Softcat plc

Okay, good morning and welcome to the Softcat first half results for FY26. I'm Graham Charlton, Chief Exec at Softcat, and I'm delighted today to be able to take you through an exceptional set of results and period of growth for Softcat. And to help me with that, I'm joined by our CFO, Katie Mecklenburg, who you'll hear from very shortly. But before I hand over, I'll begin with our usual quick reminder of who we are. and the dimensions of our business today. These metrics continue to change quickly as we grow, and this latest period has seen an acceleration in that expansion as we've stretched our lead further as the UK's largest provider of IT infrastructure solutions. We operate across the entirety of the modern infrastructure stack, and as well as having the broadest offering, we've also got by far the largest and most diverse set of customers in the UK. And the growth in that customer base has also accelerated in this latest period. Recurring customer count now stands at nearly 10,500, and it's the combined breadth of our offering and the strength of that customer base that is behind the acceleration in our growth. It's also that combination that provides us with such a huge opportunity in the future, and I'll talk after the financial update from Katie about how we plan to seize upon that and how AI is enhancing it in a few very specific ways. And against that opportunity, we've continued to invest. Those investments have been targeted at our own technology, our people and our workspaces. Headcount is now just shy of 3,000. We've relocated the majority of our offices to prime contemporary city centre locations over the past few years and we're in the process of completing the rest of them. We've grown our teams across all areas again, built leading edge skills and capacity into those teams, and we've given our people access to a full range of modern applications and tools. As I said, I'll talk more about our strategy shortly, but for now, I will pass you to Katie, who can give you the detail on a very strong set of half one numbers.

Thank you, Graham, and good morning, everyone. I'm very pleased to share with you Softcat's results for the first half of FY26. In summary, we have delivered strong growth in GII, gross profit and underlying operating profit in the year, all of which are significantly ahead of our expectations at the beginning of the year. This strong performance reflects the strength of our business model and excellent execution in the period. We have also benefited from the sustained investments that we've made over recent years, including investments in the breadth of our offering and capabilities and in improving our internal operations. Gross profit, which is our key measure of income, grew by 22.6%, reflecting strong underlying business performance, supported by the delivery of previously announced larger solutions projects and a pull forward of some customer orders due to memory shortages. The gross profit growth was delivered by a 3.5% increase in our customer base and an average gross profit per customer growth of 19%. Underlying operating profit of £93.8 million was an increase of 27.3% versus half year last year and reflects the flow down of the gross profit over delivery together with further investment to drive future growth. Underlying operating profit excludes the impact of £8.5 million of non-underlying costs and I'll run through these items in more detail shortly. We've also maintained a strong balance sheet in the period with underlying cash conversion of 147.6% and we've ended the period with £206 million in cash. During the period, we announced a £45 million share buyback programme to return excess capital to shareholders and the Board has approved an interim dividend payment of 9.9p per share. Finally, underlying basic EPS increased by 25.8% year-on-year. Turning to the summary income statement and starting at the top. Grossed invoice income grew by 33.3% to just over £2 billion. This was driven by particularly strong growth in hardware, up 78.7%, with services up by 29% and software up by 18.6%. Hardware growth was driven by strength across data centre, networking, server and compute sales, supported by the larger solutions projects. However, only half of the large data centre project that we were expecting to complete by the 31st of January is reflected in the period, with the balance now expected to be recognised in quarter three. Software growth reflects strength in cybersecurity licensing software and Microsoft CSP deals, while services growth was primarily driven by partner-provided businesses in the period. Revenue grew by 53.5% ahead of GII growth, largely due to a higher share of hardware, which is reported on a gross basis under IFRS 15. Software revenue grew ahead of GII, primarily due to a shift in mix towards higher margin security licensing. Services revenue growth of 6.9% was behind GII growth, reflecting a higher share of externally provided services at lower margin, which are reported on a net basis. Gross profit grew by 22.6% to £269.9 million. This exceeded our expectations at the start of the year and reflects broad-based strength across our portfolio of technology solutions and customer segments. Gross profit growth was particularly strong in our corporate segment during the period, with both enterprise and small and medium businesses growing strong double-digit, with public sector growing high single-digit. On a product basis, hardware, software, and services all grew double digit, and by technology area, growth was driven by continuing customer demand for cybersecurity solutions, alongside extensive growth in data center and networking, supported by the larger solutions projects. In workplace, GP growth was more modest, reflecting continued improvement in demand for client devices and the impact of Microsoft incentive changes, which we have now annualized. Overall, gross profit as a percentage of GII declined by 120 bps year on year, primarily due to the impact of larger solutions projects at lower margin, while gross profit per employee grew 15% year on year. Moving slides, please. Underlying operating costs grew behind gross profit growth. Commissions and other variable pay grew broadly in line with commissionable gross profit, while wages and salaries grew by 15.4%, driven by average headcount growth of 10.5% in the period. This was 7.7% excluding Oakland, an average cost per head growth reflecting an annual pay increase of 4%, and the continued increased mix of specialists. We expect full-year headcount growth, including Oakland, to be low double-digit. The growth in underlying operating costs also reflects the impact of the step-up in employers' national insurance contributions, together with investments in our internal IT team, data and digital capabilities, and increased costs associated with office moves to larger sites. Underlying operating profit grew by 27.3% to 93.8 million, ahead of gross profit, and as a result, the underlying operating profit to gross profit ratio improved to 34.8% from 33.5% last year. In the first half, we incurred 8.5 million of non-underlying costs. These include system implementation costs of 7 million, relating to the new cloud-based sales and HR systems, which despite being one-off development costs, cannot be capitalised. In addition, there is a £1.5 million charge relating to the acquisition of Oakland, which consists of contingent consideration of £1.2 million and £0.3 million of amortization of acquired intangibles. We now expect FY26 non-underlying charges at the bottom of our £20 to £25 million guided range, with the majority relating to the sales and HR systems implementation, as we continue to build our foundational platform for Softcat's data, digital and AI transformation journey. After deducting non-underlying costs, statutory operating profit was £85.2 million, an increase of 15.6% year-on-year. Net interest income from the period was marginally lower year-on-year at £3 million. This reflects an increase in interest income due to improved cash management, more than offset by the increase in interest costs from the new office lease liabilities. And lastly, the effective tax raise increased by 60 basis points due to an increase in non-deductible expenses, resulting in profit after tax growth of 13.9%. Turning now to our customer base and portfolio offering. Our growth continues to benefit from the diversity of our customer base and the breadth and depth of our customer offering. On the left, you can see the latest customer segmental view of our business, which remains very well balanced. The public sector and enterprise segments of our business together account for just under half of gross invoiced income, with small and medium businesses accounting for the balance. The middle chart shows the range of our activity between our traditional technology resale business and our services offering. And on the right, you can see that we continue to generate well-balanced income across all areas of our technology portfolio, stretching from the cloud and data centres through networking, security and end-user compute. The diversity of our customer base and comprehensive breadth of expertise, product offering and services remain a key strength of our business, and this underpins the sustainability of our gross model and our opportunity to further scale. Moving slides and on to our customer metrics. The chart on the left shows the growth in our total customer base and growth in average gross profit per customer, which demonstrates our ongoing ability to acquire new customers and sell more to existing customers. During the period, we grew our customer base by 3.5% to more than 10,400 customers, with net new customers added across all of our segments. Gross profit per customer over the last 12 months grew by 19% to £52,200, reflecting progress throughout all of our technology towers. The graph on the right shows the growth of customers with whom we have an established trading relationship, as measured by customers delivering at least £1,000 of gross profit each year. These customers tend to buy across more technology areas and the greater range of vendors, enabling us to transact high levels of gross profit. In this cohort, there is a more balanced profile between customer growth of 5.7% and GP per customer growth of 16.5%. The longer tail of transactional customers continue to represent an important source of future growth for us, but our established customers account for over 99% of the group's current gross profit. Now turning to cash. Underlying cash conversion was 147.6%, reflecting continued good work in capital management, together with a timing benefit of a £42 million customer prepayment. Excluding this upfront customer payment, underlying cash conversion would have been 102.4%, still ahead of our target range of 85-95%. Depreciation and amortization stepped up year-on-year due to the recent investments in offices and internal technology, while capex halved during the period, reflecting lower spend on new office fit-outs compared to the prior year. Cash tax was slightly lower year-on-year due to phasing. And in the period, we have returned 95.4 million of cash to shareholders, reflecting 73 million via the FY25 final ordinary and special dividends, together with 22.4 million of the 45 million pound share buyback that we announced in January and that subsequently completed on the 13th of February. Thus, we ended the first half with a cash balance of 206 million, an increase of 65 million pounds year on year. We continue to expect cash conversion to be towards the lower end of our guided range of 85% to 95% in FY26 due to the cash outflows related to implementations of the sales and HR systems. This next slide covers the interim dividend. The Board has recommended an interim dividend of 9.9p, which is up 11.2% year on year, and is in line with our policy of paying out one third of the previous year's ordinary dividend as an interim in the current year. As a reminder, our full year dividend policy is to pay out between 40 and 50% of profit after tax on an annual basis. Finally, after the period end, we established a new revolving credit facility of £15 million. This facility is undrawn and reflects the maturation of our liquidity management approach, providing the group with the flexibility to maintain our operating cash flow through a combination of cash on hand and available credit lines. And turning now to capital allocation. We have a disciplined approach to capital allocation and our framework remains unchanged. Our top priority is to invest in future organic growth, which supports our ambition to take further market share and enables us to continue to scale the business. In H1FY26, we invested in our core systems and IT capabilities, expanding our office footprint, increasing headcount and capabilities, and developing our data and digital platforms. Our second priority is to maintain a progressive ordinary dividend policy. Any excess capital is then either allocated to a compelling strategic investment, which could include both on acquisitions, to expand our portfolio offering or expansion in international markets, or is returned to shareholders. During the period, we initiated our first share buyback to return £45 million of excess capital to shareholders. This completed in mid-February and reduced the issued share capital by 1.7%. And finally, moving to the outlook. Based on our performance in the first half, we now expect to deliver high single digit growth in underlying operating profit, which is an increase from our guidance at the beginning of the year of low single digit. We are entering the second half of our financial year with good momentum. However, we face a tougher comparator due to the contribution from larger solutions projects in the second half of FY25. And in addition, the net impact of ongoing memory shortages remains uncertain through the remainder of this year and into next year. And we're also mindful of the evolving macroeconomic and geopolitical situation. And with that, I'll now hand over to Graham to run through the strategic update.

Thank you, Katie. So as you've seen there, very strong progress indeed during the first half. And there are a number of clear factors behind the strength of that growth and acceleration, which I'll take a few moments to highlight now before we move into the strategic update. I think it's clear that our core strategy continues to work. The competitive advantages that we've created in customer service and the breadth and quality of our offering continue to differentiate us. They create loyalty and trust with our customers and vendor partners. And we've maintained our investment in that strategy through the slightly tougher market conditions of the past few years and stretched those advantages further. We've also continued to execute well. The morale and attitude alignment of our people and leadership has been fantastic throughout. And the market has become a little easier in these past six months as well. Inflation, interest rates and wage growth have moderated. And that's helped our customers unblock some investment. To be clear, we do continue to see intense scrutiny on ROI, but customers are moving ahead with new projects, including but not limited to preparedness for and implementation of AI, which I'll come back to. And as Katie mentioned. We've seen some deals accelerate due to the component shortages that are ongoing. It's very hard to predict how that will play out over the next two quarters and beyond, but it was a slight net positive during our Q2. And then we've got AI, which is beginning to manifest in very positive ways in our business. Firstly, AI is becoming a strong tailwind across all five of the tech towers that we use to frame our full stack infrastructure offering. Customers are at different stages, but we're seeing demand for AI capable infrastructure build across all areas. And the other aspect of AI that's been positive for us in the period and which will develop much more momentum is its effect on our own operations and proposition. As we've mentioned, we've been hard at work on our own systems and technology for years now, and we're beginning to see the dividends from those investments as we bring on stream new AI functionality and automation and develop our own agents. And because it's been of such clear interest to investors over the past few months, I'll pause on the AI topic specifically for a few minutes now, because the upside we've seen in half one is just the thin end of the wedge. And so we'll look at each aspect in turn. Firstly, the opportunity in what we sell. As AI transforms the applications we all use at work and at home, the infrastructure those applications operate on and within needs massive investment. And secondly, the opportunity in how we sell. As Softcat's become bigger, our offerings become the broadest in the market, and the need for better tools, analytics, automation to take that offering to market with full effect, the need for those tools has grown exponentially. And now, just when we need them most, AI is giving us the means to transform the quality and effectiveness of our go-to-market motions and other processes. So let's start with the innovation and demand that AI is creating within the infrastructure space. And this slide shows, in a simplified way, how the application and infrastructure layers of modern technology are each being affected. Firstly, if you consider the application layer, there's no doubt that we are and will continue to see huge innovation from AI within both enterprise and consumer apps. This is not where we play, although some of our vendors have products which stretch into this space, Microsoft probably being the best example. But the vast majority of the software, hardware, and services that we trade in sit within the infrastructure layer. But AI applications require more compute power of a different nature to traditional sequential CPU processing. They demand more and better structured and cleaned data. They need that data to be available in low latency environments, whether it's in the cloud or at the edge. And this also creates the need for bigger and faster networks, creates new cyber attack and defense mechanisms and so on and so on. In short, as applications become embedded with and enabled by AI, They demand more power, speed, capacity, flexibility, governance and security from the infrastructure they work on. And that infrastructure layer, that is where we Softcat operate. We have the broadest and deepest offering in the market. We serve the largest and most diverse set of customers. And the growth in that customer base and our share of their IT wallet is growing at an accelerating rate. So our positioning is perfect. We've illustrated on the slide here the five technology areas that frame our technology proposition. As I said before, spans the entirety of that modern infrastructure. And we're seeing AI have a positive effect on the demand within all five of those towers. IT infrastructure is about to get a lot bigger, even more complicated, and this will be fantastic for our business and our industry. And whether customers are clear or not yet on the applications and use cases that they'll rely on in the future, they know that they will depend upon quality infrastructure, fit for the age of AI, and we are helping them get to work on building exactly that. The help and support that we provide them has therefore never been more important. For example, our access to the latest innovations and roadmaps of all the key vendors. Our deep understanding of the hugely complicated, never-changing infrastructure maps of our customers, which, by the way, will usually contain the technologies of at least 50, 60, maybe 100 different vendors and have been constructed over many, many years. our access to the best pricing and rebates through our top tier accreditations, and the co-investment programs we're collaborating with the vendors on to build the support and service structures they need for us to deliver and run this new breed of technology. And the ways in which we augment the skills and capabilities of both our customers and our vendor partners has never been more sought after by both parties. So we're bringing decades of proprietary data, know-how and investment together to create the proposition of the future for our industry and make sure that Softcat remains the very best partner for both customers and vendors. And this leads us to the next area. in which AI is creating huge benefits for us. So on this next slide, we'll flip the direction of travel around and now talk about how our internal technology investments have made us AI ready. And as you're aware, we've been modernizing our data and systems for at least the past five years. The investments we've made are now worth their weight in gold. the importance of AI readiness applies to us in just the same way as it does to our customers. And in this latest period, we've begun to move beyond readiness and into deployment. For example, we've built a new data lakehouse with the help of Oakland. Over the past few years, this has cleaned our own extensive internal data and augmented it with multiple sources of external data on customers, market spend, product information, and so on. And this is now searchable using AI tools and is serving up new insight, driving new marketing techniques and sales processes within SoftCap. We've also built a database of our own capabilities and resources, combined this with the customer and product data we have, and this is transforming how quickly our people can interpret customer challenges, bring forward appropriate options and solutions from within our range, and align available resources from both Softgat and vendors, and ensure best pricing and rebates are applied as a matter of course. So forgive us the terrible name, but we've called one of these new tools CatNav, and hopefully that gives you an immediately clear impression of what it does. It's filled with proprietary data on our skills, capabilities, vendors, products, customers, IT environments, and so on. And it's giving us a step change in the effectiveness with which our people can navigate and deploy the extensive offering that we have. It's helping both our most senior and our most junior people match customer problems with Softcat solutions faster and more successfully than ever. And we're also experimenting with many other new agents created in-house across our key business processes, such as order fulfillment and rebates. And in addition to our own internal developments, we've been embracing the tools that are becoming embedded within the enterprise systems that we use as well. So Copilot, the most obvious example of this, but we're also seeing AI functionality be released into our finance, service management, and other systems. And these new systems will become increasingly integrated as we release this summer our new Microsoft Dynamic Sales Platform and our new HR platform as well. Both of those systems are now in user acceptance testing. And while we've seen tangible benefits already from these initiatives, we're only just beginning to tap into the full potential of what's possible here. And so those are the two ways that we're seeing AI benefit our business right now through growth in the demand for our services and products and in the transformation of our own operations. What I'll do now is update you on the things that we're doing more broadly within our strategy as well. So on this next slide, a reminder first that the core of that strategy, the flywheel that powers our growth engine is unchanged. Our special culture delivers market leading service that creates trust and loyalty with our customers and has enabled us over many years to invest in and build this broad offering that we have today. And so those are the two sources of advantage, best customer service and the highest quality offering. Despite that, we only still have around a 5% share of a market that's growing and accelerating. This model has decades of opportunity in it still. But if we turn the page again, you can see that we've sharpened the framework that we use to channel the investments we're making back into our business. The clarity of what we do and for whom and where and how we will play is absolute. We've created what we call our four engines of growth, which you can see in the different colours at the bottom of the page. And we'll invest in those to drive our future growth. And they are sales and customer excellence, the broadest offering, operational excellence, and a special culture. And I'll talk about what we're doing within each of them briefly now. So firstly, sales and customer excellence. And we've used this pyramid before to show how our account managers win and nurture new customer relationships right from the very early stages of their careers with Softcat and as they mature over time. And as that relationship develops, trust builds from the foundation of the brilliant customer service we provide, and the customer puts more and more of their IT spend through us as we displace incumbent competition within the account. And during this latest period, we've been focused on enhancing the differentiation that we can bring to the various different customer segments in which we operate from SMB and mid-market in both the corporate and public sectors through to large and complex enterprise-grade accounts. We're looking to enhance all of our go-to-market motions, but especially in that large and complex space where we've got relatively less maturity. We're also working hard to ensure that our systems and procedures for the oversight of customer account allocation continue to evolve. And this is another area where new data analytics and AI are producing significant benefits for our sales managers. And as we've continued to build our multinational capability and honed our focus around some of the verticals as well, such as financial services and insurance. And all of those efforts have accelerated the overall growth in the customer base and ensured that the progression of customers through this pyramid is proceeding well too. So, for example, growth in total customer count stepped up from 1.6% last year to an annual run rate of 3.5% this first half. And within that, customers delivering more than £1,000 of GDP grew by nearly 6%, and customers delivering more than £100,000 of gross profit, the layer right at the top of the pyramid there, grew by 11.5%. And on the right-hand side, you can see another step up as well in the number of deals transacted with gross profit of half a million pounds or more during the period. And while I mentioned we're building new capabilities to mature that offering in the large and complex customer space, remember that these stats cover the whole of the customer range and some of our mid-market customers have requirements just as big as that enterprise segment. So these stats therefore show that we're continuing to grow across all areas of the customer base. We are not pivoting away from anything. Certainly we're not reducing our focus on the mid-market. We are adding, as we've always done, to our offering, increasing the addressable market as we add new capabilities all the time as well. And if we turn on now to the broadest offering, I'll give you a reminder here of the scale and depth of our product portfolio and services. The five towers of the tech proposition include all of the key and emerging vendors from the likes of Microsoft and NVIDIA through to smaller and newer players. We continue to build our skills and service offering towards those new and emerging areas. For example, we've made excellent progress on the integration of the data engineering consultancy we acquired last year at Oakland. So far, we've linked the sales motions of Softcat and Oakland very carefully and selectively. And the pipeline we're building in their cycle is really significant. And the reputation that their services brings to SoftGat is strengthening significantly our credibility with some of our best prospects. And in addition to new offerings, we're also ensuring that our core strengths don't decay. And we're co-investing heavily around the changes that Microsoft and other vendors have made to their programs in recent times and see huge opportunity there as well. And if we turn on again, we'll come now to operational excellence. I've talked about this area a lot already in relation to the positive effects from our investment in our own technology. So I'll just reiterate a few key points briefly. Firstly, the foundational developments and platform enablement we've invested in these past five years or more. has encompassed core systems and data, and built on those foundations, we're now beginning to deploy new analytics, agents, and automation to increase the speed and the quality of what we do for customers. The new CatNav tool I mentioned, the agents that we're creating across processes like fulfillment and rebates, the propensity to buy analytics that we're feeding into sales dashboards, and new marketing techniques, these are just the first wave of those innovations. These are developments that will accelerate as we complete the delivery of the sales and HR systems this summer. And we're just only at the beginning of what I think is going to be a really exciting transformation in our model over the coming years, driven by both the adoption of Core A functionality in our core systems and proprietary developments on top of and around that enterprise stack. And we're doing this in a very coordinated way. We've got much more proactive oversight of our end-to-end processes than ever before. And we're leading that, as always, by well-tenured soft cap people who understand our business and the industry well. And turning on again, we come finally to our special culture. You can see the essential elements of that culture listed here, and it really does continue to be the single most important foundation for all of our success. During the period, we put a lot of time and attention into strengthening the framework of support and freedom we give to our local office leadership teams and investing, as I said right at the start, in the fabric of our workspaces. You can see at the bottom there that we've completed in this latest period the relocation of both Manchester and Dublin offices and we've refurbished our headquarters in Marlow as well. And also shown at the bottom there, I'm really pleased to say that we've just placed fourth in the latest survey of the best workplaces in the UK. And we're now hard at work on creating a formal employee experience strategy. This will bring together all of the rich feedback we received during the year, both formal and informal from our people. We'll aggregate it against external benchmarks and other insight to ensure that our people continue to get the very best working environment training possible. support that we can offer them. So in summary then, if we turn to our final slide, we've delivered exceptional performance in the first half of the year and we carry good momentum across all fronts into the second half. There are new elements of uncertainty creeping into the macro, of course, but notwithstanding that, we're very confident of our prospects for the full year. And this confidence is fuelled by the positive effects of AI on both customer demand and our own operations, together with the traction that we're getting from investments across all areas of our strategy. So we'll continue to invest in those four growth engines, the most important of which continues as well to be our people and culture. They remain at the heart of everything we do. And so I'll finish, as always, by saying that I cannot thank them enough for their efforts and brilliance so far this year. That brings us to the end of the remarks that we've prepared for today. So thank you again for your time and attention. We'll turn the call back now to the operator to take some questions.