Bytes Technology Group H2 Earnings Call Highlights

Key Points

• Bytes Technology Group reported 11.5% growth in gross invoice income and 2.5% growth in gross profit, but operating profit fell 4.6% as Microsoft incentive changes and sales-team restructuring weighed on margins.
• The company said cash generation remained strong, ending the year with £98.6 million in cash and no debt, while returning capital through a higher dividend and a new £25 million share buyback after completing a prior buyback.
• Management expects gross profit growth to reaccelerate in fiscal 2027, supported by AI, cloud, cybersecurity and services demand, even though operating profit is expected to be broadly flat due to about £4.5 million of cost normalization.

Bytes Technology Group LON: BYIT reported higher full-year gross invoice income and modest gross profit growth, while operating profit declined as Microsoft incentive changes and internal sales realignment weighed on performance.

Chief Executive Sam Mudd said the software solutions provider made “good strategic progress” during the year and entered fiscal 2027 with improved sales momentum. The company operates through two brands: Bytes, focused on the private sector, and Phoenix, focused on the public sector.

“We’re confident that despite growth being temporarily impacted in H1, H2 has showed movement back to recovery, including strong growth with Microsoft as we annualize the incentive changes,” Mudd said.

Profit Growth Slows as Microsoft Incentive Changes Weigh

Andrew, the company’s chief financial officer, said gross invoice income rose 11.5%, driven by software and services sales. Gross profit increased 2.5% to £167.3 million, while operating profit fell 4.6% to £62.7 million, in line with guidance issued in October.

Public sector gross profit grew 7.4%, while private sector gross profit declined 0.3%. Andrew said private sector performance was affected by the segmentation of sales teams, which caused an adjustment period in the first half. Momentum improved in the second half, though against a tougher comparison.

Gross profit as a percentage of gross invoice income declined to 7.1%, down 0.7 percentage points from the prior year. Andrew attributed the decline to Microsoft incentive changes that took effect in January 2025. Microsoft remains the group’s largest vendor, contributing around 50% of gross profit.

Andrew said the incentive changes affected public and private sector sales differently. In the public sector, enterprise agreements remain the primary program used to fulfill Microsoft requirements, reducing gross profit without affecting gross invoice income. In the private sector, the company has sought to mitigate the reduction in incentives by moving customers to Microsoft’s Cloud Solution Provider program.

Costs Rise as Company Invests in Systems and Staff

Administrative costs rose 8.5% during the year. Salary costs increased 17%, reflecting headcount growth, strengthened senior leadership roles and annual wage increases. Average headcount rose 12%, though Andrew said more than 40% of that reflected annualized hires made in fiscal 2025, with less hiring during fiscal 2026.

The company capitalized £1.8 million of employee costs related to IT modernization projects. Andrew said those costs will be expensed in fiscal 2027 now that the projects are complete. He also said bonuses are expected to be just over £2 million higher in fiscal 2027 based on full-year guidance.

Other administrative expenses increased 23%, driven by investment in systems, travel and entertainment as teams increased in-person engagement with customers and vendors. Andrew said cost normalization in fiscal 2027 is expected to total about £4.5 million, including higher amortization, returning developer salary costs and higher bonuses.

Cash Conversion Remains Strong; Buyback Announced

Bytes reported cash conversion of 105%, using operating profit as the denominator. After tax and returning £74 million to shareholders, the company ended the year with a cash balance of £98.6 million and no debt.

Andrew said the company maintains a strong cash balance because of large gross payable balances at year-end, seasonal working capital outflows in the first half and a negative working capital environment of around £80 million at year-end.

The board approved a final dividend of £0.07 per share, bringing the full-year dividend to £0.102 per share, a 2% increase from fiscal 2025. Bytes also completed a £25 million share buyback in November 2025 and announced a new £25 million buyback program.

Andrew said the company remains committed to returning 40% to 50% of post-tax adjusted profits through ordinary dividends, while returning excess cash through either special dividends or buybacks. In response to an investor question, he said the company determined buybacks were the better route given the share price level.

Services and AI Cited as Growth Drivers

Mudd said Bytes has a 3% share of an £82 billion addressable U.K. software solutions market and sees structural growth from artificial intelligence, cloud, cybersecurity and services. He said services gross profit rose 38% during the year, supported by customer and vendor-funded adoption work, managed services and expanded capabilities around integrated AI solutions.

“The complexity of AI adoption, the governance, the integration, the data readiness, the security considerations, is precisely the kind of complexity our customers pay us to navigate,” Mudd said.

Microsoft-related gross invoice income grew 11.5% year over year, and Microsoft gross profit returned to double-digit growth in the second half, Mudd said. Microsoft services, including pre-sales advisory, implementation and adoption, increased 31%.

Mudd highlighted work with NHS England as an example of Bytes’ AI-related services. He said the company partnered with NHS England in 2025 to deliver more than 80 tailored workshops to NHS trusts to assess AI use cases. That led to what he described as the largest global Microsoft-funded rollout, with Bytes helping deploy and drive adoption of Copilot to several hundred thousand employees in 2026.

Outlook: Gross Profit Growth Expected to Reaccelerate

For fiscal 2027, Bytes expects gross profit growth in the high single digits to low double digits. Operating profit is expected to be broadly flat as the company absorbs about £4.5 million of cost normalization.

Andrew said growth is expected to be slightly weighted toward the first half because of Microsoft’s year-end and the company’s public sector focus. He also said renewal rates are expected to normalize after existing customer gross profit declined slightly in fiscal 2026, when all growth came from new customers.

Mudd said the company is not planning additional major restructuring. Bytes announced in March 2026 that it would remove market overlap between its two businesses, making Bytes a pure-play private sector reseller and Phoenix a pure-play public sector reseller. A small number of account managers will move within the group, but Mudd said customer relationships will be unaffected.

The company also announced that the board decided to split the combined CFO and COO roles currently held by Andrew. He will step down as CFO once a replacement is appointed and then transition into the COO role, remaining with the group but leaving the board.

“The momentum that we’ve talked about in H2 of last year continues, that obviously gives us confidence in our outlook,” Mudd said in closing remarks.

About Bytes Technology Group LON: BYIT

With a 40-year track record, Bytes Technology Group is one of the UK and Ireland's leading software, security, AI and cloud services specialists. We enable effective and cost-efficient technology sourcing, adoption and management across software, security, hardware, and AI and cloud services. Our strong relationships with many of the world's largest software companies enable our specialist staff to deliver the latest technology to a diverse and embedded customer base. This has resulted in our long track record of strong financial performance.

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