Dicker Data Limited (DDR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Dicker Data Limited Full Year 2024 Results Presentation. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. David Dicker, Chairman and CEO. Please go ahead.

Hi, there, everyone. I'm David Dicker, CEO and Chairman, founder of Dicker Data, and I'm here to present the results from last financial year 2024. Probably not as good a year as we would have liked, although certainly much better than many other companies comparatively speaking from their previous years. The conditions are still quite difficult in Australia, and we're such a large percentage of the market that the days of being able to just take it off the other guys have much further reduced, and we're much more affected by the overall economic conditions, and the overall economic conditions, at the moment, are just not great. Saying that, I think it was still a pretty good outcome, all things considered. We're very focused on this year where we expect to do substantially better. For a deep drill into the numbers, I'm going to now hand over to our CFO, Mary. Go ahead, Mary.

Thank you, David, and thank you, everyone, for joining the call. And it's our pleasure to be presenting our results for the FY '24 year. As David has said, obviously, not as strong as we would have liked in terms of bottom line. But on a top line basis, considering all the market conditions, the company was still able to deliver growth despite a declining PC market that we were experiencing at the start of the year and the decline in sales that we reported in the half year was abated with some new vendor additions and some growth in some segments like our Retail segment and even our Software segment increasing despite a loss of a major vendor in the comparative period from the year before. So top line, in summary, $3.4 billion, up 2.9% on a gross sales basis. Pleasingly, we were able to maintain EBITDA relatively flat, even though there were some challenges around some cost elements, which I'll go into a little bit more detail with the P&L update. We -- in terms of our recurring revenue, our software sales recurring revenue was also up 7.5% with total software sales now making up around 29% of our total sales. In terms of PBT, sort of a headline number, down 2.8%, but having come off a flat EBITDA, a lot of that was impact of increased interest rates and the cost of the finance impacting the bottom line, delivering for the year earnings per share of $0.436. If we go to the next slide, this is just a graphical presentation of our historical performance. And the area I want to highlight is the ability of the company to maintain gross profit margin in a difficult market. Part of that was attributed to improvement in our New Zealand business gross margins, even though there was a small decline in the Australian business in terms of gross margins with a pivot to more enterprise type business, which generally operates at lower margins. Pleasingly, too, PBT margin was relatively maintained over the last couple of years, slightly down on last year, largely attributable to increased finance costs. If we go to the next slide, this is just a presentation of the profit and loss outcome. As you might recall from last year, we reclassified our -- the way we present our revenue with our statutory revenue now presented on the basis of our software and virtual services sales being represented as net, which is in terms of an accounting perspective, the fee we earn is represented by the margin reflected in that revenue number. Generally, though, in terms of our own business, we still sort of target ourselves around the gross sales and growth percentages, hence, why we've presented it in this format. So, from a gross profit percentage, like I said, margins were maintained and the fact that EBITDA was still able to be delivered relatively flat despite some significant cost increases, particularly related to increase in bad debt. So, we had increase in provisioning plus quantum of bad debts that we've written off. I think if you add those elements back in effect, the result would have been a more positive outcome. We're still seeing some sort of challenges around debtors and collections. However, I don't believe it's going to be as significant as we experienced in the last year. PBT, profit before tax, down 2.8%, like I said, largely impacted by increased finance costs. If we go to the next slide, we've got the results for the Australian operations. And as you can see, despite a difficult market, gross sales in Australia grew 3%. However, there was some decline in gross margin. This is mainly attributed to not only the competitiveness in the market, but also a pivot by our business to more enterprise style customers with our smaller mid-market segments having reduced their spending in FY '24. I think Q4 was a good indicator to show that some of this small-medium business is returning with much stronger top line growth recorded for Q4 period last year. The EBITDA was down in Australia and mainly the bad debts that were written off were in respect of the Australian business, so not our New Zealand business. So that's reflected in that outcome. And interest costs in Australia were up over 26%, again, impacting the PBT outcome, resulting in a decline in PBT margin delivered. However, if we go to the next slide, if we look at our New Zealand business, as we've said previously, there was a lot of focus and work done by our teams to improve the profitability in that business. So while top line was not as significant growth as we would have liked, the ability to improve margins and the collaboration work that we've done across ANZ to achieve that outcome with margins increasing across many of our segments within our New Zealand business, having significantly improved has flowed through to significant increases in profit before tax. So whilst PBT margin is at 1.4%, that was a significant improvement on the one from the year before. And our focus for this year is to deliver over 2%, preferably closer to 2.5%. So there's still more work and with a lot of the new vendors and new signings are all -- not all, but generally, our conversations are around ANZ participation, so we would be looking to have some of the benefit of all these new vendor signings that are across our New Zealand business as well. If we go to the next slide, we're having a closer look at our balance sheet. A few things to point out. So overall, net working capital increased by about $12 million or $13 million. However, this was largely funded with some increases in the support and terms that we have from -- with our vendors. As you can see, inventory has increased significantly. And that's largely due to some larger buy-ins with our major PC vendors in anticipation of the PC refresh cycles. I mean there's been a lot of talk about it. We've sort of seen some movement in terms of demand for PC sales in our Q4. Part of that was education, but part of it is contributing to the refresh, particularly with our enterprise-type customers. In anticipation of sort of increased demand around that, in the way, some of our vendors have [ called ] and targeted us has resulted in increased inventory. However, we don't -- I mean, we still don't see an issue with the size of the inventory, particularly knowing that there's sort of this incoming demand for PCs that we're expecting to come through in the next couple of quarters. Receivables balance also increased. This is a reflection of having pivoted to sort of more enterprised-style customers. And one of our stronger growth segments was our Retail segment. So with the profile of those type of customers, collections tend to be slower. So that's reflected in the receivables balance. And as I said, partly funded with increases in accounts payable or supplier payments with some extended terms arrangements to cater for the sort of large linear purchasing that happened with some of our suppliers. Also we didn't take up as much early settlement discount as we have in the prior years just because of the nature of the way a lot of that inventory was delivered or concentrated in sort of short spaces of time. There was also an increase in borrowings. So the other part is the working capital requirement was funded with the increase in borrowings. We did renew our Westpac receivables facility last year, increasing the limit to $320 million. Our drawn balance as at balance date was $245 million on that facility, so still have headroom within there to keep funding the business for future growth. And the facility that was renewed was for 3 years. So just the certainty around the funding that's been locked in, in respect of funding growth from that. Obviously, we welcomed the rate reduction recently announced. So that's going to contribute to our funding -- reduction in our funding cost this year if debt remains relatively stable, but part of funding the cyclical movements of working capital, sometimes the drawn balances of the debt could vary from month to month. Moving on to the next slide in terms of cash flow. We closed the year with $45 million cash, about $35 million higher, largely attributed to the EBITDA that was delivered and some drawdown from additional funding activities. The collections as at the end of the year were relatively strong. And normally, we would have taken excess cash and applied it against the debt. However, with sort of -- in terms of forecasting how much was going to come in towards the end of the month was -- ended up being more than what we had forecasted. So otherwise, the gross debt would have been lower, and we would have applied the excess cash against the receivables facility. But on a net debt basis, I think it was relatively flat. If we go to the next slide in terms of dividends, the company has long had a policy of paying quarterly dividends, and this year was no different. We tried to set our interim dividend indicative of where we think we're going to finish for the year, possibly leaving some room for some final dividend being higher. But based on the results and the final PBT after tax, total dividends paid in respect of the FY '24 year was $0.44 per share. We will continue with the quarterly dividend policy, and we are retaining the dividend reinvestment plan, of which this year, I think, we had about $2.6 million of dividends reinvested. That's all for me in terms of the financial update. I'll now hand it over to Vlad to provide a little bit more color around the business and future outlook and sort of focus areas for FY '25.

Okay. Thank you, Mary. So, we're now going to Slide 14. IT market and the strategy. And I'll just give you a little bit of a color around 2024, like Mary said, and then we'll look at the outlook. Okay. So 2024 was not a growth market. In fact, like David said, it was a challenging market. Both Australia and New Zealand were nearly recession. Some people would say we weren't in the recession. Dicker Data has a majority market share in the IT distribution space, full stop. However, when we look even further where our success came from, where our growth came from, like what is really our customer base is what we call small and medium business. That downturn in the economical conditions, first of all, impacted spend by small and medium business. And that, first of all, impacted us as an organization. Now that's a bad thing. The good thing is when the economy do recover, we hold a very, very good ground. But the interesting fact that in 2024, we did not lose any small and medium customers in terms of number of them trading with us. What has changed is how much they spend with us. So their spend with us went down. Now the market share that we hold with each vendor improved. So we know that small and medium business gave more relative spend to us than to any of our competitors, but the overall spend went down. So for us, as our 80% of revenue comes from small and medium business, we needed to find other avenues to find that growth. Unfortunately, those other avenues to find that growth is the territories where we usually don't really participate as much, such as consumer business, such as enterprise business. So we pivoted our investments. We adopted to the new market conditions, and we started to drive more and more of that business. It's exactly what David said. We own a very, very strong market share position and our market share is continually improving. We are adding more vendors. The further we go, the more and more we will be subject and dependent and create dependency on the market conditions. It's very -- it's natural. So that's why the company is talking a lot about getting into the new segments of the market. This is what we've done with our DAS business, AV business. We're gaining good momentum in our consumer, high-margin, high service business, but also we started to look outside of Australia and New Zealand as well. We've been talking a lot about it in the previous years. Now we're starting to really putting a lot more effort into driving that motion. 2024 was a tough year. And within this tough year, we end up growing our revenue. Unfortunately, the mix between small, medium and enterprise have shifted. But looking at 2025, we're looking to shift it back, which is a good news. Our ability to adapt to a different market conditions, I feel, is exceptional. We know where to go and get this business even when our traditional bread and butter sweet spot customers are not spending. So market share is very strong. We're improving our operation in New Zealand. We're making it profitable. We've had one of the global distributors completely pulled out of Australia and New Zealand business. Arrow ECS is one of the globally largest IT distributors. They're no longer present in this market. We're seeing Tech Data, another big global distributor is losing a lot of share. And we're seeing Dicker Data gaining some share. We're seeing Ingram Micro, another big global distributor, did quite okay last year as well. So we're seeing larger dominant distributors, very resilient distributors, distributors who can adapt to the conditions are winning the market. So we were one of the biggest winners in last year, tough environment. Now, going into our next slide, industry recognitions. Again, it's interesting. In a tough market that we've had, we've received more recognitions than ever. From various industry entities like CRN and ARN. For the 12th consecutive year, we've been voted as a Hardware Distributor of the Year. The interesting irony of this, I mean, we have an incredibly strong hardware business. What's really growing and what's really doing exceptionally well is our software business. We are by far the largest software distributor. Interesting tendency has been happening in the last couple of years, but especially last year, everybody trying to do more with less. Our suppliers, our software vendors, partnering with fewer distributors. In fact, last year, we've locked in 4 or 5 vendors that we already had as our exclusive vendors. So they went into the market. They said, but I need 2 or 3 distributors, we just want to really strategically partner with the distributor that gives us the best return on investment, the best value in the market and servicing our partners through the enterprise, mid-market and SMB, and they've chosen Dicker Data to be partner of choice. We're doing so good on the global arena as well. Local distributor, Australia and New Zealand, winning global awards, global acknowledgments. And obviously, it gives us a really good boost in confidence. But what we're doing here in this market, we can drive those values and practices outside of Australia and New Zealand. And we're doing a lot of -- we're having a lot of conversations, a lot of work with a lot of vendors to see how we can pull it through. Again, more industry recognitions in New Zealand, industry recognition by all our vendors. Look at the top 3 PC vendors. By the way, PC segment was in decline globally. It was in decline in Australia and New Zealand. Dell, HP and Lenovo, 3 largest commercial suppliers -- vendors acknowledged us and for our work. We've added our market share. We've added more customers to them. Unfortunately, the spend of the customers was lower, but the number of customers actually continue to grow. We have various recognitions from so many different partners, including NVIDIA. We obviously are a very, very strong partner with NVIDIA, and there's lots and lots of opportunities there for us, especially this year. But I'll touch base on it when we're going to go into 2025 outlook. All right. If we move further to 2024 ANZ vendor addition, this work continues happening. We've added some really strong vendors last year. Adobe was one of the largest vendors we've added, which started to really ramping up their sales, especially in the Q4 last year, and we're going to see the full year of expansion of this vendor. BMC, an AI platform vendor, Equinix to host a lot of data center equipment, and we're doing -- have a really good partnership -- exclusive partnership with Equinix, I have to say. Hikvision came on board as part of our Access and Surveillance business. So we're building our competencies and building our portfolio with some strong additions. Saying all that, these are the great vendors. And we're going to continue to add more, and you'll see Q1 and Q2, we're going to have some really good significant vendors. But at the sizes where we are, when you add this sort of $3.5 billion size, this is great. And this will give more confidence to the vendors, to the partners to deal with us. But is that going to give me this kind of 10% growth year-on-year that we've used to experience probably not so much. So that's why thinking outside of the box, thinking outside of other territories is very important. But again, I'll touch base on this a little bit later when we look at 2025. Long-term vendor relationships, diversification is continue happening. I'm really, really happy with this slide. Top 5 vendors is now representing significantly less than 50%, which is fantastic. I think you could see that, that's kind of slowing down. I think our top 5 is always going to be there. Top 5, by the way, haven't really changed. Microsoft is our largest vendor, followed by HP, Cisco, Lenovo and Dell. So top 5 global vendors, top 5 with us and especially improved their performance. Some of them improved their performance last year due to the very strong enterprise business. Now moving to the category performance, okay. So that's an interesting slide. I'll stay here a little bit longer because this is where I'm going to touch -- starting to talk a little bit more on 2025. So this is the major segment that Dicker Data plays. Remember, 80% of our business is coming -- when we look not at the product categories, but at the customer segment, 80% is coming from Small and Medium business. That's our usual kind of structure. Endpoint Solutions, which is our personal computing, transactional type of business as well as Advanced Solutions, which is our data center infrastructure, server storage, enterprise networking, 2 major categories as a segment were in decline last year globally, and it was in decline in Australia and New Zealand. On top of that, these segments, we are dominant, very, very dominant in that mid-market and SMB. So if we were not to attack enterprise, if we were not to transfer some of the larger enterprise deals, we would have seen a much, much deeper decline. We would have declined with the market. We try to deny decline with the market. We try to bring -- we were very careful in attracting those deals because normally, those deals are at a very low margin and then really putting pressure on our gross margin, which we really didn't want to achieve. Now if I look in the past, Q4 -- calendar Q4 and our financial year Q4 2023, that's where the softness started. Q1 2024 was one of the worst quarters we've ever had. It's actually -- we knew it's going to be soft. We knew we're moving into a decline market. We did not anticipate such a decline in those markets. Both segments went into a very sharp decline. So if you remember after the Q1, we had a double-digit decline. Q2, double-digit decline. Q3, started to get better. Now the positive news. In Q4, which we always called every time we've met with you guys, we've said Q3 is going to get flat, Q4 is going to go and grow. That's exactly what happened. Q4, October, November, December, 3 consecutive months of both of those categories back into the growth. January, fourth consecutive month into the growth. So we started to see the trend. We are moving into the growth market. My Endpoint Solutions Computing back into the growth. Advanced Solutions back into the growth. Software. Software is one of those category in segments were never in decline. Not in '22, not in '23, not in '24. We would have actually delivered a good double-digit growth if it wasn't for losing $100 million of Autodesk business, which was a one-off event. Last year was one of the best years for our software business. We've added a couple of new very, very good vendors like Adobe. We've locked in exclusive relationship with a large vendors like VMware and Cloudflare and a few others. We started to really see some good growth. If you add $100 million of Autodesk business, we would have grown close to $170 million year-on-year, which for a $900 million business is a significant growth. So this year, we're moving in with a huge enthusiasm and hope. I think software business is going to continue to be dominant growth area as the Endpoint Solutions and Advanced Solutions are going to come back to growth. Access and Surveillance, look, growth is not back. It's not bad, but it's not where we really anticipated. So we've done a lot of operational work, a lot of changing and chopping and culturally. It takes -- we picked up the company with 120 people of a very strong established culture for many, many years. Now we have reshaped some of the businesses. We reshaped some of the thinking. So hopefully, we'll start seeing some more aggressive growth. However, there is a growth there. We are -- in terms of our market share in Access and Surveillance, we still are not there. So it's not only the market moves into the growth, but also for us to take share. Audio Visual, I think we need to be a little bit more aggressive. Audio Visual actually had quite a soft year as well because, once again, small and medium didn't spend as much on Audio Visual. They didn't spend as much on Endpoint Computing. Limited budgets they had, they spend on cybersecurity. They're trying to play with AI. They're experimenting with that. So we've seen a limited amount of spend by our core customer base, and we've seen an increased number of spend with our enterprise customers. Last but not least, our fastest and biggest growth segment was Retail. Retail comes from a very small base. So when you look at the landscape of IT distribution, there are major 2 players who is playing in the consumer retail space, which is Ingram Micro and Synnex. Between them, they probably hold somewhere around $3 billion in consumer spend. So we're currently around 10%, give or take, of the market. The important thing for us, we do want to continue to grow, and we will continue to grow, but it has to grow with a strong margin attached to it, with a strong value that we can add to it. And we're working on bringing more vendors at a high double-digit margin, so it's a really good work in progress with Retail. Exciting segment, good growth segment. You can see our market share is very, very small, but we have to be really, really careful not to get engaged into larger opportunities at a lower margin. So we're currently doing what we're supposed to do, and I think we're very, very happy with this progress. Our Services number is down. Part of our Services is what we call our telco go-to-market with Telstra. We've been with Telstra for many, many years. Unfortunately, Telstra, again, on a tough market conditions, they're losing their market share a little bit. There are other players coming on board. We have adopted to it. We have rethink our strategy of how we play with Services in telco, and we're going to produce something very, very soon, something very, very exciting for this space. Okay. So this is the category performances. Okay, 2025. Let's move straight away into Page 21. So we are moving into the growth markets. We had an interest rate cut. Hopefully, inflation is under better control. We already start seeing small business spending more. Indication of January and February is incredibly positive. So we have a really good feel that our -- what we call a core customer base started to increase their spend. Are we completely out of the woods? No. Election is coming. So a lot of people want to come into the election with a really healthy balance sheet. So they don't really -- they may overspending right now. So there's lots of other sort of things that are influencing. But all in all, idea for our business this year is to -- if we can maintain our level of enterprise customer spend with us, we will be fine with that so long as we continue to grow our small and medium patch. That was in a very strong decline last year. So with that coming back into the market, with all segments is going to come back into the growth this year, if we continue to hold our enterprise spend, and if we continue to grow double digits in our software and our retail strategies, I think we're looking at a very, very good position for 2025. What will drive this? Yes, improved market conditions is very important. But also we have a very transformational things happening in the industry, exciting things that's happening in the industry. Windows 10 Refresh. We've been talking about it for a long time, that's it, this is the year. In October, all corporate and commercial PCs have to be refreshed. We started to see that cycle. We started to see some really good growth from the mid, mostly at the moment from the mid type of customers refreshing their fleet. We will start to see some small businesses refreshing. So that's going to drive growth in our PC segment. Cybersecurity ever growing. We're strengthening our position in cybersecurity. We actually, as Dicker Data, while we have the largest software business, particularly in cybersecurity, we hold a fair share, but we don't hold the majority of the share. I feel this year, we're going to move into the leadership position, very strong leadership position. Some of the existing vendors, but we're also working on bringing some of the larger, stronger players in the market to really strengthen our cybersecurity practice. AI, we've talked a lot about AI. I was saying last year, the deals are happening, we're quoting, we're doing things. Guess what? We've landed a couple of really, really good deals. I mean we're talking about multimillion dollar deals. We have the biggest pipeline of quoting AI work and opportunities that we've ever seen. We've seen other regions booming with AI investments, Singapore, Malaysia, United States, other territories. We're only starting to see some good investments happening in this market. Our government finally, finally, after 2 years of talking about it, putting really good healthy grants for a lot of AI factories to be built in Australia. We, of course, in an incredible position being an exclusive distribution partner for NVIDIA, being a chosen authorized AI distributor for the companies like Deltek and a few other states, we are in a great, great position to take advantage of that build of AI. And we obviously continue watching that market convergence and seeing where we can bring it all together. Well, for example, audio-video category used to be stand-alone completely. We will have audio-video distributors on its own, partners on its own. We brought it in, we developed it. Now if you look at the top 5 customers who are spending on our audio-video integration, it's actually IT customers. So convergence is there. It's happening, but it's not moving probably as fast as we want, especially when we look at our DAS business, Dicker Data Access and Surveillance business, we thought that convergence is going to be a lot more integrated by now. It's not quite there. It's definitely moving. And I think AI is going to really drive that transformation, but we want to see. Just before I end, I just wanted to say a couple of more things about AI. If we look at digital space, if we look at global performance, I can bet you've never seen so much investment going into AI. If you look at big companies like Microsoft and Google and Meta and all the other big giants global, billions of dollars getting invested. Now from talking about it, I really start seeing it happening. So that's why us being upfront of mind, us being investing in this cycle prior any other distributors really who was kind of watching this space and seeing before they invested, they kind of left behind. So I'm very, very happy with the way that we work with our vendors and the opportunities we're lending are fantastic. So I think AI is going to drive a lot of change in our world. If we think back internet, mobile phones, cloud, multi-cloud thing, it's only been happening in the last 30 years. I think that AI is going to drive that change, the transformation, the way we live, the way we operate, the way we collaborate, the way we -- you might do things. I think in the next 5 years, we will see more change than we've seen in the last 30 years because I can see from the front lens what it means for the organization. Look, we can probably skip Slide 22. It's all about how do we see AI, and how does it play. I think I've explained to you. Everyone who is on the call in one way or the other already using AI, whether you're using ChatGPT or Copilot or you're introducing some of the enabled AI functions within the organization so that it can streamline your processes, make you more effective, more efficient or you do all 3, then it makes you unique. It makes your value goes up because you can do a lot more with a lot less. That's how we see it. We internally, at Dicker Data, trying to drive a lot of innovation and automation using AI tools so that we can then train and enable all our customers and partners to do so as well. Okay. Now, we're at Slide 23. And I pass back to the moderator and back to Mary and David.

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

First question, just on the sales growth. So Q4 sales up 10% year-on-year. You said PCs contributed to that growth. Software is back. You've made a pretty robust start to January, February. So I guess, taking that into account, would that 10% type sales growth rate be a reasonably fair expectation for calendar year '25?

The way we see the market at the moment and the early signs of the growth are very strong. However, there's one thing. Q1 2024 was very weak. So delivering similar type of growth in Q1 probably is not going to be unreasonable. Delivering those type of growth year-on-year, absolutely within our aim. Absolutely, that's what we're going to drive. It feels like we have a lot of really good tailwinds. But remember, 10% growth on $3.4 billion, it's $0.5 billion. So it's going to be challenging. We would need to see how quickly the market is going to recover, how quickly our customer base is going to recover, how much more small business will start to spend. If small business goes back into the normal spend, I think somewhere close to 10% could be reasonable, but I don't particularly think that's going to happen. The other thing is how much of those AI deals will land, and how many of those new vendors we're going to bring. All this is the components. So we are aiming for a good growth this year, whether it's going to hit 10% or going to be above 10%, we'll see.

Okay. That's fair. I appreciate the comments. And just on endpoint solutions specifically for calendar year '25. I mean in this sort of refresh cycle, it's been pretty compressed in a pretty sort of short time frame. You've talked about in the release how you're outperforming quite strong in the AI PCs, which presumably have a bit of a higher price point. Just curious on your thoughts on how that category specifically should be growing in a year like this that has such a refresh cycle?

Okay. So interesting, I'll give you some stats. Globally, last year, in 2024, AI PCs represented 8% of overall shipments. For Dicker Data, last year, AI PC represented 23%. It's not a surprise to me. We always work on a higher ASP model. We'll always outperform our distributors, other distributors playing with a low-end volume kind of play. We do a lot more value-based selling and computing. This is where a lot of our value coming from. I think -- well, IDCs and Microsoft, they all believe that AI PCs is probably going to represent about 25% globally. We're already at 23%. So I think we're probably going to go close to 30% AI PCs. AI PC around 10% to 12% higher in the price, but also it's incredible in the features-wise and what people can do with the AI PCs. We're pushing really, really strongly with the whole AI PC motion, and we are absolutely outperforming our competitors.

Okay. And maybe just a third one for me, just on gross margins. So the second half was a little bit softer, 9.5% versus the first half at 9.8%. Just curious how we should think about gross margins into calendar year '25, particularly taking into account, I guess, 3 positive comments that were noted on the call. The first SME sector start to pick up, that's obviously high margin. The second comment that Mary made that New Zealand PBT margins should rise to over 2%. And then the third comment that new retail vendors, you're saying are pretty high double-digit margins. So I mean just taking all those comments into account, how should we think about calendar year '25 gross margins for the group?

Well, exactly what you've said, and that's exactly how we see things. We see -- if I can potentially maintain my enterprise sales at the level where they are, so they don't further impact my gross margins. The small business, again, the recovery of small business depends on the rate of recovery. We know it's going to recover. We just don't know is that going to be 10% more small business coming through, 20%. I mean, when we look at the small, small business, it's somewhere around 20% to 25% of our overall spend. But a 20% increase in that is going to drive a very significant up in our margin structure. So that's going to have a positive impact. Look, we always guided the market that we're going to maintain our 9.5% to 10% margin profile. You obviously have seen we have elevated inventory levels. With the increased demand, we will probably end with the small business coming back. I think we will make getting into doing some deals and moving some [ industries, ] getting in a better capital position. So that can influence slightly margin. We will balance it out. The more we go with the small, the more aggressive we'll be able to drive our inventory down. So it's going -- all in all, it's going to have a very positive and healthy effect on the business. But I think the gross margin is probably going to stay somewhere at the 10%, maybe just maybe 9.8%, 9.9%. That's what we're aiming for.

The next question comes from Bob Chen from JPMorgan.

Just a quick one on OpEx. Obviously, seen a little bit more reinvestment this year. How are you thinking about that pace of reinvestment into '25 and '26?

Do you mean in terms of where OpEx came in overall, Bob?

Yes, overall.

So, I think like I've called out, impact on our OpEx was -- there was a significant impact from what I wouldn't say one-off, but higher-than-normal write-off in respect of bad debt. But other than that, all other categories were relatively similar, some increase in head count costs driven by a little bit more provisioning around there and also increase in superannuation levy. So we're expecting the cost to be relatively similar as a percentage of sales.

Okay. Great. And then just there were some earlier comments about maybe looking at international or offshore opportunities. Could you elaborate on the thinking around that?

I mean, obviously, you've seen we've established incorporated entities in Singapore and Philippines. We've always had the aspiration to seek growth outside of Australia and New Zealand, and we're just exploring some opportunities in respect of those, but preparing ourselves for that by having established the legal entities in each of those regions.

Okay. Great. But should we expect any movement on that this year? Or is it still in very early stages of planning?

I think -- I mean, it's probably more than early. There's been significant positive discussions with some vendors.

Okay. Great. And then maybe just a final one. I think Microsoft talked through some incentive plan changes sort of kicking off this year. It looks like some of those changes are trying to sort of fire up the SMB segment. Like do you see any benefit from that given your heavier SMB exposure?

Yes. Yes, we've seen some benefits already. It's early stages here, but we are expecting our Microsoft business to do really well. So basically, what they've done, they've removed some of their very strong rebates and incentives for the enterprise agreements for the larger partners. Now in the past, the enterprise agreements were done direct with those partners and Microsoft. The reason why Microsoft has done it is because they want to move most of their AI agreements, EA agreements into CSP motion. We are, of course, a CSP indirect provider. So a lot of those opportunities, those larger enterprise businesses are probably not as competitive as before. So a lot more mid-market and small guys winning those via CSP motion rather than Enterprise Agreement motion. And of course, we become a beneficiary of that as well. Interestingly enough, Microsoft is empowering and enriching mid-market and small businesses to go after that business. And while we are Microsoft, I just wanted to mention as well, we are now absolute leader in Microsoft CSP, Azure and Modern Workforce across Australia and New Zealand. Not only we're the largest indirect provider in this region, we are the 15th largest direct provider globally. So putting us in a very, very good space, obviously opens up a lot more opportunities with this particular vendor.

Your next question comes from Edward Woodgate from Jarden.

Great fourth quarter result. Just wanted to just drill into that a bit in more detail. Can you just talk about the performance by region? Was New Zealand still a drag? Which were your strongest customers with SMB enterprise? And like if you go into January, it sounds like that was strong. Like was that more education or SME? Just any sort of color on the fourth quarter in January would be helpful.

So I'll give you a general statement. I think market is back into more decisiveness and commitments. We've been through a couple of quarters of quoting and requoting and providing different solutions and customers would chop and change, and it's understandable, because they have a limited budget, they wanted to make sure they get into the right solution. And outside of the cybersecurity protection, some of the experimental things with AI, they try to sweat their assets for as long as they can. So they may require a server and storage refresh, and we could have done so many quotes, which resulted in either no spend or very insignificant spend. We've seen that start changing in Q4. More orders started to come. I think some of the price increases anticipation move them in a little bit more commitment. And we're definitely seeing that momentum in 2025. So all segments are doing good in terms of small, medium enterprise. I think software has continued to be a flagship and a real strong growth area. PCs are growing, and it's in a growth mode, but too early to determine, obviously, given that weakness in the Q1 last year. New Zealand, government spend is insignificant. By the way, if I can mention federal government's spend is the weakest point for both Australian and New Zealand business. Gladly, federal government spend is only like a couple of percent of my overall revenue. If anything, I'm more dependent on the local government spend, which is actually upticking. So that's probably give you a color with the election and everything. So in New Zealand, I think rate cuts were a lot more aggressive and a lot earlier. We started -- but it took longer as well. So we're kind of starting to see that uptick in the growth market, both Australia and New Zealand at about the same time. Yes, so to answer your question, it's good to see that the Q4 strong performance is kind of continues into this year, gives us a lot of optimism, but also the effects. We're looking at conversion, we're looking at quoting. We're looking at how many orders placed within the quote period of time. So we track all those details, and it's all tracking very positive.

Understood. That's very helpful. And then maybe for Mary, happy for you to jump in, Vlad, just on the bad debt, it looks like there was $2.3 million expense in half 2. Just given some of the commentary you made about the Q4 profit, I'm just wondering, can you talk about where those second half debt fell? Was it mostly in Q3? I don't know if you can break that up by quarter.

Yes. I would say predominantly, yes. So we had an increase in provisioning for bad debt based on sort of where the ledgers are at the end of the year. However, there was also an increase in the amount of bad debt written off that where the debt became uncollectible. The first half of the year, we had already provided some the year before. So the impact, it was split between sort of taking some of that cost in the first half and Q3. Hence, why Q4 in terms of profitability is even stronger. But on a comparative basis, it probably wouldn't have been as relevant.

Yes. Okay. And so, Vlad, I mean I don't get too positive just because there's a lot of tailwinds a big business like this is always something that can be a slight headwind. But it sounds like the bad debt environment has improved in Q4 and into January, and so that should potentially be upside into FY '25.

I mean, obviously, we've got sort of provisioning around an increase in our provisioning. So that's already taken in the expense in FY '24. I mean a lot of this small business that's going into administration driven a lot with the Australian tax office collecting debt. So we've definitely seen an uptick in amount of companies going into administration. But equally, they are in -- they do end up settling part or in some cases, all of their debt with their suppliers, but it's just been a process that means we have to probably provision more. So I'm counting on that getting better for FY '25, but we have taken some sort of forecast around that there's likely to be a little bit more to come.

Okay. Got it. Maybe there's some seasonality to that then, I guess, okay. And then working capital, just last question for me, it was up a little year-on-year, but given the strong Q4, and it sounds like PC sales were a decent part of that. I guess if you think about your days inventory relative to the Q4 sales, is it actually trending in a better direction than what was maybe implied by the full year numbers?

No, I think our inventory days are still out, but that's got to do a lot with where we closed at the end of the year. What was sort of another sector again of last year was a lot of deliveries happening within a short space of time and in significantly bulky quantum arriving within a period. So when you close at an end of year, it's reflecting elevated inventory levels.

Your next question comes from Aryan Norozi from Barrenjoey.

Just first one, if you end up growing 8% to 10% this year, do you have enough liquidity to fund that growth in terms of debt facilities and just working capital commitments?

Yes. So I believe we do. I mean there's capacity within the current facility. The type of facility is [ viewed ] against our receivables balance. We've got strong relationships with our current bankers in Australia and New Zealand that have indicated support for more funding. Obviously, on our balance sheet, we've got an asset being our building that's unencumbered. It's valued at cost on the balance sheet, but significantly higher market value. So there's definitely capacity.

Great. And then just on the PBT margin, if I just paint the picture of the year, so first half '24, you had 3.2% margin. Second half '24, it was 3.5%. Is that normal seasonality with second half being higher than first half? And maybe moving into calendar year '25, how should we be thinking about sort of adequately conservative PBT margin, please?

I mean we probably striving around that 3.5%, just fell a little bit short for the year in respect of where we finished for FY '24. Obviously, if we can get any sort of gains and improvements in terms of some leverage from costs, we'll continue to do that work, but expectation probably around that 3.5%.

Great. And then just a comment on your OpEx margins being flat in calendar '25 on '24, considering your bad debt charges will be probably less, as you mentioned in calendar year '25 and revenues growing relatively strongly, like shouldn't that drive lower OpEx margins year-on-year?

That's correct. But I mean, we -- yes, I'd agree with that. Adjusted for the bad debt relativity.

Okay. So, just -- if you exclude the headwind from bad debt, it's flat, but like-for-like just versus what you reported actually down because the bad debt unwind.

So we should get some leverage from costs.

Yes, perfect. And then just in terms of January, February, like if you look at the year-on-year revenue, gross sales -- growth rates in January and February, is that still around that 10% mark year-on-year?

Yes.

Okay. And then the comps obviously get materially tougher because last year, as you mentioned, it's cycling a very...

We had a strong Q2.

Yes. So is the way to think about it, all else equal, about 10% will probably be closer to 6% to 8% for the rest of the half given -- the rest of the year, just given the tougher comps?

Hard to say, but yes, it's probably not unreasonable to think of it that way.

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

Just on those large AI/DC deals that you mentioned could land. What sort of gross margin and PBT profile could that deliver on an incremental basis?

It depends on the deal and the construct of the deal because each AI deal we're quoting includes some hardware piece, includes some software piece as well. And normally, it's like a 70% hardware, 30% software. But the blended margin at the moment, we're seeing is in par of our gross margin that we're delivering as a company. So it's not -- normally on the big volume deals, we would expect to quote at a much lower margin. But those -- even though they're very, very large deals, we're continually sustaining our between 8% and 10% gross margin.

Yes. Okay. So presumably, if you do get a few of these or some acceleration in that trajectory because you're saying that it sounds like it's starting to ramp up now that should drop through to the bottom line at a reasonable kind of incremental margin?

Yes. Yes, yes. So those deals are quite significant, and these deals are not -- like they're quite material. So the question is how many of them will drop and how long will it take for us to drop them. Some of the deals that we've just received, we've been working for the last 12 months. There is another few deals that have been working for about 18 months, and there's new opportunities arising as well. I mean the greatest thing we could have done last year is position ourselves and to build expertise when we receive those deals. So the vendors when they choose to distributor to work with, they're choosing us. So we're very, very proud and happy with this development. So I feel it was all about -- is it real? Is it not real? Is it more hype? Are we going to invest before the curve? And we decided to invest before the curve. And now I think it's a payoff, which is really good.

Yes. Just maybe on Singapore and the Philippines. I mean, in your discussion when you're talking about PBT margins, et cetera, is there any drag from the early investment potentially in those territories, or for the moment, you don't think that there will be actually any revenue or cost or meaningful cost kind of from those territories in the calendar year?

You go, Mary.

Yes, I was going to say, I mean, there's a little bit of investment, but not material. And the idea would be we would only invest if we were to land an opportunity and hope that -- or the way we're thinking about it is that it won't be a contributor to profit, but it will give us access to a territory to grow into. It won't be a plus or minus, hopefully.

Yes, okay. Yes, and I mean, one of the large ICT resellers did suggest that some of the small, medium customers may be so late to the party around the PC refresh cycle that it's a bit of a log jam, and they struggle to actually get PCs. I mean are you -- how good are you in a position to actually meet that demand when it does come when the realization that they've got a bunch of PCs that they'll even need to pay really expensive extended support for or actually get them out of their fleet.

Yes. Look, we are in a very good position. That's why you probably see a little bit of elevated inventory, in particular, around sort of HP and Lenovo side. I think between HP and Lenovo, we have the biggest market share in our small and medium business. You're absolutely right. Only 10% of the small business is refreshed, a lot higher percentage of the enterprise already refreshed. So the opportunity of the refresh in the small and medium is significant. We're ready, absolutely. We hold a very, very good inventory levels, not only by the volume, but also by the SKU levels. Also we drive a huge amount of incentive program training enablement session and Microsoft is investing and sponsoring those events with us. So we -- and we're about to launch another very, very strong program, specifically for small businesses to even incentivize them even further to get into the refresh cycle earlier rather than later.

The next question comes from Claude Walker from Rich Life.

Mary, perhaps more one for you. Over the last year or so, a couple of years now, I guess, increasing interest costs has been a thorn in the side of the company's profit growth. What are you seeing in terms of the interest cost or cost of funding going forward? Are you seeing any opportunities to get better rates on the company's borrowings? And I guess, like what plans, I guess, do you have to try and address that expense line?

Sure. So the way our cost of funds is BBSY plus margin. I feel margin is quite competitive. So any sort of reduction in BBSY is going to be a positive contributor to profitability. All indications are that there are expected rate cuts. So we would be a beneficiary of that. But you're right, in sort of the prior years, it's been definitely a factor in terms of impacting our profitability overall. Should rates continue to rise, if they're not going to be declining, then we would have to reconsider sort of our capital structure and how we fund going forward. And we do have that lever to sort of consider that as well. But we just haven't felt that, that was necessary at this point. We feel it's more efficient to fund the working capital by debt.

Your next question comes from James Lennon from Petra Capital.

Just a quick one on the New Zealand margins. Just keen to know, I think the GP margin jumped quite nicely there year-on-year and that filtered through to the PBT. Just curious to know a couple of things. First is, I think you mentioned that you've got a number of vendors you recently signed that are due to start doing business in New Zealand. So keen to know whether that's going to have a further impact there, maybe not necessarily on the GP margin, but sort of more at the operating leverage line.

Yes, yes, yes. So we -- again, we are trying to drive new vendor adoption in New Zealand. If we look at our portfolio in New Zealand, there's nowhere near the close as we have in Australia. Last quarter, we've made a few strategic changes where we aligned our New Zealand business and Australian business a lot closer together. So that will drive a lot of new vendor engagements in New Zealand as well. It will, absolutely. The issue in New Zealand still is our scale. We need bigger scale with the larger high-margin vendors, and we need to reduce our reliance on some of the larger like low-margin consumer retail business in New Zealand. That's probably the biggest prohibitor. As we continue that, we will continue to improve. So operationally, we improved really well. Gross margin is in the right trajectory, but we need to accelerate it. So it was quite hard to accelerate it last year. I mean I think we've done an incredible job in New Zealand last year, but it was a tough environment. So hopefully, that newer growth market environment is going to assist us to do it more efficient this year.

Would you also say that economically, things are turning a corner over there or still as bad as it is in Australia? How would you sort of distinguish between the 2 regions that way?

Slightly, slightly. I would probably say the same. I would hope that New Zealand would recover sooner because they had cut sooner. But I think they were a much more deeper decline for longer. So I think the recovery will take longer as well.

Okay. And just in terms of the currency impact there, obviously, the New Zealand dollar has obviously been weakening. Was that a factor as well in terms of that -- I mean, obviously, the margin performance was good, but would it have been better had the currency not been as weak?

Not necessarily because in New Zealand, our contracts are sort of with either New Zealand-based entity or where we're paying in foreign currency, we would take a forward and then lock in our by price and our margin is added on that.

Your next question comes from Edward Woodgate from Jarden.

Just conscious of time, so I'll just ask a quick 2-parter. Have you seen signs of PCs average sales price increasing through the half? And then just for the vendors that you won in the second half of '24, which are the ones are you most excited by?

So the PC prices have increased already. Majority of the price increases been happening throughout Q4, somewhere around between 4%, 5%, 6%. The ASP drives up due to the AI PCs and increased take-up. So that's also helping the whole thing. But the number of units we ship is also up year-on-year, which is even more encouraging. What am I excited the most about 2025? AI deals. I think everything else is same, same all. Refresh cycle, okay, well, it comes and goes. We've been there. I've done many refresh cycles in my career. Data center infrastructure, look, good space, interesting. Are there fundamental change to the server and storage and sales? I don't know. Maybe a little bit of move back into the on-prem versus cloud just because of the people love to hold their data in where they live, they don't want, you know. So -- but again, nothing new there. To me, like what's going to really move the dial? What is a big opportunity, strong opportunity? What big can change our structure and our revenue growth opportunities. And AI is a big deal. It's really a big deal. So that's the most exciting thing. Opportunities are there. I know we -- from a distribution landscape, we're doing the best. There's no question about it. From overall point of view, 90% still go outside of the distributors. I just met with the guys from Deltek. They've landed a $400 million deal and a $600 million deal, all of those direct. So people investing millions and billions. And I think the AI workloads are very heavy. So they require a huge deal of those GPU compute power. So NVIDIA is miles ahead of all their competition, doing exceptionally well. We see those deals through NVIDIA relationships, through our other AI-focused vendors. And if we can land 2 or 3 of them, there's going to be a meaningful change in the direction and in what we do. Yes.

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

Hi, there. I hope that's been informative for everyone. And I'd just like to reiterate that we're confident that this year is going to be a much stronger year than last year, all things around. And as always, we're working as hard as we can to get the best outcome we possibly can. Thanks, everyone, for coming on the call and have a nice day.

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