Bytes Technology Group plc (BYIT) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Bytes Technology Group H1 Interim Results Update where we will consider our results up until 31st of August of this year. So it's half 1 results. Before we do this, let me just take you to the running order of today's update and just to remind any analysts and investors on the call that we've got a Q&A tab on the screen you'll have in front of you, and you can put your questions on there, and we'll answer those at the end of the presentation. Okay. So many of you know me and for many of you who know the Bytes story, I'm the CEO, and I've been working at Bytes now for 25 years. I'm pleased to still be going pretty strongly. I'll be showing today's duties with Andrew, our CFO. And I've got here in brackets in my script it says he's only one bad hair cut away from being a Boris Johnson look alike, close brackets. So there's a bit of [ gesturing ] first thing in the morning, middle of the week. I'll take you through the high-level performance and overview before Andrew goes into a bit more detail on the financial results for the period under review. I'll then take a bit of time to remind the audience of our strategic imperatives, followed by a summary of the half and then give you an outlook on the remainder of the financial year, which I know will be [indiscernible] to all of you. So let's just get into the meat and veg of this presentation. If I was to pick one word to describe this slide, I'd probably use the word continuity. At IPO, almost 2 years ago, we talked about our commitments to delivering year-on-year double-digit growth. And what we're presenting today is a continuation of that theme. This performance reflects robust demand from both corporate and public sectors with our customers showing continued appetite to invest in their IT requirements despite the macroeconomic environment. A key reason for these results can be close to the high-quality customer service that sits at the center of our business and makes us so competitive in our markets. And for this, I'd like to extend my thanks to the people of Bytes who do an outstanding job supporting our clients. But let's just spend a few moments and go through the headlines on the slide. I'm especially pleased with the continued strong double-digit growth in gross invoiced income or gross sales is another way of describing it. This reflects the very strong sales engine that we have built up in the group over the years. And just to put this into context to illustrate our recent year's growth, these half year sales at GBP 786 million are delivered in just 6 years. But in the entire financial year to February 2020, which is 2.5 years ago, we did GBP 722 million. So we've grown the sales engine quite considerably in just in a very short period of time. Our almost 24% growth in gross profit reflects the quality of the work we do with our customers and indicates a healthy demand for our products and services. And it also further supports our decade-long double-digit CAGR track record. Obviously, we're delighted to report AOP up by 19.2%, it's a very pleasing number. It is below our GP growth, and that's due to the increased costs in the past year, which Andrew will talk about in his section. But it's an indication also of the continued investment we are making in the company and our people. Earnings per share up at 17.7% reflects another good year of organic profit growth for the group. Our AOP to GP ratio at 45.5% is a metric that reflects the efficiency of the business in terms of the efficiency model that we have in our operation and our ability to convert gross profit into adjusted operating profits. Whilst I often talk about the simplicity of our business, it's fair to say that our accountancy friends like to complicate things. And so the revenue number in our case, is a good example of this added complexity. And it reflects the accounting principles of IFRS 15. Again, Andrew is going to touch upon that a bit later. But businesses like Bytes, GII is a much more relevant metric to measure our sales performance by rather than revenue. And we're happy to take questions about that at the end. Although you'll see in [ Andrew's ] section that our cash conversion is lower than the comparative period, last year and in previous years to that, H1 has typically been a low-performing cash conversion half for the company. If I go back to 2020 and 2019, it was very, very low in both of those years at 47% and [ 0% ]. That's not an uncommon thing for the company to have a difficult first half cash conversion. It always makes it makes great sort of progress in the second half. So as a consequence of that, I'm pleased to announce a 20% increase in the interim dividend of 2.4p per share, which will be paid in early December. Now moving on to the how. If we move on to the how element of our success this last 6 months. This slide is really about our key stakeholders, employees, customers and vendors. It's fair to say that much of our success in this half is -- comes from the work we've done over many years, and we continue to build upon these foundations. Our simple strategy and business has taken many years of investment and planning, and we believe we have a formula which works and is based upon these 3, 4 components. However, we will never be complacent, and we will keep a continual watchful eye on every moving part of these 3 pillars. Sustainability and continuity in these areas drives long-term value and growth. When it comes to employees, left-hand side, I'm often asked how many people work at Bytes. And I jokingly reply, about half of them. This is quite a well-known joke in the organization. But of course, it's not true. It's probably more like 2/3. But anyway, when we report our group employee NPS results at year-end, I'm confident of continued good news in terms of staff satisfaction. We've increased our head count by 13% this year as we continue to invest in the business and to build for future growth. We actively encourage a culture with a growth mindset. And in fact, most of our staff advice have only ever known the business delivered double-digit growth. Small steps every day has allowed us to add 300 new customers as net new logos in our business in H1 with around 5,000 customers now in our portfolio. And at the same time, we have a gross profit renewal rate of 120%, from a like-for-like customer set in the corresponding prior period. The focus on customers is relentless. And to help us with this focus, we ask ourselves various questions such as, are we meeting our customers' needs consistently, what's going on with our clients and our clients' clients, what impact is the energy crisis having on our customers. What about the inflation and interest rates. What about supply chain woes, logistics issues, continued COVID lockdown in China, et cetera, et cetera. How are these things affecting our customers. So to better understand our clients, we must put ourselves in their shoes as customer service is at the core of our business philosophy. Again, we will report our group NPS for customer satisfaction at the end of the year, and I'm confident we'll be pleased with the outcome. I'm grateful also to our clients for their continued confidence in us as a value-added part of their own ecosystem of partners. And as far as our vendors are concerned, we continue to work with the world's biggest and best to provide our customers with first-class IT solutions. And in recognition of the strength of our partnerships, we won the Microsoft Worldwide Award operational excellence. This was awarded to us in July, just a few months ago, where we were selected from over 3,900 Microsoft partners globally. This is no average award. Microsoft said at the time, this achievement highlights your truly exceptional work in delivering solutions built on the Microsoft Cloud and platforms, solutions that positively impact our mutual customers across the globe. Many other awards from vendors such as Mimecast, Darktrace, Check Point, Barracuda and Dell demonstrate our capability and strength of relationships with vendors who see us as an integral part of their go-to-market channel. Moving on to the next slide. Our high-quality customer service is at the center of our business. The holy grail of customer service is often defined by the willingness of customers to keep coming back to you. We've worked hard at this element of our business over many years, so that we become a trusted adviser to our clients. This is an [ intricate ] process. But once again, culture is at the heart of this. We believe we have built an organization that is a fun place to work where people can build a successful career and also build great friendships. We have an environment that is collaborative and teams-based supported by highly experienced management teams, we start take responsibility for their actions and also take great pride in their work. It takes multiple activities and endeavors to get the right culture, but this includes elementary items like enrolling as many [ stocks ] possible into the company's share sales schemes, where over 58% are now enrolled. These people are now feeling invested both from a financial perspective and of course, emotionally. Directors and managers are very conscious that the word care is a vital component of management currency. These efforts have recently been recognized with both operations in the business becoming certified as great places to work in 2022. Investing in the future by recruiting more people in order to scale the business to take advantage of the strong market opportunity is, of course, nothing new for Bytes. That's why in the past 6 months, we've increased our head count by 13% and expanded our customer-facing headcount, with 40 new technical people and more sales staff to ensure we continue to grow at double digits. We're confident that these additional costs will pay off in the medium and long term just as they have done in recent years. We've also invested in skills development and training. We sincerely believe that by investing in our people, we are indirectly investing in our customers. This is significant because it helps us build long-term sustainable customer relationships. As a sales-driven business, 53% of staff are involved in customer-facing roles, and we will continue to build our sales engine through the rest of this financial year and further invest in our high performance and high reward sales culture. Our highly focused sales engine concentrates on where to play and how to win. I like to think of them as consultative salespeople but with a degree [indiscernible] operation. Some of them, I must confess are like labradors who want the quickest and easiest meal. But I -- but like a pet dog, they are loyal, and we have lost only one of our top 50 sellers in the last 6.5 years. This is very significant for our business and it's integral to our customer longevity story. Now that's a lot of the fluffy stuff, but very important stuff, but I'm now going to turn to Andrew's section so that Andrew can cover the first half of the financial year at a financial overview. Thanks, Andrew.

Thanks a lot, Neil. And as Neil introduced me, I was one bad hair cut away from Boris Johnson. I'll remember that to keep my -- the same hair cut I've got. So -- straight on to the income statement. We can see our gross income -- our gross income is up GBP 148 million to GBP 786 million, which is a growth of just over 23% and in line with prior years. On the of software solutions makes up most of our sales at 94% with the sale of hardware and services coming in at 2.4% and [ 3.5% ], respectively. Our public sector grew by 20% from GBP 416 million to GBP 500 million, which -- and this equates to 64% of our total GII with a balance of 36% or GBP 286 million coming out of the corporate sector. This, in turn, equates to a 29% growth. As far as revenue concerned, our judgment around the way we recognize revenue has been updated since we published our full year results at the end of February 2022. This updated judgment is in line with our peer group in both the U.K. in the recent year. In the past, we've seen ourselves as an agent in selling cloud solutions and security solutions as well as some externally delivered services. In the period under review, we have changed this judgment to recognize all software sales and all externally limited services as agent that is on a net basis. So we only recognize the gross profit as the revenue. We have restated the prior year in line with this change. Our gross profit, which for us is one of the best measures that the company's performance is up 23.8% to GBP 65.5 million and this in turn gives us a GP to GII ratio of 8.3%, which is in line with the performance in the first half of the prior year. For the full year of 2022, this ratio reflected 8.9%. In the first glance, you would have seen that we continued to face margin contraction. However, in the first half of our year, we see the majority of our lower margin public sector business, while the second sector -- second half is dominated by a higher-margin corporate market. In contrast, our gross invoice income ratios, we see most of our profit coming from our corporate sector and the sector grew at 22% to GBP 41.3 million, representing 63% of our total gross profit, whilst the gross profit from our public sector grew 28% to represent GBP 24.2 million. From an administrative cost point of view, we have a growth of 28.6%. And to get a clearer view of these costs, we need to break it down a little bit further. And so if we look at employee costs, which make up 78% of total cost base, this grew at 19.8% to 27 -- GBP 29.7 million. And if we were to exclude share-based payments, this increase was 17.6%, which is notably lower than that of the 23.8% growth in gross profit. During the reporting period, we've seen total staff numbers increased from GBP 773 million to GBP 871 million, and this equates to 13%, which is sort of the underlying reason why our remuneration cost has grown. The risk of our administration costs increased by GBP 3.6 million to GBP 8.5 million and these included several staff-related costs, such as welfare, entertainment, recruitment and so on. As predicted in the prior reporting period, our travel and entertainment costs have not reverted back to pre-lockdown levels, but have increased compared to those experienced in the corresponding period in H1 last year by GBP 0.3 million. Also in line with our aging debtor profile. In our debtors book, we have increased our doubtful debt provision by GBP 1.15 million, which is included in the GBP 3.5 million increase in administrative costs. This means that adjusted operating profit, which excludes amort -- and other acquired intangibles and share-based payments is up 19.2% to GBP 29.8 million. And at half year, our efficiency ratio of adjusted operating profit divided by gross profit is 45.5%, slightly down from the 47.3% in the prior period. So moving on to the balance sheet and focusing on 3 key messages. Firstly, we continue to be light from a capital nature. We own all our own buildings and the bigger buildings in Leatherhead in York, and with the smaller premises in Reading and Manchester are either leased or are shared office spaces. We have no intention of changing this model and prefer the flexibility of shared environments as we continue to look at expanding our footprint to match opportunities, whether it be in the customer base or the skills base. From an IT and application perspective, all our contract management modules, cloud management platform, software and asset management capabilities are all developed in-house with our own resources and in line with prior year as we continue to expense these costs. If we spend a little bit more time on receivables and payables. And as Neil alluded to in his opening remarks, the cash balances at the first half show we have converted none of our operational profits into actual cash. So trade receivables increased from GBP 102 million to GBP 177 million, partly due to the increased trade but mostly due to our average debtors days increasing from 32 days to 38 days from the comparable period. Some of the positive attributes of the cloud include flexibility and agility. However, the downside of this positive are often complex and variable invoices resulting in queries and the different approval processes that in turn delay our payment processes. Trade payables also increased from GBP 150 million to GBP 199 million on the back of increased trading. Average credited days are consistent with prior years and always we continue to ensure that we remain within contract terms for all our partners and vendors. The last comment on the slide is around cash and given the size of our monthly collections and payments even a small movements of a few days materially affect this number. We're in the reporting period with cash of GBP 35.8 million, which means a negative cash conversion for the first half. The group continues to target a sustainable cash conversion of over 100% over the longer period, and management are confident that we've returned to higher levels in H2 of this year. So on to the cash flow. If we look at the cash generated from operations we've gone through. So I'd just like to spend a little bit of time around the trade receivables. And more time around the trade payables. So we've already gone through the trade receivables of GBP 13 million, and that represents or GBP 13 million out of the GBP 13.6 million that we've absorbed into working capital. The balance of GBP 18 million or more cyclic in nature includes statutory, so i.e. VAT and bonus payments. And we've had a slight reduction in receipts in advance and then our trade payables as such as [indiscernible] reduced by GBP 8 million. So that makes up the GBP 18 million that we've absorbed into working capital via the trade payables. We are currently and we are still in debt free. We do have access to a revolving credit facility of GBP 40 million, which we have not utilized at all. However, the setup and maintenance cost of this facility is reflected as interest paid of GBP 200,000 for the half year. We've asked -- we've been asked before how much cash we need to keep on the balance sheet and the answer is currently around the GBP 40 million mark as holding this amount of cash will enable us to navigate the monthly movements in working capital and ensure that we remain in a position to pay out all our liabilities with the -- factors that influence this cash flow include cash conversion and the planned reduction in our debt facilities. As management are confident that we'll return to higher cash conversion rate, only the revolving credit facility for ultimate amount of cash flow that we need to hold. On to the -- well, the last slide of my section. Our dividend policy is to return 40% of our post-tax adjusted operating profits to shareholders via ordinary dividends. I'm therefore pleased to announce that our Board has approved an interim dividend of 2.4p per share, which is 20% up on the prior period of 2p per share. So with that, I hand back to Neil to cover the outlook.

The typical use era -- I was on mute. So apologies for that. And that will get me to play around with the mouse whilst Andrew is talking. So thank you, Andrew for that. I'm going to talk a bit about our ESG road map and also an update on the strategy before I go on to the outlook and the summary. So -- just a slight technical hips there. But I think we're back to normal now. So apologies for that. All the best movies have had technical [ hedges ] during the production process unfolds. So as a business, we can't stand still. And as our biggest challenge really is how to transform the business, whilst also running the business. And for us, transform means tiny incremental changes on a constant basis. A gradual measured transition over multiple years. So when we look back and join up the dots, we can see what we have achieved and how we've achieved it. When we do this at Bytes, we see a pattern and a formula which is repeatable and which has longevity. You could describe it as more of the same and you would not be wrong. Small steps every day has allowed us to add 300 new customers as net new logos into the business in H1. Our organic growth continues to be at the heart of our business and our simple but repeatable strategy of expanding our customer base and increasing wallet share is a familiar story. We'll continue to pursue the simple but repeatable strategic goal by increasing the size of our sales engine with more feet on the street covering more ground and addressing the massive opportunity in our total addressable market. We'll be creating more regional sales capability across the U.K. and Ireland. We'll be collaborating with high-growth vendors to harvest the maximum opportunity to help clients adopt the very latest technology. We'll be increasing share of wallet because we have low single-digit market share, and so we have plenty to go after. And we will be reporting on customer GP growth at the end of the financial year when we have a full 12 months of measurement. Whilst we focus on our organic growth, we always maintain the option of M&A to complement our future growth potential. There is opportunity for accretive growth in adjacent technology areas or other geographies. We all see this under review, as you know, but we're extremely happy with our organic growth focus. And that continues to be the core focus of our strategic growth going forward. I would like to turn to subject of sustainability and ESG. Let's start with the E. There's much talk about this. But let me give you an update on the subset of some of these very important topics and what we're doing about them here at Bytes. We're progressing our environmental targets under our low carbon action plan. While given the very nature of our business, our carbon footprint is relatively small, reducing this further, nevertheless, remains a really key focus for the group. We've continued with our actions around Scope 1 and 2 reductions and we're engaging with our supply chain around Scope 3 emissions reductions as well. As the initiatives under our low carbon action plan develop, we'll be partnering with environmental specialists to work with us in driving our net zero goals. And as part of this, we aim to align our plans with a science-based target initiative to ensure that these have maximum beneficial impact on the environment. Secondly, our carbon disclosure project. In H1, we completed our first CDP submission as a listed group. We view this as another important platform through which we are able to disclose to stakeholders the positive work we do around managing our environmental impact, and we're going to continue to mature our reporting in this regard. And then finally, on the environmental points, in line with regulation, the start of this year was the first instance where we produced our TCFD or Task Force on Climate-related Financial Disclosures report. We support the broader adoption of TCFD reporting as we believe it will accelerate business efforts towards the net zero future we all strive for. As such, we follow the TCFD recommendations closely. And as our progress in this regard develops, have identified areas for additional disclosure, which is being attended to. Let's just look at the S. Here at Bytes, countless actions and activities were undertaken by staff to provide social and environmental support and charitable work. I never failed to be amazed at how much our staff do for good causes and for people in need. We supported dozens of charities and staff continue to donate a day per year to good causes. Whilst the company once again continues to contribute up to 1% of post-tax profits to charities and good causes. In our last annual report, we highlighted our own women in IT initiative, where the group takes positive steps to recruit, promote and retain more women in the business by offering a more structured succession planning and development program. Both operations joined together to form women in technology as a group which provides mentorship and buddying to female colleagues across our entire operation. And then finally, under S. And social and its supporting staff through mental health and other well-being initiatives, we're further emphasizing that care is the new currency of leadership and is an important part of our overall business philosophy. Then from a governance perspective, we continue to strengthen all components of our regulatory and framework obligations, and we continue to keep close supervision on risk management across our operations. And I'm very pleased with the progress we have made across all of our operations. Now I'll turn to the summary slide. We've had another very positive start to the year. With strong double-digit growth in high teens or early 20s percentages in all our important financial metrics, and all of it is entirely organic growth. Our customers in both the public sector and private sector continue investing in the software and services that we provide. And we still see strong sector tailwinds in cyber security, hybrid data center and cloud-based IT solutions. Much of this is provided by Bytes by way of annuity-type contracts, providing repeatable business for our group. We have continued to invest in the business, its people and the culture so that we can do just more of the same and scale up our operation to continue our medium- and long-term growth. Now let's just turn to the outlook as we complete the presentation this morning. With almost 2 months of H2 now under our belt, we've seen the continued momentum in our business across private and public sector verticals with demand across our entire range of products and services. Post-COVID, new ways of working are here to stay. We believe we are now operating in the new normal, and our business, frankly, is thriving in this environment. We continue to be well placed to capitalize on the demand for software, services and IT solutions in a market where we have low single-digit market. We continue to work in close partnership with the world's most successful IT vendors to grow our business. Yes, there is an uncertain economic and political landscape today. Business will not be without its challenges. We remain vigilant and we will certainly not be complacent, but we remain confident that we will continue to deliver double-digit gains in line with our strategy. So that concludes today's presentation, and we'll find further notes on the system, on the screen of your benefit and you also have other sources of material. But let's just turn to the questions in our Q&A box.

Question one, I think Andrew is probably focused towards yourself. A question about cash flow from [ Alex Noden ].

So Alex, I answered some of the questions. But if we look at the question around how we recognize subscription contracts. So typically, subscription contracts are -- we have 2 elements of it. Customers -- almost commit to the annual spend, but they get billed monthly. And then it is still a variable account or, let's say, Azure and Azure consumption or AWS and AWS consumption. That would be the variable account that they receive on a monthly basis. So we only recognized as our cost is recognized in line with our cost expense, so it will be recognized on a monthly basis as opposed to old [ EA ], which was bill upfront for a year, and your cash would have come in sort of 30 days later. So that is a big change.

Second part of the question because it's around vendor prices for product price and FX and so on. Yes, you want to cover that off as well?

So typically, Alex, what we have seen in the last couple of months that has created a little bit of volatility in the -- in pound versus the dollar is that 2 things have happened is that the validity process or the validity period of the quotes that we've been getting from our distributors have reduced down to 7 days sometimes. So they hold the dollar price or the pound price for 7 days and then it will adjust. And then as far as we're able to pass the risk of FX back into our client base. So we will give them the same sort of period of 7 days. And so we hardly take a risk on the FX side. Where we do, we tend to buy in dollars and transfer in dollars straight away. So we're not overly exposed to FX cost.

Okay. And then just turning some other questions. Andrew Rilibrum asks, is it possible to say how much benefit to GII you got from the Microsoft and other vendors' price increases in H1. Can't give you specific numbers, Andrew, on that other than to say we would have benefited economically from Microsoft price increases on office during H1 that we'll see the full benefit of that during a full 12-month period. Next year because, of course, customers renew their contracts at different monthly stages through the course of the year. And those price rises only come into effect March 14 of this year. So you'll see partial benefit as you go through the 12-month period, but I couldn't give you numbers specifically on that. Just turning to some of the other questions from [ Tintin ], there's another question there about cash conversion, Andrew, about corrective measures we're taking to drive down receivable days. And a further question about consumption-based billing, Andrew, that's question 5.

Okay. So basically, I'll combine with a couple of other answers, post the year-end, we have seen an improvement in our cash collection. However, there is much work to do, and that would be internal training and maturing the customers' expectation to what's going to happen. So we would like to see our average debtors days down by 3 or 4 days by the end of the year. So -- and then on the absorption into the trade payables and other payables. And some of those are cyclic. So by the end of the year for [indiscernible] bonuses and that will recover to the previous levels. So it's a bit of a two-edged sword we are focusing on, both debtors and creditors.

And then, Andrew, another -- from Tintin in there, a question really about a couple of things we might do if we had to flex the cost base, should there be a significant weakening in the economy more sort of 2 or 3 things we could do. What levers do we have in that regard? And how important is it to keep EBIT as a percentage of GP at circa 40%.

I think -- as I called out in my section, our remuneration costs are around about 78% of our total cost. So obviously, that would be where we would look to reduce costs if we need to. However, around a good percentage of our remuneration cost is flexible and that flexibility relates directly to the GP. So as we see our GP either increase or decrease, that portion would automatically decrease. And then because we have a natural churn within the business and recruitment, we would slow down the recruitment or stop the recruitment and that would give us an automated headcount reduction over the period of time. I think it is important that we try and keep our efficiency ratios up, but efficiency ratios are also to do with scale. And so if our scale dropped significantly, obviously, we would expect that 40% ratio to asset drop. However, there's no indications that we are striking.

And Kevin, [indiscernible]. A question really there about has progress been made on resolving these issues since the period end. I mean as we sit here at the end of September, we were -- cash conversion was already back up to 75%. So we've made a lot of progress and Andrew and his team have implemented other measures, as you just alluded to there, to improve the cash collection thing. From a CSP perspective, billing clients on a monthly basis in the cloud just through -- rather than having an annual query, I guess you're breaking now -- have 12 [ periods ] is you're billing customers monthly rather than annually. And that's -- as customers have moved to that time of billing solution, it has thrown up just a greater quantity really of queries, Kevin, which has meant we have actually -- we've hired a few more people to help us resolve some of those queries and so on. I don't know if there's anything else you want to add to questions [indiscernible], Andrew, in terms of answering that one.