Dicker Data Limited (DDR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Dicker Data Limited Half Year Results Presentation. [Operator Instructions] I'd now like to hand the conference over to Mr. David Dicker, Chairman and CEO. Please go ahead.

Yes. Hi, everyone. Thanks for coming on to the call. My name is David Dicker. I'm the CEO, Founder and Chairman of Dicker Data. And we're going to give you an update on the H1 for '23. It's been a pretty good result really. Obviously, the industry and sector numbers are probably not as great as people would like them to be, but we performed pretty well. Gross sales at AUD 1.6 billion, up 9.4% half-on-half. The EBITDA at AUD 70.6 million, up 15%, and the net profit before tax is AUD 54.9 million, up 6%. I think when you look at the conditions, the market sector and competitor conditions, these are pretty good results. We're pretty happy with these. So in much greater detail, I'm just going to hand over now to Mary to give you an in-depth rundown on the results. Thanks very much for being on the call.

Hi, all. Good morning, and thank you for joining the call and the results update. I'll be going through the financial results for the half year '23. David has covered the points in our highlight screen. As David has stated and as we've provided in our market update a few weeks ago, gross sales finished at AUD 1.6 billion, up 9.4%. However, you will notice slightly different reporting in this half year. With references to statutory revenue, we are showing at AUD 1.1 billion. I will explain in further detail what has changed in terms of revenue recognition shortly. And it's around how we recognize our software and virtual services revenue after a review of those revenue segments. But by and large, there was a very positive result overall in terms of growth top line and bottom line. Net operating profit before tax, up 6%. Our net statutory profit up over 7%. This was reflected by -- supported by strong gross margins, and that's reflected in the increase in our EBITDA up by over 15% at AUD 70.6 million. Also in terms of sort of high-level highlights for the half year is our increase in active partners. You will note that last year, we reported about 10,200 transaction partners. That was over 12 months. These numbers are representative for the first 6 months. We do expect that to be over 10,200 partners by the end of the year. And again, it shows the strategies we've put in place around new partner acquisitions, particularly as a result of the business acquisitions we've made over the last few years. Another key highlight for the year, again, which we're very proud of is the recognition of our diversity and inclusion programs, again, being recognized by our industry peers in terms of the practices that the company has put in place and being awarded Diversity & Inclusion Champion and Hardware Distributor of the Year again, through our network. If we go to the next slide in terms of financial trends. We are showing this slide on half year-on-half year, and reflecting the gross sales in this scenario, as we've previously reported. And the gross profit margins and net profit margins are in this slide calculated on the basis of gross sales rather than net revenue, which I will explain a little bit further. Highlights for the year is that the growth half-on-half was delivered despite being in an environment where there were a lot of challenges around different segments in our market. And Vlad will provide a little bit more color and in-depth discussion around what we saw in different segments. But I don't think it's any secret around PC decline coming off the back of very strong growth in the years prior. We did experience a decline, probably more steeper than what we were anticipating, but the beauty of the diversified business was that we had some strong results in other categories, and we've worked really hard to make sure that we are participating in all segments of the technology [ suite ] so that mitigating the risks of different demand cycles within the different segments. Also very positively was the ability to retain our gross margin. This was supported by the fact that the growth came from the segments around our networking service storage, which are more value-added type sales being able to command stronger margins in that category and also supported by the -- coming off of some very large growth numbers in some segments. Some of our targets with our vendors were recalibrated. So the opportunity to actually achieve target metrics to earn the margin was supported in this half year. In terms of profitability, strong outcome as well considering the environment around interest rates and other inflationary pressures. If we go to the next slide, I'll just talk a little bit more in terms of what's changed in our recognition of revenue and how we are presenting our revenue going forward. With so many new software vendors and software agreements and different ways of procuring our software licensing programs over time, the company undertook a detailed review of these new agreements, plus updated agreements with our software vendors to determine if the company is acting as principal agent in the resale of the software licensing and maintenance products. This was something that we reviewed a few years ago and on the basis of the agreements at the time and the way we were transacting software at that time, it was determined that we were acting as principal and therefore, we're reflecting the revenue on a gross basis. As we've -- as the programs have evolved and as we've added new software vendors to our portfolio, we've had a closer look at what the agreement specifically say in terms of what our role is around how we are selling our software programs. And the key differentiator is around inventory risks and performance obligations that come with these agreements. After that detailed assessment in conjunction with our new auditors, it was determined that the company is acting as an agent in respect of the sales. And as a result, we've revised our presentation of revenue. So what essentially this means is that where previously cost of goods relating to software and virtual services were represented as cost of goods and the customer was our reseller, under this model cost of goods that relate to the purchasing of software and licensing products now is netted off against the revenue number. Effectively it's reflected on a net basis. So it's referred to as the agency fee. Another way to look at it is, cost of goods are now mapped against revenue. What that has resulted is in total statutory revenue for the half year was AUD 1.1 billion, up 5.3%. So we have restated our June comparative '22 numbers on the same basis. There's actually no change to gross profit dollars. That's exactly the same on both revenue presentation models. What does change though is the gross profit percentages. For the purpose parts of our presentation and the fact that we've reflected previous comparatives on the basis of gross sales, we have continued to provide that through our update, and we will be referring to [Audio Gap] sales in terms of the full value of the transaction when we're doing on a like-for-like comparative basis. So the outcome of that means that whilst gross profit dollars were exactly the same and increased by 17.7%, our gross margins vary, although the result is the same in that both have increased half-on-half, again, as a result of what I've said earlier around the segments of the market we're selling into and the ability to recalibrate some of our targets that came off some very high-growth periods. If we go to the next slide, if we have a closer look at the profitability outcome for the group. So whilst revenue is up, we've also had -- and EBITDA was up, we've experienced increase in operating costs. They were up by 23.3% for the half year. This was predominantly increase in salary and wages costs as we took on the full value of the Hills acquisition in the first half, whereas in the comparative period, the acquisition was from 1st of May. We did take on over 100 people that came with that business. And in this first half '23, we've got the full 6 months of costs that relate to that plus the branch network that came with it. Also increases in our depreciation and amortization costs, up by over 20%. Some of it's driven by the fact that we acquired some plant and equipment and other depreciable assets from recent acquisitions. It also includes AUD 2.3 million for amortization of identifiable intangibles. This was the customer contract acquired with Exeed and prior to that Express Data being amortized. I suppose the most sort of significant impact to profit before tax was the significant increase in our finance costs. The business is -- the working capital is funded by debt facility. It's a floating facility, and we've been exposed to the recent interest rate increases that have occurred over the last 12 months. It was -- in the comparative period, it was probably the onset of the rises. So there was a significant increase in costs, I think, over AUD 5 million in terms of incremental funding costs on the comparative period. But to be able to deliver a profit growth on the basis of these incremental costs that we've had to incur, we feel was a phenomenal result and being able to continue to grow our gross margin and contain costs where we could and put in strategies around that to make sure that the business can deliver profit growth. If we look at net profit after tax, up equally to the growth in gross sales at 9.4%. If we go to the next slide and have a closer look at the balance sheet and see what was sort of driving some of these elements. We've been able to maintain our working capital dollars slightly up on last year in the last balance date. This was as a result of reducing inventory. Total inventory hold was down just under AUD 10 million. We've been driving a lot of disciplines internally to be able to bring our inventory levels down as supply chain has normalized. If we also look at the trade and other receivables, almost AUD 20 million down as well in the last comparative period with the improvement in collection days. So both of those releases in working capital were offset by a reduction in trade and other payables where some of that working capital release we've put to early settlement programs and some of new vendors coming on board, some investments around that as well. Whilst total borrowings have increased, net debt has remained relatively flat on last balance date. The increase in the borrowings was supported by an increase in our working capital facility limit from AUD 220 million to AUD 270 million in Australia, and that's put in place to support the longer-term growth for the next 12 months. The facility is up for renewal in May, which we're actively looking at refinancing but from now to then and support our growth for the second half based on net debt outcome debt-to-equity ratio at 1.26x. So overall, quite stable in terms of balance sheet performance. There's also an increase in our property, plant and equipment. We've made an investment in our warehouse extension. If we look at the next slide, there's an update in terms of where we're at with our investment in expanding our distribution center. We did start construction on that extension in December last year with a view to having it completed by June this year. The construction is largely completed. What's left to do is fit out the warehouse with racking and that's scheduled to happen in the next few weeks. Depending on how long that takes, whilst we would have liked to have utilization of that warehouse about now, that looks like it will be pushed out for about 4 to 6 weeks before we'll be able to utilize it. In terms of space that gives us, the combined space across the existing and the extension will have close to 40,000 meter square capacity to support the growth in terms of the new vendor acquisitions we've been making and the other growth aspirations in terms of the segments of the market we are looking to capitalize on as reflected by the acquisitions and the segments we entered. The cost of the construction was circa AUD 15 million. Most of it has been already reflected within the cash flow. There's a couple of million left to go on the fit out side. And we are expanding our [ clean ] energy footprint with extra solar panels to be added. So we'll be able to support our business with our own energy generation, and that's already been reflected in our costs with the current capacity that we have been able to maintain a lead on our energy costs as we've expanded the business. That's a summary from me in terms of the financial update. I'll hand it over to Vlad now to provide a business update.

Thank you, Mary. Thank you, David. Good morning, everyone on the call. I'm going to give you a market update and what we've been seeing the trend in the last 6 months. I'm going to also try to look at the next 6 months, how I see the market evolving and what challenges is going to continue to bring and what opportunities is going to come. And then I'm also going to look a little bit more at 2024. So like David said and Mary said, I believe, given the circumstances and the increased cost of financing our business, delivering a growth in top line and bottom line has been a very, very, very encouraging outcome for us. We are very growth-minded organization and it goes throughout the culture of the organization that goes from the founders and executive board. But not only we're very focused on growing, but we focus on growing profitably. And everything we do, all the investments we put all the strategies we pursue is to continue to grow. Distribution space is a very unique space in our channel ecosystem. And I'll explain why. When things are good, things are good for everyone. But when things are not so good, and market is tough, a lot of suppliers and vendors, a lot of partners actually accelerate their reliance on distributors and accelerate their dependence on distributors. And we've seen that happening in the last 6 months. Markets got really tough, inflation gone up, small businesses started to slow down a little bit. What it does, it gets a lot of large vendors to cut some of their costs and put more reliability and more functions towards distributors. And we've seen it. We've seen how all my vendors came in and saying, "We need you to do more. We want to perform more." So we're gaining a great opportunity in a tough market to actually perform and do more. And that's what we really reflected in the first half. But going a little bit more in specifics, data center infrastructure and networking did exceptionally well. I'll go through the actual numbers in a second, but double-digit growth in both sectors exactly as we've predicted, getting out of COVID, all the digital transformational projects came back. But what's really good about this segment of the market, not only are we invoicing and deploying a lot of tech into the data centers, but also, we're actually receiving a lot of great bookings and the new orders are coming in. So it gives me a great deal of confidence that that boom for digital transformation and willingness to continue to drive that transformation is still very, very strong. It's going to continue growing strongly. Our PC market was soft as predicted, as called out, a little bit more than I thought originally, but the COVID sort of -- during the COVID days, the PC market was very, very strong. We had a big uplift. Now it's kind of pulling it down. So we're getting closer to sort of 2019, early 2020 numbers and again, there is a really good optimism around this. I'm going to talk in a second about the actual numbers, but our PC device number dropped about 24% year-on-year in the first half. Now when I talk to all my leading PC manufacturers, they all are as one and saying that 2024 is going to be when the market is coming back and coming back really strongly. So Microsoft is going to end their Windows 10 and below support. So there's more than 4 million devices in Australia and New Zealand that are still sitting on -- not on Windows 11 latest update devices. So that's going to be a phenomenal refresh cycle. And that has to happen between '24 and mid '25 because the support will be ended in May 25. Also, we're seeing a rise of artificial intelligence. I don't think there is anyone on the call or anyone who hasn't tried to use AI support systems [indiscernible] copilot through the Microsoft office or through various different tools that's currently available. AI is here, it's revolutionary, it's a game changer. Now in order to take full advantage of this, you need a PC that can support these AI functions. None of the current fleets can actually take full advantage of this. So everyone calling 2 major points of why they believe 2024 and 2025 is going to drive the biggest PC refresh cycle that we've seen in the history. One is Microsoft stopped supporting their Windows 10 and below, and 2, utilization of AI. And I'm very, very optimistic about these predictions. So having that business declining throughout 2023, going into 2024, that's where a lot of our growth is going to come back in. Looking at data center infrastructure networking, that's booming and it's going to continue to drive really good growth. I actually feel that enterprise networking is going to continue double-digit growth well into the 2024 and beyond. Our software business is doing incredibly well. That's going to continue to do well. So it gives me lots of good optimism. Just to finish with that slide. We have an incredibly diverse range of technology. Our aim is to mitigate the risk and open up new markets to drive more growth. Remember that growth mindset is incredibly passionate and strong within the organization. Hence, obviously, I'll talk about how we actually continue to diversify our technology. So if we go into the next slide and we look at DAS acquisition. We've acquired that company to open up new markets. We acquired Hills Security and IT division in May 22. We've had a very transformational 4 quarters in this business. And in the last quarter, we performed incredibly well with that business, delivering a very good not only growth but also a net profit contribution into the company. So we are super happy with this turnaround. In fact, we delivered AUD 73 million in first half. If you look at the year before, that's what we did in the first 12 months of the acquisition of Hills. So we're perfectly online on our projected AUD 150 million revenue out of this business at substantially higher gross margins as well. That's why we have a business. But the keynote in this, we opened up new markets. We opened up and unlocked over 2,000 new partners, both Australia and New Zealand. So we're going to continue to do this. We do believe in market convergence, we do believe in diversification and being a diverse platform giving us that good business resilience. If one sector is slightly soft, the other sector picks it up. And now we're at the point of our evolution where a lot of partners actually have a strong expectation for us to deliver those various solution stacks and services. So going into the next slide. We've acquired a similar type of Hills but in New Zealand to add to our Dicker Data Access and Surveillance family, again, opening up new markets. Over 500 new customers came on board, small but very, very solid business. Since then, we added another couple of very good vendors there, Halo and Ajax. We continue adding vendors. You will see in the next 6 months, we're going to add about half a dozen new vendors for Australia and New Zealand into our DAS portfolio. So the growth that DAS represent is significant, it's phenomenal. And most importantly, it went into a good profitable area, which is absolutely great to see. Next slide is our new vendors. We continue adding new lenders to the portfolio. You could see a lot of smaller complementary vendors on your right. I've pointed out 3 transformational new vendors that we've added, Cloudflare is a software-defined networking platform we are actually using ourselves here at Dicker Data. And it's currently taking the world by the storm. We have an exclusive relationship with them, love their technology and is one to look out for the next 5 years. NetApp is one of the leading enterprise storage vendors in the market. Probably the only remaining gap we've had. We now have the biggest and the widest range of the enterprise storage vendors, including Pure Storage, NetApp, Hewlett Packard Enterprise, Deltek, Lenovo Data Center Group, and a few smaller ones. So we've really completed that range. NetApp has established very, very well in Australia and New Zealand. Now both contracts, Australia and New Zealand. And Ajax, it's to complement our already existing very strong security and infusion portfolio. Ajax is the fastest-growing European security and intrusion brands. So we're super happy to sign a contract with them, just very, very recently, a couple of weeks ago. Again, it's Australia and New Zealand contract. So that work has continued to happen. We are talking to a lot more software vendors, hardware vendors. There is real good opportunity and real good feel for all these vendors to continue to work with Dicker Data. Next slide just represents our entire vendor portfolio. Like I've always said, there is no right or wrong answer on number of vendors we as an organization, represent. However, as we become such a leading force in the tech industry in Australia and New Zealand, there is a very strong expectation by a lot of our partners. When they deal with Dicker Data, they want to have access to all their technology vendors of choice. And obviously, we feel that pressure, we want to assist in health, it's not an easy process, but we're doing really, really well in terms of giving them a platform to access all their leading technology venders. But as we know, tech is probably one of the most vibrant industries in the world, new innovations and happening all the time. New start-ups and new vendors and new technologies are coming every quarter. We're keeping our eye on it. And again, as we already represent so many leading brands, it's getting slightly easier for us to tap in into the new technology stacks, which we're taking the full advantage and full opportunity of. The next slide is our industry recognition. I mean we know we're doing really well. We have firm starts. We have numbers. We have strategy. We know how our competitors are doing. But it's always incredibly enjoyable and satisfying to receive industry recognitions as well. So like Mary was saying, 10 years in a row, we've been voted as the Hardware Distributor of the Year. Not many people are aware of this and we need to do, I think, much better job in promoting this. But we are actually the largest software vendor in Australia and New Zealand as well. We're getting very, very close to AUD 900 million of gross software sales. The CRM editors voted Dicker Data as the best performing large distributor of the year a couple of weeks ago in their summit and Channel Choice gave us the Distributor of the Year as well. We have numerous, numerous recognitions. Yesterday as part of the Dell Technologies Partner Summit, and we won Distributor of the Year for the 7th year in a row, which is just incredible accomplishment given that we've only had Dell Tech for about 10 years in our partnership. So wonderful, wonderful recognitions. So next slide, it actually show how we're doing against our competitors. We're doing really, really well, really well. So we continue growing market share. So yes, we're growing, but organically, we're adding new vendors, and we're adding more market share. So in Australia, we're now looking at corporate commercial and enterprise business. We are well over 1/3 of the business, 35%, continue dominating, continue leading the stack. We do have now a very small consumer retail business in Australia that came by acquisition of Exeed Group last year. It's grown as well, which is fantastic. We had 10% growth in this year. But it's not what we've known a traditional fulfillment business. So we've removed that complete segment when we compare ourselves to Ingram Micro and Synnex, for example, because we are not interested in that low-margin fulfillment type of scenario retail business. However, when it comes to the good value offering and a good end-to-end value servicing, then we are interested, and we are growing it. So this is -- hence, the numbers is repositioning that way, just so it reflects more apples-to-apples. When we look at the New Zealand market, we do have substantial Apple fulfillment business [indiscernible] their largest retailer, hence, have left the inside distribution landscape for New Zealand. We are a 29% market share in New Zealand, Ingram Micro is still a little bit bigger, but we're definitely closing the gap. And the growth we're currently experiencing, I think it's -- I think we're moving perfectly in the right direction in this business. New Zealand business is now fully integrated, fully functional. We had a really good quarter -- sorry, half -- first half '23 with New Zealand, and that business is growing from strength to strength for us, which is awesome to see. If we look at the next slide and look at the revenue category and what the splits are, currently, software still around 27%, 28% of our business. I wanted to move it more and more towards over 30%. The growth in our software business was phenomenal, 21% year-on-year, AUD 443 million. We're tracking towards sort of that AUD 900 million mark. My absolute strongest ambition is to get to AUD 1 billion that would be such a good result. I think we have the basis, we have the vendors. We're talking to some new vendors who we are looking to bring on board by end of the year that would give us that -- hopefully that push and hopefully for the next '24, '25. Our subscription and revenue base is growing as well with 21% up there as well. So over AUD 400 million is now coming. It indeed came in the first half out of subscription and renewables revenue stack. When we look at the hardware business, despite -- despite 24% decline in the PC business, despite a 17% decline in our print business because it's kind of sort of print and PC is affiliated very closely together, despite about 30% decline in our peripheral business, peripheral is more like monitors, docking stations and other accessories then again, closely associating with PCs. So as soon as PCs go back into the growth, all of those categories are going into the growth as well. So despite all those challenges and those softness in the market, we still produced 5% growth in our hardware business, largely driven by servers and storage, enterprise networking and AV/UC. You'll probably notice that our AV/UC business, which is digital signature, smart offices, sort of categories, the growth has slowed down as well. And it is a lot to do with some of their factors that a lot of people have deployed a lot of this technology. And now they are facing whether -- obviously, the inflation and interest rate is getting them to think whether they need to upgrade or refresh. I feel that category has continued to grow. We're doing really, really well there. And as soon as the PC category storm back into the growth in the next year, we will see an uplift of AV and UC business as well. So that's doing really well. Access and surveillance business, 300% growth year-on-year, phenomenal results. Continued to grow and heading towards that sort of AUD 150 million projection mark. So good, healthy business overall, good balance. As soon as we see our PC category, I mean, it's a very big business for us. If you look at overall out of AUD 1.6 billion, over AUD 300 million PCs represent well over AUD 300 million. And if you look at the 24% decline, it was a bit of a hit. So given the circumstances, I think a very, very, very solid result. Next slide is continuing to show our diversification strategy. We're pushing really hard there. Nothing really new compared to the last couple of years. Top 5 represents just under 50%, perfectly balanced positions. Our top 5 is Microsoft at $200 million, Cisco at $150 million; HP at just $140 million, Lenovo at $113 million and then Dell about $100 million. So these are our $100 million-plus vendors, beautifully positioned, big practices, strong presence in the market. We are a leading distributor for all top 5, and that's never going to change. We're going to continue to drive these very specialized and focused practices with those top 5 vendors. [ Adding ] the new vendors is continuing to diversify the risk. Microsoft, giving over $200 million in revenue for Australia and New Zealand in the first half, it's still around 12% of our revenue. So again, this risk is very balanced and mitigated. So now if we look at the strategy and outlook. So why are we getting so excited? Why do we believe we're going to continue to grow, which we've always said we will, and we are, whether the market is good or not so good. So what's hot in the market? So I've mentioned artificial intelligence and how it goes, and I think it's big and revolutionary. So that's going to -- but AI is going to drive existing technical tech layers and platforms. We're not going to necessarily see a huge deal of how do you monetize AI as such. I mean Microsoft probably will. We will monetize it via -- I mean we have an exclusive relationship with NVIDIA. NVIDIA is a very strong vendor for us. We're seeing a very good potential with the GPUs and graphic card deployments for a lot of data centers. So we're seeing -- so indirectly, we will start to see some really good uplift in demand. Cybersecurity, very topical. We have a great number of vendors in cybersecurity, but we can do better. And that I see as an opportunity. And hence, obviously, putting a lot of focus into the new cybersecurity vendors, new technological stacks that we can bring on board. Hybrid IT, multi-cloud, we've talked about it before, again, growing really well. Access and Surveillance, we've touched based on this as well. 5G, I personally thought 5G is going to grow a lot faster and accelerated to grow in Australia and New Zealand area. I think it's doing really well elsewhere in Europe and America. I think we are yet to see the uplift in opportunities for us. But now, as all data center infrastructure equipment is getting refreshed as an enterprise networking refreshment cycle happening. Hopefully, we'll start to see a lot of 5G opportunities also coming in play. Yes, you could see on your slide, all this area, is strong, is double-digit growth. We're very well positioned to take a really good advantage of those. So yes, continue to put a lot of investments in there. So what's the focus for us as a Dicker Data? So where are we putting all our energy. Where do I put all the energy? So New Zealand. New Zealand is doing a lot better. New warehouse, new company, fully integrated, great talent, we're absolutely on track to do $600 million in New Zealand, all the big tick boxes. But can we do better? Can we get New Zealand into the profitability levels that Australia is reporting? Can we actually accelerate the growth? Absolutely, we can. So a lot of focus on accelerating the growth and improving the profit margins in the New Zealand business. It's going into the right direction, we want to accelerate it. So a lot of focus on doing a lot of things in there. Dicker Data Access and Surveillance, it has opened up in new markets. We are taking it as a [ storm ]. We are nowhere near. Like our market share in this particular division is still around 10%, maybe a little bit more. So the opportunity to grab another 10% of the market share is absolutely visible. It's real. It will be done in the next couple of years. So we're definitely incredibly excited about this business. And especially, we're excited because, it's giving us double gross margin opportunity on this business. So it's something we can feel, we can see, we're already doing it, we're turning around, getting us really excited. So it was a fantastic acquisition. Next one is Cybersecurity. I've mentioned it before, I mean it's growing over 100% year-on-year for us. So that segment is absolutely critical. Not only -- and Cybersecurity is such a big spectrum of work that we can do. Our aim at Dicker Data, my personal ambition is not only to be a largest software distributor in the channel in Australia and New Zealand, but also to be known as the cybersecurity hub, cybersecurity distributor, Australia and New Zealand. And I know it's a lot of work required, but I see a great deal of opportunity there. And I don't think the opportunity in the cybersecurity space is going to go down. I think if anything, in the next couple of years, we'll see more and more interest in service security. It becomes a lot more compliant. We're leading a lot of sales with a cybersecurity conversation. So it's a big topic of conversation. And the market convergence I've always been big on believing in this. It is happening. Maybe not as fast as I wanted it personally. But ultimately, IT drives in becoming an anchor and a platform for all market convergence, whether it's the physical security, electric market, operational technology market, software, cloud, data center, everything cycles around IT platforms. IT engineers and specialists can do all of that and simplify the inside infrastructure. Electricians cannot do IT. Physical security license guys, they cannot do IT. So that's why I feel Dicker Data has such a strong platform. At the moment, a lot of this market is still operating a little bit separately, but we can start seeing good signs of that convergence. And when it does happen, I think we will see a revolutionary kind of change in the way we're dealing the business, and revolutionary way that customers are consuming the technology. So definitely looking for it, putting ourselves in a great position. Okay. Well, that's my last slide, giving you a bit of insight in what's happening. I think -- okay. So just a couple of quick remarks on H2. H2 last year is where we've started to see a little bit of a decline in the PC market. So when we look at the H2 2023, while we still see a decline when we look at the percentage decline, I don't think it's going to be 24%. I'm looking at July, August, I can already see that. So we're going to still kind of decline, but that percentage decline is not going to be as big. Our H2 in the last couple of years has been overperforming H1. There's a couple of reasons that are giving me confidence that, that perhaps is going to be the case again. So I'm very optimistic about it. So currently tracking perfectly to our own internal projections and guidance. So we're quite comfortable with [ Inspire Annual '23 ] number. Going in '24, I share a huge deal of optimism. When the PC market is going to come back and the refreshment cycle happens, and I'm going to go back into the double-digit growth in the PC market. I'm going to hold on really good growth in our software division, with a cybersecurity push and the data center infrastructure and enterprise networking going to continue to drive that accelerated growth. I think we're potentially looking at a very good next year. So currently incredibly optimistic, looking at the [ difference ] we're going to continue to diversify. We're going to continue to open up new markets, and we're going to continue to bring new partners on board. So yes, I think we're in a really, really good position right now. Okay. That would be it from me. And yes, I just wanted to thank you. Thank you for being with us and listening to our results. And yes, just opening up for the questions.

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

Just a few questions for me. Just circling back on your H2 remarks, Vlad, I mean, given you have a bit of acquisitions to benefit into the second half, there should be pretty limited risk, I'd say, of H2 being sort of worse than the first half?

Exactly. Yes, pretty limited. And plus, like I said, our second half 2022, that's where we started to see some softness in the existing business outside of the acquisition. So yes, voice acquisition is going to keep growing. Softness to see. So we'll see that decline in PC and PCs are actually not accelerating, but going the other way. So hopefully, we'll see a really, really good result in H2.

Okay. Great. And then maybe just a question on the inventory balances and obviously, that ties in with your working capital facilities as well. Like do you guys expect to continue working on reducing that into -- in the second half?

Yes. I'll give you an answer how I see the second half, and I'm fairly confident on that, and then Mary can probably comment on existing inventory levels. So what happened is, our [ entry ] level started to come down, they're a lot more balanced. The supply chain is pretty much back to normal. There is a couple of single-level lines of some of the enterprise networking vendors, who still have very long lead times. But all in all, on average, we're pretty much back to where we were pre COVID, which is really good. The biggest issue in the last couple of quarters not being able to take our inventory even further down, was the decline in the PC market and actual decline, what's happening with the sell-through, was not reflected in some of our vendors target-based exercises towards all distributors. So our vendors did not expect such a decline. They've given us slightly bigger targets. All distributors had to continue to buy through it. Hence, we've seen a slightly elevated level of the PCs sitting in our warehouses. Now the good news is, finally it happens. So in Q3, all vendors are saying, yes, we're realizing, the market is in decline. We have to give our distributors a bit of a breather. The targets came back. We're doing very limited new buying this quarter and still getting our profitability balanced with those vendors. But it gives us an opportunity to chew in through a lot of stock that we currently have. So my prediction by end of the Q4, we're going to come back to a very normalized stock level. I don't see the targets going up. I think it's leveled nicely. I see the same behavior from all vendors. Gives me a good optimism, it's not one-off, it's actually going to be a continuing tendency.

Yes. And what I'll add to that, Bob, is that -- and because of what Vlad described, we still are not experiencing linear deliveries. So there were some scenarios of sort of chunky deliveries, which -- where we closed at the end of June, is probably a little bit more elevated than where we've been intra-month in the last few months prior to the end of the reporting period, and it's definitely come back over the last 2 months. But there was still a [Audio Gap] working in stockholdings, because of some disciplines we've put in place around that as well.

Okay. Great. And then just on the cost base of the business. I think OpEx is around that $80 million level for the first half. Is that a reasonable base going into second half, just maybe adjusting for some CPI?

That's correct, because we're now reflecting sort of the full 6 months of extra costs through all the acquisitions. They were not in the comparative period. So yes.

Your next question comes from Apoorv Sehgal from UBS.

Firstly, just on gross margins. Second quarter is obviously a lot stronger than the first quarter. I think it was about -- if you [indiscernible] 9.7% in the second quarter. To what extent can we extrapolate that outcome into the second half of '23, taking into consideration, I guess, product mix? You've touched on networking and storage going quite well, that's obviously high margin. And any sort of comments on seasonality into the second half, please?

Yes, sure. There's a couple of factors here. Obviously, we're seeing a good growth in our DAS business, which affects our gross margins in a positive way. So that's going to continue to grow. I mean, H2 versus H2 is going to be really strong for DAS business. So you can extrapolate that. Our New Zealand business started to produce stronger gross margins as well, which is nowhere near where it needs to be, but it's accelerating and it's helping the overall gross margin mix as well. Enterprise networking, data center infrastructure, because we had such a phenomenal invoicing and hitting the numbers and so forth, that gave us a really good back-end rebates, which transacted in gross margins as well. That's going to continue to happen. So none of that -- so looking at July and August, we already started exceptionally strong in those particular segments, enterprise networking and data center infrastructure. So my view that we should be nicely retaining that, unless something goes really, really wrong that at the moment, talking right now to you, I just cannot see happening.

Sorry, Vlad, I'd say, in terms of moderate that around sort of the inventory around the PCs and maybe sell-through. So I think it will be balanced. The margin will be balanced that way. Just to -- because we've had some large buy-ins with the sell-through is happening in the next [Audio Gap].

Okay. And just wanted to follow up on the question just before asked on the cost base. I think you're saying the $80 million mark first half is kind of like a fair base going forward into the second half. If I'm right, I think your second half sales should be more than your first half sales, like software itself should probably grow a bit more in the second half. So would that imply that, you're comfortable with the cost base as a percentage of sales in the second half being a little bit lower than the first half? Because the first half was about 5.0% of sales. But I guess you're saying cost base kind of similar in the second half on probably bigger sales, that as a percentage of sales, it could come down a little bit more?

I'll probably just qualify that too, because the largest part of our cost base is salary and wages and a lot of our remuneration schemes are performance-based. So whilst that -- if the company continues to deliver performance within the metrics of those remuneration schemes, then there could be a little bit of increase in that part of the cost base, as it is variable. But we should see leverage from the balance of the cost base. So you're correct in that statement.

Is it fair to say that cost savings opportunity is now -- has that sort of played out now? Because I guess if we compare back to first half '22, your cost base was something like 4.7% of sales, and it stepped up to 5.2% in the second half because of the [ duplicative ] costs? And now you've obviously brought it back down to 5.0%. So you realized some sort of cost out. Has that kind of played out now or is there more to go?

Not entirely. We are always sort of reviewing sort of our cost structure, particularly around team structures and the one-off costs that we're reflecting are largely redundancies, and that work is still continuing in terms of streamlining the optimum team sizes. So no big restructures or anything like that, but our focus on costs and efficiency. And that's an ongoing process, I would say, until the end of the year. As we bed down -- continue bedding down the integration of the acquisition.

But saying that, Bob (sic) [ Apoorv ], right now, we have a very strong, how I'd say, human platform, I don't know how to describe it. We have a really good talent. We have good teams in place. And we do believe that additional work that comes in to us and additional roles that we're going to perform would not require -- we believe would not require substantial cost additions. So I think that -- just to answer your question, we will be very much focused on trying to optimal -- continue optimizing it.

Your next question comes from Chris Gawler from Goldman Sachs.

Just want to ask a follow-up question on the PC demand. You mentioned that you expect in percentage year-on-year terms for that rate of decline to moderate in the second half of this year. Can you give us a sense of what you're seeing at the moment or what you're expecting in level terms, like in absolute sales terms? Is it still declining or has it basically hit a bottom in terms of dollar sales terms?

I think -- okay, so it's interesting. A lot of people are there in the market saying, it's absolutely peaked now and from now on, it's going to start levering up and going back. I kind of feel it's the same within our business and I kind of feel a bit skeptical. So I'm probably going to come out a little bit more pessimistic and skeptical to answer your question. So I will answer it. I think it's going to be about the same in absolute volumes decline in the next 2 quarters. And if it's not, it's going to be the bonus on the cake. But the way we see the markets and the way we look at our second half, it's probably in absolute volumes, it's going to continue to do very similar decline rates, as it was in the first half. However, due to that softness and becoming -- instead of getting into a little bit more declining in the PC market and leveling out, in the last second half of 2022, the percentage of decline is not going to be 24%. I'm thinking, I don't know, I'm just speculating here. I'm thinking maybe 15% to 17%. So that's what I think. If we're going to come to a single-digit decline in second half, fantastic. That's what -- that's going to be just really, really good. And that's going to give me also, me and you, all of us have really good optimism, we're going to go back into the very strong growth for next year.

Yes. That's very clear. And then I wanted to ask you a question about the comment on back orders, is it still well above $200 million. How do you think about a typical level of back orders? And I suppose, in your thinking, how much of the strength that you've seen in services and networking has been running down some of these back orders?

So the back order predominantly -- I mean, because the supply chain is pretty much normalized everywhere, like just a slight cloud exceptions here and there, we actually do see elevated number of bookings, new orders through our enterprise networking and infrastructure business. So that gives me the good optimism that we're going to continue to turn around and continue to drive. So it can perhaps be a new norm. I mean, I would love that to be a new norm, because it just gives me more optimism in driving more sales. So if I started to see decline in the back orders, then probably I would probably treat it more as a normalization. I don't see it right now. So bookings are very, very strong. We are at about $220 million right now. And yes, we're still getting new bookings for the next 2 quarters invoicing. So it's a pretty good space to be in.

And then just a final question on the balance sheet, just conscious on some of your comments before about inventory continuing to normalize into the second half. But at your last result, you were saying that you're broadly expecting net debt to be roughly flat at the end of December '23 versus December 2022. Do you still expect net debt to be flat year-on-year?

I would -- that's the expectation on the basis that we can continue to drive inventory levels down. We do feel they're still quite elevated, and with some large buy-ins that Vlad explained earlier around some of the target setting that was already in place. We hope to see that come down or relative to sort of the growth of the business and providing there's sort of no working capital movements that might explain an increase. That's what we're aiming for.

Your next question comes from Ed Woodgate from Jarden.

Great results. Just following some of the gross profit margin, so it was pleasing to see that kind of come through so strongly. Some investors were concerned like, with your elevated inventory level, that you might have to discount through the half. So can you just talk about whether you got some support from vendors or whether you'll just be able to -- maybe to stock a bit more easier than you expected?

We will not discount. We would have to discount only if the vendors would give us again, high targets. And in order to bring in another big load of inventory, we have to get rid of the existing one. But the market is not there. Demand is not there. So in order to go against the demand and stimulate demand and create the demand, we have to heavily discount. And even if we have to do this, we have to engage vendors and drive incremental funds from the vendors. Even in this case, we wouldn't have to. The good news is all vendors -- well, 3 top vendors, HP, Lenovo and Dell, have reset their targets for Q3. So what it means, it means we will be doing very limited new buying in this quarter. It means very limited new store going to hit us. So we're going to chew in through the existing stock that we've landed in July, August. We already started to see the industry level, started to slowly, slowly coming down. With the limited new buy-in, I have a very, very strong feeling by end of Q4, we're going to come to very, very good levels of inventory.

Yes, sure. And look, I mean, I guess the progress you made with inventory during the half, shows there is not really a problem there. But just to pivot to the change in accounting with gross sales to net sales. Are you going to continue to provide the split of gross sales on an ongoing basis? And just, I guess, today, could you provide the split between Australia and New Zealand's gross sales?

So the intention is to do -- to provide the gross sales number, because a lot of our internal reporting is geared towards that as well, and it's also the number that was previously reported. So we will be reflecting the gross sales and our segmentation in terms of the product categories is based on gross sales. The New Zealand split on the revenue recognition piece is in the segment note, but we will provide a more detailed New Zealand update in our full year results, and we'll take on board to reflect the gross sales in that update as well.

Okay. And maybe just one more for me, [indiscernible]. Just on the PC refresh cycle with non-Windows 11 devices, I mean, that sounds like it is a great opportunity. I think something we've talked about previously, but the $4 million figure that you quoted Vlad, is that -- can you just help us contextualize that? Is that consumer devices as well or is it just commercial?

It's -- I think -- I believe it's all devices. But you know what, I've been asking different vendors and different vendors giving me different numbers. Some saying it's $3.5 million, some $4 million, and I'm saying it's up to $8 million. So look, I actually don't know what the sizable actual opportunity is. All I know, it's significant. And that's just purely based on Windows 10 and below. You know what the funniest thing is, we still believe it or not, we still ship some of the PCs with Windows 10, which would have to be refreshed by May 25, but I don't know. Look, it's great. The opportunity is there, will be very hard to quantify. One thing for sure, I know we will go back into the growth. That's very -- I'm very confident there.

Your next question comes from Aryan Norozi from Barrenjoey.

Just first one for me, around the $5 million of other income in the first half of '23, it was about $2 million last year. Could you please explain what that is and how we should be treating it for the next half, please?

So that's largely FX and mark-to-market unrealized FX movement, but that accounted for somewhere around 2.2% of that increase. And there was also a settlement amount, which is probably more of a one-off with a debtor reflected as other income for about $0.5 million. That's the largest part. Otherwise, the other categories of other income being credit card fees and other sort of admin fees, relatively similar in the comparative period.

Right. And just on the segment disclosures. So PCs and peripherals -- so, PCs, I think you sort of -- Vlad, you are sort of saying down 16%, 17% year-on-year in the second half of '23. Is that correct?

Well, that's my just sort of a guesstimate. I don't think we were going to continue to decline in the second half at 24% mark. So I think we're going to go maybe -- we will see. I mean, 15% to 17%, that's what my sort of prediction is.

Yes. And what happened in the peripheral segment? Because I mean, second -- first half '23, approvals are about $59 million of revenue. It was about $200 million in the second half of '22. So how do we think about -- I mean, it's lumpy because of the back orders coming through, but how do we think about how that [ pans out ]?

Yes, yes. We didn't have a lot of docks, then we have huge demand for docks and they all came. They had to ship them out. But now kind of supply chain is back to normal, very linear now, and then as PCs are starting to decline, we're shipping a lot less docks. We're shipping a lot less accessories, bags and all the other things to come. And also monitors. So it's a very good -- like a very large degree of displays and monitors the that ship with desktops and notebooks and that's also softened up. So look at those 2 categories as very much linked to each other. But as soon as desktops and notebooks going to go back into the growth, this area is going to go through [indiscernible].

So is the first half $23 revenue for peripheral the right number for the second half as a base? So there's no lumpiness or uneven change. It's pretty significant?

Yes, yes, yes, good base, absolutely.

Yes. Yes. Okay. And then the -- on the gross margin, I mean, just the other question. So you mentioned that you're comfortable with it, but I think Mary, you were talking about vendor targets being changed in the first half of '23. And I think does that benefit you? And to what extent does that normalize in the second half? Basically, what I'm trying to get at is, do we assume the first -- the sort of 9.7% second quarter '23 gross margin continues for the second half of '23?

So to explain that, so in terms of the segments where there's growth around networking service storage infrastructure, the access and surveillance, yes, margins will be maintained. My only comment around sort of being that elevated at 9.7%, is that may come off with moving some of the PC inventories, where we've had some large buy-ins to meet the initial -- before the targets were adjusted, the bigger buy-ins we've done, which is reflected in our inventory. So [indiscernible] necessarily no discounting, but it might be at lower margins than to balance it still, we would say, somewhere between 9% and 9.5%. Yes, it's hard to say exactly if we will be able to maintain the 9.7%.

Perfect. And then just very quickly, the DAS business PBT margin, you sort of mentioned it's profitable in the second quarter. Could you please quantify what the PBT margins were in the same quarter and maybe how you think about calendar year of second half '23, calendar year '24 margins, please? PBT?

So we're looking at PBT to sort of work within the same range that the company PBT. Is that -- so that's between 3% and 4%.

Okay. And that's -- yes, okay. So the comment around -- in the outlook being double, that's only for gross margins. So PBT, you're looking at...

We run branch networks and things like that, which is why the objective is to -- at least this year where you're coming off not contributing to profit, to actually deliver at least the company net profit before tax margin. Obviously, we'd be looking to leverage the cost base and investments we've done and grow that in subsequent years, but that's the objective for this year.

So when you have this year for calendar '23, but calendar '24, is that still the [indiscernible]?

[indiscernible]. No, no, you go.

Like we always -- like even in the beginning of the year, we were guiding -- we want DAS business to come to the NPBT of the company baseline of about -- between 3% and 3.5%. And I think we are on track to delivering that. Overall business, of DAS business, we have to deliver more percentage of NBPT. Not sure if we're going to deliver 7%, but we definitely have to be somewhere around 5%, 5.5%. That would be the expectation. This is the highly valued business. It's the growth opportunity business. We're providing a lot of value to this. So we are expecting higher NPBT. But for that, we need to grow our top line aggressively, which we are currently doing. So everything we're doing is perfect. We just need to continue to accelerate growth, maintaining the cost, which we are, and we're going to deliver way above 3.5% next year. But that's next year, not this year.

[Operator Instructions] Your next question comes from James Lennon from Petra Capital.

Mary, just a quick one. I think there was a couple of questions earlier about OpEx. Just wanted to clarify, I think in the past, you've said what the sort of one-off nonrecurring costs would be relating to restructuring and whatnot. Are you able to give the figure for what that was for the first half?

Yes, it was $800,000, so 0.8%, and it was actually lower than the comparative period, which was, I think, about 1.6%. And the reason why the previous year half was higher is we had some significant one-off costs that related to the integration of Hills, which brought it to the 1.6%. So that's why our statutory profit growth was higher than our operating profit.

And just a comment around OpEx, I think the number got mentioned of $80 million. I presume that's just what the employees and other costs, is that what you're sort of saying that's the baseline going forward?

That's correct.

Thank you. As there are no more questions, that does conclude our conference for today. Thank you for participating. You may now disconnect.