Bytes Technology Group plc

Hello and welcome to Bytes Technology Group's half year results presentation, the period ending 31st of August 2024. Andrew and I will talk through slides summarising our performance and then we will open the conference call line for Q&A and we will also receive questions through the webcast chat function. Moving to slide three, I am pleased to report another positive set of results for the group. We have increased our share of wallet amongst our existing customers as they've continued to invest in their IT needs. And we have also expanded our client base in both the public and corporate sectors. I want to take this opportunity to reflect on the trading environment we've experienced since we last reported results in May, which has continued to be challenging and with slightly elevated levels of uncertainty related to the snap general election in the UK. That said, the public sector has remained resilient despite the change of government, while we saw more caution from corporate customers over the summer months. For me, the performance in the period demonstrates the resilience of our two operations. We have established ourselves into many verticals across UK corporate mid-market sectors and extensive public sector frameworks to access the right to bid. This provides us with a solid platform from which to grow. Our account management teams maintain strong and enduring relationships and the low attrition rates we experience across the group means that our key relationship holders stay pivotal and continue to be the engine of our business growth. Importantly though, we must keep moving forwards, improving and evolving our proposition for customers. We've been building the business to adapt and transform to our customer needs for the future. We've continued to provide excellent advisory services for software and related solutions. Investments have been made in new enterprise-grade systems and office environments to support future growth. Our most recent office opened in Port Solent in September, which will attract more talent and allow us to operate close to clients in that region. The feedback I have received directly from customers underpins the confidence I have in our customer propositions, and I'm excited about this point in time. We're in the very early stages of the take-up of AI-powered software products that have the potential to transform how businesses operate, while structural drivers such as the requirements for even more sophisticated cybersecurity and cloud-based products remain as prevalent as ever. I'm looking forward to evolving the business and have an absolute focus on meeting our customers' progressive needs. Moving on to the financial highlights for the period. We delivered over 82 million in gross profit for the first six months with a 16.3% increase in operating profit driven by contributions from all areas of the business. Despite the challenges in the UK economy and political upheaval over the past six months, our customers have continued to invest in their IT needs. As we have expanded our client base in both the public and corporate sectors and increased our share of wallet among existing customers. Gross income for the period was £1.2 billion, up 13.7%, and reflects the busy public sector contracts period and Microsoft year-end in June. It is because of our passionate, talented and experienced staff that we are well positioned to continue providing high quality licensing advice, technical enablement and support to meet our customer needs. This will remain our defining unique selling proposition and we believe the momentum is there for us to make continued progress in FY25 to execute on our plan. As part of our growth strategy, we continue to hire more sales heads and strengthen the ranks of our sales teams in both operations in readiness for our plans in FY26. Headcount increase of 7% to date aligns well with our growth plans. And this also includes the addition of technical heads, which we see as the important growth driver and enabler for our strategy. technical heads allow us to devote more advice and guidance into our client discussions and scale our capability in preparedness for future growth with vendors. We also continue to invest in our physical footprint, a move that brings twin benefits. It brings us closer to both the talent in the regions that we operate in and the customers that have offices and operations nearby. During the first half, we opened offices in Sunderland and Portsmouth and we expanded the floor space of our office in London. We will inevitably consider more locations in the future to continue this strategy. To support the growth in people, we're investing in our internal systems to improve user experiences, drive new efficiencies while more closely supporting our customers. As part of this, we have recently started two software development projects. One, to build a customer-facing marketplace portal, connecting our customers to our vendor platforms more seamlessly to purchase a wide range of products and link to a new internal platform for order processing. We aim to launch these in the second half of FY26. All of this work serves to position us as trusted partners to our customers and ensure that we are able to support their decision making on their software and IT requirements as market environments evolve. I wanted to take a moment to focus in on one really important part of our business, cyber security. Security represents 25% of our GP and as part of the growth drivers we will continue to invest in our offerings and more heads to expand our security go-to-market strategies. Product resale and services in this space are part of our core DNA And the celebration of 25 years heritage invites security partnership that has traded for that period as an example of how embedded into our business the cyber security phenomena is. And given that Channel accounts for 93% of cybersecurity spend, this is great news for strong security partners like BTG, who have backed the top five main security vendors such as Checkpoint, Microsoft, Minecast, Sophos, Palo Alto and many others. At Bytes Technology Group, we're incredibly proud of our partnerships with organisations such as Shelter, where we delivered a robust cybersecurity solution to safeguard their operations. By implementing advanced security measures and more resilient framework, we help Shelter protect sensitive data and ensure the continuity of their vital services. This collaboration reinforced our commitment to providing top-tier cybersecurity solutions while supporting Shelter's critical mission. The success of this project highlights our ability to secure organisations' digital environments and safeguard their futures. We also hold strong customer relationships on the corporate side, as illustrated by the work we did with Howard Kennedy. Here, we partnered with them to align their security controls to industry-recognised frameworks by applying our security methodologies based on several robust controls. We assisted them to validate the approach that they've taken, worked with them to identify areas for improvements for existing technologies or the introduction of new technologies where needed, and thereby helped to strengthen their cybersecurity landscape and protect the security of their client data. The successful approach and execution of this project again demonstrated the journey we go on with our clients to support them on their future programmes of work, such as around security in this instance, as well as in the security investment decisions based on both commercial and technical requirements. I appreciate this is a very busy slide with a lot of content on it, but we think it's important in demonstrating the strength and breadth of our vendor portfolio. There are a number of key points that I want to land here. As we continue to grow our most strategic vendors and some of the security brands I have just referred to, they are working closely with our operations as one of their most trusted and highly accredited partners in the UK. Because it is evident we can grow with them and scale and respond with agility when required to do so. We are determined to ensure this remains the case and that we keep expanding our services offerings with them and other vendors to suit our client needs. Having the right specialisations, designations and accreditations will remain a focus area for us going forwards. We are delighted with our portfolio of partners and this slide is not exhaustive of all the great partnerships we continue to work strategically with and invest with. Transforming workloads and embracing cloud transformation are critical for organisations aiming to stay competitive and innovative. Bytes have trusted relationships with our customers, vendor partners and expertise to navigate the paradox of choice involved in leveraging new and emerging technologies that help organisations future-proof themselves. Our accreditations with the major players and our ambitions for growth are focused on following core areas that are significant for our customers. Firstly, enhancing agility and scalability through continued migrations to the cloud resources. The unrealized potential of moving legacy on-premise workloads to multi-cloud is significant. Maintaining cost efficiency amid the increasing demands and complexity involved in economics of cloud consumption, but also the broader strategy of software asset management, which is evolving in line with customer IT changes, more cloud-based technology. Improved security and compliance will continue to be a priority for customers. And the huge footprint within our Microsoft 365 customer base, which leads into wider managed services. we can help to unlock innovation and competitive advantage. As a scale solution partner, we have relationship and access to the key vendor technologies and we can give customers the inside track on the future roadmap. Finally, there is business continuity and disaster recovery. This resilience is crucial for maintaining operations, minimising downtime and links closely with security managed service capabilities we are building on. I would like to now hand over to Andrew for our financial performance.

Thanks, Sam. Good morning, everyone, and thank you for joining the presentation this morning. I'm really pleased with our performance we delivered in the first half of the year. All the strategic progress that Sam has talked you through is underpinned by a strong financial position that our business is in. I'll now take you through the key elements before spending some time on our sustainability efforts. Starting with headline figures, gross invoice income, or GII, again grew by double digits at 13.7% to just over £1.2 billion. Gross profit grew by 9% to £82.1 million. Despite concerns that the early election could impact our growth, I'm pleased to say we experienced very little disruption to our trading patterns and have continued to see positive momentum with several new contract wins. We've also invoiced the second year of our big NHS Microsoft contract, this time for the full 12 months rather than the 10 months invoiced in the first half of last year. GP over GII, this half was 6.7%, a reduction of 0.3% from the comparative period. This reduction reflects a slightly heavier weighting towards the public sector, where contracts are won at a lower margin. I'll touch on this in a bit more detail on the next slide. Within administrative costs, we saw employee costs rising only 4.2% despite granting pay increases at the beginning of the year and growing our headcount by 73 employees. Of the 73 employees, 51 are accounted for within administrative costs and 22 that are technical staff, their expenses are accounted in cost of sales. Having last year replaced our HR and payroll systems, we've embarked on a project to modernise all our IT systems. We are replacing our back-end accounting systems and we have started a project to develop a new billing and sales platform. This will assist in simplifying our processes and future-proofing our business. This development project will create an IP asset, so in line with our accounting policy, we have capitalised the cost, which in turn has reduced the existing employee costs by £700,000. For the last time, we are showing adjusted operating profit, which excludes amortisation of acquired intangibles and share-based payments. This is up by 13.6% to £38.5 million. In the future, we will focus on operating profit, which in this period is up 16.3% to £35.6 million. The efficiency ratio of operating profit divided by gross profit is at 43.4%, up from last year's ratio of 40.6%. This expansion is due to the slight decrease in share-based payments, as well as the capitalisation of the aforementioned development projects. our finance costs, largely comprised fees associated with our evolving credit facility, which we renewed during the course of last year, and also includes finance lease interest on our right of use assets, including the popular staff electric vehicle scheme. The finance team has done incredibly well in managing our cash position, which has resulted in significant increase in interest earned from the money market, totalling £6 million for this half. Our effective rate of tax is 26.7%, which is higher than the standard rate, and this is entirely due to changes in our deferred tax asset linked to our employee share schemes and driven by the lower share price over the period. As mentioned on the previous slide, the slightly heavier weighting towards the public sector now means that we have 70% of our GII coming from this sector and 30% from the corporate sector. When we look at contributions from the public and corporate sector by gross profit, we find a similar expansion in the public sector, moving from 34% to a 37% contribution. When we segment our performance into the three broad categories, that of software, hardware and services, we see sales of software product increased by 15.6% and gross profit derived from these sales increased 11.3%. Publicly available data shows this segment is growing around 8% per atom. Therefore, we are growing ahead of market and continue to take market share. Hardware sales are down over 40%, whether measured by GRI or GP, showing that we are not immune to the current market conditions. While hardware remains a focus area for us, the contribution to GRI and gross profit remains relatively small. The sales of services have shown little growth over the comparative period. But this half, we are focused on building capacity and utilising our existing internal capabilities to add value to our customers whilst giving us access to a higher margin. Gross profits from these services has grown 8.6% to now contribute 5.8 million pounds. On this slide, I'm going to spend a bit of time outlining why we're moving our focus to operating profit from adjusted operating profit. The graphic to the left of the slide shows the accounting adjustments made to the operating profit by each half since we've listed. As we can see from the graph, adjustments peaked at the end of FY24 and now we expect a normal rate of growth from this expense line. Of interest might be a little bit more detail around the number of participants in each of these share schemes. Currently, we have over 200 or 20% of our employees participating in the Altip scheme, as well as 530 or 47% of our employees participating in the ShareSafe scheme. These numbers show how vested our employees are on the continuing success of our company. The graphs to the right of the slide compare the performance of both operating profit and adjusted operating profit since listing. The change in focus to operating profit also changes the calculations of efficiency ratio and cash conversion. So for completeness, I've shown both graphs as well. Our cash conversion continues to follow the same cycle that we've discussed in the past. As a reminder, We tend to see lower cash conversion in the first half, followed by a very strong cash conversion in the second. This half, using operating profit as our denominator, we've had a cash conversion of 56%, and this equates to a rolling cash conversion for the last 12 months of 112%. After tax and returning £35.4 million to our shareholders, we are left with a cash balance of £71.5 million at the end of August. Moving on to how we think about using cash and deploying our capital. As our framework shows, our priorities are to fund future growth, invest in capital projects, integrate growth through M&A and shareholder returns. On the latter, our dividend policy is to return 40% to 50% of our post-tax adjusted operating profits to shareholders via ordinary dividends. I am pleased to announce that the Board has approved an interim dividend of 3.1 pence per share. This represents a 14.8% increase on the FY24 interim dividend. Sustainability remains integral to our mission as a responsible business. The first six months of the year have seen us make good progress on a number of initiatives, but I'll focus on just a few here. We have now had our near-term and net-zero carbon reduction targets validated by SBTI. This gives us the confidence that we have the right strategy in place as we move towards our net-zero target by 2040. Our people are the lifeblood of our business. And so we will continue to listen and act on feedback to improve the employees' working lives. For example, we've carried out a diversity reporting project in order to understand the demographics of our business. This will enable us to identify areas where more support is needed to create an environment that caters for our workforce. In addition, we've expanded our apprenticeship programs into more business areas and into a degree-level apprenticeship. I'm particularly proud of the formation of the ESG committee at board level. This is a great example of the importance we've placed on this topic, with the board now playing a crucial role in overseeing all ESG issues. With that, back to Sam.

Thank you, Andrew. This strategy is focused on ensuring we can continue better serving our customers and people into the future. We have not deviated from our purpose and how we serve our customers, but we have evolved and remain agile to new demands and new emerging models. What is consistent is the four key pillars of our strategy remain. grow wallet share, grow customer base, expand solution capabilities, and broaden and deepen vendor partnerships. The diversification of our client base enables us to ride out changes in the economic environment that impact certain sectors. The last six months in public sector has performed well. Our customers trust us to deliver new and enabling services and look to Bytes Technology Group for support when required as we have proximity to vendors. Our expansion into new regions and office openings brings us closer to our customers, whilst at the same time allowing us to recruit locally for the needs of business growth. This expansion will continue in both operations as part of our Grow Wallet Share KPI. Our vendor relations and accreditations are based on our customer needs and our core capabilities, and we aspire to be the best of the best in our top strategic vendors. This also acts as a magnet for us attracting both sales and technical heads, as quality talent will always want to work for the best in class. As we broaden and deepen our capability with technology vendors, we are determined to be at the forefront of AI experience, enabling our customers to maximise the value from technologies such as Microsoft Co-Pilot. And to date, we have sold more than 130,000 Co-Pilot seats. And our continued engagement with customers is a wonderful services relationship example. On this slide, I'd like to emphasise how we are positioned to adapt and benefit from the ongoing trends in the IT industry. Our sustained growth is supported by Microsoft's expanding market share as we build upon a partnership we've maintained for over 30 years. Our strong relationship with them and other major vendor relationships encourages us to adapt incrementally as the market evolves. And so, as the big players in the industry continue to grow, we transform with them in parallel. This means we must be ready to move with vendors when they're prioritising certain products or technologies, whilst also ensuring we are delivering to the needs and demands of our customers. Taking Microsoft as an example, the business has been clear about its efforts to focus on CSP and Azure products, and there is progress building around co-pilot as organisations of all sizes embrace AI. Inevitably, evolving product sets and delivery models in the software industry drive a shift in how vendors incentivize channel partners to align their sales teams to meet these trends. We're experiencing this at the moment with industry-wide changes from a key vendor and Bytes has a long track record of successfully adapting to changes in partner incentivisation. The up and coming changes are consistent with the structural trend towards annually reoccurring licences that are billed monthly. This has already been an area of focus for a number of years and so we feel we are very well placed to adapt to the changes. It is important to say the overall incentive pool continues to grow and taking into account our actions to react to the up and coming changes, we do not expect there to be a material impact in the current or next financial year. As the industry continues to evolve at pace, we continue to hire additional technical heads within the company to enhance the levels of service we can offer customers and ensuring we are best placed to provide the expertise that both customers and vendors require of us. responding to the changing needs of partners and customers is deeply entrenched in how we do business and it is a process we have been through constantly down the years and one that we're always preparing for in the future. So in summary, we have delivered a positive set of results for the first six months of the year against a backdrop of macroeconomic and political uncertainty. Our clearly defined and well-understood strategy enables us to continue to invest in the right areas to deliver against our plan in FY25. Our strong partnerships with vendors, the quality of our people and our customer focus are the USPs we will continue to protect and preserve. We remain well positioned to benefit from structural demand drivers we see in our markets, including cloud computing, cyber security and AI, and are confident in our prospects for the remainder of FY25 and beyond. Thank you for your time. I would now like to open up the presentation for any Q&A.