Softcat H2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2024

There are 10 speakers on the call.

Operator

Right. Good morning, everybody, and welcome to the Softcat results presentation for the year ended 31st July 2024. I'm Graeme Charlton, the Chief Executive of Softcat. And I'm joined today by our CFO, Katie Mecklenburg, who you'll hear from very shortly. But before I hand to Katie, I will run to run through the financial results from last year.

Operator

I'll start with a brief reminder of who we are and what we do. Then once you've heard from Katie, I'll be back to give you an update on the evolution of our strategy. So who are we and what do we do? Softcat is today the largest provider in the U. K.

Operator

And Ireland in what's known as the VaaS space, so the value added reseller space of IT solutions. That covers cybersecurity, hybrid cloud infrastructure, networking, workplace technologies and so on and across hardware, software and services. So it's a tremendously broad and well diversified offering across the full scope of the modern IT environment. And we've grown to that position as number 1 in the U. K.

Operator

Entirely organically from a standing start 31 years ago. And in the most recent decade of that history, we have a 10 year average growth rate of over 15% for both gross profit, our primary measure of income, and operating profit. We work with the biggest and best known IT vendors globally. And to each of these, we are the largest or at least one of their largest partners in our domestic markets. And we are also actively sought out by all of the up and coming vendors as a primary route into the lucrative and growing U.

Operator

K. And Irish technology markets. This gives us a fantastic visibility across the very latest IT solutions and customer demand trends. And our customer base is incredibly diverse with over 10,000 recurring annual customers now from the mid market through to enterprise and from the corporate world into the heart of the public sector. We're increasingly as well being pulled into overseas markets by those customers, and we now have operations in the U.

Operator

S, the Far East and Australia. And that gives us yet another facet to the future opportunity that we have as well as unrivaled experience across different sectors and solution areas and in an age when that experience has never been more valuable to our customers, customers who are having to navigate an increasingly complex IT landscape. The breadth and the depth of the offering we've been able to grow is now truly market leading, which is why I believe we are much more than just a value added reseller these days. We are also a consultancy, an implementation partner and a multifaceted MSP. And I'll talk more about how we're going to develop those capabilities and opportunities further after Katie has updated you on the results.

Operator

And for that purpose, I will hand you directly across to her now.

Speaker 1

Thank you, Graham, and good morning, everyone. If we can move on to the next slide, please. I'm delighted to be able to share Softcat's results for FY 'twenty four. I won't read out all of the details on this slide as I know many of you will have already looked at the numbers, and I'll go into more depth on the following slides. But in summary, our results for the year are ahead of the expectations we set out 12 months ago, and we are very pleased that despite the challenging and volatile macro environment, we're once again delivering double digit growth in gross profit, which is our key measure of income.

Speaker 1

This growth highlights the resilience that our broad based technical offering and diverse customer base brings to our business. Gross profit growth of just under 12% resulted from a 1.8% increase in our customer base and a 9.7% increase in the average gross profit per customer, demonstrating our progress on both key aims of our strategy. Operating profit of GBP 154,100,000 was ahead of expectations. Operating profit growth of 9.3% reflects both our success in growing gross profit as well as continued investment in our strategic priorities, including average headcount growth of 14%, taking Softcat's employee base to just over 2,500. This leaves us well positioned to capitalize on the significant future growth opportunities across our market.

Speaker 1

We also maintained a strong balance sheet, delivering very healthy cash conversion of 95.9%, slightly above the top end of our target range. We ended the year with more than GBP 158,000,000 in cash and therefore alongside our normal policy of paying out between 40% 50% of profit after tax as an ordinary dividend, we are also recommending the payment of a special dividend which will be the largest dividend in our listed history. Moving to the next slide, please, and looking at the summary income statement. Starting at the top. Despite the continued weakness in the PC and devices market, gross invoiced income grew in line with gross profit, up 11.3 percent to €2,850,000,000 Strong growth in software and services, up by 17% 18%, respectively, was partially offset by hardware, which was down 8%, reflecting the headwind from the decline in low margin client device sales and the reduction in low margin server and compute sales, which were linked to a handful of sizable transaction in the base period and materially impacted the Corporate segment.

Speaker 1

Revenue declined by 2.3%, largely driven by the reduction in hardware GII, As software and services are largely reported net under IFRS 15, hardware accounts for a much higher proportion of revenue than the other reported metrics. And consequently, the hardware decline has a much more material impact on revenue. Software and services revenue both grew behind GII due to lower software gross margin driven by a mix into high volume, low margin, mostly public sector transactions and an increase in the proportion of services fulfilled by partners which aren't reported net sorry, which are reported net. Gross profit, which is our primary measure of income, grew by 11.7 percent to CHF 417.8 million. This is in line with the guidance that we set out at our FY2023 results of double digit growth across FY2024 and a good outcome considering the challenging trading environment, which persisted across the full 12 month period.

Speaker 1

Gross profit in the second half grew at 12.5%, an acceleration compared to the growth of 11% in the first half, driven by a relatively easy comparative. Gross profit growth was broad based across our customer segments of Enterprise, Midmarket and Public Sector, with each growing either high single digit or double digit. We also delivered good growth across all our technology groups of data center and cloud, networking and security and workplace. Growth in networking and security was particularly strong with a more modest contribution from workplace given the weakness in the client devices market. Looking at the numbers on the product basis, software and services gross profit also grew double digit, while hardware gross profit accelerated in the second half, delivering high single digit growth for the year.

Speaker 1

Overall, gross margin was flat for the year with an expansion in the first half due to the decline in low margin client device sales and a mix into towards higher margin data center infrastructure solutions largely offset in the second half by higher volume of lower margin deals, mainly in the public sector. Costs grew by 13.2% year on year due to increased commissions, which were in line with the gross profit and the impact of a 14.3% increase in average headcount. Our continuous investment in growing headcount is reflected in a small decline in our operating profit to gross profit ratio. This investment in capacity and capabilities puts us in a very strong position to take advantage of the considerable growth opportunities in our market. And as I've already mentioned, operating profit thus grew by 9.3 percent to CHF154,100,000.

Speaker 1

And lastly, net interest income in the period increased to CHF 5,300,000 due to higher interest rates and improved cash management, while the tax rate increased in line with the change in the statutory corporate tax rate, resulting in profit after tax growing by 6.3%. And moving on to the next slide, please. As I've already mentioned, our growth is supported by our diverse customer base and broad customer offering. And while there will always be some peaks and troughs in our portfolio, such as we've recently seen with client devices, it is the breadth and comprehensive nature of our business that we think is the key strength. And to illustrate this, you can see here the latest segmental view of our business.

Speaker 1

While Softcat's initial focus was on the mid market, on the left, you can see that today we are very well balanced with nearly 60% of our gross invoiced income coming from public sector and enterprise, a mid market now accounting for just 41% of the business. The middle chart shows that despite the scale of our technology resale business, 17% of our income is now generated from services. In total, that was CHF 470,000,000 last financial year, an 18% increase from FY2023. And on the right, you can see that we generate significant income from all areas of technology, ranging from the cloud and data centers through networking security and end user compete, with balanced growth across all three segments in the period. And it's this diversity across all these facets, together with the scale and ongoing growth of our business, that makes Softcat so unique in the sector and we think strives a significant competitive advantage.

Speaker 1

Moving on to our customer metrics on the next slide. Those of you who are familiar with our presentations will recognize the chart on the left, which shows our growth in our customer base and growth in gross profit per customer, reflecting our strategy to grow through acquiring new customers and selling more to existing customers. Pleasingly, as you can see in FY 'twenty four, we have again grown the customer base by 1.8% to 10,300 customers and grown gross profit per customer by 9.7% to £40,600 The graph on the right shows some additional detail. Including in our customer base is a tale of customers who we transact with at low value infrequently and with whom we have not yet built an established relationship. If we look at the same drivers of growth, but only for the 8,000 customers delivering over £1,000 of gross profit per annum, which is a level of business that reflects a more stable run rate of business and where we see a significant reduction in customer churn, the growth between the metrics becomes more balanced with customer growth of 5.1% and GP per customer growth of 6.3%.

Speaker 1

These established customers account for around 99% of the group's gross profit. However, our longer tail of smaller customers continues to be an important source of future growth. Graham will provide some further insight on this shortly in terms of how we optimize our customer proposition and approach to account manager to deliver on our strategy. And now moving on to the next slide. We ended the year with strong cash balance of £158,500,000 an increase of £35,800,000 in the period after the payment of an ordinary and special dividends totaling £76,000,000 Cash conversion of 95.9 percent was slightly above our guided range and as a result of good networking capital management with an improvement in debtor days enabling optimal use of early settlement discounts.

Speaker 1

This more than offset an increase in capital expenditure as, while still relatively small, we continue to invest in our systems and in our expansion of data and digital platforms. In line with the income statement, cash tax increased due to the increase in the UK corporate tax rate, while interest income, which is included in other, improved compared with last year given increased interest rates and better cash management. In FY 2025, we plan to start a sales system replacement project. The accounting treatment will depend on the solution chosen. And if the implementation costs cannot be capitalized, then we will treat them as an adjusting item.

Speaker 1

Taking this into account, our cash guidance is in line with our cash conversion target of between 85% 95%. Taking us to the next slide, which covers the dividend. As a reminder, the interim dividend for the year already paid back in May was 8.5p. Today, we're proposing a final ordinary dividend of 18.1p, reflecting our normal policy of paying out between 40% 50% of profit after tax. This represents a total ordinary dividend for the year of 26.6p an increase of 6.4% on FY2023.

Speaker 1

In addition, we're also proposing a special dividend of 20.9p. This is in line with our capital allocation policy to return excess cash to shareholders, subject to maintaining a cash flow of £75,000,000 The combined total dividend of GBP 47.5 is the highest in Softcat's history. And if we can move slides again, please. We have a disciplined approach to capital allocation, and our framework remains unchanged. Our first priority has always been and will continue to be investing in future organic growth, which allows us to continue to take market share in a growing market.

Speaker 1

Our second priority is to maintain a progressive ordinary dividend policy. Any additional excess capital is then either allocated to strategic investments or returned to shareholders. This year, in line with previous periods, we're returning excess cash via a special dividend, but we continue to explore acquisition opportunities, both in our international markets as well as bolt on acquisitions that would enhance our technology proposition in the UK market. And moving on to the next slide. And finally, before I hand over to Graeme, I'll touch on the outlook for the full year.

Speaker 1

The future of our industry remains as exciting as ever, with the ever increasing complexity of the IT landscape driving more opportunities for Softcat to be able to support our customers. Our continued investment in our people, systems and data and digital journeys positions us very well for further market share gains. And all of this means that for FY 2025, we expect to deliver another year of double digit gross profit growth, together with high single digit operating profit growth. And I'll now hand over to Graham to run through the strategic update.

Operator

Thank you, Katie. And so as you saw there, our progress last year in a difficult market was terrific. And I wanted to just set that progress now in the context of our broader history because I think to really appreciate where we're going next, it's helpful to remember where we've come from and how we got to this point. Because only then can you really appreciate why we take such a long term view of our business and our industry and why we're so excited about the capabilities and positioning that we have today. So this chart shows how our gross profit, primary measure of income that we have, and our headcount have grown since the day we started selling technology back in 1993.

Operator

So this is 31 years of organic growth and investment. And this kind of progress in our industry is unique globally because we have evolved from our beginnings as a mid market Microsoft specialist and built upon and around that to today having the broadest and deepest offering in the market. We are relevant to some of the largest customers for some of their most complex projects in both the corporate and the public sector space. And we've marked on this chart just a few notable events from that time line, a mixture of internal and external impacts. But the point that I'm really trying to convey here is that our growth hasn't been sporadic.

Operator

It's been relentless and it's been consistent and sustainable too. And it's been that way because we found in the ethos that we were created upon, we found a way of being truly different, a truly different and special place to work. And in that, we found the basis of a differentiated customer service that has been the driving force of all of this growth. And our models proved to be scalable through time and through some significant changes in the technology landscape and over these 3 decades, and scalable as well through becoming a public company and through changes in leadership. And even though we are now the largest in the U.

Operator

K, we only have around a 5% share of the market still. And that fragmentation of our industry does not serve customers well. And so the momentum that we have and our future opportunity are not constrained by anything outside of our own control. And importantly, the factors that I think led to a lot of this growth in the past are still very much present today. And in fact, I think we're in better shape than ever.

Operator

So firstly, our culture, that will always be our number one priority. But we've coupled that with a desire and a discipline to invest for long term success as well. And the business and that's underpinned the double digit compounding that you can see there as well. And the market headroom today is actually bigger than ever because we've expanded our offering, but the market continues to grow as well. So all of that means, in my view, that despite this, we are just getting started and the opportunity ahead is truly vast.

Operator

And so I'll try and illustrate now how we plan to take advantage of all of that. So here it is. This is the soft cat strategy on a page. This simple diagram shows you the virtuous circle of growth and investment that is sparked and fired by that very special culture. This is the recipe that has created the growth you saw on the previous slide and will continue to power us into the future.

Operator

That culture creates teams of people that strive for and deliver for customers in a way and with a tone that the competition just can't match. That creates trust and loyalty. And that leads customers to spend more and more with us every year. And that, in turn, enables us to invest in building a bigger and better proposition for them. So as well as that special people culture and attitude, our customers then have even more reasons to stick with us in the future.

Operator

And so that cycle perpetuates and continues. This means that today, while the culture will always be the magic and most important ingredient, the depth and breadth of the offering that we have is also unique and also a source of competitive advantage. And realizing our potential from here requires us to develop and drive both of those advantages. So that overarching strategy is unchanged and will be permanent. But what is evolving and what I'd like to try and show you now is how we've mapped out the components of the customer proposition that we need to stay at the top of our industry and how we plan to invest in and develop them to stretch our advantage further.

Operator

So here they are, and I'll talk through them very briefly. And I've also indicated on here which member of the senior team in Sofcat is responsible for coordinating and driving them forward. And I'll do this broadly by working from left to right, but I'll start a little bit in actually with the technology proposition and the service offering that sits alongside that because together they inform some of the other components. So what do we mean by the technology proposition? Well, this is the technology we sell to our customers and how we organize it and present it to them.

Operator

And I'll show you the key components of it in a moment, but I'm starting here because it does inform the technical skills and the service portfolio that we create and will continue to build. And that's why those two things are side by side. They're very much two sides of the same coin. And having set out and created the tech proposition and the service offering that goes with it, we can then set a sales strategy aligned to those things. And that's both from an organizational design point of view, but also in the go to market motions that we create, the marketing plans we design and the channels through which we carry them.

Operator

Then we have the vendor management strategy, and we don't talk about this as much as we do, our customer relationships, but our partnerships with the vendors have always been a key strength of ours. And again, the power of those relationships has an awful lot to do with our culture and the teamwork that we're able to foster between organizations. And in addition to that, our growth has allowed us to invest in scale and the technical skills. So the accreditations we have with all of the top manufacturers in the industry are at the very in their very top tier. But we're now seeking to manage the technology portfolio with each of our partners in a much more deliberate and purposeful way, making sure that we carry the very best technologies with the most impact through the framework of our technology proposition into the market.

Operator

That gives our customers the broadest choice, but curated in a way and at a time that is the most impactful for them and their particular circumstances and enabling much more collaboration and better co selling with the technical and presales teams in those manufacturers so the customer gets the best support from the combined Softcat and vendor teams. All of this will be enhanced by new digital platforms and data insights that we've begun to lay the foundations for in recent years. We've put new finance system in 2 or 3 years ago, and we also, at that time, carried out a massive overhaul of our own database architecture and integration layers in our own technology stack. And that's allowed us to create data a data lake that's augmented by external sources. And we've begun to use this in exciting new analytics and reporting internally.

Operator

This is applications in intelligence we can give to our salespeople, highlighting which customers might be ripe for which opportunities at which time, but it also will feed modern marketing techniques and enhances, as I said, the collaboration that we can do with our vendor partners. So it's the foundation for driving value and innovation from Microsoft Copilot as well, which we're now in the process of implementing across the whole organization. And it will enable as well the automation of many of our back office processes, something which we're already well underway with. So from left to right on this slide, each of these interlocking areas has a plan for its development over the next 3 to 5 years. They are coordinated as a whole and will be led through the unique teamwork that runs through the Softcat Organization.

Operator

And as a result, the business that we will be 3 to 5 years from now will be smarter, will be more automated and capable of presenting our uniquely broad offering to customers in a way that is easier for them to interact with than ever. And our offering will be bigger, better and more cutting edge than ever. And I'll delve a little bit deeper now into the technical service that we offer to customers. And you can see here, it's composed of 3 key layers. Firstly, the vendor proposition sorry, firstly, the technical proposition, then the vendor portfolio that we have, and then finally, the service offering that we've created over many years.

Operator

And at the top, there are the key components of the tech proposition, as I mentioned. And there's nothing especially proprietary about the framework in and of itself, but it's only ourselves and maybe 1 or 2 others in the UK market that can really claim to be fully across all of those areas. Then in the 2nd layer, and there's just a few examples on the slide, but there are 100 that we work with in total of the vendors that we have playing into the different components of that tech proposition. Each vendor has got a different portfolio, and of course, they overlap and compete in some areas and then are highly complementary in others. But again, this in this facet too, there is nobody deeper or broader than Softcat.

Operator

We have the very best of the biggest manufacturers in the world, coupled with the hottest emerging innovators in each area as well. And then finally, there's the third aspect of this technical offering for customers, the service portfolio that we operate. This is separated across the 5 disciplines that we've outlined there. And I'll explain each in brief. And to help me do that, we'll bring up the next slide, which expands a little and shows you the scale of the resources that we have in each of those 5 service towers.

Operator

So firstly, our advisory function, this is exploring the art of the possible with customers. We've got a growing team of expert technologists who operate at the emerging edge of each area of that tech proposition. They understand the innovation the innovations being brought to market by the vendors. And we also have a group of chief technology strategists who are expert in different verticals who can take some of that blue sky thinking and help apply it to customers and their particular organization and their business model. Then our Architecture Services team, they can take those ideas and plans created at the advisory stage and start to turn them into workable solutions against which we can begin to build and design implementation implementable programs of change.

Operator

At the implementation stage, we've now got designable designed workable solutions, and we can help customers implement those. We can do it ourselves, or we can supplement the resources that they and the vendors bring to that effort as well. And then finally, our support and excuse me, managed services post implementation, we can offer support across many of the solutions that we're selling as well. So if we zoom back out to the 3 layers, and hopefully what you can begin to see is the three-dimensional set of permutations that this offering gives and why I talk so much about the breadth and depth of what we can do. And it's also why it's taken us 31 years of relentless growth and investment to build it.

Operator

And it's so important, not just because we can show customers the art of the possible and where they're going, but we also have expertise in where they're coming from and a knowledge of their legacy IT to work with. And hopefully, you can see as well why I mentioned before the term reseller hopelessly undervalues what we do for our customers today. If you imagine you're a CIO or an IT manager in a modern organization, you haven't got a team that can possibly be across all of this. And even if you do, the vendors of the technology haven't got a team that can engage with you directly. So the need for a solutions provider with real substantive capability has never been greater and the quality of the Softcat offering is unique in the market.

Operator

So we'll look now at how this rich technology offering combines with the outstanding customer service that we have to create lasting and profitable relationships with and for our customers. And this slide presents a view of the addressable customer base we have in the U. K. And how we're trading with it. And it's a new slide, so I'll try and take a bit of time to explain what it's showing.

Operator

So just look in the middle to begin with, where you have a representation of the 50 1,000 addressable customers in the U. K. Market. And in the bottom layer, what we've called the customer pool, are customers with whom we've either not started trading at all yet or have just made a brief start with. Then right at the top of the pyramid, you've got customers for whom we've become a trusted adviser and have likely to been working with for years.

Operator

And each layer of the pyramid is defined by the amount of GP each customer is generating. And what you can see as you work up that pyramid is that the longer we've been working with a customer, the more vendors' technologies that we tend to be selling into them, the more GP that they're yielding and the lower that the churn rate becomes. And then you'll also notice that the higher up the pyramid you go as well, the faster is the rate at which we've been growing the number of customers in that layer. So while the total number of customers we're working with has only been growing in recent years at around the 2% mark, The rate at which we are growing the most profitable layers and the deepest loyalty of layers of the customer base, that has been much, much quicker. So for example, at the very top, you can see there customers yielding more than 100,000 gross profit per annum.

Operator

The number of those customers has increased by 16.8% per annum over the last 5 years. And the rate of growth in the number of customers, the next layer down, is 6.2%. And so if you stand back from this diagram, hopefully what you can see is that while we continue to draw brand new customers up from the pool, our future growth can and will come much more from accelerating those customers that we've already made to start with up through this pyramid of trust. And that's why I think that 31 years in, we haven't really even scratched the surface of our potential yet. All we've really done so far is build the organization that is capable of being to our customers what they really need, which is a provider with the skills across the full range of their technology infrastructure capable of partnering with them for the long term.

Operator

So I'll summarize now and then we can move to questions. Before I do that, I will just give you a quick word on our ESG activities. And I won't dwell too much on this because you can read the page and you've heard us talk about this framework before and how we've embedded it in our operations. But related to our focus on culture, I would just like to draw attention to the awards we've won this past year there in the social column. And we really are proud to have been named the best place to work in technology and for apprentices and for women.

Operator

And we have been named 5th best place to work overall in the UK. And there are a ton of people in Sofcat working really hard to make sure that we preserve the very special culture that we have, but also make sure it's progressive and inclusive. And I think those awards show that they are doing a terrific job of that. So moving to summary then. So we've continued in this past year to execute really, really well, delivering growth slightly ahead of the target that we set ourselves on entering the year.

Operator

And the future that we have is brighter than ever. The plans that we have to build upon the uniquely broad and deep offering we have have never been in sharper focus. And the growth opportunity ahead is huge. The plans that we have to realize that potential are sustainable, we think, for decades to come. We're incredibly well positioned in one of the most exciting industries in the world, and we have the heritage and the model, the determination, and most importantly, the attitude to make the most of it, not just in this new financial year, but way, way beyond that as well.

Operator

So thank you for listening. We will take questions now. What we'll do is start with questions in the room and exhaust those first, and then I think we might have some questions from the line to move to as well. I don't know who's in charge of mics. It might be me by the looks of it.

Operator

You've got them there. Perfect. Damindu, go ahead.

Speaker 2

Hi, thanks. Damindu from Peel Hunt. I have two questions to start with, and I'll come back to other questions later on. The first one is, thanks for the slide, the new slide, that's great. I wanted to understand the 300 or so people you have now in doing the implementation, the support and the managed base of the 410, are they mostly focused on the top of that pyramid?

Speaker 2

And then related to that, so that's 300 people is around 12% of your total staff doing essentially IT services going beyond value added reselling. Should we think of that becoming a slightly bigger piece of the equation going forward?

Operator

Am I okay just talking through yes. That's a really good question. You would and I can see why you would think that most of those people are working for people at the top of the pyramid. And there might be some correlation there, but not as much as you would think. And this is what part of the power of our offering, I think, these days is that we can start anywhere.

Operator

So actually, a customer might have a security issue and might be looking to put a managed SIEM in place, and that's where we might start. So we could go straight into that place and expand out of that. Equally, we could still start by selling someone a bunch of laptops. It can work either way. So I think the concentration of that service effort and resource at the top of the pyramid is far less pronounced than you might imagine, actually.

Operator

It will though, the service business, continue to become a bigger part of our business. I remember when I joined Softcat 10 years ago, about 50% of the organization were frontline salespeople. That has dropped to less than 30% now. And that's because we've grown the service business and the technical offering so much. And that will continue as we go deeper with customers and do more and more for each one on average.

Operator

Tintin, down at the front here.

Speaker 3

I know we are pressured to just ask one question because we'll

Operator

end up. Yes.

Speaker 3

I'll do 2, if that's okay. Still on that services piece, when you look at that sort of growing piece of the revenues and the, to some extent, the revenue and charging model to the customers, How are they charged for currently across those five lines? And do you think sort of you're at the right place in terms of kind of charging for them? And then the second question is, I think it was in the income statement slide where you have the GP per employee, per average employee. When you're thinking about kind of the investments kind of going forward and growing that piece and growing the investments, Do you think of that GP per employee much?

Speaker 3

Or the number is what the number is as it comes out, as it were?

Operator

Yes. Do you want to stop? 1 and I'll do 2. Okay. So how we charge for the services bit.

Operator

A lot of the work we do in the advisory and architecture layers are not charged for. That's part of the everyday conversations that we have with customers. And we can work in those areas with a customer for months before it comes to fruition. That's part of where we get. A lot of people, they talk about service contracts being sticky.

Operator

It's the value of the service conversation that really binds a customer to you because of the value they get from it. So our advisory and architecture services generally won't be charged for extensively. And then when we create workable solutions, maybe do the implementation, implementation and managed and support services are then charged for. And we will charge in some cases for advisory and architecture work. Someone might ask us to do a particular consultancy project with a particular deliverable, and that will be chargeable.

Operator

But it's in those other three towers. Do we think that's right? Yes. It's kind of proven to be a terrific model for us. And the margin that we earn because of the value that we add at the architecture and advisory stage when it comes to selling product and design solutions is then much higher as a result of that.

Operator

So how you account for it and how it really works in the real world are probably 2 very different things where that margin comes from.

Speaker 1

And to answer your second question, so we added the metrics. We used to always look at the gross profit per account manager. As Graham said, that's become a smaller percentage. So it's something that we're more conscious of, but it's very much an output. So just like operating profit as a percentage sorry, of gross profit, it is the same thing.

Speaker 1

However, as we move forward, we're putting more into IT and AI, which we would expect to drive efficiencies. So I think that will be sort of a trend moving forward, but very much we've always invested today because we think the future of the business is so strong and we'll carry on doing that. So if the investment makes sense from a medium term cash flow, we'll invest. And if that means that, that metric dilutes, then so be it.

Speaker 4

Hello. Good morning. Rahul from HSBC. I have two questions. I think previously, you did flagged about the macro conditions about longer sales cycle and consumer differing purchase decision.

Speaker 4

Just want to understand how that has changed in the most recent months, in particular, Public Sector. And I can see strong sequential growth in the Commercial Enterprise in particular. So just want to understand what you're seeing in terms of trends there, first question. Maybe I have a second later.

Operator

Okay. Not much change is the short answer. So I think customer behavior is still where it's been for probably the last 12 or 18 months. So what we're seeing is customers being thoughtful about spending. Usually, that's the last place it impacts is IT infrastructure, but it has been impacting there for a while now as well.

Operator

So yes, longer sales cycles, sweating of assets, and that's the case in both public sector and the corporate space. I'm pretty optimistic, optimistic by nature, but I think the more we move into next calendar year, I think we will start to see that change. I think the age of particularly laptops is well known now that they're starting to creak. And we are starting to see some signs of that device refresh cycle kicking off. I think that will strengthen next year.

Operator

And there's always something to be worried about in the world. And I think people are getting fed up of that now and just have to get on with things. So in 2025, I think we'll start to move forwards. But just to be clear, though, we don't need that environment to change in order to hit the numbers that we're projecting into next year. So if it remains tough, that's just fine too.

Operator

We've got the offering. We've got the capability to keep taking market share. So come what may for the economy, I'm confident Softcat will continue to grow.

Speaker 4

Thank you. And my second question is in terms of headcount growth. Your closing headcount growth was close to 8.4% against 15% plus 14% growth for an average. I think you're looking at high single digit headcount growth for 2025, FY. And in context, you're flagging double digit GP growth for next year.

Speaker 4

So just wanted to understand basically what's driving low single digit sorry, high single digit operating profit? Should not we expect operational gearing in the business given the slower pace of headcount growth? Thank you.

Speaker 1

Yes. So the budgets, going on very low double digit headcount growth. And obviously, then we'll have salary inflation on top of that. We are also moving, I think, about 4 offices next. So we're going to have the double running costs of that in the P and L and some of the IT investments as well.

Speaker 1

So in terms of cost growth, it won't be dissimilar to FY 2024 in total.

Speaker 5

Good morning. It's Andrew from Pammi Liberum. A couple from me. Just I wanted to sort of pull out second half GII trends and maybe you could elaborate a little bit more about 2 customer verticals. I was interested in what your comments are in relation to enterprise, where this H2 versus H2 growth really stepped up.

Speaker 5

Can you put a bit of color around that in terms of what you've won? And then on public sector, which was pretty strong across the year, there was also a small acceleration in second half. And I appreciate there's a seasonality to public. And you referenced it obviously in your commentary around margin. Maybe you could bring to life for us why public's been so strong and what the outlook is, please, in relation to public, given election, a lot of angst about fiscal position, etcetera?

Operator

Okay. I'll start and maybe Kate will add a few thoughts in as well. So the short answer to your question is nothing much in particular because we've got over 10,000 customers. And I think every year now, for as long as I can remember, we've talked about our growth being broad based at every set of results, and that's exactly what it is. So teasing out what's driven it is almost impossible, and you'd have to go down to what hundreds of individual customers are doing with their IT estates, which is the idiosyncrasies of their own journey.

Operator

However, we have our capability and credibility to support enterprise grade organizations with complex projects has been moving forward for years. And we do have a particular focus, like we always do. Our strategy is about layering on a core and finding the next most proximate opportunity. And taking that credibility and capability into the enterprise space is a focus for ours. So we've got some dedicated resource around doing that, and I think we're getting good traction from it.

Operator

But it's not one particular customer or one particular vertical or one particular area of technology driving it. It's broad based within enterprise itself, and we're very optimistic about the opportunity in that space going forward. Similar answer on public sector as well. On generalizing massively, I think the public sector IT is a bit behind the average corporate user. And so the need for public sector to modernize their IT is well documented and is not going to go away.

Operator

The color of the government that we've got might have some small impact on that. I don't think any of us can predict it. But the optimism that we have for our being able to help public sector with that modernization and the growth that it will yield for us is as strong as it ever has been. And the tactical things that might influence it are much smaller by comparison to the general trend of that direction of travel and the capability that we have to help them with it as well. So we're excited and optimistic about enterprise, public sector and the mid market.

Operator

There's still tons to be done in the mid market. And the breadth of that customer segmentation we have and the richness of the offering that we have means that whatever is happening in different parts of technology or different parts of the customer segment or different parts of the economy, our ability to grow through all of that in a blended way is what excites us most. Anything?

Speaker 1

The only thing I'd add in H2, so the gross profit for total corporate and public sector growth was really similar, practically identical. So we're really pleased that we saw a broad based growth across 2. And then just a little color for public sector, what happened. And again, I think it just no trend. But in H2, it was central government and education that were particularly strong in the public sector.

Speaker 1

But I don't think we think that was a trend.

Speaker 5

Thanks. I wanted to get a second one, if we can. I just wanted to ask about Microsoft, which is your most important vendor and I think they had a gathering recently of their major partners of which should be 1. What takeaways would you share with us from that session that you think are relevant in terms of the go forward?

Operator

Takeaways from the changes Microsoft have announced to their fee structures and

Speaker 5

Not necessarily rebates. No, I'm talking about in terms of plans for tech products. You guys obviously major reseller in the U. K. For them.

Speaker 5

What can you share with us about Microsoft's plans for the next year and how you'll be part of that? Right.

Operator

I mean, I think what Microsoft are doing is hugely exciting. They have created, over the last 10 or 15 years, an incredibly rich portfolio, which stretches way out of what was their original heartland a long time ago. And I think they're continuing with that. So they're now one of the top security providers in the world. They are committed to and leading the way on AI, whether that's hosting bespoke AI workloads in their cloud or putting it to work in their office environment with Copilot.

Operator

And their plans for I think what Copilot will become is a base of new way of working, which then customers can create individual IP on and around, and Microsoft will bring out agents for Copilot that allow organizations to make it more specific to their way of working as well. So we're just in the foothills of that AI opportunity with Microsoft and their commitment to it and the ideas that they have, I think, are really exciting. And what that means for their partners is those of us who have been building motions around cross sell and up sell and using the richness of a portfolio like that are in great shape. And those of us with a service portfolio that's really rich to help customers access and understand that are in terrific shape as well. So the future of the Microsoft product stack and the opportunities we have as a partner of those, I think, have never been more exciting.

Operator

It's incredible what they've done, and I think their plans are even bigger going forward.

Speaker 5

Thanks, Graham.

Speaker 2

Hi. I'm going to squeeze in 3, if you don't mind. The first one is actually on systems. Obviously, you've done finance systems changes, but I can't remember the last time you talked about changing sales systems, at least not to the market. Is there a big opportunity here?

Speaker 2

And could you kind of bring to life? Because obviously, this is still largely sales led organization, and therefore, sales productivity is in focus for you guys. So could you bring that to life? And then the second piece I wanted to ask is, it's always a bit too dangerous to look too deep into the GII numbers, but second half hardware numbers look not so bad in the grand scheme of things. Do you need that kind of hardware GII levels to recover into next year to hit your double digit targets or you I.

Speaker 2

E. The device recovery? Or if the device recovery doesn't happen in the next 12 months, is it not a problem? And the last one I wanted to ask you was, when you listen to vendors, cybersecurity feels like still a very high demand area. Do you see an elevated demand around cybersecurity, especially in the coming months?

Operator

Yes. Okay. Sales system is a massive opportunity. We're succeeding despite not having the best sales system in the world. So and it's so there's friction in day to day usage that will get benefit from changing that system.

Operator

But when it's done, with the finance system, with the architecture of the data that we've got with Copilot and what we can do around Copilot and linking all of that together, these integration layers I mentioned, the ability of applications to talk to each other. The transformation that we'll create over the coming few years in our employee experience of our technology and the data and insight it can give them access to will be profound. And that will play into a massive uplift in the customer experience of the quality of the conversations that we have with them as well. So there's huge opportunity there. That's why data and digital strategies and IT enablement sit as carve outs of our focus areas in how we develop our proposition.

Operator

So yes, so really excited about that. We put a lot of the hard work's already been done over the last 4 or 5 years actually, and this is just the latest part of that jigsaw. Anything to add on that one particularly?

Speaker 1

No.

Operator

GII in half 2 for hardware, not so bad. Do we need it to recover? No is the short answer. I mean, we hope it does and if the device refresh does pick up pace. But again, back to the breadth, depth, richness of what we do, we'll go where the customers need us to be.

Operator

We're not going to be forcing laptops down their throat. We will respond to their needs, as we always do. One of the biggest strengths that we have these days is we're asking a customer where do they need our help. We're not a data center specialist or a laptop specialist or a security specialist ringing them up, trying to push that onto them. We are responding to where we need.

Operator

And we don't have utilization issues because of the way that the very malleable way in which our organization fits around customer and account manager teams. So I'm pretty confident that hardware will I mean, hardware is still really exciting. We're still seeing really good growth in data center, on premise data center because of the hybrid cloud setup is the right one, not all in on public cloud or any one method of model of compute. And on premises networking has been good for us over the last few years as well. So hardware is exciting.

Operator

It's growing. Underlying hardware trends are in good growth for us. But exactly what happens to them in the year ahead, we don't have any particular needs or requirements. Cyber, just not going to stop. I think AI and what AI means for data, how it's managed, governed the quantity of data in the world, where it's located, latency of processing.

Operator

The data landscape is as dynamic as ever, and that means that the security of that data has never been more important. And the methods of attack, because of AI, are just proliferating too. The quality of the security tools in the IT estate are going up. So it's kind of a never ending arms race that we are on the journey with our customers for and to support them. So yes, hugely important.

Operator

Right, yes. So I mean, our the service offering we have in the cyberspace now is full fat. It's rich across all areas from the endpoint through to managing response to incidents and as well as assessment services too. So and we've got in house management of things like, as we said, based on the Microsoft Sentinel tool for managing incidents. So we've just been accredited as MXDR with Microsoft as well.

Operator

So the richness of our service offering is terrific in that space. We'll continue to build capacity into that. We'll continue to extend it. But it's a huge source of not just income and profit, but rich conversations with customers too.

Speaker 6

Yes. Hi, guys. Joe George from JPMorgan. Just one question for me, please. Could you give us an update on e commerce sales, digital sales and sort of cloud marketplace sales?

Speaker 6

And what sort of investments are you making here? And how do you think about this part of the business with regards to targeting that tail of smaller customers and working them higher up the pyramid?

Operator

So I mean, marketplaces are a new probably the best way to think about it, it's a new method of distribution for software. And for some customers, in some cases, it's a highly relevant one, and it's the best route for them to access that software by. So we're the biggest, I think, marketplace reseller in the UK, so we're well versed in the big marketplaces and how to operate them, and we'll use them appropriately for customers in the right circumstances. I don't think it's fundamentally a different way for us to access smaller customers and take them up the stack. The reason what marketplaces don't do is replace the value we add in the value chain, which is around advice and architecture and support and implementation.

Operator

They're just a different way of accessing that solution that may or may not be right in different circumstances. So whether it's the likes of the hyperscalers or other marketplaces, we'll interact with and use them, but they're not really a new way for us to access the customer base. They could be, in the future, a way of drawing some customers in from the pool to interactions with our technical people and salespeople. But yes, I don't think they're transformative in that way.

Speaker 3

Just one, maybe 2. On Slide 19, I keep looking at Slide 19, the new slide of the pyramid of customers And trying to think of with the tech proposition and services proposition you have, what metric there do you think are the low hanging fruit? Is it the growth in the sort of kind of the lower end? Or is it the rate in which you could accelerate customers up the stack? Sort of when you look at all those numbers and think, okay, which numbers?

Speaker 3

Or do you actually think the top bit would just grow even faster?

Operator

It's a really good question because a few things. Firstly, that sort of layer, the GBP 1,000 to GBP 10,000 GP layer, the rate of growth there is quite low because there's a lot of in and out. So it's moving up through the pyramid. So we'll continue to draw customers in from the bottom. But I think the other thing about this is those growth rates are 5 year looking back.

Operator

Now the business that we are today is very different from the business we were 5 years ago. And so those rates of growth reflect the capability that we had in the past. And what we are seeing is that our ability to accelerate I've always I've said for a long time, you can't fast track loyalty and trust with a customer. You've got to do the right thing and be the right partner for them over a long time, and that's how you get and that's true. However, the reputation we have, the capability that we have much more referenceability around now in the marketplace means that we are seeing customers go through that journey quicker, not in all cases, but there is a chance, I think, for us to accelerate those growth rates at the top end of the pyramid going forward because of the capability we've built and will continue to build and the perception of that the increasing awareness of that quality that we have in the market.

Operator

So not sure there's any low hanging fruit because this is the exciting pathway for those customers we've built over a very long period of time. And we're now realizing the fruits of that offering that we've built. So it's I don't think there's any low hanging fruit. This is hard work, but we've proven to be very good at taking customers on that journey. So I do think that those growth rates at the top end of the pyramid will stay high and could hopefully get higher.

Speaker 4

I have a quick couple of follow ups. In terms of Microsoft, could you just give us color in terms of number of copilot licenses you have sold, maybe just platform flavor in terms of maybe number or positive of GII, if that's helpful? And any changes in terms of Microsoft rebate structure? Understandably, it's less part of your portfolio, but just want to understand what your conversations are and maybe just understanding of what is E as a percentage of CSP mix for you in terms of exposures?

Operator

Okay. So I'll try and it sounds like you might have more. I'll try and cover some of those. So CoPilot penetration is mid single digits penetration of our Microsoft installed base, which I think is in line with broader experience as well. So Copilot is terrific conversation.

Operator

We're getting good traction with it. But as we've said, right from the start of this, it will be a slow burn as well. As well as the commitment of budget, it's a changing way of working for customers. And I think it will be pervasive and ubiquitous in the fullness of time, but it'll take time to get there as well. So we're about, I think, a mid single digit penetration of the installed base on that.

Operator

The Microsoft fee changes, I'm very we're relishing those changes because what Microsoft did and it weren't a surprise, by the way. So Microsoft's direction of travel has been consistent and well signaled. So it was a big step that they've announced for January, but no surprise. And I think, as I said before, it benefits partners who are able to co sell and cross sell, and I don't think there's anyone better in the business at that than Softcat. And it also benefits partners with a rich service offering.

Operator

And again, I think Softcat is best positioned in the market for that. And equally, we are Microsoft's biggest partner in the U. K, but we have a very, very broad offering as well. So you were talking about CSP and EA fees. Our sellers don't really think about it in those terms.

Operator

They think about how best to support a customer. And Microsoft is a terrific part of that. And the richness of the Microsoft offering we can take into a customer, whether in the enterprise space and on an EA or in the mid market space and on the CSP, there's a much bigger game for us to play than optimizing percentage income levels for Microsoft in one customer. We've got a much bigger job to do for a customer than that with a lot of rich profit opportunity for our account managers around it. So we're really relishing that change in this journey with Microsoft for those reasons.

Operator

So it looks like it might be end of questions in the room. I don't know if there's any for us to take from the online side of things.

Speaker 7

And we do have a question from Charlie Brennan from Jefferies. Please go ahead.

Speaker 8

Hi, good morning, everyone. Thanks for taking my question. I had to dial in late, so I apologize if you've already addressed these. But can I just ask a few questions? Firstly, just on the OpEx trends.

Speaker 8

I think at the half year stage, you're expecting OpEx growth to accelerate in the second half of the year and actually decelerated. It feels like OpEx in the second half of the year was probably €2,000,000 or so lower than you expected it to be. Can you break that down between to what extent that was gross profit disappointment against internal budgets and to what extent that was curtailed investment? And then secondly, can I just ask a question on the cash flow expectations for the year? I missed the CapEx investment you're going to be putting in behind systems.

Speaker 8

And is there anything to call out in terms of working capital reversals? I see you had a $6,000,000 benefit from long term deferred income in the period. Is that something we need to consider in working capital trends for this year? And then thirdly, again, I'm not too sure if you addressed it, but is Q1 fully consistent with double digit gross profit growth and high single digit EBIT growth? Thank you.

Speaker 1

Okay. So OpEx costs were, you're right, slightly lower. Part of it's just leveraged on the gross profit trend, so commissions grew in line with. And the core bit, which was slightly under our expectations, but actually I think we knew going into H2 because we'd managed headcount, so wages and salaries were slightly on the lighter side as well, Charlie, but overall mostly in line with what we were expecting in terms of those trends. In terms of CapEx and apologies, I haven't written down, could you just repeat that question again?

Speaker 1

Networking capital trends, we're not expecting any core reversals. We're guiding to the same target cash conversion of 85% to 95%. In terms of that sales system, so we're still in very early stages of the procurement at the moment. So when it gets to half year, we'll have sort of more tangible numbers. But at the moment, we're basing our assumptions on what we spent on the finance system, which was low double digit over about 3 years.

Speaker 1

So that would sort of be our best estimate at this point in time. But as we sort of finished RFPs and have got a more detailed plan, then we'll be clear on phasings and quantum as well. But no, we're not expecting any reversals of trends. And the amount of cash that we think that we will spend on the system in FY 2025 is built into our forward looking cash guidance.

Speaker 8

Just given the working capital movements this year, particularly on the long term deferred income, is it reasonable to assume that this year is going to be at the lower end of your traditional range for cash conversion? Or am I reading too much into things?

Speaker 1

I think you're probably reading a little bit too much into it at the moment. We're happy sort of, I would just say, sort of mid range of guidance. But it can be relatively volatile. It depends on what we sell right at the end of the period and what the payment terms are that come in we are paying customers on versus our suppliers. So that sort of tends to be the biggest swing factor.

Speaker 8

And then just on Q1, is that consistent with the double digit gross profit and high single digit EBIT growth?

Speaker 1

So yes, it is. I think we think that the second half might be slightly stronger, but first half still double digit and high single digit as well.

Speaker 8

Perfect. Thank you.

Speaker 7

Thank you. And we have another question now from Chandra Suryaman from Stifel. Please go ahead.

Speaker 9

Yes. Hi. Thanks for taking my question. I just wanted to clarify one detail and question on services. So I noticed that you talked about using partners to deliver some of your services and therefore revenue growth seems to be lagging GII growth.

Speaker 9

So I was just wondering, is this just due to the mix of the services provided? Or is it something that you need to now invest in to ensure that revenue growth keeps pace with GII growth? And just in terms of clarification, the guidance for next year, I assume, does not assume any kind of rebound in the underlying hardware market, does it?

Speaker 1

So I guess that we don't try and manage revenue at all is what it is and not helpful. But on a GII basis, so that again, I think Graham talked about it well. No real trend, but in the period, we happened to sell more from internal partners than external partners. So again, nothing that we're intending to do off the back of that at all. And in terms of guidance, we don't need client devices to rebound to hit our numbers.

Speaker 9

Thank you.

Speaker 7

Thank you. And as there are currently no further conference call questions, I'd like to hand the call back over to you, Mr. Turtin, for any additional or closing remarks.

Operator

Thank you. And thank you to everybody again for their time today. As we said before in the summary, we're delighted with the progress we made last financial year, terrific growth, slightly ahead of our expectations coming into the year despite the tough market. We've sharpened up our focus on the things that we think we need to be for our customers in the years ahead. We've got terrific plans to do that.

Operator

We've got the financial firepower with the organic growth that we deliver invest in those things at pace. So we're really excited about the future opportunity. Still only a 5% share of the market in the U. K, we think the broadest and richest offering. Still incredibly proud of our people and our culture, and that will always be our key differentiator.

Operator

And if we keep getting this right, the next 31 years can be every bit as exciting as the last 31 have been as well. So we'll look forward to keeping you informed about that as we go. Thank you.

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Earnings Conference Call
Softcat H2 2024
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