in our

hardware solutions and professional services capabilities.

By adding consulting, solution design and project

management expertise to our core offerings, we are well

positioned to address the infrastructure requirements of any

organization, regardless of size. It’s the perfect fit and the

ideal complement to our strengths as a leading provider of

software licensing solutions.

Through these acquisitions, we will surpass our goal of

achieving parity between software and hardware revenues

before the end of 2008. And with a capable new team

from NexInnovations and Optimus Solutions, we will do

so profitability by enhancing customer value every step of

the way.*

In many respects the success of our hardware business

is fueled by the vital role we play in helping organizations

address their future software requirements – the first step in

the technology planning process. In Canada we have been

the number one provider of Microsoft software licensing for

some time. I am pleased to say that in December of 2007

we consolidated our position as the fifth largest Microsoft

Large Account Reseller (LAR) in the U.S. with our acquisition

of Software Plus. This company has delivered strong growth

serving the requirements of U.S. enterprise and public-sector

organizations. It is also a significant milestone for Softchoice.

Our combined organizations now enjoy a share of the U.S.

Microsoft licensing market approaching 10 percent. With the

launch of a North American enterprise sales team and one

of the strongest product pipelines we’ve seen from Microsoft

in years, we will continue to scale this business across North

America through 2008 and beyond.

We have clearly made big strides in the implementation

of our growth strategy. We have our people to thank for

20072007 president’s letterIn every way, Softchoice is measuring up and reaching

beyond its potential. We are growing our services offerings,

diversifying our revenue base and improving our operating

margins – all at the same time. Thanks to the focus and

drive of the Softchoice team, we stand poised to achieve the

corporate growth objectives we laid out in 2005 – almost two

years ahead of plan.*

For all of these reasons, 2007 was a very important year for

Softchoice. Since my last report to you, we recorded revenues

of US$777.1 million, representing a year-over-year increase of

11 percent. Net income grew by 38 percent to US$22 million,

while earnings per share (basic) grew by 37 percent over 2006.

We also issued our eighth consecutive quarterly dividend in

the amount of C$0.10 per common share.

The hardware business we started just five years ago

grew by 34 percent over 2006, accounting for 30 percent

of reported revenues and contributing US$231 million to

our 2007 top-line results. Compared to the prior year, we

also saw growth of 44 percent in the fee revenue we receive

from the sales of Enterprise Agreement licensing, a strong

reflection of our ability to take market share. As we look

toward the coming year, our status as one of the leading

providers of Microsoft Enterprise Agreement licensing

remains unchallenged.

The past five years have been a remarkable journey.

Since 2003, our earnings have increased at a compounded

annual growth rate of 48 percent. During this time we

expanded our portfolio of products and services, added

more than a dozen branch offices and doubled the size

of our employee base. With our feet-on-the-street model,

we enjoy a level of reach and depth in the market that is

second to none in our industry. Yet in many respects, our

journey has only just begun.

was an exciting and transformational year for Softchoice. We delivered

above-market growth, continued to diversify our revenue base

and enhanced our value to customers through the introduction of

new solutions and services. We also participated in the continued

consolidation of our industry through a series of acquisitions that

broadened the scope of our market reach and services offerings.

Through these initiatives, I am very confident that we have laid the

foundations for a future that is more promising than ever.


our commitment to ensuring Softchoice remains a place of

growth and opportunity for the best talent in our industry.*

It is especially gratifying to tell you that the unique culture

of Softchoice remains among our most prized assets. As

we meet new customers, add new vendors and acquire

new partners, our strength as an organization continues to

be exemplified in the sincere and enthusiastic attitude of our

people. I am extremely proud of the fact that in addition to

having one of the fastest growth rates among our industry

peers, Softchoice is also among the most respected.

I’d like to thank our people for an incredible year and

for once again making Softchoice one of Canada’s Best

Workplaces. With our stated goal of tripling the size of our

business within the next five years, we have again set the

bar high for ourselves and our business. We wouldn’t have

it any other way.*

Thank you for your continued support. We look forward

to delivering an equally impressive performance in 2008 – for

our customers, our employees, our partners, and you, our

valued shareholders.

David MacDonald

President and CEO

Building a high-performance team with talented and dedicated people like this has been tremendously rewarding. In 2007 we continued to invest in the development of our employees and managers and we will continue to do so in the years ahead.

that. They have done a remarkable job – not just in terms of

integrating these organizations but in ensuring we remain

focused on serving our customers with the same passion

and dedication as always.

I am pleased to tell you that with these acquisitions – and

continued above-market growth – we will realize our goal of

doubling our Total Revenue, including Imputed Revenue,†

by the end of 2008. As always, synergies are key. Whether

extending the reach of our software licensing expertise or

delivering a full spectrum of infrastructure solutions, the

prospects for deepening existing relationships and earning

the business of new customers have never been better.*

We are clearly at a very different place than we were five

years ago. But so, too, is the world of technology. According

to CNET, a leading expert on technology and consumer

electronics, the number of unique product SKUs available to

the market has more than doubled since 2003. Innovation

has carried on at breakneck speed while component

costs have continued to drop in price. What were once

highly customized solutions for the enterprise space are

now becoming critical drivers of success for mid-market

organizations looking to compete on the global stage. The

array of choice – and complexity – is unprecedented.

Of course, there are some things that never change – like

the constant drive to reduce costs, mitigate risk and improve

time to market for our customers. As organizations seek

to balance the ongoing management of their infrastructure

with the need to innovate, our value as a trusted technology

advisor has never been clearer or more in demand. Unified

communications, server virtualization and consolidation,

and reducing the environmental impact of IT on our planet

are just some of the opportunities and challenges awaiting

our customers. We believe Softchoice has an unparalleled

opportunity to provide value in each of these areas.

Looking ahead, our local presence in more than 40

North American cities will allow us to build relationships and

respond to market trends like no one else can. Industry-

leading assessment services like the Softchoice TechCheck™

and our expertise in large-volume purchasing transactions

certainly bode well at a time when cost justification and

regulatory compliance are key customer concerns. So, too,

do the launch of our new website and our promise of making

it just as easy and efficient to do business with Softchoice

online as it is through our call centers. With these capabilities

and the capacity to deliver a full spectrum of infrastructure

solutions, we are ideally placed to help organizations meet

the demands of a globalized world.*

I am extraordinarily proud of what our people have

accomplished this year. Through every acquisition and every

opportunity to enhance customer value, they have risen

to the challenge. But the measure of their success goes

much further than what they have achieved for our business.

Through Softchoice Cares, our people are working to bridge

the digital divide by building computer labs in places like

Laos, Cambodia and Nepal. These efforts stand to improve

the lives of thousands of people around the world. They

are also leading the charge to green our own business and

convey the message that the technology decisions we make

today can be just as good for commerce as they are for

our planet.

Building a high-performance team with talented and

dedicated people like this has been tremendously rewarding.

In 2007 we continued to invest in the development of our

employees and managers and we will continue to do so

in the years ahead. In December I was especially proud to

announce the promotion of two new vice presidents from

within Softchoice. These appointments are about more than

just strengthening our senior leadership team. They embody

* This section includes forward-looking information. See “Caution Regarding Forward-Looking Information.”

in the Management’s Discussion and Analysis.

† See “Use of Non-GAAP Measures” in the Management’s Discussion and Analysis for a description of

Total Revenue, including Imputed Revenue.

“

”

17 Management’s discussion and analysis Management’s responsibility 4748 Auditor’s report Consolidated financial statements 4953 Notes to consolidated financial statements 10-Year financial summary 7071 Directors and Officers Corporate information 72

Financial section


This document has been prepared to help investors understand the financial performance of the Company in the broader context of the Company’s strategic direction, the risks and opportunities as understood by management and the key metrics that are rel-evant to the Company’s performance. Management has prepared this document in conjunction with its broader responsibilities for the accuracy and reliability of the financial statements, as well as the development and maintenance of appropriate information systems and internal controls to ensure that the financial informa-tion is complete and reliable. The audit committee of the Board of Directors has reviewed this document and all other publicly reported financial information.

This document and the related financial statements can also be viewed on the Company’s website at www.softchoice.com and at www.sedar.com. The Company’s latest Annual Information Form is also available on these websites.

Caution Regarding Forward-Looking StatementsThis Management’s Discussion and Analysis contains certain forward-looking statements based on current expectations. Management bases its expectations on current market conditions and forecasts published by experts, on knowledge of observed industry trends and on internal intentions based on developed business plans or budgets. The words “expect,” “intend,” “anticipate” and similar expressions generally identify forward-looking statements. These forward-looking statements entail various risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Certain of these risks are described in the Annual Information Form. They include risks related to the economy and financial conditions such as the risk of declining economic conditions, exchange rate risks, credit risk and Multilateral Instrument 52-109. The Company also faces risks related to the IT distribution channel such as dependence on Microsoft, reliance on financial incentives, dependence on distributors, the inability to respond to changes in the manner of IT distribution, technical innovation, competition and the risk of IT product defects. There are additional risks regarding the management of the business, including the inability to successfully execute strategies; the integration of acquired companies; customer attrition; productivity; compliance with U.S. federal government procurement processes; sales model risks; debt service risks; the need for additional capital in the future; dividend policy; management of growth; future acquisitions; hiring, training and retention of personnel; variability of quarterly operating results; information systems; damage to Softchoice’s computer systems; and dependence upon management. These risks are described in full in the Annual Information Form.

February 13, 2008 Management’s Discussion and Analysis

Softchoice 2007 Annual Report18

Selected Annual InformationThe following information is provided to give a context for the broader comments elsewhere in this report. In 2006, the Company began reporting its financial results in U.S. dollars. As a result, pre-2006 historical data noted below has been restated in U.S. dollars and will not conform to data presented in the 2005 annual MD&A or to the audited financial results for that year.

(in thousands of U.S. dollars, except per-share amounts)

Year ended

December 31, 2007

Year ended

December 31, 2006

Year ended

December 31, 2005

Revenue $ 777,082 $ 703,237 $ 639,482

Total Revenue, including Imputed Revenue (i) 1,261,133 1,061,979 909,150

Gross profit 125,117 98,554 81,172 Gross profit as a percentage of revenue 16.1% 14.0% 12.7%Gross profit as a percentage of Total Revenue,

including Imputed Revenue (i) 9.9% 9.3% 8.9%

EBITDA (i) 41,515 29,590 25,699

Earnings before income taxes 36,950 26,085 21,569

Net earnings 21,997 15,930 13,108

Earnings per shareBasic $ 1.27 $ 0.93 $ 0.76 Fully diluted $ 1.25 $ 0.92 $ 0.76

Total assets 319,826 190,747 173,485

Shareholders’ Equity 74,700 56,127 45,563

Dividends (ii) 6,546 6,044 –

(i) Imputed Revenue and EBITDA are non-GAAP terms. See “Use of Non-GAAP Terms.” All imputed revenue and Total Revenue, including Imputed Revenue figures are unaudited.(ii) The Company began paying dividends in 2006. See “Dividend Policy.”


† Imputed Revenue is a non-GAAP term. See “Use of Non-GAAP Terms.” All imputed revenue and Total Revenue, including Imputed Revenue figures are unaudited.

Corporate customers across all areas of the economy are •growing their national and international reach and are therefore looking to their suppliers for national and international support. This is forcing local resellers to consolidate.

Corporate customers are also reducing the number of vendors •they work with, and therefore there is pressure from customers to provide an increased number of products and services.

As software becomes more powerful, the purchase of software •and services has become more strategic to corporate North America compared to stand-alone hardware purchases. There is now a strong desire from hardware resellers to augment their product selling efforts with related software and services revenue sources.

We indicated in our 2005 MD&A that we believed that an •acquisition strategy would augment our growth and we execut-ed on this strategy in 2007. In the last quarter of 2007 and the first few days of 2008 we completed the acquisitions of some of the assets of the Technology Solutions and Professional Services division of NexInnovations, the common shares of Software Plus and the common shares of Optimus Solutions.

For Softchoice, the purpose of the acquisitions is to: Strengthen our hardware sales expertise. Softchoice began •selling hardware products in late 2002 and has grown the revenue from this product segment organically to about $231 million in just five years. While we are proud of this accomplishment, we believe that this growth can be accelerated by the acquisition of expertise in specific areas, especially in selling more complex hardware solutions to larger or enterprise customers.

Increase our penetration into the enterprise customer base, •especially in the U.S. market.

Diversify our vendor base to decrease reliance on sales from •any one vendor.

Selectively acquire incremental services expertise and certifica-•tions that are consistent with a services strategy aimed at increasing hardware revenue and gross margins.

2007 HighlightsNet earnings growth of 38 percent•

Revenue of $777.1 million, representing year-over-year growth •of 11 percent

Total Revenue, including Imputed Revenue• † of $1.3 billion and growth of 19 percent

Hardware revenue growth of 34 percent, including 76 percent •growth in the fourth quarter

Softchoice completed the purchase of some of the assets •related to the Technology Solutions and Professional Services division of NexInnovations Inc. (“NexInnovations”) for a purchase price of $12.4 million, including acquisition costs of $0.6 million, on October 12, 2007

Softchoice acquired all of the outstanding common shares •of Software Plus Ltd. (“Software Plus”) for cash consideration of $47.1 million, including acquisition costs of $2.1 million, on December 11, 2007

Subsequent to Softchoice’s year-end, Softchoice acquired all •of the outstanding common shares of Optimus Solutions LLC (“Optimus” or “Optimus Solutions”) for an estimated purchase price of $38.1 million in cash with a deferred payment of up to $9 million payable in 2008 depending on the financial perfor-mance of Optimus

Industry Consolidation and Softchoice AcquisitionsFor several years now there has been extensive consolidation within the IT distribution channel. There are several reasons for this, including:

Increased buying power reduces costs of goods sold and •therefore either increases gross margins or creates pricing differentials to grow market share.

Increased sales levels create opportunities to leverage infra-•structure costs and back-end operational processes. Econo-mies of scale are a factor in this industry and have contributed largely to the trend in consolidation.


1. Throughout this analysis we refer to our customer base segmented by size. We define enterprise customers as those with more than 2,000 PCs and small and medium-sized businesses (SMB) as those having 150 to 2,000 PCs. Government organizations are also included as part of our customer segmentation. * This sentence includes forward-looking information. See “Caution Regarding Forward-Looking Information.” † Total Imputed Revenue is a non-GAAP term. See “Use of Non-GAAP Terms.” All imputed revenue and Total Revenue, including Imputed Revenue figures are unaudited.

percent of total revenue. In the fourth quarter, 338 of these cus-tomers purchased from Softchoice following the acquisition. We retained 78 of the division’s employees following the acquisition.

The products and related services that NexInnovations sold to its customer base represent a significant expansion of the range of products and services previously offered by Softchoice alone. See “Corporate Strategy” and “Our Growth Strategy” for a discussion of how this rise in capability is relevant to our overall strategic positioning and growth expectations.

A Business Acquisition Report with respect to this acquisition will be filed with the Canadian provincial securities regulators.

Software PlusOn December 11, 2007, Softchoice acquired all of the outstanding common shares of Software Plus Ltd., a company incorporated under the laws of Missouri, for cash consideration of $47.1 million including acquisition costs of $2.1 million. Immediately following the acquisition, Software Plus was merged with Softchoice U.S. Software Plus was the largest corporate reseller of computer software in the U.S. Midwest and the industry’s ninth largest Microsoft Large Account Reseller (LAR). Software Plus had trailing 12-month revenue of US$198 million as at September 30, 2007, and total imputed revenue of US$338 million for the same period.† About 90 percent of the revenues for this period were from the sale of software and 10 percent from the sale of hardware. Software Plus did not have any material services revenue. Software Plus had about 6,600 customers at their most recent year-end, and about 1,000 bought from Softchoice between December 12, 2007, and the end of the year. We also retained approximately 60 of the Company’s employees following the acquisition.

This transaction expanded Softchoice’s geographical coverage in the Midwest with very little overlap of customer accounts. In particular, Software Plus concentrated on a number of enter-prise customers, and this expertise will be a leverage point for Softchoice to launch an enterprise-focused sales team in the U.S. Because of the similarity between Software Plus’s Microsoft concentration and the Company’s core competencies and the

NexInnovationsOn October 12, 2007, and again on October 26, 2007, Softchoice purchased certain assets of the Technology Solutions and Professional Services division of NexInnovations Inc., including the records, authorizations and certifications associated with this division, the division’s computer systems and the NexInnovations and Computerland names, including the domain names and all related trade names, trademarks, copyrights and other intangible assets, for a cash consideration of $12.4 million including acquisi-tion costs of $0.6 million. This division is engaged in the provision of consulting, technology solution architecture, infrastructure deployment, and support services to business and government organizations across Canada primarily in the enterprise space.1

In particular, this division has developed expertise in providing hardware product sales and related support services to some of the largest corporate customers and government groups in Canada. NexInnovations had filed for protection under the Companies’ Creditors Arrangement Act (CCAA) for the second time on September 27, 2007. In neither transaction did Softchoice purchase any liabilities or obtain any exposure to the debts of the parent company or the division, pre-acquisition. No other assets were purchased in either of these transactions.

The Technology Solutions and Professional Services division of NexInnovations Inc. had revenues of $258.3 million for their fiscal year ended May 31, 2007, down from $388.8 million the year prior. We estimate that the revenue stream of the entity when acquired by Softchoice was about $100 million per year as a result of the sales erosion caused by the CCAA process. We believe that the revenue levels achieved by this division for the year ended May 31, 2007, will not be regained under Softchoice for at least a two-year period.* Approximately 76 percent of the Technology Solutions and Professional Services revenue for the year ended May 31, 2007, was from hardware products, 13 percent was from the sale of software products and the remaining were service revenues. Approximately 52 percent of these revenues were derived from enterprise customers, 20 percent from SMB customers and 28 percent from governmental organizations. The division had approximately 1,700 customers prior to the CCAA process; its largest customer accounted for 20



We have taken a deliberative approach to the process of acquisi-tions and believe that the acquisitions that were not completed over this period are as important to our success as the ones that we did complete. We believe that the acquisitions that we did complete reflect our focused attention on specific strategic objectives and a disciplined pricing approach to executing this strategy.

Hardware GrowthSoftchoice began selling hardware products to our customers five years ago and since then we have grown this revenue stream to more than $231 million. There are a number of factors that we believe have influenced our growth and will continue to augment our growth of this segment in 2008.*

Sales of Microsoft’s Vista product line meant that many cor-•porations were required to upgrade their hardware platforms in 2007 to support the requirements of the new operating system, and we believe that this trend will continue in 2008. Our internal studies indicate that 50 percent of all companies will require hardware upgrades to enable them to run Microsoft Vista and about 90 percent of companies will require an upgrade to run premium versions of Vista.

Only 41 percent of our customer base buys hardware products •from us. The opportunity to extend our hardware offerings to the rest of the customer base is also expected to increase hardware sales in 2008.

Early in 2007 we reorganized our sales and marketing func-•tions to allow for a more integrated solutions-based approach to the market. We augmented this structural change with significant sales training in solutions-based selling of hardware products. Both of these initiatives were expected to have a longer-term impact on the growth of hardware sales rather than a short-term impact at the beginning of the year. Hard-ware revenue growth was 13 percent in the first quarter of 2007, 15 percent in the second quarter and 28 percent and 76 percent in the third and fourth quarters respectively. Fourth-quarter revenue growth was affected principally by the acquisi-tion of NexInnovations, but organic growth alone accounted

diversified nature of the customer base, we expect that integration activities are likely to be completed by the end of the first quarter of 2008 and that cost synergies will begin to be realized thereafter.*


Optimus SolutionsOn January 3, 2008, Softchoice acquired all of the outstanding common shares of Optimus Solutions, a limited liability company formed under the laws of Georgia. Immediately following the acquisition, Optimus was merged with Softchoice. Optimus Solutions is a comprehensive IT products and solutions company focused on helping enterprise and mid-market clients plan, build and maintain their information technology infrastructure, with headquarters in Norcross, Georgia, and nine offices elsewhere in the United States.

Under the terms of the agreement Softchoice paid US$38.1 million in cash with a deferred payment of up to US$9 million, payable during 2008 depending on the financial performance of Optimus Solutions. On a trailing 12-month basis, Optimus Solutions gener-ated approximately US$140 million in revenue. Approximately 40 percent of Optimus’s revenue during this period was derived from enterprise customers, 50 percent from small-medium business (SMB) customers and 10 percent from the public sector. Approximately 87 percent of this revenue is from hardware sales, seven percent is attributable to the sale of software and the remainder is from services. Optimus employs 100 people and services 1,500 customers, with no single customer representing more than 12 percent of total revenues.

The acquisition significantly enhances Softchoice’s ability to provide advanced infrastructure technology solutions and services, including storage, internetworking, server consolidation and security solutions to U.S. mid-market, enterprise and public sector organizations.



* This section includes forward-looking information. See “Caution Regarding Forward-Looking Information.” † Total Imputed Revenue is a non-GAAP term. See “Use of Non-GAAP Terms.” All imputed revenue and Total Revenue, including Imputed Revenue figures are unaudited.

The fees that Microsoft pays to Softchoice vary depending on several factors: Fees are higher in the first year of a contract than they are in years two and three; higher fees are paid for true-ups in years two and three than for the ongoing payment and fees are higher for EA licenses sold to smaller companies than to larger enterprise accounts.

Microsoft has indicated that their revenue stream is roughly balanced with a similar percentage of first-year agreements occurring in each year. However, at Softchoice we have a dispro-portionate number of first-year agreements occurring in 2004, 2007 and 2010. This concentration is due to the large number of Upgrade Advantage licenses that were sold in 2002 and then renewed into EAs in 2004. Therefore, about half of the increase in margin earned on EA fees in 2007 is due to the percentage of first-year renewals that were signed in 2007. This proportion is expected to decline in 2008, and therefore this margin should also decline.

The other half of the margin increase is due to the percentage of true-ups sold in 2007. To the extent that this activity is maintained in 2008, the increase in margin is likely to be sustainable this year. The true-up activity is more contingent on the health of the U.S. economy than on other factors.*

DividendsWe paid dividends in 2007 aggregating to C$0.40 per common share. These dividends were paid on the last business day of each quarter throughout 2007 in the amount of C$0.10 per share. On February 12, 2008, the Board declared a dividend of C$0.10 per share payable on March 31, 2008, to shareholders of record on March 14, 2008.

Business OperationsSoftchoice customers range from large multinational banks to small home offices. The Company’s revenues can be segmented by customer size as follows:

2007 2006 2005

Small and medium 50% 49% 47%Enterprise 26% 23% 20%Government 24% 28% 33%

for growth of 23 percent. These initiatives were also partially responsible for the growth of our Other Software product seg-ment as solutions selling has proved effective in this area as well. We expect that these initiatives will continue to affect our growth trajectory in a positive manner throughout 2008 and beyond.*

The acquisitions of NexInnovations and Optimus Solutions will •increase hardware sales in two ways: The revenue streams from these organizations will be additive, and these revenue streams are largely related to hardware product sales. In addi-tion, the employees of these organizations bring specialized knowledge that we expect will benefit our existing sales force as they seek to build increasingly complex hardware solutions for our customers.

The acquisition of Software Plus is also expected to increase •hardware sales, partly because of the hardware revenue stream from that organization but more as a result of the number of customers that they bring to whom no hardware sales were made. We believe that there is an opportunity to penetrate this customer base further and more aggressively with hardware products.

Strengthening Microsoft Enterprise Agreement Sales In 2007, about 37 percent of Softchoice’s revenue and 61 per-cent of Total Revenue, including Imputed Revenue† were derived from the sale of Microsoft products. Enterprise Agreements (EAs) are the key licenses sold by Microsoft. EAs comprise 42 percent of Total Revenue, including Imputed Revenue and 69 percent of all Microsoft sales. In 2007, fee revenue from the sale of EAs grew by 44 percent. For this specific license, Microsoft contracts with the customer directly and pays Softchoice an agency fee. This means that our revenue from the sale of these licenses is recognized on a net instead of a gross basis. In 2007, the actual amount of the revenue recognized from these licenses is 8.7 percent of what it would have been under a gross revenue recognition arrangement and excludes rebates that are not earned on these sales (compared to 8.3 percent in 2006). The growth of EA sales in our business means that our use of Imputed Revenue is essential to understanding the underlying trends of our reported financial results. Softchoice sells more EAs in the U.S. than any other reseller and we rank fourth in EA revenues billed.


* This section includes forward-looking information. See “Caution Regarding Forward-Looking Information.” 2. See “Microsoft and Softchoice.”3. In December 2006, Softchoice published a white paper called “Lack of Vista Readiness Pushes PC Lifecycle Management to the Forefront,” in which the readiness of corporate North America for Vista was analyzed. The source data for this study is the Tech Check surveys that we have made of 472 customer environments. This study is available on our website at www.softchoice.com.† Total Imputed Revenue is a non-GAAP term. See “Use of Non-GAAP Terms.” All imputed revenue and Total Revenue, including Imputed Revenue figures are unaudited.

felt by the SMB sector somewhat later in the economic cycle and, because of the diversification of the SMB sector, to a somewhat lesser extent. In addition, expenses related to bad debts from customers could be increased in the event of a recession in either country.

In this document we are describing a number of industry and business trends that affected Softchoice in 2007 and the way that we expect these trends to affect us and our business in 2008. Clearly, if there is a significant slowdown in the North American economy the impact of these trends will be affected by the more general economic conditions.

Microsoft*In late 2006, Microsoft introduced Vista to its corporate custom-ers with the consumer version following early in 2007. The impact of the Vista launch is expected to affect Softchoice in different ways depending on the customer.

Many corporations have purchased Software Assurance (SA) or Enterprise Agreements (EAs)2 and these customers have the right to deploy Vista at any time. They do not need to make any new purchases of software as a result of the terms of SA and EAs. Our internal study3 of our customers’ hardware environ-ments indicated that 50 percent of all corporations would not be able to deploy Vista in its basic form without a hardware upgrade. We therefore expect that hardware sales will continue to increase throughout 2008 as a result of increased deployment of Vista. As the product becomes more widely accepted in the marketplace, deployment rates will accelerate, and we expect that license-only sales of Vista will increase as those customers who elect not to buy Software Assurance begin to upgrade to Vista. We expect that this trend will begin late in 2008 and will manifest itself more prominently in 2009.

In addition, Microsoft has a strong product pipeline with new releases planned in 2008 for Longhorn Server and SQL server. Further, Microsoft has released a relatively bullish outlook for their results in 2008, in spite of potential uncertainty in the economic environment. All of these factors will lead to continued growth in Microsoft sales.

Softchoice enables our customers to manage their IT infrastruc-ture throughout its life cycle from assessment, design and solu-tion architecture through procurement, lifetime management and asset disposal. In most cases our services offerings are designed to enhance the product procurement revenue stream and to deepen the customer relationship. Softchoice has been providing assessment and other services for some time, but the acquisi-tions completed at the end of 2007 and early in 2008 significantly increase our service capability and the strategic relevance of these offerings. These capabilities are expected to enhance the growth of our product business in 2008 and beyond.*

Current TrendsThe industry has been subject to some specific trends over the last few years that we believe will continue to manifest them-selves in 2008.

Economic Conditions*As this document is released there is significant uncertainty in the North American capital and financial markets regarding the general health of the U.S. economy and the extent to which a potential recession will have an impact on the Canadian economy. We have highlighted this uncertainty as one of the risk factors affecting Softchoice at this time. Specifically, Softchoice’s business is sensitive to the spending patterns of its customers, which, in turn, are subject to prevailing economic and business conditions. All of Softchoice’s revenue is derived from customers in Canada and the United States. To the extent that capital invest-ment, particularly in the area of information technology, diminishes in both of these countries, Softchoice believes that demand for its products and services could be suppressed. In particular, if the U.S. economy heads into a recession it is highly likely that there will be a spillover effect on the Canadian economy, and capital spending by corporations in both countries could be reduced and the Company’s revenue could be similarly reduced. This reduction is likely to have the greatest effect in larger enterprise customers and, based on economic conditions in early 2008, in the financial services sector. The impact of a general recession is likely to be



Corporate Strategy and Growth StrategiesThe Company’s strategy is detailed in the Annual Information Form and comprises six key elements:

Deeper customer relationships: By focusing on the broad •customer relationship we save customers time and money acquiring and managing their IT assets. Ours is a high-touch model, and we measure and manage the interactions with the customer to focus on obtaining a higher proportion of their IT expenditures.

Local sales branches: We have 43 local sales branches with •outbound sales representatives who meet with customers face to face to develop these relationships. They also work to develop and expand a local network of IT professionals whom they can call upon to assist customers with a variety of IT management needs.

Call centers: Our five call centers across North America man-•age the daily transaction flow for customers. Our telephone infrastructure is designed to ensure that customers receive a live voice response when they call our call centers; we do not use phone trees or call waiting technology. We believe that this practice is largely responsible for the high levels of customer satisfaction registered by our customers when surveyed about their call center usage.

Flexible proprietary systems: We processed about 300,000 •transactions last year, and the efficiency of our internal IT systems ensures that these transactions are processed as efficiently and accurately as possible. These systems are largely responsible for our low cost model.

Services offerings: Our services are designed to help our •customers manage their infrastructure throughout the life cycle of the assets under management. We provide services to customers through our own employee capabilities and com-petencies and through a web of partner networks that blanket the continent. These services include assessments, design and architecture, procurement, asset management and disposal services.

Customer Investment Initiatives*As in prior years, investing in IT security continues to be a priority for most customers, and the complexity of these requirements is expanding. In particular, customers are demanding a more coordinated approach to security across their entire infrastructure, and Sarbanes-Oxley Act compliance requirements are continuing to drive enhanced security requirements.

Other developing areas of customer investment include server virtualization and unified communications. Green computing and secure, environmentally responsible disposal of older equipment are also growing areas of customer demand. The areas of server virtualization and unified communications are both benefiting from a host of new applications and product offerings, each increasingly powerful, complex and cost- and energy-effective. We believe that we are well positioned to help our customers take advantage of these initiatives. Given the close working relationship we have with our customers, we tend to learn about their initiatives and projects early in the process, enabling us to assist the customer in managing these projects with both our internal services staff and our national partner network of service providers.

Software as a Service*A number of software publishers, such as Salesforce.com, Webex.com and Microsoft Live Meeting, are marketing software that can be accessed from a remote site. The payment model is such that customers are charged based on a usage fee, rather than a one-time perpetual license cost. The risk to the Softchoice busi-ness model is that these publishers could use their direct access to the customers to disintermediate Softchoice and abandon the distribution channel. While this is a risk in our business, we believe that the publishers’ decision to deploy their software electronically and charge a usage fee is different from their decision about how to sell most effectively to their customers and their use of the channel. Customers also generally still prefer to deal with a reseller that is independent and can help them determine the best software solution and licensing strategy to meet their needs.



To grow by acquisition, where appropriate. We believe that 2. there continue to be acquisition opportunities that will allow us to increase the business, particularly our hardware segment, more rapidly.

These strategies are described in the Company’s Annual Informa-tion Form, which may be viewed on the Company’s website at www.softchoice.com and at www.sedar.com.

In our Annual Report for 2005, we indicated our intent to achieve the following growth targets within a three- to five-year time frame:

To double our Total Revenue, including Imputed Revenue1. † to US$1.8 billion;To increase our share of the U.S. Microsoft software licensing 2. market to 10 percent; andTo achieve parity between hardware and software revenues. 3.

With the completed acquisitions, on a pro forma basis, these tar-gets have largely been met at the end of the first two years into the cycle, and we are confident that the remaining growth areas in these targets will be realized in 2008.*

Microsoft and SoftchoiceMicrosoft is the ubiquitous provider of infrastructure software worldwide. Approximately 70 percent of Microsoft’s revenue is from desktop applications and operating systems such as Windows and Office productivity suites. Microsoft has about 95 percent of the market share in this area with projected single-digit growth for the next few years. About 37 percent of Softchoice’s revenue or 61 percent of Total Revenue, including Imputed Revenue† is derived from the sale of Microsoft products.

Software Licenses Software licenses are used across the industry to regulate the use and ownership of all types of software products. For Micro-soft products, the customer is able to buy the license alone or with an “insurance” type of product that allows the customer to obtain, free of charge, the most recent versions of the software for the term of the “insurance” product. Microsoft sells this type of product through Software Assurance and Enterprise Agreements.

Virtual supply chain: As a result of our supply chain, Softchoice •holds minimal inventory levels, and customer requirements can be satisfied through access to more than 30 warehouses across North America. We use the services of distributors to drop-ship product, as well as to collect returns when neces-sary. We also use the facilities and capabilities of our distribu-tion partners to provide our customers with services such as imaging, configuration, asset tagging and staging. We maintain extensive electronic links with our distributors across North America, enabling real-time decision-making by our sales staff and customers to expedite purchases and delivery.

Our ability to manage a direct sales force that focuses on small and mid-sized corporations has been and continues to be a differentiating strategy for Softchoice. Our experience has shown that by working with customers in person we are able to capture a greater proportion of our customers’ IT budgets than if we were to provide service through a call center alone. These stronger customer relationships allow us to be more proactive when considering customer requirements and this, in turn, saves these customers even more time and money and reduces their risk in managing their IT assets.

Our growth strategy has two components:

To grow organically 1.

By increasing our share of the software market primarily •in the U.S. We are investing in better prospecting tools, such as CRM, and licensing capabilities to offer EAs to a wider set of customers. In addition, we have launched an enterprise sales team to capture larger accounts to mirror our presence in the Canadian marketplace.

By increasing the depth of our customer relationships by •offering them more products from a wider variety of IT manufacturers and publishers. We entered the hardware market just over five years ago, and our growth in this product line has been strong; however, our market share in hardware product sales is negligible. There is a significant opportunity for us to increase this product line, and we expect to continue to do so.*



The proportion of sales of this product has risen significantly in the past few years. Meaningful year-over-year comparison of Softchoice’s revenue requires an adjustment to the EA sales that Microsoft obtains and on which Softchoice is paid an agency fee. Softchoice refers to this revenue line as Imputed Revenue.†

Microsoft does not pay rebates on sales of EAs. As a result of the increase of EA sales, rebates have begun to have a smaller impact on the overall profitability of the Company. We anticipate that this trend will continue.*

Canadian Dollar FluctuationsApproximately 57 percent of the Company’s revenue was from sales to U.S. customers in 2007.

There are four areas in which currency fluctuations between the Canadian and U.S. dollars affect our financial results and risk profile:

Transactions where there are two currencies and time lags, or •transaction risk; Our net position in U.S.-dollar-denominated assets and liabili-•ties in the Canadian parent; Reporting the financial results of the Canadian parent in U.S. •dollars; and The erosion of our economic advantage of having operational •costs in the Canadian marketplace.

The transactions in the U.S. are conducted through the U.S. subsidiary and are denominated in U.S. dollars. U.S. cash flows are also managed more or less separately from the Canadian parent, and there exists a separate credit facility for the U.S. and separate arrangements for the use and management of excess cash.

During the year, the Canadian dollar appreciated from 0.8817 to 0.9311 in 2007 for a year-over-year change of 5.6 percent. If the foreign exchange rate had held constant, Reported revenue and Total Revenue, including Imputed Revenue†, would have increased by eight percent and 16 percent respectively for a total foreign currency impact of $21.2 and $29.6 million respectively.

Customers are also able to purchase the license agreement on its own, but this gives them no rights or access to later versions of the product. To upgrade, they must repurchase the software license.

Software Assurance Software Assurance (SA) is an “insurance” or “maintenance” type of license that allows customers to upgrade to the latest technol-ogy if new applications are introduced during the period that SA is in effect. The license also entitles the customer to many different types of training and service benefits. SA licenses are renewed annually; this renewal feature increases the predictability of the Company’s revenue stream.

Enterprise Agreements (EAs) In October 2001, Microsoft began offering Enterprise Agree-ments (EAs). An EA includes a perpetual license and SA. Customers license every desktop in their environment with a consistent suite of Microsoft products. They are then considered to be compliant with all Microsoft license requirements for the ensuing year, regardless of changes to their employee base. EAs have a three-year term whereby the customer pays three equal annual installments for the perpetual license and the SA benefits. Annually they are charged a “true-up” fee for changes in the number of users over the year. Customers usually like the convenience and risk-mitigation factors associated with the annu-al evaluation process rather than a constant evaluation of the number of users actually deploying the software compared to the number actually licensed.

After the three-year period, customers may renew the EA for a further three-year period, but this renewal includes the SA ben-efits only and is cheaper for the customer than the original EA.

With an EA, Microsoft transfers the license and bills the custom-ers directly, paying resellers such as Softchoice an agency fee or commission on these sales. The result of these transactions is that the revenue recorded by Softchoice is reduced but the gross profit remains. Therefore, the Company’s margin on these deals is 100 percent and, as a result, they increase the Company’s overall gross margin.


* This sentence includes forward-looking information. See “Caution Regarding Forward-Looking Information.”

quarter, a significant level of sales usually occurs in the last two or three weeks of the quarter. The following trends have typically influenced the sales in each quarter:

March 31 is the Canadian federal government year-end. •Historically, the government tended to make purchases toward the end of its fiscal year. The effect of this buying pattern has diminished recently as the government has attempted to spread out its purchasing activities throughout the year. In addition, as the Company’s U.S. business has increased, the net impact of these sales has declined. In 2007, the Canadian government represented 15 percent of total sales. With the acquisition of NexInnovations and their revenue generated from the Canadian federal government, the net impact of these sales on the rest of the business is expected to increase somewhat.*

June 30 is Microsoft’s fiscal year-end, and Softchoice has •historically benefited from the sales and marketing drive that has been generated by Microsoft sales representatives to meet its year-end targets. In the last few years, this has become the largest quarter in our fiscal year.

September 30 is the U.S. federal government year-end, but •our business from this segment is not sufficient to overcome the more general reduction in activity due to the summer vacation schedules.

December 31 marks the fiscal year-end of much of corporate •North America. Historically, there have been increases in all revenue lines as our customers complete their asset purchases to meet their internal year-end requirements.

In the Canadian company, the vast majority of transactions are in Canadian dollars. Occasionally, a supplier will bill us in U.S. dollars or a customer will prefer to be billed in U.S. dollars. These transactions are monitored, and we have the capacity to hedge the transactions if the size and frequency of these transactions and/or the projected volatility of the dollar warrant this action.

Historically, cash requirements in Canada have been funded through a U.S. credit facility, and this has given rise to currency risk. This credit facility has been replaced with a separate facility denominated in Canadian dollars so the cross-currency exposure is reduced significantly.

The decision to report our financial results in U.S. dollars has reduced the impact of currency fluctuations since the size of the Canadian business is smaller and therefore the overall impact is lower.

We believe that there is still a financial advantage to be gained by maintaining the bulk of our operational facilities in Canada. The currency advantage has eroded in recent years, although it is still a factor, but lower health-care, salary, cost-of-living and rent costs, in particular, still provide a significant advantage.

SeasonalityHistorically, the Company has followed a quarterly seasonality pattern that is typical of many companies in the information technology industry, with high sales at the end of the second and fourth quarters and low sales in the third quarter due to a lag in corporate spending during the summer months. Within the

Summary of Quarterly Data (in thousands of U.S. dollars, except per-share amounts)

2007 2006

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Revenue $ 168,953 $ 182,543 $ 159,395 $ 266,191 $ 160,688 $ 186,903 $ 141,444 $ 214,202 Gross profit 24,757 38,368 24,983 37,009 20,928 29,733 19,737 28,156Operating income 6,205 16,758 5,123 8,308 3,125 10,625 2,062 9,845Net earnings 3,658 10,088 3,041 5,210 1,806 6,598 1,233 6,293EPS $ 0.21 $ 0.58 $ 0.18 $ 0.30 $ 0.11 $ 0.38 $ 0.07 $ 0.36


In 2007, the number of customers increased by about three percent in Canada and by about seven percent in the U.S. These increases were as a result of the acquisitions of NexInnovations and Software Plus in the fourth quarter and include customers who bought from us following the acquisitions. If the impact of these acquisitions is excluded, then the number of customers declined in both Canada and the U.S. by three percent and four percent, respectively. We measure and manage our customer base in two different ways. The data presented here reflects all customers who purchase from us in a year, for a total of 14,670 organic customers in 2007. We consolidate customers with multiple locations so that these customers are included only once in the data. Our sales force manages the subset of customers who have more than 150 PCs and who spend more than $500 (not expressed in thousands of dollars) with us. The size of this customer base was 6,465 in 2006 and grew by two percent in 2007 to 6,567 on an organic basis.

The following information reflects Softchoice customers only. Excluding the impact of the acquisitions, the number of hardware customers grew organically by nine percent in Canada and two percent in the U.S. for a consolidated growth of four percent. Forty-one percent of our customer base is now buying hardware from us.

2007 2006 2005

Small and medium 50% 49% 47%Enterprise 26% 23% 20%Government 24% 28% 33%

Key Performance MeasuresThe Company presents five key performance measures to help investors understand the underlying forces of the business. The measures reflect both the growth of the business and our productivity and are consistent with the way that management evaluates the business. We use gross profit measures, instead of a more typical revenue measure, because of the trend among our customer base toward EA license agreements. Therefore the increase in our revenue mix that is recorded on a net basis would make revenue-based analysis distorting.

Revenue or growth indicators:

Number of Customers •Gross Profit per Customer•

Productivity indicators:

Gross Profit per Order•Gross Profit per Sales Representative•Gross Profit per Employee•

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deepening customer relationships is effective and that the growth of our hardware business is occurring in our customer base.

Gross Profit per Order is an important measure of productivity since increases or decreases affect the number of operational staff required to process the same gross profit. Since the introduction of the hardware product line, we have been able to balance the impact of the smaller hardware orders with the larger EA sales, and this trend is fueling our productivity growth.

In 2007, Gross Profit per Order increased in Canada by 17 per-cent and in the U.S. by 29 percent for a consolidated increase of 26 percent. This increase is largely due to the increased proportion of EA sales in 2007. The size of these license sales is much larger than sales of other products. While these licenses are more complex to process and to ensure that the agree-ments are complete and accurate, it is still more profitable for us to process EA license agreements than other product sales because of the size of the order and agency fee earned thereon. This metric reflects the business of Softchoice alone and does not include the impact of the acquired entities. We will not be able to measure the Gross Profit per Order from the acquisitions until they have been integrated into our systems.

Gross Profit per Customer Gross Profit per Customer needs to be analyzed in conjunction with total customer growth patterns as well. New customers tend to buy less when they first start purchasing from Softchoice, and generally the amount per customer grows over time. In 2002, Microsoft stopped selling Upgrade Advantage licenses, and many of our existing customers rushed to purchase the product while it was still available. As a result, the total number of customers declined in that year as we were focused on selling more to each existing customer. As those customers had no need for Microsoft products the following year, Gross Profit per Customer fell in 2003. Since that time, we have been able to balance our sales approach to increase both the number of customers served by Softchoice and the average amount purchased by our customers.

In 2007, Gross Profit per Customer increased by 19 percent in Canada and 17 percent in the U.S. On a consolidated basis, Gross Profit per Customer increased by 21 percent. These results include the sales to former customers of NexInnovations and Software Plus. If the impact of the acquisitions is excluded, Gross Profit per Customer increased by about 28 percent on a consolidated basis. It is logical that the impact of the acquisitions would reduce this metric since the customers had a relatively short time to purchase from us and sales that reflected their pur-chases over a full year would be quite different. We believe that these growth numbers are a strong validation that our strategy of

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Critical Accounting PoliciesThe Company’s accounting policies are described in the “Notes to the Consolidated Financial Statements.” These policies are subject to management’s judgment in several areas, including the allowance for doubtful accounts, sales returns allowances, the accrual for rebates earned in the period, provision for current and future taxes, measurement and classification of financial instruments, value of goodwill, and various other reserves and accruals for costs incurred in the period. In all cases, these areas of judgment represent management’s best estimate. In particular, the Company’s accounts receivable are not concentrated in any specific industry, and the top 10 customers in 2007 accounted for 14 percent of total revenues.

The Company recognizes revenue when several criteria are achieved: when evidence of an arrangement exists; when the products are shipped to a customer FOB shipping point; when the customer acquires the right to use or copy software under a license agreement, but in no case prior to the commencement of the license term; when the price is fixed and determinable; and when collection is reasonably assured. Management estimates the level of returns of product that would normally occur after the end of the period using historical trends to predict future levels of returns.

The Company also generates revenue from providing profes-sional services to end users based on a predetermined time and materials basis contract. Time incurred on the contract is tracked, and revenue is recognized using the percentage-of-completion method of accounting. Costs associated with the interim billings are tracked and recorded against the associated revenue.

The Company generally recognizes revenue on a gross basis rather than a net basis. This revenue recognition policy means that we recognize as revenue the total cost of the product sold and invoiced to our customer and we recognize our cost from the publisher or manufacturer as cost of sales. There are three distinct reasons to support this treatment:

Softchoice incurs the risk of physical inventory loss once the 1. customer has placed the order with us and we have placed the purchase order with the supplier;

Employee ProductivityThe impact of the acquisitions on productivity metrics is not mate-rial since the employees joined Softchoice so late in the year. During 2007, the average number of sales employees decreased by 25 people, or seven percent, as a result of managing telesales productivity primarily in the first half of the year. Early in the year we established a method of estimating call center productivity and capacity more precisely, and this proved to be an effective tool for managing hiring needs in the call centers. The average number of total employees increased by 19 people, or three percent in the year. As a result of managing the headcount effec-tively during the year, the Gross Profit per Sales Representative and Gross Profit per Employee increased by 36 percent and 23 percent respectively. If the impact of the acquisitions is included, Gross Profit per Sales Representative increased by 34 percent and Gross Profit per Employee increased by 22 percent.

The chart below indicates that once again this year, we were able to maintain a steady trend of increasing employee productivity over the last couple of years. We expect that the acquisitions completed late in 2007 and early in 2008 will erode productivity metrics as we manage the integration process. We expect that it will be late in 2008 before we achieve productivity metrics that are consistent with 2007 levels.*

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financial liabilities and non-financial derivatives. This section requires that:

All financial assets be measured at fair value, with some excep-•tions such as loans and investments that are classified as “held to maturity”; All financial liabilities be measured at fair value if they are •derivatives or classified as “held for trading purposes”; Other financial liabilities be measured at their carrying value; •andAll derivative financial instruments are measured at fair value, •even when they are part of a hedging relationship.

The CICA has also reissued section 3860 of the CICA Hand-book as section 3861, Financial Instruments – Disclosure and Presentation, which establishes standards for presentation of financial instruments and non-financial derivatives and identifies the information that should be disclosed about them. These revisions come into effect for fiscal years beginning on or after October 1, 2006.

Accounting ChangesOn January 1, 2007, the Compan

2007 softchoice annual reportm.softchoice.com/files/pdf/about/2007-annual-report.pdfsoftchoice 2007...

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