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

Thank you for standing by, and welcome to the Data#3 Limited 1H FY '25 Results Webinar and Investor Presentation. [Operator Instructions] I would now like to turn the conference over to Mr. Brad Colledge, CEO and Managing Director. Please go ahead.

Thank you, and good morning, and thank you for joining us for this briefing of Data#3's first half FY '25 financial results. I am joined by Cherie O'Riordan, our CFO, who will cover our financial highlights a little later in the presentation. For those of you not familiar with us, Data#3 is an ASX 200 listed IT services and solution provider in Australia and the Pacific Islands. Our vision is to harness the power of people and technology for a better future. We have 47 years of experience in evolving our solutions to enable our customers' success, and we partner with world-leading technology vendors. We're delivering the digital future for our customers through our solutions that you will hear more about throughout the presentation. In terms of the agenda, we will review the first half highlights, then Cherie will provide a more detailed overview of our financial performance. I will cover IT sector trends and round out with strategy and outlook before closing out with Q&A. Let's begin with the financial highlights on Slide 5. Gross sales was a record $1.4 billion for the first half, up 7.4% on first half FY '24, driven by solid growth in services, particularly managed and Maintenance Services and Software Solutions. Pleasingly, gross profit increased 10% on the previous corresponding period to $143.6 million, boosted by the contribution from our higher-margin services businesses, which in turn improved our average gross margin to 10.2% this half. Profit before tax of $32 million was up 4.1% and in line with half year guidance provided at the AGM of $31 million to $33 million. Earnings before interest and tax was up 4.6%. We delivered earnings per share growth of 4.2%, and we are pleased to announce a healthy dividend of $0.131 per share, which is an increase of 4% and represents a payout ratio of 90.8%. It's also important to note that our first half earnings included some one-off costs that we don't expect to recur, which Cherie will outline a bit later. Overall, we're pleased with the first half financial performance, a record for the company, particularly as we saw a continuation of the subdued and challenging economic conditions reported in FY '24, which resulted in some delayed customer purchase decisions and project start dates in first half FY '25, which impacted our Infrastructure Solutions business. Moving on to Slide 6 and the first half FY '25 overview. Our company continues to build as evidenced by the increase in gross sales, which is in line with calendar year 2024 Australian IT market growth rate. Our recurring business in first half FY '25 has grown to 70%, boosted by growth in Managed and Maintenance Services and Software Solutions gross sales of 28%, 38% and 11%, respectively, this half. This also reflects the ongoing shift by our customers to multiyear Subscription-as-a-Service offerings. Solid growth in our Services and Software Solutions business was unfortunately partly offset by a decline in our Infrastructure Solutions business, which was impacted by delayed customer decision-making, the impact of the Queensland election in the first half and a slower-than-anticipated half in end-user compute sales as customers delayed upgrades. In response, we completed some internal restructuring initiatives. However, we're careful to balance these actions with not slowing future growth in this business. Now we'll move to Slide 7. First half FY '25 had a number of operational highlights. From a solutions perspective, our cloud software, services and security were all highlights. Software infused with AI is accelerating software growth. As we continue to assist customers with their digital transformation and adoption journeys, our professional services business is growing steadily. And with our solutions life cycle approach, we see more and more customers engage Data#3 to help them manage their environments. As customers move to secure their data in preparation for AI and with ongoing threat of cybersecurity breaches, security remains the #1 priority for our customers. A highlight in the first half was the procurement and adoption of security solutions and pleasingly, more customers were onboarded into our security operations center for monitoring and managing their environment. We have a strong balance sheet and remain efficient in managing our working capital. Our customer experience initiatives and leveraging our own digital investments were successful in driving higher levels of service, raising customer satisfaction scores. In the first half, we continue to invest in our capability and certifications with global leading vendors and in return, receive the support we need to be successful in market. Slide 8 outlines some of the vendor awards won by the company during the past 6 months. The investment in our partners resulted in these awards and recognition. This is important as it also influences who customers choose as their preferred partner. Overall, it was a successful first half FY '25. I'll hand over to Cherie now to cover our financials in more detail.

Thanks, Brad, and good morning, everyone. It's my pleasure to now take you through some highlights of our interim FY '25 financial results. Gross sales grew by 7.4% this half to a record $1.4 billion, driven by growth across most business units, except for Consulting and Infrastructure Solutions. This represents a 5-year CAGR or compound annual growth rate in gross sales of 14.6%. As Brad mentioned, this sales growth is supported by a pleasing increase in recurring gross sales to 70% in the first half of FY '25, up from 67% in the previous corresponding period. There is a gradual shift in customer preferences towards as-a-service and annuity-based offerings, and we continue to grow sales of multiyear licensing agreements and longer-term services contracts. Net profit before tax for the 6 months to 31 December '24 was up 4.1% to $32 million and in line with the half year guidance provided at our AGM. This represents underlying earnings growth of 7% before one-off redundancy costs of $0.9 million. We also have a 5-year CAGR in PBT of 20.3%. Basic earnings per share increased by 4.2% and the interim dividend increased by 4%, representing a payout ratio of 90.8%. The fully franked interim dividend of $0.131 will be paid on the 31st of March with a 17-month record date. The table on Slide 11 shows total gross profit and margin on gross sales in addition to the breakdown by product and services. We achieved growth in gross profit of 10% for the first half, representing an improved gross margin of 10.2%, up from 9.9% in the prior corresponding period. Services gross profit increased by 13% on the PCP to approximately $74 million. Overall, gross margin declined slightly to 36.1%, predominantly due to competitive maintenance services deals this half that are typically at a lower margin than other services revenue. As our services gross profit only includes direct contractor costs, it is impacted by the mix of resources. However, net profitability of the services business continues to improve with scale and ongoing effective cost management. The product-based gross profit increased by 6.7% to over $69 million, with margins on gross sales consistent with FY '24 at 5.7% despite some highly competitive product deals this half. Product gross margin was boosted by adoption and services rebates in the software licensing business as we align services with vendor incentive programs. Our diversified portfolio of IT products and services is broken down into 3 broad functional areas: Infrastructure Solutions, Software Solutions and Services and their underlying business units. It's important to remember that there are very significant interdependencies between these different business areas and our solutions typically comprise a combination of all 3. The charts on Slide 12 provide an overview of the financial performance of our services line of business. Our combined services gross sales increased by over 19% to $205.4 million in the first half, reflecting a mixture of growth rates across the portfolio of businesses as follows. Maintenance Services grew by 38% and benefited from the shift with vendors such as Cisco to multiyear enterprise agreements. Our managed services business achieved growth of almost 28% following a number of large contract wins this half, particularly in the resources sector and contracts onboarded during FY '24 entered their operationalized phase. Project services gross sales increased by 9.9% with steady demand for digital transformation and copilot engagements despite challenging market conditions and some customer-driven project delays. People Solutions recruitment gross sales were up slightly on the PCP, reflecting a relatively stagnant labor market with low unemployment and a slowdown in demand for contingent labor in the public sector. And consulting gross sales declined on the first half of FY '24 by 8.6%, negatively impacted by the Queensland state election and some customers' budgetary constraints. The first half saw plenty of services opportunities with solid demand for managed services and transformation projects as customers increasingly seek to improve, transform and stabilize their IT environments while managing costs through outsourcing. Total product gross sales increased 5.6% in the first half of FY '25 to $1.2 billion, with consistently strong growth in the Software Solutions business, offset by a decline in Infrastructure gross sales. Software Solutions gross sales were up over 11% to almost $976 million with ongoing demand for security products, cloud subscriptions and Adobe, particularly in the education and public sectors. In addition, we were successful in earning higher adoption and services rebates this half as we align services with vendor incentive programs. Infrastructure Solutions gross sales were down 12.9% on the prior period, reflecting ongoing delayed decision-making by customers, the impact of the Queensland state election and a slower-than-anticipated first half in end-user compute sales as customers delayed upgrades. The Infrastructure Solutions business remains impacted by general economic uncertainty and delayed project start dates and decision-making by customers, resulting in fewer and more competitive larger deals and in turn, putting sales and margins under pressure. Despite these factors, we have delivered sustainable growth in product gross sales and stabilized gross margins in this challenging market and the outlook for the second half is positive. You can see in the graph to the bottom right of the slide, the steady improvement over several years in both product gross sales and gross profit. Moving now on to Slide 14 and a reminder that from FY '24, the statutory revenue presented in our financial statements includes the reclassification of software licensing and vendor-delivered maintenance support revenues on a net basis in accordance with the change in our revenue recognition policy. I wanted to emphasize that this is a statutory presentation change only, and the company will continue to measure operational performance and report on a gross sales basis in addition to reporting statutory revenue. We believe gross sales is a better indicator of company performance as it represents the gross value provided and invoiced to our customers rather than the net profitability on these sales. Statutory revenue declined by 1.9% because of the decline in the Infrastructure Solutions business this half and the fact that it remains presented on a gross principal basis. The next slide, #15, shows the key points on the income statement. Statutory revenue was down slightly on the prior year, as just mentioned, with the decline in Infrastructure revenues, which are presented on a gross principal basis. Other operating expenses were up 11.5% and comprised of the following movements: an increase in employee costs of 11%, driven by general salary increases of around 6%, particularly across high-demand technical roles and a net increase in head count of 1%, predominantly relating to billable managed and professional services staff and other specialist strategic roles. Employee costs also included $0.9 million in redundancy costs following some restructuring initiatives, predominantly in the Infrastructure Solutions business. Adding back these one-off costs, employee expenses were up 9%. Software licensing costs increased relating to Microsoft Azure, Premier support and new payroll and learning management systems with some licensing costs recoverable under managed services contracts. There was also increased spend on internal technology projects of $0.4 million when compared to the first half of FY '24 as we commenced the year with a number of key projects already in train and successfully completed more projects this half, including the implementation of a new payroll system, ongoing security capability uplift and work on e-commerce and cloud solution provider platforms. Lastly, we saw general increases in other expenses such as audit fees and insurance. Our pretax earnings benefited from interest income of $6.5 million, in line with forecast and the prior period as our strong cash position, a result of the company's growth in gross sales and diligent working capital management benefited from the high cash rate. Based on our current projections, assuming a slight reduction in the cash rate in the second half and no change to our typical cash flow seasonality, interest income is expected to be approximately $9 million for FY '25. The summarized balance sheet is shown on Slide 16, and I'll now run through the key points. Our balance sheet remains strong and debt-free. The traditional fourth quarter sales spike inflates the current trade receivables and payable balances at 30 June and typically generates large temporary cash surpluses at year-end. A key internal trade receivables measure is average day sales outstanding, which improved to 25 days at 31 December '24, down from 27 days in the prior comparative period. Overall, net assets of $78 million at 31 December were up $3.5 million, predominantly driven by first half FY '25 net profit of $22.4 million and offset by the final FY '24 dividend of $20 million paid in September '24. Slide 17 shows summarized cash flow statement and key highlights. The sales seasonality has a significant impact on the operating cash flows due to the high volume of sales in May and June each year and the timing differences in the collections from customers and payments to suppliers around 30 June each year. This causes the typical operating cash outflow in the first half of the next financial year. The net cash outflow from operating activities was $123.8 million in the first half of FY '25 compared to $266 million in the prior corresponding period and reflects the normalization of the company's seasonal cash flows post pandemic, which impacted the opening FY '24 balances. Our average daily cash balance for the 6 months to 31 December '24 was $284 million and relatively consistent with the 6 months to 31 December '23 average of $300 million. The other points to note are the relatively low levels of capital expenditure and the high dividend payout ratio of over 91% for FY '24. We manage our internal staff costs and operating expenses very closely as a business. And the chart on the left of Slide 18 shows the trends for these costs and how they compare to the total gross profit over several years. Our internal cost ratio, which is staff and operating expenses as a percentage of gross profit is one of our key measures of operating leverage. The ratio has improved from 88% in FY '16 to 82.2% this half or 81.6% after adding back one-off redundancy costs, which is relatively consistent with the prior period. This is due to our continued investments in people and systems, predominantly in our services business in addition to inflationary pressures on wages and general operating expenses. Spend on IT projects also increased in FY '25, as mentioned previously. These projects will realize benefits, both financial and nonfinancial over several years. It's important to note that the ICR has improved across our services and software licensing businesses and -- but it has been impacted by the slowdown in the Infrastructure Solutions growth. While some restructuring initiatives were undertaken in the first half, these must be balanced with not impeding future growth as the majority of our workforce is comprised of revenue-generating roles. Where contracts allow, we pass wage and cost increases through to customers via annual contract pricing reviews. This is not an immediate adjustment and our ability to increase prices in a highly competitive and price-driven market, such as that seen in recent times, must be balanced with the risk of losing business. Thank you for joining this morning. I'll now hand back to Brad.

Thank you, Cherie. Let's take a few minutes to review technology industry trends, half year strategy and outlook. In calendar year 2025, Gartner expects the Australian technology industry spending to increase 8.7% to approximately $147 billion. Sales growth generated from software is expected to grow at 13.4% to nearly $46 billion, while devices is expected to grow by 9.1%, which is substantially up on the lower-than-expected growth last year of 5.9%. The projections that both software and devices are up for 2025 are good news for Data#3 as they are core offerings. IT services growth is forecast to be steady at 7.2%. In the last 6 months, our services growth exceeded this rate, and we expect to do the same in the second half. Communication services is lower at 3.2%. However, this is a large sector, including a lot of telecommunications equipment. We expect more positive growth in the sectors in this area in which we engage such as networking. Data center is expected to grow by a healthy 11.3%. While much of this again will be seen in the hyperscalers such as Microsoft as they continue to build generative AI processing capability, this means additional capacity from our vendors to sell into our customers as part of our integrated solutions. We also expect customers to continue to invest in their own data center capability to provide additional processing power. On to Slide 21 and our strategy and outlook. Our FY '25 strategy remains consistent and is adaptable to industry trends. Let's look at a summary of our strategy before commenting on the outlook. Customer success remains at the center of our strategy. The more successful our customers become, the more successful we become. The inputs to customer success are our remarkable people, innovative solutions and operational excellence. We've consistently enabled customer success in turn delivering sustained financial performance for Data#3. Slide 23 shows our innovative solutions. Our ability to integrate these solutions is what sets us apart. Nearly all of these solutions are embedded with AI. We see opportunity right throughout the solutions life cycle from consulting to adoption with our project services and ongoing management with our managed services. The next slide outlines our opportunity in FY '25 and beyond on which we continue to execute. Investment in AI continues to grow as does the multi-cloud opportunity. A top priority in assisting organizations to meet their sustainability goals and helping customers to have secure environments. However, the opportunity that eluded the industry as a whole in the first half was Windows 11 upgrade. As with the enterprise infrastructure, customers delayed upgrading their end-user devices. With Windows 10 end of support being 14 October 2025, customers can no longer delay. This, together with the general availability of AI-enabled devices should provide upside to second half FY '25. Data#3 with our vendor partners such as HP, Microsoft, Dell and Lenovo are ready to help our customers migrate now. In the first half, we did well with software and services. Let's take a look at an example of a software and services solution with one of our commercial customers, Glencore Technology. Glencore had disparate systems that were end of support and that also provided challenges in collating data and reporting. The Data #3 Microsoft application solutions team within our professional services business unit implemented a modern cloud-based Software-as-a-Service solution using Microsoft Dynamics and Power Apps. The outcome was improved in automated processes that improved efficiency dramatically and reduced errors from the previous manual processes. It increased the quality of data and timeliness of reporting and provided a modern platform on which they can build further. In December, we provided an update regarding changes to Microsoft's channel incentives. From 1 January 2025, there are reduced incentives for Microsoft enterprise agreements and an increased focus on cloud solution provider program, Copilot, security and Azure. We are implementing a range of initiatives to mitigate the financial impact on our Software Solutions business. We have a proven track record in adapting to changes in vendor incentive programs with speed and agility and have increased our focus on small, medium and corporate customer segments and are well advanced with cloud solution provider, Copilot, security solutions and Azure cloud migrations. We are also growing our business with other vendor partners. As we said in the ASX announcement on 16 December 2024, the financial impact of the Microsoft incentive changes is expected to be immaterial in FY '25. Moving on to Slide 27. Our competitive advantages when combined, make us a unique organization in the Australian IT market. In addition to our people, partners, expertise and innovation, it's our agility to respond to changing market dynamics supported by our strong financial position and market-leading brands that provide comfort to our customers in choosing Data#3 as their preferred technology partner. On Slide 28, that comfort leads to long tenure and over time, leads to increased spend. The longer the tenure of our customers, the more they become familiar with our broader capability and overall spend increases. Turning to the outlook. We expect to maintain software profitability through the increased focus on CSP and other vendor partners. We expect ongoing growth in our services business, which is expected to accelerate from the demand for AI solutions. We also see further profitability from our managed services business as we continue to onboard new customers. Security will see growth with the continued trend towards annuity offerings. While we anticipate ongoing delayed decision-making for large capital purchases and infrastructure, we should benefit from the uptick in multi-cloud and end-user devices infused with AI. Our services business continued to grow faster than the market with security solutions leading the way. Data#3 is well placed to deliver sustained growth in FY '25. We have a growing market, pent-up demand for devices and increased interest in multi-cloud solutions and AI. Consistent with previous practice, we do not intend to provide specific FY '25 guidance. In line with previous years, we continue to expect a sales peak in the months of May and June, and our goal remains to continue to deliver sustainable earnings growth for our shareholders. Thank you, and we'll now open for Q&A.

[Operator Instructions] Your first question comes from Apoorv Sehgal with UBS.

Well done on the results. My first question is, could we unpack the Infrastructure segment's second half outlook, please, and whether we can expect a rebound to growth? I guess there are a few positives that you're sort of cycling a negative half last year. Brad, you talked about the PC refresh cycle kicking in. Cisco networking maybe pass the worst as well. And I'm also curious if there were some November, December timing issues around new deals that will flow through. But I guess on the flip side, I'm sort of thinking there's the federal election coming up back end of the half. So just curious around your thoughts, Brad, on how we should weigh up some of those tailwinds for infrastructure versus that federal election headwind in the second half, please?

Yes. Thanks, and it's a great first question. Pleasingly, we are seeing a rebound of the Infrastructure Solutions' forecasted numbers already in this half, which is nice considering, as you mentioned, that Q3 and the first half of Q4 was not that strong last year. And we struggled to convert a lot of those deals by June 30 in the Infrastructure Solutions area. This year, we're already seeing some of the business that carry over from December, which is nice and a well-improved forecast already. And that's across the board in infrastructure across our data center, networking and devices forecast. And I guess -- sorry, to answer the second part of the question with regards to the federal government election. Yes, we're actually trying to encourage customers in that sector to act early if they want to have a business outcome this financial year because as we know that once we get into election mode that can affect and does affect the ability to place orders for the customers, particularly with the large capital-based purchases. So we also have within federal government, as you're aware, a number of existing contracts and existing annuity contracts, which are contractual commitments. So they will continue in Canberra regardless. However, we could be impacted by capital purchases during that period, which is typical in any election process.

So net-net, it sounds like tracking positive in the second half, which is good to hear. Okay. My second question then would just be around the Microsoft incentive changes. In your update back in December, you talked about it having about a 3% GP impact, retrospectively. How can we think about that impact on a go-forward basis, particularly because you've talked about how Data#3 is repositioning resources to align with those areas where Microsoft want to incentivize resellers. So is it like a permanent 2%, 3% GP impact we should be factoring in going forward? Or do you think there's an opportunity for that impact to be maybe fully neutralized at some point in the future?

Yes, absolutely, Apoorv. Our plan is 100% to mitigate the changes, the downside. And that's our plan for the current FY. And also, obviously, it's going to be a bigger number for next year because it will be for the full year as opposed to just 6 months. But we've got a little bit more runway leading into FY '26 to be able to execute on some of the programs. And we're already seeing a positive impact to our Software Solutions business from some of the newer programs that Microsoft has introduced around some of those areas such as Copilots and security and Azure migrations. And while some of those actually kicked off earlier in the financial year, the channel incentive changes for enterprise actually only occurred from the 1st of January 2025. So we're actually a bit ahead of the game at the moment from a software solutions perspective as the results show. And that's one of the key reasons why we see no material impact for FY '25, and our plan is to mitigate that for FY '26.

Your next question comes from Bob Chen with JPMorgan.

Just a couple from me. Maybe just a follow-up, firstly, on those Microsoft channel incentives. It looks like there is a bit more of a focus on that small, medium sort of segment. Can you talk to how your business is set up to service that? Like what's the broad split currently across your business that's servicing maybe enterprise versus the small, medium-sized businesses? And where do you want to get that to in the future?

Yes. I guess I won't talk to split per se, Bob. But the -- I guess, suffice to say that we have always dealt with what we would call medium business, not so much small business. And when I say small business, not so much below 50 to 100 employees, for example. But in that medium business space, we've always dealt in that area. So it's not new for us. However, we are ramping up our activities in that sector across both from a marketing and also systems and support perspective. Because as you can imagine, dealing with more customers means basically a higher transaction volume, more administration. And so we -- I think we already previously mentioned that we have been investing in more automation through a cloud solution provider platform, which will automate a number of those processes. So we are quite well advanced already in terms of growing that sector. I'll stick away from the percentages at this point in time, but we might be able to talk a little bit more about that at another time.

And then just some of the comments earlier just around that slight sort of restructuring the business as well. Can you sort of give a little bit more color on that? And was that really to sort of pivot the business to focus more on the consulting part of the business?

It was really a cost alignment in -- predominantly in the Infrastructure Solutions space, given the fact that we continue to see the delayed decision-making that we were able to make some decisions on roles and realign some of the costs and investments. So it really was not so much on the consulting space, but to realign the focus within the -- predominantly the Infrastructure Solutions go-to-market.

[Operator Instructions] Your next question comes from Edward Woodgate with Jarden.

Great result today. And yes, just wanted to dive into the rebates discussion a bit further, if that's okay. Just maybe 2 elements. So maybe the first part of the question would just be in relation to like some of your peers have called out that the changes to the Microsoft enterprise agreements impacted their fourth quarter GP margins. It just seemed like some confusion created more competitive pricing. So just curious if you've seen anything in relation to that?

No. I guess is the short answer. In theory, it should actually improve margins because the margins in the enterprise space are lower than the FMC space. So unfortunately, I can't really talk for the others. But no, we're not seeing that currently. Not to say that it won't happen in the future.

And then just as far as like the overall take seems to be that the rebate part continues to grow. It just been moving from one part to another though. I guess it'd be interesting just to understand if you could provide some color quantitatively or qualitatively, like what percentage of your software revenue would be impacted by these changes? The percentage of the software revenue, well, a good majority of it because it affects all our Microsoft enterprise agreements. So I'm not sure what further flavor or color I can add to that other than the -- as you're aware, even with the public sector, very high revenue, lower gross margin percentages, typically in the commercial space where the customers see the further value that you can provide around licensing and licensing consulting and software asset management, some of the margins are higher and then, of course, into the SMB sector. So as you know, we don't really -- while we plan to grow overall revenue in line with market or better than market. As you know, our real focus is on that growing that gross profit. And we've just got a -- we have no sound coming through at the moment. So I'm not sure whether that's on this end or the host's end.

Apologies. Your next question comes from Olivier Coulon from E&P Financial.

Hopefully, you can hear me. Just on the -- Cherie, this is probably one for you. The quantum of the investment in IPT projects, either in dollar terms or basis points? And then is there an expectation that -- I suspect you're going to say that it never really ends, but is there an expectation that, that level of investment tails off at some point and turns into more of a tailwind for margins as opposed to a headwind?

Yes. Thanks, Olivier. So I won't call out the total quantum that was spent other than just what I said previously in that we spent about $400,000 more than we had spent in the previous half. There's a number of internal initiatives that need to be completed on an annual basis, as you can imagine, things like our security program is an annual program and will require ongoing uplift in capability. We had some more one-off projects this half, such as the payroll system implementation, which obviously won't be repeatable. But I think there's probably an endless tail of things that the business would like to do to improve profitability and generate future returns. So I can't see those sorts of investments going away. There may be periods in our lifetime where we decide to strategically invest more. But obviously, we would signal that to the market before we did so. However, it will depend on what initiatives need to be completed to generate future profitability. Obviously, one focus, as Brad mentioned, is on building out our CSP capability and building that platform, which is a significant investment. So that's underway. But yes, there will likely be more that we need to evolve and invest on going forward.

Perfect. And then what is material in the company's view is that less than 5% versus the status quo? Or what's the threshold for that?

In terms of the impact on earnings?

The Microsoft channel incentive changes, yes, in FY '25?

So you're asking about the statement that the impact won't be material?

Yes. Yes. Just a clarification on what does that mean in Data#3 speak.

Yes. It's probably anything at or around 3% or less.

Because I suppose if you just take 3% of gross profit, and obviously, that's on an FY '24 basis, flow it straight through the P&L unmitigated, it's more like 13% of PBT.

Yes, that's correct. But that would be also -- theoretically, that's absolutely correct, but...

That's for the full year, obviously.

But it also assumes no mitigation whatsoever for realignment of costs or focus on the market. So yes, while that's theoretically correct, that would be the wrong assumption.

Yes. But I guess if you simplistically just take 13% divided by 2 for the second half, it sounds like implicitly, you're saying that you're hoping to mitigate upwards of 50% of the impact. Or is that the wrong way to think about it?

Yes. We're saying that we're hoping to mitigate the majority of the impact so that the net impact on the bottom line is immaterial, which would be below that 3% that I mentioned before.

Your next question comes from Elijah Mayr with Goldman Sachs.

Maybe just in the Services segment and just looking at the managed services, obviously, impacted and benefiting from a couple of contract wins in the second half '24 and first half '25. Can you give us a sense of the size of the contracts and how the pipeline is looking more broadly for the Services into the second half?

Yes, we can. In terms of the -- one of the contracts that we just onboarded, we keep on saying it's our biggest ever because we keep on doing biggest ever managed services contract. So I won't give away the actual revenue specifically on an individual contract, but we have actually seen some nice business across the board. And what -- in terms of -- with our enterprise managed services, which is really managing a customer's IT environment for them holistically in a lot of ways, depending on the scope of the engagement. But where we've also been successful in managed services as well is which is part of the deliberate strategy is the focused select managed services. And so the security operations center, for example, with just managing that -- those security focuses for the customer, just managing Device as a Service is another one of our managed services offerings where we're managing the end-user compute device for the customer and just managing that, we're able to onboard more of those than larger enterprise managed services. So we've got a joint strategy that is, yes, around continuing to onboard the enterprise managed services, but also to do those select point solutions, whether it's managing a network or a device or a server, for example. So we had good success across the board.

Excellent. Good to hear. And then maybe just one on inventory and granted it's probably material -- less material given the size of the revenue, but just a bit of a step-up versus June in sort of prior year. Is that more reflective of timing? Or should we think of that as sort of a leading indicator for inventory committed to customers and following into sort of that rebound in infrastructure into the second half that you talked about earlier?

Yes, it was really just timing. So it was just products that are obviously coming into the warehouse just before 31 December that we couldn't get out the door and invoice to customers in time for the half year results. So it's yes, a tailwind for January.

Your next question comes from Nick Harris with Morgans.

Just a couple of questions from me. Number one, I appreciate this is a tricky question to answer, but just how you're thinking about the Microsoft rebate changes longer term. Should we think that what they changed in December is almost like a quasi kind of one-off large change? Or should we think that, I guess, it's indicative of them potentially doing something similar over the next couple of years, so it could be a longer-term move. Just how you're thinking about that is my first question, please?

Certainly. And if you got the crystal ball then Nick, from Microsoft, now it's time to get that.

That's a hard one.

Yes. Look, we don't know from that regard. This change -- and one of the reasons we did the market announcement is that we -- it is one of the larger changes from Microsoft. They do change their general incentives on a regular basis, and we move to change to their focuses. Just this one was larger than anything that we've seen previously. So it's a bit hard to get the crystal ball out and understand where they may go next. However, I think the main thing is that from a licensing and services perspective, aligned with Microsoft and even that Glencore example, for example, even if we didn't sell the licensing into that example and just did the services around the Microsoft solution, even without any channel incentives and just the margin on the services engagement, that's where we've got opportunity. And as we've mentioned previously, and even outside of our licensing customers, we can do so much more services into those customers. So that will -- we'll just continue to evolve our strategy and -- but also at the same time, we'll focus on the things that Microsoft would like the channel to focus on where they see will provide value to the customers. And we're pretty good at doing that. We're pretty good at getting the skills and the certifications and competing at the highest level.

And my 2 other ones, which are probably a bit easy. Just the laptop replacement cycle, obviously, laptops sort of peaked in 2021. You've mentioned slow decision-making in the infrastructure side with Windows 11 and things like that. I'm just wondering, do you think all of that will sort of collide as in the upgrade cycle of AI-enabled laptops plus the new Windows operating system to really help the second half quite significantly? And what would that mean in terms of margins? Are there better margins in the AI-enabled laptops?

Yes, absolutely. I think this time last year, the vendors were just announcing their AI laptops, and they weren't generally available and it sort of really became to the middle of the year before they became available. However, they've been generally available for quite some time now. And as they're usual with technology, the next generations have been announced and they're available now. So for customers that were waiting now is the time to upgrade because the technology is there. And at the end of the day, you can't sweat your laptops too long because not only do -- does the latest software become more resource intensive as we've seen over many, many years, but also that end of support, I think, is really key if there's only going to be a portion of customers' existing laptop environments that are able to be upgraded just from a software perspective and the others will be replaced. So we're expecting that, that will ramp up as the vendors certainly during H2. I guess it just depends on how quickly we can get orders, get the stock in and ship it out to affect the June 30 number. But I think if you're talking about calendar year 2025, it's going to be a very busy year as far as devices is concerned.

Your next question comes from Ross Barrows with Wilsons Advisory.

I had a couple of questions. The first one is about Slide 28, so I thought I'd call it out now. Just wanted to dig into that chart a little bit more. So the customer count has grown steadily over time, as you can see, but it seems to have moderated in the past few years. But I guess, at the same time, the average spend has been going up. So that's been a good thing. I guess the question is, what do you think the key catalysts or catalysts would be to kind of get that customer count increasing again? And obviously, acknowledging that's a net number. So I'm sure you've won some and lost some, but on a net basis, getting that growth back in the customer count?

Yes, I'll start off and you can jump in, Brad. But I just wanted to call out that this slide is more important with respect to the actual trend line rather than the absolute values that are presented. There has been a little bit of aggregation of customer accounts over time, which might be skewing the data and probably making it look a little less favorable than reality. Just wanted to call that out. You can see there the growth in the customer accounts. Within those customer groups, there are many sub accounts. So if we look at our government agencies or our education accounts, there are a significant number of subaccounts that sit within those. So that's also just something to call out where the numbers would probably look better if we presented the lowest level of customer group in that graph. So I think in terms of retention, we have a really good track record of keeping our customers. We don't have a lot of attrition. That obviously plays to all of our strengths and competitive advantages that you're familiar with. So yes, I think the trend is moving in the right direction, albeit there's just some slight anomalies with the data presented. Anything to add there, Brad?

No, I think the only thing I'd add to that is the intent of the slide is that as customers become more familiar with us, they want to deal with us on more solutions and offerings. And that's the main takeaway from the slide.

Understood. The second one is just a quick one. You did call out wages growth of about 6% in the period. Are you kind of seeing that starting to moderate? Or do you think we can expect to see that remain elevated in the short term?

Yes. Look, it will be probably dependent on external factors. So obviously, we're still operating in a highly inflationary environment and all of our staff are impacted by the high interest rates and just general economic conditions. So there has been pressure on wages over the last 12 months. We are going to market on a regular basis, recruiting new billable services resources to service those new contracts that Brad referred to earlier. So any new hires are done at slightly higher market rates. But as I said before, they -- over the life of the services agreement, they are largely recoverable. So some of that is just timing. So I guess in short, Ross, it probably is dependent on external factors as to whether we've peaked with the wage inflation. I don't see it coming up dramatically in the very short term, but I'm hoping it will moderate over the next 6 to 12 months.

Your next question comes from Apoorv Sehgal with UBS.

Cherie, just a quick one. With the redundancies, what was the timing of when you made those redundancies? And just presumably, there'd be some sort of cost save as a result. So was there like a larger cost kind of benefit coming in the second half compared to the first half?

Yes, that's right, Apoorv. Most were done in Q2 from memory. And yes, there will be an annualized saving impact, which we'll start to see in the second half.

I might squeeze in a question just for Brad really quickly. Brad, just like the current mix of your business -- of customers on enterprise agreements versus CSPs. I know you might not want to give percentages, but is it a case of more than half your customers are on the enterprise agreements? And if that's the case, like how long does it actually take Data#3 to get everyone onto that CSP model?

Yes. the CSP won't be relevant for a bunch of the customers, too, because they're still be better being under an enterprise agreement. So we won't be able to migrate all customers over the CSP. In terms of numbers, I don't really have those numbers at hand. But the -- from a revenue perspective, as you know, one large enterprise customer can be tens of millions of dollars and a smaller customer, not so. However, some of the recent analysis that we've done shows that even on a commercial customer that is engaged with us more so across CSP and some of the services around that can be more profitable than some of the enterprise customers that are buying under EA. So that's nice and that's the opportunity. As far as numbers, as I mentioned before, we do have a number of SMB already in terms of the actual numbers comparatively to enterprise, I don't have that at hand.

Your next question comes from Chenny Wang with Morgan Stanley.

Maybe just the first one on the slow decision-making across the space. I guess we've heard about this for the past 12 or more months already. But when you talk to customers, what are they looking for, I guess, to release that spend? Should we be thinking more macro factors like elections, rate inflation? Or is there kind of more micro factors tied to their IT budgets? And sorry for the long-winded question, but if it is micro factors, like what other things they're looking for to get that increased clarity?

I'm not sure whether I understand where you're headed with that one, Chenny. Maybe you could just summarize that again, please?

Yes. I mean I was just after -- just in terms of, I guess, some of the slow decision-making that, I guess, you guys have called out and peers in the space have called out. This is a dynamic that's been going on for, I guess, 12 months now. And I'm just interested, when you talk to your customers, like what are they looking for to release some of that.

Right. Okay -- so it's -- so now -- the interesting thing is it hasn't been just us either. So when we compare with others in the industry and our vendors, everybody has seen a lot of that, particularly with large capital purchases. So one of the strategies that we've had is change those large capital purchases into annuity offerings through as a service offering. So that's been working well for us. However, comparing notes with some of our vendors already and distributors, they are already seeing what we're seeing this quarter, which is great with that freeing up a little bit. Now as far as also with the interest rate announcement yesterday, that may just help the sentiment as well in terms of freeing up organizations to actually commit to the projects that they've been stalling on. So from our perspective, we're looking at that delayed decision-making sort of becoming less. However, we do still believe it will be a factor moving forward. It has seemed to be the norm. But hopefully, we can manage that better moving forward given the fact that the economic environment may seem to be improving.

Got it. And then just maybe a second one. I mean a lot of attention has been on the Microsoft changes. But I think there's also been a few other changes to your major vendors and their programs. So yes, maybe just an update on that. And anything else out there we should be aware of?

Yes, not really. I believe the vendors do change their programs regularly. And as I've mentioned previously, some of those vendors have multiple programs. So we're not talking about just one program with a vendor. They might have 10 different programs, and they move around the programs based on the focus. So there's nothing that outside of business as usual that we're dealing with in that regard. And if there was, then we'd certainly be transparent about that. But it's other than the larger Microsoft change, it's really business as usual.

Your next question comes from Adam Dellaverde with Taylor Collison.

Just a couple of quick ones. When you talk about recalibrating for the EA rebate changes in the second half, is there any expectation that there'll be more restructuring charges that are there to occur?

We don't know yet. I guess, is the short answer. We -- our initial strategy will be around focus rather than having to take cost out. However, if we need to do that, we absolutely will, Adam. There's no point having individuals that are unaligned individual roles that are not aligned to the go-to-market. And if we can refocus those roles, we will or if we need to change those roles with others or even just restructure, then we will. So nothing flagged at this point in time, but that's not saying that we wouldn't.

And just I appreciate that kind of only had clarity in December and then we're sort of 50 days into actually applying. But talking to customers who are about to roll or partway through any contract about shifting to CSP, is the expectation that you're able to induce the mid-contract under certain circumstances or with certain -- is there any way to induce the mid-contract? Or is it a matter of just dealing with the EAs expiring as they come and sort of dealing with the profitability consequences in the interim?

Yes. It's definitely -- it's just more typical to be at the end of a contract and migrate them over at the end of the contract. There are ways of migrating the contract, but that needs a whole bunch of exceptions and support through Microsoft, which are outside of operational guidelines. So typically, the discussion is with the customer around renewal.

There are no further questions at this time. And that does conclude our conference for today. Thank you for participating. You may now disconnect.