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.