Bytes Technology Group H1 2026 Earnings Call Transcript

Quartr
Provided by Quartr
October 14, 2025

Key Takeaways

  • Neutral Sentiment: Bytes reported a 9.1% increase in gross invoiced income to £1.342 billion and a 0.4% rise in gross profit, offset by a 7% decline in operating profit and 105% cash conversion.
  • Positive Sentiment: The reorganization of the corporate sales team—moving 750 accounts to segment-focused specialists—temporarily eased first-half growth but is expected to enhance account management, tailor solutions, and boost services revenue.
  • Negative Sentiment: Microsoft Enterprise Agreement rebate cuts from January 1, 2025 reduced gross profit margins, with further public-sector and November 1 pricing changes set to drive more customers to the higher-margin CSP model.
  • Positive Sentiment: Services performed strongly with 15% GRI growth and 43.6% gross profit growth, underpinning a strategy to increase services’ share—targeting around 20% of gross profit within five years and exploring M&A to accelerate capabilities.
  • Positive Sentiment: Capital allocation included a 3.2% increase in the interim dividend to 3.2 pence, a £25 million share buyback programme (with £15 million executed) and £8 million of capex on two new IT platforms to launch a customer marketplace and improve order processing.
AI Generated. May Contain Errors.
Earnings Conference Call
Bytes Technology Group H1 2026
00:00 / 00:00

There are 8 speakers on the call.

Speaker 2

Joining us for our half year results presentation for the six months ending August 31, 2025. I'm Sam Mudd, the CEO, and I'm joined by our CFO, Andrew Holden. I'll begin with a quick introduction to our business and overview of the results, and then Andrew will provide a financial review. I'll come back after that to provide a strategic update and finish by opening the floor to questions. I know most people in the room know our business very well, but for those that don't, Bytes Technology Group is one of the largest IT resellers in the UK, and we have a focus on software. We're driven by a clear mission to help organizations succeed in a world of change through trusted partnerships and transformative technology.

Speaker 2

We've got significant tenure and experience not just in our leadership teams, but across all of the staff positions, allowing us to build and sustain those trusted partnerships and to deliver what our customers need in the form of licensing, advice, recommendations on solutions and procurement, and providing technical services where required. We're committed to building a sustainably growing company that's also a great place to work, and this clear focus on culture fosters the tenure and experience critical to our success. Our staff's commitment to delivering for our customers is testament to the culture we pride ourselves on. We've been pleased to have been included as a constituent in the FTSE for Good index. Our first half results this year were impacted by the reorganization of our corporate sales structure, which affected the phasing of our growth. I'm pleased to say that that's now settled.

Speaker 2

With roughly half our business related to Microsoft, managing its changes to the partner incentives was also a core focus in that period. This change has gone well as a result of that focus, and we're pleased that our services proposition continues to grow. I'll come back to why that's important on the headline numbers. This is a resilient set of results for Bytes Technology Group given the internal and industry changes that I've already mentioned. We saw a 9.1% increase in gross invoiced income, a 0.4% rise in gross profit, a 7% decline in operating profit, and 105% cash conversion on a rolling 12-month basis. Now I'll hand over to Andrew for the financial review.

Speaker 4

Thanks, Sam, and good morning everyone and thanks for joining us at the presentation this morning. In my section we'll cover off the income statement, a bit of segmental analysis, the cash and capital allocation. To start with, gross invoiced income, or GRI, grew at 9.1% to £1.342 billion, whilst gross profit only grew at 0.4% to £82.4 million. GP over GRI this half was 6.1%, a reduction of 0.6% from the comparative period last year. This reduction reflects the impact of the Microsoft Enterprise Agreements incentive changes. Other income on the slide relates to the offices that we acquired in December of last year, and this will decrease in the second half as we now occupy one of the two buildings acquired. Administrative cost in total increased by 6.9%, resulting in operating profit declining 7%.

Speaker 4

I've given some additional detail around the administrative costs to highlight some of the contrasting movements in the underlying drivers, and this will help with your modeling. Salary costs are up 14% due to headcount growth and a cost of living wage increase as of the 1st of March this year. Most of this increase is in annualized hiring made towards the end of FY25, with only 1.7% headcount growth in this year. We have capitalized £700,000 worth of employee costs, and this was the same amount as what we capitalized last year, and this relates to the project to modernize some of our IT systems. Commissions and bonuses are down 8.1%. Within this, commissions have trended broadly in line with the GP, and bonuses, which are mostly driven by targets, are down, accounting for most of the reduction. This would normalize towards next year or delivery on our targets.

Speaker 4

Social Security costs are up 34.3%, and this is due to the increased national insurance contributions that were effective from April this year. Share-based payments are down 32% against lower profitability, and we would expect the share-based payments to be around £3 million for the full year and show some increase next year. Other administrative expenses increased 10.8% with continued investment into staff welfare and some other internal systems. The efficiency ratio of operating profit divided by gross profit is at 40.2%, and this is down from last year's ratio of 43.4%. As a reminder, this ratio tends to be lower in the second half due to higher commission percentages paid to those salespeople that exceed their base targets. On an annualized basis, we continue to target a ratio of between 38% and 40%.

Speaker 4

Interest income is down 6.7% due to lower interest rates and our interest income is first half weighted, and this is in line with our higher GRI weighting in the first half. The effective tax rate is normalized, following a higher tax rate last year due to the changes in deferred tax asset driven by the lower share price over the period. Looking at the income analysis, GRI growth is roughly the same across public and corporate sectors, resulting in the split of GRI unchanged on a year-on-year basis at 70% from the public sector and 30% from the corporate sector. When we look at contributions from gross profit, public sector grew by 1.6% and the corporate sector declined by 0.6%, resulting in the public sector contribution increasing from 37% to 38%. The Microsoft EA incentive changes have impacted the public and the corporate sectors differently.

Speaker 4

For Enterprise Agreements, we invoice the public sector directly where we are now making less gross profit and thus a declining margin. Whilst in the corporate sector, where Microsoft invoices the customers and we receive a rebate, we effectively show a higher 100% gross margin. Where we transition customers from EA to a CSP agreement, we then invoice the customer directly and make a margin. We might make more gross profit, but we show a declining margin in these instances. The Microsoft share of total GP reduced by 2% year on year but remains around 50% of our business for the first half. Segmenting our business into the three broad categories which we report, that being software, hardware, and services, we see the sales of software grew at 8.9% while gross profit derived from these sales decreased 3.5%.

Speaker 4

Our hardware GRI increased 16.8% and the GP by 25%, but again that's off a low comparative last year and a reminder, we shrunk both of those GRI and GP by 40% in the prior comparative period. Our services GRI increased 15% and the gross profits increased 43.6%, and this is benefited from the increased or mix changes as well as cost efficiencies. Cash conversion continues to follow the same cycle that we've seen in the past. As a reminder, we see a lower cash conversion in the first half followed by a very strong cash conversion in the second. This half we've had a cash conversion of 34%, which equates to a rolling conversion of 105% for the full 12 months after tax, and returning £42 million to our shareholders, we are left with a cash balance of £82.3 million as at the end of August.

Speaker 4

In this half we capitalized an additional £2.3 million into our software development and this relates to the two new IT platforms. One to provide a marketplace gateway for our customers to more seamlessly purchase products online from a range of our vendors, and the second to improve our operational processes around customer order processing. The marketplace platform is now complete at a cumulative CapEx of £3.4 million, the cost of which will start to amortize in H2 at an annual rate of around £400,000 per annum. Work on the second part of the platform continues through the second half and is expected to move into production early in FY2027. We expect the combined investment to be around £8 million by year end and result in an additional amortization of £1 million a year.

Speaker 4

From a capital point of view, our capital allocation policy remains unchanged with investment into organic growth mostly in headcount, which we've discussed in the income statement, but moving on to the dividend policy is to return between 40% and 50% of post-tax operational profits to shareholders via ordinary dividends and this is further broken down into approximately 1/3 paid as an interim and the final 2/3 paid as a final dividend at the financial year end. I'm therefore pleased to announce that the Board has approved an interim dividend of 3.2 pence per share, which is a 3.2% increase on the prior year and it just happens to be the same number. Organic growth remains our key focus and we continue to assess potential acquisition opportunities that would accelerate some of our drivers like services.

Speaker 4

After considering the group's strong balance sheet for the year and the prevailing share price, the Board believed it would be beneficial to return more capital to our shareholders and on the 15th of August we launched a £25 million share repurchase program of which we've completed £15 million as of last night. I think that's all from me and Azit. I'll hand back to Sam, thanks.

Speaker 2

Thank you, Andrew. We always say our people are our core asset, and we're proud of their energy, their enthusiasm, and commitment, and the tremendous job they do supporting our customers by providing an outstanding service. As such, we increased headcount 12% year on year, with most of this growth coming in the second half of last year. With more measured investment in the first half, headcount has increased by 1.7% in this period. We appointed our first Chief People Officer this summer, and I'm delighted to welcome Kali Kankazi to the team. Kali is focused on attracting top talent, developing future-fit leadership, modernizing our people operations, and at the full year we'll be able to say more about the long-term people strategy that she's developing to underpin scalable growth, customer excellence, and a high-performance culture.

Speaker 2

As our headcount grows, we've made it a priority to provide the right office environments in the right areas. We try to balance access to talent pools with proximity to customers and try to create a vibrant working space for our staff to collaborate, which is key to the value proposition to customers. This also enables us to provide joined-up programs of work where required from our clients that may need access to multiple teams and resources. Now, I want to spend some time on the sales segmentation. There's a lot of detail on this slide, but I want to explain why we did what we've done and the impact it's had. What have we done?

Speaker 2

At the start of the year, we realigned our corporate sales team from a generalist structure, where account managers could have had customers of any size, into customer segment-focused teams based on customer seat counts. You can read the split on the slide. Our account managers often naturally lean towards a particular profile of customer, but the change actually still resulted in 750 accounts changing account managers, and these customers represented approximately 20% of corporate gross profit. Why did we do this? The new corporate structure will enhance our account management, tailor our solutions and service delivery, and improve our vendor relationships. How does it enhance our account management? By having more homogenous customer groups, it supports our account managers' ability to bring value to customers.

Speaker 2

Ultimately, the challenges and level of complex interaction at an enterprise customer is very different to that of a mid-market customer, and that's why we're also creating more tailored solution and service delivery. We've done this by segmenting our technology specialists and service teams who support our account managers. How does this improve our vendor relationships and why does this matter? By mirroring how we go to market, our sellers can actually deal with a single vendor counterpart as opposed to working with multiple. In the past, we co-sell technology alongside our vendor partner teams, so having good relationships with them can support the margin we get on deals and increase referrals from the joint sales motions. What impact has this had? There is no hiding the fact that the reorganization caused an adjustment period that has temporarily impacted the phasing of our growth.

Speaker 2

Just to recap, our account managers had very strong pipeline execution in the second half of last year on the accounts they were handing over. This, alongside the handing over of the relationships, impacted the volume of pipeline to close in the first half of this year and provides a tough comparator for the second half. Importantly, despite the short-term disruption, customer and account management retention, the foundations of our growth are consistent with prior periods, and we've now started to see the benefits of segmentation coming through, such as strong services growth, which I'm going to talk about shortly. Now let me discuss the Microsoft incentives and the changes in this period. The rebate that partners receive on Microsoft Enterprise Agreements, also known as EAs, reduced from January 1, 2025, to incentivize partners to focus on the Microsoft Cloud Solution Provider (CSP) model, which is higher margin for partners.

Speaker 2

A lesser reduction in incentives was made in the public sector. CSP is not a viable alternative for public sector customers due to the discounts that they only get under an Enterprise Agreement negotiated directly with government. Our plan for corporate customers was to accelerate the transition to CSP to accelerate the provision of services and broaden our software portfolio for all customers, and we've been doing that for some time now. For FY2026, we expected the impact of this change to be more heavily weighted to the first half. Our Microsoft business is first half weighted due to the high levels of Microsoft renewals around public sector in April and May and the Microsoft year end in June. Furthermore, the changes only impact four months of our second half, having taken effect in January 2025. How has it gone in corporate?

Speaker 2

Our Microsoft gross profit grew, supported by the transition to higher margin CSP. In public sector, where this was not viable, Microsoft gross profit declined. We've seen stronger growth in services and other vendors, and this is all part of the mitigation plan for public sector. What's the outlook? We believe the effect of the incentive changes should have fully washed through from January 1, 2026. Some of you may have seen that Microsoft recently announced some reduction in discounts to Enterprise Agreements set to come into effect on November 1, 2025. This will make CSP relatively more attractive and potentially result in more customers transitioning from EA. In terms of partner relationship, we think the opportunity remains largest in our mid market, including indirect and corporate segments. This slide is fairly familiar to those of you that have followed us for some time.

Speaker 2

Our sources of growth remain expanding our customer base, growing with existing customers, and with plenty of runway on both vectors. We continue to expand our sales force. We also continue to make investments in new vendor accreditations to drive growth and support our customers in navigating the complexities of the evolving IT market. This is an important part of our growth strategy that complements our Microsoft growth too. We're also expanding the number of support and managed services that we provide. We're upgrading our systems to support new purchase models and higher volumes as the business grows. On AI, Bytes aims to establish itself as a leader in AI-driven software, cloud, and security services by integrating AI across its divisions and by promoting innovation, inclusion, and continuous learning.

Speaker 2

The strategy will focus on accelerating client digital transformation, improving operational efficiency, and embedding ESG and DEI principles into what we do. We've created a dedicated internal engineering and innovation team, and in the first half that team created a document review system that checks tender submissions against a predetermined set of rules of Bytes standards. It's also worth calling out that we've launched an internal agents initiative for all staff. Like our customers, we've got lots of work to do in making AI use prevalent across the entire organization, so we've tasked our staff to come up with ideas for AI assistance that can improve business processes. This follows the rollout of Microsoft Copilot across the majority of employees last year. We win for three main reasons. First and foremost, customer centricity, as evidenced by our consistently excellent NPS scores.

Speaker 2

This is now supported not just by our vertical structure and public sector, but also by our segmented sales structure in corporate. We win because of depth of knowledge. We're software specialists, we're Microsoft's largest UK partner and one of the most highly accredited. We were recently named a Microsoft Inner Circle Partner for AI Business Solutions, which puts us amongst fewer than 1% of partners globally. We win because of vendor partnerships. When we decide to work with a vendor, we invest in the relationship. The strength of our relationships with Microsoft and many other vendors in the top tier such as Adobe, AWS, Check Point, Dell, VMware, Rubrik, ServiceNow, all of them and many more allow us to seize exciting opportunities whether in cloud adoption, data and workload migration, storage, security, virtualization technologies, or any combination of these.

Speaker 2

We think this positions us to benefit from structural growth of customer spend on Microsoft across the tech stack and cybersecurity, which is still a top priority for customers, as well as cloud, which still has a remarkable 83% of data estimated to be on premise. Of course, not forgetting data and AI. On the software side, a lot of customer core investments is in areas such as data center modernization, data governance, security, cybersecurity, modernizing their applications. It's in part due to the demands business leaders are making on their people to use AI and be able to implement it effectively in services. Around 20% of our profit already comes from AI-related services, for example across governance, adoption, and Microsoft Copilot amongst others. It's still early in the cycle versus the opportunity that our existing customers and what we see in the total addressable market.

Speaker 2

It's fair to say that some form of AI service exists in all our vendor technologies and their technical roadmaps that are being developed with AI in mind. I'd like to move on to the services strategy and take a few moments to talk about the prominence of services in our business. Today we provide a vast array of services, but at a high level our services split is roughly 1/3 professional project based and 2/3 managed and recurring. Our customer and daily interaction is generally with the IT department. We're not providing support to end users and we sell services to all our customer segments. What we sell to each can differ.

Speaker 2

In mid market, the public sector customers are more likely to outsource, manage, or support services due to their more limited internal bandwidth and capability, whereas larger corporate and enterprise customers typically look for a more specific solution. Services is a key focus for us fundamentally and at the core of our business. We think services helps us sell more software, makes our relationships stickier, and we're seeing huge demand in this area. Services support software sales by engaging our technical people with our customers. Technical people in IT build trust. It covers additional opportunities for our account managers to prosecute. This is particularly valuable at larger customers which are more complex to navigate. These customers value partners who've been highly authorized or certified with a breadth of vendors and who are deploying technology for them and bring that expertise and myriad of skills that customers may not have.

Speaker 2

It's becoming increasingly harder for customers to stay on top of all the technologies that exist in their environments. Services makes our relationship relevant and customers often prefer to buy the software from the party managing IT, and our contracts are generally multi year with very high renewal rates. We see huge customer demand as the continued shift from on premise to cloud has helped IT departments become more focused on delivering outcomes versus managing the infrastructure. What's driving the strong growth is a combination of push and pull. Our customers often want us to provide more services, viewing us as a trusted and reliable partner. Our account managers are increasingly recognizing the attractions of selling services and how it deepens their relationships with their customers. We're balancing internalizing our services as demand scales the higher margin whilst maintaining a partner network for capacity.

Speaker 2

We've always had a strong partner ecosystem, which we will maintain while we also expand our own offerings in specific and intentional areas. On the right-hand side of this slide, you'll see an illustrative journey for a customer around Microsoft Cloud. It starts with us using the Microsoft funding to provide a professional service for a customer, looking at a business case to move workloads to the cloud and helping us better understand the customer challenges and requirements. We then look to win the customer's existing Azure CSP contract if we don't already have it, and having a 24/7 technical support and FinOps tooling. This is often important to the customer. We then provide a professional service to deploy the workload into Azure, and deploying additional workloads drives Azure consumption and profit under the CSP contract.

Speaker 2

In the fifth step, many customers don't have the skills nor the time to manage Azure themselves, so we offer a good number of managed services to accommodate that, and then we deepen our engagement with the customer and the cycle repeats as we identify more workloads to deploy. To summarize, through our passionate, talented, and experienced staff, we are well positioned to continue providing high-quality licensing advice and technical support service delivery to meet our customers' evolving needs, and this will remain our USP. I want to take the opportunity to thank our hard-working staff for their professionalism, their unwavering commitment to the business, and for their focus on customer needs.

Speaker 2

We remain confident of delivering a full-year outcome within the range of market expectations, and this implies an improvement on our first-half performance driven by our corporate sales structure being settled down and a smaller headwind from Microsoft changes. However, we're also mindful that comparators will be impacted by particularly strong trading performance that we saw in the last months of the prior financial year. Despite the uncertain macroeconomic environment, we feel we're well structured and motivated to capitalize on positive sector trends and to continue growing this business. With that, I'd like to open the floor for questions. Thank you.

Speaker 2

Thank you. Julian from Investec. A couple of questions. One financials and one market financials, really sort of housekeeping software. GP normally goes down in the second half sequentially, just because of the seasonality of your business this time round. Could you maybe walk us through the dynamics there for H2 because of the H1 headwinds? Could we expect maybe a sequential uptick in the second half, or do we see the same seasonal progressions? That's the one. The more business-related one is the customer marketplace portal. When that rolls out at scale, could you talk us through some of the business model implications in terms of, I guess, customer reach? Is it a much more scalable model? Is it a light touch model to the sales from the salesforce? How does the service wrap around?

Speaker 2

Just some of the sort of implications, maybe if we're sitting here in 18 months' time and everyone's using the marketplace, what do we expect?

Speaker 4

The first question is around GP and looking at half and half, particularly around the software element. The first thing to note is that Microsoft GP has obviously been a headwind for us in the first half and that was acknowledged at H1 last year. We said that the impact of Microsoft will be less than 5%. We see a weighting towards the first half for two reasons. You have six months impact because the rebate changes started from January 1, so a full six months of the effect. In the second half, from a comparative point of view, you only have four months, so that headwind is less. The second part of that conversation is around the heavy weighting towards GRI in the first. That obviously throws off more profit. You'll see a bit of a moving part, less headwind, more tailwinds in two aspects.

Speaker 4

As Sam mentioned, the Microsoft change in the discount structures is effective from November 1, so that changes behavior as well. There will be an effective price increase into the market that will take three years to roll through depending on when you've renewed the contract. It's a mixed bag. What we have seen in the past is that we've seen November and December being very, very rich from a renewal point of view around the security environment. If we follow the trends of the past, you see a margin rich environment, but sort of 50/50 on the GP. It's not clear because of the headwinds and the tailwinds. I think that you will see a normal trend year on year given the mix between those two elements on Marketplace.

Speaker 2

Julian, it's an interesting phenomenon. I mean, look, Marketplace has been around a few years and this is probably the first year where I'm starting to see the momentum, and clearly Microsoft have just embellished and launched their latest version. We have Adobe, we've got lots of other vendors, so I think it's another procurement route for customers. A year ago I wasn't sure that public sector would be leaning into it as much, and we've been surprised by a number of transactions we've done there with various vendors. It's just a different way of us packaging up what we can do. We can create private offers, we can also wraparound services, we can protect margin in that regard. We can work intimately with the vendors as we would do.

Speaker 2

It's all about customer choice, and that's effectively what I think Marketplace is about. There are obviously some clear ambitions and growth stats being thrown around, and we shall see, but it's certainly building momentum. I think internally we have enabled all our sellers operationally, we've clearly invested, we've been part of launch programs with a number of vendors, Adobe and Microsoft to name but a few. I don't think we're going to not continue investing in that area because if it offers customers what they want, we tend to be led by the customers.

Speaker 2

You've put a lot of money into it, a lot of CapEx has gone into it. One would assume that you'll be looking or hoping for some decent returns from it. Should we see that as incremental, or would you like, you know, ideally incremental, or is there a cannibalization, or again sort of looking more an 18-month, two-year out sort of journey for this?

Speaker 4

I think what we have to look at is that we've had probably subpar investment over a long period of time into our IT. There's a bit of a catch up into that space. You mentioned a word earlier, is it scalable? The brand new tech that we've launched is certainly scalable, it's on the cloud and therefore we can run a long way. I think there will be incremental returns on that environment. The argument's always going to be does the platform enable the business or does it enable growth in the business? In this case it's just enabling what the customer wants. I think generally you're going to get the returns on that business but hard to target you to get. If you didn't do it, would you have got it? That's the question. It's newer tech, scalable and obviously with older tech it's less supportable.

Speaker 4

It goes beyond support and those types of things. We're right up to date now. Cool, thank you.

Speaker 4

Hi there, it's Charlie from Jefferies. Just a couple of things from me. Firstly, let's do Microsoft as you alluded to. I think you were originally expecting it to decline low single digit percentage points, but if I look at the first half results, Microsoft was actually down year on year, 3.5%. I think that looks to be worse than your original expectations. Where do you think the shortfall came from? Were you less successful in shifting people to CSPs or was the new low game momentum maybe less than you were expecting? Then, completely unrelated to Microsoft, can you just give us a sense of your ambition for the services? If we were to look out five years from now, would it be 5% of gross profit, 10% of gross profit? What's the sense of ambition for the services?

Speaker 4

Charlie, thanks for that. I don't think I sort of agree that we've delivered less than what was expected. The 3.5% on the half year, and if we roll forward, what I said before to Julian about the impact is four months out of the six. On the full year, we might expect the decrease to be around 3% in total. I'm just not guessing, but summarizing the impact of the second half will be lower. It won't be 3.4% lower, but it'll be less than that. The total impact might be 3%. We said less than 5%, so I think we're within that environment. It was the fully mitigated environment, less than 5%. What we've had a look at is the mitigation strategies of scale, and you can see the software growth has been 8.9%.

Speaker 4

Arguably, that's an area that we could have done better, because in the past we've had gross invoiced income growing at sort of 15%. There is a little bit of an element of we need to accelerate our gross invoiced income, and we can look to the cell segmentation and the focus internally impacting that number a little bit. I think we know internally what our move towards the Cloud Solution Provider (CSP) model would be, and it's in line with our expectations and it's in line with Microsoft's expectations, which is more important, I guess. We're quite happy with the CSP. Sam did mention that the changes on the discount structure put the CSP program higher up the food chain within the Microsoft space. Just to make clear, Microsoft was focused on less than 5,000 users who were the main target for CSP.

Speaker 4

With those changes, I think that raises the cap to about 7,000 users, becomes attractive. I think there'll be an accelerated conversion into the CSP environment. Services, we don't report services as Microsoft, and that's one of the challenges in how we report our numbers. Microsoft, what we derive directly from Microsoft or from Microsoft products, is down the 2% that we showed. Some of that services growth has been a transition back into services, so that's the other mitigation strategy. Beyond Microsoft, where we need more work, it was some more other vendors into our customer space, and you can see from the decline on the corporate side and only 0.4% growth in the gross profit. I think we've got more work to do in the other vendors as well.

Speaker 4

The lessons learned through this is that the changes from Microsoft have consumed an awful amount of management time and looking at managing that. Once you're through that hub, hopefully that releases some of that management focus into focusing on other areas. Mainly the gross invoiced income growth and other vendors would be good.

Speaker 2

Charlie, just on the services ambition, I think if we look five years out, I think that was the sort of time frame you were talking. As our business grows in relevance, the software, it's always going to be a hard juggernaut to keep up with and grow the services GP in line with that. We absolutely are seeing as part of the mitigation plan that we had with Microsoft driving up more capability, more GP around that. It is a multi-vendor approach as Andrew has just indicated and as I spoke to the strategy earlier. The ambition for me is could we get it up to 20% within five years organically, potentially. We are going to have to work hard and we have a very, very clear vision of the sort of services we want to keep developing and the response so far has been great.

Speaker 2

I think this is where M&A might come in to help us accelerate some of that vision as well, because there is a limit to how many technical skills we can keep pulling into the business. I also think that there are certain opportunities that some of the skill sets that don't exist in our business now would be fine. Quicker to embrace those if we did a bit of M&A in the future to work on that strategy.

Speaker 2

I stole the mic. Three questions for me. First, sorry, Tintin Stormann from Deutsche Bank, what % of the corporate business is still on Enterprise Agreements versus Cloud Solution Provider model? I'm going to try to ask that second one in terms of a different way of asking about services, how should we think of the services attach rate at the moment? For example, in public sector where you have been selling more services already versus corporate, and what does success look like if you're measuring, okay, what the attach rate should be in a year's time or two years' time? Thirdly, talking about picking up on the M&A point you have talked about, you have obviously a partner services ecosystem. What tips them over first? How many are there that you normally partner with, and what would tip them over to this would be a good candidate to acquire.

Speaker 2

If I pick up on the services and M&A question. Tintin.

Speaker 2

Thank you.

Speaker 2

In terms of the number in the ecosystem across our two organizations, you're talking maybe 50, 60 partnerships that spread across the wide portfolio of vendors that we're managing, and those are partners that we have onboarded. We've done all of the right due diligence with them because that's important as well. Then there's probably a longer tail where we haven't onboarded, but we might speculatively work with them and work on a deal and assess their suitability. Coming back to what type of partner we would consider, we always maintain that cultural fit is the first and foremost variable that we would need to have in the formula of success, because if a partner that we're working with doesn't feel that they're aligned with our management style and our general culture, it's not going to be for us.

Speaker 2

I will say that we have looked at some opportunities in recent months and it didn't quite fit the criteria for us. We are actively assessing and partner ecosystem opportunities and assets is one of the areas. Obviously, there's other pipeline as well. In terms of the attach rate, that's an interesting one. We've had more success in public sector because we've been more proactive in mitigating lower margins over more years, and I think the corporate entry into now taking full advantage of services that we've got, we're only just getting going. The runway and the opportunity there I see being immense. It is about taking our sellers on a journey as well because selling services and solutions is a little bit different to the transactional licensing behavior that they've been used to over the years.

Speaker 2

We're seeing success, and what we tend to do is put on a pedestal those sellers that have achieved very high levels of GP. In fact, most of our top sellers achieve multi-million pound GP targets because they have done a combination of selling product services and managed services and maybe a bit of hardware as well. It's that blend that really drives the success. Attach rate is higher in public sector. Watch this space on corporate.

Speaker 2

Cloud Solution Provider model.

Speaker 4

Yeah, I noticed that Sam jumped in very quickly, so left me with that question. As you rightly say, it's about a corporate question because public sector is very much Enterprise Agreements and will remain Enterprise Agreements driven. If you split the corporate sector into broadly the two segments, call them corporate and enterprise, that's mostly dominated by Enterprise Agreements too, and that's where that sort of target changes for the next year. So Cs and Ds from a SaaS point of view. As and Bs, we've been active on the program for about three and a half years. The Cloud Solution Provider model has been around for 12 years, but we've been very much focused on it for the last three and a half years, knowing what was coming. We are outgrowing our top line by about double in the conversion there.

Speaker 4

There's still lots of headroom to go, so we're not there yet. I'm not going to give you finite numbers, but I think your question is more around how much more to go, and there's a multi, multi-year story, so we're not close to the top end of that.

Speaker 4

Great, thank you.

Speaker 4

Hi, morning, it's Andrew Ripper from Palmio Librum. A couple from me. Just wondering if we could talk a little bit about the corporate sales team. You gave us a pretty good explanation of why you'd made the changes. Could you just remind us of the structure of the team, give us a sense of how many important quota carriers there are within the team? You know, say, I don't know, over £1 million GP or whatever you think is a relevant metric. You talked about retention having remained very strong. Has there been any churn at all or are all the senior salespeople still here that were there at the first of January? Attached to that, you talked a bit about rebuilding the pipeline after the initial changes.

Speaker 4

Can you update us on that in terms of pipeline going into the end of the financial year and maybe give us a sense of ambition in terms of the next financial year and whether you expect to add any headcount or basically continue to drive better productivity out of the resources that you've got? Sorry, a bit of a multi-part question, but just trying to get the questions there.

Speaker 2

No, thanks. Thank you, Andrew. In terms of headcount, we continue to hire on the front end. In terms of sales heads, we've just both operations stood up new sales academies. This is intake of a combination of experienced and sometimes new-to-IT sales individuals. This is a cadence of hiring that goes on around this time and gets the people ready for contribution in next year. If they contribute anything, it'll be negligible. This is all part of the process of building out more sales heads into the business. First and foremost, we are still hiring front end, and we're also covering the growth and demand that we need around pre-sales specialists, solutions specialists. That goes hand in hand with hiring more salespeople. The actual pipeline that we have visibility of for H2, as I mentioned, is solid. I'm pleased with it.

Speaker 2

We know we've got the season of security renewals upon us back end of this calendar year. It's about executing against that. There's been much more meticulous management of that since Q1, and all of that conversion is going as we'd expected, bar the slower conversion rates in the first half. At the moment, we're seeing that pipeline build out, and that will continue into FY2027. For us, the sales segmentation is behind us, it's in the rear mirror. Everyone's settled, everyone's moving ahead. In terms of losses, we had one account manager leave us. It wasn't to do with segmentation. We did have a reduction and, if you like, a streamlining of some of the management lines, and we lost two managers. That was very much part of our plan as reorganizing the sales.

Speaker 2

If I give an example, we had one of our top sellers, you talked about the top performers, the GP contributors. There's one particular lady who has been one of the highest performers on the BSS side for a number of years. She had a mixture of clients, about a third, a third, a third of public sector, corporate enterprise, and mid-market. Effectively, if I give you this example, she could have chosen which of those type of profile customers she wanted to serve as we moved into the new segmentation, and she picked corporate and enterprise. That meant she relinquished those relationships with the other 2/3 of customers; they moved over. She has been able to dedicate more time, more strategic intent into those relationships. Much fewer accounts. She went from, I think it was 14 down to 7.

Speaker 2

You can start to see now the strategic enterprise approach that she'll be giving these customers. Couple that with the technical alignment, the solutions sales specialists that were also aligned into those segments, and she's partnering up and got her business partners around security or cloud transformation or Sam Finops tooling, and she can now go and prosecute those customers with a higher level of intensity. For the top performers, I think what we've done in structuring into corporate and enterprise is we have grown up, we've become much more aware that those types of customers need a different way of being managed. It's strategic. It's about engaging at C-suite level and being very embedded into that customer relationship.

Speaker 2

Sometimes it takes time, sometimes you need to devote a lot of meetings and energy to prove yourself to those accounts, which is why I think ultimately in FY2027 we'll see the actual fruits of that coming through.

Speaker 2

Thanks, Sam. A quick one for Andrew. What's your guidance on cost growth, please, in the second half or maybe an absolute number for the full year? What are you saying on that?

Speaker 4

Our underlying cost is 80% of it remains in the people space. You will still see a cost growth into the second half.

Speaker 4

We.

Speaker 4

I've cut a cloth according to the GP growth, but we'll continue to invest in those frontline sales because that's important not only for next year but the year after. You would see a cost growth, but it should be more muted, I guess, than last year. If you have a look at the consensus outlook, the elements of cost that will grow is the commission because you spoke about the top performers. If you recall, at the end of last year, we had over 50 people in, call it, the million pound club for want of a better word. Those individuals typically hit the accelerators into the second half. You will see commissions come back stronger into the second half. That will be an element across growth and an element of employee growth, the salary cost, other than that normal sort of expectation. Thanks, Andrew.

Speaker 2

Hi Chris from UBS. Thank you for taking my question. Maybe one on Microsoft incentives. Obviously they made very big changes this year, but I guess for next year they typically sort of talk about any incentive changes right about now. I was just wondering if they're making any big changes for next year. Hi Chris, thanks for the question. I've just come back from Seattle actually last week. It was the large-scale strategic partners globally that are invited a couple of times a year, and it gives us the opportunity to spend time with the exec teams, the different product teams, try and understand their go-to-market strategies. They tend to test or bounce around any ideas that they might be thinking of with the group.

Speaker 2

I'm pleased to say, it doesn't mean to say they won't do anything, but I'm pleased to say I think we, apart from the price increase that I referred to on the 1st of November, there aren't any more dramatic incentive changes planned. I think they know the reaction from the channel a year ago when we got that news. You're right, it was about this time last year that we were sat, Andrew and I, trying to explain it. I think we were one of the first partners out of the block that had results, and the spotlight was on us to explain it. I think they made some pretty bold moves when they did that. They've restructured as a business. They've just brought in a lady, a new executive that's ex-Cisco, Splunk. I was introduced to her. She's very mindful of channel being important.

Speaker 2

In fact, all of the execs and the strategy from Microsoft at the moment seem to be leaning heavily into channel. I've talked about in the past the fact that it does seem to be scale partners that are benefiting from more attention, more support. We're certainly in a very privileged group and amongst some strong peers when we sit down at the table with Microsoft and talk about strategy. It's a bit of a long way round answering the question. As far as I know, there are no further incentive changes, and I think if you were to ask any of our peers, they would come back with a similar answer. Got it. Thanks. Thank you, Chris.

Speaker 2

Just one follow-up on the second half. Actually, you referred to these price changes from Microsoft, hoping it's going to drive an acceleration to CSP. Is an acceleration in CSP embedded in your second half expectation, or is that something that would cause a pleasant surprise for us at the end of the year?

Speaker 4

I think a certain amount of conversion is built in, right, because you have this expectation from Microsoft and we haven't got % growth target from Microsoft. As I said before, we are tracking that. If we are right in a little bit of acceleration, I'm not quite sure I'd term it a pleasant surprise or a surprise, but certainly something that we will be actively working towards. Yeah, I wouldn't put a number on it because obviously that's you're convincing a customer with the renewal at the right time to change. There's moving factors within that. Bear in mind the time that you move programs is the time at renewal. If you had a three-year Enterprise Agreement that is only terminating in, I don't know, November next year, that's the time that you get to convert it.

Speaker 4

The Microsoft call it discount structures changing will take a full three years to wash through the system or four.

Speaker 2

If you're a three plus one Enterprise Agreement, it could, you know, you could be as far out as four years before you hit the point of, okay, now I've got to decide, do I continue on Enterprise Agreement or go Cloud Solution Provider?

Speaker 2

I've got a follow up on Microsoft as well. Talking to Microsoft earlier on this year and one of the Senior Execs in the UK business, they expressed a great deal of satisfaction with the way that Bytes and Softcat had invested ahead of the curve, anticipating the changes that were brought in. The intimation from that was that you were well positioned to gain share amongst the Microsoft partner community. Given you're now sort of nine months into the change, how do you feel that you've done relative to the rest of the channel in adapting?

Speaker 2

I think we have been very well prepared. I think there's also an understanding that the marketplace has been very competitive, and that's because over the years there's a really busy ecosystem of partners that are authorized to sell CSP. Microsoft have acknowledged that, and they have obviously raised the bar around authorization status, and that removes some of the longer tail. Could they have gone higher with that? Could they have gone harder and deeper potentially? Would they look at it in the future? Who knows? There's no announcement or anything I'm aware of, but I think there's no getting away from the fact that whilst we have built strong and we are very compelling with our ability to add value around the CSP, there are other partners out there that have been very tactical, sometimes naive, and sometimes not knowing what they were doing.

Speaker 2

We've had customers knocking on our door that may have dealt with a very small Microsoft partner around a particular solution stack who had no knowledge or no comprehension of all the rest of the details around licensing. Those that understand Microsoft licensing will know it's an absolute dark art in terms of complexity, and anybody that tries to pretend they know it, if they haven't got that depth of skill, will soon get themselves into a pickle, and that'll be a problem for customers. We at Bytes Technology Group have experienced customers being very dissatisfied having dealt with partners that didn't understand licensing at the right level and were sold, you know, something transactionally very cheap. I think that's been a compete for us. We don't devalue our services.

Speaker 2

We're not looking at taking price points down and reducing margins on a level that wouldn't allow us to keep investing in our business. It's all about value when we talk to our customers and our overall portfolio of skills and depth of expertise and accreditation that we bring to those customer engagements.

Speaker 4

Andrew, just interesting enough that in order to sell an Enterprise Agreement, and this is an old terminology, you would have to have been a LAR or an LSP. Microsoft has not appointed any more LSPs or LARs in many, many years. There are roughly 20 service providers in the UK that can sell EAs and these are typically, I mean I sell Softcat, Computacenter, Trustmarque, Boxxe and so on. The shift is the bigger getting bigger. It applies to everybody. We do not see a share shift between those enterprise environments, but we do see the longer tail of the Cloud Solution Provider (CSP) environment. Strangely enough, as we now try and convert people from an EA to a CSP environment, you are actually having more competition rather than less right into that declining environment.

Speaker 4

One of the impacts of share shift is that Microsoft's intent about changing the incentives is to get us as a community to focus on the CSP customers. They have removed, call it the carrot, into going after the large enterprise because it is hardly worth your time unless you can cross and upsell. That is the area that we feel that we can work, but we are not unique in that situation. Softcat as well is ideally placed in that enterprise. If you have only got an EA environment and not a multiple sort of solution driver, then I think you would be the loser in that space. I am not going to name the guys, but you can bear in mind who they are and hence our sort of driver towards other vendors and services to complete a holistic offering in order.

Speaker 4

Once you are in the door of Microsoft on an Enterprise Agreement, our job is to cross and upsell. Where do you cross and upsell? You cross and upsell up the value chain within Microsoft, other vendors and services. That remains unchanged.

Speaker 2

Sorry to add to what Andrew's described there, I think the scale partners, we have a plethora of accreditation specializations that actually give us access to lots of different funding pots, and that's where we have a differential versus the smaller players who might have access to just one credential area and funding in that specific technology area. What we can do is have a much more joined up conversation and move them through various technology stack areas and potentially access the funding to help them get going.

Speaker 4

One of the other tailwinds that we haven't discussed, and Chris, going back to your question about incentive changes, this is not an incentive change, but the Cloud Solution Provider (CSP) model, when they launched CSP, call it 2011, 2012, anyone could be a CSP seller and contribute to the program. What Microsoft has done twice now is that they've upped the bar. You have to do, I think it's around £1 million a year or $1 million a year to be a CSP provider. That takes out, you know, sort of the longer tail. What Microsoft have done is they're looking at an indirect. Indirect is when those partners come to us, and that's a growth area for us. They've just moved up that number to $30 million a year. If you're not contributing to them $30 million a year, you can't be an indirect provider in your region.

Speaker 4

I think there's about 200 indirect providers across Europe, and a large number of those probably are beneath the $30 million number now. Those are, you have, that includes DIS and so on, that maybe Microsoft's a small percentage of their business. The question is, how do we benefit from that? It's something that has been added to our growing list of priorities, I guess, in Germany.

Speaker 2

Dimitri, you've been very patient.

Speaker 2

I think a lot of the questions were already asked. This is Daman Dejayavira from Peel Hunt. I just wanted to ask a few, if I may. Sorry if I missed this out. You obviously talked to the 750 accounts that change hands. I think it's fair to assume that when we first heard about the number of accounts being changed, there was an assumption of like 20% plus attrition in those accounts. I wanted to understand, has that turned out much better than you expected in those account changes?

Speaker 2

What I am pleased to confirm is that the growth of those accounts that changed hands is equal to the growth of the accounts that were retained with the account manager. I think that's the evidence, isn't it, that we haven't seen the impact in a negative way. It's really about now the growth kicking in and moving us forward on that journey with those customers where the relationships, you know, back to Q1 for various reasons, took a little bit longer to settle down. As I've talked about in my presentation, we're pleased with everything we've seen from there. I'm happy to say that those growth areas are not sending any signals to me that we've got issues.

Speaker 2

Second one, obviously we've discussed Microsoft a lot, but when you look at the GAI, Microsoft GAI grew 7% and a bit, obviously. Overall GIA is up 9%. A lot of the other vendors, and we forget that the other vendors are doing quite well. Do you want to call out any trends or any vendors?

Speaker 2

I guess I have intimated some of those areas. We've talked about the data center investments and partnership with the likes of Rubrik has been important. Actually, Broadcom, VMware, and some of those vendors that you might classify in your head as virtualization and so on. We've had some good growth also with some ServiceNow. I've talked about this vendor again, we're strategically working with them and in the next few years I hope to be able to report on substantial growth with that. Lots of security vendors, I mean we represent a very, very rich portfolio of security vendors to address all of our different segmental customer needs, and price points from different vendors will resonate with different customers in different ways. Security again is an area that we continue to want to grow.

Speaker 2

You come back to some of the classical vendors like Adobe and Dell, Sophos, and so on. These are partnerships that we invest heavily into in terms of time, team, sometimes funded heads, and those are all vendor names that I'm proud to be associated with.

Speaker 2

Some of the services growth you anticipate will potentially come from those.

Speaker 2

Cybersecurity Check Point is an example. You know, has been a well-established partnership within the business through the Bytes Security partnership acquisition years ago, and that has brought some superb skills capability within the business. That's an example of, you know, non-Microsoft that we're doing very well with.

Speaker 2

I can't let you go without asking one more question on Microsoft. When you look at the U.S. posting by Microsoft on the November 1st changes, they specifically carve out saying the U.S. government institutions or the education institutions would not be affected from that pricing change. I wanted to understand what would happen when it comes to public sector, not just November 1st changes, but just what is Microsoft thinking about public sector in the UK and how they are trying to incentivize.

Speaker 2

In my Seattle trip last week, there are some new VPs that have just been put in place to cover public sector globally and at a European level. I think it's going to be interesting as they get closer and understand that public sector business because my opinion is that whilst they've obviously had huge colossal contracts around the world, with public sector they tend to, well, they have made decisions in the past that were very unilateral and didn't tend to think of public sector's nuances or they did so belatedly. I think front of mind for Microsoft now, public sector is a huge growth opportunity. I think they're also understanding that down at different country levels, those government agreements have been agreed, they've been put in place and we have our own UK version. However, the price increases are going to affect those customers.

Speaker 2

It's a question of trying to understand how will customers react to that. Back to Andrew's point of at that point of renewal, how are they going to think about their renewal and their budgets? Public sector budgets aren't necessarily increasing in line with those price increases. Will they look at the different SKUs, the premium SKUs or the lesser premium? Will they look at consolidating other vendors? I think it's going to be a conversation with each customer, a unique one, as we go through that discussion.

Speaker 2

Last question I wanted to ask is that over the years, when I do channel checks on you guys, one of the things that come across is some of the systems you have, like the Quantum system for example, because obviously everybody struggles with these complexities of changing license agreements and other dark arts, as you mentioned. Is that still a differentiator?

Speaker 2

We have our own IP and License dashboard, which came from Phoenix as well. Between Quantum and License dashboard, around finops and our ability to give customers line of sight of their assets and to manage them more effectively and do optimization, I think we've invested in all the right platforms.

Speaker 4

Thank you.

Speaker 5

Thanks very much. We've got questions from the webcast and the conference call. If you'd like to ask a question on the conference call, please press star one on your keypad. People who are on the webcast, please enter your questions in the bottom of the toolbar below. Just pause one moment for questions on the conference call. Okay, we'll move to your first question from the webcast. It's from Rethabo Falele from Allan Gray regarding the account management restructure. Was the restructuring vendor mandated? Why has the generalist structure not been a hindrance for bespoke advantage advice to clients to date, and be noted that the public sector sales team has operated on a segmented basis to good effect with most of the public sector business running through Phoenix Software. Was the restructure mainly based through Bytes Technology Group?

Speaker 2

Absolutely. The only changes were in the corporate Bytes area, not the Bytes public sector team. It was segmenting those as I described in my presentation. There was no need to do it in any of the public sector teams. Phoenix Software already had their vertical industry go to market, and in terms of how that's changed the interaction, I think we've covered that in the presentation adequately.

Speaker 5

Thank you for that.

Speaker 4

Sorry, just to complete that answer, it wasn't mandated by the vendor environment, but we feel it is more aligned to most of the way the vendors operate. If you look at small, medium, corporate, and enterprises, sort of broad segmentations, most of the vendors have specific teams focusing on those areas. What it does do is it gives us a one-to-one relationship. If our enterprise sellers are now talking to the enterprise team within Adobe or within Microsoft or within AWS, for argument's sake, it's not mandated, but certainly aligned.

Speaker 2

Yeah, I think just to also call out that it was conceived as the right strategy about this time last year. This wasn't a belated or a quick decision for Bytes Technology Group at the start of the first financial year restructure. It was something that the BSS management team felt strongly about at the time, the maturity of the business, the scale of it required this. Consequently, the start of the new financial year was a very logical point for us to embark on that change.

Speaker 5

Thank you, Sam. The follow-on question was incentive changes noted that CSP is higher margin for the partners. Is this also true for you, or are the reduced incentives on Enterprise Agreements net negative for Bytes gross profit and operating profit? I couldn't understand the basis for why you expect lower impact from the reduced EA incentives in H2. Are the changes not effective for at least 12 months, and how would you improve the effectiveness of CSPs? Are they not lower margin for you?

Speaker 4

Let's deal with that sort of EA question. The EA changes happened effective from January 1, 2025, because most environments are on an annual renewal basis. When you look at if you've signed up for an agreement, whether it be a year agreement or a Cloud Solution Provider (CSP) agreement or EA agreement, you would have to renew those in some way. Even if you've signed up for a three-year agreement, you get billed annually. All those billings that we do would occur in a rolling 12-month cycle. What we're saying is that once you've billed them in this calendar year, then you add a new low base, right? If your percentage, just let's take a view of if you sold £1 million and you were getting 10% and now you're selling £1 million, you're only getting 5%. Now you reduce it down to 5%.

Speaker 4

That 5% remains for next year. That reduction of 10% to 5%, we've had six months of it in our first half. We're only going to have the reduction of 10% to 5% for four months in the second half. That's why that would sort of disappear and it will not roll forward. It's totally through our base by December 31 this year. I think that I've got nods around the room. Hopefully that explains it better. I don't know how else to explain it. Then on the margin on the CSP environment, how the rebates work on EAs is Microsoft dictates the price and we get a slice back and a rebate. There's no pricing competition to the customer itself. You can give back your rebate if you wanted to, but it's marginally small. You're talking about, you know, a percent sometimes.

Speaker 4

On the CSP environment, what Microsoft has done is they've reduced, so they've got a recommended selling price and then they've got a vendor price and that allows the vendors to make a margin. You're still in control about how much margin you're adding. If your selling price was 100 and you're getting it for 90, you can increase it to 105 if the market will take 105. The increased competition means that you need to be now, because now pricing matters. You can bid at 95, 96, 91 if you want to. You're in control of that margin. It's not necessarily just a cut and dry that you're going to get more. The opportunity is that you can make more. How you make more is about the relationship and the value add that you put into it, because it's not all about the pricing.

Speaker 4

It's how you sell it and what you sell rather than how much you sell it for.

Speaker 5

Wonderful. Thank you for that. We're going to move to a question from the conference call. It's from Martin O'Sullivan from Sure Capital. Martin, please go ahead.

Speaker 4

Yes, good morning. Thanks very much for taking the question. Obviously we've had a lot of questions already, but I just had a very simple one if I could. In terms of the Cloud Solution Provider (CSP) transition, what differentiators do you think matter most in the CSP environment, and how are you positioning for that?

Speaker 2

Hi there, Martin. Thanks for the question. I think it comes back to the point I was making earlier. I think, look, CSP can be viewed as a transaction, but actually most of our customers, mid market, corporate, enterprise, value a partner that understands the technology that they're buying and advice and actually access to some of the funding that may or may not be available around that. Also, the value add services that we wrap around it, it's been commented on by Domindo, Quantum Tooling as an example and so on. Our sellers have got actually a rich portfolio of ways of enhancing that conversation around CSP. We tend not to just think of it as, you know, bang a price out there.

Speaker 2

Let's really get to understand the customer's requirements, what they're trying to achieve, what SKUs they're looking at, and we might be able to work with them to develop a much better outcome than they originally set out to achieve. I think that's our USP. We're not just there to provide a price. It's a journey we want to go on with our customers.

Speaker 4

difference between an Enterprise Agreement and a Cloud Solution Provider (CSP) agreement is largely around flexibility. When you enter into an Enterprise Agreement, what you typically do is say, I've got 10,000 users and I get a price list and I get billed for those 10,000 users for the full year. At the end of the year, it's called truing up or truing down. You're allowed to, strange enough, true up as much as you like, but you're not allowed to true down more than 10% for some odd reason. You then true down and you get billed for the second year and you get billed for the third year. If you look at the consumption model, particularly around Azure, that doesn't really fit into an Enterprise Agreement.

Speaker 4

Where CSP comes to life is CSP gives you the ultimate flexibility because you're getting billed monthly on the actual usage, both in your license usage and your Azure. You're able to scale up and down rapidly. If you look at a retailer that's hiring maybe hundreds of people for stock taking and Christmas seasons, you're able to put them on and then take them off again. You don't have to commit for a long period. That is the sweet spot. If you want further discounts around the CSP, what you do is you commit, not on the user count, you commit a spend. You now commit a spend of, let's say, £10 million over a three-year period and you find yourself in the sense of, okay, I've only used, I don't know, £8 million. The strength then of the marketplace comes in: how do you burn down your commit?

Speaker 4

You can now go into the marketplace and burn down that sort of example of £2 million buying other products through the marketplace, Microsoft Marketplace. That sort of brings back from our point of view and from the customer's point of view, if you're going to get an extra 5% discount because you've committed £10 million and then you're able to burn down that discount into selling a different vendor through Marketplace. Now you can sort of join the dots of why it's important to be a multifaceted back into your customer space. It's not only about Microsoft, it's about anything else that's going to run on Azure that Microsoft's interested in. They're not interested in Adobe licenses, but they're interested in can I run Adobe on Azure? That will stimulate cloud growth.

Speaker 4

It's all interconnected and that's why the sort of multifaceted strategy, Microsoft first, other vendors and services to underpin it, and all of those are important and then the marketplace investment into our systems. This last comment brings us to life.

Speaker 5

Thanks very much.

Speaker 4

That's really good. Thanks very much.

Speaker 5

Thanks very much for that question there, Martin. Next question is from Timothy Oles from Laurium Capital. Please could you provide more color on your expectations for H2 and the next financial year if you were to weigh up UK macro pressures versus structural demand drivers. Is 7 to 8% GP growth from FY2027 still achievable?

Speaker 4

Okay. I think we've moved away from talking about the macro headwinds and tailwinds. I think what we look at is the Gartner IDC growth environment, particularly around the software environment being sort of 8% to 12% depending on what segmentation that you're playing in. I think that we can achieve that growth next year and you look at the evidence of that, why would we have a flat growth in H1 and then return to a 7 or 8% next year? I call out two figures very briefly. First, we spoke about the headwinds of the Microsoft environment disappearing. We've just discussed that it's 3.4% on the gross profit, so remove that. Automatically I've got a comparator that's 3.4% higher. Then you look at the pull forward that we had from Q1 to Q4 last year and we've sort of spoken about in the past around £2 million.

Speaker 4

You add that because now you're sort of £2 million less in the comparator and you quickly find yourself at a normalized base growth of north of 5% already, right? It's not a big stretch of the imagination to get to high single digits growth. If you look at consensus around 7%, 7.5%, 8% and I think that's what is doable and I don't want to dig my own grave here, but I think that would be normalized growth for us next year. I think the cost side is somewhat different for us because we have two elements coming back into next year. We've spoken about capitalization of internal resources looking at the IT dev environment. If you look in the script it was £700,000 that we capitalized in the first half. Now those resources are targeted at the second platform that we spoke about.

Speaker 4

If that goes live in, call it Q1 in FY2027, that means that headcount comes back into our cost base. That gives us, call it £1.2 million a month coming back into the cost base and that extra £1 million worth of depreciation that we have spoken about then also comes back into the thing. You're talking about, you know, call it £2.2 million additional cost that we don't see this year. That creates a little bit of sort of the cost driver. If the gross profit grows at, call it 7% or 8%, we're not seeing the operating profit at this stage grow at the same rate for next year.

Speaker 5

Thank you. Next question is from Patrick O'Donnell from Goodbody. Ignoring Microsoft incentive changes for a moment, how would you describe existing spend amongst your customer base both on a private and public side? Can you show examples of the wallet share expansion? If so, how would you describe price sensitivity given the macroeconomic, the macro environment? Perhaps if you could delineate between public and corporate side on this too.

Speaker 2

Thank you. Thank you for the question. Following Q1 where I think, you know, we absolutely did see a reaction to the macroeconomic situation, the wars, I believe that business leaders and public sector as well have had to continue with their investment. Investments we typically sell keep the lights on software solutions. It's really non-negotiable. They've got to keep renewing and the renewals that we follow through each year, we have a very tight program of activities around that. It's always been about the additional spend and upselling and incremental areas, services and so on that we'd like to talk to our customers about.

Speaker 2

What we have seen over the summer and, you know, we continue to see in the pipeline as we go forward for H2 is the services side, the software solutions and the renewals being converted at the level that we've been used to in the past. From that perspective, I think as much as the macroeconomic issues have not gone away, people have become a little bit more used to just tolerating them and getting on with the business. You've asked me to delineate between the two industries. If I think about public sector, we're already in this year's budget cycle and our growth with public sector at a gross invoiced income level would indicate that, you know, we're still working very well in how we bid and how we win business and convert it. Of course, we've been impacted by the Microsoft incentive changes.

Speaker 2

Then I come over into the corporate world and again I think there has been a rebound in confidence. No, maybe confidence is the wrong word. A realistic reality check of we just need to get on and run our businesses and invest. Whereas the pause button I think had been on with some of our project areas and investment areas a couple of quarters ago, people at the moment now seem to be back to normal spending levels.

Speaker 5

Thank you, Sam. George O'Connell from Progressive Equity Research, good morning and thank you for your presentation. Can you give color on the receivables movement and the consequent impact on DSO? Do you have a target model number in terms of days? Many thanks, George.

Speaker 4

I think the movement both from debtors and creditors have been very much in line with each other, number one, and in line with what our expectation from a seasonality point of view. When you look at the cash conversion at first half, and I know it's in line with the seasonality, we would expect sort of a 50%. I know it's 34%, but if you work out the numbers it's not that far off and won't delve into that. When you look at our debtors days for the full year, if you wind back the clock four or five years ago, we were averaging 32, 33. I think more our internal target would be sort of 37, 38, and that's an important number because we contract our vendors and our suppliers at 45 days, so we still get a positive movement in working capital.

Speaker 4

We should then, all being equal, still be able to deliver over 100% of cash conversion in the full year or in a rolling 12-month basis.

Speaker 5

Thank you. Our final question today is from Timishu Motlanth. You talk about the pipeline being strong. Can you contextualize today's pipeline versus six months ago versus twelve months ago?

Speaker 2

Six months ago would take us back into a very busy period, public sector and corporate. As we chase down towards the end of Microsoft year end, I would say that we're back at those levels. If you ask me to go back 12 months ago, a year ago to date, I think we are absolutely on a par with the growth that we expect for the business to get us back on track. From that point of view, on a 12-month basis, we've certainly seen an increase, and that goes hand in hand with our optimism, cautiously optimistic around H2 performance.

Speaker 5

Thanks very much. That's all the questions we've got time for today. Sam, I'm going to hand back to you for any closing remarks.

Speaker 2

Ok. No, just want to thank everybody for your time and your interaction. Enjoyed seeing you all today, and thank you for everyone that's dialed in and for the questions that you've raised. Thank you.

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