Bytes Technology Group plc

Good morning. I'd like to thank you for joining us for Byte's half-year results presentation for the period ending August 31, 2023. Before we start, just a few words on this morning's session and the order of events. Andrew, our CFO, and I will provide a short presentation lasting around 20 minutes or so, and then we'll turn to live Q&A. We are delighted to present another strong set of financial results with double-digit growth driven by contributions from all areas of the business. While the economic backdrop remains mixed, we've continued to see strong demand from our corporate and public sector customers. I want to thank our people and our partners who have worked together so well to deliver solutions for our customers. We are delighted that our customer and staff satisfaction levels continue to be amongst the best in the industry. Now let's turn to our key financial headlines for the first half. As I said a moment ago, we've delivered another strong set of sales and profit growth, extending our track record of positive progress in both the top and bottom lines. Grossed Invoiced Income or Sales are up at almost 38% at just over £1 billion. This marks the first time that the company has surpassed the £1 billion mark in a six-month period. This exceptional level of growth was underpinned by some large strategically important contract wins and I'll talk a bit more about these later in our presentation. Looking at some of the other core metrics Gross profits are up by 15% to 75.3 million. This has been driven by higher sales and by an increase in gross profit per customer. Adjusted operating profit is up 13.8% to 33.9 million. This reflects strong demand for software, services and hardware from both our public and private sector clients. And this is all clear evidence that we are continuing to grow our market share here in the UK and Ireland. Reporting revenue under IFRS 15 shows a revenue increase of 16.3% for the period. We also grew earnings per share by 17% to 10.6 pence. Our AOP GP conversion rate remains industry leading and ended the half at 45%. This is ahead of our target of no less than 40%. And we plan for this to be at or near 43% for the full year as we continue to invest in new heads to ensure future growth by increasing our scale and reach. Now turning to cash conversion. Half-year cash conversion of 48.7% is in line with our historical performances and long-term expectations. This reflects the seasonal timings of cash flows and our normal weighting to a much higher conversion in the second half. Our rolling cash conversion for the year ended 31st August 2023 stood at 107% and reflects our five-year average performance in excess of 100%. We have finished the half with a cash balance of £51.7 million after having paid out £30 million in dividends and having made a £3 million investment in CloudBridge, the AWS solutions business. Now let's turn to the key ingredients of our successful first half and touch upon some of the work we've done to prepare for H2 and beyond. We've all said our culture and people are the secret source of our business formula. This continues to be true. Winning best places to work awards and having high levels of staff satisfaction demonstrate our focus in this important area. We're very pleased with our low employee churn levels while we continue to boost our headcount to support future growth. Headcount has increased 10% in the first half and we now have more than 1,000 employees. Although only six months have passed since it opened, we're delighted with the progress of our new sales office in the City of London, supporting existing clients and targeting new clients in the square mile. Some companies owe their success to a handful of major clients. Not so at Bytes. With thousands of customers and no client contributing more than 1% of our overall gross profits, we've established a well-balanced and diverse range of clients giving us a very resilient source of income. A key KPI for us is to grow gross profit per customer, and I'm delighted to report an increase of 10%, growing from £14,800 to £16,300 per customer in the first half. Our strategic relationships with the world's biggest and most successful IT companies is another key part of our business model. Our most important partner is Microsoft, and I'm pleased to say as our relationship has deepened as diverse as ever. After more than 30 years of working together, we both continue to invest in the tremendous opportunities we both see in our existing markets. With over 200 Microsoft certified professionals, we're excited about the announcements of forthcoming AI products in the form of Microsoft Copilot. These new tools should radically improve productivity and increase innovation. Our role as a multi-vendor reseller provides our customers with a leading selection of technology solutions to meet their specific needs. Our relationships with world-class vendors such as Adobe, AWS, IBM, CrowdStrike, Darktrace, Checkpoint, and Palo Alto, to name but a few, enable us to offer a diverse and dynamic set of solutions in an ever-changing environment. We remain focused on cloud computing, software as a service, hybrid data centers, and cybersecurity, which are all areas enjoying good growth. This gives us a high degree of confidence in our ability to continue our multi-year track record of growth. Now let us turn to customers. The diversity, depth, and breadth of client type gives our business great resilience, especially at times of uncertainty. These relationships are underpinned by the vertical knowledge of our sales teams and a laser focus on customer care. Whether we are delivering our own IP in the form of licensed dashboard to IKEA, a long-standing customer for the last eight years, or implementing cloud solutions to one of the universities shown on the slide, we engage knowing that the customer experience is key to their organization and to our future opportunity. As our customers face into an increasingly competitive environment, we believe IT will become an even greater competitive advantage in the years ahead. With cybersecurity threats increasing and the security of data becoming more heavily regulated by the authorities, We believe IT spend in those areas will continue to grow at pace. We will continue to expand our relevance to clients who need support and assurance as they seek to strengthen their own IT resilience and security. Our focus on cross-selling and up-selling into existing clients has allowed us to grow GP per customer by 10% so far this year. With 200 new customers in the first six months of the year, we have a strong pipeline to continue executing this strategy in the years ahead. As many of you will know, Bytes has a very high customer retention rate and enjoys a high level of repeat business. Our renewal rate for the half stands at 113% and 98% of business came from existing customers. This was 1% up on the corresponding period last year. This follows our normal trading pattern and should reduce to the lower 90s as we work through the year and new business becomes a bigger component of overall sales. Before we go on to the financials, I'd like to spend a bit of time on our most important single partnership, Microsoft. As I've said previously, there is no doubting the continued importance and benefit of a strong relationship with Microsoft. We first partnered with them in the 1990s and due to our skills and capabilities, have won many global and UK awards from Microsoft in that time. It has been a super relationship, but on strong operational and technical commitments and multi-million pound investments on both sides. Microsoft owes its enormous success to its sell-through partner model, which enables it to reach millions of global organisations without the need for hiring thousands of sales personnel in every geography. Bytes has hundreds of people with Microsoft certifications, young, energetic, capable people with a thirst for knowledge and a desire to do well. Given Microsoft's diversification into gaming and hardware, some have referred to Bytes as more Microsoft than Microsoft. And this reflects our focus on Microsoft's cloud, data, and office productivity segments. Microsoft now lays claim to being the world's largest cybersecurity company, And this complements our long-term security focus, which now equates to around 25% of our overall gross profits. We're excited by the prospects for the commercial launch of Microsoft's AI-powered Copilot 365 products on November the 1st. As their biggest UK partner, we are well positioned to benefit over the next few years from Microsoft's huge investments in AI. We continue to invest in the relationship by expanding our services portfolio and by achieving the very highest technical accreditations. This further strengthens and cements our relationship with Microsoft, and it also makes us even stickier to our customer base as they come to rely on us to help them prepare for the implementation of new and existing technologies. I'll now hand over to Andrew to talk you through the financials in a bit more detail.

Thanks Neil. I'll now take you through our financial results for the first half of FY24. The first six months of the year seen continued double-edged growth across all our key performance indicators. GII has increased 37.6% year-on-year with growth spread across all income streams. While software sales remain our core focus, contributing 95% of the total GII, we've also seen good double-digit growth across both hardware and service sales. The group's already substantial presence in the public sector has been bolstered by several significant Microsoft contract wins, and this has resulted in our public sector GII increasing 44% to 722 million pounds whilst our corporate GRI increased 25.7% to £360 million. This means our overall GRI mix has moved slightly compared to last year, now with 67% generated in the public sector against corporate's 33% contribution. Gross profit increased 15% to £75.3 million. This is below the growth of the GRI primarily, due to agreeing lower margins on some of the big strategic wins within the public sector clients. Neil will come on and talk about this later in the presentation, but this is consistent with our land and expand strategy, where we believe we can sell more to these clients, increasing profitability over the next two to five years. Administrative costs have risen slightly ahead of our growth in gross profit. This is mainly due to investing in our people, with headcount growing by 96 employees and rising above 1,000 for the first time. This equates to a growth of 10%, with over half of our employees being in frontline sales. Employee costs, including commissions and share-based payments, which make up 80% of our cost base, grew at 20.2%. Adjusted operating profit, which excludes amortisation of acquired intangibles and share-based payments, is up 13.8% to 33.9 million pounds. The net finance income of 2.7 million pounds relates to the interest earned from positive cash balances. As everyone's aware, corporate tax increased to 25% on the 1st of April. This plus our growth has meant that our income tax expense has increased by 49% to 7.9 million pounds, This makes our effective tax rate for the first half 23.8%. Profit after tax increased 17.1% to £25.4 million, with the impact of higher tax rates largely being offset by interest income. Free cash flow from operations was strong during the reporting period, generating a positive net inflow of £16.5 million. During the period, we invested £3 million into acquiring the 25.1% stake in our AWS service partner, CloudBridge. This has given us access to over 80 skilled resources, allows us to present a multi-cloud strategy to our customers and maintains internal focus on our Microsoft offerings. After this investment, tax payments and £30 million in dividend payments, we are left with a healthy cash balance of £51.7 million. The group's cash conversion ratio for the period was 48.7%. This is considered normal for the first half and we expect H2 to be higher than H1. Our rolling cash conversion for the 12 months to 31st of August stood at 107.2%. For the same period last year, this cash conversion was 65.3%. The group continues to target a sustainable cash conversion ratio of 100%. and we are focused on achieving this for the full year FY24. Our capital allocation policy remains unchanged with our priority being to ensure that we invest appropriately to support our organic growth. This includes investing in our people so that we can attract and retain the talented employees needed to drive growth and at the same time enhancing our value proposition to our customers. We remain a capital light business with less than £900,000 spent on CAPEX in the first six months. This includes some refurbishment in Leatherhead, aligning our premises to the new ways of work for our employees. Our dividend policy is to return 40% of post-tax adjusted operating profits to our shareholders via ordinary dividends. This is further broken down into approximately one-third as an interim dividend and the balance as a final dividend at the end of the financial year. I am pleased therefore to announce that the Board has approved an interim dividend of 2.7 pence per share, which is 12.5% up on the prior period's interim dividend of 2.4 pence per share. While organic growth remains our focus, we do have a strong track record of acquiring and integrating when the right opportunities arise. We continue to assess investments that could potentially enhance our value on a highly selective basis. Our investment into Clybridge is a good example of this. Sustainability is not optional. Between our employees, customers, vendors and shareholders, we have a powerful platform from which we can make a positive contribution to society. Over the last two years, we have been focusing on our efforts of reducing Scope 1 and Scope 2 emissions. This year, this has widened to include relevant measurements from within the Scope 3 categories, and we are formally committed to submit our targets to SBTI for validation. We know that high inflation environment has affected all our employees to some extent. The three main drivers of inflation are utilities, transport costs and food. These items typically make up a large portion of the lower paid employees' disposable income, and therefore high inflation is more keenly felt by this segment of our employee base. When granting our annual salary increases in March of this year, we have tried as far as possible to allocate more of this pot to these colleagues. I would also like to take this opportunity to note the appointment of Sam Mudd to the board as an executive director. Sam has been a long-standing MD of the Phoenix business, which has a particular focus on the public sector.

to end we've had another strong half from a financial performance perspective and we remain well positioned for the balance of the year back to neil thank you andrew by now many of you will be very familiar with our strategy it is straightforward and it has not changed for the last decade our business sells software and i.t solutions to existing and new customers and each year we aim to expand the wallet share of the customer base by upselling and cross-selling new solutions. We know this works. You can see from the chart on the right a CAGR of gross profit growth over the last 10 years to February 23 of almost 18%. In the half under review, we've continued to invest in more headcount to create future bandwidth for our sales engine to deliver greater scale and continued growth. We've shown over the years our ability to grow our market share, and we'll continue to see further gains as we invest in our business. A key part of this will be to work strategically with high growth software companies, especially in cloud and cyber, so that we're in the best possible position when it comes to helping customers with product selection. We are well-placed to assist customers and broaden the use of AI in their IT strategies. We are particularly excited about the potential of Microsoft Co-Pilot and look forward to rolling this out to our customers in due course. This represents another tailwind as we enter 2024 and we expect this to gain momentum over the next two to three years until it becomes a normalized product selection for our customer clients. Given our low single digit market share of the total addressable IT market, we continue to view our organic growth as our biggest strategic opportunity, and that remains our priority. In the headline slide at the beginning of this results presentation, I spoke of the very strong growth in sales, and I'd now like to take a few moments to explain the background behind this abnormally high growth rate. Bytes was awarded a five-year contract by the National Health Service to supply Microsoft Cloud software and potentially other vendor solutions to provide a platform for future innovation in healthcare. For many years now, we've taken the approach of investing in new customer relationships by agreeing to lower margins up front. This has enabled us to win long-term, high-value contracts. It's an established element of our sales strategy. However, it's not often that we win a contract with a sale value approaching £900 million over five years. We were delighted to win this very prestigious contract. It's the biggest ever Microsoft contract in the UK and it now means we have a seat at the table for the entire NHS to embark upon our land and expand approach. We believe we can help deliver a real difference in productivity for the NHS and we also believe that we can earn a good return on this long-term contract. This year's contract value was £140 million. The overall NHS IT budget exceeds some £4 billion per annum and supports over 1.4 million users. By adopting a multi-cloud strategy, all NHS staff will have access to the latest digital tools as part of the ongoing efforts to improve efficiency. This helped our business grow top line sales by 37.6%. How did we do without this NHS win? I'm pleased to say we would still have recorded top line sales growth of over 19% without this contract, which is a very positive indicator of our broad-based sales growth. So, in summary, we have a tried and tested business model which has continued to pay off for all of our stakeholders. We continue to enjoy a large addressable market with well-established and persistent tailwinds supported by increasing global IT spend. With increased scale, we expect to continue delivering double-digit growth across our key financial metrics as well as increases in market share. Despite the mixed macroeconomic backdrop, demand has remained strong across all verticals and across all business lines that we operate in. The group also benefits from a robust balance sheet and no debt. And finally, we are confident that our proven strategy means we are well placed to continue our progress over the remainder of the financial year and in the years to come.