Data#3 Limited (DTL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Data#3 Limited FY '23 Interim Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Laurence Baynham, CEO and MD. Please go ahead.

Okay. Thanks very much, and good morning, everyone, and thank you for joining us for this first half briefing for FY '23. Today, I'm pleased to introduce Cherie O'Riordan, who is our new CFO, who started 2 weeks ago. And also Brem Hill, who many of you will know, our transitioning CFO. Both Cherie and Brem will be available during the question-and-answer session. The agenda -- if we move on to the agenda is relatively simple. I'll start with Data#3 overview and then lead on to the operational overview for the first half. The financial performance will be presented by Brem Hill, and I'll close out with a look at our strategy and outlook. We'll then open for questions. Before I start the presentation, I'd like to put into perspective the performance for the first half. And on reflection, I believe this is the best DTL performance of any reporting period over my last 8 years as CEO and maybe for many years prior. So let's move on to Slide 3, and let's begin with the financial highlights. Revenues were up 16.7% to $1.2 billion. Gross profit was up 13.8%, which flowed through to the net profit before tax, growth of 32.4%. The net profit after tax was up 38.1%, therefore, reflecting strong operating leverage, which we'll elaborate more on during the presentation. The profit increase is reflected in the EPS growth of 37.8%. And from this result, the Board is pleased to announce a healthy dividend of $0.10 per share, which is up by 37.9% and a touch over the 90% payout ratio. Let's move on to Slide 4. So what's driving this growth? Well, firstly, we're operating within a growth market for the, IT, for the information technology for large corporates and government customers. We've been reporting on public cloud growth for 7 years, and our customers operate now in very much a multi-cloud environment. That's both the public cloud and the private cloud and multi-cloud now is so significant for our business that it is the majority of our business. We're also pleased to report that our recurring business is also 2/3 of our total. We've seen a gradual improvement in the supply chain during this period. However, the estimated $6 million of profit backlog has not changed materially during the current period due to increased volume of business. Consequently, the backlog has not impacted the underlying strength of the first half results. We continue to see demand for large IT integration projects, and our pipeline remains solid. It's also gratifying to see that our success with our customers has been reflected with several global and national awards from vendors such as Microsoft and Cisco, which I'll cover later in the presentation. At the same time, as improving the solutions and financial performance of the company, we're pleased to report that we made progress on making Data#3 a better company with our ESG investments. We move on to Slide 5. The integrated solution sets are multi-cloud, modern workplace, data and analytics and connectivity, all wrapped up with a robust enterprise security. These customer solutions provide the foundation for customer digital transformation projects. Each one of these solutions has many service offerings that provide competitive differentiation. There are very few, if any, other organizations in Australia that have the breadth or the depth of these solutions and services. Our solutions are relevant to our customers, and our strategy is to build around each solution to provide a full life cycle of services from consulting to design and implementation through to support. For example, growing our security consulting, security solution design and implementation and our security support services. If we move on to the next slide and also to the operational perspective, first half had many high points. Slide 7, security is one of our fastest-growing business units, and the solution complements every solution we provide to our customers. Operationally, we continue to grow faster than the market. One of our strategic priorities is to increase our services business so that we can become more valuable to our customers and gain higher margins. The resurgence of managed service business reflects our strategy. Whilst we're pleased with the performance of managed services, we understand that it will take time to see the financial benefit of the multiyear contracts. Customer experience focuses on the long-term success of our customers. We become more relevant to their overall business. Increasingly, our cloud-based software and systems provide important data to help achieve better return on investment for technology. Move on to Slide 8 now. The external factors influencing our performance are steady or improving. And according to the IT industry analyst, Gartner, the market is predicted to grow by 5.8% and supply chain is slowly improving. That is the market -- the 5.8% is the market, the Australian IT market. Move on to Slide 9. One of our greatest points of differentiation is our vendor relationships. We are the leader with each of these vendors, Microsoft, Cisco, HP and Dell. Interestingly, leadership can be measured in many different ways. However, in the first half of FY '23, we succeeded in winning the global -- the Cisco Global Security Partner of the Year. This was selected from 60,000 Cisco partners globally. We also secured 2 Microsoft global awards, which is not too bad for a relatively small Australian company. Awards do not have any direct financial benefit, but they do play a part in attracting and retaining the best talent, and our customers look to awards for validation of our skill sets. In the Australian large corporate and public sector market, we estimate that these vendors represent 70% of customer spend, which is why we focus our investments with the leaders. In addition, we have hundreds of other vendors who we work with and continually evaluate our levels of investment. One of our greatest strengths is to combine the products and solutions from the multiple vendors to make a tailored and integrated solution for our customer. So the next slide, Slide 10. And to round out this part of the presentation, we have many new successful customer stories. All of these, you can see on our website with a description of the project and the benefits that the customer derived from their technology investment. I'll now hand over to Brem Hill for a financial summary. Over to you, Brem.

Thanks, Laurence, and good morning, everyone. It's my pleasure to review our first half financial results in more detail with you. So I'll start with Slide 12, which shows the total revenue trend. We've clearly delivered sustained revenue growth with a compound growth rate of 16.3% over the past 5 first half periods. And once again, we're very pleased with the growth in our cloud-based revenues, both public and private, which together represent more than 50% of our total revenue. And as shown in the overview earlier, approximately 65% of our total revenue is recurring, consistent with the PCP and derived from contracts with government and large corporate customers. This reflects our deliberate focus on growing our software and services businesses. Data#3 comprises a wide portfolio of IT businesses, and the chart on the right-hand side of the slide breaks the total revenue into 3 broad functional areas: infrastructure, software and services. This chart clearly shows that the change in revenue mix over time, with strongest growth in software, which is also where most of our cloud revenue is recognized, and I'll provide more detail on these areas in the next slide. However, it's important to remember that there are very significant interdependencies between these different business areas and our solutions typically comprise a combination of infrastructure, software and services. So while revenue growth is important, we've placed greater emphasis on gross profit and the table on Slide 13 expands on the revenue mix, showing the breakdown of revenues by their individual business units within the 3 board functional areas and the changes compared to the PCP. It also includes the relevant gross margins generated by the various business units, simply rated low, medium and high in terms of the typical gross margin spectrum. Our main product-related businesses achieved better-than-expected growth in the first half, more than 3x the broader market growth rate. The infrastructure sales increased by 18.4% to $242.3 million, and software licensing revenues increased by 18.3% to $766.5 million. And just to complete the product view, Discovery Technology's product revenues decreased to $0.5 million due to reduced activity in the retail sector. Our combined services revenue increased by 6.4% to $155.1 million, reflecting a mixture of growth rates across the portfolio of businesses. So just looking at the individual elements, the Consulting revenues increased by 22.8% to $15.9 million and project services revenues increased by 11.8% to $36.3 million. The support services revenues decreased by 6% to $65 million due to a change in mix, and this reflects a reduction in Managed Services revenues following an unusually strong PCP result, which offset the strong growth in Managed Services revenues. People Solutions recruitment revenues increased by 22.5% to $36.5 million, and our other services revenues remained steady at $1.4 million with Discovery Technology being the largest component. The combined total gross profit increased by 13.8% to $120 million, and the total gross margin decreased slightly from 10.6% to 10.3% due to the change in sales mix. Pleasingly, the services-based gross profit increased by 26.4% to $57.8 million, with gross margin increasing from 31.4% to 37.3%, and that reflects the growth in the higher-margin Consulting and Managed Services revenues. The product-based gross profit increased by 4.2% to $62.2 million, with gross margin decreasing from 7% to 6.2%. To reiterate, the company's revenue has seen very strong growth in recent years in relatively low gross margin areas, especially software and public cloud, and this has reduced the overall blended gross margin. This is purely a result of the change in revenue mix. The gross margins have remained relatively stable within each individual business areas. Our deliberate strategy to accelerate the growth of services has been successful and the strong growth in the higher-margin areas of Consulting and Managed Services have helped stabilize the overall blended gross margin. And the key point I've emphasized in previous briefings is that, our objective is to achieve sustained growth in total gross profit dollars, and that is a more important measurement of success than the blended gross margin percentage. We expect to continue to deliver strong growth in services, which will boost the overall gross profit and should, in turn, increase the blended gross margin over time. So as mentioned earlier, we placed considerable emphasis on gross profit. And the left-hand chart on Slide 14 shows the total gross profit trend. We're particularly pleased with the first half performance, which delivered a 13.8% increase in total gross profit. We continue to manage our internal staff costs and operating costs very closely, and the chart on the right of the slide shows the trends for these costs and how they compare to the total gross profit. Our internal cost ratio, which is staff and operating expenses as a percentage of gross profit is one of our key measures for operating leverage. And this ratio decreased from 82.6% in the PCP to 80.9% in this half, which is an excellent result. Longer term, we expect to continue to drive further operating leverage across our business and especially in services. The next is a brief summary of the earnings and dividend trends on Slide 15. Our goal remains to deliver sustainable earnings growth, and we're very pleased to report that the growth in gross profit and increased operating leverage have delivered particularly strong earnings growth this half. As highlighted by Laurence previously, basic earnings per share increased by 37.8% and total dividends increased by 37.9%, representing a payout ratio of 90.6%. As the chart show, this is clearly another record result. The fully franked interim dividend of $0.10 will be paid on the 31st of March. So moving on the next slide shows the P&L statement, and I'll summarize the key points on the slide. As highlighted previously, total revenue increased by 16.7% to $1.17 billion. So looking at the expenses section of the P&L, the first 4 lines represent cost of sales. The deducting those items from the revenue from contracts with customers gives the total gross profit, which, as I said previously, increased by 13.8% to $120 million. The next line in the expenses section is labeled other employee and contractor costs, and that comprises our internal staff costs, which increased by 12.3% to $84.8 million. This reflects steady growth in headcount, predominantly in services, as well as general remuneration increases in line with the market. The sum of the remaining expense lines gives the other operating expenses, and that total increased from $11.6 million to $12.3 million, up 6.6% with increases in travel and software amortization expenses. The balance sheet is shown on Slide 17, and I'll quickly run through the key points. We have a very strong balance sheet with no borrowings and the traditional fourth quarter revenue spike inflates the current trade receivables and trade payables at year-end and typically generates large temporary cash surpluses at 30th of June. Our key trade receivables measure is average day sales outstanding, and that was 33.1 days for the first half, up from 26.8 days in the PCP. This reflects some collection delays caused by the supply chain issues and the associated partial shipment of orders. But despite that temporary increase, the day sales outstanding remains at industry best practice levels and the underlying risk of collection of overdue debtors remains very low. Our inventory holdings are typically relatively low and comprised of allocated stock. That is product held in our warehousing and configuration centers pending delivery to customers. However, the supply chain delays and the partial deliveries have temporarily inflated our inventory holdings up to $47.2 million at the end of the first half, and that compares to $33.1 million at 30 and $16.6 million in the PCP. I must emphasize though that virtually all of our inventory is allocated to noncancelable customer orders and holdings will reduce as the supply chain constraints continue to ease over the coming months. The fourth quarter sales spike skews the working capital at year-end. So I've included a working capital analysis on Slide 18 to help illustrate the seasonal impact. The chart shows the changes in the working capital components reported at 30th of June and 31 December over the last 5 years. The key point to note is that, the underlying working capital position, which is shown by the black line, remains stable and positive despite the significant seasonal fluctuations between the reported period ends. We have a very efficient working capital model, and the working capital cycle is typically very short or even negative. So our business is effectively self-funding. This is due to our relatively low inventory levels, our short collection cycle and the favorable trade terms offered by our suppliers. Lastly, Slide 19 shows the cash flow statement and summarizes the key points. The sale of seasonality has a significant impact on the operating cash flows due to the timing differences in the collection from customers and the payments to suppliers around 30th of June each year. As previously mentioned, the 30 June cash balance is usually significantly inflated by temporary cash surpluses due to sizable collections pre 30 June with the associated supply payments occurring post 30 June. This causes the typical cash outflow in the first half of the financial year. The first half net operating cash outflow of $88.8 million was less than the $121.6 million outflow in the PCP because the temporary cash surplus at 30 June 2022 was lower than the temporary cash surplus at the end of the previous year. One point of comparison is the average daily cash balance, which was $147 million for the first half compared to $190 million in the PCP. These cash balances typically include sizable temporary surpluses due to the working capital cycle and the reduction in the average daily balance in the first half is attributed to the temporary supply chain impacts on inventory and collections. The other points to note are the relatively low levels of capital expenditure and the high dividend payout ratio. I hope this information is giving a better understanding of the key drivers of our financial results. And before I hand you back to Laurence to complete the presentation, I'd like to extend a very warm welcome to our new CFO, Cherie O'Riordan, who joined Data#3 at the end of January and is settling in extremely well. You will get to meet Cherie shortly. Many thanks for joining in this briefing.

Okay. Thanks very much, Brem. And great to see those strong numbers again. Before we go to the Q&A, I'd like to confirm our strategic direction and the outlook. If you can go on to Slide 21. We continue to see strong growth in the large corporate and public sector, and I believe that digital transformation is the major driver of that growth. Every organization has a digital strategy. And increasingly, the digital strategy is the same as the business strategy. We are still in the early days of digital transformation with plenty of headroom for growth. Data#3's role in digital transformation is to provide the foundation layer of cloud, workplace, data, connectivity and security. This platform enables some of the cooler technologies such as artificial intelligence and robotics, 3D printing. We move on to Slide 22. Our strategic focus areas for FY '23 are: customer experience, security and accelerating services. Our growing customer success team work with important customer data from our customers' use of multi-cloud technologies is where we take a long-term view of our customer relationship rather than a transactional deal. These results -- this results in an improved overall customer experience. Our security business is going from strength to strength, and it's still the #1 priority for our customers. The continued investment in all our services business units and the associated solution sets is the centerpiece of our strategy. Across each of these focus areas, we aim to improve our gross margins, provide better value to our customers, capture internal efficiencies and increase our recurring revenues. We move on to Slide 23. With this background, we're making a difference to large corporate and governance by working on significant transformation projects. These will benefit the community and the overall Australian economy. We will continue to grow our services across each of our solution sets and capitalize on the growing Australian IT market. The strong trading performance has continued with a solid pipeline of large integration projects. While we've experienced a gradual improvement in the supply chain conditions, the overall backlog has not changed materially due to an increased volume of business. At this stage, it wouldn't be prudent to provide specific guidance for FY '23. In line with previous years, we continue to expect a sales peak in the month of May and June and a profit skew in the second half. Our goal remains to deliver sustainable earnings growth. On that note, I'd like to thank everyone. And now we are happy to take questions.

[Operator Instructions] Your first question comes from Bob Chen from JPMorgan.

Can you guys give us a little bit of extra color on that backlog? Is it still largely Cisco-related? And also, how does the clearing of this backlog impact your normal sort of first half, second half PBT split?

I'll answer the first part of the question, and I may pass to Brem for the second part. But the -- and Bob, thanks very much for joining us and the question. The backlog, as we described, is actually not materially different. We've certainly shifted the backlog when we moved into the first half. But with our increase in business, we've created a new backlog, if you like, almost the same level as we had when we came in. So that's -- that we see as certainly improving as far as the second half is concerned. We're seeing it almost on a weekly basis that we're seeing improved delivery time frames for the infrastructure. And the majority and the vast majority of the backlog is networking, data center and essentially Cisco product sets. I think when we flagged this back at the AGM, we said that Cisco were indicating verbally that there will be improvement in supply chain, we're now seeing it.

And Bob, I'll just address, I guess, the second part about the skew. It is hard to predict, and that's why we're reluctant to give guidance because we would expect to see that backlog reduced during the second half. But to what extent, it's just too early to call. And traditionally, we do have a second half skew in previous years, it's been around a 40-60 skew or thereabouts. It is interesting when we've had a very strong first half as we have this year, that might alter the skew slightly, but it's still going to be skewed to the second half. But we'll -- as we get better visibility, obviously, we can provide further guidance.

Okay. Great. And then just sort of thinking longer term, can you talk a little bit about the sort of the sustainability of the strong growth we've seen in the last couple of years, especially given we might see a bit of COVID normalization or yes, there's obviously a bit of a softening macro backdrop as well? Like how are you thinking about that sort of longer term?

Yes, sure. The -- we're seeing some of the pre-pandemic projects come onboard now. So the larger transformation projects were right in the middle of many of them today and seeing a pipeline as I've described before. The macroeconomic environment, look, I won't say that we're immune from it. However, the impact, I believe, will certainly be felt on the consumer end and the small to medium business. At the larger corporate and public sector where we're seeing -- we're not seeing any decline. And as I've described before, the prediction is that, the overall market will continue to grow. There's always a mixed bag in that, not all companies may be growing, but even companies that may looking to gain operational efficiencies, will use technology for that. So we think that we're well placed to address customers' needs, whether it's growing or whether it's rebalancing.

The next question comes from Chris Gawler from Goldman Sachs.

Laurence, Brem and Cherie, can you hear me okay?

Yes, Chris.

Maybe just narrowing down on Bob's question, just specifically to software. I mean, Microsoft and some other U.S. vendors have recently started to call out a bit of a softening in cloud software demand, some optimization of spend on things like Azure and Office 365, for example. I understand that Australia is on a bit of a lag compared to the U.S., but are those themes factoring into your conversations at all?

Yes. We're obviously monitoring it and seeing that. And one of the questions that we have been asked recently is Microsoft had some layoffs, I think, 10,000 layoffs. Those layoffs were predominantly in the Gaming division and really didn't impact any of the areas that we work in and certainly not the cloud areas. And in fact, during the last 18 months, Microsoft have hired 70,000 people. So that didn't hit the headlines, but the 10,000 layoffs did. The -- but as far as what we are seeing, we're seeing still plenty of upside with customers not necessarily just moving to the cloud. It is doing more work within the cloud. And so, optimizing what they've currently got. And we see the upside in the associated services in particular. Of course, the cloud-based software when customers move into a public cloud, it's typically a 3-year agreement, and we see that continuing -- that trend continuing as far as the subscription services are concerned. But the upside for us is very much around the associated services that we can provide on design implementation and support.

Yes. Great. And then maybe just on the mix shift within services from Maintenance to Managed Services. I was wondering if you could give us some color on what's driving that? I mean, did you lose or consciously exit a big maintenance contract? Was there a one-off component to the PCP? What's driving Managed Services? Just a bit of color around that would be helpful.

Yes. Thanks, Chris. I'll tackle that one. And also, I just want to clarify because I think I might have confused the issue when I was going through my slides earlier when I said that there had been a -- well, there's a decrease in Maintenance Services revenue and an increase in Managed Services revenue. I might have said Managed Services instead of maintenance. So just to clarify, our maintenance did decrease, but -- and that offset a bit the strong growth in Managed Services in the PCP. And if I can just reflect that change in mix. If I go back to the PCP, we had a very strong result in Maintenance Services. It was abnormally strong. Just looking back, I think they had growth rates of about 48%. And that was kind of, I think, boosted during the sort of pandemic period, where we saw our infrastructure revenues were relatively weak. We saw low growth there. It was just under 2%, and that was offset by really strong growth in maintenance. The 2 sort of tended to move counter to each other. And so, now when you come into the current year or into FY -- the result of this first half, we saw much stronger growth in infrastructure again and softer growth in maintenance or actually a decline in maintenance because of that strong PCP. So there were some larger contracts in the PCP as well. And I think some of the renewals may not have occurred in this period as well. So that was another factor that all maintenance revenues come off a bit. It's absolutely not a concern. It's really a bit of a timing issue. And we do quite often see that if infrastructure is strong, maintenance tends to be a bit weak and vice versa, it's just the fact of life. Any other would you add to that, Laurence?

No. I was just reiterating it's not a concern for us going forward. The Maintenance business is still a strong business, and there's some timing issues -- and also, as Brem said, when our customers are spending, our aim is obviously to satisfy the customer demand and make sure that the customer spend is with us. And sometimes they choose to purchase new as opposed to maintain old. But as long as they are spending with us, then we're pretty happy.

Your next question comes from Ed Woodgate from CCZ.

Can you hear me?

Yes.

Congrats on the result. It's very impressive. Just on your internal staff costs, they increased by circa 12%. Could you -- you previously split out how much related to headcount growth. Can you give us some color on what you saw there during the half?

Yes. Look, I can answer that one. It was very similar to the PCP in terms of the split. I did -- we didn't actually call out the exact percentage. It was similar to the PCP. So we continue to grow headcount at a sort of steady rate. And then the balance, which is around sort of 3% or 4% would be just general remuneration increases.

And the headcount growth is in the services business as it was last year. Last year, we ended up with nearly 95 to 100 new people on board. This year will be similar.

Yes.

Okay. Great. That's helpful. So -- and then just following on from the question regarding the maintenance renewals. So you're saying it's just a timing issue. Is it fair to say that some of the renewals [ that's in Intel ] slip into the second half then?

Look, potentially, Ed. And we end up getting really into the detail because there's also a bit of a backlog impact in maintenance as well because of, as we said, it's predominantly Cisco geared. So if someone's purchased a Cisco support contract, but the product is held up in the supply chain, well, there's going to be a maintenance impact there as well.

We can't recognize it.

Which we haven't recognized. So we do expect the maintenance performance to improve in the second half.

Are you including that Maintenance Services work in your -- the [ payment ] backlog you quoted?

It would have been -- it's a component of that. Yes.

Okay. All right. That's helpful. And then I'm just not sure if I heard you exactly. I think you might have said the product-related sales were circa 3x the broader market growth rate. Can you just talk through like what [ contract that was at ] because of the [ digital you're applying ] in like enterprise, government or is it due to like some competitive advantages that you guys have like maybe having better scale to source inventory in more diverse vendor relationships or products and service offerings? So is there anything you could call out that you think is driving that?

Well, you've answered somehow the first one.

I think you've answered some of the questions, which is great. And I'd agree with you. We do have competitive differentiation, our position in the market and our position with the vendors is stronger than it's ever been. And as I said at the larger corporate and the public sector still have -- still spending and the market is -- this sector of the market is growing. The vendors that we choose to work with and also the portfolio that we focus within those vendors is all equally important. It's something that we evaluate each year in terms of where we place our bets in terms of investments, and we do a good job in matching the customer demand in particular with the backlog and growing the infrastructure business, the Cisco business is growing at a faster rate than the [ NGs ] we're competing.

Okay. Great. Yes. Congrats on the result.

Your next question comes from Chenny Wang from Morgan Stanley.

Just the first one on the headcount growth in the services business. Apologies if I may have missed it, but can you kind of help me understand, obviously, you saw a bit of a step-up in the first half. Can you help me understand what that trajectory looks like into next year? Are you going to be continuing to add resources into, I guess, into that business, whether it's to kind of support the backlog of opportunity? Or just that what were you kind of just interested in that trajectory over the next few years, if I could?

Yes, sure. Thanks, Jenny, and thanks for joining us and the question. It's much the same as last year. We succeeded in winning new projects and bringing new skill sets into our business as we succeeded in winning projects. As I think hopefully, everyone on the call is aware, we're not in the business of speculating in terms of bringing on teams of people in the hope -- from a services perspective and the hope that we win business. We tend to win the business, have the pipeline of business and then bring people onboard to match where the customer demand is. That slow but steady growth. When I say slow, it's faster than the market, but it's not dramatically -- it's not dramatic in terms of the growth rate, and it's manageable from our perspective. Incidentally, the labor market has changed fairly significantly from the start of the -- this financial year to now, and that has opened up a great deal in terms of the turnover rates are far lower. We now have more availability of people in the market. And we're also now getting some -- getting international candidates coming through as well. So all of that is helping the -- effectively, what is the supply chain for people. So -- but the supply chain for product sets and supply chain for people are both heading in the right direction.

Okay. Got it. And then just a second one. I think a few vendors may have been putting through price increases or looking to put through price increases. Like have you seen a boost to your pipeline activity levels from those customers wanting to get ahead of that?

Yes. We are seeing that, and we are seeing the price increases, which is obviously beneficial for us as well and creates urgency amongst customers in terms of their spend. However, it hasn't really been a material impact in our results. We don't consider it to be that material, but it's a nice little [ hiccup ]. And it seems to be the trend is price increases, but that seems to be the trend for everything.

Your next question comes from Adam Dellaverde from Collison Limited.

Just clarifying, maybe you don't talk me a question for this, but this is Brem's last call.

[indiscernible] end up giving what time, Adam.

I could have given a bit more attention to that, I reckon. Well done, Brem. It's been a great run.

Thanks, Adam.

I'll hit you with some hard questions, hopefully, on your way out. Services, can you maybe parse out within those lines, Recruitment, Consulting, Project Services? How -- like the Slide 13 is really helpful. But in terms of what sticks -- what is actually directly related to the projects you're working on currently? And what sticks 1, 2, 3 years in those lines? Because those seem to me like non-recurring lines that are general activity related. Am I interpreting that wrong?

No. Look, it is a mix, Adam. So when I look at what the recurring revenue is predominantly is that, services -- support services revenue, so Maintenance and Managed Services. Typically, the project is -- and Consulting is not recurring. And same with People Solutions, it's a bit of a mixed in People Solutions because they do have some, what they call, augmentation services, which is sort of term based. They're not just providing resources, actually managing those resources for a contracted term. But yes, it is a mix.

Yes. Although we don't include it as part of our recurring revenue calculation, but we've looked over many years in those business units, and we have very little turnover in terms of customers. So in terms of what's sticky, if we've got a preferred supplier agreement for the recruitment of contractors and permanent people, we tend to keep that for many years. If we do a good job, then we'll continue to keep that. Likewise, in the project-based activities, the work that we're doing with many of our larger professional -- larger project companies are almost recurring in their nature, although it's not contractually recurring, but there is a much deeper relationship because, again, we do a good job. We come back for the next one.

Okay. I think that's where I was headed with my second question. In terms of -- if I look at overseas and I look at other similar business models, that services piece gets competed away on the renewal. So I'm just kind of interested how -- like is there a way that you're going to market where you're combining the software and the integration and incumbency to sort of really lock in that service? Is -- how are you thinking about that? Because you seem to be indicating in your pipeline that there's a lot of services stuff that's coming to these projects.

Yes. We're going to market, as I described earlier, very much around the life cycle and customers working with one organization that takes responsibility from where to go and stays close to the organization as much as possible. What the customers are ultimately out for is not the cheapest service provider or even the great -- the cheapest technology or the greatest technology, what they want is a business outcome. And we're well -- increasingly well positioned to provide a business outcome. Our Consulting business is well positioned to understand their business requirements, translate into technology solutions and our project and implementation teams are the most skilled people in the market with the highest levels of certifications with the vendors that are leading the market. And then you put that together with the support services team, which is now growing, you put all those 3 elements together, we don't believe that there's too many other organizations, if any, that can compete.

So, I guess, just to understand that through the numbers, where will we see that as those projects complete, where will we see that come through in the services line?

I'd say that covers the whole spectrum, Adam.

All of them and also, obviously, in the software and infrastructure lines as well. Because as Brem described, the interdependencies of our business units are increasing. They're not separating, that's for sure. The interdependencies are getting closer and closer.

The rebates attached to these services and sort of usage-based rebates, did they flow through those services lines and timing of them skews May, June?

Yes, increasingly. And we'll see it going forward into next financial year as well, even more so. But the vendor programs are changing based on consumption models and also services adoption. So it plays into rebates being associated with services increasingly. I don't see that trend reversing.

And just jumping in there, that's one of the things that's been helping boost the services gross profit. We're seeing a shift from product to services in that respect.

Your next question comes from Nick Harris from Morgans.

Starting with my apologies. I was stuck on another results call, so apologies if you've already answered this. But I heard parts of it and I just wanted to clarify. Question one was just the backlog. I heard Laurence you're saying about supply chain easing. Do you think that backlog gets cleared, as in, 100% cleared in the second half? Or should we assume some of it still spills into FY '24? And then my second question, which again, you sort of touched on was just, obviously, these mega-tech companies are seeing a global or the impact from a global slowdown. Laurence, I think you said because of your areas of specialization and the fact that your service enterprise and government, you're not seeing any of that at all. I just wanted to clarify, I mean, you don't really think the trajectory will change, particularly in the second half? And then maybe just finally, just to echo Adam's comments and say, well done, Brem, what a cracking innings.

Those are quite a few questions. And thanks for joining our briefing as well. Hopefully, ours was better than the other one you attended.

100%.

Okay. The -- just in terms of the -- working our way through the backlog, we can't confirm what the backlog is going to look like at the -- at June 30. We will have something which will carry through into next year. We always do the size of it, though, we don't know. But what we can say is that, there's definitely an improvement, and we've seen a recent improvement. And really -- it's really been in the last 2 to 3 months that we've seen that improvement. So hopefully, that will continue and we'll reduce that backlog going forward and also importantly, increase our business as well. And so, get into some normality in terms of the supply chain and predictability. So we won't have to report backlogs in the future reporting periods. But that will be our hope, but I can't promise you that takes place during the May, June time frame. So the other one...

The global slowdown, whether it affects?

Yes. Without sounding arrogant, we're not seeing it. So -- and we also would back that up with Gartner's latest estimate and prediction of the Australian IT market, which is a January number which comes out for the calendar year of 2023 is a 5.8% increase in the market -- in the overall market. If you put that into perspective, going back a few years, last year, it was around the same number, around 6%. But if you go back a few years, it's never been higher than 3%. So we're at highs. If you look at a 10-year trend where it certainly at highs in terms of growth rate as far as IT in the Australian market. And I would also say, particularly in the larger end of the market as opposed to the small and medium business.

[Operator Instructions] Your next question comes from Christopher Gawler from Goldman Sachs.

Just a follow-up for me just on the services gross margin. I just want to confirm 2 things. Firstly, was there any change between the different elements of services in terms of margins on an absolute sense? Or is the margin growth purely driven by mix? And then what sort of visibility do you have on that being able to grow from here regardless of mix?

Look, it's predominantly a mix shift, Chris. I think within each area that margins have been pretty steady. The only the other factor, which we mentioned earlier is, there's an increasing rebate component now feeding into that equation, which is boosting services margins generally, obviously, in certain areas. But yes, that -- I don't expect there's any material change in those margins. It's just a case of we're deliberately accelerating the areas like Consulting and Managed Services because they are higher margin. But at the end of the day, the other services businesses can also grow strongly, too. So it will just be a mix issue.

Your next question comes from Ed Woodgate from CCZ.

Just one quick question I thought probably best to ask on the call. In relation to your payments of software assets, I just noticed that you didn't spend anything during the half and you spent quite well, at least like $1 million to $2 million per annum for the last few years. So I don't know if you touched on this, but is there any -- is that kind of the new normal now? Like should we be looking at it going forward on a much more lower rebased level?

Look, there was an inflated spend going back over the last couple of years on our ERP project. So that has now normalized. If you want to put it that way, then there's always other projects and other expenditures, but they're at a much lower quantum. So I think that is the sort of the ongoing base rate of spend now.

Yes. I mean -- so should we share some capitalization going forward or just kind of carry forward?

No, minimal. It's -- the rules around capitalization are pretty stringent anyway, particularly with cloud software. So yes, there will be very little capitalization in the future. Most of it will be expensed.

There are no further questions at this time. I'll now hand back to Mr. Baynham for closing remarks. Please go ahead.

Okay. Thanks very much. Thanks very much for your questions. Thanks very much for your attendance in this briefing. And I look forward to catching up with many of you over the coming few days. So thank you.

Thanks, everyone.

Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.