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.

Thank you. If you would like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. If you change your mind and want to withdraw your question, please press star 2. And please ensure your lines are unmuted locally, as you'll be prompted when to ask your question. The first question comes from a line of Tintin Stormant from Deutsche Numis. Please go ahead.

Can you hear me okay?

Loud and clear, Tintin.

Hello. Yeah, cool. I'll go for three. I'll just be cheeky. Sorry. First one is, are you able to give more color in terms of Q1 versus Q2 performance if there's anything to call out there? Two is regards to headcount growth. I think you're sort of kind of flagging 6%, 8% headcount growth for the full year, having done 6%. Is there anything to comment on that with that headcount growth versus double-digit growth, profit growth, is this something that sort of kind of going forward you feel that you could do, obviously, you know, sort of being able to generate more of that sort of kind of GP with less kind of, to some extent, one-to-one on the headcount side? And then thirdly, on pipeline, is that pipeline relative to sort of kind of previous years, is that trending higher in terms of, Are you getting just involved in larger opportunities that's giving you a little bit more visibility in terms of the projects being larger and you being able to see a bit further out?

Okay. Hi, Tintin. So let me kick off. Graham can jump in. So on Q1 versus Q2, the growth in Q2 was higher than Q1, but really that was sort of just a manifest of the base period. We were the difference in comps. And if you looked at the two year, it would be really pretty similar. So short answer is no, nothing really to call out there. But as I say, just pleasing progress across the half. On the headcount question, yep, you're right. So sort of full year, 6% to 8% sort of guidance and sort of similar range for H2. So we expect H2 to pick up a little bit, but probably land sort of, I guess, in the midst of that range for the full year. In terms of that relationship to gross profit, we... I think clearly sort of messaged we've invested quite hard in headcount the previous two periods. So it was always our plan as we entered FY25 to continue to invest in heads but to slow the growth rate down and sort of embed the heads that we've recruited over the last couple of years. We're also continuing to invest in IT as well to try and really drive sort of efficiencies as well across our model and as we continue to scale. So I think Moving forward, that allowed Graham to comment, we'd expect to see sort of a tightening of headcount, but I think that that's sort of a general trend.

Yeah, thanks, Katie. And hi, Tintin. Thanks for the question as well. Yeah, the headcount, we said, you know, through the cycle, we'd continue to invest. And over the past few years, while the market's been tough, we've grown headcount very significantly and said last year that we'd take time to digest that growth, drive a return off it, and so to expect lower growth this year. So I think you can expect lower headcount growth from us next financial year as well compared to, gp hopefully um it doesn't need to be a one-to-one relationship certainly not at all there's a lot of productivity and as katie says system investments that can keep gp growing faster than headcount in the future we hope um and you asked about the pipeline um it's our pipeline's a difficult thing to measure because we've got 800 well it depends how you count them but hundreds of nearly 1,000 sellers out in the market talking to 10,000 customers. But there's some clear appetite among some of our customers for big infrastructure projects that's been bubbling away for a while now, so it's not concentrating on any one customer or any one vertical, but encouraged by the number of conversations that AI and other topics is developing, and we think that will come to fruition with some good business in the second half. So we're excited about that.

Great. Thanks, guys.

Thank you.

The next question comes from the line of Damindu Jayawea from Peelhunt. Please go ahead.

Thanks, guys. Well done on good sort of results. I just wanted to ask a little bit more on the head counties. You're calling out the following year, the headcount growth will continue to lag GP growth. But can we assume the commissions will continue to grow in line with gross profits as they did in the first half? That's my first question. The second question I wanted to ask was, you flagged a survey where customers were obviously calling out cybersecurity as one of their priorities. primary concerns. Could you remind us and talk to us about your internal cybersecurity services capability? I saw when you kind of called out the internally provided services growth in the GII, you didn't necessarily mention cybersecurity. Was that part of the bid that grew? And then the last question I wanted to ask was, you talk about how you want to evolve the UK vendor management framework. Is there anything more to add there? I mean, what are you launching next year? I'm just intrigued. Thank you.

Thanks, Domingo. Yeah, and I'll try and answer all those in case you'll chip in if I miss anything. Firstly, on headcount commissions. So, yeah, we think headcount growth will lag GP. I think commission growth will probably continue to be closely tied to GP growth. I say probably because it does depend on the mix of products that we're selling and we don't mandate that. We follow customer need. But, yeah, commission growth will likely to remain consistent. closely pegged to GP growth would be my expectation. Security practice, yes, it's growing. Our security services is growing in breadth and capability and in terms of the revenue and profit it delivers to the company. So our security practice covers assessment services, implementation services and support and manage services. It's a really rich offering now. It includes some complex services in there such as Managed SIEM and MXDR, and it's highly accredited with the likes of Microsoft, which we use as a platform for that as well. So a strong capability for us, a source of rich conversations with customers and developing both service growth and product growth as a result of our having that capability. Lots of partnerships in that space as well to complement that. And our vendor management framework, it's really just a... a tightening up of how we work with vendors, having spent time more clearly defining what we offer to customers, which makes it easier for them and for our salespeople and the rest of our business to organise ourselves and present that to customers. The way that we play vendors in through that framework has been revisited and tightened up as well. I wouldn't make too much of that. It's really just about operational excellence, but also it is a response to the quality, the richness, the innovation that's happening in those vendors' portfolios and making sure that we're doing their innovations justice with our customers and making sure that we've got the time. to spend planning and developing our accounts with those top strategic vendors as well. So it's not a fundamental change in how we operate. It's just an evolution.

Thanks.

Thank you.

The next question comes from a line of Andrew Ripper from Panmure Liberum. Please go ahead.

Yeah, morning, everybody. Well done on a good set of results. A couple from me. I wanted to start with software, please. I'm wondering if you could explain a little bit more what happened to software margins. I think you mentioned, obviously, you don't disclose the GP numbers, but you mentioned the high single digit. I presume that relates to software. Can you contrast that with what's happened to GII and explain whether that's a short-term impact or a more sort of permanent shift in the mix?

Yeah. Hi, Andrew. So I'm sure you remember we focus on absolute gross profit and GII is largely just sort of an output of what we're selling and our margins can fluctuate quite a lot just depending on product mix and also sort of the channel that we're selling in if it's sort of large complex transactions they tend to come with a higher margin if it's something that's simpler and high volume lower. So nothing sort of to read into it in terms of trend, just really much more sort of just reflective of what we sold in that particular period. And, you know, overall really pleased with the way that software performed.

Great, thanks. Second one, the SME growth really stood out to me. you know, compared to enterprise and public sector in an environment where the UK macro has been pretty tough and companies, if anything, have been more cautious, I think, in terms of investing, given the increase in wage costs, particularly that's affecting some sectors. Could you basically expand on that? And, you know, if you consciously put more of your sort of sales capacity focused on sort of, you know, customers with sort of 2,000 seats or less?

Yeah. Hi, Andrew. It's Graham. So no, we don't we don't move effort around based on sort of short term trends that you might see in the economy like that. We often get people worried about our mid market business when times are tough because they think credit risk or demand dries up faster. We often see mid market perform well. in those periods they you know big corporate organizations tend to have more structured approach to budgeting and can get swayed by business sentiment perhaps a bit more um but really it's it's hard to read too much into any trends that we might present over six months we're biggest player in the market but we're only five percent market share so it's much more reflection on the collection of customers that we work with the idiosyncrasies of their budgets but you'll notice that all three of our customer segments grew strongly, and that's really what I'd emphasise, the fact that we've got diversity in the customer base, diversity in the offering that we've got, and seeing growth in all parts of that matrix and mosaic as well. Now, the mid-market continues to perform well for us. I think our opportunity in the mid-market and the enterprise space and public sector are all of a pretty similar size going forward as well.

Thanks, Graham. And then final one, can you give us a bit of color on what Copilot adoption has been like across your Microsoft customer base, please?

So it's continued on a similar trajectory, which I think we were seeing in the second half of last year, which is customers interested in it, trying it out, creating budget for it, creating use cases for it, and the quality of the products developing as well. So we're getting on really well with it in soft cap, able to talk to customers about that and seeing customers increasingly adopt it. It's not... And I think we said this before, we're not expecting suddenly a big inflection point. I think it will be a gradual build and that's what we're seeing. So good source of conversation and more and more customers starting to use and get value from it. Thanks, Graham.

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. The next question comes from a line of Dina Aburame from Morgan Stanley, please go ahead.

Hi, good morning. Congrats on your results and thanks for taking my questions. Just two on my end. First, in regards to the end market of your clients within SMB and enterprise, could you please touch on which sectors or industries you see are driving most growth? And then secondly, I understand that GP growth is broad-based in terms of your customer groups, but are you seeing any differences in client attitudes in terms of IT spending, particularly when you're comparing SMPs versus your enterprise customers? Thank you.

Thank you. In corporate, which sectors are driving strongest growth? Again, hard to generalise, but if you think about the sectors in the economy that are doing well and those that are under pressure, it broadly reflects in what they're spending on IT, I think. So areas for us that have done well, kind of financial services, not hospitality and retail, but very hard to generalise again, but, yeah, broadly reflecting sectors. what you're seeing in business confidence in the different sectors, I would say. And sorry, could you just try the second question again? I'm not sure I fully understood it.

Yeah, of course. I suppose just in terms of client attitudes, in terms of IT spending, can you maybe give us more color on how you're seeing that? Has attitude changed since 2024? just to get an idea of the spending environment.

Right, yeah, thank you, sorry. No is the short answer, not really seeing any change yet. I think the sentiment from customers has been broadly the same over the past six months as it was over the 12 or 18 months prior to that. I think the change in government that we've seen in the UK, the change in approach, change in taxation and government spending and what's been happening in the broader world led to a fall in business confidence or rather has kept business confidence a bit lower than it might otherwise have been so I think that the conditions have continued to be somewhat challenging we're lucky in inverted commas to be in the industry that we're in which I think despite that's been in structural growth but I don't think we've seen a material shift in customer sentiment yet.

The next question comes from the line of Rahul Chopra from HSBC. Please go ahead.

Hello, good morning. I have two questions. In terms of could you give a sense of productivity of new employees who have joined in the last 18 to 24 months? Basically, where are we with more tenured sales force and more generally the past hiring plans? I just wanted to get a sense of that, please. Second question is around basically, again, just coming back to instance of market growth. Could you give us what is your view of the market growth more generally within public sector and corporate sites? I just want to get a sense of basically market share of performance versus soft cash growth here. Thank you.

OK, thanks. The line wasn't great, so I think I've got the questions. But if I've misunderstood them, let me know and we'll try again. New employees, I think you're asking where are they? Which departments are they going into? Where are we investing in headcount? And the answer to that is, again, it's broad based like it always has been. We're building our sales teams and the technical departments. And service teams that support those and investing in our back office capability, like in previous periods, that growth has been skewed towards the technical and service side of our organisation as we aim to go deeper and provide a fuller service and expand our capabilities into new areas for those customers. And in the market growth... really hard to do this, even with the benefit of hindsight. I think we're growing quicker than the market. We've generally thought we're growing two or three times the rate of the market. Still, I think a pretty reasonable estimate. I'm not sure that I can discern a big difference between the growth in those guesstimates between corporate and public sector. Maybe slightly biased towards corporate over the most recent periods but again that's it's very different and different verticals and different parts of public sector but i think our performance and gaining of market share in both the corporate and public sector space has been good and probably pretty similar but very hard to quantify exactly did i get the questions right or or was there any expansion on that you need

Thanks, Karim. I think my first question was done more generally in terms of the productivity changes in the new employees versus previous hires. That was probably the core of what I wanted to get through.

Yeah, sorry. No. So no, no real difference. The people, and I think you're referring there really to the sales people that we're bringing in and how they're doing against targets. So the people we're bringing into sales, their productivity, their ability to hit targets has broadly followed historic norms because the market has been tougher recently. That maybe presents them with a few more challenges at times like this, but they're performing well and new recruits making a good start.

Thank you very much.

Thank you.

The next question comes from a line of Joey George from JP Morgan. Please go ahead.

Yeah. Hi. Morning, guys. And thanks very much for taking my question. I think with the FUIA results in October, you gave us a little bit of color on how Q1 was trending versus the guidance at the time. And I'm just wondering now how Q3 has trended versus the updated guidance. And then just as a follow-up question as well, just looking at the public sector GII growth through H1, it's still close to double digit, but it's it's a bit slower than H1 GII growth in public sector has typically been over the last few years. And just obviously, there's been a lot of headlines around efficiency of government spend and allocation of funds right now. So with that in mind, as you look to April, which is typically a larger public sector month, what are the sort of early indications you're seeing there with regards to public sector spend?

Thank you. Q3, what we're seeing, it's really too early to say. A lot of our sales cycles close, as you might imagine, as the quarter ends. These earlier stages of a quarter are less meaningful. Too early to really give you any insight into how Q3 is trending. So sorry about that. Public sector GI growth. So again, hard to form conclusions about short periods and what we're seeing relatively speaking. I think our public sector business is in really good health. Our offering is very good. Remember that a lot of IT spend, infrastructure spend, particularly whether it's public sector or corporate, is recurring by nature. Software licenses, renewals, hardware that needs refreshing or adding to. So we're still seeing good growth and demand from our public sector customers. Yeah, maybe with the change in government and the rhetoric about the need to find efficiencies, some government departments are being affected by that. But we're still seeing strong demand and growth because their IT infrastructure is critical to them. And I think, come what may for public spending, our public sector business has a great opportunity going forward and we'd expect it to remain in growth.

Great. Very clear. Thanks very much.

The next question comes from a line of Harry Reid from Redburn Atlantic. Please go ahead.

Hi. Good morning. Just one for me. Curious because obviously gross profit per customer remains the key driver of gross profit growth. You said in the past that your share of customer wallet is part of mid-20s percentage-wise. I'm curious if you have any estimates of what the ceiling for that could be, i.e. the amount of IT procurement that an end customer is willing to allocate to the channel and then the growth potential there because your runway for growth seems quite large given that context. And then maybe a follow-up is that does services and investment in services help open the conversation to procuring new IT that you maybe didn't have a footprint in before? Thank you.

Thank you. So we try, and again, it's not a perfect science, but we try to define our opportunity in what is truly addressable. So in theory, we could do 100% share of Wallet with each customer because we've tried to make sure that that that share of wallet, that market share is couched in those terms. Now, clearly, customers will choose whether or not they want to put everything through one provider and whether that's healthy for them. But we do see a share of wallet in some of our longer standing customers of 70, 80% and upwards. So that trust that we gain with them can be very powerful over time. I don't see any reason why in the way that we define this, that we can't get to 60% share of wallet with every customer over time. I think that would be a reasonable goal for us to aim for in every account. Our service business is really important, yes, in opening up that opportunity. When we see technology evolving, customers need help and advice on that. and us being able to respond to that need for help and advice is a crucial part of how we win their business, how we win their trust, how we show them that we're a provider that can go on the journey with them over a very long term, no matter what happens to their infrastructure and what innovations come through in technology. The way that you phrased the question around how much would a customer put through the channel, Customers don't really think of it in that way. They look at where they can get the best advice from. Really, really large customers will have capable internal teams and vendors will create a capability to talk directly to those customers. internal teams for the very, very large customers. They've always done that. So really big enterprise-grade customers will put probably less of their spend through the channel than the smaller players who need the interaction that we provide more than some of the bigger ones. But what we don't see is that proportion of business going through the channel move significantly period on period. You'll get different plays from different vendors at different times in different segments. If there was a trend, I'd say more business has been going through the channel in recent times. The one exception to that is a lot of investment in the AI data center space has been done by the hyperscalers, and a lot of that work goes directly. So some of that recent AI-driven growth has not been via the channel, but... Everything else tells me that the channel, the service, the value that we add is as healthy as it's ever been. The complexity of IT infrastructure plays into that, and I think that's why you're seeing strong growth in Softcat as a result.

Great. That's very clear. Thanks. If I could just do a quick follow-up question. On a different topic, I heard from a competitor that obviously there's a lot of uncertainty around Microsoft commission changes, but there was a positive surprise on public sector rebates. I'm not sure if you're seeing that as well, if there's any additional colour you can give there.

Same as what we've said in the past on this topic, the Different people were surprised by it. I don't think we were. I think Microsoft have made changes that they've signaled for a long time now. They make good sense. We understand where they're going. What they're demanding from us is very, very clear. It is a challenge to respond to. We've got to move things around. We've got to change some sales motions. But we love that because we think Softcat's ability to respond to it is as good as anybody's. So, yeah, the effect of those changes is in our forecast, in our expectations, and we're very positive about what that's doing for our relationship with Microsoft as we work with them through those changes. I think there's a lot of opportunity in that for SoftCap.

Great. Thank you very much.

As a final reminder, if you would like to ask a question, Please press star one on your keypad. We have another question from Damindu Jayawira from Peel Hunt. Please go ahead.

Thanks, guys. Just here if you have time. One is on the capital allocation policy. So I think for the last few years, you've had this kind of semi-active, you've been semi-actively looking at the two avenues of M&A bolt-ons and what you can do more for the overseas customers. I assume nothing really changed in that strategy, and therefore, how should we think about if there's no change to your special dividend policy, I assume, because you always returned excess cash beyond what you considered you should keep on the balance sheet. That's my first one, and then I have two quick follow-ups.

Okay, thanks, Damindu. Katie will maybe comment in more detail on special dividend, but there's been no change in our stance on M&A, the way that we consider M&A. as an option is the same as it has been over the last two or three years. We look at different areas. I call it a no-lose effort because we'll either find something really compelling, act on it, bring it into soft cap, and it will accelerate our capabilities in some way, or... We'll learn a lot about capabilities that we're trying to build by looking at targets, and that will inform our organic growth strategy. So no change in our stance, still an option for us.

Yeah, and on the capital allocation point, our capital allocation policy is quite clear, excess cash. If there was a brilliant opportunity and we've got a pretty high bar there and we needed the cash, then Yeah, the cash returned to shareholders could go down, but obviously it would just depend on the size of any opportunity. And historically, that cash has always come back to shareholders.

And then the other one, Graham, this actually relates to the IT Channel Oxygen interview you gave where you called out the no-lose M&A policy. You called out cybersecurity gross profit growth in excess of 20%. I just wanted to verify that number. Is that accurate at gross profit level?

In our cybersecurity services business, I think yes. Yeah, so cybersecurity services we've invested in over the last three or four years and our growth, the growth in the contribution from that has been around about 20 percent or above over the last three or four years. So it was a generalization over a. long period of time. And of course, the service part of our cybersecurity offering is a relatively small proportion. It does lead to a lot of product sale, but growing very strongly as we've invested in new capabilities there over recent times.

Yeah. And the last one is just an observation. I It's remarkably stable at around 5% since kind of 2022 in every single half, it feels like. Just wanted to check, that's not a metric you necessarily monitor, right, operating profit over gross to invoice income, because it almost feels like you managed to it because of how stable it's been despite the mixed changes and sometimes low margin software sales.

No, so I don't think I've ever looked. Well, indirectly we look at that because it's one of the moving parts, but as a direct comparison, it's not something we monitor. It's certainly not something we manage to. It doesn't surprise me it's been quite stable. We do say that our gross margins move around depending on customer demand more than anything else. So customer demand goes from one place to another in that evening out over time. It makes perfect sense to me, but we don't manage to that metric at all.

Yeah. Thank you. Amazing London offices, by the way, the new offices. Look forward to seeing them in person.

Well, we might have you there for the full year results. We'll see if we can make that work. It's a great space and it reflects what we're doing with some of the other locations as well. We're moving Manchester to a city centre location. It's really important that in the way that work, modern work works, that people have that collaborative space. So, yeah, really pleased with that. Thank you for noticing. Thanks.

There are no further questions, so handing back to Graham for closing remarks.

Thank you. And just to reiterate our appreciation for your time and interest in Softcat, really pleased with the first half momentum we've developed, good confidence going into the second half. Most importantly, lots of exciting investment into the business's long-term future and the opportunity that we think exists for us in the markets that we're in is as vast as it ever has been. So we'll look forward to keeping you posted on progress. Thank you for your time today.