Softcat plc

So good morning and welcome to the Softcat half-year results presentation. This is for the six months ended the 31st of January 2025. Thank you very much for joining and for your interest in the company. I'm Graham Charlton, Chief Executive, and I'm joined today by our CFO, Katie Mecklenburg, who you'll hear from shortly. Before I hand over to Katie, I'll begin with a quick reminder of who we are and what we do. Katie will then headline the results for the period. I'll come back after that and give you an update on the strategic progress that we've made in that time as well. So Softcat is the largest provider in the UK and Ireland of technology infrastructure solutions. This includes extensive capabilities across consultancy, implementation and other related services. Our market leading portfolio is incredibly well diversified, covering the breadth of cybersecurity, hybrid cloud infrastructure, networking, workplace technologies, and as well as data, AI, and automation. And we do all of this across hardware, software, and services. We currently have more than 2,600 employees, and our consistent strategic execution coupled with a disciplined long-term investment strategy has enabled us to grow our gross profit and operating profit by an annual average of more than 15% over the last decade. We work with all the biggest and best-known technology vendors globally, often as their largest or one of their largest partners in our domestic markets. And we are also regularly approached by new emerging vendors as a primary route into the lucrative and quickly growing UK and Ireland markets. This provides us with fantastic access and insight to the very latest in IT solutions and customer demand trends. The success and resilience of our business is demonstrated by the diversity of our customer base, with more than 10,000 customers ranging across the mid-market into enterprise and from the corporate into the public sectors. And we continue to grow our overseas presence as well, driven by the demands of our multinational customers. So as I said, I'll come back more and talk about how we're developing those capabilities and shaping our business to capitalise on significant growth opportunities ahead of us. But for now, I'll pass you over to Katie, who will give you an overview of the first half results.

Thank you, Graham, and good morning, everyone. I'm pleased to share with you Softcat's results for the first half of FY25. In summary, our results for the period reflect the resilience of our business model and consistency in strategic execution. Despite the backdrop of continued macroeconomic uncertainty we've once again delivered double-digit gross profit growth which is our key measure of income alongside double-digit growth in operating profit which was slightly ahead of our expectations. Gross profit growth of just over 12% reflects a 1.4% increase in our customer base and a 10.7% increase in average gross profit per customer demonstrating further good progress on our two key strategic goals. Operating profit of 73.7 million, which is an increase of 10.4% versus H1 FY24, was slightly ahead of our expectations due to a slight over-delivery on gross profit during the period. We continue to invest in future growth with average headcount growth of 6.6%. As planned, this is a more measured level of investment compared to the last few years, as we have been able to leverage the more significant headcount increases we have made in the previous periods. We thus remain well placed to deliver on the considerable future market growth opportunities across our market. We've also maintained a strong balance sheet, delivering cash conversion of 110.9% and ending the period with £141 million in cash, with the Board approving an interim dividend payment of 8.9p. Moving on to the summary income statement and starting at the top. Grossed invoiced income grew by 19.3% to 1.5 billion. This was driven by particularly strong growth in software, up 22.5%, and hardware, up 18.5%. Software growth was broad-based, while hardware performance was largely driven by strength in data centre and networking sales, alongside server and compute. Services GII grew by 8.8%, supported by strong growth in internally delivered services, particularly support services. Revenue grew by 16.8%, largely driven by the increase in hardware GII. Hardware is reported gross under RFRS 15, and thus revenue growth is materially in line with GII. Services revenue growth of 17.6% was ahead of GII growth, reflecting a higher share of internally delivered services in the period, which are reported on a gross basis. while software revenue grew behind GII, causing total revenue growth to be lower than GII growth due to a lower software gross margin, reflecting product mix and a mix shift into high-volume, low-margin transactions. Gross profit, which is our primary measure of income, grew by 12.1%, to £220 million. This is consistent with the full-year guidance we set at our FY24 results for low double-digit growth and slightly ahead of our expectations for the first half. Growth's profit growth was broad-based across our customer segments of enterprise, mid-market and public sector, and on a product basis of hardware, software and services, with each growing either high single-digit or double-digit. Across our technology groups, growth was driven by security, reflecting the continued prioritisation by customers' investment in cyber, together with growth in data centre and networking, where demand was broad-based and where we continued to see a strong pipeline. In workplace, client devices recovery continued to be slow and thus is still not a strong contributor to our growth. Overall, gross margin declined by 100 basis points year on year, reflecting the impacts of several higher volume, low margin sales in the period, together with the decline in software margins. Operating profit grew by 10.4% to 73.7 million, slightly ahead of our expectations, reflecting the GP over-delivery. Operating costs grew by 12.9% year on year, with increased commissions, which grew broadly in line with gross profit and circa 11% increase in wages and salaries, driven by average headcount growth of 6.6% and average increase in cost per head of 3.9%. Moves to new offices, including the dual running of sites during the fit-out periods, also contributed to the operating cost growth. Our continuous investment in the long-term future of our business is reflected in a small decline in our operating profit to gross profit ratio. This investment in our capacity and capabilities puts us in a strong position to build on our current momentum and to further improve our market-leading UK position. And lastly, net interest income in the period increased to £3 million due to improved cash management, while tax increased in line with profit growth, resulting in profit after tax growth of 12.5%. Touching now on our customer base and portfolio offering. Our growth is supported by a diverse customer base and the breadth and depth of our customer offering, which is a key strength of our business and underpins the sustainability of our growth model. On the left, you can see the latest customer segmental view of our business, which remains very well balanced. Around half of our gross invoice income is generated by the public sector and enterprise segments, with mid-market accounting for the other half of the business. The middle chart shows the spread of our activity between our traditional technology resale business and our service offering. And on the right, you can see that we generate significant income from all areas of technology, ranging from the cloud and data centres through networking security and end-user compute, with balanced growth across all three segments in the period. This diversity provides us with significant competitive advantage and is one of the factors we believe underpins the continued growth in what has been a more challenging market and will continue to support our ability to scale. Moving on to our customer metrics, the chart on the left shows the growth in our entire customer base and growth in GP per customer on that basis. These are the key measures of the two elements of our strategy, adding new customers and selling more to existing customers. During the period, we've grown our customer base by 1.4% to almost 10,300 customers and grown gross profit per customer by 10.7% to £43,000. The graph on the right shows a more detailed view of those customers with whom we have an established relationship and experience lower churn rates. This view focuses on the more than 8,000 customers that deliver at least £1,000 of gross profit each year. In this cohort, there is a more balanced profile of growth between customer growth of 4.9% and GP per customer growth of 7%. The longer tail of transactional customers continues to represent an important source of future growth for us, but our established customers continue to account for around 99% of the group's gross profit. Now moving on to cash. we ended the period with a cash balance of £141 million, an increase of £28.5 million year-on-year, after the payment of ordinary and special dividends totalling £78 million. Cash conversion of 110.9% reflects good working capital management, together with a £16 million prepayment by a single customer. Excluding this advanced customer payment, cash conversion would have been 89%, in the middle of our target range of 85% to 95%. CapEx increased to 7.9 million in the period, primarily reflecting investment in new office openings. In line with the income statement, higher cash tax reflects the growth in profits, while interest income, which is included in other, improved compared with last year, driven by better cash management. The next slide covers the interim dividend. We've announced an interim ordinary dividend of 8.9p, which is up 4.7% year-on-year. This reflects our slightly amended policy. We will now pay out one-third of the previous year's ordinary dividend as an interim, whereas previously we paid out one-third of the estimated current year dividend. Our full-year dividend policy remains unchanged, and we continue to target paying out between 40% and 50% of profit after tax on an annual basis. Touching now on capital allocation. We have a disciplined approach to capital allocation. Our framework remains unchanged. Our top priority remains investing in future organic growth, which enables us to continue to take market share in a growing market and helps us scale our business over the long term. Our second priority is to maintain a progressive ordinary dividend policy. Any excess capital is then either allocated to strategic investments or returned to shareholders. We continue to actively explore acquisition opportunities, and our current core focus centers around bolt-on acquisitions that could help enhance our technology proposition in the UK market. And finally, moving to the outlook. Based on our performance in the first half, we are slightly upgrading our guidance for operating profit this year. We continue to expect to deliver another year of double-digit gross profit growth in FY25, with operating profit growth now expected to be low double-digit up from high single-digit previously, supported by an encouraging second half pipeline. And with that, I'll now hand over to Graham to run through the strategic update.

Thank you, Katie. And as you heard there, we're really happy with that strong performance in the first half, but we're also very pleased with the progress we've made on implementing our strategy over the last six months. And I'll now give you a recap of what that is and an update on how we're doing. So you can see here an overview of that strategy, which is shown and is unchanged from the one that we used last year. It's a simple illustration of the virtuous cycle of growth and investment that is powered by our special culture at Softcat That is what has underpinned our success to date and it will continue to drive our growth into the future as well. Our culture creates passionate teams of people who work collaboratively as they strive to meet the needs of their customers in a way and with a tone that we think our competitors can't match. This creates a cycle of trust and loyalty that results in customers placing more and more of their requirements through us each year. And that fuels further investment in our proposition, reinforces our competitive advantage over time. And as we've said before, our culture and the positive attitude shown by our people will always be the main driving force of our success. But in an increasingly complex technology landscape, it's the breadth and depth of our offering and our wealth of expertise, too, which is becoming an ever greater source of advantage as well. And that's why our strategy demands that we continue to develop both of those elements and ensure that we continue to be a sustainable and market-leading growth business. And I'll touch now on each of these areas in more detail. So firstly, our culture changes. And Softcat, we believe, is a truly special place to work. It's full of talented, dedicated people who demonstrate that positive attitude day in, day out. And this unique culture forms the basis of a differentiated customer service that helps us retain and strengthen customer relationships over the long term. And I've tried to highlight here some of the key elements that make our culture so special. But of course, trying to capture culture on a PowerPoint slide is a bit like trying to bottle mist. And our culture is a vibrant, living thing that our people would probably each have slightly different ways of describing. And what we don't do... is paint values and corporate slogans on the wall and try and get people to recite them. But hopefully what we've captured here gives you a flavour of it because our culture is very open. People can speak freely. They know that their views and opinions matter to the company. Senior leadership are very visible, very accessible. We don't have offices and symbols of power to hide away behind. We do tonnes of recognition, especially for people who show that great attitude, go out of their way, to help each other and to help our customers. Low ego coupled with very high drive is a key combination that we're looking for. We've always been keen to create vibrant and welcoming office environments too, providing the facilities that enhance the connection between our people and also between our vendors and customers when they come to visit us. But as much as anything else, we put trust in our people to do the right thing for their customers, and we keep the business as simple as we possibly can as well, so their efforts don't get bogged down by unnecessarily complex processes and systems. And we've seen the results of this culture in our performance over the past 32 years, and you can see at the bottom of the slide there some of the external recognition we've received for it over the past six months. So culture is a driving force, but these days it's powering what we believe is the fullest and most complete offering in the market too. So we'll turn now to the components of that customer proposition. And you can see here how we segment that internally to enable us to form clear plans for its strategic development. Each area is coordinated and led by a member of the senior team that enables clear ownership, but also facilitates really strong teamwork as well. Our vision is to build a business which is increasingly automated, smarter and easier to work with. This will improve both the customer and employee experience and ensure that our uniquely rich combination of products and technical and service offerings can be delivered to the right customer at the right time in a way that works for them. Our sales strategy with targeted go-to-market motions built in partnership with our vendors then carries that offering wrapped in the unique Softcat culture into the market. And in the past six months, we've been especially active in maturing our approach to large and complex customers in both the corporate and the public sector space. And partnership with our vendors has always been a key strength of ours too. And during the first half, we've worked on evolving the framework through which we do this. This will allow us to work even more closely with our very top strategic vendors, such as the likes of Microsoft, who are evolving and innovating their technologies and offerings faster than ever. And all of this is enhanced by the new digital platforms and data insights that we're developing. Just as many of the customers we serve are looking more closely at the way their data is organized, we're enhancing our own database architecture, the integration layers between our different systems to enable us to leverage innovative analytics and insights. Microsoft Copilot is one good example of an application that we've started to harness the benefits of, particularly through the automation of back office processes and improving productivity, and importantly, the quality of work. We've also recently selected Microsoft's Dynamics platform to replace our current sales system, and this will ultimately enable our salespeople to leverage integrated AI functionality between these core systems. And then this next slide brings all of this together and illustrates how our customers can benefit from a clearly organized set of products and services presented to them through a clear framework built around the common building blocks of modern infrastructure. And you can hopefully imagine how each of these vendors' product sets are segmented across that technology proposition, supported by our teams of specialists and solutions architects. Each of these areas then has all of those service disciplines playing through it, carrying a tailored approach to customers in the mid-market, enterprise space and public sectors. This gives our account managers the confidence and credibility to deal with customers, knowing that whatever issues or challenges that customer is currently facing in whichever part of their technology stack, that SoftGap is the best partner to help them with that over the short, medium, and long terms. And because of the richness and breadth of our business, we're valued by our customers for the insight that we can give them into the challenges being faced by other organizations and what solutions are being implemented. So this next slide gives you a flavor of some of those hot topics that we're currently helping customers with. And I won't go through all of it, but Microsoft Copilot continues to be of interest to customers, who are keen to hear the user cases being developed in different industries. In the data center space, the architecture of both storage and compute has never been more important as the age of AI really starts to dawn. Carefully balanced considerations have to be made around the type, cost, and location of the right processor for each individual workload, as well as issues such as data sovereignty and latency. And good data engineering is increasingly important, too, if that data is to be fit for use within complex emerging systems such as agentic AI. And for that reason, we're investing significantly in both our own capabilities and building a strong partner network in the data and AI segment of our proposition as well. All of this activity, of course, gives new approaches and new avenues of attack to the cyber criminals. And consequently, we continue to see very strong growth and investment in our security practice. And for our customers, having a single partner who can range across all of these issues with them is a huge advantage. The benefit for the customer is advice on integrated solutions that can be implemented as part of a long-term strategic roadmap where the individual components work together and don't conflict with one another. For our account managers, they can focus on doing the right thing for the customer in the long term, knowing that that will also bring them their very best earning opportunity. And that alignment of interests has always been a really powerful force in the sustainability of Softcat's growth. And then this next slide, which will be familiar to those of you who saw our last full year presentation, it hopefully illustrates the point I was just making nicely. It shows how we evolve our relationships with our customers and add value to them over time by doing exactly what I just talked about, by focusing on using the full breadth of our offering to help them over many, many years of partnerships. Each layer of the pyramid that you can see here is defined by the amount of gross profit delivered by the customers. And so what you can see as you work up the pyramid is that the longer we work with a customer, the more vendors we tend to sell into them, the more business we do with them, and the lower the churn rate becomes as we build that lasting trust. In the bottom layer, what we've called the customer pool, are customers with whom we're either not yet trading or have just made a start with. And these customers generally represent new opportunities, predominantly for our junior cohort of account managers, but also for senior people as well, who will typically always maintain a small pool of prospects. But as you move up through the layers, the relationship builds towards that trusted advisor status. And interestingly, at the very top, where we show customers yielding more than £100,000 of gross profit a year, we've seen some of the fastest growth in that cohort recently. And this isn't purely a reflection of the size of customers and IT budgets in that layer. In fact, only around a third of customers in that top layer are enterprise-scale customers. And this shows that we've got significant scope to do more in the enterprise space, but also how successful we are in the mid-market as well. And also that the size of IT budgets now is very significant across all different shapes and sizes of organisation. In terms of growth in customer numbers, the number of customers in total that we're working with has been growing at around 10%. 1% or 2% per annum in recent times. The rate at which, though, that we are converting customers through that pyramid, customers with whom we've just made a start, converting them into more significant relationships, that has been accelerating. And this reflects our strategic aim to go deeper with existing customers and will continue to be a focus for us over the next three to five years. And so to summarise then, we've continued to successfully execute our strategy during this latest period, delivering results slightly ahead of expectations over the past six months and giving us good momentum heading into our second half. We've made some really exciting progress and have ambitious plans to further enhance that customer proposition and match the ambition and innovation that we're seeing from our vendor partners. Our unique culture continues to be the bedrock of our purpose and the sustainability of our growth. And that sustainability is further supported by an incredibly healthy balance sheet and cash flow dynamics. So as I said at the start, thank you again for your time today and interest in Softcap. We're very happy now to take any questions.