Softcat plc

Good day and thank you for standing by. Welcome to the soft cut results for the year-ended 31st July 2022 conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automatic message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to a speaker today, Graham Watt. Please go ahead.

Thank you, Nadia, and good morning to you all, and thank you for joining Graham, Charlton, and I as we review and run through our results for the year-ending 31st July 2022, as released earlier this morning. I wanted to start by thanking the whole team at SoftCap for delivering another strong performance. The team continued to exceed my expectations of what we're able to achieve together. You guys are simply fantastic. I'd like to thank my leadership team for all their hard work and the results, and I'd like to thank the board too for their support and counsel. We've again delivered strong, profitable growth, taken market share, grown the gap between ourselves and our nearest competitors, and continue to invest in the business for future growth. The team continue to manage the challenges of the pandemic very well, which are now effectively behind us, and I feel sure we have benefited from getting our teams back together in much greater numbers so we can be better connected with each other and our business partners. I believe we've executed on our straightforward strategy very effectively again this year. And if we move to the next slide, please, I'll provide a brief explanation of who we are and where we sit in the technology space for those who are less familiar with Softcat and our operation. So Softcat is the leading reseller of infrastructure solutions and technology products and services in the UK and Ireland to both the business and public sector communities. We serve a customer base of 9,900 customers, focusing on the segments of enterprise, mid-market, and public sector. We operate a simple model with a clear strategy, which we aim to execute effectively and work hard to meet the commitments we make to both our customers and our other business partners. We work very closely with a strong portfolio of over 400 vendors, providing our customers with choice and solutions that are fit for their specific needs. Where we don't have resources or capabilities ourselves, we're happy to partner with third parties to complete the solution for the customer. We operate now out of 10 offices in the UK and Ireland and the US and also have branches in Singapore, Hong Kong, Australia, and the Netherlands. Those offices and branches sitting outside of the UK and Ireland support what we call our multinational business. Think of it as a mechanism to procure, sell, fulfill, and facilitate the overseas needs of existing and potential customers in our core markets of the UK and Ireland. From a cultural perspective, we foster a culture that thrives on putting our people and our customers first and believe that by working hard to deliver the highest levels of employee engagement and motivation, that this in turn allows us to deliver exceptional customer service. This essence is well captured in our purpose statement, we help customers use technology to succeed by putting our employees first. Our culture is a key positive differentiator in what is a fragmented market, and we are pleased to receive further recognition in the period for the strength and positive impact that culture has on our employees and our business. Our growth continues to be wholly organic and has been sustained throughout our 29-year history, and this is something that we're very proud of. Our cash conversion is strong, we're debt-free, and we continue to manage our costs wisely, balancing that with the need to be almost continually further investing in the businesses. to secure and deliver our longer-term growth ambitions. Our mission is simple. We want to be a great place to work, deliver outstanding customer service levels, and grow faster than the market by taking share. Our value to our customers is helping them navigate the complexities, the alternatives, and the pace of change of technology. We need to offer outstanding advice, technology, and services to suit their needs and be the best at what we do. We work hard to be recognized for a number of really meaningful attributes in the market, and it's not just about being the best place to work and having a reputation for providing a world-class customer experience, but having the broadest and deepest technical offering in the UK, backed up by our extensive multinational network, is important too. And at Softcat, we have a team that really cares about people and the environment. We're pleased to be known for playing a really active role in our community network groups and for giving to communities outside the company And we've been increasingly recognized for leading the way towards a truly inclusive and sustainable future. So that's a brief snapshot into who we are and what we're about. Can we move to the next slide, please, for a summary of our results? We exceeded the expectations we set at the start of the year and delivered a strong organic operating profit performance, up 14% on the prior year. And we were successful in achieving strong headcount growth, which accelerated in the second half. We made further share gains in the market and were able to deliver strong growth when viewed by both customer segment and technology. We grew a key measure gross profit per customer by 16.1% and have now completed 68 successive quarters of organic year-over-year growth of income and profit. The balance sheet is strong and the fact that we're debt-free gives us flexibility and it provides resilience that many of our competitors are unable to match. And we're pleased to have announced also a final and a special dividend again this year. I want to provide perhaps a little bit more context to this performance. In December 2021, we achieved CRN number one bar in the UK by grossed invoiced income. And we achieved another significant revenue milestone in the year where we punched through the $2 billion grossed invoiced income barrier. And if we look at our operating profit performance on those sales, we have doubled our operating profit now in just the last four years. Moving to the next slide, please, where I'd like to give you a short business update. The fact that we're growing across all key segments and technologies is a clear sign that we're addressing the needs of our customers through our technology and services offerings across digital workspace, cybersecurity, and hybrid infrastructure. Our customers demonstrate a continual appetite to invest and consume IT infrastructure to support their growth and digital transformation needs, deliver productivity and efficiency gains, and remain competitive. We delivered double-digit growth across all customer segments of enterprise, SMB, and public sector, and won the CRN Public Sector VAR Award for the third year in a row. And we delivered growth of over 20% across all of our high-level technology categories of hardware, software, and services. And perhaps just a reminder that when we're talking about SMB customers, our focus is on sending to established businesses within the 50 to 2,000 users rather than the micro accounts of 50 seats or less. Back in January, the business emerged positively from the pandemic in the sense that we're able to turn back on some of the things that are important to us, like vendor days, customer visits, incentive and recognition events, and more recently, our kickoff event where we hosted 1,900 employees together at the ICC in Newport, Wales. This has meant costs coming back into the business, but these are good costs, providing real value as evidenced by our high levels of customer and employee engagement and net promoter scores of 55%. and 52 respectively. And in breaking news, our employee net promoter score for the annual employee survey we've just completed last week has come out at a very pleasing 63. Given that this survey is just closed and we've got a lot of work now to do to sift through all the detail of that feedback and turn it into an actionable plan for our team. In one of the toughest talent markets we've perhaps ever seen, we were able to grow our headcount by 14%. And in August, we hit a new milestone and now have over 2,000 people in the organization. In Q3 of last year, we made a commitment to an enhanced 5% standard pay review for good performance this year and a series of fixed pay increases in sales and sales-related functions to get closer to the market rates and give a clearer reward path for responsibility and career development. Our most recent statistics on recruitment and attrition clearly demonstrate the positive impact of these actions. And our recruitment team have worked incredibly hard and effectively to deliver this performance. So a big thank you to them all. Customers are investing in digital infrastructure spend to provide an enhanced and automated experience for customers and employees alike. They need to manage distributed workforces in a slick and secure manner. And cloud migration continues to be a driver of growth, most often in a hybrid cloud environment. And there's a growing demand for data insights. whilst every CIO or IT director needs to protect their systems and data. This is backed up by the feedback we've received in our customer engagement survey this year, which also highlights connectivity and IT asset management as areas of focus too. As a result of these trends and the skills and expertise we've developed at Softcat, we have seen cloud adoption, device solutions, and our multinational business grow at premium rates. We have seen supply chain shortages stabilize in the second half, and in the case of devices and PCs, have eased somewhat towards the end of the year. To put things into context, these shortages impact only part of our hardware sales, which makes up 32% of the business, our total business, during the year. Server networking product supply constraints remain, and it's difficult really to make any predictions of when things may ease here. If we can move to the next slide, please. I just wanted to highlight to you that we've got a very well diversified offering in both what we sell and who we sell to. And every single category offers an outstanding opportunity for growth. This diversified portfolio delivers real resilience when elements of the business become challenged. Supply chain and the pandemic negatively impacted our business in some areas, but we were able to deliver growth by compensating positively in other areas of our portfolio. Our customers are embracing the fact that we're able to offer such a broad portfolio. And as many customers look to further consolidate their reseller partners, then they know they can look to SoftCap for the vast majority of their needs. And this is helping us in our quest to grow share of wallet in our existing customers. And you can see from this chart not just the relative share of each component, but if you look closely, you can also see the impressive growth rates that we've delivered in the seven years since SoftCap's IPO in 2015. clearly demonstrating that growth has been delivered across all areas of the business. We have the broadest and deepest technical offering in the UK market, and we've got the largest commercial team in our sector. These two things mean that the opportunity to win wallet share with long-standing customers is at an all-time high. Context data suggests that we outgrew the market by over threefold in the year, and the addressable market is forecast to grow too. Growth drivers include areas such as remote working, conferencing and collaboration, and which are yet to be fully built out across many organizations. The workspace has a complex set of needs that require supporting, so it's not just about the device, it's about the network, the bandwidth, the latency, the connectivity, the security of the connection, the access and storage of data, the telephony, and accessories and apps to support. And we're still at the relatively early stages of a 5G rollout that will enable real-time intelligent outcomes at the edge, which in turn provides more data and insights that will deliver productivity efficiencies and better outcomes for our business and our planet. Moving to the next slide, please, I just want to try and summarize as briefly as I can our strategy. And our strategy, I'm pleased to say that our strategy remains reassuringly straightforward and consistent whilst evolving over time. We're a people and customer-led organization and aim to grow our customer base by introducing new customers to our capabilities whilst at the same time expanding our share of wallet with existing customers. We aim to help and support our customers in making the right technology decisions for their business. We've invested heavily in developing a highly skilled and experienced commercial team to do just that, and we use the insights we gain from our 9,900 customer engagements and leverage our vendor partnerships to help us provide a solution to each individual customer. We know that every single customer is consuming some or all of what we sell, And we expose those customers to a range of solutions we have to offer as we look to build trust, loyalty, and partnership over time. And in parallel, we're continuously working on making sure our breadth of technology and services remain leading edge, up-to-date, and relevant by working with our vendors and listening very closely to our customers. We know there's always more we can do, and we will continue to evolve and improve our sales machine in support of those key strategies. We recently announced internally that we'll be opening up a further sales office in the UK and in the second half of this current year. That office will be in Newcastle and takes the number of UK offices to nine. And there's three main drivers to opening up an additional sales office. The first is to get closer to our new and existing customers in that region. The second is to tap into an additional pool of talent from which we can recruit. And the third is to provide career development opportunities for those already in soft caps. We always start any new office with a nucleus of existing Softcat employees so that we get the right culture installed from day one. And as we're talking about people and culture, if I move to some of those supporting pillars, our culture remains very important to us. It shapes the way we act and behave with each other and our partners in business and is arguably the biggest competitive weapon we have in a market which is fragmented and difficult to differentiate. We often get asked how we can maintain such a distinctive and vibrant culture as we expand? Well, I think the key is to clearly prioritize our time towards constantly reviewing what we're doing with our people and our organization. What motivates them and what holds them back? It is key that our leadership team lead by example and we continue to recruit people into the company who we believe are ambitious and have a really good cultural fit to Softcat. We work hard to be a company in which the teams and individuals take responsibility and have a positive attitude. We look to avoid complacency and we try and keep things simple. We drive a customer obsession and are always looking to find ways to say yes to our customers without cutting corners or taking unnecessary risks. We want our staff to feel able to be themselves to succeed and help others to do the same. And these are just some of a range of key principles that make us tick. We're a people-led business, so we continue to invest in our people, not just in headcount, but also we pour an enormous amount of time, energy, and investment into into a multitude of learning and development programs for people right across the company. We believe that we've transitioned well into the world of flexible working, and we've empowered our people to do the right thing for themselves personally, but also for the business. I think we've created a good rhythm of balancing remote and office working while maintaining the highest levels of internal and external customer service levels. We remain focused on giving our new employees the best possible start to their SoftGap career, and we continue to prioritize the importance of face-to-face interaction customer and vendor interactions. And as we announced in July of this year, we have plans to change the leadership of the company as both Graham and I step up into new roles on the 1st of August 2023. Graham Charlton to CEO at the same time as I move to become chair of the Softcap Board of Directors. This will be an orderly execution of what is a well-developed succession plan and we won't start any material transitioning until quarter four of this year. Our focus must be staying focused on our current roles and the fiscal 23 priorities we have in the business. In terms of ease of doing business, our new financial system implementation went live in May. I'd like to go on record to give my thanks to all those who play huge roles in delivering this significant project. The project provides an Oracle NetSuite financial system that will support our future growth, enable us to be more productive, and do things that we couldn't do before. The system implementation has been a great success It's still bedding down, and we've already embarked on phase two of this project. And we have an investment focus on systems, tools, and processes within an IT roadmap that also includes a project for a major upgrade of our service management system, starting in earnest in the new calendar year. The data capabilities these new systems bring create the chance to modernize some of the ways in which we operate, giving us the basis upon which to implement a strategy for the digital age, and the ability to more easily and better support customers with the challenges of adopting multi-cloud and consumption-based technology. Our data and digital journey can now accelerate in areas such as providing improved portals for our customers, augmenting our sales efforts by guiding our salespeople more quickly towards the right opportunities, and making it easier to manage and process renewals. And then turning to expanding our addressable market, we continue to make sure that our technology and services portfolio and capabilities evolve at pace driven by the needs of our customers, and we're expanding our multinational capabilities, building on the credibility we've established for large and complex projects in that area. As you know, last year we opened an office in the U.S. in Arlington, Virginia, near Washington, D.C., representing a very exciting next step in giving our domestic customers in the U.K. and Ireland what they need in the U.S. There are also many customers and resellers in the U.S. who need partners to help them with their business outside North America in what we're calling reverse multinational business And over time, we can develop this area of the business and support our customers much more effectively by having a team on the ground in Arlington. And although we haven't yet acquired in our history, we've always kept an eye on opportunities to drive our strategy faster. In the year ahead, we'll be dialing this interest up a little further with the appointment of a corporate development manager, looking at how we might grow our addressable market and take a deeper look at smaller businesses in the UK that could add to our technical capabilities in key areas. We don't need to do anything at all in terms of acquisitions, and our biggest focus and opportunity is still very much focused around our organic growth. But equally, if we see something that will help us expand our capabilities or addressable market quicker, then we know we have the bandwidth as well as the financial firepower to act. I'd now like to hand over to Graeme Charlton for his review and commentary on our reported results. Graeme.

Thank you, Graham, and good morning, everyone. If we can turn on to the summary income statement slide. And before I get into the details of the financials, I'll just highlight that we've altered our interpretation of IFRS 15 for revenue in these results. Now, I won't go into great detail of that on this call because it's largely a presentational matter, and we continue to disclose gross invoiced income as an alternative performance measure, which is unchanged. And full details around the change to our policy for IFRS 15 are contained in the longer statement that we put out this morning. And we have a table showing the adjustment to previous practice in the appendix to this slide as well. We also continue to regard gross profit as our primary income measure, and most of our commentary will focus on that. But in brief, All of our software, rather than just some of it, as was previously, is now being recognized as if Softcat were an agent to the transaction. This increases the net down applied to gross income to get to the revenue number. And it's a material change, so we've restated FY21 as well as applying it to FY22. I'm happy to take questions on it at the end, but it affects revenue and cost of sales in equal and opposite measures. So there's no impact on gross profit or any other part of the income statement. And we do expect this new treatment to be consistent largely across our industry and certainly from our big listed peers in the UK and Europe. So with that out of the way, we'll get into the financials proper now. And on the slide here, you can see the summary income statement. In the period, gross income was up by almost 30%, as we saw very strong demand across all customer segments. and areas of technology throughout the year, as Graham has already said. GP growth was very strong at 18.4%. Our half-year results, we reported 12% GP growth for those first six months, and that reflected strong contribution from a major customer against very tough comparatives for that first half from FY21. Now, the volume of business from that major customer was much reduced in the second half of FY22 compared to those first six months. But notwithstanding that, we went on to post-GP growth for the second half of 25%. So very strong performance across both halves, which reflects the benefits of the breadth of our proposition and the customer base with public sector, mid-market, and enterprise all delivering double-digit growth. And we saw that right up to the year end with July being one of our strongest months for growth for both gross income and gross profit. And that strength of demand has continued so far into the new financial year as well. Our operating expense growth for the year was 21.7%, slightly ahead of GP growth. And it was planned and expected that costs would grow at a relatively faster rate than GP when we came into this year, knowing as we did, about the tough comps for the first half of income, as well as anticipating the return of pre-COVID costs alongside our usual investment in our team and building new capabilities. In the end, the return of pre-COVID costs was only partial. Lockdown restrictions eased from March in 2022, and we were able to host incentive trips again for our people from May of this year. So that cost build will continue into FY23, and accelerate our cost growth again in this new financial year. But we're delighted with the resumption of those normal operations. They are so important for our culture in the long term and our ability to connect properly with our customers and partners. Headcount, which is also one of the key drivers for cost growth, was up by 14%, and our commission costs grew in line with gross profit. And also a factor for cost growth in the second half were the uncapitalized costs of the new finance systems. So testing and implementation costs are expensed. And again, this will be a factor in FY23 as we continue to bed in that system, but also begin other systems evaluations and projects too. So as a result of all of that, operating profit was up by 14% exactly, and our operating to gross profit ratio fell back a bit, as expected, down to 41.6%, from the slightly artificially high 43%. of the COVID-affected prior year. Further cost normalisation will occur in FY23, so we expect that ratio to drop again a little bit in the year ahead. The tax situation for the company remains very straightforward indeed. The effective tax rate is almost exactly in line with the UK statutory rate, and consequently, profit after tax is up by just under 15% to $110.4 million. So if we can turn over the slide, please, and we'll now look at how that performance has been delivered in terms of the productivity of our sales force. This slide shows how the gross profit generated by the company in total compared to the cumulative experience of our account managers. And it's clear to see that the investments that we've continued to make in the technical and support functions which sit behind our account managers are enabling them to go deeper into accounts and win share of wallet. That delivers increasing productivity for each account manager, a trend which began in earnest during FY18. And as you can see by the divergence of the two dashed lines, it's continuing strongly. And we believe that this approach has many years of further potential ahead of it as well, considering that our latest calculations show that we've an estimated 20% to 25% share of wallet with our existing customer base. And turning on again to the next slide, please, and we can see how that account manager productivity trend is mirrored by the very strong progress we've made in GP per customer. The bars on this graph represent the customer base and how that has grown since 2015, and the line shows the average gross profit per customer over the period. We've continued to make gains on both of these key aims of our strategy to win new customers and sell more to existing customers. And again, just to reiterate that point that I made on the previous slide, we currently estimate that about our 5% market share of the value of the market comprises a trading relationship with about 20% of the addressable customer universe coupled with around about 25% share of wallets. So both of those axes of our strategy continue to have significant potential for future growth and a potential that we feel when coupled with the expected growth in the market is best measured in decades rather than years. Moving on again to the next slide now and we come to the cash flow statement. The business model remains unchanged and so the basic dynamics are consistent year on year. We expect to be able to continue to generate around about 90% cash conversion on a long-run basis. But you can see here that the delivery this year dipped a little bit below that, coming out at 76% for FY22. And this was mainly due to the implementation of the new finance system during the fourth quarter, which, while very successful, as Graham mentioned, created some disruption to certain customer-facing processes, which has temporarily impacted the speed of collections with some customers. This situation has already improved in the first few months of the new financial year, and we expect the position to normalize during the remainder of the first half. But that said, it was still a very strong year for cash generation, and nothing structurally has changed in our model. We closed the year with £94 million in the bank, having returned £84 million to shareholders during the year as well. And that brings us to the dividend situation for this coming December. So if we confirm the slide again, please, I'll run through the details of what we're proposing today. So here you can see that the interim dividend for the year already paid back in April was 7.3 pence. Today we're proposing a final ordinary dividend of 16.6 pence. And this reflects our normal policy of paying out between 40 and 50% of profit after tax and gives us a total ordinary dividend for the year, which is up by 15% on FY21. In addition to that, we're also proposing a special dividend of 12.6p. This has been calculated to clear down cash in December to around 60 million. Previously, we were operating to a cash flow of 45 million pounds. We last adjusted the target minimum cash balance two years ago. So this adjustment is just to reflect in gross income, which has increased by nearly 60% between FY20 and FY22. Both the final ordinary and the special dividends will be paid on the 19th of December, and the shares will trade ex-dividend from the 10th of November. Those payments will bring the total cash we've returned to shareholders since our IPO seven years ago to just over $400 million. And I think our enterprise value on float was around $450 million. So we're closing in on that milestone potentially in the year ahead. And we now want to spend a few minutes just updating you on our approach to inclusion and sustainability at Softcat, which Graham and I will share between us. So I'll pass you back now to Graham Watts, who will frame that and get into some of the details.

Thanks, Graham. And as you've already said, we're going to cover inclusion and sustainability in a separate section this year. So we can move on to the slide around our approach, please. Our staff remain very active and supportive in all areas of inclusion, our communities, ethical behavior, and our environment. These topics are something that they feel very passionate about and drive together with our leadership teams. It's part of our DNA and our culture. and not some corporate tick box exercise. You'll hear from Graham in a minute on sustainability, on how we've been driving our environmental sustainability agenda forward in a space which is clearly an urgent issue for the planet and is becoming more and more relevant to our customer proposition with every month that passes too. I'm just going to focus for a second on inclusion. As I've said, it's embraced by us all at Softcat, it's embedded how we operate and how we go about our business. Our focus on gender, for example, has delivered a steady improvement where women now make up 33% of the workforce compared to 29% four years ago. And you may recall our gender diversity goal of 35% women by 2030. We remain committed to further diversifying our workforce across all areas, particularly in our leadership teams, which is one of the number of moves I think will help accelerate progress. It's a long-term endeavor, though, and not a short-term fix. and some of you will know that we added community as a fifth company value this year, which reflects our belief in the power of people and encouraging collaboration. And I'm also pleased that our industry-celebrated charity ball and associated fundraising is back on the calendar for November. We now have a total of 850 people that are members of our seven network groups, and I look forward to the awareness and celebration events lined up throughout the coming year. Moving to the next slide, please. We were delighted or are delighted to have been recognized on so many fronts for our culture and our efforts around inclusion and sustainability. And here's a list of just some that we captured from CRN, the principal channel commentator in the UK, from Glassdoor, from Great Places to Work, and from Canalys. These are really a wonderful recognition of the progress we've made in these areas. There's a lot more we'd like to achieve too, so we're pleased but not yet satisfied. Graham.

Thank you, and we'll turn the page again now and look at environmental sustainability as well. So on this slide, you can see outlined some of the key facets of how we're trying to shift soft care towards ultimately being a business at the center of a net zero value circle by 2040. And the governance section of the outline shows you how we have board oversight linked all the way through to our local green team initiatives that are driven within each of our offices. I have executive responsibility for our plans and progress, and that is enabled by a sustainability leadership team, which includes another member of our senior team alongside me and members of our broader management team drawn from key departments across the business. This team sets and reviews our progress against the current action plans with that action plan then being delivered on a day-to-day basis by what we're calling the delivery team. Again, this is a bigger group that runs across all areas of the organisation. So we have an appropriate level of resource and focus on what is, of course, a huge and evolving task. Our targets aren't new, but we've made good progress in this past year, and notably our pathway towards that target of net zero in 2040 has been reviewed and approved by the Science-Based Targets Initiative. to have attained that milestone. And I think we were the first IT company in Europe to get to that stage. But make no mistake about it, we are not complacent about this task. And we realize we're just in the foothills of a very large mountain that Softcat, our industry and society at large has to climb. So our action plan is the most important part of this slide. And you can see that we've created what we're calling our 10 in 10 plan to guide us on this journey. The idea here as we go along. And I won't go into all the detail of that today. You can see much more information on this laid out in our annual report that will be published shortly. And we can, of course, take questions at the end as well. But to give you an idea, the goals we've set for the next few years relate, for example, to the transition of our fleet vehicles entirely to electric, switching all of our offices over to renewables. And plans further out include things like verifying the net zero of plans and credentials of suppliers, seeing them transition to renewables in their operations, verifying carbon neutrality in our own service offerings and many other such things. We expect this 10 in 10 plan to be a rolling fluid evolution and we'll use it to communicate our progress and how those targets change over the near and medium term as we tick them off. Also in the action section there on the slide, you can see the word INEXO. This is the name that we've given to an internally developed carbon emissions reporting platform. We use this tool internally to record and report our own scope one and two emissions, and we've released it for free use to our customers as well. And as well as quantifying current emissions, it can be used to plan a pathway to reduced output, and really importantly, to train employees in carbon literacy. We'll be using it as a tool to train our soft cap people all levels of the organization in the year ahead on carbon literacy. We think that's a really, really important part of driving progress over the long term, and we'll explore a number of other potential applications for the system as well. We'll maintain also our alignment to the Support the Goals organization, encourage our partners to adapt the appropriate elements of the UN program into their own plans, and we're working on embedding environmental sustainability targets into remuneration structures throughout the business as well. As I said earlier, we realise this is just the beginning of a very long journey, but it's a challenge and an imperative that Softcat is really excited by and fully committed to. We've been honoured that we've had that commitment recognised within the industry, picking up very recently the Channel Sustainability Annual Partner of the Year Awards from the two main industry bodies, both CRN and Canalys. So that's it from me. I'll pass you back now to Graham Watt to summarize and bring us to a close.

Thanks, Graham. And can we move to the summary slide, please, for our closing remarks? In summary, we're pleased to have announced and delivered another strong set of results where performance has, again, been broad-based. Our GP per customer growth and additional new customers are the outcome of our strategic priorities, and that performance is underpinned by strong levels of employee engagement and the power and influence of our culture. We have and will continue to invest in our people, our systems and the portfolio of technology and services to provide real value to our customers and to our vendor partners too. Our strategy and focused execution continues to deliver results in a market that's growing and where we have significant market share opportunity to chase down too. The world is becoming ever more connected and the demand for digital infrastructure will only grow. We have really good momentum, energy and spirit in the business. and we've got a clear plan, excuse me, we have a clear plan to deliver further performance and success for us all. Turning to the next slide for the outlook please. It's important to set the outlook expectations within the right context and hence the outlook statement is a bit longer than usual this time around. We've summarized on this slide into a number of bullet points which I'll read out as they provide that context. So the company is in a strong competitive position as ever heading into the new financial year and we expect to continue to deliver double digit gross profit growth and deliver market share gains. Demand has remained strong and customer behavior normal and our business model has significant agility and our balance sheet remains strong. The comparative first half period to January 2022 was exceptional benefiting from a very high volume of business from our largest customer. Resumption of internal events, pay increases across all departments, and the increased rate of recruitment mean cost growth is likely to outstrip gross profit growth in the first half of the year. We are confident that operating profit for the year will be in line with expectations and at levels similar to 2022, and that we will continue to outperform the market. So to close, we couldn't do any of this without the help and support of our vendors and partnerships across the entire business. Thanks too to Graham for his outstanding work as CFO and the way he supports both the business and me personally. And I can tell you we're both very excited about continuing to work together on our new roles at the end of this financial year. But I wanted to close by thanking our team. You're a fabulous team to work with and your passion for the business and for each other and your hunger to help customers and keep growing is amazing. Keep doing what you do whilst always looking for ways to improve. I'm very, very proud to be part of this team. and I'm very excited about the future. That's all for now. Thank you for listening. I'll turn the call back to our operator, Nadia, for any Q&A.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. This will take a few moments. Thank you. Now we're going to take our first question. Please stand by. And the first question comes from Ross Jobba from Citi. Your line is open. Please ask your question.

Great morning, Jeff. Can you hear me okay? Yep, fine, yeah. That's great. Sorry. Just a quick one. Two questions if I may. The first one is I can see lots and lots of reasons in these results why Softcap could have a a better market downturn, economic downturn than the market as a whole. But I'm really interested in what you think about the market as a whole. I'm particularly interested in what you think about some of the smaller competitors that you've been taking share of for some time now and how you think the market as a whole might react. And then my second question is, you talk in the results about the amount of commission in your cost base and how that gives you flexibility. I wonder if you could give us a rough idea on numbers. If you had a 10% downturn in revenues, What sort of effect might that have at the GP level, given that you have got variable costs in your structure?

Thanks. Thanks, Ross. It's Graham Watt here. I'll take the first one, and I think Graham Charlton will pick up the second one for you. I think market as a whole is quite interesting because there's clearly a lot of concern and uncertainty about how the market is going to behave in the future. What I can tell you is that we – We aren't, as I said in our outlook statement, that we had good momentum finishing the year, that that momentum has continued into Q1. So we're not seeing some of these sort of speculative signs of slowdown or weakness in demand at this point. I think, you know, we can only really focus on what's in front of us. So we think that we've got some good mechanisms to manage cost and manage risk if that becomes necessary. something that we need to do. We also think that we're competitively well positioned with a debt-free balance sheet. If it does turn out that demand weakens, if you think about any given performance, and this performance is the same, around about at least three-quarters of our growth is coming from taking share rather than from the market growth itself. And we see no reason why that shouldn't continue. The breadth of our growth would indicate that our technology portfolio is exactly what customers are expecting from us. If customers hunker down in terms of the way they're behaving and operating in terms of resourcing, then we're there to help them as bandwidth becomes an issue for them. If our competitors start to hunker down in terms of the way they resource and go to market, we're there ready to win even more customers and help those customers that need that help and support and provide credit and so on. And I think the market as a whole, I mean, you will see the same sort of reports as I do. I think if you look at where there's most likely to be weakness, I think perhaps in the consumer segment, and you've got to remember that we don't really, some of our customers address the consumer segment, but the consumer isn't really part of our business. I think if you go to our – we've looked at our top six vendors and looked at some of their outlook statements, and I think most of them are forecasting to grow as well. So there's growth in the industry. There's market share opportunities for us right the way across the range of customers and technologies. And I think, honestly, when we're talking to customers – so I'm not just – giving you feedback about how we feel and our major vendors. When we talk to our customers, a lot of customers are still investing in IT as a way to deliver cost and productivity gains that they need to realize. So a lot of customers are still investing IT in their digital transformations as a key priority. So I don't know if that kind of helps you frame how we're feeling about the market, but that's...

And I'll, Ross, I'll just do the commissions side of your question. So our commission cost is pretty stable year after year, about 35% of our cost base. It's about 20% of gross profit on a blended rate because we're paying account managers and specialists double bubble on some deals. So it's about 20% of GP. So we'd expect that to move linearly with gross profit. There's steps in it because people have targets and so on. So you could get a slightly non-linear movement in a very exceptional or a very poor year. But, yeah, hopefully that answers the question. It's a pretty straightforward set of maths on different scenarios after that.

Thank you.

Thank you.

Now we're going to take our next question. Please stand by.

And the next question comes to the line of Charles Brennan from Jefferies. Your line is open. Please ask your question.

Good morning. Thanks, guys. Just two questions for me. The first, perhaps an obvious one, just on your M&A ambitions. I don't think I've heard you so open and vocal about looking at potential targets. Can you just give us a sense of what an ideal shopping list would look like for you? Is there a sweet spot in terms of size or capability or technical outlook that we should be thinking about? And then secondly, just in terms of numbers, you've called out, I think, this one very large customer. It looks like year on year it contributed about 170 million of extra gross invoiced income. Can you just remind us where you booked that divisionally in your numbers? Given the size of it, I'm assuming it's somewhere in enterprise or public sector. But if that's the case, that accounts for most of the growth in one of those areas.

Hi, Charlie. It's Graham Watt here. If I take the first one, I'm sure Graham will take that second one. I think, you know, as we said in the commentary, we're – we're still very much focused on organic growth. That's where our opportunity lies. And from an M&A point of view, we may be dialing up a little bit of capability and foundation in that area, but we're still very committed to organic growth. And we wouldn't, as we've consistently said, we wouldn't go and do any M&A unless there was a very compelling reason to do so. But building out... the foundations of what those criteria might be to your question, building out the foundations of what our advisory network would be in the event that something did come across our desk that was interesting and compelling. It just puts us in a position where we can take some of these opportunities more seriously. We've got the bandwidth to deal with them. We've got the foundations in place. And it turns an opportunity into into an opportunity rather than something that comes across our desk we're interested in and we think, well, we can't do anything because we haven't got the time or the energy or the bandwidth or whatever. And as I said, you know, in terms of criteria, something that's niche, you know, probably niche capabilities in the UK would be interesting to us. We partner, as I said, also in the country, we partner with a lot of third-party service companies in areas where we don't have the expertise or we don't have the... We can't necessarily scale those businesses properly. And something niche may come up that we think, oh, actually, we'd like to have that in-house. It's very compelling for us. And I think, I mean, making sure that we know what's going on in some of the other key markets outside the UK and Ireland is important to understanding what the dynamics are in those markets and what opportunities may exist from an addressable market point of view. So that's kind of where we are. But we're not in any discussions with anybody. We're not... searching for anything right now. Think of it as gearing up our capabilities so that we can react more effectively to things that come across our desk and perhaps at some point in the future start to get a little bit more front-footed.

Gearing up might be the wrong expression to use in the context of an acquisition, but Can you say anything about potential size? Is the 60 million net cash floor, does that take on board your M&A outlook so anything has to be funded out of free cash flow? Or can you imagine a scenario where you do dip below that 60 million floor?

Graham will cover that bit, and I appreciate the use of the word gearing there. Thank you, Charlie. But there's no size. There's no hard and fast criteria. Obviously, the criteria for a niche capability in the U.K. would be entirely different from what it may be in a new market. So no criteria that I can share. Do you want to comment on that?

Yeah, the cash movement, the uplift in the cash flow doesn't really – I mean, we've always tried to operate with a cash balance. We've got some level of ability there on the strategic front, should we ever need it. It's more about just comfortably operating the business, though. So, yeah, as Graham said, it's more about if we saw a compelling opportunity to make our business better quicker, we've sort of, as you might imagine, over the years done various work about affordability, how things might be funded and so on. So we've got some ideas about scale and how things would be financed. But the cash flow is really just about comfortable operation of the business. And it obviously puts us in a position of strength to act, but there's no specific calculations going on behind the scenes. And Charlie, on your question about the effect of the large customer where it's reported, it's actually a mid-market business with a very big data center. So you'll see that number is reported in And if you exclude it from both years, our mid-market growth was still, I think, in excess of 20%. So it's not in enterprise and public sector, and it's not the reason that those segments were growing in isolation.

Perfect. Thank you.

Thank you. Now we're going to take our next question. Please stand by. The next question comes to the line of James Zaremba from Barclays. Your line is open. Please ask your question.

Good morning. Yes. Two questions, please. Firstly, just on the growth of your cumulative account management experience, this looks slightly lower in 22 versus 21. I was wondering what your outlook here is for FY23 following the salary review and other changes you implemented and you know, where you see the greatest upside to develop this more broadly.

Yeah, thanks, James. I'll take that one. It's Graham Charlton. Yeah, I mean, 21's been an interesting year, obviously, for many people in terms of pandemic or FY21 and 22 taken together. And particularly the labour market that we've seen this year in FY22, particularly the first sort of nine months of this financial year, it's been been very difficult. So during the pandemic, lots of a real spike in retention, actually, and we always expected that to come back to an extent to higher attrition rates following the pandemic, the war for talent, and lots of salary inflation as well. We've responded to that obviously with all of our good cultural stuff and getting people back into offices connected again, we've made salary adjustments also, which we talked about in the statement. We've restructured within that the starting salaries for our graduate intake of salespeople as well. And so we've seen very strong response in our retention rates over the last, well, four or five, maybe six months actually in response to that. So we're hoping and expecting that that growth in the cumulative experience of account managers will step on again strongly in this year ahead in FY23.

And then the second question was just on your customer base. I was wondering, as you move into more and more kind of technology areas, is there an underlying mix change within that 9,900 towards larger customers as you maybe retain larger ones and drop some of the smaller ones?

No, not really.

That's not how we think about it, actually. In fact, if anything, it's the other way.

We've got a foot in the door with quite a lot of larger customers. And as we've talked about many times, our customers will be working with a number of resellers because why wouldn't they? And they'll have different resellers doing different things for them. So we've made a start with a lot of enterprise customers that we really think with the continual investment that we're making in our proposition, we can really drive share of wallet with those larger customers. So I don't think our customer numbers is going to skew particularly from one blend that it is today to a different blend. We're winning in all sectors. So we're continuing to grow the mid-market customer base, the public sector customer base. And if anything, as I say, enterprise growth is probably a little bit lower because we've already made a start with a large proportion of that customer base, and we just need to keep going, build loyalty, show the credibility of the proposition. And it's bearing really good fruit, so that is a strong driver of the GP for customer growth.

Perfect. Thank you.

Thank you. Now we're going to take our next question. Please stand by. The next question comes from Andrew Ripper from Liberum. Your line is open. Please ask your question.

Hi. Good morning, everybody. It's Andrew Ripper from Liberum. I've got two questions, if I may. First of all, just on the hardware, just wondering how much visibility you've got on the hardware side. And looking at last year, I think the GII was about 350 million in the second half. Is that sort of representative of the sort of the run rate? I know that's tied in to the sort of the major customer. Can you give us your sort of perspectives on the outlook for this year for hardware?

Yeah, I think, hi, it's Graham Watt here, Andrew. Thanks for your questions. I think on hardware, you know, hardware has pretty consistently been at around about 30% or so of our mix. And as you say, it was last year buoyed by the first half in particular performance of our largest customer. But I think hardware will continue to operate at similar rates from the second half of the year just gone. We expect growth there too, of course. Devices in particular are growing at premium rates within that hardware category just now. And we're starting to see in the market a pickup on server storage as well. So you could argue that that we might see a little bit of tailoring back of some of that growth. We still expect to see growth in devices, but that may come off a little bit, but we'd expect server and storage and networking to continue to drive through there. So I think we don't anticipate anything dramatically different. Still hardware maintaining its position as a percentage of the overall company, maintaining its profitability and growing too, so.

As you alluded to in your question there, Andrew, the first half was really strong, as in just gone because of that major customer that we talked about. Probably expect hardware to be down in the first half of the year ahead, but that's still specific rather than underlying trends, as Graeme's talked about.

But I think your point is the second half more representative, I'd say, probably. Yeah, absolutely. Yeah, yeah.

Yeah, okay. And then second question, just on the technology mix, you lump in sort of networking and security together at 22%, I think. What is this... split out there of the security piece. Are you able to split the two? And just looking at maybe some of the sort of the smaller vendors that are growing quite fast, the likes of sort of AWS and CrowdStrike, how are you positioned with those vendors? You know, maybe sort of 1%, 2% of GII, but growing fast. What's sort of happening with those?

On the vendor piece, we're taking a look to see if we can get some granularity on that. Security is definitely growing at a premium rate within that category. And we'll see if we can dig out a number for you now or later. I think in terms of what other vendors did you mention? You mentioned CrowdStrike.

Yeah, CrowdStrike, AWS, you know, the sort of high-growth vendors going into FY23. I think they're sort of at the bottom end of your top ten vendors. What are you sort of seeing with them?

Well, I mean, good growth. CrowdStrike, we're doing some standout business with them. They've very much come onto the radar in the last 12 or 18 months for us, as you rightly point out. We're seeing good growth across most of the security vendors. And you didn't mention Microsoft there, who are increasingly taking on security within their kind of corporate portfolio. So security... I saw something recently that said the security growth over the next five years is likely to run a double-digit CAGR. So it really is the technology that just keeps giving. People can't afford to take shortcuts around that piece of the business. We've geared ourselves up, not just from a specialist point of view, but also from a services point of view to support our customers in that area with both managed services and assessment services too. Yeah, I'm feeling really good about the way that's been offered.

It's not an exact split, and it's tricky because we segment our business in a number of ways, and the split between sort of hardware and networking at a pure level is awesome. security, but both growing. Securities, I think about two-thirds of that number, certainly at a profitability level, and growing quicker this year. But hopefully those supply chain challenges with networking will ease over the next 12 to 18 months. We do think it's that kind of timeframe. But there's a lot of pent-up demand for networking refreshes as well. And this is the point about our proposition, I think. As we've seen these challenges on the supply chain, because of the breadth of that proposition, which is Not unique to us, but we're probably one of three, four, maybe five, around about a handful of businesses, bars in the UK that have that breadth. And so we can work with customers on those other projects while networking is on hold as well. So, yes, a really strong performance from security, but good demand for networking in the backlog too.

Great. Thanks for your answers, guys.

Thank you.

Now we're going to take our next question. Please stand by. And the next question comes to the line of Tintin Stormont from Numis. Your line is open. Please ask a question.

Morning, guys. Just aware of the time, so I'll be really quick. First one, in terms of wage inflation, you talked about the sort of kind of positive impact of the changes you've made, and you've seen that through the year in terms of your recruitment and attrition. What sort of wage inflation are you sort of contemplating in this coming year? And then secondly, in the output statement, you talked about customer behavior being normal. When we look at your vendor relationships and vendor partnerships, how are those conversations like at the moment in terms of, you know, sort of kind of direct versus indirect incentives and all of that? Are they sort of kind of business as usual as well?

Hi, Tintin. It's Graham. Good to hear from you. Graham Watt. Hiya. Wage inflation, I mean, what we did last year, we talked in the commentary to the presentation, we talked about a 5% across the board, which ordinarily in previous years, at least since I've been here, that's been pitched at more like 3% for good performance. And then you need to kind of roll that 5% up by a couple of percent, because on top of that, we work on promotions and do a few market rates on individuals and teams as well. And then, as I said also, we did quite a lot of work around our sales and sales related teams in terms of how they're, although they're predominantly commission based, as you know, but their fixed pay to market was getting out of sync. So we addressed that. And I think when you roll it all up, that inflationary measure on salaries when taken across the whole company is about a 14% rise is what we ended up doing from – and you see that coming – you will see that coming into the current year we're in at the moment. In terms of what we've got planned for this year, we'll take that when we come closer to, you know, when we need to – make those salary adjustments. But we keep a close eye on things, as you'd expect, and we make a number of adjustments throughout the year, too. So we'll kind of hold fire on putting a figure on that just now. I think in terms of the vendor piece, things are very stable. As I said before, the vast majority of our top vendors are forecasting growth in the coming quarter. They're Direct versus indirect strategies aren't really modifying. There's always one or two deals from time to time with one or two vendors that get caught in the crosshairs of that. They're on the cusp of an indirect versus direct deal. That's something we manage anyway. But in terms of fundamental shifts in the channel approach, there's nothing going on. I think the vendors are largely very happy with the growth that they're getting in the channel right now. And the way they're incentivizing no real change in terms of the amount that we're able to earn and rebates in the year we're up year over year. And of course, they'll always tweak their schemes and try and move them to different parts of their portfolio or different segments. But we have to balance that with what we see in the market and then what we're able to, the rebates we're able to then generate from the schemes they put in place. And we oftentimes have quite a lot of input into what those schemes are going to be. They would come to a Softcap, for example, and discuss their plans and their thinkings. Tell us what's really good about this. Tell us what's really not going to work and is going to disincentivize you. So nothing really major to report on that side.

Great. Thanks, guys.

Thank you.

Thank you. Now we're going to take our next question. Just give us a moment. And the next question comes from Michael from UBS. Your line is open. Please ask your questions.

Great. Good morning. A couple from me. Just on the cash flow, obviously you had some issues at the year end. How quickly do you think you'll recover that? By implication, should the cash conversion this year sort of reverse the impacts from 2022? And then in terms of the trading patterns, I know you're saying that demand seems robust. across the piece. Can you be a bit more granular between the very smallest SMEs? I think you have, you know, a certain cohort below 10,000 GP, how those people are behaving relative to these slightly larger SMEs in government, et cetera.

Thanks. Thanks, Michael. Yeah, it's Graham Charlton here. I'll take the cash flow and I'll let Graham Watt talk about those smaller customers, perhaps. So, yeah, transient issues, admin-related, processing-related. So, There's a body of work that we need the processing teams to work through to get back on top of that. We anticipate, we hope, we're targeting that that will normalise within the first half of this year. So, yeah, nothing structural there and hopefully a quick resolution to it. I mean, these finance system implementations are tricky at the best of times. We think ours was a very successful project, but the knock-on impact of that and dealing with some of the unknowns and particularly working with customers so that they can flow the paperwork through their systems in the right manner following that change. There's just a bit of ironing out to do. So yeah, hopefully within the first half, that's what we're targeting back to normal.

On the segmental growth patterns, we're not seeing anything materially different. I mean, things move from month to month, quarter to quarter. Anyway, Michael, I think we're only Well, I suppose we're almost three months and one quarter into this year. We haven't seen any noticeable moves from public sector or enterprise. When we look at our SMB, we break it down into mid-market, SMB, and micro. And even at that level, we're not seeing any material shifts in growth or demand. So nothing really to report back.

Okay. All right. Thank you.

Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star 11 on your telephone keypad.

Now we are going to take our next question.

And the next question comes from the line of Martin O'Sullivan from Shaw. Your line is open. Please ask your question.

Yes, thanks very much. I had a quick question on the gross profit growth in the second half, you know, the 25% year-on-year gross profit growth. which compares to 12% in the first half. Presumably that was mainly a mix effect as you did a lot of software sales in the second half versus the first half. But I'm just wondering if that's the correct interpretation and if you could put a bit of colour as well around the type of software sales of vendors that actually drove that. Thank you.

Yeah, thanks, Martin. Sort of a mix effect, not really, though, because our margin differential between hardware and software and services as well, actually, is probably narrower than you might imagine. So a mixed shift towards software is generally helpful, but it's not transformative. So it's really more of a volume of business thing. And in particular, actually, we had some really tough comps in FY21 for half one. So growth was always, GP growth was always going to be more challenging in that first half by comparison. were strong. I don't think, like always we say with our numbers, I don't think there's one particular driver of that. And we don't think that it was sort of one event that gave us exceptional growth. It was just good demand in the market, people back in offices, the world returning largely to normal and people getting on with some projects that perhaps have been on pause as well. There's just so much demand for IT infrastructure out there in the market, which is why we've got a very positive tone about the future and the year ahead, despite the uncertainty that does exist. So yeah, nothing particularly driving that, but software was strong, but also other elements of the business too.

Okay, fantastic. Thanks very much.

On your point about the software and what we're seeing on the software side, Martin, I mean, I'll throw out a few names to you of some of the ones that we software companies that we deal mostly with and are all, I mean, things like on the security side, touching on the conversation that we had earlier on, Minecast, CrowdStrike, some of those guys all going really well, Trend, Symantec. On the kind of infrastructure, hybrid infrastructure point of view, VMware is obviously a big vendor for us. We've got Microsoft, clearly, on operating system, you know, SharePoint, security, all the various applications within Microsoft and the cloud side too. Things like Adobe, Tableau around data management and analytics. So it's a real red hat. So it's a real kind of cross the board portfolio we've got around software.

Okay, fantastic. Thanks very much.

Okay. Thank you. Dear speakers, there are no further questions at this moment. I would like now to hand the conference over to our CEO, Graham Watt, for closing remarks. Please go ahead.

This time for closing remarks that are entirely unprepared. So I'd just like to thank everybody on the call for attending. We really do value your interest in Softcat. Thank you for investing the time to listen to us this morning. And thanks once again to my team for doing such a fabulous job. Thank you.

That does conclude our conference for today. Thank you for participating.