Bytes Technology Group plc

Joining us for our half-year results, a presentation for the six months ending August 31st, 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. So I know most people in the room know our business very well, but for those that don't, Bytes 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 organisations succeed in a world of change through trusted partnerships and transformative technology. 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, and 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 reorganisation of our corporate sales structure, which affected the phasing of our growth. And I'm pleased to say that that's now settled, 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 and I'll come back to why that's important. On the headline numbers, this is a resilient set of results for bikes 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. And now, I'll hand over to Andrew for the financial review.

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. So to start with, gross invoice income, or GRI, grew at 9.1% to 1.342 billion pounds, whilst gross profit only grew at 0.4% to 82.4 million pounds. GP over GII this half was 6.1%, a reduction of 0.6% from the comparative period last year. This reduction reflects the impact of the Microsoft EA 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 costs in total increased by 6.9%, resulting in operating profit declining 7%. 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 modelling. Salary costs are up 14% due to headcount growth and a cost of living wage increase as of 1st March this year. Most of this increase is in annualised hiring made towards the end of FY25, with only 1.7% headcount growth in this year. We have capitalised £700,000 worth of employee costs, and this was the same amount as what we capitalised last year, and this relates to the project to modernise 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 normalise towards next year. or delivery on our targets. 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%. And 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 annualised basis, we continue to target a ratio of between 38% and 240%. 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 GRR weighting in the first half. The effective tax rate is normalised 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. 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 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%. Our hardware GRI increased 16.8% and the GP by 25%. But again, that's all for lower comparative last year. And a reminder, we shrunk both of those, GRI and GP, by 40% in the prior comparative period. Our services GII increased 15% and the gross profits increased 43.6%. And this has benefited from the increased or mixed 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 of the end of August. In this half, we capitalised 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 amortise 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 FY27. we expect the combined investment to be around eight million pounds by year end and result in an additional amortization of a million pounds a year. 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 one third paid as an interim and the final two thirds 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. 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. 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 repurchase program of which we have completed £15 million as of last night. I think that's all from me, and as it, I'll hand back to Sam. Thanks. Thank you, Andrew.

So we will say our people are our core asset and we're proud of their energy, their enthusiasm and commitment and tremendous job they do supporting our customers by providing an outstanding service. And as such, we increase headcount 12% year on year, with most of this growth coming in the second half of last year. And 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 Kankhazi to the team. Kali is focused on attracting top talent, developing future-fit leadership, modernising 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. As our headcount grows, we've made it a priority to provide the right office environments in the right areas. We try and balance access to talent pools with proximity to customers and try and 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 programmes of work where required from our clients that may need access to multiple teams and resources. 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. So what have we done? 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. So why did we do this? Well, we believe the new corporate structure will enhance our account management, tailor our solutions and service delivery, and improve our vendor relationships. So how does it enhance our account management? Well, we think by having more homogenous customer groups supports our account manager's ability to bring value to customers. 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. So 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? Well, there's no hiding the fact that the reorganisation caused an adjustment period that has temporarily impacted the phasing of our growth. 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 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 the 1st of January 2025 to incentivise partners to focus on the Microsoft Cloud Solution Provider Programme, also known as CSP, which is higher margin for partners. 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 FY26, 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. And furthermore, the changes only impact four months of our second half, having taken effect in January 2025. So how has it gone? In corporate, 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. But we've seen stronger growth in services and other vendors. And this is all part of the mitigation plan for public sector. So what's the outlook? We believe the effect of the incentive changes should have fully washed through from the 1st of January 2026. Some of you may have seen that Microsoft recently announced some reduction in discounts to enterprise agreements set to come into effect on the 1st of November 2025. This will make CSP relatively more attractive and potentially resulting in more customers transitioning from EAs. In terms of partner relationship, we think the opportunity remains largest in our mid-market, including indirect and corporate segments. Now, this slide is fairly familiar to those of you that have followed us for some time. Our sources of growth remain expanding our customer base, growing with existing customers, and we have 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. And 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. And 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. 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 BITE standards. It's also worth calling out that we've launched an internal agents initiative for all staff. We, like our customers, we've got lots of work to do in making AI use prevalent across the entire organisation. So we've tasked our staff to come up with ideas for AI assistance that can improve business processes. And this follows the rollout of Copilot across the majority of employees last year. So why do we win? We win for three main reasons. First and foremost, customer centricity as evidenced by our consistently excellent MPS scores. This is now supported not just by our vertical structure in 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 partnership. 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 Rubric, 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. 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, and 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 of 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 service, for example, across governance, adoption, and co-pilot, amongst others. but it's still early in the cycle versus the opportunity that our existing customers and what we see in the total addressable market. So 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 one-third professional project-based and two-thirds managed and reoccurring. 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, but what we sell to each can differ. In mid-market, the public sector customers are more likely to outsource managed or support service due to their more limited internal bandwidth and capability, whereas larger corporate and enterprise customers typically look for a more specific solution. So why is services 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. It builds trust. It covers additional opportunities for our account managers to prosecute. And this is particularly valuable at larger customers, which are more complex to navigate. These customers value partners who've been highly authorised 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. it's becoming increasingly harder for customers to stay on top of all the technologies that exist in their environments. So 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. So what's driving the strong growth? It's a combination of push and pull. Our customers often want us to provide more services, viewing us as a trusted and reliable partner, And our account managers are increasingly recognised the attractions of selling services and how it deepens their relationships with their customers. So we're balancing internalising our services as demand scales for higher margin whilst maintaining a partner network for capacity. We've always had a strong partner ecosystem which we will maintain whilst 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 existing Azure CSP contract if we don't already have it. And having a 24 by 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. 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 and we identify more workloads to deploy. So to summarise, 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 hardworking staff for their professionalism, their unwavering commitment to the business and for their focus on customer needs. 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 capitalise on positive sector trends and to continue growing this business. And with that, I'd like to open the floor for questions. Thank you.