Softcat plc

Good day and welcome to today's SoftCat results for the year ended 31st July 2021. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, please press star and one on your telephone keypad. I also must advise you that this conference is being recorded today, and I would now like to hand the conference over to your first speaker today, Graham Watson. Thank you. Please go ahead, sir.

Thank you very much. And good morning, everybody. And thanks for taking time to spend with us this morning as Graham Charlton and I review our results for the year ending 31st July 2021, as we announced earlier this morning. I want to start off by saying we didn't envisage a full fiscal year under the shadow of a global pandemic. So I would like to start by thanking everybody at SoftCat. and all those in the wider community for your continued help and support in what has been a difficult time for many. It's fair to say that the results we've posted this year really did surpass our expectations. And I'm continually positively surprised by the level of support and care that our team is able to extend to each other and our partners on a continual basis. To our team, you've again produced another exceptional performance and at the same time delivered good in the community. And for that, I send you a huge thank you from both me and Graham, the leadership team, and the board. And it's important, I think, also to note that we count ourselves fortunate to be an industry that's growing and allows us to add value across a whole range of commercial and public sector entities as companies continue to look to improve their customer and employee experience, their productivity, their security, and their agility whilst taking care of regulatory requirements too. If we move to the next slide now, please, I'll provide a brief explanation of who we are and where we sit in the technology space for those of you who are less familiar with Softcat and our operation. Softcat is a leading reseller of infrastructure technology solutions to customers in the UK and Ireland. We provide a broad portfolio of leading multi-vendor technologies and services to suit our customers' needs, and we help them deal with the difficulties of complexity, choice, and pace of change around infrastructure technology by bringing our experience and expertise to bear on their behalf. Where we don't hold those resources internally, we are more than happy to partner with third parties to complete the solution for the customer. We work with over 200 leading vendors in the infrastructure space where we represent their technology to a target market of somewhere in the region of 50,000 customers across the UK and Ireland. And you can see from this slide here that we serve an active base of around 9,700 customers who operate across a wide range of corporate and public sector entities and verticals. We close the year with close to 1,700 staff covering the functions of sales, sales support, sales specialists, technical, services, and business operations. And our team operate out of nine offices in the UK and Ireland. And we also have branches in Singapore, Hong Kong, Australia, the Netherlands and the US. Those branches form part of what we call our multinational business and they allow us to fulfill the global needs of our customers in those countries delivering local value. Our cash conversion remains high at 90% and has remained strong and predictable despite the pandemic. And our goal is simple, to be the leading IT infrastructure products and services provider as measured by an employee engagement by customer satisfaction, and shareholder returns. Our track record of success is built around the ethos that a highly engaged and motivated team of employees will provide outstanding customer service. And that is the essence of our purpose statement, which says, we help customers use technology to succeed by putting our employees first. Simply put, we are focused on growing our sales and gross profit faster than the market by taking share and being a great place to work. Can we now move to the next slide please just for a summary of our results. We're pleased to report a positive set of results where organic growth of income and profit has now been sustained across 64 consecutive quarters. You can see the gross profit growth in line with the grossed invoiced income growth at around 17% which indicates a stable margin performance and drove a strong operating profit of 119 million pounds up 27.4% on the prior year. Productivity in sales, as measured by gross profit per customer, grew nicely too, by 14.6%. And we're pleased to see increased growth in our customer base as restrictions were increasingly lifted. The 11% increase in average headcount demonstrates that throughout the period, we continue to invest significantly in people, not just people in the company, but also systems and capabilities, at a time when others paused or reduced their investment. As always, that investment is designed to build skills and capacity to capture and capitalize on the enormous growth opportunity we see in the market. And it also helps us stay ahead of the game. And just a reminder that we made no redundancies or following or took any government support at any time throughout the pandemic. Cash generation remains strong. We have no bank debt. and our strong ability to generate cash has enabled us to propose a further dividend this year for our investors. Our performance and vendor partnerships were generously recognized again in a year where we received over 50 vendor awards, including a number that recognized our performance on both the EMEA and the global stage. We won the highly prestigious CRN Reseller of the Year Award and the Public Sector Reseller of the Year Award, the latter for the second year in a row. And these CRN awards are regarded as the Oscars of our industry. And these accolades really lit up the organization. If we move to the next slide, please, I'd like to just cover the business update. Throughout the pandemic, we've continued to focus on leading the company in a calm and pragmatic manner, focusing on the well-being and safety of our people and the things that we can control. And as we said this time last year, our strong culture has been an enormous source of strength and comfort for us all. We continue to be very active in making sure that in a remote environment our people feel connected, they feel valued, and they feel supported. We have changed things so that our recruitment and onboarding processes work in a hybrid working environment. We've innovated too in order to make sure recognition and fun remain central to how we operate. Employee communication in all its shapes and forms has been constant and have the acts of kindness and mental health support we've been able to offer throughout the year. What we have demonstrated again in our performance is that having a broad range of vendors, technologies, services, and customers buffers us to a certain extent from specific challenges when they arise. We know that the pandemic threw out some sales demand challenges in some specific verticals and in those technology areas that relied on in-office working. Thankfully, those challenges are offset by strong demand in devices, in connectivity, in networking, security, and cloud. And across the year, we grew in all areas of hardware, software, and services. At the height of the pandemic, our ability to gain new customers was hampered, as customers seemed to prefer to hunker down with their existing trusted advisors. But as the restrictions have eased, we've returned to the office in greater numbers and with greater frequency. We've seen new customer acquisition rebound, together with a growing demand for on-premise infrastructure and some modest recovery in print. Our public sector and mid-market segments remained strong throughout the year, and we started to see enterprise recover as the year progressed. We have always said that we continue to invest in people, almost regardless of market conditions, as long as we can continue to see a significant opportunity to grow in the market. And we did just that, to the extent that our headcount is now 26% up on our previous pre-pandemic close two years ago. And our employees and customers have continued to respond positively to how we've managed the pandemic with healthy net promoter scores recorded again for both customer and employee satisfaction, which sit at 59 and 58 respectively. We live in a hybrid working world where technology is no longer discretionary, is increasingly distributed. This drives opportunity to innovate and add value through the channel. And the demand environment has remained positive and our customers are investing in workspace while grappling with the challenges of managing remote and in-office workforces. And this in turn is driving strong demand for devices, accessories, security, networking, and collaboration tools. Our customers are investing in hybrid multi-cloud environments too, and demand is growing for compute at the edge as enabled by the ongoing rollout of 5G networks. The trend for businesses to be cloud ready, mobile ready, and secure remain at the top of our customers' technology priorities, as reinforced by the insights we gained from our recent customer survey. It's been wonderful to see the team work so hard together to support each other and our business partners, and it's fantastic too to see that support extended into the wider community to support those less fortunate through company and individual charity initiatives and volunteering activities. And our industry is having to manage through a period of component shortages impacting some elements of our hardware and networking products Our multi-vendor strategy and close relationships with our vendors and our distributors means we have multiple good options to source constrained product. Whilst the precise impact of the shortages is difficult to quantify, and we are managing them well, we don't expect them to deteriorate further. To put into perspective, the shortages impact only some elements of our hard work portfolio, which itself is only 30% of our business. We've continued to perform well throughout the period of constraints spanning last fiscal and the start to this fiscal year. Moving to the next slide, please, which is our strategy update. Our customers' appetite to use IT to gain competitive advantage while remaining secure and resilient is relentless. We've built an outstanding base of customers with whom we have a privileged and valued relationship. The opportunity to do more with those customers while continuing to win new ones is clearer than ever. And that is our strategy in a nutshell. We aim to grow the business and take market share by selling more to existing customers and at parallel acquire new customers. Our investments support this and we're recruiting additional account managers to find new accounts for us as we speak. We aim to build strong relationships with our customers and grow trust and loyalty over time and we were pleased to be able to grow the customer base by 2.3% after a period of lockdown when it was more difficult to engage with those new customers. New customer prospects tended to remain focused on their existing relationships whilst they waited to see how things played out. And we trade with around 20% of the customers in our addressable market, so we believe we have a wonderful opportunity to keep growing that number. Our efforts to sell more to existing customers were rewarded with an increase in gross profit per customer of 14.6%. Market demand remains strong for the three areas of technology that we serve and support, namely cybersecurity, digital workspace, and hybrid infrastructure. And we believe we now have around 4% of the addressable market, which means we have an average estimated share of wallet of around 20%. We think we can grow that share of wallet by around threefold, as we have many customers already with a much higher than average share of wallet who use Softcat as their preferred and primary partner. We're continuing to invest in specialist salespeople and services and technical resources to help enable our account managers and support our customers directly. And we're sure to keep listening to our customers so that we provide them with what they need. Some examples of this are our further investments in cloud and in the office of the CTO, the latter being a team of technical experts and specialists to ensure that we remain relevant and current in our supply of leading technology. And then if I can stay on this slide, please, but move to the supporting pillars, starting with people and culture. Within these three key pillars that support our strategy, that huge focus on our people and our culture continues, continues unabated, and remains very important to us and the success of the company. I mentioned some awards earlier, but the ones that make us most proud relate to our people and the way we work together. So we were delighted to be ranked fifth in the UK by Glassdoor for the second year in a row, and number one UK tech workplace by Great Places to Work. We've continued to invest for future growth without pause, with a large proportion of our new starts being graduate and apprentice recruits just beginning their working career. We've successfully bedded in a new leadership structure announced at the start of the fiscal year. We've welcomed a new head of cloud, as well as a new sales director for public sector sales. And we've established an office of 10 people in West Virginia to focus on delivery into the North American market. Our staff engagement net promoter score of 58 tells us that we continue to have a highly motivated, and engaged workforce. And we believe that our special culture creates outstanding customer experience and is the key driver for our healthy customer and net promoter score of 59. It is perhaps worth highlighting that at the start of the fiscal year, we thought it was prudent not to make the usual across the board pay rises, instead focusing only on those in the lower pay brackets. As the business continued to perform throughout the year and perform well, we took the decision in February to implement a pay review for all staff backdating them to the start of the year. I think this is just one good example of doing the right thing for our staff, which incidentally in this case gave us the opportunity to provide a second pay rise for those in the lower pay brackets. And our plans for hybrid working I think will clearly evolve and we'll refine them over time. And we're very mindful of the challenges of home working for some. So we've introduced, we're very mindful of the benefits of home working for some too. So we've introduced a flexible policy And all employees can choose how they split their time between the office and other locations within an expectation that on average we have a slight bias towards the office. We've asked our staff to use good judgment, balancing their own needs with those of their teams and the wider business. And within this policy, we aim to keep the culture as vibrant as ever, whilst being able to operate as effectively as before. In essence, we want everybody to enjoy the best of both worlds. And whilst getting it right is a significant challenge, We're confident of working things out by remaining close to our teams and ironing out any wrinkles as we go along. From an ease of doing business perspective, in the same way as our customers need to keep evolving and modernizing their IT infrastructure, we have the same needs at SoftCap. We've increased the amount of time and money we're putting into improving the ease of doing business for our staff and our customers, and we have a roadmap of investment that includes our financial systems, our e-commerce portal, ECAT, our IT service management, and our order processing tool, amongst others. Our financial systems and data project is progressing well and remains on track for delivery in this fiscal year. That project is designed to create a platform that will support our future business needs and deliver process improvement and automation, and at the same time create a data structure that will provide enhanced business insights and reporting. As noted in previous presentations, we've continued to work on bringing our public sector and corporate sales organizations closer together to improve best practice sharing and adoption, and that's worked well. We've made good progress in leveraging our sales development program and our customer bid management process across the entire sales team. And we're happy that we've got a really strong sales team, but we're always looking at ways to improve how we operate. and moving to the expansion, expanding of our addressable market. Our US office in Arlington represents further investment in our multinational capability, through which we assist UK and Irish customers with their global needs. But it also enables us to begin to target local US customers with their international needs outside the US. We now have 10 staff there, which combines local sales and operation capabilities. And as with our other multinational entities, This investment gives us the opportunity to build stronger in-country customer and supplier relationships where we can operate on local time zones and do business more effectively with local supply in local currency with local sales taxes. We continue to invest and build out our capabilities too. On devices, we've expanded our ability to deploy, service, and replace devices on a much larger scale than before by investing in heads, processes, and third-party partnerships. Similarly, we've invested in the financial services vertical. This is a significant opportunity, we believe, and we expect this to grow substantially over time. And finally, we've seen the demand for financial solutions increase and further accelerate over the last year. We've invested here, too, in skills and additional services to enable and accelerate further sales. For those of you who know Softcat well, you already know that the areas of sustainability include and diversity and inclusion have become an increasingly important part of our strategy. So this year we've split them out on the strategy slide just to highlight the high profile they already get within our business. We've enjoyed a particularly strong focus on diversity and inclusion initiatives this year, with a raft of programs launched to support our network groups in driving awareness and celebration of the various minority groups. We now have eight active networks, including the two network groups that we've added this year, a faith group, and a disability and neurodiversity group, and we launched an allyship program through which now around 700 members of staff have attended and contributed. In addition, we've joined some of our fellow companies from different parts of the channel as one of the founding members of TCARE, the Technology Channel for Racial Equality, and we hope to make good progress here too. Although our female representation at SOFCAT has risen nicely to now 30%, we recognize that we still have some work to do on the ethnic and gender diversity in our leadership teams. And I am totally committed to changing this, but it will take time. These are long-term endeavors and not short-term fixes. And so that we maintain progress, we've made several changes to the recruitment process, which is key as talent is attracted to an employer like us who can demonstrate that everyone has a place in SOFCAT. and an opportunity to deliver value regardless of their background. We aim for equality of opportunity and talk internally about widening the gate without lowering the bar. And it was wonderful to see our efforts recognized with two very recent awards, the CRN Diversity Employer of the Year and the CRN Ethnic Diversity Champion. And I think too that we would all recognize on this call that companies that balance the interests of the planet, our people, and returns are clearly the most sustainable in the long term. And Graham Charlton will cover our focus on sustainability in a few moments. And in fact, that's a great point on which to bring in Graham Charlton, our CFO, for a more detailed review of the financials and our sustainability leadership and status. So I'll hand over to Graham.

Thank you, Graham. And yeah, we'll have a look at the numbers in a little more detail now. So if we can turn on, please, to the summary income statement, which I think is slide seven. And I'll deal firstly, quickly, with revenue and the gap revenue growth rate this year of 7.4% compared to a much faster rate of growth in gross income as we continue to see a shift in the mix within the software line, particularly towards cloud-hosted and security products. We net down the gross income from cloud and security software to just the margin element when calculating revenues. gap revenue under IFRS 15, and that net down is becoming a proportionately bigger number as those elements of our mix grow. And this trend for revenue growth to lag gross income growth is something we've seen before, and we expect to see it again in the coming years as well. But the best way to think about our income and profitability is with reference to gross income and gross profit. And gross invoice income and GP both increased by a little over 17%, with the GP margin to gross income consistent year-on-year at 14.3%. And that consistent margin reflects a stable mix of business when split between corporate and public sector customers. Gross income from public sector customers comprised 39% of the total in both years, with corporate customers accounting for 61%. The enterprise segment returned to growth in half two and overall growth was strong at double-digit rates in both the first and second halves, but slightly more weighted towards half one as a result of a few exceptionally large deals that we flagged in the half-year report. And so this continued double-digit rate of organic growth in income is something, of course, we're very pleased with. And despite the fact we've delivered on our promise to maintain levels of investment throughout the pandemic, at the same rate as we were at before COVID, the 17% growth in gross income has comfortably outstripped cost growth of 10.5%. That cost growth was driven predominantly, as it always is for us, by our investment in people. Average headcount across the year was up by 11%. And in normal times, that would translate to around 15% to 17% cost growth when the impact of pay reviews and commission growth are factored in. But as we've been saying throughout the pandemic, the social restrictions that have been in place have prevented us from carrying out our usual range of travel and events. And as a result of that, we've been saving approximately a million pounds a month on a run rate basis. And that means the actual cost growth has been the 10.5% you see reported on the slide, rather than more closely aligned to the GP growth of 17%. And so as a result of all of that, the operating profit grew by just over 27% and conversion of GP to OP was up from 39.8 to 43.2%. And we do hope and expect that we can get back on with traveling to see our customers and running staff events and particularly our incentive trips much more normally in the year ahead. And so we do anticipate that most of these cost savings will reverse in FY22. So if we could turn over to the next slide, please, and I'll come back to some of the key drivers of our growth, and we'll take a look at how the productivity of our salespeople has again stepped forward in recent periods. And the chart on slide eight shows how the total gross profit delivered by the business correlates to the aggregate of our salespeople's tenure with the company. FY16, 17, we accelerated our rate of investment in the resources and skills within the business to support our account managers going deeper into their customer accounts. And over the period between then and now, we've continued to recruit hundreds of new account managers each year, but we've even more aggressively hired into the specialist and technical and service roles to support them. And the results of that strategy and long-term focus, I think, could be clearly seen by the pathway of increasing productivity we've been able to track since that time. And we think there's still a huge further opportunity ahead here as well. We estimate that the average share of wallet we have with customers today is around about 20%. And so we're going to continue to invest in the skills and capabilities that we need to support our customers in their journey to the cloud, to provide their employees with modern workplace technology, which is course now suitable needs to be suitable for a hybrid working world to help them connect their people and securely store their data and in doing all of that we think we can further enhance what we believe is already possibly the broadest and deepest technical offering in our industry and that will allow us to continue to capture incremental wallet share turning on to the next slide please and I can show you on this next slide the customer side of that productivity coin. And on this chart, the line represents how gross profit per customer has expanded since 2015 up until the most recent period. And again, here you can see a very clear inflection point. You can see a slight kink in the line at the end of the 2020 financial year. That reflects the onset of the pandemic. But notice then how we've resumed resume that upward trajectory since then. And do notice as well how we've been able to continue in growing the customer base throughout this period. The size of the customer base is represented by the bars. And I think just about visible to the naked eye here is not only that we grew customer numbers again in 2021, but that we saw, especially in the second half of the year, as we came out of that third lockdown period, and really for us from sort of April onwards, and acceleration in the growth of new customers as well. And we think today we have around one in five of the addressable customers in our customer base. So still lots and lots of opportunity on that front in the years ahead as well. And turning over to the next slide again, please, we can have a quick look at how that profit growth has converted into cash. We've no news really to report here. The business model and the organic nature of our growth again this year means we've converted operating profits to cash in line with our historic rate of 90% even after deducting capital expenditure. Capital expenditure is down a bit year on year. Those of you that follow us will remember that we carried out some major refurbishments to our head office in Marlow and our second biggest office in Manchester. during FY20, but those works were substantially complete before we entered FY21. We've continued throughout FY21 with the development of our new finance system, and that expenditure forms part of the 6.5, 6.4 million that you can see on the slide, and work on that system will complete within FY22. But we plan to continue to work on other internal systems over the coming years, as we expect, capital expenditure will remain at similar levels in the next few years as well. The working capital model hasn't changed in any fundamental way, and so working capital balances continue to grow broadly in line with gross income and deliver cash conversion, as we said, in line with our historic cumulative average of 90%. And turning over again, please, I thought I'll take just a moment to reflect how this latest performance stands within the context of our long-term progress. And across all of the time period you can see on this slide, we've had a very simple strategy, and that strategy is essentially the same today as it was back at the start of this trend. And the good news is it's still working, and we don't intend to alter it. You can see the somewhat exceptional nature of the OP growth on this slide. I'm on slide 11 now, operator. I'm not sure if you've caught up, but hopefully you can see that the slightly exceptional nature of the OP growth in the latest year accentuated, as I mentioned, by the post-pandemic, the pandemic-related cost savings that we've mentioned. And that's a very high hurdle for HUDs to try and get over in the year ahead, as we hope that those costs related, as I said, to incentive trips, internal events, and traveling to see our customers become possible again. But of course, we do continue to target very strong gross profit growth ahead of market rate. And with a market share today, we think of around about 4%. Despite all this progress, we think the years ahead offer us a similar opportunity again. And turning over to slide 12, please. that growth and cash generation enable us once again to confirm a very substantial dividend, the details of which are shown on this slide. And you can see that the interim dividend of 6.4 pence already paid in May will be added to by a final dividend of 14.4 pence and a further special dividend of 20.5 pence, both of which will be paid in December, and the ex-dividend rate will be the 11th of November. And before I hand you back to Graham, as Graham did mention, I'll take a moment just to give you a view of some of the work we're doing on the sustainability of our business and within our industry. So if we can turn on to slide 13, please. And you can see a framework on this slide that we've developed to enable us to concentrate our efforts into three key areas. These are, firstly, the sustainability of our own business and operations. Secondly, working with our suppliers to find ways to reduce the carbon footprint of the logistic elements of our industry. And finally, how we work with customers and manufacturers to bring green product innovations to market and into use, fundamentally, we hope, driving down the ecological impact of IT infrastructure into the long-term future. And we've developed an action plan across each of these areas, and you can see some details of this on slide 14. And we've set three goals. The first two are focused very much on putting our immediate house in order and in short order at that. Firstly, to offset our scope one and two carbon emissions by next year. And I'm pleased to say, actually, we've managed to achieve that one already. The next target is to get all of our offices switched across to renewable energy sources by 2024. And we're seven tenths of the way through that at the moment. And then finally, and of course, this is the really big one, is achieving a net zero supply chain by 2040. And this is where the collaboration with our suppliers and the manufacturers of the technology will be so crucial. But we started that process, we started that dialogue, and we've begun to tap into the resources of things like the WRI's science-based targets initiative to build an understanding of the steps that we will need to take. And in time, this will create an action plan which we'll be able to share and report our progress against. In the meantime, we're pleased that our desire to try and take a lead in our industry on these matters has been recognized by both our partners and trade bodies in the industry, as well as some external organizations that specialize in these matters. And you can see some of those awards at the bottom of the slide here. And you can expect us to continue to report on progress in future briefings as well. That's it from me now. I'll hand you back to Graham Watt for the conclusion of the presentation.