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

Good morning. Thank you for joining us at the LSE this morning. I look forward to presenting to you online our full year presentation for the year ended 28th of February 2025. I'm Sam Mudd, the CEO of Bytes Technology Group, and I'm delighted to be here alongside Andrew, our CFO. We'd like to invite those of you here with us in person to join us for tea and coffee afterwards, if you'd like to. I'll begin quickly with an introduction to the business and overview of FY '25. Andrew will then provide a financial overview before I come back to provide a strategic review. BTG is one of the largest IT resellers in the U.K., and we have a focus on software. We're driven by a clear mission to help organizations succeed in a world of change through trusted partnerships and transformative technology. We have significant tenure and experience, not just in our leadership teams, but across all of our staff positions. This allows us to build and sustain those trusted partnerships and to deliver what customers need in the form of licensing advice, recommendations on solutions, and procurement, and providing technical services where required. We're on a mission to build a profitable growth company that's also a great place to work. And this clear focus on culture fosters the tenure and the experience critical to our success. And our staff's commitment to delivering for our customers is testament to the culture we provide to them. I'm proud to say that in FY '25, we lived up to our mission, thanks to the great people across Bytes Software Services and Phoenix software, our loyal customers and our vendor partners, we help more businesses in public sector organizations than ever to meet their objectives through innovative IT solutions. I would like to thank our 2 Managing Directors, Jack and Clare, for steering their respective teams through a challenging year, delivering these superb results for the group. One area that I will spend a little bit more time on later in this presentation is our expanding services delivery offerings as part of our innovative agile culture. On the headline numbers, I'm pleased to report another set of positive results for BTG with a 15.2% increase in gross invoiced income, a 12% rise in gross profit, a 17.1% increase in operating profit and over 100% cash conversion. We have doubled all of these income metrics in our 5 years as a listed entity while sustaining over 100% cash conversion, enabling us to distribute the majority of these growing earnings to shareholders whilst maintaining a strong balance sheet. And our track record of double-digit organic growth profit is now well over a decade. Last year's record results were again achieved despite a tricky macro backdrop. We saw this most in our corporate business in the middle of the year, given the uncertainty that customers faced last summer around the election, but our successful H2 sales execution gave us a strong overall position for the year, in line with our historical double-digit growth performance. This was also achieved as we entered into the new world of Microsoft incentives January 1, 2025, which we're well prepared for. The performance was driven by continued demand for our broad range of software, solutions and services with our existing customers spending more with us as they continue to invest in their IT needs with their client base -- with our client base growing in both public and corporate sectors. Now I'll hand over to Andrew for the financial review.

Thanks, Sam, and good morning, everyone, and welcome to the LSE, and this is the first time we're doing this in person. So please forgive any glitches. So Sam has already highlighted some of the key numbers that we are particularly proud of. And in the next few slides, I'll walk you through some of the details and then be available for questions at the end. So if I start at the headline figures and looking at the gross invoice income, as Sam said, grown 15.2% to GBP 2.1 billion. And this is the first time we've exceeded the GBP 2 billion, so sort of a landmark growth for us. Gross profit grew at 12%. And this is the sum of the 2 halves for the -- the 2 halves. So if you look at H1, we reported a growth of 9%. So you can infer 15% growth in the second half and sort of maybe a switch in the 2 corporate at the end of the first half grew by 3% and nearly 15% in the second half. And so corporate averaged out at 8.8% or 9% growth for the year and then public sector averaged out at about 18% growth. So in the next slide, I'll touch a little bit more on the GP over GII margin and skip it for now. And then if I look at the administrative costs, so there's a couple of items in the administrative costs at half year. We also spoke about the investment into our accounting systems as well as developing a new billing platform and the sales platform to assist in capitalizing on future growth and simplifying our business and sort of a single source of truth. This development project will create an IP. And so in line with our accounting policy, we have capitalized these costs. So in the first half -- sorry, not in the first half, in the full year, we've capitalized GBP 3.7 million, of which GBP 1.4 million was internal cost and the balance, the GBP 2.3 million, was external cost. Now that has artificially reduced our cost base [ to 8.8% ]. And if you work it backwards and include the difference on the share-based payments, you'll see around about 13.7% cost growth for the year. We also started the year at 1,057 staff. We ended the year at 1,245 staff members. We averaged 1,150 staff members, which infers that our growth was slightly back ended into the second half. And that also when you look at the forward-looking statements, just to keep that in mind in how our cost base grows. So our adjusted operating profit, excluding amortization of intangibles and share-based payments grew at 14.4% to GBP 72.4 million. And our operating profit, which we'll focus on in the future, and I'll get to why we are focusing on that just now in this period is up 17.1% to GBP 66.4 million. And this has obviously benefited from the share-based payments, declining from GBP 5.7 million to GBP 5.1 million in the period and then the aforementioned capitalization. If I look at the efficiency ratio of operating profit divided by gross profit, this is at 40.7%. Last year's ratio was at 38.9%. So this expansion in that ratio is solely due to the decline in share-based payments as well as the capitalization. So I don't expect that sort of expansion in margin into the future. Our finance cost largely comprises of the fees associated with our RCF facility. And this includes a little bit of right-of-use assets for our expanding electric vehicle scheme for staff. Our finance team has done incredibly well over the period, and we've seen a significant increase in interest earned to GBP 8.5 million for the year. Our effective tax rate is 26.7%, which is marginally above the corporate tax rate of 25%. And this is solely due to the deferred tax asset linked to the employee share schemes and the lower-than-anticipated share price for the year. So you have to write back some of the deferred tax asset. So on the previous slide, I mentioned the growth achieved by the public sector, and this has led to a slightly greater weighting towards the public sector, which now means we have 65% of our GII coming from the sector and 35% from our corporate sector. For those of you that we've spoken to before, you know that in the public sector, we invoice directly. So all enterprise agreements occur in our GII as well as in our GP for the corporate sector environment, Microsoft typically invoices the EA agreements, and therefore, we don't reflect the same amount. And that is mostly what drives the difference on the GII side. So when we look at contributions from the public sector and the corporate sector by gross profit, we find a similar expansion in the public sector, moving from 34% contribution to a 35% contribution. This means at the total level, we see the GP to GII conversion at -- declining from 8% to 7.8%. Now that is not because there's a decline in margin. This is more to do with the mix. So if you look at the mix in the corporate sector and the public sector, we've explained the movement there. But what's interesting is our public sector margin runs at 4.4%. This year, it's declined to 4.3%. And conversely, the margin in the corporate sector has expanded from 14.1% to 14.4%. So given those 2 elements, you can see the margins are fairly consistent year-on-year, and it's just the mix that changes. When we segment our performance into the 3 broad categories of software, hardware and services, we see that the GP from software grew at about 12%. Hardware, that was down over 40% in the first half now only shows a slight decline of 6% for the full year. And this had a positive impact on our corporate growth for the second half. And then we see that the services grew quite nicely by 19% to contribute GBP 12.8 million, nearly 8% of our gross profit. In focusing on the services, you'll see the top line on the services GII hasn't moved that much, but we've been focusing on building and utilizing the capacity that we have, moving externally based services internally. And then our utilization has gone up, and therefore, our profitability has gone up significantly for that environment. When I look at this slide, and this is -- I used the same slide at half year, and this is just to re-illustrate the move between AOP and OP. And you'll see on the left-hand side of the screen, this denotes all the accounting adjustments that we've made since IPO between AOP and OP. And this is mostly share-based payments. And you can see it's peaked in 2024 and it will stabilize. And so therefore, it's not an excessive growth environment anymore. So it's appropriate now we move to OP as a primary measurement. And then what I've done from a completeness point of view is I've also shown the efficiency ratio of GP over AOP and GP over OP, just to look at it from a consistency point of view. So we've been reporting between 42% and 43% AOP over GP as a ratio, and this will now drop between to 38% to 40%. And all the graph is [ referred to ] on this side is that there's no smoke and mirrors in this, and we're not changing our numbers because it suits us. It is comparable. So if you see a 38% to 40%, it is in line with what we had shown in prior years. Looking at the cash flow and also a bridge that you've seen before, a waterfall that you've seen before. So very good cash generation from our operations. And I just want to call out the GBP 6.4 million that you see on the PPE side. Now that is abnormal for us. And normally, PPE stands at about GBP 1.2 million, GBP 1.3 million. This year, we have bought 2 buildings that are next door to our Leatherhead environment, and that total cost was GBP 5.2 million, including stamp duty and legal fees and so on. Now we bought those 2 buildings because it gives us access to 27,000 square feet that we'll utilize as we grow into that environment. And just to show how well we've utilized the current building, when we bought the building 11 years ago. Bytes Software Services, BSS, had 210 staff members and it's well over 700 at the moment. They're obviously not all housed into the current building. A lot of them are remote. But it also denotes where we're moving in the sort of the view that we have around staff growth and the Leatherhead environment and the talent pool that we have access to. When we look at the after tax and returning GBP 42.8 million to our shareholders, we are left with a cash balance of GBP 113.1 million at the end of February. So our cash conversion continues to follow the same cycle that we've discussed in the past. And as a reminder, we tend to see a lower cash conversion in the first half, followed by a very strong cash conversion in the second. For the full year and using operating profit as a denominator, we had a cash conversion of 114%. And again, if you use it the other way around, we reported cash conversion using AOP as a denominator, it's still 104%. So again, [indiscernible] conversion changing the numbers there. If we look at capital deployment, as our framework shows our priorities in order to fund organic growth, to fund capital projects to pay normal dividends, to fund acquisitions and then to return excess cash via -- to shareholders via either special or share buybacks. Our dividend policy is to return between 40% and 50% of post-tax adjusted operating profits to shareholders via normal dividends. So I'm pleased to announce the Board has recommended a final dividend of 6.9p per share and bringing the full year dividend to 10p per share. This represents a 15% increase on FY '24 numbers. We remain focused on delivering organic growth for which there remains a lot of opportunity within the U.K. and Sam will talk about the progress we have made into executing some of our strategies. We'll also continue to monitor the potential acquisition opportunities that come up from time to time in the market that could assist us in accelerating our strategic goals. But we are mindful, any one that we have a look at has to be a good cultural fit. We have yet to find the opportunity and in keeping with our commitment to return all excess cash back to our shareholders, the Board is also pleased to announce that we are recommending a further special dividend of 10p per share. Sustainability. So sustainability remains integral to the mission as a responsible business. And as part of this in the environmental field, we've enhanced our transparency and scientific rigor, and we've achieved validation of our near-term and net zero carbon reduction targets by SBTi and improved our third-party accreditation scores. We've also made progress in developing a multi -- multiple social initiatives, which we've listed on the slide to ensure that we hear and support our people in their roles, their ambitions, their values, whoever they might be. All of this activity has been carried out under the direction of our Board, ensuring good governance through a Board town hall, a new ESG committee chaired by Anna and a new designated Executive Director. So with that, I'm going to hand back to Sam for a walk through our strategic review. Thanks.

Thank you, Andrew. For those of you newer to BTG, I'm going to explain how we fit into the technology value chain with customers and vendors. So why do customers buy through us? We act in their best interest. Our simple incentive structure aligns our staffs' interests too. We understand them. Our people are experts in our customers as well as technology, often having daily interaction with clients for years, enabling them to understand customer needs. And thanks to our relatively high staff retention rates, our customers often deal with the same account manager and the same team year in and year out, building up that trust. So we make their lives easy. By partnering with hundreds of vendors, we can act as the trusted adviser across multiple technologies. And we support communities, looking at the social value projects, which are important, particularly for public sector customers. So why do vendors partner with us? Well, we offer scale. We give access to nearly 6,000 customers, and we provide a fantastic route to market for new and existing vendors. We drive adoption for them. We help customers get value from their products and improve renewal rates for vendors. This relies on our technical investments behind our partner technologies, evidenced by our accreditations and the number of specialists that we have in the business. And we can provide feedback to the vendors, given our breadth of customers and closeness of relationships, we're often invited to partner advisory councils, sometimes called PACs, to help the vendors make informed decisions about their programs and customer campaigns. And most importantly, we have track record. We're a tried and tested route to market. Notably, Microsoft has increased the focus on its channel strategy on scale in the mid-market segment, where we have particularly strong presence. This is where they see the most white space for their technologies and portfolio expansion. And as a consequence, we are well positioned to take on their mission for more campaigns and lead generation. So having spoken about the proposition from a bottom-up perspective, I'm now going to frame it from the top down. This slide shows, on the left, the customer segments that we can target. In the middle, the technology areas where we can help customers with, which is constantly growing. And at the bottom, the vendors we partner with to help customers as broadly as possible, leverage those technologies, noting Microsoft does sit across everything. And on the right-hand side, the services that we're providing in both pre- and post-sales capacity. Our broader vendor partnerships work well alongside our Microsoft focus. And I want to recap first on what drives that attractive defining feature of our business and then summarize how the incentive changes have settled since they were first announced in the autumn of last year. We've long been a strategic partner to Microsoft and we're proud of our rank as the #1 partner in the U.K. to overall revenue influence. The reason we stay focused on their growth strategy is threefold. First, they're a world-class vendor who consistently grow by taking market share and expanding their portfolio, giving our sellers something new to talk about on a regular basis when they visit their customer contracts for further upsell. Two, it becomes the springboard for us to work with customers on other technology needs, as noted on the bottom of the slide -- sorry, I'm actually going to come on to the next slide around account managers and what they're selling. The Microsoft drive around Copilot supports related work streams around data management, hybrid cloud, data preparation, segmentation and security, all the areas that we generate new opportunities from, services opportunities in some cases. And thirdly, Microsoft are a partner-first organization, particularly supportive of large-scale partners whom they have worked with for decades, and we have built up our operations to enable more growth for them in the future. This is evidenced by us doubling our profit related to the Microsoft vendor over the last 5 years. So whilst enjoying the growth with the Microsoft juggernaut vendor that it is, we have simultaneously also kept up our growth with all other vendors that we represent. At this point, I'd like to play a video of Darren Hardman, the CEO of Microsoft U.K., talking about Microsoft's relationship with BTG. [Presentation]

You will remember that at our half year results, we stated that the Microsoft incentive changes, including reduced enterprise agreement rebates were not expected to have a material impact on our business, and this has proven to be the case. Since that update, the rebate reductions in public sector were partially reversed, further mitigating the impact. Adjusting to incentive changes is part and parcel of our business. The key adjustments for these changes is transitioning more corporate customers to CSP and providing more services, which has long been a part of our strategy. On this slide, I'd like to bring you with me on the evolution of the strategy we have executed against in our first 5 years as a public company, starting with what remains true today. Our sources of growth remain expanding our customer base and growing existing customers and with plenty of runway on both vectors. We have invested significantly expanding our sales force, and we will continue to do so. We also continue to invest in new vendor accreditations to drive the growth and support our customers in navigating the complexities of the evolving IT market. This is an important part of our growth strategy that complements our Microsoft growth too. And we win for 3 reasons: Customer centricity evidenced by our consistently excellent NPS scores, the depth of knowledge, we're a software specialist and Microsoft's largest U.K. partner, vendor partnerships where we decide to work with the vendor, we invest behind that relationship and the strength of our relationships with Microsoft and many other top-tier vendors such as Adobe, AWS, Check Point, Dell, VMware, ServiceNow allow us to seize exciting opportunities in cloud adoption, data and workload migration, storage, security and virtualization technologies. Our structural growth markets, we have particularly benefited from the growth of customer spend on Microsoft across all of the tech stack, cybersecurity, which is still a top priority for customers; and cloud, which is remarkably still 83% of data estimated to be on-prem. But of course, the next 5 years won't look exactly like the last 5 years, and we're always evolving, and I want to explain how. So you can see the different shading in the -- on the slide. Services is one of the key evolutions which sits across where we are investing, why we win and our growth opportunities. This is about following the evolving needs of both our customers and our vendor partners. With technology evolving quickly, customers need more help understanding what to buy as well as supporting and managing what they have. And vendors are shifting their go-to-market to match this evolution, funding presale services that ultimately drive technology purchase and consumption, which will remain where we generate most of our income. Investing more in presale services supports our existing reselling business directly by putting us at the center of those purchasing decisions and elevating our status with vendors who offer higher accreditation to partners with this capability. Examples of these services include envisioning workshops, requirements gathering and design, project-orientated consulting services, IT business strategy, cloud migration assessments, cybersecurity and a wide range of value-added services aimed at maximizing the return of an organization's investment in technology. Similarly, vendors focusing on their core competency of software development are increasingly happy to lead partners like BTG to provide the support and managed services to our mutual customers. So investing more in services supports our existing reselling business indirectly by increasing the breadth of our customer relationships, which often helps uncover additional customer needs that we can help them with. And it elevates our status as a technology partner, which is particularly helpful when public sector and enterprise customers are evaluating their options. Examples of these services include IT professional services, adoption change management, managed services and a wide range of vendor around a wide range of vendor technologies, including 24/7 support for critical cloud and security services, software asset management and software cost optimization and IT management. We expect services expansion at scale to be self-funding, but typically, new services can involve fixed setup costs. For example, staffing a 24/7 security operations center will need covering at first before earning a mature margin. And beyond services investment, as Andrew mentioned, we're upgrading our systems to support new purchasing models and higher volumes. On winning, we expect benefits from segmenting our corporate sector sales structure, mirroring the approach that we've achieved success within public sector already. This positions us well to know each sector's technology needs and align us better with vendors who similarly are also structured in that vertical way. Microsoft continues to grow strongly, and it is around half of our GP, but there are several additional drivers that I want to just call out. Data and AI. This has not moved the needle yet, but we strategically think it's very important with our customers, and we expect to become more prevalent in years to come and are already engaged with our customers in those conversations. Growing the breadth of our cloud offerings, AWS is one of those examples, and it's one of our fastest-growing vendors, and helping customers to take advantage of cloud marketplace is another newer important category. We always say that our people are our core asset, and we're proud of their energy, enthusiasm and professionalism and the tremendous job that they do supporting our customers by providing an outstanding service. To support our ambitious growth plans, we continue to focus on targeted recruitment and training, attracting talent in the front-end sales, delivery teams and all supporting areas from apprentices through to senior roles. And I'm pleased to say that we've grown headcount by 17.8% this year to 1,245 people with growth across all of our teams. We've worked hard as ever to ensure that the unique culture that has brought us so far is maintained even as a bigger company. And I'm pleased that over 500 employees are literally invested in the continuing success of the company as participants in the Sharesave scheme. And we're also very proud of our exceptionally high rank in the Great Places to Work survey. All that said, I'm committed to improving this year's eNPS results, which remains strong and high for tech industry, for which scores are generally between 20 and 40, but we've fallen from the previous high level of 71 to 57. We think this reflects a year of change, both externally with the weak economy and political uncertainty, but also internally with the changes in management and now our sales' new structure. We're soon to appoint our first Chief People Officer this summer, who will report directly into me, and we will work together to develop our culture further. As our headcount grows, we've made it our priority to provide the right office environments in the right areas. And as Andrew has mentioned, some of the expansion already, we want to balance our proximity to talent pools, with proximity to customers, and to try and create a vibrant working space for all our staff to collaborate, which is key to the value proposition to our customers. As Andrew has mentioned, we've acquired the 2 adjacent buildings in Leatherhead Business Park to cater for our further expansion. We've expanded our London office to accommodate more sales hires and open new offices in [ Portsmouth ] and Sunderland. It's important to be visible to prospective customers and the talent in the regions we serve. Now we talk a lot about the importance of culture, and I'm going to highlight a couple of components in this slide and the outcomes that they drive. We've long been a proponent of teaching growth mindset, and this gives us 2 benefits. Firstly, the confidence to grow our talent; and secondly, the resilience in our people. We think everyone can develop, and we see this proven out by the growing numbers of people delivering an impressive GBP 1 million of gross profit for the group. We're also seeing people reach the GBP 1 million mark in only a few years, benefiting from the increased breadth of our offering. And as the contribution of our top performers is also compounding as they broaden the number of annually the annuity technology streams sold into their customers. I also want to talk about the simplicity of our incentive structures, which lets our people dynamically focus on the opportunities they find most attractive rather than relying on a central direction. This is illustrated on the bottom left by very different ways that our 2 top-selling performers delivered their results. One sold twice as much security software to their customers as the group average, whereas the other sold 4x as much hardware and services as the group average. So it's our ambition to accelerate all of our sellers in their journey towards excellence. Equally, customers who have been with us many years and expand what they buy from us to multiple vendors and solutions help our account managers deliver these impressive results. And similarly, our account managers' tenure increases as it increases, so does their job knowledge, their IT industry expertise. And as such, they become more adept and capable of selling more sophisticated solutions and more expansive ranges of software and services. They've become more strategic with their customers as they go deeper with their engagement and operate across more decision-makers and stakeholders, and they spend more time with their clients. Thus we reduced the number of customers that they will be dealing with to enable a more strategic engagement with fewer clients. We're proud to highlight that the Royal Household is an example where tenure strengthens our relationship with the customer, with Phoenix receiving a Royal Warrant following a 10-year relationship. I've personally had the pleasure of being aligned as an executive to this important customer, and I know both Jack and Clare and their sales directors and CTOs and divisional leads are also aligned to many of their top-tier customers in private and public sector. The same is true of our vendors, where we're aligned as executives and close -- and we're close to the wheels of action. Being close to the vendors and customers at all levels is a very important part of our high-performing sales strategy. And finally, through our passionate, talented and experienced staff, we are well positioned to continue providing high-quality licensing advice and technical support delivery to meet our customers' needs. This will remain our defining USP. Despite the uncertain macroeconomic environment that we're mindful of, we feel that we are structured and motivated to continue growing this business and to deliver double-digit gross profit and high single-digit operating profit as we absorb about GBP 1.6 million of costs related to the national insurance contribution changes. I want to take this opportunity to thank our hard-working staff for all their efforts over the last year to deliver another set of strong results. Thank you. We need to go in an orderly fashion.

So Mark is going to come around. And if we just start, I guess, ladies first. There we go.

I'll do a couple of questions rather than be too greedy. Just in this -- particularly in this new Microsoft incentive structure world, are there opportunities to augment your services and just grow faster through M&A? Do those players exist instead of presumably part of the 17% headcount growth is to make sure you're kind of driving towards that direction and maximizing the opportunity there? Secondly, you talked about Microsoft public sector incentives, obviously, some partial reversal that has taken place. How should we think about that? Should we think of that as a half step or do you think that Microsoft truly understands that that's a different structure altogether and sort of kind of that's the status quo going forward?

I'll take both questions. So in terms of M&A, I think we've been very explicit that we're very happy with our organic strategy as it currently stands. And we do attract technical talent where we need to in terms of standing up the services. I think that's a feature of the high levels of accreditation that we have, our reputation, et cetera. So we do find when we need to, we can onboard the right levels of expertise. I take your point that M&A could be an accelerator, and we are active and looking at the market, at opportunities, but we're very patient and considered in our approach as you will see from previous acquisitions, Phoenix being the last one in 2017. So culturally, as Andrew had mentioned, it has to align, it's got to be accretive and it's got to be a business that would align very, very obviously into our strategy. So we're looking, but at the moment, our organic plan is prevalent in our minds. In terms of the public sector Microsoft incentives, you're right, they roll back. And for the time being, I think we've certainly got years where this will be the status quo. I don't envisage that changing nor do Microsoft have the platforms or the mechanics of making that happen in the near future.

[ Julian ]?

A couple from me. Public sector, could you just explain exactly what drove that already strong growth in terms of -- just give us a bit more granularity? Is it the large sort of tenders? Or is it the run rate sort of local authority deals? Just a little bit of color because it was a pretty impressive performance. And I guess the follow-on is the current backdrop, does that continue into sort of, I guess, the next year ahead? That's the public sector. The second one was sort of a follow-up to [ Tintin's ] question on the CSP changes from a slightly different angle. Are you in a position to gain market share there? You're, I guess, streets ahead of the competition to some extent, I would expect, in managing that, you've been doing it for quite some time. So are you now seeing a fallout of some of the smaller vendors who are struggling to cope with the changes in billing and selling services and add-ons that Microsoft is basically trying to incentivize to channel that, can that enable you to gain share? Or conversely, are you seeing more competition and some of the bigger resellers who are focused into larger accounts have to go mid-market and go down now to get an action because Microsoft is obviously moving that focus of rebates to the smaller end of the customer base?

Yes. Okay. So the public sector growth that we enjoyed last year, I think, was very much a reflection of the building momentum and investments we've made over a number of years. So both operations have their own public sector go-to-market. Phoenix is more exclusive. Bytes has substantial focus as well. They preside over the NHS agreements and many others. And what we've seen, and I think this is our USP, is that we've got incredibly strong bidding tactics. We know when to play. We preside over the right frameworks, which gives you visibility of what's going to market. We choose whether we want to bid or not. And if it's high-level contracts, and we're looking to bid aggressively, the risk assessment is done right up to Board level. So I think we spend an awful lot of time on this, where we've become good at it is the other answer, and we know how to bid strong. So I think that's where we've been successful and why public sector numbers have come through and reflected the way they have. In terms of the CSP changes and are we likely to gain market share? We have a predisposition to focus on the mid-market, which is the SMC mid-market that Microsoft are inviting their channel to go and work hard on. We already preside over that customer base. So for us, we're already engaged in that community across all different industries, corporate and public sector. So I think the fact that we're a scale partner gives us an advantage. So to answer your question, are the smaller partners going to lose out? It's been a noisy market over the last few years, and I think scale partners are potentially going to be the winners because they've got the engagement with the Microsoft reps. We've got the ability to understand what's coming down the line programmatically before the long tail of other partners. And I think also our investments, to Andrew's point, in some of our systems, we're just -- we are just absolutely operationally on the ball here. And so for a smaller partner, it's hard for them to compete in those areas. And finally, on CSP, the broad portfolio of conversations we have around CSP because it's lots of different technology areas you can sell. We have that capability. Some of the smaller boutique partners might have an offering around one singular area on CSP. So is the customer going to want to have those multiple faceted conversations with lots of partners? Or do they want to go to a scale partner and have a singular one? I think we're in a position where we're going to probably win out from that perspective. Competition, I've kind of…

Just looking at the top end, so you've got some of the bigger resellers that may be doing business with some of the larger corporates. If that is drying up from a Microsoft angle as Microsoft pushes more rebates down to the mid-market, is there a risk you see some of the bigger focused customers of ours move into your segment to try and get a bit of the margin cut that's now not available when you sell into larger corporates or not really?

It's always a competitive market. I don't -- I haven't seen any particular changes.

My view, [ Julian ], is these large resellers are multifaceted. And so the hardware and the services is still a very attractive market in that enterprise space. So to come down the value chain where you're only selling software to the SMC market is quite difficult and the cost of acquisition of those customers would remain quite high for them. So never say never. But those multifaceted, we wouldn't see an immediate sort of target on the SMC space.

It's a totally different cultural approach and different way of selling, isn't it?

Yes. I think there were some questions starting from the back there.

Yes, I think.

Patrick O'Donnell, Goodbody. The questions I have really are around market share initially, just your composition of how you calculate that and basically where you see that going over the next 3 or 4 years? And then secondly, I suppose when you look at the cloud demand that Microsoft has seen, they noted they were surprised by the non-AI element of that. When you look at sort of the Microsoft demand and when you compare it with other cloud providers, which you're contracted with, is there elevated demand for Microsoft -- Azure-related transition? Or do you see that like equally across AWS, et cetera, as well?

Andrew, do you want to do the composition of market? And I'll talk about the Azure.

Yes. So our internal [indiscernible] address the market into addressable market. So our addressable market is 100 users upwards and then 10,000 users downwards. So we don't play in that big enterprise space and especially in the corporate space. So when we estimate the market, it's estimating within that parameter space. And the software, we're actually quite a lot higher than the rest. So -- but we measure in 2 ways. We would think that we sort of have around about 6% to 8% of the market share on software alone, less than sort of 0.2% on the hardware side, tiny, and maybe less than 1% on the services side. So when you add it all together, we think around about 3% is the total. Now the other data point is quite interesting is 6,000 customers, probably 42,000 buying points in the U.K. So plenty of opportunity in new customers. So 36,000 new customers to go and get. And that sort of element of software still to grow in the environment, so particularly strong. So -- and everyone is going to have a different view on it, but consumers out, enterprises out. The only difference is public sector. We obviously -- our biggest account is NHS, which is over 1 million users. But what is similar to that, everyone is local, right? Everyone is in the U.K. It's not multi-geographical splits.

On the Azure point, you're right to suspect that the Azure growth, the non-AI elements is still substantial. It's still one of Microsoft's fastest-growing areas and for us, too, we're aligned and we see that as opportunity. Notwithstanding that 83% of data is still on-prem. So we see that as a long runway. And that's also a feature of all different segments, whether it's enterprise, mid-market or smaller. The customers have still got workloads to transform to the cloud.

And just are you seeing any like difference between Microsoft and Amazon or like other providers in terms of net demand on that…

Well, we're actually enjoying a great relationship with AWS at the moment as well. There's similar growth opportunity there. So it's a multi-cloud conversation for some of the bigger customers, and we're able to service both of those.

It's Charlie from Jefferies. I'll do 3 questions, if I can. Firstly, on Microsoft, I'm under the impression that they've made additional incentives available to the larger partners. Can you explain that strategic partner program to us? And can you just simplify what it means? You've seen a net reduction from EAs. You've obviously seen this benefit from strategic partner status. On a net basis, do you think commissions are up or down with Microsoft on a like-for-like basis? Secondly, you called out the slight negative impact on margin this year because of national insurance. But if we think about Softcat, we've seen a multiyear period where they've been trying to overinvest in OpEx to drive new capabilities. You're also talking about new services. Is this the start of you being on a multi-period journey of maybe operating profit margin contraction? And then thirdly, on customer numbers, you called out you've got 36,000 to go for. You've only managed to get 85 in the last 12 months. Is there any sense of disappointment in the customer adds?

I'll talk a little bit about the Microsoft program. So programmatically, as a scale partner, as I've mentioned, we are able to accredit with Microsoft in much the same way that other partners can. Of course, we come from a transactional background, LSP, which was the old terminology. But over the years, they've introduced specializations, designations. And that's where you start to earn the money. If you have access to funding pots, incentives that are aligned around those areas, those are in addition to all of the more standard features of how we used to pay the old transaction world. So I think scale partner is just a feature of us having more of those designations and specializations means we're accessing more of that. So that's my answer in terms of being scale and what does that mean to Microsoft in terms of our special arrangements. On the negative impact around NI, Andrew, if you want to comment?

Yes. So I can't comment around what Softcat is doing and what Softcat is investing in. But if you look at us, what we've done is maintain that sort of lever and the lever in between our GP and OP is very much headcount. And what we've done is invested obviously ahead of the curve. So we've maintained that ratio quite sort of accurately over the last 3 years from 42% to 43% and this is talking about AOP. And the second element of this is that the headcount that we are growing and growing the headcount equally around services sellers and administrative. So our headcount on sellers, particularly, has grown ahead of the demand because we are typically bringing in junior people and then growing those individuals. So if we look at it 2 years out, and that sort of depicts our confidence as a runway for 2 years. So I fully expect, into next year, we will return to the same ratio. So we will try to our growth in costs and our growth in GP would be equal. Now on your services side, you're quite right, and there's an investment to the services side, but the services headcount sits in cost of sale and doesn't impact that margin at all.

On the customers, the 85 net new, I don't know if there's anything, Andrew, you want to highlight from last year's.

Yes. I think there's a little bit of a correction from last year's. So one of the things that we've changed, I guess, in our measurement is that when we find groups that we -- and typical, we've discussed this in the past, a large financial institution that we sold multiple delivery points. Last year, we counted multiple of those delivery points in our customer base, so we took them out. So only gaining at the high level, the gross amount of 100-odd customers, it's not the net amount. So we have some churn within the environment, some collapse within the sort of child to parent environment. So the better way to look at it, in my view, is if you look at our recurring -- sorry, our retention rate, 109%. So 109% of sort of gross profit out of the same customer base. And then you look at the other sort of point of reference is 97% of our GP came from existing customers and 3% came from net new. So if you look at it just from a mathematical point of view, 3% of GBP 163 million is, call it, GBP 5 million. So we definitely didn't get GBP 5 million GP out of 100 customers. So those were net new. So typically speaking, our new customers would average around about GBP 11,000 in the first year. And then we back ourselves with that land and expand environment. So taking a new customer up the value chain over the future years. So that gives you the point. So I think, yes, maybe we can make it a bit clearer about sort of what is new and what is net new and what is growth into the future. So I know there's a question from Andrew in the front.

I've got a few, but I'll do them one at a time, and well done on the results. First of all, just on Microsoft, as it seems to be a bit of a theme today. Sam, when you were going through your part of the presentation, I think you rattled through a whole load of services that you've been investing in. I didn't quite catch them all. But could you maybe just take a little bit more time to elaborate and how that's making a difference for customers and supporting your growth?

Okay. No, you're right. And the reason is we have so many. It's quite a complicated matrix and we actually played around with one slide where we did actually try and call it all out and then we realized that, look, this is crazy busy. So the script ended up trying to reflect some of that. The types of work that we do, you can almost segment it into pre- and post-sales. And it's probably common knowledge that Microsoft and other vendors will pay for pre-sales work to generate pipeline, get a customer into a workshop environment. So you're envisioning what the art of the possible is, talking about the technology, potentially moving it into a pilot, potentially then doing the transaction. And then beyond that, there's the post-sales activities and adoption change management. Driving the consumption is one of the key metrics that Microsoft are very, very keen to pay out on. And even within that, there's fast-track incentives, there's lots of others. It's actually PhD level of detail that we employ lots of people to manage within the business. But what you can see from just generally our go-to-market sales is we've stood up very specific services. So beyond some of the discrete incentive areas where we've got service activity, we've also got our own IP. So we sell managed services. Azure Expert is one of the status accreditations that we hold within the group, and that means that we provide managed services around the Azure environment. We also do the same for the Sentinel security. So we have a Microsoft SOC that's built out of Phoenix. And there's another example of our own IP. And I could go on. But those are the range of services. And then even within that, you've got sort of discrete offerings that underpin those bigger themes.

And then one of the challenges with Microsoft, I appreciate the overarching disclosure you've given, sort of 50% of GP. But it's quite difficult to sort of relate Microsoft's reporting with your reporting. And obviously you mentioned some of the growth drivers in services and cyber. I just wonder, can you bring them to life a little bit financially for us in terms of how significant they are for you today as a proportion of GP? And then maybe give us a sense of where you think you and/or Microsoft could get to. Satya, for example, has made comments in relation to the security business. Maybe you could use that as an example.

So at a high level, I know you want to get into the detail, Andrew. Security represents 25% of our GP. So already, you can sense that this is a really important part of our sales portfolio. But it's not just Microsoft because our security conversations span many, many vendors. Microsoft is an offering that customers have choice around and there's huge incentives to drive customers to take that E3, E5 SKU option. Many customers do, but many have lots of other areas. So as a proportion of GP in terms of that Microsoft service, it's quite hard to extrapolate that out as well because of the combination of security services that we do, but sometimes are blended. In other areas, of course, you've got -- I've already referred to some of those managed services and so on. I don't think we specify how that actually as a vendor is apportioned as part of our services GP.

Could you do a SOC in private sector as well as public, for example?

Yes. So we do sell SOC services in the corporate space. And when we look at internal versus external services, so when we build these services to start with, we tend to use our ecosystem, and we use a third-party vendor to support our corporate customers at the moment into the SOC. And as of the end of last calendar year, we have now started looking at the SOC that we've already built within the Phoenix space that is public sector focused, and that's based on the Microsoft SIEM, and we're looking at bringing that into the low end of the corporate market. So you should see us starting to accelerate that SOC environment, but it's the low end of the SOC environment. So -- and we'll probably be looking at 1,000 users or leases. So it's not all bells and whistles like the big corporates would be expecting a sort of multifaceted environment.

And then the final thing I just wanted to ask, with the incentive changes, obviously, you've had them for 2 months of the last financial year. If you were to look at sort of January, February, March, April, has the aggregate impact of those changes had any meaningful impact on the GP growth rate for the group? Would externally we notice a difference as a result of the changes?

So we -- we're well prepared. And so far, the months that we've operated with the new incentive world, it's panned out exactly as we expected, Andrew. So there's no surprises for us. This is as we imagined it would roll out. And bear in mind, we've actually had some high-volume months in March and April public sector expenditure. So I think we've got a good feel. A large proportion of that Microsoft business will flow through our sales engine in those months. So I think we have a good sense here, and it's panning out how we imagined it would. You've got a couple more...

Just a final one. Historically, obviously, Phoenix software has always had -- I think, had more of the top accreditations with Microsoft versus Bytes Software Services. Could you just talk about where Bytes Software Services is at in terms of those accreditation? And does that sort of kind of leave some opportunity as they grow into those accreditations in this kind of new world?

Yes, I haven't got the exact ones, but actually BSS are almost comparable to Phoenix in terms of specializations and designations. In fact, they just took a very unique one BSS did last week around the virtualization play. So both organizations have been very, very laser-focused on this because, as I mentioned, it allows you to fall in behind the incentive themes that Microsoft offer.

So I think Chris had his hand up, and Julian, I'll come back to you.

Chris from UBS. 2 from my side. On current trading, can you just comment on how that has progressed? Obviously, we had sort of Liberation Day and an increase in national insurance. Has customer conversations become more difficult? And secondly, in terms of sort of the cadence of the gross profit growth outlook, do you see any sort of seasonality elements? Or do you still expect sort of double-digit growth for each half?

So I'll talk about the conversations that we're having with customers, and Andrew, you can talk about seasonality, if that's okay. I think, Chris, we've got a continued lack of confidence in the customers that's been prevalent since last summer and they're very cost conscious, and they're very mindful to think through their expenditure. But actually, the type of software and solutions we're selling is very, very obvious to say yes to because it's your standard, keep the lights on software, it's e-mail, it's security, it's backup, it's your collaboration tools, it's Teams, and so on. So we're not necessarily the areas of the budget that they're going to agonize over. So from that point of view, I think we've operated in this very tough environment well because of that, because it's very, very mainstream. Like I said, it's like paying your gas and electricity, you don't turn it off. But I am very mindful that the environment is -- has created customers to be less confident about what does the future mean. And I think we've got to sit and wait and see what the next 6 to 9 months bring with the tariff scenarios. But thus far, it has been business as usual for us.

So Chris, if I can add to that and then go on to the seasonality. In preparation for today's session, we've also been talking to some of the industry and getting insights from other players. So one of the things that is universal is the sort of lack of confidence at the moment. And therefore, that lack of confidence leads to slower decisions and particularly in the professional services environment. So Sam alluded to our stuff is that we sell our value proposition is more like utilities and, therefore, that will continue. But we still need decisions to go our way in the sense of change, right? So why change, we need to add. So I think the professional services side would be particularly affected with that and those big CapEx items that will be affected. But -- so I would think that at some stage, business confidence has to return and we will see an uptick in the environment. From a seasonality point of view, we've always had sort of 2 seasons. H1 has been dominated by the public sector and particularly because of the budget. So people empty their coffers in sort of leading up to March and then they've got new coffers into April, which they start spending. So we do see very big months in that environment, particularly because of those of the enterprise agreements. And then we have a third sort of tailwind in the first half would be traditionally Microsoft's year-end, which is in June. And that's very much around the annual renewals, right, not so much on the CSP side. And in times gone past, there's been a hard push to sign up these customers. So automatically, your renewals will be sitting around the June environment. So interesting enough, those are all enterprise agreements, and that's where we've -- sort of Microsoft's made all those incentive changes as well. So you also see some of that transaction -- some of those transactions coming through our books at this stage. Julian has also got a question there.

Just a quick follow-up on M&A. Would you be able to give us your views on U.K. or Europe in terms of what companies you're looking at? Also services from a cross-sell angle, I would assume maybe services will be part of the focus. Or would it be sort of a vendor-specific that you're looking to build up access to a new vendor or a current vendor you want to build up or to all the above? Just interested in what you're seeing.

Yes. Look, and we periodically think what would we, could we do. I think the U.K. would be our preferred. We've got so much opportunity on our doorstep. And as we've alluded to, we've only got 4% of our addressable market. So I think international as a first move, probably unlikely. In terms of services, I think we've been very open about the fact that there's some immediate obvious areas that we would potentially consider. And that comes back to security, managed services, cloud migration. Would we look at new vendor areas? Well, we did an investment into Cloud Bridge and AWS was part of the strategy behind that. It's given us some decent technical capabilities in that arena. Maybe a joint venture of that sort in the future could be of interest. But I think at the moment, we know what our mainstream business is, and we know where we're enjoying success. And the strategy has worked for a number of years. So I don't think we want to deviate off that. We are very clear on what the future should be for us.

So what I'm going to do is ask James, just if there's any written questions coming through the audience that are hybrid.

So from Harry Read at Redburn Atlantic. 3 questions, probably all for you, Andrew. 2 on headcount. So why is headcount growth higher than the growth in employee costs? And how can we think about headcount plans and wage inflation in FY '26? And then one on kind of customer contributions. How should we think about the relative contribution of existing and new customers to future growth?

So if I look at the employee side, so some of the stats were given during the presentation. So 1,245, average was 1,150. So that means it was back-end weighted. And what you typically find within our business at least is as we draw towards December and we start preparing for the budgets, what the leadership automatically do is they look at what they need to achieve in the following year or 2 years, and then they start building that staff complement to hit the ground running. So what you'll find in -- particularly in November, December, January is a buildup of staff and particularly the sales staff in order to hit the road running from the 1st of March onwards. And so obviously, your time to value for your new people become shorter within the context of the new financial years. So we do then see an expansion of that sort of cost base because you've had those staff count for, call it, an average of 4 months during last year, and you'll have them for 12 months this year. But -- so that's taken into our consensus view of sort of double-digit growth on the GP and high single-digit growth on the OP. So the combination of NI increases and that sort of extra headcount have been taken into account. And then -- so your second question was around the contribution, existing to new. And this maybe relates a little bit to what we're saying that we need the decisions into the change environment. So people are holding on to their customers. And everyone we've spoken to in the market would expect to get more from their current base and have less new logos coming in and we're no different. So you'll see from -- in the prior years, we've had 33% of our growth coming from new customers and the other 66%, 67% coming from existing. I think it's slowed down slightly this year. So we have slightly less of the new growth, so about 25%, so 1/4 of our growth has come from new and 75% is coming from existing. And this is just that sort of margin expansion from the 145.8 million to the 163 million. So that sort of 18 million, and that's where I get the 75%-25% split. So I think from Harry's point of view, I would look at sort of repeating that in the model.

One final question, Martin O'Sullivan, Shore Cap. How have Copilot sales progressed since the first half? And how has the mix between full deployments and early-stage adoption evolved over the past 6 months?

So Copilot is still a conversation for our customers. We're still highly engaged. We've built out the teams in terms of the delivery aspects and adoption change management. So that's going great guns. In terms of how many of them have gone full deployment, it's still a mixture. It's absolutely a journey we're on for the next few years. And of course, you can get Copilot in different flavors, and now there's the agentic conversation. So the answer is the growth is there, and it's ticking over for us and the sellers are motivated, trained to sell it because it springboards all of those other ancillary services that I alluded to earlier in terms of data segmentation, security and support beyond that. Damindu? Final question. I couldn't see you.

I'm going to squeeze in a question. It's a non-Microsoft one. Slide 18 is super interesting where you have the top account managers versus the group, which is top account managers on the corporate sector, 52% of GP from cybersecurity. And on the public sector, it's 42% from hardware and services. So related questions about kind of long-term strategy for you guys. To me, it feels like you should probably think more hardly about cybersecurity, perhaps including services associated with it, if you combine the 2. And so is that what you are doing? It sounded like that's what you are doing in your M&A plans and also given the internal provision services were up a lot, and you mentioned SOC a couple of times. But also because there is hardware in that statement, should you rethink about hardware over the very long term?

I'll give my version and Andrew can chime in. So look, I know specifically that individual, that salesperson. And the magnificent result that he turned in was very strategic hardware sales. It was built up in a very considered fashion. And this is what I've said in previous presentations that we will be selective around when we bid on hardware. We will do it so that we can work closely with the vendor, have protected margin and make it very lucrative. We are not interested in going into the volume hardware resale business. I think there are some superb competitors out there already doing that. And we'd be very late to the game. We're not built and organized in that way to do it justice. So I think, Damindu, where we pick off and we know when to play with the hardware vendors, we do it very, very well. And I would like to see more of that. So that example of that seller, we want to put them on a pedestal and we want more sellers to see how beneficial that can be when you are working on a transformational infrastructure project, which that was, by the way. So it's going on, but I don't think we'll ever be an Insight or a Softcat or a CDW with that kind of mindset.

Yes. I think I agree with Sam here. My background is multifaceted and broad spread IT. And it's hard yards if you're going to sell 10,000 laptops, right? So you have to have setup, you have to have distribution, you have to worry about data and arrival. You have to worry about reverse logistics. It is tough. And we don't have that expertise internally. So I wouldn't go down there. But your observation is quite interesting around the 2 top sellers that the one thing that I think will take away from that is that when you're servicing your customer is going to be multifaceted. So the answer is Microsoft and something else, right? Because you've already developed the relationship. You've developed a trusted advisory sort of seat at the table. So what do you do with that trusted adviser status is you have a look at picking up all the other software vendors around there and then you start looking at services that complement those. So we're not in the game of creating a BPO or ITO service, but we are in the game of supporting those software sales by services. So the top sellers would end up with 10 or 12 accounts. And because they are so deep in those accounts, they're spending days a month with each of those accounts sort of activating or enabling that customer strategy. So why Sam called those 2 out is that's aspirational for all of our sales force. So that's what we would target is that multifaceted, that deep relationship with our customers to deliver more with less.

I'm just going to squeeze in one more. So one of the differentiators in this story was your proprietary IP around software asset management back in the day, the quantum system. It's interesting that you are now again building some IP around the billing system and other things. Is there more to say? I mean, obviously, there are all these marketplace things that are happening. What are you exactly building? And will that -- how will that provide you moat beyond the efficiencies that you're obviously going to gain?

So I think there's 3 facets to what we're building. So if you have a look, and someone alluded to the multi-cloud environment. So you're looking at Azure, you're looking at AWS, you're looking at Google. So there's hyper clouds out there and what they all have is the marketplace. So what gives you a single pane of glass for your customer to interact through that multiple environment. So that is our front end to the customer so they can transact with us through any chosen aspects. So that's the first aspect of it. Then of our billing systems and particularly around the CSP, as we focus on driving that CSP environment, a lot more transactions playing. So Sam spoke about the capacity building. And so that's the second aspect. And so if you can get your customers to self-serve, so to switch on and switch off. And yes, you can do it with Microsoft already, you can do it with Amazon already, but you can't do it with multiple, right, through one pane of glass. So that's that self-serve environment that obviously leads to efficiency and that enables us to sort of focus on the SMC market that you are going to get GBP 1,000 or GBP 2,000 a month worth of gross profit and your cost of acquiring, your cost to serve, if you're not doing it from an automation point of view, it's just going to be too high. So those are 2 aspects. And then the third aspect is the single source of truth environment. So when you look at the single source of truth and particularly when you're going into that customer, and this is talking back to your previous point, is if we know we're selling a Microsoft E3 SKU and a bit of Azure and a bit of this, we know what the white space is around that customer. And so therefore, that advisory is then sort of directed correctly rather than a shotgun approach. So that's where we're building. So maybe something that I'll add at this point because we haven't picked up on it. We spent GBP 3.7 million in the first -- in this last year into building the IP. We said at half year, would probably cost us about GBP 5 million. And so we've extended that a little bit. We're probably up to about GBP 7 million. So we're expecting to spend about GBP 3.3 million in this year. But from a modeling point of view, then we won't start the amortization until FY '27. And the reason why we've extended is the scope changes we've had with the Microsoft incentive changes and sort of the turmoil at the latter half of the year and sort of that bigger driver. So our scope has changed a little bit, expanded, and we'll have a better product at the end of the day. So thanks to everyone.

Thank you. Okay. New venue for us, and it's been delightful to see you all in person. I thank you for your questions. We look forward to seeing you again in 6 months.