Softcat plc (SCT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Softcat preliminary results. [Operator Instructions] For your information, the conference is being recorded. Now I would like to hand the conference over to your speaker today, Graeme Watt, our CEO. Please go ahead, sir.

Thank you, Andrea, and good morning, everybody, and thanks for spending some time with us this morning as we announce our results for the year ending 31 July, 2020. And I'm pleased to say I'm joined by Graham Charlton, our CFO, here this morning as well. I wanted to start off by saying that the global challenges of the coronavirus over the last 6 months have clearly had significant impacts on people's lives, and so I wanted to really begin to say that we're enormously grateful to all those who continue to prioritize the health and safety and care of us all, it's clear that we couldn't manage without them. During the year, we also faced the uncertainty surrounding Brexit, and we had a general election. And in the face of all those challenges, I'd like to take this opportunity right upfront to thank the team at Softcat for all their hard work and support. That support that they put in -- they've provided to the business, to each other, to our customers, to our partners and to those who have needed help outside of the business has been just outstanding. So thank you all so very much for our performance last year and everything you continue to contribute. Without doubt, I think it's fair to say we are fortunate to be in an industry that continues to be in demand with technology playing a full part in helping companies and other entities remain agile, productive, competitive, compliant and secure. So turning to Slide 2, if we can, please. I just wanted to give a very brief explanation of who we are and where we sit in the technology space for those of you who are less familiar with Softcat. Softcat is a leading reseller of infrastructure technology solutions to customers in the U.K. and Ireland. We provide a broad portfolio of multi-vendor technology and services to suit our customer needs, and we help them deal with the difficulties and complexities of choice and the pace of change in technology by bringing our experience and expertise to bear on their behalf. Where we don't hold those resources internally, we're happy to partner with third parties to complete the solution for the customer. We work with now over 200 leading vendors in the infrastructure space, representing their technology to a target market of tens of thousands of customers across the U.K. and Ireland. And you can see from the slide here that we serve an active base of around 9,500 customers across a wide range of corporate and public sector entities and verticals. We closed the year with 1,534 staff covering the functions of sales, sales support, sales specialists, technical services and business operations. We operate out of 9 offices in the U.K. and Ireland and have branches in Singapore, Hong Kong, Australia, U.S. and most recently, we've added one in the Netherlands, too. These branches service what we call our multinational business. And what we mean by that is that they deliver local supply relationships with vendors and distributors, so we can fulfill the overseas needs of our U.K. and Irish mainly enterprise customers. I'm pleased to report that our cash conversion remains high at 88% despite the pandemic, and our cumulative cash conversion in the 5 years since IPO stands at 92%. And just to kind of conclude on this slide, really, to say that our goal -- we believe our goals are simple; to be the leading IT infrastructure, product and services provider as measured by our employee engagement, our customer satisfaction and shareholder returns. Our track record of success is built around the ethos that are highly engaged and motivated team of employees who provide outstanding customer service. And I think this is captured very well in our purpose statement, which reads we help customers use technology to succeed by putting our employees first. So with that, can we turn to Slide 3, please? And I'd like to go through our summary results. We're pleased with our results for the year and happy to report further sustained profitable growth across a number of key metrics. Our growth is entirely organic, and we've now delivered 15 consecutive years of growth in income and profit, and we believe we grew faster than the market and took share in the period. In particular, I'd like to highlight our year-over-year growth of gross profit of 11.6% to GBP 236 million and the resulting operating profit of GBP 93.7 million up 10.9% on the prior year. We couldn't have done this without further success at customer level, where we again grew our customer numbers in line with our sales strategy, and we drove our gross profit per customer in the period, too. All 3 of our customer segments grew by double digit, and our customer satisfaction scores increased further despite the challenges of the pandemic, and we continue to invest in the period. Our cash conversion remains strong. We held GBP 80.1 million of cash on the balance sheet at the year-end and held no debt. And as you can see, we are pleased to propose an ordinary dividend together with a special dividend, and Graham Charlton will add some further color around the proposed dividend later in this presentation. Can we turn to the next slide, please, Slide 4, where I'd just like to say a few words about how we've managed with the COVID pandemic? And I'd like to take a moment to reflect on the implications of COVID, not just on our people, but on our business, but I do think -- before I go through some of the points on this slide, I do think it's important to share our leadership approach and how we've been dealing with the challenges as those challenges look like they're here for some time to come. And as a leadership team, we've addressed the challenges of the pandemic head on, we believe. We've remained calm and pragmatic, and we've focused on the things that we can control. We dealt with the realities of the situation and avoided getting too speculative. And we plan for the worst but manage for the best and try to apply good judgment at all times. And I think it's been important -- these are reporting guidelines for us. It's been important for us, too, not to underreact or overreact. And I can tell you that our strong culture has been an enormous source of strength for us all. And never before -- it's become very evident to me and all of us at Softcat, never before has the power of having a strong team around us been more evident. We've looked to prioritize our people, our customers and communities and, particularly, the safety and well-being of our staff. We've worked really hard to make sure that, in a remote environment, our people feel connected, that they're onboarded properly, that they're supported, that their achievements are recognized while still having fun. We've innovated and enhanced what we regard as business-as-usual routines, and we actively review and seek regular feedback from our teams to make sure we're on track. Our annual kickoff is by far and away the biggest internal event in the Softcat calendar, and we held Kick Off 2020 just a few weeks ago. It was virtual this year, entirely virtual, and based on the feedback we received, it was a resounding success. And this is just one of many examples where we've been able to maintain focus on the critical elements of our business and innovate at the same time, innovate to make things happen in true Softcat style. We transitioned seamlessly to remote working overnight and that was great credit to the entire team at Softcat, who were brilliantly supported by our internal IT team. Naturally, we had robust business continuity plans in place, but no one had envisaged a requirement for all staff to transition to remote working in one go. Supply chains remained open throughout and aside from some industry-wide product shortages, we've been able to operate entirely normally. So great thanks must go out to our vendor and our distribution partners. We carry out an annual survey of our customers, and we did that again this year, and the results this year showed a significant -- showed significant further gains on an already positive position. A score -- a Net Promoter Score of 66 positions us very favorably against others, both inside and outside our industry, and provides us with confidence about the quality of our customer engagement. And as a reminder, these results came in the middle of the pandemic. They were in July, I think. And we think demonstrate that from our customers' perspective, we have responded well to the challenges of a hybrid working environment. And we've been able to still find time to raise money and support those outside of the business that need help. We've helped provide additional food for that homeless. And in one particular case, we were able to support the vulnerable in the care home with tablets so that they remain able to see and speak to friends and relatives during lockdown. From a market dynamic perspective, we saw public sector demand increase, particularly in the education and health verticals, where we are well positioned. In our corporate segment, our exposure to the most highly impacted verticals of leisure, retail, travel and events is limited to around only 10% to 15% of income, but we did see corporate demand soften in the last 4 months of the year with no distinguishable difference between what we saw the demand behavior from our SMB customers or from our enterprise customers. There's no doubt that the pandemic, though, has shown a spotlight on just how fundamental technology is to business and public sector entities alike. We've been saying for some time now that technology spend is no longer discretionary and has very much become part of the fabric for entities to operate, and this has been borne out, too, in recent months. It's very clear that our industry continues to have a bright future. And when you take a deeper look at our model, the Softcat model, you can see that we've got built-in resilience. We have no strong dependencies from an individual customer or customer segment perspective or from an individual vendor or a technology perspective either. And the breadth and balance that we have in the company serves us well. Our portfolio of technology is broad, which means we're in a great position to react to customer needs for different technologies and advice at different times. The spike in demand for remote working capability, which encompassed end-user hardware and accessories, collaboration applications and security, is just one good example of that. And I'm pleased to say, looking at cash, pleased to say that cash collections were largely unaffected. And again, Graham will talk more about that shortly. We've continued to invest and grow our headcount throughout the year, both for the immediate and long-term needs of the business, and we're fortunate not to have been forced to make any redundancies or furlough any staff or use any government support, and that's thanks to the great work of our team in maintaining the growth in the business. So if I can turn to Page 5 now, please, for some further business updates. There were several drivers of growth in the period. Remote working, I've touched on already, drove some strong demand for mobile devices, collaboration tools and accessories, but at the same time, we saw companies accelerate their digital transformation plans, and there's no doubt that those that did were in a better position to sustain their business levels and weather the storm. Cloud adoption continues to grow mostly in a hybrid multi-cloud computing environment and the proliferation of connected devices and distributed IT at the edge are also trends that are driving spend. More simply said, the trends for business to be cloud-ready, mobile-ready and secure remain at the top of our customers' technology priorities, and this was reinforced by the insights we gained from our recent customer survey. In some quarters, the appetite to spread the cost of those solutions, whether through consumption models or traditional finance, has increased, too, as customers look to invest and conserve cash at the same time. So we've seen substantial growth in customers taking financing solutions. I touched on this, too, during the year, we took headcount from 1,330 to 1,534, an absolute growth of 15% year-over-year. And that's very much a continuation of our policy to invest in all areas of the business to cater for both current demand and, at the same time, build capacity and capabilities for the longer term. As throughout all of our history, all of that growth we reported this year was organic. And that growth remained very broad-based with no dependencies in our model, as I've already said, and we were pleased to achieve double-digit growth across all of our customer segments. After several years of investment, public sector has built up very positive momentum. It's our fastest-growing segment at 26% growth of gross to invoiced income year-over-year and now makes up 39% of gross to invoiced income for the year. As an added bonus, we were delighted to be recognized as the CRN U.K. Public Sector Reseller of the Year. From a technology perspective, software grew by 23% and now comprises 59% of gross to invoiced income, and we've made further positive progress on our SaaS, our public cloud fulfillment and services businesses. If we can move to Slide 6, please, I'd just like to run through our strategy update and progress on that strategy. Our strategy for growth remains organic and focused on acquiring more customers as well as selling more to our existing customers, where over time, we look to build trust and relationships. Our investments very much support that. We're recruiting additional account managers to develop new accounts for us. And at the same time, we're investing in the specialist services and technical resources to support the sales account managers and the accustom themselves to drive greater share of wallet. We remain very excited about the opportunity to grow share in the U.K. and Ireland. We continue to acquire new customers, and we were able to grow our customer base by 3.3% to 9,500 this year. And we believe we're currently selling to around 20% of our addressable market. So there's lots more share to chase down. Our infrastructure spend penetration in existing customers is, on average, around 15%. So that's a share of wallet on average 15%. So there's lots more share to chase down here too. And taking new and existing customers combined, we were able to grow gross profit per customer by 7.8% in the year compared to last year. Of the key pillars that support our strategy, none are more important than our people and culture, and we covered some of our initiatives in that section when we went through the impact and our responses to COVID-19. We received our fair share of awards during the year, but still get most excited by those that are awarded for what we're able to achieve with our people. So it gave us great pleasure to be awarded fifth great place to work, not just by Glassdoor, but the Great Places to Work organization, too. I think this is wonderful recognition for our people, and all the time we rightly spend focused on our people. We're continuing to invest across the whole company and plan to grow headcount by around 10% in the coming year. That includes apprentice and graduate first year sales resources to grow our customer base. In time, those new customers that we bring on board will become our existing customers in the future and its existing customers that deliver the bulk of our GP in any given year. We've put a lot of effort into getting our apprentices off to a good start, and it was great to see this recognized in one award, which rated Softcat best apprentice employer in the U.K. Additionally, we're launching a tech starter program this year to home-grow our own talent for technical roles, so we can expand our resourcing here in line with our plans and not rely solely on the market where talent is scarce and expensive. From a diversity and inclusion perspective, at Softcat, I'm very proud that we've created an environment where everyone is naturally welcomed and valued, allowing all of our colleagues to express themselves and play to their strengths. Our focus on diversity, inclusion remains undiminished, and we keep building, we continue to build on the initiatives we have in place to grow a more diverse workforce over time. It's the right thing to do and the smart thing to do, but it will take time. Our gender and ethnic diversity levels are on a par with the industry and national averages, respectively, but we believe we can improve those levels, and also, over time, we aim to create the same representation levels in our leadership teams. On the second of these pillars, operational excellence, we continue to ask ourselves, what can we do better and where can we improve. Our systems and data upgrade project is going well and is on plan and is a key element of our overall IT road map. This investment in our financial systems is required to underpin and help run our business for the next phase of our growth and development. The project is designed to create a platform that will support our future business needs and drive process improvement and automation for our staff and customers as well as create a data structure that we think will help provide better insights on the business for us all. It also creates an opportunity for us to review and update our processes while making sure that we continue to simplify things as much as possible. We've brought corporate and public sector sales closer together so we can share and deliver best practice across the 2 sales teams even more effectively than we do today. The outcomes we are looking for, including driving a clearer and defining a clearer career path in sales, leveraging our first year sales development program across all new starts, taking our large customer bid management process to more customers and investing further in the development support of our mid-tier sales cohorts and their customers. We have a fantastic sales team and fantastic performance, but we can always make improvements. As previously commented in our latest customer satisfaction survey, the results of that showed very positive further movement versus last year's Net Promoter Score. Every single one of the relationship measures that we ask our customers to comment on have improved, which is particularly pleasing given the survey was carried out well into the COVID-19 pandemic. We also gained important insights into the customer spend intentions from the survey. And this year, the top 3 categories remained the same as last year. First security, coming second was mobility and digital workspace followed by data center and cloud in third place. From a sustainability point of view, we take our responsibilities for the environment and our planet very seriously, too. And this year, we've formalized our approach to sustainability, which was recently reviewed and approved by the Board. You will be able to see a much more detailed review of what we're doing in the annual report, but our headline goals are to be carbon net 0 by 2022, to have adopted renewable energy sources only by 2024 and to be part of a carbon net 0 supply chain by 2040. In parallel with our focus on driving share in our existing model, we're always looking for ways to expand our offerings further and to grow the addressable market. I've touched on this before, but we -- we've added Netherlands to our multinational branch network, and we're also investing in tools and partnerships and dedicated resources to supply software to our customers within the growing SaaS model. Our cybersecurity services have advanced and developed further and the number of customers taking advantage of these services is growing nicely. And finally, we continue to drive further vertical specialization areas, where we're currently less well developed or there is a large opportunity, areas such as defense, secure government, research and central government and financial services are just some of those areas. So with that, I'll now hand over to Graham Charlton for a bit more detail on the numbers. Graham?

Thank you, Graeme. So if we could turn on to Slide #8, please, and we'll take a quick run through the summary income statement. FY '20, as Graeme Watt has already alluded to, is very much a tale of 2 halves. And I'll come back in a moment to how growth looked half 1 versus half 2 and some of the dynamics at play in the COVID-impacted latter part of the year. But for this slide, I'll just focus on the full year figures. And at the top there, you can see that revenue for the year was above GBP 1 billion for the first time under IFRS 15, but the gross value of products and services sold is shown as gross invoiced income, GII, or just gross income for short, and that was GBP 1.6 billion for the year, up 16.4% on FY '19. And that 16% growth reflects double-digit increases across each of our 3 customer segments. So both -- all of mid-market, enterprise and public sector growing gross income in the double-digit range. Gross profit generated from that gross income was just a touch under GBP 236 million. And that's a margin on the gross income of 14.3%, slightly below the 14.9% from last year. But as we've said, I think many times now, the margin is far less important to us than the absolute amount of gross profit and the growth, particularly in that gross profit, that we're able to generate. And once again, this year, the reduction in percentage margin is mainly due to a further shift in mix within our customer segments towards the public sector. Public sector accounted for 39% of gross income during FY '20, and that was up on 36% from the year before, and margins are lower in that customer segment. But of course, it's incremental growth, and that shift in mix and the dilution in margin that it creates is not something that we are concerned about. Gross profit growth, therefore, overall, was just under 12%, which as Graeme said, as a result, we are delighted with. And as all of our growth has been today, it was achieved entirely organically. And despite the significant challenges for [Audio Gap] over the last 4 to 5 months of the year. Cost growth was just over 12%, and most of that cost base, around 85% of it relates to our people in one form or another. And average headcount during the year was up by 13% on the prior year. And that headcount growth is, therefore, once again, the main driver of our overall cost growth. [Audio Gap] investment in the scale of the sales team, but also -- and yet again, and I say yet again because I've been saying exactly this for 4 or 5 years now, that investment also reflects a slightly quicker rate of growth in our specialist teams, the technical teams and our service areas, too. And this is the result of our strategy to actively build the breadth and depth of our skills to support customers in making informed choices. And their informed choices have to be across a very significant and proliferating range of IT choices available to them. So this investment is helpful in the short term, but it will also have a huge impact for us over the coming years as the needs of our customers continues to evolve. And meeting those evolving needs through this continuous investment is something we feel is creating and will continue to create competitive advantage in our technical proposition. Operating profit growth as a result of all of that was 11%, very closely aligned with the GP growth. And therefore, the main measure of operating profitability that we look at internally, the conversion of gross profit into operating profit, was very stable year-on-year at 40%. And there's nothing too much to note of significance below operating profit, the small net interest expense reflects the new IFRS 16 lease charge and the effective tax rate is unchanged year-on-year as expected. So turning over now to Slide #9, and we'll have a quick look, as I mentioned, at how the first and second halves compared. And here, you can see on the left-hand side, the half 1 numbers that we reported back in March just as COVID restrictions were coming into force, and on the right-hand side are the half 2 numbers. And our half 2 performance in both FY '18 and '19 showed very significant growth. So we were operating against really very tough comps in the COVID-impacted months of half 2 and especially the fourth quarter. And to you -- to give that full context, our half 2 and Q4 figures for FY '19 were both about 55% up on what we achieved just 2 years earlier in FY '17. So not just 1 year of growth, but a couple of very strong years of growth to compare ourselves to in those comparatives. So the fact that we were able to generate growth in both half 2 and the fourth quarter of FY '20 against that backdrop of COVID is, we think, testament to really the great attitude and determination of the team at Softcat as well as the resilience of our model and the industry as well. Operating profit in half 2 was cushioned by some natural cost savings, both as a result of our model and the COVID restrictions, such as lower sales commissions, and they flexed purely mathematically with lower gross profit. We didn't alter the schemes or rates in any way. And also, the cancellation or postponement of incentives and events that we would normally otherwise have put on. But overall, my best guess is that the cost savings we achieved probably only offset around 40% to 50% of the impact that we saw on gross profit, that lower spending by some of the most affected corporate customers that Graeme mentioned. And that impact on GDP was mainly concentrated on those customers operating in sectors that were most affected. And as Q4 wore on, actually, we did see a gradual positive recovery trend for some of those most affected customers, and the current year has started well, too. If I turn on now to Slide #10, and this is our usual chart of sales productivity. This chart shows the correlation between the experience in our organically growing sales team. And remember, the vast majority, about 90% or so, of our salespeople join us either apprentices or graduates. This chart shows the correlation between their cumulative experience and the GP they collectively generate. And the data here is presented on a 12-month rolling basis with a data point marked at each half year. And as you can see, the gross profit efficiency, which took a very noticeable step up in FY '18, that's been maintained in FY '20 despite the difficult market conditions. The July '20 data point is below the half 1 trend, as you might expect, given the lower growth in half 2 from the previous slide, but we have and will continue to invest in and build that sales experience during the coming year, during FY '21. And we're very clear that the long-term [Audio Gap] in the market is just as exciting as ever. We recruited around 190 new salespeople in FY '20, and that was broadly in line with what we did in FY '19 and '18 as well. And that's around the level we anticipate bringing on board during the coming year. And we've had around 80 of those new salespeople already joined or set to join within the first quarter. Turning on to Slide #11. This is our update on the size of our customer base and the gross profit we're generating per customer and growth in both of these KPIs is something that we target each year within that very straightforward strategy that we have. And once again, you can see here that we've managed to advance both of those during FY '20. The customer base expanded by 300 or around 3% to 9,500, and gross profit per customer was up 8% as well. And furthermore, those KPIs grew in each case for our 3 customer segments. And so in each of those mid-market, enterprise and public sector segments we traded with more customers and delivered more income per customer than we did compared to the prior year. Going forward, we continue to see lots and lots of headroom in both of these metrics over the long term. On to Slide #12 now and look at the cash flow. And in short, a continuation here of the strong cash generation that our model has produced since our IPO 5 years ago. And over that time and with these results, the cumulative cash conversion since then has been around 92%. And as you'll see halfway down the slide here, we delivered an 88% conversion of operating profit cash after capital expenditure in 2020. That's ever so slightly below trend as a result of higher capital expenditure this year, most of which relates to the major refurbishment of our Marlow and Manchester offices, our 2 biggest offices. And in fact, we were able to accelerate the completion of those works due to the onset of COVID and once the full lockdown was lifted, but our offices remained largely empty. We took the opportunity to move ahead at full pace for those works. And you can see the impact of that on the net capital expenditure line towards top of the slide. Working capital movements were in the main proportionate to growth in our gross income. So underlying cash generated from trading was as strong as ever. We did experience some customers looking for extended payment terms post-COVID, but the vast majority continue to pay as normal, and we experienced no change in our usual very low incidence of bad debt during the year. In the lower half of the cash flow statement, you can see the impact of the new corporate tax payment scheme for very large companies that came into force during the past year. We flagged this on entry to the year, and the impact is in line with the expectations that we had to the company, effectively made 6 quarterly tax payments during FY '20. So there's a one-off but permanent effect of an extra GBP 9 million or GBP 10 million outflow on the tax line. But notwithstanding that, we closed the year with GBP 80 million in cash, slightly ahead of prior year. And that brings me nicely on to Slide #13, just to reconfirm what Graeme has already mentioned on the dividend. So the final ordinary dividend we're announcing today includes the 5.4p interim that we announced but then canceled back in March. That's reinstated within 16.6p final ordinary. If you exclude that reinstated interim, the normalized final dividend would be 11.2%, and that's nearly 8% up on last year's final of 10.4p. And we're also proposing the special dividend of 7.6p as well. Taken together, the final and special amount to an aggregate payment of just under GBP 48 million and that will go out in December. And that will mean the company forecasts to retain a minimum of GBP 45 million cash. That's up from our usual cash flow of GBP 30 million. We've had a GBP 30 million cash flow since IPO. And since then, actually, we've more than doubled the size of the business. So given the current uncertainty that does exist in the market and even though we remain very confident about our prospects, we just felt it was an opportune time to review that minimum cash level and bring it up a bit, and I expect we'll look to maintain that new higher level going forward. So that is -- that's it from me. I will hand you back over now to Graeme Watt who'll wrap up, and then we can [Audio Gap].

Thank you, Graham. And if we could just advance the slides on to Slide 15, please. Just really to summarize, we're very pleased to have been able to report another set of positive results. We believe we've dealt very well with the challenges of the COVID-19 pandemic to date and are very focused on continuing to respond accordingly to any further twists and turns that may arise. Definitely, the broad base of our growth continues to be a source of advantage to us and is a testament really to how well the team has operated across all business lines and customer segments. Looking forward, we remain very excited about the technology industry and our opportunity for further growth in that industry in what remains a very fragmented market. And as you could see and hear from earlier on, our sales strategy remains unchanged. We've not been thrown off course by the pandemic and will continue and are continuing to invest strongly in capabilities and capacity to support our current and future purely organic growth ambitions. I love working for this company alongside my colleagues, our spirit and culture remains our biggest positive differentiator in the market alongside our ability to listen to our customers and deliver to them the breadth of technology and services with that expertise we've built up over many, many years of investment. So finally, I'd like to just turn to Slide 16, please, and just read out to you our outlook statement, if I may. So our outlook statement reads as follows: during the last 4 months of our 2020 financial year, our public sector business performed strongly, but we did experience a softening in demand from corporate customers. This year has started well. However, we do expect corporate customers to continue to be circumspect with their spending over the coming months. This may mean that market conditions remain challenging for a time, but we remain confident in our ability to gain market share and our view of the long-term opportunity is undiminished. As a result, we'll continue to pursue our strategy of organic investment in new capabilities and seek to take advantage of our financial strength and scale. We have every confidence in a bright future for our industry and Softcat, in particular. So that brings us to the end of the presentation. Thanks for listening. I'd like to conclude by saying that I'm very excited personally about the future and extremely proud to be part of such an amazing team. Thanks to everyone, once again, at Softcat for playing their part or your part for rising to the challenges of this particularly unusual year. Thanks again for listening. And if it's okay now, we'll turn the call back to the operator to Andrea for any questions you may have. Andrea?

[Operator Instructions] We are now taking our first question from the line of Charlie Brennan from Crédit Suisse.

If it's not too cheeky, I'm going to go with 3 questions, if that's okay. Firstly, Graeme, you spoke about taking market share during the period, but based on our analysis over the last 6 months, the extent of that outperformance against the market seems a little bit less than we're used to at Softcat. I'm just wondering where you think you've been over-indexed and where you think you've been under-indexed over the past 6 months that the usual extent of market share gains hasn't been perhaps as apparent. The second question is just on the international opportunity. You've spoken about opening up the international offices. Can you give us a sense of how much revenue is coming from outside of the U.K. and Ireland at the moment? And I'm conscious the computer centers obviously doubling down in the U.S. I'm under the impression that some of [ Kelloway's ] success is coming from pushing into Europe. Do you think we're getting closer to the point where an inorganic opportunity makes more sense for Softcat? And then thirdly, just a very quick number follow-up. Graham, you spoke about gross margin against gross invoiced income. If I look at gross margin against revenue, it actually looks like it's ticked up during the period. Is that due to the different margin on software and hardware? I'm just surprised to see it ticking up given the increased proportion of public sector.

Well, okay. I'll start off with maybe the first couple of questions. Graham will chime in as well, I'm sure. On the market share point, Charlie, we look at how we're performing one of the measures we have, which is borne out of the comment I made, it was around context data. And context data forms, as I understand, it's somewhere in the region of 75% or more of the total channel business. So it's indicative as always things are rather than exact science. That said, our data would show that we have been outperforming the market throughout the year in every single quarter of FY '20. And to your comment or your question, sorry, about being over or under-indexed, I don't think -- I don't feel like there's an area where we have been over-indexed or under-indexed. I feel like, because of the breadth of our customers and the breadth of the technologies we serve and services we take to those customers, I think we've been very representative of the demand those customers have had. So as I alluded to earlier on, when we've had the spike in remote working capabilities and there continues to be strong demand for the hardware, the collaboration software, the accessories and the need to secure that environment, we've been able to respond to that. In the same way, we did notice, although it's improving a little bit now, but we did notice that some demand for data center and networking was reduced for a while. I think that's reflected in what you see in our vendor's commentary, the vendors that support those spaces. And the fact that for a while, in that kind of March, end of March, April, May, early June period, most companies weren't even able to get into the office. Their ability to make serious investments in data center, server, storage and networking was impaired. So I don't really feel like we have over-indexed or under-indexed. I think we've pretty -- I think we've performed pretty well. And I don't feel like we've missed or opportunity has already gone long in other areas either. In terms of your international perspective, we do see that business growing for us over time. I think all of the -- when we open a branch in a market, it's very customer-driven. So we're chasing an opportunity and we -- I think we've said before, we're either defending customers that we already have a strong relationship with who have needs overseas or representing an opportunity to help a customer who has an overseas business, where perhaps they're not getting what they need from the current incumbent. All of the branches we've opened so far are delivering, and we are opening up -- we have opened up, should I say, sorry, the Netherlands around again some specific customer opportunities. The business -- to be honest with you, the business fluctuates a little bit because we have 1 or 2 particularly large customers in there. And whilst we're comfortable that we're doing -- I don't feel like we're at any risk with those customers, but they do spend different amounts at different times. So I think you should look at our multinational business as fluctuating anywhere between 5% and 10% of our total revenues. And -- but we do see that growing over time. I'd like to get to get to a point where it's consistently double-digit percent of our revenue moving forwards. I think the Netherlands opportunity to, you mentioned a couple of the things on multinational, will help us. It's a second entity in the EU. So depending how the Brexit negotiations go, that will help us deal with some of the challenges. And by the way, some opportunities we might see around Brexit. And then in terms of inorganic expansion outside U.K. and Ireland, I think it would be fair to say there that we don't have any plans for that. As I said earlier on, all of our investments planned currently, and if we look really kind of short term in the next 12 months around organic investments in heads to support taking further share in U.K. and Ireland. That said, we do, as a team and as a Board, discuss the opportunities outside of the U.K. and Ireland. We've obviously got to look at ways particularly in the midterm, I would say, of how to grow our addressable market. And it's not inconceivable. It's not in our plans today either. That's how I'd answer that question. And then on the third point, Graham, do you want to comment on Charlie's question on gross margins?

Yes. So you asked, Charlie, how was it that our margin to IFRS 15 reported revenue was up in half 2. And it's purely -- despite that shift towards public sector, it's really to do with how much of the revenue under IFRS 15 is netted down. And we -- a couple of things in the second half. We sold a lot of cloud-based software and that gets netted down. We also had a couple of big and good deals on what we -- partner Alliance's business, which is also netted down. That's where we work with third-party providers through public sector frameworks, and we facilitate the deal, but we net the revenue from those deals down under IFRS 15. So it's really just a shift towards revenue being netted down in half 2, and those are 2 of the key drivers of it. That's why we always talk about our margins at the gross income level because that really reflects the margin at the point in which the customer is paying for the gross value of the products, and the trend downwards on that front in second half was driven, maybe as I say, by that shift to public sector.

We are now taking our next question from the line of Ross Jobber from Citi.

A couple of questions, if I may. One on new customers and one on the public sector and then maybe a cheeky third. On new customers, what do you believe is driving new customers towards you at the moment? And what percentage of your gross profits are from those new organizations? I know you talked about 3% increase in customers in absolute terms. So those are my 2 new customer questions. What's driving towards your what percent of gross profit? On the public sector, it's just a general question. I'd be very interested to hear your views on. It's been a strange year in public sector IT spending. And I'm interested in further color on how you expect the next 12 months to evolve. And my third one is, I'm very interested to hear about your sustainability targets, and I'm sure that will be really well taken. How is the Board baking that into hard performance targets? Is it going into LTIPs? Is it going into Board's short-term performance criteria? Those are my 3 questions.

Thank you, Ross. It's Graeme Watt here in case you struggle to distinguish the difference between the 2 Grahams. On new customers, really, our new customer engagements are driven by -- they haven't really changed. And so they're driven by things like a customer is having a horrible experience with their current provider, and they're looking elsewhere. And I think over time, we've built up quite a positive reputation in the marketplace. So we would consider ourselves as potentially somebody they might come to see. We have relationship changes. So when a IT Director or a CIO or a -- sorry, excuse me, Procurement Director moves companies, quite often they take relationships with them. So we benefit many times, in fact, in that respect. And then I think there's just a point in time where customers have a certain need. And we are exposing the customer through our cold calling, through our first year apprentice and graduate sales teams. We're just making that connection with the customer. We're continuing to trying to expose the customer to what our capabilities are. And because of the breadth of our capabilities, we're quite often relevant to the customer. So when they have a need, they've gone to remote working, they need to make it secure. You'd imagine that perhaps if they were building a shortlist, and we've exposed our capabilities to the customer, we might get on the shortlist as a result of that. Those are often -- we also get referrals from our vendor partners as well. We work very closely with our vendors. And from time to time, our vendors will unearth opportunities with customers, either new or existing and they will very much partner with Softcat together into those customers. So those dynamics haven't really changed. In terms of the amount of business that we do with new customers, last year, it was 5% of our GP came from new customers. So -- and that's been very consistent over certainly the time I've been at Softcat. Typically, 4% or 5% or 6% of our GP in any year would come from new customers with the bulk of the GP, the balance, coming from existing customers. Your second question around public sector. Not easy to have a kind of crystal ball and talk about what we're going to see in the future. What I will say is that the public sector demand we've seen, I think, has come from 2 or 3 places. First of all, our own strength and our own investment in public sector over the last few years has been a very concerted effort for us to be bigger in public sector. And I think we're -- if we're not at that point, we're very close to being the leading public sector reseller in the U.K. now by virtue investment and the success we've put in. So we had, as a company, strong momentum in that sector already. I think the government then put a lot of -- the new government put a lot of -- new Prime Minister put a lot of energy into saying, we need to put investment into public sector. And I think there's a long-held view that public sector and the adoption of technology lags generally behind corporate. So I think the government were trying to catch up in some respects. And then obviously, the pandemic has created greater focus in certain areas, probably most significantly in central government, in health and education as well. In terms of the -- and we've seen that demand continue. In terms of the sustainability of that demand, we've seen nothing and heard nothing to suggest that those demand levels aren't going to continue or can't continue. But what we're also doing, Ross, is, as I mentioned in the presentation, we're also putting -- continue to invest significantly in public sector. We're investing in [Audio Gap] we think there's big growth opportunities where we've got relatively low market share in some of the specific verticals within public health, and we're piling in resource now to open up defense a lot further, research, secure government and central government. And that's how we're going to continue to kind of grow our presence in public sector. On your sustainability point, we've -- these are relatively recent discussions. I think your question was, how are those goals manifesting in terms of -- I think you said LTIPs and long term and other long-term incentives. They're not built into any long-term incentives at this point. And as I understand, there isn't a current plan to build them in. What I would say, though, is we're in the process of building, to your point, some shorter-term goals that we will be measured on at least quantitatively and qualitatively that we will take to the Board and review on a 6-monthly basis, just to make sure that we are making progress towards those headline goals I gave you earlier on.

We are now taking our next question from the line of James Zaremba from Barclays.

A couple of questions for me. One, obviously, in terms of your comments about people and the importance of this business. And I guess, one of the key things is, obviously, incentives are a huge part of the compensation structure. I was wondering if you could talk a little bit about the importance of just having a commission there versus people hitting their targets. And of course, I guess, in terms of those targets, I guess it's a little bit harder for you to maybe stretch people versus the previous growth you would get given this current environment. And I guess, how that impacts momentum in the business is the first question, please.

Okay. Do you want me to -- do you want to hold your second question, and I'll answer that one in?

Yes. That would be great.

So it's Graeme Watt here again, James. On the people -- I'll sort of deal with the people bit and then come to the commission piece, if I may. On the people side, again, as I touched on in the presentation, the strength of the culture here has been really helped us -- when you weren't remote, the fact that we've got a strong culture, I think, has set us apart from others. And we've really been able to and been very keen to lean on the strength of that culture. I think the -- we've been working, obviously, early lockdown was entirely remote. And then since then, we've been encouraging people back at the office. So -- and on an entirely optional basis, we're encouraging people to take the advantages and the benefits of remote working, but take the advantages and benefits of the office working environment as well. And I think we've cycled somewhere in the region of 25% of our people have been touching the office at some point. And I think that's important because some of the collaboration, some of the relationship building, some of our speed of responses, I think are -- we've been effective working remotely, but we're even more effective in the office. And you've got to bear in mind that of that fifth 1-5-3-5, the vast majority of those people know the culture, understand the culture, they've been brought up to embrace the culture and lead that culture out. I think the longer the pandemic goes on, that does obviously become a little bit more challenging. But in terms of how we've responded on our people, all of the recognition, employee of the month, employee of the quarter, lunch of the quarter, kick off that I mentioned, celebrating daily figures, we have a weekly love e-mail that goes out that extends thanks and -- to other people inside the organization, all of those things are going on. We've made some quite -- put a lot of energy and effort into adapting our onboarding, our recruitment, our team meetings and our one-on-ones to be able to be -- of a high quality or the highest quality in a virtual environment. We've obviously put in incremental efforts, too, around regular -- we have a weekly -- it's a Wednesday bulletin around COVID-19 and what our -- we have a taskforce that we've established as well, led by one of our directors, our WIN, who puts out a communication every week just to update and reassure people or inform of the changes. We've had several hands calls that weren't a feature of the way we worked historically. Pulse surveys, body systems, extended mental health to families, holiday carryforward, equipment for everybody at home that needs and loads of fun events as well. So we've put an enormous -- we always put an enormous amount of energy into our people, and that's very much continued. From a commission point of view, you've got to remember, I mean, commission is based on the GP that people are generating. And we -- for all 4 quarters last year, we were growing the GP we're generating. The second thing is that given that some verticals are more impacted than others, we were able to build that into our thinking for the targets that we have set for this financial year that we're now in FY '21. So we've taken into account that some verticals are more impacted than others. And I think the third thing, we reviewed this in a management meeting yesterday because I thought this question would come up and I suspected I knew the [Audio Gap] information of it. The -- we've done a look into how our salespeople are performing against targets, James, so far. And the normal percentage of people in a normal year that would be hitting target seem to be aiming to hit target in Q1 of this year. So we think that indicates that in any given year, some customers spend, some don't. That might be on their cycle of IT investment, it might be because they're having challenges or they're getting merged or bought or there's all sorts of drivers for people to spend. And we think that our -- so some sales guys are making more -- having more success than others. And we think that pattern is broadly the same that we're experiencing this quarter, if that answers your question.

Yes. I suppose it was partly, I guess, in terms of the expectations for gross profit growth this year versus maybe that for the last few years, it's obviously a lot lower. So I suppose, to my mind, that almost implies that the target versus prior years must to be lower this year. So I was wondering about in terms of if that's the case, how -- if you are planning to reaccelerate growth in a better environment, so how those targets that they reramp back up in future years in terms of, let's say, your employees hearing their target has been fair, et cetera, versus the market operating.

Let me make a comment, and Graham might jump in as well. Just to explain a little bit further around our targets and the commission structure. The salespeople get paid on the gross -- commission on the gross profit that they generate. So if they were to deliver the same amount of gross profit no more or no less this year than they did last year, they would get paid the same amount of commission for generating. Broadly speaking, there's a little bit of a uptick if you hit target. The target will create a small uptick to commission and will create a series of recognition opportunities around some of the things I mentioned, the lunch of the quarter and some of our incentive programs as well, our trips away and what have you, which obviously we can't do right now either. So if the targets are relevant, they love the recognition, they love to hit target, they're really classic salespeople, but in terms of what it means to them financially and their ability to generate commission, it's a relatively or very small part of their overall compensation package.

And you might be surprised to know, James, as well that we always try and set what we think are very realistic and achievable targets for the people. So we actually have a company target that's bigger than the sum of the internal targets and our people are used to overachieving. So the kind of target doesn't act as a limit on their performance. The best salespeople keep pushing on beyond the target. Everybody wants to be the top salesperson. So it's kind of a -- it's a helpful yardstick, our internal target, but it's not more meaningful than that. So I wouldn't get too distracted with kind of worrying about the internal dynamics of how we do that. I think our performance doesn't depend upon us just engineering those targets in the perfect place, it's really driven by the hunger and desire of people to maximize their own opportunities.

And just a bit more color on that, James. Just to add one other comment, if I may. I mentioned earlier, in a normal year, we have about 50% of our sales team hitting target. And based on the discussion we had yesterday, we're seeing a similar number on track to hit targets this quarter. So I don't think there's any -- we're not layering in any -- there's no sense of despondency or the targets are unachievable or any of that kind of sentiment internally.

That's very helpful context. And then just one follow-up question I had was, in terms of, I suppose, your gross profit drivers, and I guess you always refer to the kind of new customers versus debt and I guess this year, it sounds like you're keeping the number of graduate salespeople flat. If I guess, this wasn't a normal year, was that something you're looking to grow? Or is it more actually the focus is now a lot more on those technical staff to basically improve the depth of your existing sales force rather than hiring new graduates to grow the accounts?

James, it's Graham Charlton. No, we sort of focus or the rate at which we're hiring sales versus technical isn't significantly altered as we go into this year. We've certainly got an appetite to keep building the scale in the sales team, but equally, we've got a strong appetite to keep growing the technical skills as well. So the budget that we've put together imagines similar rates of recruitment, slightly lower year-on-year. And of course, as the year develops, depending on how trading pans out, we'll be able to respond to kind of slight differences to plan. We can increase the rate of hiring, we can reduce that as well. But broadly speaking, the rate of investment in the sales team and non-salespeople will carry on as we have in previous years as well. So we're definitely going to continue to build that technical capability during the coming financial year. The number of salespeople we hire always moves around depending on availability of talent in the market. So our target for recruitment of new salespeople is typically a 180 to 200 plus or minus depending on then how things progress.

We are now taking our next question from the line of Paul Kratz from Jefferies.

Just maybe one question for me. I mean, I think you made a mention there about having a greater focus on developing, I guess, your mid-tier account managers. Is there any expectation that, that should yield maybe an uptick in either wallet share or maybe the level of productivity for the same level of experience?

Well, that's clearly our expectation, but to try and quantify it would be very difficult. I mean, there's a couple of reasons for doing that, Paul. Thanks for your question. Couple of reasons for doing that. One is, you may recall that we've spoken in the past about narrowing the focus of our longer-tenure account managers so that they can deliver incremental share of wallet in the accounts they remain with. We've talked about that over the last couple of years. And that's worked well. And by virtue of that, they have then cascaded accounts down to some of the people with a slightly lower level of tenure, including the cohort that I mentioned on the call. So one reason for focusing on them is so that we can give the accounts that have been cascaded down as much focus as the accounts that get the focus they get at the top end. And then the other piece really is that just a realization that a little bit goes back to the commentary we've just been having. As you know, we have quite a high level of attrition in our year 1 and year 2 salespeople, and that's part of the model. That is us selecting people out because they don't fit the role. They may move somewhere else in the company or they're just not -- the performance just isn't where it needs to be. And in many cases, people are self-selecting as well. They understand how tough it is to be cold calling and to learn sales techniques and learn more about technology and they self-select out of those roles themselves. So once we've gone through those 2 years, with anything between 30% and 40% attrition rates in each of those years, we've got a very valuable resource. The capabilities of our 6 and -- 5- and 6-year plus tenure people are very well documented. And in fact, in the last couple of years, not in FY '20, but in FY '18, FY '19, the bulk of the increase in productivity was coming from those longer-tenure salespeople on existing accounts. What we've realized here is there's an opportunity to replicate that in the mid-tier cohorts, and that's why we're making a number of changes to put more focus on them. They've been through the toughest part of the sales in Softcat evolution and academy, if you like. They now are most likely to succeed. We want to improve the probabilities of their success in assets.

And maybe just to kind of follow up on that, I mean, when you, I guess, push the first initiative, I mean, what was the kind of lead time in terms of uptick in productivity?

That's a good question. I'm kind of guessing a little bit. And Graham, maybe you may have a better answer here, but it takes a while, but I would say -- my estimate will be 12 to 18 months, something like that. But you've got to remember that these aren't new customers. These are people they already are very familiar with. They know what their end-to-end infrastructure spend is. They know which way we're participating in. They know that we've got the skills and expertise to participate in more. So it's not -- they're not working from 0. So it's actually not as long as you think it is for these people to develop more trust, deeper relationships, demonstrate our capabilities to take greater share of wallet. And so it's -- my estimate would be 12 to 18 months, something of that order.

Yes. I think it's a good estimate. It's slightly different, Paul, to when we sort of materially accelerated our investment in kind of the technical skills and capabilities, that broadly coincided with our IPO. So I've said a few times previously. When we came into the IPO and we really took a good hard look at the market and the opportunity we had in the market and how our proposition stacked up, we saw that opportunity to deepen our skill base and make more use of the really great relationships we had with our longer standing customers. And 2 or 3 years probably after sort of FY '16, probably when we really started that, and we really started to see the results in FY '18 and '19 from that, but I think the lead time on this initiative that we're talking about here is slightly different. Again, what we're talking about now is we've gotten a way of nurturing our people that gives them the tools to be successful, and we rely then upon their self-starting their own wit, determination, hunger and drive to make use of those tools, and what we're saying here is that we're going to look in a structured way kind of all off, actually, the early-, mid- and late-stage salespeople and just put some investment into the tools and training available at each of those stages and have a slightly more structured way of training them and guiding them through that. And by the way, these initiatives are designed and led by people who've been there and done it. So the people who are running and designing these schemes are some of our very best salespeople who graduated up through selling themselves and are now invested in kind of stepping away from frontline selling themselves and nurturing that talent and bringing the organization on. So I think it will be a kind of, as Graeme said, 12 to 18 months lead time on really starting to see some of the benefits of this, but some of them will be very immediate as well. But yes, it's hard to quantify and kind of get the timing too precise on that. It's -- we're excited about it, but it's part of how we operate on an ongoing basis.

We are now taking our next question from the line of Tintin Stormont from Numis.

Actually most of my questions have been answered. But just following up on the talk about people. I'm just curious in terms of the new [customers] that arrived in 2020 and obviously, looking at the new hires that you'll be making in the current fiscal year, what has your experience been on -- in terms of getting the training up, especially for those new beginners when a big part of the culture has been about them putting alongside more experienced salespeople and maybe picking up from that? Have you seen a notable difference in terms of maybe delay in terms of getting them on board and trained? And have you adjusted kind of for that in terms of the upcoming year? Just wondering if you've seen any difference.

It's probably too early to say whether we've seen any difference, Tintin, given that most of our sales recruitment is front-end loaded. So a lot of our salespeople last year came pre-pandemic. And we're -- as Graham touched on in the presentation, we're in the process now of recruiting what will be somewhere in the region of 80 first-time salespeople into the organization. We're probably about halfway through that now, and we'll have 80 new starts by the end of this calendar year, I would suggest. We -- I think we have built and changed things in terms of how we onboard people. We've lengthened the onboarding program and we've shortened the days. They don't get a shortened day but they get a shorter day of onboarding because the difficulties of learning virtually and the intensity of being on a screen all day, we've made some adjustments to that. We are helping them. So all of the onboarding and development that we would normally give them, we're giving to them, but we're giving them in a different way. But to your point, the challenges are some of that being next to somebody, being able to hear their calls, being able to get those kind of visible queues from people, seeing whether how they're doing, not just over a phone, but actually seeing how confident they are about what they're doing. Some of the kind of well-being assessment. Some of those things aren't so easy remotely. But we're keeping in very regular contact with them. Our apprentices are I think this is standard, but I'm in the Marlow office this week. I was here last week, too. Our apprentices here are coming in Mondays, Wednesdays and Fridays. Our apprentices in London, where I was in London last week, were in the office as well. So those -- so the apprentices are not -- are coming in. It's not as if they're 100% remote. Now clearly, there's not as many people in the office. So their ability to do some of the things we've discussed is not as good as it was, but we -- but they also come in the office, it's also not 0 either. So we're trying to do the best job we can. Another thing that we've identified as a gap, which we'll fill very quickly, is the ability of experienced salespeople to sit on a call with an inexperienced salesperson, be able to listen to it and then create advice and commentary around that and help people improve over time. We're just introducing that so that we can do that remotely as well. So we're doing everything we can to replicate all the good points. We're encouraging people into the office. We were using the technology the best way we can. We've got a ton of touch points between manager and individual as well and regularly pulsing them in a formal and an informal way, but it's not without its challenges either. In terms of any impact of that, I think it's too early to say. I think we would -- as I say, we're halfway through our big intake this year, and so we're at very early stages.

There are no other questions from the line. Please continue.

No other questions was the comment. Okay. With that, in that case -- I wasn't quite prepared for that. In that case, Graham and I would just like to thank you for all your interest in Softcat and for your time this morning. And if you have any other further questions, we're always available to you. Thank you very much.

That concludes the call for today. Thank you for participating. You may all disconnect.