Softcat plc

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Softcat half year results call. All lines have been placed on mute during a presentation portion of the call with an opportunity for question and answer at the end. If you would like to ask a question at this time, please press start followed by one on your telephone keypad. I would now like to turn this conference call over to our host, Graham Charlton, CEO. Please go ahead.

Thank you very much. Good morning, everybody. And thank you for joining Katie and I for Softcat's first half 2024 update. And we are delighted to be sharing another strong set of results with you, which puts us in a slightly better position than we expected to be in at this point of the year. You'll hear about how we continue to make progress and just how excited we are about the future of our industry. And we'll also talk about how confident we are that Softcap is in the very, very best position to capitalize on the huge opportunity ahead across all areas of IT, as we see yet another revolution, this time kicked off by AI starting in technology and its underpinning infrastructure. But first, if we can turn to the next slide, please, we'll start with our usual reminder of who we are and how we got here. We are the largest provider in the UK in our space now achieving that from a standing start 31 years ago with an entirely organic track record and no debt in the company's history. Today, we are just under two and a half thousand employees spread across 11 locations globally. We only service customers from the UK and Ireland, but we work with them in their overseas operations too. And we've now established a presence in the US, on mainland Europe, as well as in the Far East and Australia. We work with all of the very largest technology vendors in the world, to each of whom we are the largest, or one of the largest, or one of their largest UK partners. And we're also actively sought out by many of the up-and-coming players from the world of cybersecurity data, route into the lucrative and growing UK market for technology and as a result of all of that we have our finger on the pulse of the very latest and contemporary IT solutions and trends and to our customers we're able to offer the very best support advice and solutions available in the market nobody else in the UK has the depth of expertise that we do across so many areas of tech and nobody else has the trust of such a large pool of customers of all shapes and sizes, from the mid-market to enterprise and from the corporate world into the heart of the public sector. And this gives us unrivaled experience across the different sectors and solution areas in an age when that experience has never been more valuable to customers who are desperate to not get left behind. And the breadth of our offering means that today we're very hard to put a label to. We'll always be happy to be called a bar or a reseller, but the reality today is that we're also a consultancy, an implementation partner, and a multifaceted MSP as well. And to illustrate that point about the breadth and depth of our business and expertise, if we can turn the slide again, please, you can see the latest view of some of the segmentations in our business. And on the left here, you can see that while we started in the mid-market, today we're very well balanced with just over half of our gross invoice income coming from public sector and enterprise combined. And in the middle, despite the scale of our technology retail business, organization during the last financial year. And on the right, we can see that we generate significant income from all areas of technology, from the data center and cloud, through networking, security, and end-user compute. And it's this diversity, combined with the scale and the ongoing growth of our business, that's a theme we'll come back to when looking ahead to the opportunity in front of us. But first, before we do that, we'll review the most recent period and the progress that we've been able to make during the last six months. So if we can turn the slide again, please, I can headline some of the summary results from the first half of the financial year, and I'll fly through these briefly as Katie will come back to them in more detail later. But you can see that we were able, despite very strong comparative figures, to grow gross profit by 11% in the first half. And that's in the context of a prior period when we grew GP by 18% on a reported basis, but by 27% if we exclude the impact of a single large customer. Operating profit was up by nearly 6%, and that was ahead of our expectations, reflecting both the strength of the gross profit performance and also costs coming in slightly under Plan 2. We were able to make good progress as well on our customer KPIs, once again, expanding the customer base, as well as significantly increasing gross profit per customer. And despite the weakness of the PC and devices market, gross invoiced income expanded too, up by 4%. Revenue is not a meaningful metric in our industry, now given changes in accounting standards, but Katie will explain how that's netted down and how changes in the income and hardware mix impact that later. Well, cash conversion was once again very strong too, as expected, up just above 100%. So those are some of the financial highlights. And if we turn the slide again now, please, I can show you some of the business highlights underpinning that performance and the progress we've made against our strategies. So as we said, we've been able to generate sustained growth against tough competitors, and we're seeing that be driven by broad-based demand once again, coming from a wide range of technology areas and well spread across the customer segments. Generative AI and Microsoft Copilot have been big topics of conversation with customers. Everyone's really keen to understand what it can do for their operations and how it might transform their sectors. And therefore, even where customers are not trialing the technology directly yet, they are considering their readiness to do so. And this, of course, plays directly into our unique scale and breadth. Whatever the next step any particular customer needs to take on AI, we are very, very well placed to support them. Security also remains a hot topic, and we've seen more and more opportunities national capabilities we've been building and we continue to engage with larger and more complex customers. The client device market was challenging again during the first half but we've relatively outperformed in that space too and expect a corner to be turned here as the rest of this calendar year progresses. It's clear that there are a very large number of aging laptops in circulation now and with co-pilot and the Windows update cycle both adding stimulus we think the volumes will start to pick up here. On the customer front, as I mentioned, we expanded both the base and penetration again. The competitive landscape in our industry remains highly competitive and very fragmented, but that fragmentation doesn't serve customers' interests well. And we continue to see IT managers and CIOs needing partners who can work with them and address complex and overlapping problems, able to help them think through their options and create a roadmap providing integrated solutions over time. And turning on to the next slide, please, we can look at how we continue to invest in our people for future growth. Our culture remains our most prized asset, and so we're delighted to be recently ranked number five in the latest edition of the Great Places to Work list. and that's up from 10 in the previous release. And at the start of this financial year, we held our biggest and most successful annual kickoff event ever. And during November and December, we had a number of groups away in South Africa. And so employee feedback is as strong as ever, and headcount is up 14.6%, bringing the team to nearly 2,500 overall. That's a slightly slower rate of growth than last year in headcount, and half two will likely be a bit slower again. doesn't reflect any less optimism that we have in our future we've very successfully built the team over the last few years adding and retaining talent well and so our focus over the next 18 months or so will be on adding to that at a steady rate while generating returns from those investments that we've already made and as well as investing in people we've got ambitious programs running across Our operations aimed at modernizing our use of data and digital platforms to improve employee and customer experiences as well as making us a more efficient outfit as well. Many of you will remember we talked about the successful finance system implementation that was completed during 2022 and as part of that we also updated our internal database architecture and application integration layers and we're now starting on all of that by enriching our own data with external insights to feed clever analytics and implement automation and AI over time as well. The first iterations of some of those efforts will be trialed in the second half of the financial year, and we're creating a roadmap for the developments over the coming periods that will drive our own digital transformation. And this will also encompass the interlinking of our systems with new distribution routes emerging in our industry, which includes marketplaces and other vendor as a service offerings. And if we turn the page again, please, you can see those developments that I've mentioned set within the framework of our broader strategy, alongside some other recent milestones and initiatives that I haven't mentioned yet as well. For example, you see that we've been awarded both Reseller of the Year and the Sustainability Champion of the Year by the main industry commentator CRN and customer NPS is up to 62 from 55 as well. But not resting on our laurels, we're also working to develop new strategies to target and win new customers across both corporate and the public sector and in our efforts to ensure we realize the full potential from that existing customer base and remain relevant into the future, we're taking a fresh look at our technology offering, making sure it's presented to customers in a way that's intuitive to them and easy to engage with, and importantly, will ensure that it evolves in the direction that AI and other trends are moving the market. All of this sits on the foundations of our approach to ESG, which both Katie and I will expand upon later. Before we do that, however, I'll spend a little time on AI and how we're beginning to see that opportunity unfold and what we're doing to address it. So if we can turn the slide again, please. We try to lay that out here, starting with a view actually from Satya Nadella at Microsoft. And Microsoft are, of course, leading the way with some of the potential applications of generative AI, specifically with Copilot. But you can see how Nadella expects these applications to require huge investment in the foundational infrastructure in order to operate, which is exactly what we've said before. From the data center, whether that's in the cloud or on-premises, all the way to the edge via the network, core architecture has to evolve to power this revolution in productivity, which is great news for Softcap because that is exactly And SoftCap, with the depth and breadth of our capability across hardware as well as software and extending into solutions design, implementation services as well as managed and support services, SoftCap is uniquely placed to capitalize on all of that. Right now, this means helping customers understand the possibilities for their operations and assess their readiness for implementation. And then at different times and in different ways, based on their unique circumstances, through the implementation of the plans that we can co-create with them. But right now we are just in the very smallest foothills of this opportunity. This is the beginning of many years of innovation and evolution, and one that we will help customers with, but also one that we will engage with, as I mentioned, in our own operating model. I talked a minute ago about the modern data and digital architecture we've been implementing, And with hindsight, we couldn't really have timed this any better because we now have internally an excellent foundation to work with. And we'll look to exploit this by deploying Copilot and other more bespoke tools within our own processes. And you can see some of the ideas that we'll be exploring on the bottom of the slide there. But if we turn over the slide again, we've tried to illustrate in brief, just why this is such an interesting opportunity and why we think it will be such a long-term trend. So we try to illustrate here how generative AI is just one sub-branch of a sub-branch of the huge multifaceted discipline that is artificial intelligence. As a concept, AI has been around for decades now, but some of its most powerful applications are just beginning to mature into workable and deployable solutions. Other branches of AI are already at work in many applications, including being embedded within underlying IT infrastructure, for example, being used in security and network management applications, and also in more bespoke and highly specialized proprietary systems, for example, in weather forecasting or in the medical industry for imaging and so on. And so the usage of all types of AI is likely to grow exponentially in the years transforming the power and efficiency of many existing computer models. And this is the future that Satya Nadella and many others see for the IT applications and infrastructure industries. And this is the future that we are arranging our resources and investments around as the number one partner in the UK market for the manufacturers of those technologies. Because the key message here really is that generative AI is just the tip of the iceberg in terms of the opportunity it presents to providers like us. The breadth of the offering that we at Softcap have stretching across all areas of technology, from software to hardware and from end user compute into the data center, across the network, the security estate and the services around all of that, AI will touch all of it and we are able to help customers with all of it too. So if we can now turn the slide again, please, and move from that sustainable growth opportunity of AI to our approach to sustainability more generally, where I'll cover an overview of our ESG strategy and a few comments on inclusion, and then I'll hand to Katie to give us more detail on our progress in other areas. So the soft cap culture has always been very firmly rooted in doing the right thing for our people and our customers and partners and trying to play a really positive role in the communities in which we operate. The long term sustainability of our models and increasingly joined up effort that touches on each strand of environmental, social governance and our sustainability vision shapes both the environmental and social responsible government. And looking at the middle column and our efforts around our people and communities, we are very, very proud of the many vibrant internal network groups at Softcap. For example, our green teams, our Softcap women in business group, we have a neurodiversity group and many, many more. And these groups help promote the core values of Softcap and ensure that different perspectives on how we can keep improving and evolving our culture are And as a leadership team, many of us are directly involved within these groups to contribute and listen very hard to the feedback we're getting as well. We're really proud of the progress that we have made on diversity. 2023 saw us achieve the goal that we set of 35% gender diversity across the business a year ahead of target. So we've now raised the bar again there and are looking to be at 40% by 2030 at the latest. Our board now has over 60% female representation, which puts us right at the very top of the FTSE 250 in that regard. And across the business, our ethnic diversity is slightly higher than the UK population as a whole. And so I'll now pass you to Katie, who'll update more on some of the environmental parts of our strategy and progress, and then move on to financial performance. Katie, over to you.

Thank you, Graham, and hello, everyone. Our environmental strategy addresses how we can act more sustainably as a business throughout supply chain and how we can support our customers' own net zero journey via our technology offering. We have been carbon neutral since 2021, used 100% renewable energy in our offices and our car fleet since 2023, and we have an unchanged ambitious goal to be net zero by 2040. This aspirational goal drives us to play a leading role in the net zero transition in our industry. And in November, we hosted our first sustainability forum for our partners. We're also pleased that the efforts from our teams have been recognized with three awards at the CRM Sustainability and Tech Awards earlier this year, plus awards from some of our largest vendors. Finally, and briefly, turning to the government pillar. We continue our focus on underpinning all we do with effective and appropriate government policies and procedures. We are committed to complying with all of our obligations and do so with openness and accountability. We've also recently appointed a data protection officer and have relaunched our management risk committee. If we can now please move on to slide 12, I'll run through our financial results. I'm pleased to be able to present a really positive set of results for the first half of FY24. Invoiced income increased by 4% to just under 1.3 billion. With strong growth in software and services, up 11.9% and 13.3% respectively. Partially offset by hardware, which was down 17.6% due to a market-driven decline in low-margin client-device sales and a reduction in low-margin server and compute sales, which were linked to a handful of sizable transactions in the base period and materially impacted the corporate segments. Revenue declined by 8.8%, driven by the hardware decline. As software and services are largely reported net under IFRS 15, hardware has a much more significant impact on revenue than the other reported metrics. Gross profit, which is our primary measure of income, grew by 11 cents to 196.5 million in the first half of FY24. This is in line with the guidance we set for that FY23 results. a double-digit growth across FY24, and despite a tough comparator, with first-half FY23 base period gross profit growth of 17.9%. Gross profit trends were, as expected, largely in line with the second half of FY23. Growth was broad-based across our customer segments of enterprise, mid-market, and public sector, and our technology groups of data center and cloud, networking and security, and workplace. with all of these segments growing gross profit, either high single-digit or low double-digit. Software and services gross profit also grew strongly, while hardware gross profit grew marginally despite the decrease in GII, with strong growth in margin-rich data center infrastructure solutions offsetting the decline in low-margin client device sales and a reduction in low-margin server and compute sales. These positive mixed impacts within hardware also drove the increase in gross margin, which expanded by 98 basis points versus the prior period. Cost grew by 13.9% year-on-year, driven by increased commission in line with the growth in gross profit, alongside the impact of a 16.7% increase in average headcount and an average cost per head increase of 2.9%. This continual investment in headcount reflects our strategy to grow our staff base, ensuring we are well-conditioned to capitalize on great opportunities in the medium term. However, current growth is more in line with historical levels after significant catch-up investment in FY23. As a result of this investment, our operating profit to gross profit margin decreased to 34%, which was slightly better than we had expected. These trends resulted in operating profit of 66.7 billion, an increase of 5.8%, which was ahead of our expectations at the start of the year. And lastly, interest income in the period increased due to a higher interest rate and improved cash management, while the tax rate increased in line with the statutory rate change. If we can now move on to the next slide, please. This chart will be familiar to anyone who's been following SoftCat. As you can see, the correlation between growth in gross profit and the cumulative experience of our account managers remains strong. We continue to invest in technical and support functions which enable our account managers to operate more effectively and efficiently and increase our share of wallet with customers. Despite some challenging market and macro conditions over recent years, we've continued to deliver consistent productivity gain. Moving on to the next slide, you can see how we continue to deliver against both aims of our strategy, winning new customers with customer numbers up 1.3% compared to the same point a year ago, and by selling more to existing customers, with gross profit for the customer up by 9.6% to nearly £39,000. We estimate that our market share is circa 5% of our addressable market, with our average share of wallets around 20% to 25%, and our customer base estimated to be around 20% of the total number of customers in the UK. We've also had a significant runway for future growth through continuing to grow market share by increasing customer penetration and increasing our share of wallet with existing customers supported by a growing market. Our continual investment in our capabilities will put us in a very strong position to leverage the market trends that Graham has spoken about, and thus we are very positive about the long-term opportunity ahead of us. Now moving on to cash on the next slide. we ended the period with strong closing cash of 112.5 million, a decrease of 10.2 in the period, which included the payment of final and special dividends totaling 59.1 million. This equates to cash conversion of 101.1%, which is higher than our guided range of 85 to 95% because of strong phasing of receipts at the end of the period, which is in line with normal variability in our networking capital cycle. As a reminder, H1FY23 was impacted by an unwind of longer day-to-day following the implementation of our new finance system at the end of FY22. Capital expenditure, while still relatively small, was up versus prior year, behind investments in new tools and platforms that passed our data and digital strategies. Whilst in my P&L, cash tax increased behind the statutory increase, while interest income, which is included in OTHER, improved year-on-year behind increased rates and improved cash management. Taking us to the next slide, please. Moving on to our proposed interim ordinary dividends. Our capital allocation objectives have not changed. Our primary objective is to invest back into the business to optimise for the fantastic organic opportunity in front of us, followed by maintaining a progressive ordinary policy with any additional excess capital then either allocated to strategic investments or return to shareholders. Consistent with this, I'm pleased to announce an interim dividend of 8.5p per share, payable in May this year. This is in line with our ordinary dividend policy to pay between 40% and 50% of after-tax profits, with one-third paid as an interim dividend, and the balance as a final, and equates to an increase of 6.3% from the prior period. This is ahead of the growth in profit after tax, due to a split of the dividend payment in the base period. The dividend is payable to shareholders on the register of the close of 12th of April 2024, and the shares will trade ex-dividend from the 11th of April. Now moving to the next slide, please. And finally, I'll cover the outlook for the full year. As a reminder, a gross profit comparator gets easier as we move into H2. with second-half FY23 gross profit growth of 11.1% compared to 17.9% in H1. In addition, our positive performance over the first six months of the financial year reinforces our expectations to deliver on our four-year guidance of double-digit gross profit and high single-digit operating profit. We continue to see significant and expanding opportunity in our market and will maintain our investment approach to building the team However, as Graham has mentioned, we will slow the rate of investment in HED a little in H2 and into FY25 as we look to embed and drive results from the growth of the past two years. We will also continue our investments in systems, including our data and digital strategy. Cash guidance remains unchanged and is in line with our target cash conversion of between 85% and 95%. And on that note, I'll now hand back to Graham to conclude.

Thank you, Katie. And if we could turn on to the final summary slide, please, we'll wrap things up. And to conclude, performance in the first half has been very positive. We're very pleased to be slightly ahead of where we expected to be at this stage of the year, driven by strong GP growth and a well-managed approach to our investments for the future. Income drivers have again been broad-based. with the range of our offering allow us to more than offset some of the weaker areas of the market currently with good growth from elsewhere. Our dialogue with customers is showing their appetite to invest in IT is unabated and we are working with them to plan their AI, security, device refreshes and other investments in the years ahead. We're seeing more and more opportunity to make our scale and breadth an increasing part of our competitive advantage as IT becomes more interlinked and more integrated than ever before. We're investing behind that opportunity with the team now approaching two and a half thousand and further steady investments planned for the future. How our people feel about SoftCap and the company they work for is and always will be the beating heart of our success and feedback on that store as strong as ever and all of this reinforces our confidence in meeting those full year expectations as Katie has said and we'll look forward to reporting back to you on that in the months ahead and so that concludes the prepared remarks for this morning we can turn the call over now to any questions the audience would like to ask us thank you very much thank you Graham if you'd like to register a question please press star followed by one on your telephone keypad

ensuring you are unmuted locally. If you'd like to withdraw your question at any time, you can do so by pressing start followed by two. So our first question comes from the line of Tintin Stormant of Deutsche Numis. Your line is now open. Please go ahead.

Morning, guys. Three for me. A bit greedy, but I'll have a go anyway. First for Graham, you talked about the evolution of your role and you mentioned consultancy. Can you give more color on these engagements in terms of kind of how long are these engagements? Are there capabilities you still want to build? Should we expect a change in the charging arrangement for these types of engagements? And then I'll rattle through the three. For Katie, appreciate GP is really the key metric you guys track and measure the business on. And you guys obviously talked about broad-based growth there. But we look at the GII. The growth has really come from public sector, more flat, slightly down in SME and corporate. Can you just talk to us through the dynamics of those two numbers? And then lastly, and I suspect this is a Graham one, if you look at the vendors, apart from Microsoft, who do you think are the early movers most prepared with our product set to monetize the AI opportunity?

Great. Thank you, Tintin. We'll take them in the order that you laid them out. So I'll start with the question around consultancy and evolution of the role we're playing. I mean, this has been a gradual and kind of very long-term shift for us, really starting, I guess, many years ago when we began to move just out of being a Microsoft mid-market specialist and broadening across software and then moving into hardware and starting to wrap that and lead it with services as well. So we've progressively been investing in functions like design, different parts of our service operation, an organization that we call Octo, which is blue sky evangelists, the possible thinkers that can work with the CIOs in our organization to really rethink how they do their IT, especially in the age of AI that we're heading into now. So much of that service that we provide, that consultancy, service, we don't charge for. So a lot of us often say that our services business is much, much bigger than our financials make it look because a lot of the value that we create through that work that we do, the pre-sales, the architecture and the design and advisory stage, then manifests in the margin that we can make on selling the software and hardware for solutions that we can co-create with the customers as well. So our service business now, we have different towers to it, but it works all the way from that advisory and architectural function through to management and support via implementation. And that's an evolution that will continue for us, and we'll continue to invest in all of those parts of that service business. And particularly, as I mentioned now, it plays really, really well into the breadth sort of position being able to say to our customers look what are you tackling right now where are you having problems in your IT infrastructure because customers are tackling things at different times in different ways and being able to fit our offering around their needs led by some of the best technologists in the field and able to guide them through at the right time so really powerful part of our offering. And I see that part of our offering getting bigger and becoming more important into the future as well. And charging for that can happen in different ways. But our account managers have a lot of flexibility into how they work that service into the customers and how we charge for it. And that can be done in different flexible manners. So hopefully that helps. Pass you to Katie to talk about GP and how we're seeing GII across different customer segments.

I think you're right in terms of GII growth. In the period, it all fell to public sector. And this is basically because the hardware decline impacted both corporate segments and had little impact on the public sector. So I talked about earlier the handful of large transactions of low margin server and compute sales. They were all in corporate in the base period. So it impacts the corporate growth rate. And the client devices decline that we talked about as well happens to manifest itself more in corporate in the half. Again, as you rightly say, we care much more about gross profit. And that's where we focus and where account managers focus on as well. And that grew either high single digit or low double digit across all of enterprise, SMB and public sectors. So we really did see that broad-based growth where we wanted to see it. And that's going for the month one.

Yeah, so I think the question was, which vendors do we see being well positioned and thinking about the AI opportunity? And I'm not sure there's any vendors I talk to these days who aren't thinking about that. And it does manifest in different places. So you rightly mentioned Microsoft with Copilot. That's a very obvious one. Microsoft's devices and all the other laptop manufacturers, so HP, Dell, Lenovo, are all thinking about their AI intelligent laptops that will come to market and deploy neural processing units, MPUs, rather than CPUs in devices. So they're all sensing that opportunity and thinking about the roadmap there. We've seen HPE recently announce the acquisition of Juniper and how they're thinking about how they incorporate Juniper's AI technology into their networking offerings. and AI technology being deployed in software, particularly security software, that's something that's been happening for a long time now as well, and I think we'll see that continue to be the case. So as I say, I think it's going to become pretty ubiquitous in its application, both within the infrastructure, firmware, and software that we see, but certainly obviously in the applications that sit upon that as well with the likes of Microsoft, and I'm sure Adobe have have the things that they will want to do with AI as well, all about the .

Great. Thanks, guys.

The next question comes from the line of James of Barclays. Your line is now open. Please go ahead.

Good morning. Yeah, three questions again, please. Firstly, regarding your various technology investments, And please, can you put that into context where they're important? You know, are these more nice to have or might they be real differentiators? And if the latter, any examples of how would be great? Secondly, in terms of your comments on the customer benefits of scale and breadth and fragmentation not serving customers well, how does that vary between mid-market enterprise and public sector customers? And then lastly, on headcount, just on attrition, particularly in the sales force, How is that compared this year versus the highs of a couple of years ago and the more recent lows? Thank you.

Thanks, James. I'll try and tackle probably the first two and then maybe Katie can talk about attrition in the sales force and how we've been seeing that play out. So firstly, you asked about tech investments that we're making and are they nice to have or are they real differentiators? It's quite a nuanced answer. So on the one hand, I think we've always said But look, we're selling other people's technologies and the same technologies as our competitors. And our differentiation comes from the manner in which we do that, the quality, the enthusiasm, the togetherness of the teams that we put together to work for customers on that. That really is the majority of how we differentiate. But increasingly, the breadth and depth of what we can offer. And the fact that it is under one roof through one organic organization that deploys one set of systems, the way that customers can access that breadth and depth of expertise, I think, is a differentiator as well. So we're investing in public cloud design and management, but so are other people. We're also investing in security and assessment services, security managed services, but so are other people. We're investing in helping people use the Microsoft estate to its fullest extent and how they integrate Copilot and how they think about AI and more generally, and so are other people. But nobody else is doing all of that together under one roof across mid-market and enterprise and public sector to the extent that we are. And so it's that combination of all of those progressive investments in all of the emerging and exciting areas of technology happening by one team in one place with the ability to draw the experience of the single biggest customer base in the UK and apply that for our customers' benefits. That's where the fragmentation in our industry doesn't help. We are the standout consolidator organically of the industry and our customers benefit from that. There are significant network effects for our customers when they access that range of expertise and experience. And that's why I am so confident in the future of SoftCap because if, and only if, we can keep the culture special, make our people feel like the team that they are and working for customers on that behalf, our ability to bring that proposition to bear for them through the very best team in the market gives us a terrific advantage. So I'm very confident in that. But I don't think it's any one investment in any one technology that's our differentiator. It's the combination of all of that wrapped in our work very special customer service. And I sort of, I think I've addressed your second point there about fragmentation to some extent. I think if I'm honest, the fragmentation probably, I think actually the mid-market and enterprise grade customers need an integrated supplier equally. You'll find that different customers have different internal capabilities. And in the enterprise space, they will have more and broader capabilities generally. But they still want to talk to one provider who can help them think about how their network interacts with their data center, interacts with their end-user compute environment, how the security threats around all of that can be handled, how they might apply AI in different ways. So I think the fragmentation maybe hurts enterprise customers slightly less, but only slightly less, and plays strongly through all of those spaces and certainly into the public sector. I think the fragmentation They've got some of the biggest milestones to move through in the modernization of their IT, and that really, really helps us in that space. Hopefully that's helpful, and Katie can maybe talk about attrition in the sales force.

Yeah, sure. So overall in FY24-81, attrition was running total company around 13%, which is actually a couple of percentage points better than the same period a year ago. And same trend in sales organisation, probably fractionally better improvement in retention as well. Hopefully that answers your question.

Perfect. Thank you both.

The next question comes from the line of Joe George of JP Morgan. Your line is so open. Please go ahead.

Yes. Hi. Morning, guys. And thanks very much for taking my questions. And I've got three questions as well. The first one would just be on headcount growth. This is obviously expected to slow sequentially through H2. But can you just help us with how this dynamic will impact the absolute pound sterling amount of OPEX through H2? So just in the context of OPEX being up 14% in H1. Yeah, could we just get your views on expectations through H2? That would be really useful. Thank you. And then the second question would then just be on a sense of an exit rate of GP growth into H2, particularly given the comment that there were some signs of client device stabilization towards the end of the period. Is this just a result of the even comp? So are you seeing anything more fundamental with regard to customer spend here? And then the third question would just be on AI and particularly Microsoft Copilots. Where you're seeing customers dedicating investments here, is this incremental pounds being added to their IT budget, or is it a case of pounds being allocated from elsewhere within the budget? And if so, do you get a sense of where is losing out to this AI investment? Thanks.

Let me keep up with the one, and then I'll have to grab a few other questions. So in terms of headcount growth, as we said, we expect to add fewer heads in H2, but in terms of that average headcount, because of the way that heads faced into the base, I'd expect that wages and salaries growth rate is pretty equal in H1 versus H2. The other thing, as I said, you know that commissions is quite a big part of our OPEX costs as well, and that we'd expect to move in line with gross profit, which is, you know, again, the growth in gross profit would be higher and less in H2 than H1. So all in all, we'd expect the cost growth to probably increase slightly in H2 versus what we've seen in H1.

And on the exit rate and GDP growth and see if we saw how client devices might affect that. So we're all definitely lapping weaker comps now on the client device So growth or the declines in that particular line of income will definitely stabilize. Talking to the key vendors in that space and the distributors that we work with, because even with our scale, we've only got 5% market share. And so we're probably the best bellwether in the retailer space, but it's hard for us to say exactly what's happening more broadly with client device volumes. But the anecdotes are that demand is sequentially beginning to stabilise and pick up there. There's all sorts of predictions about how that will unfold as the year goes on. So what we've said is that we see it as something that will strengthen across this calendar year. So it could be in half, so it could be some signs of that. But it's less than 10% of our gross income. So it's only one relatively small part of how we grow and make money more generally. AI, co-pilots, very hard to answer your question. in general terms, because the reality is we see different customers engaging with it in very different ways, even in the same sectors. So it depends upon how their business is growing, what budget is available, the state of their underlying database architecture, application layers, and how they can fit it in. So we're seeing customers trial it in all sorts of different ways. For some of them, it is incremental space. very excited about what it can do, generating good results from it. We've got some people who are having to borrow from elsewhere. I couldn't honestly generalize about then where they're pulling that money from. Again, that's customer specific rather than something that I could generalize about. But all customers are interested in it and how they could deploy it. We're working very closely with Microsoft to develop those use cases, help them through the training and learning phases and deploy it. But I think it will be a slow and steady growth rate behind that in terms of how it manifests and the number of licenses being deployed.

Perfect. Thank you very much both.

The next question comes from the line of Raoul Chopra of HSBC. Your line is now open. Please go ahead. Hi, Raul, please check you're not on mute.

Hello? Yeah, sorry. Hello?

Good morning.

Yes, so my question, hello, good morning. My question is on AI readiness. You talked about AI readiness. Could you talk a bit more about how it differs in terms of big market versus enterprise versus public sector in terms of what are the top priorities we have in mind in terms of the cyber hygiene versus hardware spend versus software spend? Just want to break it down by, you know, these different end markets and how they're thinking about it, given their different hygiene in terms of infrastructure in place. The second question in terms of your thoughts about, you know, obviously your cross-profit per customer has grown faster than customer growth. I want to understand your thoughts in terms of land and expand strategy, which is expand at this stage, just how you're thinking about it going forward. Thank you.

Thank you. So AI readiness, I mean, again, I'd love to be able to generalize, but it's just not what we're seeing that mid-market or enterprise or public sector is taking the lead. It's different for different customers across all of those segments. All of the customers in those different segments are interested in it, working with it, having good conversations across it. It depends upon their operations, the nature of their business, the nature of their budgets, where they are with data and data security and indexing of that data for use with something like Copilot. So I would say the interest is high everywhere and not dominated by sort of one customer segment. I think it therefore, obviously Copilot feeds into our software layer. We are seeing some organizations, and actually we've been seeing this for years now, some organizations building big AI-capable data centers that are GPU-intensive rather than CPU-intensive. And I think that kind of opportunity will grow. We are seeing some organizations spring up that are looking to build AI-ready data centers to rent those out to other organizations that will create bespoke applications to run in those data centers. So starting to see that AI opportunity stretch into hardware. It will come to client devices in time. as well as the data center we mentioned earlier, how it's being deployed within the firmware, within the infrastructure layer, and how networks are managed, and how I think compute and storage will be managed as well going forward. Customer penetration, GP per customer, the land and expand strategy. Continuation of probably the things we've talked about in the past, which is we have... such a breadth and depth of expertise that what we can do with individual customers now is pretty much across all of their infrastructure estate. And so the share of wallet that we can provide a quality service upon is very, very high indeed and approaching 100% of many customers. And so taking the average share of wallet that we have today from about 20%, customers who are well north of 80 percent share of wallet and so that's a huge opportunity latent potential in that huge customer base that we already have and so we keep to keep nudging our strategy towards going deeper there so we're encouraging our account managers to fully service smaller number of customers in their portfolio pass on those accounts that we can't fully service to up and coming hungry bright sales people who will be able to go deeper So what we don't do is target customer growth of X and GP per customer growth of Y. We develop a strategy that allows us to fully service the opportunity in those customers that we are building loyalty and trust with. And so the customer growth and the GP per customer growth is an outcome of that. My expectation on the back of the success we've had with that strategy is GP per customer growth will continue to dominate our overall growth. and we will maintain probably the largest new business hunting sales force in the industry, but they will also be picking up accounts that are coming back down the tree from account managers who are going deeper with you as well. So I expect low single-digit customer growth and higher GP per customer growth for the foreseeable future.

Yes, just to add to that one briefly, the number of additions in customers is the net number. And the numbers that churn out are the ones that we have done least business with. So there's also a bit of a virtuous cycle. The more that we do with the customers, the stickier they get as well. So that's another focus that we've got. But while it, I guess, depending how you measure the customers, will increase the number of customers that are transacting with us to the higher degree as well, but it also shifts that metric.

Thank you very much.

Thank you. Our next question comes from Balaji Tirupati of Citi. Your line is now open. Please go ahead.

Thank you. Balaji Tirupati from Citi. Two questions from my side, if I may. Firstly, entering fiscal 24, you had cited noticeable slowing of customer investment and complex deals being delayed. How has that trend progressed and how do you see that progressing in the second half of fiscal 24? And then second question is, at this stage, would it be possible to roughly quantify the opportunity you can imagine on account of generative AI? And based on your commentary from release, while it is not likely to be material contributor in fiscal 2024, should we expect it to be one of the wheels of growth in fiscal 2025? Thank you.

Let me kick off with FY, your first question, which is about, and this is what we said, the FY23 from your results that we see sort of pockets of customers have, and that lengthened the time that DIL took to clone. We've basically seen that play out in the first half as we expected. So nothing has got worse. The timeline has stuck, which is what we have built into the forecast. And we don't expect such need anything change to deliver at H2 numbers either. So it's easy to say. So planned out as we expected, and that's what we are, if you may, carry on for the rest of the financial year.

Balaji, I'm sorry, I couldn't hear your second question. The line was bad. Would you mind repeating it, please? Yes, please. Sorry, Balaji, I think Katie did hear. It was to quantify the impact of Gen AI on our FY25 expectations. Is that right, Balaji?

Would it be possible to share any quantification, not necessarily just for fiscal 25, but in the sense that do you expect this technology evolution to drive a higher over-the-cycle growth potential for your business? And then entering fiscal 25, should it already start reflecting in the growth numbers?

Okay. So, I mean, there's always... stimulus to our industry because there's always things that have been changing. We've talked in the past about window cycles, about the advent of things like GDPR and so on. So I think AI and Gen AI is another very helpful stimulus to our industry, predicting exactly how it will play out and how all of our different customers' budgets will respond to it in the context of their board of businesses is really difficult to do. We've consistently laid out our and confidence in the future of our industry because we know things like this are always coming. And we know that there's more data in the world every day that goes by, the need for faster compute power goes up, the need for more storage that's more cleverly organized goes up. So when things like AI come along, we invest around that because we know it's those things that will be the very, very long, and I think in decades, growth opportunity that SoftCap has in the UK. So right now, what we're not doing is expecting it to generate a period of super growth. The kind of guidance that we've laid out and the way that we see our business evolving and growing over time, it is seizing upon opportunities like AI that will drive that for us. So there's no change to our longer-term expectations as a result of this, but our confidence in those longer-term expectations is absolutely founded upon this kind of development.

Understood. Very good. Thank you.

Thank you. Our next question comes from the line of Chris Tong of UBS. Your line is now open. Please go ahead.

Hi, Chris from UBS. Thank you for taking my questions. Two questions from my side. So the first question is on upcoming election. How do you think this will impact public sector spending? And my second question is on kind of your share of the market. So some of your competitors have had a slightly more cautious message on the market. How do you think you have performed versus the overall market? Thank you.

Thanks, Chris. Well, the election's helpfully away from public sector year end. So later on this year, public sector had a big period of spend year closes down and we've seen the impact on public sector spending be fairly muted around elections recently because so much of IT estates are ongoing renewable spend and emission critical applications so that kind of spend continues throughout an election cycle some of the discretionary spend and the way budgets are organized clearly is impacted by by the election cycle but work around. So not expecting it to be a material factor in how the coming 12 months play out for us. A share of the market and how that's developed. I mean, I think the commentary around what's happening in our market has been pretty consistent. I think we were very transparent and open at our year end in saying, as Kate has previously discussed, how we were seeing procurement cycles lengthen. And I think a few others have mentioned that recently as well. And that is a factor in the market. I am certain that we continue to gain share and perform well and grow faster than our competition. Again, there's different measures of this, but gross profit is our primary, almost single measure of income. And by that standard, the growth that we've delivered in this first half on top of very, very strong comps, I think it's a reflection that we've once again continue to gain the trust of more and more customers and gain market share. So very pleased with our performance in that context and very confident about half two in that regard as well.

Makes sense. Thank you.

The next question comes from the line of Charlie Brennan of Jefferies. Your line is now open. Please go ahead.

Yeah, thanks so much for taking my question. I'm going to go with two quick ones if I can. Graham, can I just bring you back to your commentary on the customer growth? I know you always expect the majority of the gross profit growth to come through from spend per customer, but you framed expectations for customer growth in the low single digit bracket. That feels much more like 2% or 3% than 1% to me. Was there any sense of disappointment with the customer numbers in the period? And indeed, Katie referenced the frequency of trading. Was there any particular portfolio pruning or anything like that, that contributed to the mass? And then secondly, in terms of vendors, you flagged up some consolidation with Juniper and HP, but we've also seen Splunk and Cisco. We've seen VMware, Broadcom. Is there anything we need to think about here in terms of changing terms of trade or anything like that as we go through any of these big M&A transactions? Thank you. Thanks, Charlie.

No, honestly, no sense of disappointment with 1% customer growth. As I mentioned before, it's an outcome for us. One thing that I think we do we will start to do is to give you a bit more information probably on the existing customer base and how we're developing that. We'll have to think about other KPIs that we might be able to share with you to illustrate the growth that we are making because, and I'm not playing with semantics here, but how you define a customer and the extent to which we're developing that customer base is probably moving beyond the very simple method we have of showing you come back with some more metrics on that at the full year to give you a view of the depth of penetration of that existing base because I'm not disappointed at all with the 1% because I know what's happening and the story that's underneath that GP for customer growth is very, very exciting indeed for us. So we'll talk to you more about that the full year, but there's no portfolio pruning going on except that, as I mentioned, we're making sure that the good accounts we're gaining trust with can be properly and fully served by the organisations. And then the vendor consolidation is an interesting one. I think what you're seeing there is how excited the likes of HPE and Dell and others are around the breadth of portfolio they can build. And some of those traditional hardware providers are thinking about the data center in its hybrid cloud form and how they can offer solutions around the increasingly distributed HPE mirror the excitement we've got about the integration and growth of IT infrastructure more generally. There are so many vendors and vendors technologies in the market. There's new ones coming to market the whole time. So I think this reflects more of a build than it does a consolidation. I think you've got growth in the vendor base is much more rapid than consolidation through M&A at the top end of it. But that consolidation is driving exciting developments in the portfolios of the likes of HPE and that's a strong basis upon which we can grow around as well as we take those integrated offerings into our customer base and give them the benefit of the strength of relationship we have with those vendors but the breadth of expertise we have to engage with all of their portfolio and that's what we're seeing from vendors. We're not seeing a change in trade but we are seeing them look for partners like us that can fully articulate the breadth of value that they're now adding with the investments they're making in that portfolio. So very, very excited about that. And we have top position from all of the partner advisory boards of these vendors. We have the accreditations and the sales specialists and the technical specialists that they need for us to take that portfolio to market. So I think it's a positive development form. I was going to say people like SoftCap, but there's not many. So that's the point. It's a very positive development for us.

Great. Thank you.

The next question comes from the line of Martin O'Sullivan of Shore Capital. Your line is now open. Please go ahead.

Yes. Thanks very much. Obviously, quite a bit of focus on AI. And you say great customer engagement on Gen AI. Could I ask you actually to give us a sense for what percentage of your customer base are actively asking about AI or expressing some kind of interest in deploying generative AI? I assume it's fairly low at this point, but building rapidly. But are you able to put an approximate or very approximate percentage on it? And are they more skewed towards the commercial sector than the public sector at this point? What are your thoughts there?

Thanks, Martin. Yeah, I'm trying to give you a sense of that. The proportion of customers that are interested in it is close to 100. The proportion of customers that are actively deploying it and trialing it is more like 10 or 20%. But the number of seats, licenses that they're trialing it with varies very, very widely from all in, give it to everybody, make it work approach to, we'll try it with one or two and see how we get on. So a huge range of different experiences there. As I said in the prepared remarks earlier, I think we're right in the foothills of what is a really big opportunity here. And we'll work with Microsoft and others to make sure that the developments in that technology, because technology is released now and developed on the fly, it will become verticalized, there'll be different ways of consuming it, So I think hopefully some of those numbers give you an idea of where we are with it, but I just think it will continue to build. There's great momentum behind it, and I do think as a technology it will become ubiquitous. It's just a case of it will be a different time and speed for different customers.

Fantastic. Thanks very much.

Thank you. Our next question comes from the line of Harry Reid of Redburn Atlantic. Your line is now open. Please go ahead. Please check you're not on mute, Harry. Harry, unfortunately, we're not getting any audio, so we're going to have to skip to the next question. Our next question comes from the line of . Jay Awara of Peel Hunt. Your line is now open. Please go ahead.

Thanks, guys. I think this question has been answered a few times already, but I wanted to kind of rephrase it if you don't mind. One of the things I noted is how your GIA on services was relatively more strong. And you mentioned how you are doing larger and more complex or dealing with larger and more complex customers. And in your hiring commentary, you also said you're hiring with a particular focus on specialist and technical roles. Does that mean that you are now going to be able to and strategically you will want to do larger and larger IT solution sales? as opposed to, you know, kind of tactical sales on hardware or license upgrades. And then related to that, in the commentary, it suggests that some of the digital CapEx that you are doing is going into improving customer visibility, what the customers have bought and so on. So related to that focus on larger solution sales, Does that mean that you are going to be better at referenceability, finding gap analysis, and having those higher-level conversations with customers than you were able to do even three, four, five years ago? Or am I making too much of this solution sales thing? Thank you.

Yeah, thanks, Tamindu. No, I don't think you're making too much of it, but the only thing I would say is a couple of things but firstly we're not moving away from anything so tactical sales of license renewals absolutely not moving away from it continue to execute that as the bedrock of our business customers absolutely need our support on that no license renewal these days is straightforward with everything that's going on so the need for advisory around just that renewal of existing estates is a really important part of our offering but yes we have been building into larger solution sales with larger customers over many years. We see that continuing. We see it as a key strength now. And the developments in our digital and data platforms are absolutely designed to help us do more of it, help us be more efficient with it, and make sure that our account managers are able to share experiences and referenceability, as you say, much more readily across the customer base, because we have... that huge base, bigger than anybody else in our market, deeper range of experience. And so putting that to good use and advertising that to our customers is a key part of what we can do. Because with these investments, our ability to feed modern marketing techniques and help our account managers find both new customers and opportunities and existing customers is definitely what it is aimed at. So it's not a cliff edge transformation. It's a continued evolution along the lines that we've been making. But also, as I said in the prepared remarks, that the foundations that we have in our own operations to do that now have been through a bit of a transformation the last couple of years. And it won't be that these things that will start to drop and trial in half too But it is the beginnings of an iterative build into being a very contemporary, modern organisation. We've always had this challenger mentality that we're not going to be complacent. We're not going to keep just, I think a lot of people look at Softcat and think, keep doing what you're doing. We've never kept doing what we're doing. We've always been evolving. We've never stood still. We still have that challenger mentality and we apply it to technology proposition that we have for customers, but also those internal methods of operation. The combination of those two developments is very exciting for us in the coming years.

Thank you, and well done. She has up like five more percent, extra five more percent since the call started, so you guys are saying the right things. Thank you.

Thank you, Damindo. Appreciate that.

Our next question comes from the line of Harry Reid from Redburn Atlantic. Your line is now open. Please go ahead. Hi, Harry. We're still not getting any audio. Please can you check you're not on mute? Unfortunately, there's still no audio coming through. No problem at all. Thank you. As there are no additional questions waiting at this time, I'd like to hand the conference back over to Graham for closing remarks.

Thank you. Thanks, everybody, for your interest in Softcap. If, like with Harry, there are any questions that we weren't able to get to, please do get in touch. Otherwise, we'll look back to coming back and keeping you informed with progress during the second half. Thanks for dialing in today. Appreciate it.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.