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.