Softcat plc

Good morning everybody and welcome to the Softcat results presentation for the year-ended 31st of July 2024. I'm Graeme Charlton, the Chief Exec of Softcat and I'm joined today by our CFO Katie Mecklenburg who you'll hear from very shortly. But before I hand to Katie I will run to run through the financial results from last year. I'll start with a brief reminder of who we are and what we do. Then once you've heard from Katie I'll be back to give you an update on the evolution of our strategy. So, who are we and what do we do? Softcat is today the largest provider in the UK and Ireland in what's known as the VAR space, so the value-added reseller space of IT solutions. That covers cybersecurity, hybrid cloud infrastructure... networking, workplace technologies and so on, and across hardware, software and services. So it's a tremendously broad and well diversified offering across the full scope of the modern IT environment. And we've grown to that position as number one in the UK entirely organically from a standing start 31 years ago. And in the most recent decade of that history, we have a 10-year average growth rate of over 15%. for both gross profit, our primary measure of income, and operating profit. We work with the biggest and best-known IT vendors globally, and to each of these we are the largest or at least one of their largest partners in our domestic markets. And we are also actively sought out by all of the up-and-coming vendors as a primary route into the lucrative and growing UK and Irish technology markets. This gives us a fantastic visibility across the very latest IT solutions and customer demand trends. And our customer base is incredibly diverse, with over 10,000 recurring annual customers now from the mid-market through to enterprise and from the corporate world into the heart of the public sector. We're increasingly as well being pulled into overseas markets by those customers and we now have operations in the US, the Far East and Australia. And that gives us yet another facet to the future opportunity that we have, as well as unrivalled experience across different sectors and solution areas. And in an age when that experience has never been more valuable to our customers, customers who are having to navigate an increasingly complex IT landscape. The breadth and the depth of the offering we've been able to grow is now truly market leading, which is why I believe we are much more than just a value added reseller these days. We are also a consultancy, an implementation partner and a multifaceted MSP. And I'll talk more about how we're going to develop those capabilities and opportunities further after Katie has updated you on the results. And for that purpose, I will hand you directly across to her now.

Thank you, Graham, and good morning, everyone. If we can move on to the next slide, please. I'm delighted to be able to share Softcat's results for FY24. I won't read out all of the details on this slide, as I know many of you will have already looked at the numbers, and I'll go into more depth on the following slides. But in summary, our results for the year are ahead of the expectations we set out 12 months ago, and we are very pleased that despite the challenging and volatile macro environment, we're once again delivering double-digit growth in gross profit, which is our key measure of income. This growth highlights the resilience that our broad-based technical offering and diverse customer base brings to our business. Gross profit growth of just under 12% resulted from a 1.8% increase in our customer base and a 9.7% increase in the average gross profit per customer, demonstrating our progress on both key aims of our strategy. Operating profit of £154.1 million was ahead of expectations. Operating profit growth of 9.3% reflects both our success in growing gross profit as well as continued investment in our strategic priorities, including average headcount growth of 14%, taking Softcat's employee base to just over 2,500. This leaves us well positioned to capitalise on the significant future growth opportunities across our market. We also maintained a strong balance sheet delivering very healthy cash conversion of 95.9%, slightly above the top end of our target range. We ended the year with more than £158 million in cash, and therefore, alongside our normal policy of paying out between 40% and 50% of profit after tax as an ordinary dividend, we are also recommending the payment of a special dividend, which will be the largest dividend in our listed history. Moving to the next slide, please, and looking at the summary income statement, starting at the top. Despite the continued weakness in the PC and devices market, gross invoiced income grew in line with gross profit, up 11.3% to 2.85 billion. Strong growth in software and services, up by 17% and 18% respectively, was partially offset by hardware, which was down 8%, reflecting the headwind from the decline in low-margin client device sales and the 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 segment. Revenue declined by 2.3%, largely driven by the reduction in hardware GII. As software and services are largely reported net under IFRS 15, hardware accounts for a much higher proportion of revenue than the other reported metrics, and consequently the hardware decline has a much more material impact on revenue. Software and services revenue both grew behind GII due to lower software gross margin driven by a mix into high volume, low margin, mostly public sector transactions, and an increase in the proportion of services fulfilled by partners which are reported net. Gross profit, which is our primary measure of income, grew by 11.7% to £417.8 million. This is in line with the guidance that we set out at our FY23 results of double-digit growth across FY24, and a good outcome considering the challenging trading environment which persisted across the full 12-month period. Gross profit in the second half grew at 12.5%, an acceleration compared to the growth of 11% in the first half, driven by a relatively easy comparative. Gross profit growth was broad-based across our customer segments of enterprise, mid-market and public sector, with each growing either high single-digit or double-digit. We also delivered good growth across all our technology groups of data centre and cloud, networking and security and workplace. Growth in networking and security was particularly strong, with a more modest contribution from workplace given the weakness in the client devices market. Looking at the numbers on the product basis, software and services gross profit also grew double digit, while hardware gross profit accelerated in the second half, delivering high single digit growth for the year. Overall, gross margin was flat for the year with an expansion in the first half due to the decline in low margin client device sales and a mix into towards higher margin data center infrastructure solutions largely offset in the second half by higher volume of lower margin deals, mainly in the public sector. Cost grew by 13.2% year on year due to increased commissions, which were in line with the growth profit, and the impact of a 14.3% increase in average headcount. Our continuous investment in growing headcount is reflected in a small decline in our operating profit to gross profit ratio. This investment in capacity and capabilities puts us in a very strong position to take advantage of the considerable growth opportunities in our market. And as I've already mentioned, operating profit thus grew by 9.3% to £154.1 million. And lastly, net interest income in the period increased to £5.3 million due to higher interest rates and improved cash management, while the tax rate increased in line with the change in the statutory corporate tax rate, resulting in profit after tax growing by 6.3%. And moving on to the next slide, please. As I've already mentioned, our growth is supported by our diverse customer base and broad customer offering. And while there will always be some peaks and troughs in our portfolio, such as we've recently seen with client devices, it is the breadth and comprehensive nature of our business that we think is a key strength. And to illustrate this, you can see here the latest segmental view of our business. While Softcat's initial focus was on the mid-market, on the left you can see that today we are very well balanced, with nearly 60% of our gross invoiced income coming from public sector and enterprise, a mid-market now accounting for just 41% of the business. The middle chart shows that despite the scale of our technology resale business, 17% of our income is now generated from services. In total, that was £470 million last financial year, an 18% increase from FY23. And on the right, you can see that we generate significant income from all areas of technology, ranging from the cloud and data centers through networking security and end user compute with balanced growth across all three segments in the period. And it's this diversity across all these facets, together with the scale and ongoing growth of our business, that makes Softcat so unique in the sector and we think drives a significant competitive advantage. Moving on to our customer metrics on the next slide. Those of you who are familiar with our presentations will recognise the chart on the left, which shows our growth in our customer base and growth in gross profit per customer, reflecting our strategy to grow through acquiring new customers and selling more to existing customers. Pleasingly, as you can see in FY24, we have again grown the customer base by 1.8% to 10,300 customers and grown gross profit per customer by 9.7% to £40,600. The graph on the right shows some additional detail. Including in our customer base is a tale of customers who we transact with at low value infrequently and with whom we have not yet built an established relationship. If we look at the same drivers of growth, but only for the 8,000 customers delivering over £1,000 of gross profit per annum, which is a level of business that reflects a more stable run rate of business and where we see a significant reduction in customer churn, the growth between the metrics becomes more balanced, with customer growth of 5.1% and GP per customer growth of 6.3%. These established customers account for around 99% of the group's gross profit. However, a longer tail of smaller customers continues to be an important source of future growth. Graham will provide some further insight on this shortly in terms of how we optimise our customer proposition and approach to account manager to deliver on our strategy. And now moving on to the next slide. We ended the year with strong cash balance of £158.5 million, an increase of £35.8 million in the period after the payment of an ordinary and special dividends totalling £76 million. Cash conversion of 95.9% was slightly above our guided range, and as a result of good networking, capital management with an improvement in debtor days enabling optimal use of early settlement discounts. This more than offset an increase in capital expenditure as, while still relatively small, we continue to invest in our systems and in our expansion of data and digital platforms. In line with the income statement, cash tax increased due to the increase in the UK corporate tax rate, while interest income, which is included in other, improved compared with last year, given increased interest rates and better cash management. In FY25, we plan to start a sales system replacement project. The accounting treatment will depend on the solution chosen, and if the implementation costs cannot be capitalised, then we will treat them as an adjusting item. Taking this into account, our cash guidance is in line with our cash conversion target of between 85 and 95%. Taking us to the next slide, which covers the dividend. As a reminder, the interim dividend for the year already paid back in May was 8.5p. Today, we're proposing a final ordinary dividend of 18.1p, reflecting our normal policy of paying out between 40% and 50% of profit after tax. This represents a total ordinary dividend for the year of 26.6p, an increase of 6.4% on FY23. In addition, we're also proposing a special dividend of 20.9p. This is in line with our capital allocation policy to return excess cash to shareholders, subject to maintaining a cash floor of £75 million. The combined total dividend of 47.5p is the highest in Softcat's history. And if we can move slides again, please. We have a disciplined approach to capital allocation and our framework remains unchanged. Our first priority has always been and will continue to be investing in future organic growth, which allows us to continue to take market share in a growing market. Our second priority is to maintain a progressive ordinary dividend policy. Any additional excess capital is then either allocated to strategic investments or returned to shareholders. This year, in line with previous periods, we're returning excess cash via a special dividend, but we continue to explore acquisition opportunities both in our international markets as well as both on acquisitions that would enhance our technology proposition in the UK market. And moving on to the next slide. And finally, before I hand over to Graham, I'll touch on the outlook for the full year. The future of our industry remains as exciting as ever, with the ever-increasing complexity of the IT landscape driving more opportunities for Softcat to be able to support our customers. Our continued investment in our people, systems and data and digital journeys positions us very well for further market share gains. And all of this means that for FY25, we expect to deliver another year of double digit gross profit growth, together with high single digit operating profit growth. And I'll now hand over to Graham to run through the strategic update.

Thank you, Katie. And so as you saw there, our progress last year in a difficult market was terrific. And I wanted to just set that progress now in the context of our broader history, because I think to really appreciate where we're going next, it's helpful to remember where we've come from and how we got to this point. Because only then can you really appreciate why we take such a long-term view of our business and our industry and why we're so excited about the capabilities and positioning that we have today. So this chart shows how our gross profit, primary measure of income that we have, and our headcount have grown since the day we started selling technology back in 1993. So this is 31 years of organic growth and investment. And this kind of progress in our industry is unique globally. Because we've evolved from our beginnings as a mid-market Microsoft specialist and built upon and around that to today having the broadest and deepest offering in the market. We are relevant to some of the largest customers for some of their most complex projects in both the corporate and the public sector space. And we've marked on this chart just a few notable events from that timeline, a mixture of internal and external impacts. But the point that I'm really trying to convey here is that our growth hasn't been sporadic. It's been relentless and it's been consistent and sustainable too. And it's been that way because we found in the ethos that we were created upon, we found a way of being truly different, a truly different and special place to work. And in that, we found the basis of a differentiated customer service that has been the driving force of all of this growth. And our models proved to be scalable through time and through some significant changes in the technology landscape and over these three decades and scalable as well. through becoming a public company and through changes in leadership. And even though we are now the largest in the UK, we only have around a 5% share of the market still. And that fragmentation of our industry does not serve customers well. And so the momentum that we have and our future opportunity are not constrained by anything outside of our own control. And importantly, the factors that I think led to a lot of this growth in the past are still very much present today. And in fact, I think we're in better shape than ever. So firstly, our culture, that will always be our number one priority. But we've coupled that with a desire and a discipline to invest for long term success as well. And the business and that's underpinned the double digit compounding that you can see there as well. And the market headroom today is actually bigger than ever because we've expanded our offering, but the market continues to grow as well. So all of that means, in my view, that despite this, we are just getting started and the opportunity ahead is truly vast. And so I'll try and illustrate now how we plan to take advantage of all of that. So here it is. This is the soft cap strategy on a page. This simple diagram shows you the virtuous circle of growth and investment that is sparked and fired by that very special culture. This is the recipe that has created the growth you saw on the previous slide and will continue to power us into the future. That culture creates teams of people that strive for and deliver for customers in a way and with a tone that the competition just can't match. That creates trust and loyalty. And that leads customers to spend more and more with us every year. And that, in turn, enables us to invest in building a bigger and better proposition for them. So as well as that special people culture and attitude, our customers then have even more reasons to stick with us in the future. And so that cycle perpetuates and continues. This means that today, while the culture will always be the magic and most important ingredient, the depth and breadth of the offering that we have is also unique and also a source of competitive advantage. And realising our potential from here requires us to develop and drive both of those advantages. So that overarching strategy is unchanged and will be permanent. But what is evolving and what I'd like to try and show you now is how we've mapped out the components of the customer proposition that we need to stay at the top of our industry and how we plan to invest in and develop them to stretch our advantage further. So here they are, and I'll talk through them very briefly. And I've also indicated on here which member of the senior team in Softcat is responsible for coordinating and driving them forward. And I'll do this broadly by working from left to right, but I'll start a little bit in actually with the technology proposition and the service offering that sits alongside that, because together they inform some of the other components. So what do we mean by the technology proposition? Well, this is the technology we sell to our customers and how we organise it and present it to them. and i'll show you the key components of it in a moment but i'm starting here because it does inform the technical skills and the service portfolio that we create and will continue to build and that's why those two things are side by side they're very much two sides of the same coin and having set out and created the tech proposition and the service offering that goes with it we can then set a sales strategy aligned to those things and that's both from an organizational design point of view but also in the go-to-market motions that we create, the marketing plans we design and the channels through which we carry them. Then we have the vendor management strategy, and we don't talk about this as much as we do our customer relationships, but our partnerships with the vendors have always been a key strength of ours. And again, the power of those relationships has an awful lot to do with our culture and the teamwork that we're able to foster between organisations. And in addition to that, our growth has allowed us to invest in scale and the technical skills. So the accreditations we have with all of the top manufacturers in the industry are in their very top tier. But we're now seeking to manage the technology portfolio with each of our partners in a much more deliberate and purposeful way, making sure that we... carry the very best technologies with the most impact through the framework of our technology proposition into the market that gives our customers the broadest choice but curated in a way and at a time that is the most impactful for them and their particular circumstances and enabling much more collaboration and better co-selling with the technical and pre-sales teams in those manufacturers so the customer gets the best support from the combined softgat and vendor teams All of this will be enhanced by new digital platforms and data insights that we've begun to lay the foundations for in recent years. We've put a new finance system in two or three years ago, and we also at that time carried out a massive overhaul of our own database architecture and integration layers in our own technology. stack and that's allowed us to create data a data lake that's augmented by external sources and we've begun to use this in exciting new analytics and reporting internally this is applications in intelligence we can give to our sales people highlighting which customers might be ripe for which opportunities at which time but it also will feed modern marketing techniques and enhances as i said the collaboration that we can do with our vendor partners So it's the foundation for driving value and innovation from Microsoft Copilot as well, which we're now in the process of implementing across the whole organization. And it will enable as well the automation of many of our back office processes, something which we're already well underway with. So from left to right on this slide, each of these interlocking areas has a plan for its development over the next three to five years. They are coordinated as a whole and will be led through the unique teamwork that runs through the Softgat organisation. And as a result, the business that we will be three to five years from now will be smarter, will be more automated and capable of presenting our uniquely broad offering to customers in a way that is easier for them to interact with than ever. And our offering will be bigger, better and more cutting edge than ever. And I'll delve a little bit deeper now into the technical service that we offer to customers. And you can see here it's composed of three key layers. Firstly, the technical proposition, then the vendor portfolio that we have, and then finally the service offering that we've created over many years. And at the top, there are the key components of the tech proposition, as I mentioned. And there's nothing especially proprietary about the framework in and of itself, but it's only ourselves and maybe one or two others in the UK market that can really claim to be fully across all of those areas. Then in the second layer, and there's just a few examples on the slide, but there are hundreds that we work with in total, are the vendors that we have playing into the different components of that tech proposition. Each vendor's got a different portfolio, and of course they overlap and compete in some areas, and then are highly complementary in others. But again, in this facet too, there is nobody deeper or broader than SoftCap. We have the very best of the biggest manufacturers in the world coupled with the hottest emerging innovators in each area as well. And then finally, there's the third aspect of this technical offering for customers, the service portfolio that we operate. This is separated across the five disciplines that we've outlined there. And I'll explain each in brief. And to help me do that, we'll bring up the next slide, which expands a little and shows you the scale of the resources that we have in each of those five service towers. So firstly, our advisory function, this is exploring the art of the possible with customers. We've got a growing team of expert technologists who operate at the emerging edge of each area of that tech proposition. They understand the innovations being brought to market by the vendors. And we also have a group of chief technology strategists who are expert in different verticals. who can take some of that blue sky thinking and help apply it to customers in their particular organisation and their business model. Then our architecture services team, they can take those ideas and plans created at the advisory stage and start to turn them into workable solutions against which we can begin to build and design implementable programmes of change. At the implementation stage, we've now got designed workable solutions and we can help customers implement those. We can do it ourselves or we can supplement the resources that they and the vendors bring to that effort as well. And then finally, our support and managed services, post-implementation, we can offer support across many of the solutions that we're selling as well. So if we zoom back out to the three layers, and hopefully what you can begin to see is the three-dimensional set of permutations that this offering gives and why I talk so much about the breadth and depth of what we can do. And it's also why it's taken us 31 years of relentless growth and investment to build it. And it's so important, not just because we can show customers the art of the possible and where they're going, but we also have expertise in where they're coming from and a knowledge of their legacy IT to work with. And hopefully you can see as well why I mentioned before the term reseller relationship. hopelessly undervalues what we do for our customers today. If you imagine you're a CIO or an IT manager in a modern organisation, you haven't got a team that can possibly be across all of this. And even if you do, the vendors of the technology haven't got a team that can engage with you directly. So the need for a solutions provider with real substantive capability has never been greater and the quality of the Softcat offering is unique in the market. So we'll look now at how this rich technology offering combines with the outstanding customer service that we have to create lasting and profitable relationships with and for our customers. And this slide presents a view of the addressable customer base we have in the UK and how we're trading with it. And it's a new slide, so I'll try and take a bit of time to explain what it's showing. So just look in the middle to begin with, where you have a representation of the 50,000 addressable customers in the UK market. And in the bottom layer, what we've called the customer pool, are customers with whom we've either not started trading at all yet or have just made a brief start with. Then right at the top of the pyramid, you've got customers for whom we've become a trusted advisor and have likely to have been working with for years. And each layer of the pyramid is defined by the amount of GP each customer is generating. And what you can see as you work up that pyramid is that the longer we've been working with a customer, the more vendors technologies that we tend to be selling into them, the more GP that they're yielding and thus the lower that the churn rate becomes. And then you'll also notice that the higher up the pyramid you go as well, the faster is the rate at which we've been growing the number of customers in that layer. So while the total number of customers we're working with has only been growing in recent years around the 2% mark, the rate at which we are growing the most profitable layers and the deepest loyalty of layers of the customer base, that has been much, much quicker. So, for example, at the very top, you can see their customers yielding more than 100,000 gross profit per annum. The number of those customers has increased by 16.8% per annum over the last five years. And the rate of growth in the number of customers the next layer down is 6.2%. And so if you stand back from this diagram, hopefully what you can see is that while we continue to draw brand new customers up from the pool, our future growth can and will come much more from accelerating those customers that we've already made a start with up through this pyramid of trust. And that's why I think that 31 years in, we haven't really even scratched the surface of our potential yet. All we've really done so far is build the organisation that is capable of being to our customers what they really need, which is a provider with the skills across the full range of their technology infrastructure, capable of partnering with them for the long term. So I'll summarise now and then we can move to questions. Before I do that, I'll just give you a quick word on our ESG activities. And I won't dwell too much on this because you can read the page and you've heard us talk about this framework before and how we've embedded it in our operations. But related to our focus on culture, I would just like to draw attention to the awards we've won this past year there in the social column. And we really are proud to have been named the best place to work in technology and for apprentices and for women. And we have been named fifth best place to work overall in the UK. And there are a ton of people in Softcat working really hard to make sure that we preserve the very special culture that we have, but also make sure it's progressive and inclusive. And I think those awards show that they are doing a terrific job of that. So moving to summary then. So we've continued in this past year to execute really, really well, delivering growth slightly ahead of the target that we set ourselves on entering the year. And the future that we have is brighter than ever. The plans that we have to build upon the uniquely broad and deep offering we have have never been in sharper focus. And the growth opportunity ahead is huge. The plans that we have to realise that potential are sustainable, we think, for decades to come. We're incredibly well positioned in one of the most exciting industries in the world. And we have the heritage and the model, the determination and most importantly, the attitude to make the most of it. Not just in this new financial year, but way, way beyond that as well. So thank you for listening. We will take questions now. What we'll do is start with questions in the room and exhaust those first, and then I think we might have some questions from the line to move to as well. I don't know who's in charge of mics. It might be me by the looks of it. You've got them there. Perfect.