Softcat plc

Hello everyone and welcome to the Softcat full year results call. My name is Seb and I'll be the operator for your call today. If you would like to ask a question on today's call you may do so by pressing star 1 on your telephone keypad or press star 2 to withdraw your question. I will now hand the floor to Graham Charlton, CEO, to begin the call. Please go ahead.

Thank you Seb and good morning everyone and welcome to the Softcat results call for the year-ended 31st of July, 2023. Thank you very much for taking the time to join us. We really appreciate your interest in the company. I'm Graham Charlton, the company chief exec, and I'm joined today on the call by Katie Mecklenburg, who's our CFO, and you'll hear from her shortly. But as a brief reminder, this is my first results call as chief exec, having taken over the reins from Graham Watt in August. And that's following my nearly nine years with the company, previously as CFO. And Katie joined the team in June and is settling brilliantly into Softcat life. But as usual, we'll start, and if we can turn on to slide two, please, with a brief overview of who we, Softcat, are for those of you who might be less familiar with the company. And we are the largest provider of cybersecurity cloud and IT infrastructure solutions in the UK with a tremendously broad and well-diversified offering across cybersecurity, cloud, but also data center, networking, and workplace technology to name just some. The vast majority of our 2,300 people are based in the UK and Ireland, but we do now have a growing base in the US just outside of Washington as well. which today comprises nine people and two people out in the Far East, too. We also have branches in Australia and in mainland Europe. Our gross income was 2.6 billion last year, and we have more than 10,000 recurring customers now. And reflecting our broad and diverse offering, we work with in excess of 400 technology manufacturers, which includes top-level accreditations with all of the major players, A few examples of which you can see in the logos on the screen there. Our advisory and architecture teams are able to support customers in navigating the huge array of complex options available to them. And the industry is in a very exciting moment with a number of disruptive new technologies coming to market, not least of which is the application of AI in its various different guises. And we'll come back to this later, but it means that customers have never, in our view, been more in need of the breadth of the expertise that we can offer them. And in addition to our advisory and design functions, we also have a very strong service offering across assessments, implementation and management, and again, covering all parts of our customer's estate, from security to networking and devices, all the way from the cloud to the edge. But with that, we'll turn on to slide three, please, and the results for last financial year. And I won't read out all of the detail on this slide here, as I know many of you will already have looked at the figures and Katie will dive into some more detail on some of them shortly too. But overall, our results for the year were ahead of the expectations we set 12 months ago. And we're very pleased that despite lapping very strong performance in FY22, we once again delivered a comfortably double digit increase in gross profit. And that remains by far and away our key measure of income. GP growth just over 14% came from a 2% increase in the customer base and 12% growth in average GP per customer. And that shows that we once again made progress on both of the key aims of our strategy. As we expected and flagged on entry to the period, operating profit growth, whilst also ahead of expectations, was slower than GP growth due to the full-year effect of pre-pandemic cost return, and the significant wage increases, especially across the sales force that we announced 12 months ago. And we also said that those impacts would not slow our rate of investment in future growth. And true to that, our headcount closed up 21% as we invested across all parts of the business. We also maintained a very strong balance sheet, delivering very healthy cash conversion, and we're therefore in a position to recommend a healthy ordinary dividend and another special dividend too. So if we turn on again, please, to slide four, we'll look at some of the highlights behind those numbers. And while gross profit is our key income measure, I know many of you are interested in gross income and the mix of business behind what is driving the GP number, what we're seeing from different customer segments and across different areas of technology. And I'm pleased to report that it was another year of broad-based growth. While GII looks a little bit challenged in the SMB segment, especially once a couple of individual impacts are taken into account, you'll see how healthy the underlying business is across all areas. So firstly, on a reported basis, the SMB decline of 6% in GII reflects the impact of reduced income from last year's major customers. And adjusting for that single customer shows that growth from the rest of the SMB customer base was otherwise comfortably in double digits. Public sector gross income growth of 4% was also slower than the rest of the business. However, GP growth from public sector was around about 20%. So reflecting a shift in mix away from client devices, which were very challenged in H2 and across all segments and the broader market during the year, So a shift away from client devices towards higher margin solution deals in the public sector. So again, we're very happy with the progress that we made in our public sector customer base during the year. And both of those impacts are also evident in the 24% decline that you can see in hardware GII. But again, if you adjust for both of those, then hardware growth would otherwise also be in double digit rates. As well as the challenging PC market, it was clear that customers became slightly more constrained with budgets in some cases after the turn of the year, and we saw an increasing incidence of large solutions deals being delayed as a result. Notwithstanding that, however, we were able to maintain double-digit GP growth during the second half of the year as well. So we therefore continued with our investment in new capacity and capability, indicating the confidence and excitement that we have about the future opportunity in our industry. Our headcount growth reflected recruitment across all functions, building further scale in Salesforce, but also expanding and deepening our technical and service capabilities as well. In addition to that, we're also investing in our own operating model, and we drive forward with our internal data and digital strategies at pace, and I'll say a bit more about that later in the call. Before I do, though, if we turn on again, please, to slide five. This will allow me just to illustrate a bit further the diversity of our business and those income streams. While there will always be some acute peaks and troughs in our portfolio, such as we've seen recently with client devices, it's the breadth and comprehensive nature of our business that we think is a key strength, especially when I come on to the opportunity presented by AI later. So the charts on this page show the sources of our gross income by customer segment and between software, hardware and services and split by technology areas too. And each chart shows the proportion of GII coming from each segment, but also the factor by which it has grown in absolute terms since 2015. And the key takeaway is that whichever way you cut it, we're incredibly well diversified and each area is showing very healthy growth over the long term. We often get questions about which areas are driving growth or which areas we're most focused on. And our consistent answer is all of them. And that's not to say that we don't recognize certain areas are hotter than others or that there's tactical focus that can be helpfully applied from time to time depending on customer needs. But by continuing to build a broad and contemporary proposition relevant to a wide range of verticals, we not only give ourselves the best chance of persistent growth over the very long term, but we also ensure that we remain relevant in a never changing technology landscape. And I'll come back to the strength of this diversity later with particular reference to the AI opportunity that we're seeing. But before we do that, we'll turn this slide again to number six, please, and look at the progress across some of the key areas of our strategy. And as we said before, despite the transition in leadership we've recently been through, there will not be a significant change to our strategy. Graham Watt is continuing as our chairman. And of course, I've been with the company for nearly nine years, as I mentioned at the start of the call. So there is a lot of continuity in our thinking. And the structure of this slide, therefore, reflects the ongoing focus that we have. both on winning new customers and selling more to existing customers as well. Those aims continue to be underpinned by the same key enablers as they always have, so by our people and culture first and foremost, but also being easy to do business with and the desire to maintain our relevance and expand the addressable market opportunity. As I've already mentioned, we did achieve growth in both the customer base and our GP for customer during last financial year, both of those strands continue to have massive opportunity for further progress in the years ahead too. Our estimation is continuing to be that we have around about 20% to 25% share of each of those axes and therefore around 5% overall share of the value in the UK market. So we'll continue in FY24 to recruit new salespeople and as always, those new recruits will drive the expansion of our customer base and service offerings will enable us to displace the competition within those customer accounts and take an ever greater share of the IT budgets of those customers. IT budgets which we think are set to continue to grow despite some challenges for the broader economy. And while we naturally talk a lot about expansion and new capabilities on a results call like this, please make no mistake about it that our key differentiator remains very much rooted in our culture, the attitude of our people and the customer service that that delivers. We were delighted to win more awards during the year from the Great Places to Work Institute, and especially to see an increase in our employee MPS score from 52 up to 63. Our people fed back very favorably on the approach we've taken to flexible working, for example, And I've personally been very pleased indeed to see how the flexibility that we've embraced has nevertheless led to a return of real vibrance and energy in the soft cap offices post the pandemic. We've also invested in expanding our development and inclusivity programs. And again, these were called out in the latest round of feedback from employees. In particular, we've extended the allyship program we piloted around 18 months ago, And our various communities, such as the Women in Business Group, our EDN network and so on, are thriving and driving positive change, both within SoftCap, but also across the wider industry too. Our customer NPS also increased up from 55 to 62, as well as reflecting the quality and attitude of our people and the service they deliver. We've modernized our operating systems, developed our customer portal too, And this includes integration with cloud and marketplace distribution platforms and increasingly the use of data and analytics to improve reporting to accelerate our sales engine opportunities. And the final enabling pillar that we've got has also undergone a slight change of description this year. This last one used to simply be about expanding the addressable market, but we've tweaked it this year to include maintaining relevance as well. And that recognizes the potentially disruptive nature of some of the changes that we're seeing in our industry. Now, there's so much overlap here with the work on integrating our systems with new cloud and marketplace distribution platforms that I just mentioned. We could easily put that under either one of these banners. But as well as that, we've continued to build our multinational fulfillment offering, investing in a larger team over in the US. And we're looking to expand that branch network that we have in Europe in the year ahead, potentially, too. We're also investing further in new service offerings, especially around hybrid cloud architecture, implementation and management. And we've been expanding our security services offering. As I mentioned before, we're integrating the Sentinel platform from Microsoft into our managed scene and MDR offering. And on the cloud side, we've been granted Azure Expert MSP status. And we're building as well our portfolio of AWS services. And we've added migration and DevOps competencies recently there. In addition to all of that, we've also become the largest transactor of business via the AWS marketplace in the UK. And we're really excited as well by the wave of innovation that AI will bring. In fact, it's already bringing to our industry, but I will come back, as I mentioned before, to that in more detail towards the end of the presentation, because it will be a significant focus and opportunity for us in FY24, but in the years beyond that as well. And so finally, before I hand to Katie to talk through the financial results, we'll turn the slide again, please, to number seven, and I'll leave you with a view of some of the awards that we received last year from our vendors. There's too many to go through in detail, but hopefully you can scan the list there and you'll see the progress we're making with both the large additional players, but also some of the newer names to technology. Also, the portfolio that we have of over 400 vendors enables us to support customers across the entirety of their digital estate. And it's always pleasing to see our people get the recognition for the work they do for those partners. And all of those efforts, of course, ultimately deliver value to our end user customers in our being able to offer them the greatest choice and support across solutions, across the solutions offering that is genuinely whole of market. I'd like to draw attention as well to the number of awards that we've got across the EMEA region and how this is speaking to our growing ability to operate effectively on an international basis. But with that, I will hand you now to Katie, who will delve into some more detail on the FY23 numbers.

Thank you, Graham, and hello, everyone. I'm delighted to be here this morning to present my first ever set of soft cap results, and I'm pleased to be able to report another year of top and bottom line growth. So if we could turn to slide nine, please. Growth profit, our primary metric of income, grew 14.2% in FY23, in line with expectations and despite the challenging FY22-based period. Second half growth profit grew by 11%, following an extremely strong half growth of 18%. Half to double-digit growth was particularly pleasing in the context of a more challenging market, where we noted customers owning some discretionary spend, and tighter procurement processes delaying some larger projects coming to market. As we disclosed last year end, in FY22, a mid-market customer accounted for slightly more than 10% of our gross income for the year, primarily driven by one-off, low-margin data center hardware sales. If we exclude these transactions, gross profit grew double-digit across hardware, software, and services, and across all customer segments and technology areas. These transactions also impacted gross income and revenue growth, and were the key drivers of the decline in hardware gross income and revenue. Excluding these transactions, hardware gross income increased marginally year on year, with a decline in client devices offset by growth in networking and data centers, while software and services both performed strongly. with gross income growth of 13 and 21 cents respectively. Gross profit is a percentage of gross income increased by roughly 150 bits year on year, with about half of the increase due to the low-margin one-off transactions in the base period, and the other half due to a positive mixed impact from higher-margin data center, networking, and security solution sales, and a reduction in lower-margin client devices. Crossing costs increased by circa 22% year on year, in line with expectations, with roughly half the increase due to people costs, with average headcount up 20% across the full year, with investments in all areas of the business to make sure that we are well resourced to support future growth. The balance of the increase was due to commissions, which increased behind gross profit growth, IT, and travel and entertainment costs, which returned to pre-pandemic levels for the full 12 months. Operating profit increased by 3.5% ahead of our expectations at the beginning of the year, driven by overperformance in H1 and delivering in line with expectations in H2. Operating profit as a percentage of gross profit declined as expected behind the significant investment in costs to support future growth. And lastly, our effective tax rates increased to 21% from 19% in FY22, behind the increase in UK corporation tax, which came into effect in April this year. So if we could move to slide 10, please. This is our standard chart showing the strong relationship between gross profit and the cumulative years of experience of our account managers, which also underpins our consistent investment in incremental headcount. The line becomes steeper over time for several reasons. Firstly, the efficiencies from selling deeper into existing customers, which is demonstrated by the increase in gross profit per customer over time, which I'll show on the next slide. And secondly, as we scale, we've invested in both technical specialists and support functions, which sit behind the account managers and enable them to sell more effectively. If we can change the slide to slide 11, please. In FY23, we have again... in line with our strategy, from both number of customers, shown on the purple bar, and gross profit per customer, shown on the blue line. Customers have exceeded 10,000 for the first time, an increase of 1.9% year-on-year, and gross profit per customer has increased from 33,000 pounds in FY22 to 37,000 pounds in FY23, an increase of just over 12%. We estimate, on average, Softcat only has circa 20% to 25% share of Orbit with our existing customer base. Thus, there is still significant headroom to keep growing with our existing customers, and at roughly 20% penetration of UK accounts, we also have significant growth opportunities for new customer acquisition. If we couple these with the expected growth in the market, the headroom to continue growing the business is considerable. Now, moving on to cash on slide 12. Plays in cash was $122.6 million, an increase of $25.3 million from last year end. This was a result of operating cash conversion of 93% in the period, at the top of our guided range of 85-95%, and a return to normal after year-end receivables were impacted by the implementation of a new finance system in FY22. The new finance system and data warehouse came into use at the end of FY22, and this is a key driver of several of the numbers on the slide. Firstly, the reduction in capex, which is lower year on year due to the completion of this project. Secondly, the higher amortization, which reflects the first full year of amortization of the system. And thirdly, net working capital, which was a small outflow in the period, reflecting both the normalization of cash collection, following the disruption from the implementation of the system, at the end of FY22, offset by an improvement in average payment days and also the phasing of both receivables and payables over the period. And finally, we returned 74 million of cash to shareholders during the year, a slight decline year on year due to a reduction in the FY22 special dividend, which was paid in FY23. So if we can change to slide 13, this brings us to the proposed dividend for this coming December. Our approach to allocating capital has consistently been to prioritise investment in future organic growth, followed by maintaining a progressive ordinary dividend policy with any excess capital then either allocated to strategic investments or returned to shareholders. As you can see here, the interim dividend for the year has already paid back in April with 8p. Today, we're proposing a final ordinary dividend of 17p And this reflects our normal policy of paying out between 40 and 50 percent of profit after tax and gives us a total ordinary dividend for the year of 25p, an increase of 5 percent on FY22. In addition to that, we're also proposing a special dividend of 12.60. This has been calculated to clear down cash in December to around 75 million pounds. Previously, we were operating at a cash flow of 60 million, and this adjustment is just to reflect the continued growth of the business. 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 9th of November. Those payments will bring the total cash that we've returned to shareholders since our IPO to just over 470 million pounds. This means that if you had invested in Softcat shares at the IPO eight years ago and held the shares, you have now received your cash investment back in full, while the value of your shareholding has increased nearly sixfold. Moving to the next slide, slide 14. To finish the financial section, I'll quickly run through the outlook. As we start FY24, the company is well positioned to continue to deliver double-digit gross profit growth and market share gains. We expect to deliver full-year FY24 operating profit in line with market expectations and the year's start as well, with operating profit growth second-half weighted and modest growth in the first half of the year. This reflects a number of short-term factors. A strong gross profit performance in the comparative period in the first half, and the continued impact of the macro environment consistent with what we saw in H2FY23. We remain excited about the future potential of our market and plan to continue to invest in headcount, data, and systems to make sure we capitalize on this significant opportunity. If we move to slide 15, we now want to spend a few minutes updating you on our approach to inclusion and sustainability at SoftCap, which Graham and I will share between us. If we could move on to slide 16, please. I'll kick off with an update on environmental sustainability. I've taken over executive responsibility for our plans and progress from Brian, but the sustainability leadership team, which includes another member of our senior leadership team alongside me and other members of our management team, is the same. This team sets and reviews our progress against our action plan, which is delivered day-to-day by our aptly named sustainability delivery group. 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. Our targets aren't new, and we continue to make great progress against them. We became carbon neutral for scope one and two in FY21, a year ahead of targets, and we are now using 100% renewable energy for the first time Again, achieving our goal a year early. But our ultimate goal is to have a net zero value circle by 2014. This is an aspirational goal and requires us to take a thought leadership and influence the role across our industry. And we are pleased our near and long-term plan has been approved by SBTI, which is a start-based target initiative. This year, we're nearing completion of our solar energy project as our Marlowe head office. And we've now replaced all of our pool car fleet with electric vehicles. But most importantly, we continue to engage and collaborate with major vendors and suppliers to drive change across the industry, which this year included supporting a project to improve sustainable product data availability and thus customer choice, being part of industry-wide advisory panels and trialing new circular economy options. We're using our internally developed emissions platform in EXO to help our customers and partners measure and evaluate their emissions, And we are pleased the role that we are playing is being recognised by our vendors and partners, as you can see from the awards mentioned on the slide. Whilst we are committed and passionate about sustainability, we also recognise the business opportunity that it presents. Helping our customers achieve their own net zero goals is another way Softcap will be able to differentiate our offering and increase customer penetration. And on that note, I'll hand back to Graham, who will take you through inclusion.