Softcat plc (SCT) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Softcat results for the 6 months ended 31st January 2022 conference call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Graeme Watt. Please go ahead.

Thank you, Nadia, and good morning, everybody. Graham Charlton and I would like to welcome you to this morning's Softcat briefing on our first half fiscal 2022 results, and we thank you for your interest in Softcat. Before we move on to the performance and results for the first half, I'd like to take a moment to reflect on the Russian invasion of Ukraine. We are deeply saddened by the humanitarian crisis unfolding in Ukraine. And we fully support any actions that can bring peace back to the people of Ukraine at the earliest opportunity. It is encouraging to see so many people in countries across the world support the plight of the Ukrainian people. And we draw strength, too, from the personal actions our people across Softcat have been taking. And our charity team are raising funds for DEC, Disasters Emergency Committee, which supports humanitarian disasters all over the world, including the Ukraine. We sincerely hope that this appalling human suffering being felt in the country can be ended as soon as possible. Returning to the topic of today's call. I'm pleased to report that in the first half of fiscal year 2022, we have again delivered strong, profitable growth and taken market share whilst at the same time, invested in the business and made further progress in the execution of our strategy. The team at Softcat continued to manage the challenges of the chopping and changing pandemic restrictions really well during the first half. And I'd like to thank each and every one of the team for their contributions, their resilience, their positivity and ultimately their performance. It's been great getting back together again within our own team and those of our partners as the restrictions have been lifted. Moving to the Softcat business slide, please. As with previous briefings, I'd just like to take a moment to describe our business for those of you less familiar than others. On this slide, you can see our full year fiscal 2021 key numbers just to give you a sense of the scale of the business. And we've added to that some half year reported numbers on our headcount and customer base. So in describing our business briefly, Softcat is the leading reseller of infrastructure solutions and technology products and services in the U.K. and Ireland to both the businesses and public sector communities. We served a customer base of 9,700 customers at the half year-end, focusing on the customer segments of enterprise, mid-market and public sector. We operate a simple model with a clear strategy, which we aim to execute effectively to commitments. And we work very closely with a strong portfolio of over 200 vendors, providing our customers with choice and solutions that are fit for their specific needs. Where we don't have resources or capabilities ourselves, we're happy to partner with third parties to complete the solution for the customer. We operate out of now 10 offices in the U.K. and Ireland and the U.S. and have branches in Singapore, Hong Kong, Australia and the Netherlands. These offices and the branches support what we call our multinational business. Think of it as a mechanism to sell, fulfill and facilitate the overseas needs of existing and potential customers in the U.K. and Ireland. And from a cultural perspective, we foster a culture that thrives on putting people, putting our people and our customers first. And we believe that by working hard to deliver the highest levels of employee engagement and commitment, that this, in turn, allows us to deliver exceptional customer service. This essence is well captured in our purpose statement, we help customers use technology to succeed by putting our employees first. Our culture is a key positive differentiator in what is a fragmented market. And we're pleased to receive further recognition in the period for the strength and positive impact that culture has on our employees and on our business. Our growth continues to be wholly organic and has been sustained throughout our 29-year history. And this is something we're very proud of. Our cash conversion is strong, we are debt-free and we are strongly cost-conscious, but that is balanced with an eye on the future and the need to be almost continually investing to secure and deliver our longer-term growth ambitions. What we're trying to achieve is simple. We want to be a Great Place to Work and grow faster than the market by taking share. If we could move to the next slide, please. Those comments take me nicely to our first half fiscal 2022 summary results. I'm not going to run through each of the numbers, except to reiterate that we've again delivered strong double-digit organic growth at the same time as we've continued with our robust investment program in internal systems, tools and people. We're always looking to build skills and capacity for the longer term. And in the last 12 months, we've backed that up by growing our average headcount by 10%. We made share gains in the period and benefited from strong and focused execution. We also made further positive progress across all of our key performance metrics, including productivity as measured by gross profit per head. We added new customers. And having set a very high bar in the previous year, have now reported 66 consecutive quarters of organic year-over-year income and profit growth. The balance sheet is strong, we have no debt and cash conversion remains high. So we're pleased to have announced an interim dividend of 7.3p per share, up 14% on the prior year. If we could turn to the next slide now, please, entitled Business Update. When we invest, we don't have a bias to any particular segment or technology in our business as each and every one of them present outstanding opportunities for future growth. So it's very pleasing to have delivered double-digit growth across the board. We saw more customers further emerge of the pandemic. And it was particularly pleasing to see enterprise customers deliver a second successive quarter of accelerating growth year-over-year. This breadth is a source of great resilience in our model. And in the event that challenges emerge in a particular area, then we're exceptionally well positioned to compensate with growth in other parts of the business. Our model worked well during the pandemic restrictions. But I think everyone agrees that you lose something when you can't meet your colleagues and partners face-to-face. As well as getting enterprise back to growth and accelerating, we've seen the number of transactions increase, too. And we see that flow into our GP, gross profit performance. Back in May last year, we reported customer Net Promoter Score at 59% and customer satisfaction rates at 95%. And in October of this year, we reported employee Net Promoter Score at 52%. Now these key measures compare favorably to the market and to our own pre-pandemic levels. We said we'd continue to invest in headcount despite the pandemic. And that is what we did. We added a further additional 296 heads across all functions in the period since the start of the pandemic as we looked to support and grow our capabilities and capacities across the board. I believe we are one of a very small number of companies recruiting at this level. And as in previous updates, we feel that we've got positive momentum in the business as we continue to emerge from the pandemic and invest further. We've seen progress in our cloud offering and performance, principally in partnerships with Microsoft and AWS. And as I said, our enterprise sales are accelerating, our device life cycle management has matured nicely and our multinational business has kicked on, too. And from a market perspective, we are seeing continuing demand across all segments for all of our IT priorities and services. And the technology trends we've seen in the last couple of years remain consistent. Organizations are continuing to enhance their customer and employee experiences through digital infrastructure spend. And they need to manage distributed workforces in hybrid working environments whilst at the same time, looking to deliver productivity improvements. Cloud migration continues to be a driver of growth, most often in a hybrid, multi-cloud environment. There's growing demand for data insights and customers need to protect and secure their systems and their data. Areas such as remote working, education, conferencing and collaboration are yet to be fully built-out across many organizations. The workspace has a complex set of needs that need supporting. So it's not just about the device, it's about the network bandwidth, the connectivity, the security of connection, the access and storage of data, the telephony and accessory and apps to support. And we're still at a relatively early stage of the 5G rollout that will enable the delivery of real-time intelligent outcomes at the edge and drive much higher levels of sense of penetration into our environment to provide insights, productivity, efficiencies and better outcomes for our businesses and our planet. So there really is a lot to look forward to. Component shortages in the supply chain have led to a relatively modest increase in order backlog for some elements of hardware, although we anticipate that this will gradually unwind over the course of our next financial year. Remember, these shortages impact only parts of our hardware sales, which were particularly strong in the period, making up 40% of our revenue. Whilst we've recruited well, finding and recruiting talent in the market isn't getting any easier. And we've responded quickly and decisively by adding resources to our recruitment team. We've widened our university coverage, we've expanded our apprenticeship program and we've shortened the recruitment life cycle. We've also responded by announcing an increased level of pay review for this year. And we are looking further at the salary structure for sales, specialists and support roles, including entry-level salaries and structured progression. And we'll announce these internally in April. The other key area we have on our minds is the crisis in Ukraine. And as I noted earlier, we are managing and evaluating the business impacts as they unfold. We've taken steps to strengthen our own cyber security protection. And we've been advising our customers, too. We're monitoring risk of supply disruption and customer trading risks and making sure we implement all sanctions on the supply of technology. It's too early to say what the impacts will be, but we'll be monitoring things very closely throughout as the situation develops. And as I also said earlier, we sincerely hope the situation in the Ukraine is positively resolved very soon. If we could move to the next slide, please, entitled Strategy Update and Progress. Our strategy remains consistent with previous years: grow our customer base by introducing new customers to our capabilities and expand our share of wallet with existing customers. It's straightforward and relies on focused execution and investment. Technology and consumption models are continually shifting, so we are constantly evolving our approach but very much within this strategic framework. One such area has been the expansion of our sales development program from public sector to include corporate sales and sales specialists. And with a full year now under our belt, it's clear that this has brought benefits of both performance and retention to our entry-level salespeople. There's lots of complexity in IT infrastructure, a lot of choice and the pace of change is relentless. And we provide expertise and skills and market insights every time we speak to a customer. And we have the support and partnership of our vendors to help us provide a solution for those customers. We operate in a fragmented market. And we believe as market leader, we still only have around 4% of the available market by sales and around 20% by customer number. That means, on average, we have around 20% share of wallet of our customers. And our aim is to keep driving that figure up by building trust and loyalty over time to become typically the leading partner for our smaller customers and 1 of 2 leading partners for our larger customers. The market is growing. And we can see a clear opportunity for incremental growth as we build that share of wallet, add new customers and over time, expand our addressable market. And we're starting from a great position as we know that every single one of our existing and potential customers are consuming some or all of what we sell. Our customers have IT infrastructure needs from the workspace to the data center. And every day, we're aiming to expose our existing customers and new customers to the compelling propositions we have to offer. We've said it before, IT infrastructure solutions have become fundamental to the success of business and public sector entities. Investing in technology has been part of the fabric for companies to operate and stay ahead of the pack. The world is becoming ever more connected and the demand for digital infrastructure will only grow. It's clear that our industry has a very bright future. And we continue to be very excited by the opportunity the market offers. Turning to people and culture. We love awards that recognize us for areas relating to our people and how we work together. So it's very rewarding to receive U.K. recognition by Great Places to Work as the third best workplaces for well-being and the #1 best place to work in the tech super large category. We were also recognized by Glassdoor as the #2 best work-life balance company in the U.K. And we are ranked 31st in Glassdoor's best places to work in the U.K., the only -- notably, the only reseller in the top 50. We feel that we've been recruiting more than most during the pandemic. And we've been able to add resources across all areas of the business. And I spoke earlier about the actions we have taken and are taking to address what is a challenging market for talent. I think this new era of hybrid working is bedding in well. We have people back in the office in greater numbers and face-to-face meetings with customers, suppliers and service partners have resumed in numbers, which is very healthy. It's important, I think, for our younger tenure employees in particular to embrace the office environment, to learn our business from others, see our culture in action and build relationships as well as receive the recognition and have fun and make friendships, all critical parts of our culture. We continue to learn as we go along in terms of what works and what doesn't. And what we do know is that in whatever mode we are working, delivering a great internal and external customer experience and continuing to be a Great Place to Work are key priorities. Our people are enjoying being back together in the office. And team nights-out, lunches in the quarter are back, our half year and full year incentive trips are all planned in, too. We have a lot to look forward to later in the year with kickoff in September. This will be -- noting that this will be the first time for 3 years that we'll get the entire company together in one location for what we think will be a kickoff to remember. From an ease of doing business perspective, our financial systems and data upgrade projects is progressing well and will be implemented later this year. And thanks to everybody in the team who've worked so hard to get us to this point. And we have a comprehensive road map of further investment and development in areas such as IT service management, CRM and eCat, our e-business portal. Our most recent customer engagement feedback was very positive. And we look forward to updating that feedback again in May this year. And from expanding our addressable market perspective, we will consolidate and over time expand our multinational entity network to support our U.K. and Irish customers with their overseas needs. Any expansion is purely customer-led. And our goal is simply to add value and capabilities whilst making the supply chain much slicker for our customers. These entities that we've already established facilitate local billing in local currency with local sales taxes and are supported by local relationships with vendors and distributors so that we can procure and deliver in-country and at the same time, be conversely competitive, too. Much of the processes and administration are run from the U.K. for both global and EMEA projects. And this is supplemented with a person on the ground in Singapore to manage the business in Asia Pac and an office now in Arlington in the U.S., where we're building a small team comprising both sales and operational staff to take care of the Americas. Client devices move very much into the spotlight when the pandemic broke. And we promised to set ourselves up to be more active and ambitious in this space by building the right processes, the right commercials and install the supply chain management to support our customers. We have done this and are now much better positioned to manage significant deals across a large number of locations, and we're adding value by imaging, holding buffer stock, offering financing solutions or consumption options, delivering the devices to new starts and replacing them, too, and managing the environmental implications of refurbishment and responsible disposal, too. And diversity and inclusion -- moving to diversity and inclusion, which is embraced by everyone at Softcat and is now firmly embedded in everything we do. Our diversity focus has led to a steady increase in our gender composition, where women now make up 33% of the workforce compared to only 29% 4 years ago. It is slow but steady progress. And I remain committed to further diversifying our workforce, particularly in our leadership teams, which is one of a number of moves that I think will help accelerate progress. We've also added community as a fifth company value, which reflects on our belief in the power of people and encouraging collaboration. And I'm pleased that plans are in place to get our industry-celebrated charity ball and associated fundraising back on the calendar for later this year. Added to that, the empowering disability and neurodiversity network that we added last year is making good progress in its work on education and awareness and its support for employees who have a disability. Our staff remained very active and supportive in all areas. We have over 1,000 Softcat people who have now been through or are registered for our Allyship program. And we now have a total of 850 people that are members of our 7 network groups. We feel passionately about sustainability. And it's imperative that we all demonstrate leadership in this area and take action now to make our planet a safer, cleaner place. There's no time to waste. And some of you may be aware that today is World Water Day. We talk a lot about energy and emissions. But as the climate changes, groundwater will become more and more critical, and we will need to work together to sustainably manage this precious resource, too. Groundwater may be out of sight, but it must not be out of mind. With that, I'd like to now hand over to Graham Charlton, our CFO. And Graham will add some more color to the numbers and provide an update to our sustainability priorities.

Thank you, Graeme, and good morning, everyone. If we can turn first to the summary income statement, please, and the headlines, which have already been highlighted by Graeme, but we'll work through some more of the detail now as well. And firstly, it's worth reiterating, and we've always been very clear about this, that we regard gross profit as our primary measure of income. And that very much continues to be the case. After that, gross invoiced income is the best way to understand the trading performance that we have with our customers and the margin that we're achieving on those transactions. Gross income also gives an accurate reflection of our working capital situation related to that trading as well. So in the period, we saw 11.7% growth in gross profit and gross invoiced income was up by 33%. So the GP margin achieved from that gross income reduced from 15.4% to 13%. And that drop in margin doesn't concern us at all. We're delighted with the GP growth of 11.7%. The reason for the drop in the margin is that we made excellent further progress with a major mid-market customer. And the nature of that work with that customer in the current period was a very large value hardware fulfillment work, which means that the percentage margin on that business is amongst the very lowest in our portfolio as well. It's still a great business for us. But the size of those transactions in gross income and revenue terms is very significant and so it affects our overall margin. On the other hand, in the prior period, we had some large, high-margin projects for other customers. And so the combined effect of those things created the large drop in GP margin that you can see on the slide there. Coming to revenue next. And it's been a feature of our numbers for the past few reporting cycles that revenue growth has actually lagged gross income growth. And that's been due to the shift in mix of our gross income towards cloud and security software. And those things are netted down under IFRS 15 for the revenue disclosure. That trend has reversed in the current period by a shift in mix back towards hardware, mainly driven by the very large value of work with the major customer I just mentioned. And so for the most recent 6 months, revenue is up by 33.6%, just slightly ahead of the 33.0% growth in gross invoiced income. But of course, and as I said, the main numbers on this chart from our internal perspective are the growth rates for both gross profit but also operating profit as well. Gross profit growth was ahead of the expectations that we had for ourselves as we entered this year. And that's down to two things. We did make good progress with a major customer. But we had very strong trading with the rest of our customer base as well. And that was the bigger effect, where we were able to capitalize on the high demand from new and existing customers. Graeme has already described some of the characteristics of that demand and how we've been able to grow our share of the opportunity. But once again, it is the broad-based nature of that success that pleases us most. And we were able to post double-digit expansion in gross income in all customer and technology segments as well. And this, despite the headwind of component shortages. We're coming down now to operating profit performance. That was up 12.4%, slightly ahead of the GP growth. We've continued to invest for the future, as Graeme mentioned, and average headcount was up by 10% in the period, which was the main driver of the 11.2% rise in costs. The return of travel and event costs has been slower than we anticipated at the start of the year due mainly to the impact of the Omicron COVID variant. And this has pushed back the full resumption of our normal operating pattern. But as of the 1st of Feb, we are back into our hybrid working policy. And we expect those business costs to ramp during the second half. For example, we have three half year incentive trips scheduled for May. And this will be the first time we've been able to run those trips for more than 2 years since the start of the pandemic, and we're delighted about that. But some savings in half 1 and so not as aggressive a cost rebound as we expected so far. And that, combined with the strong GP growth against really tough comparatives, gives us that 12.4% increase in operating profit, ahead, as we said, of where we expected to be at this stage, and especially given that we did grow operating profit by more than 40% in the first half of FY '21. But if we turn over the slide, we can now take a quick look at the productivity of the sales teams in this latest period. This is a familiar chart with a familiar pattern now showing the gross profit the company is generating plotted against the cumulative experience of our salespeople. And as is very clearly visible, aided hopefully by the lines of best fit that we've dotted in there, the gains in productivity that we really started to evidence back in FY '18 as we expanded the average resources available to the average salesperson within Softcat, those productivity gains have continued into this later set of figures. And we think that with the share of wallet with the average customer still just in the region of 20%, we think there's a lot of potential for further progression here for many years to come as well. And if we turn over the slide, again you can see this same trend but from a customer perspective. And this chart shows the progression in the customer base, which is the bars, and the growth in gross profit per customer, which is the line. Our strong progress in GP per customer began back in FY '18 as you saw on the previous slide. And that's continued unabated, except for a slight [indiscernible] you can see there at the beginning of the pandemic. What we also saw in the initial stages of the pandemic was a more difficult environment for winning new customers. The customer base is a measure that we report here, which requires an organization to trade with us in 2 consecutive rolling 12-month periods. So in order to be counted in that KPI, business has to trade in consecutive 12-month periods. And for this reason, that difficult new business environment at the start of the pandemic is actually impacting the growth in the customer base KPI as we're reporting in this current period. What we've actually seen in the most recent 12 months is an improvement in the rate of new customer wins. And so we expected that to be reflected in the customer base during our next financial year. If we can move on to the next slide, please, we'll take a quick look then at cash generation. And there's no great news to update on here, really. We're once again reporting healthy cash conversion of profit growth into cash. The conversion rate in the period was 85%, very much in the window of historic performance and expectations. And there's been no change to our underlying business model. That is slightly lower this year than it was in the prior period due to the completion last year of some major office works. The net working capital movement, which is mainly trade payables and receivables, is consistent with the growth that we're seeing in gross invoiced income as well broadly. So the closing cash balance slightly ahead of prior period despite the very large cash outflows from the final and special dividends, which we announced in October and paid in December '21. And speaking of dividends, if we turn the page again, please, I can confirm the details of the interim dividend that we're announcing today. The interim payment of 7.3p per share is up 14.1% on the comparative. And that will be paid on the 13th of May. The shares will trade ex dividend on the 7th of April. And turning the slide again, please. Before I hand back to Graeme, I will, as he mentioned, just provide a quick update on our carbon sustainability action plan. We communicated at our last set of results the structure and targets that we put in place to help us form our road map towards net zero. That's reiterated here, where at the top, you can see those three headline targets and an indication of our progress against them. So neutralizing our Scope 1 and 2 emissions from a mixture of reducing emissions but also offsetting has been achieved. And we're well on the way now to having all of our U.K. and Irish offices moved across to renewable energy sources. That means that we're now able to target a net neutral position without offsetting for our own Scope 1 and 2 emissions by the end of 2024. And we have a very clear and achievable set of actions to get us there as well. On the big goal of net zero, including Scope 3 emissions, across the supply chain, we're very honest in the grading here. We've serious intent and are very passionate and motivated to make progress. But we've done our homework and are fully aware of the size of that task as well. And that's where the three areas of action come into play. Achieving net zero will require us to pay attention to our own operations but also to those of our supply chain, too, as the solutions being designed and manufactured by our vendor partners and how they're understood and selected by our customers is very important. You can see some of the initiatives that we're pursuing there under each heading. But if we turn over again to my final slide, I can highlight a few areas of current focus. And firstly, in the top left there, you can see that we're embedding an approach to sustainability in our Board and executive-level management structures. We have a formal subcommittee of the Board now, which meets on a 6-monthly basis to review and drive our progress towards net zero. And we have a steering group that will work across all areas of business to define and drive the detailed action planning that will move us forward. In the top right, you can see that we've submitted our Carbon Reduction Plan to the Science Based Targets initiative, and we are waiting now to get their feedback, input and help on that. And finally, in the bottom rows, you can see that we're committed to transparent reporting on how we're doing against all of this. We're working towards full compliance with the requirements of TCFD. And in our recent submission to CDP, we were rated more highly than our top 10 peers in the VAR space. So we think we've made a good start. We're very conscious. It is just to start as well. But rest assured, we have a deep commitment to making progress and transparently sharing the steps that we're taking. We've set ourselves a goal of not only managing our own Scope 1, 2 and 3 targets but hopefully contributing and collaborating towards an industry-wide movement in this regard as well. So we'll keep you updated as we go. That's it for me from now. I'll pass you back to Graeme Watt to close it up.

Thanks, Graham. And if we can move to the slide that says summary, please, at the top of it. I think the drivers of our success, I can put down to a number of areas. We've got a straightforward strategy, where our focus is on keeping things simple and executing to commitment to give the customer the best experience possible. We've got a very active and, I would say, distinctive culture that drives our behavior to each other and those outside of the company. Softcat is a fun and attractive place to work. And our customers and partners enjoy working with us. we take nothing for granted, and we're always looking for ways to improve. And I think we've got some really valuable and strong relationships with a large number of customers as well. And we gain deep insights into the solutions that they need. This is very important to us and our vendors and any future customer, too. We've got a great range of technologies and services to offer existing and new customers with the skills and expertise to back it up. And we're a customer and people-led organization. And we're always investing as much as we can afford today to deliver tomorrow's growth. So those are some of the kind of key drivers that I think we've got in place. Being a Great Place to Work is the single biggest positive differentiator that we can bring to bear. It's what makes us an exciting company to be part of and is the key ingredient of what enables us to deliver an outstanding experience to our customers. These drivers have enabled us to deliver broad-based growth in the period, where we're able to report further positive progression on our metrics, including the GP per customer that we've already highlighted, which grew 12.4% in the period. We were amply recognized by our vendors in the industry for our achievements in the most recent period, too many to mention here. But in addition to the previously highlighted employee-related awards from Glassdoor and Great Places to Work, I'd like to draw attention to just some of the awards and achievements we gained in the period, just to give you a flavor of them. We were recognized by CRN as the #1 U.K. VAR in their 2021 Top VAR List. And we won the CRN Public Sector VAR of the Year Award for the third year running. We won the Cisco Transformation/Innovation Partner of the Year Award and Dell Technologies' sales team of the year and excellence in new business awards. And we were the partner of the year for Mimecast. Excuse me, let me start that sentence again. We were a partner of the year for Mimecast, where we're their second largest customer globally. And we were a Lenovo services partner of the year. And we hope those awards demonstrate the broad range of what -- of the value that we're bringing to the market on behalf of our vendors. I also wanted to share just how close we're getting to our customers. Our goal, as you know, is to build high levels of trust and loyalty over time and encourage our customers to come to us for an increasing amount of their IT infrastructure needs by doing an outstanding job on our initial engagements and exposing them to our broader offerings and capabilities. Our relationships with our customers are becoming deeper and broader than this as we discuss and share ideas in other areas, such as sustainability, diversity and inclusion, recruitment, onboarding, recognition tools and many other areas. We're in the business of building relationships where we add value to each other beyond the technology. And I think this is a growing and critical area for us in the future. And finally, to our final slide, please, entitled Outlook. I'm sure that many of you will already have seen this outlook, but let me read it to you anyway. Operating profit in the first 6 months of the financial year has been ahead of the Board's initial expectations. Whilst the current geopolitical and macroeconomic volatility make it more difficult to forecast performance, because of the outperformance in the first half, the Board now believes that the outturn for the full year will be ahead of previous estimates. We've also this morning announced the addition of Lynne Weedall, her appointment as independent non-executive Director and Chair of the Remuneration Committee. And we welcome Lynne to the team and very much look forward to working together with her. In closing, we've delivered a half with strong organic revenue and income growth driven market share gains, declared an interim dividend and executed against our strategy. Softcat is very much on track as a business and continues to perform well. And despite some really tough prior year compares, we've extended our run of year-over-year growth in gross income and profit. We're confident in our strategy and the market opportunities that are available to us. And we feel blessed to be operating in a market that is growing nicely, too. We're excited about the future and take nothing for granted. And I feel really happy and privileged to be part of this team, which gives me a final opportunity to thank the Softcat team, the broader Softcat team. You guys are doing a remarkable job. And I love what you do and the performance you create. Thank you for being you. Keep doing what you're doing whilst always looking for ways to do more and improve. Very well done, and thank you. And that's it for our prepared remarks this morning. I'll now hand back to Nadia, our operator, for any Q&A. Thank you.

[Operator Instructions] The first question comes from the line of Ross Jobber from Citi.

Three quick questions, if I may. The first one is the period you just announced and the prior period a year ago both have quite big orders in. You talked about that. Can you give us some sense of what the growth in gross profit per customer might have been, taking out perhaps the data center order this half and the large higher-margin business at this time last year? That was question number one. Question number two, you've been growing headcount really quickly. Can you give us some idea of what your aspirations are going forward? Is it to maintain sort of double digit or not? And then my third question is you talk about 20% wallet share. And I just wonder, is there any sort of color on how that might split between software, hardware and services? Is there one particular area of those three where you think the wallet share is lower than the average and therefore is a great opportunity?

So it's Graeme Watt here. I'll do the headcount piece, if you like. I think we've recognized -- I think we've all recognized that the market is challenging. And I laid out in my prepared comments that we've taken a number of actions to address the growth of headcount. I think we've done rather well, not only the number I gave in the commentary, but we've grown our headcount by 98 heads net, that is net of attrition since the beginning of the fiscal, and I think year-over-year, 121 heads. So we continue to grow at an average of 10% as you rightly highlighted. I think going forward, we'd see double-digit growth of headcount as very much our goal. That's kind of always been our goal. So I don't think our goal has changed. I think we've got a tightening of the market, where demand outstrips supply, that we need to get through. But I don't see that -- I don't know how long it will last, but I also don't see it being in play forever. So I think we've got to navigate our way through that. As I say, we've been decisive. We've taken some action. But I think you should look at us moving forward as continuing our ambitions of double-digit percent headcount growth.

Ross, it's Graham Charlton here. So I think your first question was about -- was if we sort of exclude the big deals from both periods, what would our growth look like? And the answer is very similar, really. So we've made good progress with that major customer against prior year. But it's not generating -- it's not the lion's share of the growth we're reporting in this period. So on a normalized basis, what we're reporting and the underlying position is quite similar, actually. I think your other question was about wallet share. So do we have a feel for our wallet share of split between software, hardware and services with our customers? And the answer is we don't really know. It's very, very hard to kind of get to those sorts of figures. But I think our sentiment and my best guess would be that our share of software is maybe slightly higher than our share of hardware, is maybe slightly higher than our share of services. But actually, I don't think there's much variability between them. You'll see probably a high degree of variability on a customer-to-customer basis. But we think that the fullness of our software, hardware and services offering and the length of time really for which we've been providing them now is such that they will be pretty similar levels. So our service business slightly, less mature than hardware, which is slightly less mature than software. But really, we've been doing the full stack for 6 or 7 years or longer now. So I don't think our share of wallet across the piece is wildly different to the 20% that we grow our headline level on average with our customers today.

The next question comes from the line of Tintin Stormont from Numis.

Just in terms of three questions for me. I think in the slide where you have selling more to existing customers, you talked about building a larger presence in financial services, central government and defense. Could you just give a little bit more color on that in terms of what you're seeing there and obviously, sort of kind of the level of resource that you're thinking around those areas? Secondly, in terms of the times when you work with a third party, are there areas there where you're currently working with a third party, but increasingly, you think you want to bring this capability in-house? And then thirdly, just in terms of multinational sales, could you just give us a sense of how much gross invoiced income is that accounting for at the moment? And is that the metric that becomes sort of a tipping point where you make a more fulsome decision in terms of international expansion?

Graeme Watt here. Just on the -- on your points on financial services, defense and secure government, I mean, they're relatively slow burners for us. So I -- we're -- I mean, in terms of -- if you look at our public sector business today, central gov and defense, if we break it down into kind of four broad verticals, central gov and defense is the third ranking out of those four key verticals, so -- but at over GBP 50 million gross invoiced income, is still quite substantial in the period. So we're not starting for nothing. I think the point on central government and defense is just that we've got -- it's such a big area to go after that, that even that GBP 50 million of gross invoiced income is still a relatively small share of the opportunity. We're putting in mainly specialist sales heads in there to address that market. It's an area where we're both growing internal sales and pulling in expertise from outside the company. Because having a deep knowledge of that vertical and having some of the key relationships is a really important part of growing into that business. And I'd say it's a similar story in financial services. Financial services is a big part of what we do today or a reasonable part of what we do today from our corporate customer base. But it can be so much bigger. So we're again investing primarily, I'd say, in enterprise account managers for financial services and specialists and in some cases, experienced and external account managers on central and secure government to kind of deliver that growth. So I hope that answers the question. And we'll be happy to report on progress on those areas in future statements. From a -- I'll come back to the third, one of us will come back to the third-party piece. On the multinational piece, multinational is one of those areas where we don't really have a goal for where it might end up as a percentage of our overall business. It's -- in the period we just reported, it grew faster than our gross invoiced income. So it grew much faster than the 30%-plus that we reported. And it's currently, if I strip out -- and it's quite a lumpy business as well. So some of the major customer activity that Graham referred to earlier on also happened to be included in our multinational business. But if you kind of strip that out and normalize it, it's currently running at around about 5% of our total sales but growing faster -- as I said, growing faster than our average revenue growth. And so it continues to be customer-led. If we do build it out further, it will be based on specific demand that we can see from named customers.

I think the other part of your question, Tintin, was whether or not going deeper into financial services, central government and so on is dependent upon us bringing in-house some services that we're currently using partners for. The answer is no to that in short term. There's -- we've always had a partner network that we see as fundamental to our offering. We continue to see that as the case because we've mentioned quite a few times before on the service front, it's not really possible to build a service business that can cover all of the bases for what our customers might need from us from time to time, whether that's around logistics or different levels of different lines of support for some of the managed services. So pushing into any particular vertical, I don't think depends on us bringing capabilities in-house. We will continue from time to time bring some capabilities in-house that we partner with. But that's more about the areas of technology that we see emerging and becoming really central to IT infrastructure. So it's more about the technology than a customer segment, what we bring in-house.

The next question comes from the line of Alastair Nolan from Morgan Stanley.

Two, if I can. One would just be I think you've obviously touched on the war in Russia and Ukraine. Just given you guys are kind of out in front in terms of seeing any change in customer demand and sentiment, just wondering if you could provide any more detail around any change in customer behavior and kind of buying intentions. That would be really helpful. And then also just on inflation, can you just comment on exactly how that may or may not impact your business? Is it a positive or a negative and kind of where those impacts might be? That would be really helpful.

From a Ukraine perspective, we've not really seen any changes. It's something that we're aware of that may impact the business, but nothing to date. I think probably the single area where we've seen a heightened sense of nervousness perhaps has been in our customers and their cyber security status. So we were -- we did run a seminar a couple of weeks ago in response to that customer nervousness. I think we had something like 800 or 900 customers on that seminar, so quite a number for a fairly short notice. So we're definitely helping our customers shore up any gaps they've got in their cyber security. But outside of that, if you're thinking supply chain, if you're thinking customers, nothing to report at this stage. But we will be monitoring things very closely just to understand what those impacts might be and obviously manage them accordingly. So that's the piece on your Ukraine question. On inflation?

On inflation, the obvious impacts or direct impacts are on prices and wages. So on the price side, we often see vendors put price rises through for various and different factors. And I think we are starting to hear and see some price rises coming through from some vendors. That's normal from the industry. That tends to be a slight net positive for us if it doesn't begin to weigh on demand. So it's hard to really quantify and factor that in because the vendors will do them at different times and at different rates but maybe a slight net positive from us there. Wage inflation is certainly a factor, I think, not just for our industry, for all industries. We're seeing that in both the technical and the sales side of our organization. So we're considering how we work with that over the coming year as well. But none of these impacts of inflation is something that we're fundamentally changing our expectations over the next couple of years as a result. But obviously, we'll keep an eye on it. But we're still very positive about our opportunity over the coming years.

[Operator Instructions] The next question comes from the line of Charlie Brennan from Jefferies.

So I'm going to go with two, if I can. The first is just another question on the international strategy, and in particular, your relationship with vendors. I'm under the impression that some vendor accreditations are global, but some end up being quite regional in nature. Where you've got regional accreditations, is your relative subscale in some of these international markets hindering your progress? And at what point does that start to trigger a scale discussion? And then the second question is just on the software side of the business. Can you just run through the dynamics between the disconnect between the gross invoiced income and the revenue growth in the software line? And are you seeing any kind of revenue compression from the shift to the cloud? And is that more of a temporary issue that's going to unwind and accelerate in the future? Or is that more of a structural thing that will persist?

Thanks, Charlie. It's Graeme Watt here, nice to talk to you. You're well informed as always. So yes, having that international component to vendor relations so that we can procure and supply locally has also, to be effective, to your point, has to also have the comparable commercial terms local to that market as well. And by virtue of not being in those markets at any sort of scale, that is a challenge that we have. We've managed to negotiate and work with our suppliers over a period of time to secure the same levels of accreditation that we get in the U.K. We don't have them in every single case. So it's an ongoing dialogue and discussion we have. Obviously, the vendors want to -- they want to protect their domestic partners, who have invested heavily in those relationships. And one of the ways we do that is by ring-fencing the -- in a named set of customers, we ring-fence those customers as being customers that are customers of ours in the U.K. and that we're only addressing their overseas needs. We're not trying to go above and beyond that. So that's one way of addressing it. Some vendors are happy to give us the equivalent accreditations in other markets by virtue of the strength and the size of the relationship in the U.K. And in some cases, we're still in discussions and negotiating getting the same terms. And to your point, some of those discussions may only be resolved by putting incremental resources into country, which is something that we're -- is probably an option of, I wouldn't say last resort, but it's not our primary option, but it's something that we may have to consider with one or two of the vendors. So all of your points are spot-on. And hopefully, I've walked you through some of the processes that we've been through to get to where we are. It's not a big problem for us. But to be transparent, there's one or two areas that we'd like to make more improvement than we have to date, so...

On the software sort of progression between cloud and non-cloud model, Charlie, that's something that's been happening for a while now. So sort of as that shift takes place, it does create -- it's a very complex thing because it just depends on which vendor, which licensing scheme, how does it work. I think it's fair to say that it creates a small net spreading of the recognition of income. But the rate at which that's been happening, I think it's been quite steady state for a while now. So it's not something we think about too much in terms of how we manage the business, how we target people. We've certainly got a lot of our salespeople now who are building up good sort of portfolios of that cloud business and recurring business. And they like that bit of an adjustment early on from moving upfront licensing to subscription-based. But that's probably in our rearview mirror now. So yes, not a factor that we really manage the business around. It's more about how we educate our salespeople to support customers on the different licensing schemes. And I think the way that we onboard people and the role models they have in the business about playing the long game, looking after the customer and their needs first and thinking about that over the long term is serving us well in that regard. So yes, I don't think it's affecting our growth rate significantly.

And just for the last few periods, the gross invoiced income for software has been greater than the revenue growth for software. What do you think the right measure for us to look at to track your software progress there? And what's the reason for the disconnect?

So the reason for the disconnect is that if we sell Microsoft licensing that's cloud-based versus deployed on-premise, we'll recognize the latter, net; the former, gross. So the reason for the disconnect is all about what's the proportion of mix between cloud-based or security software, which is dependent on updates from the cloud. So always, always really look at our gross invoiced income because that is the value of the transactions with the customer, the value of the software the customer is buying. Where they deploy it, how they consume it, we don't think it's that relevant, to be honest. So gross invoiced income is the measure we always look at.

The next question comes from the line of Jad Younes from UBS.

A couple for me as well, please. First, you mentioned in prior calls that COVID savings amounted to around GBP 1 million a month. How much of these savings do you think you'll be able to continue to maintain in H2? That's the first question. Second question is can you give us an indication of the types of hardware products you're seeing the shortage in? And thirdly, can you help us also understand the increase in accruals? It was GBP 61 million at year-end, and it's increased to GBP 108 million. Does that include employee bonuses?

Thanks for the questions. COVID savings, firstly. So yes, that's right, we've estimated about GBP 1 million a month. It's kind of -- it's got peaks and troughs in it obviously around our events and so on. We've started to be able to get on with in the first half some of those things again. But we've retained the lion's share of those savings in the first half, so maybe about GBP 4 million, compared to what we were otherwise expecting. I think almost all of those costs will come back in half 2. As I said, we've got a full schedule of events planned. So unless something changes on that front, we expect those costs to come back in half 2. The accrual situation is mainly related to purchase accruals. And it's related also to the building stock. So we don't buy and hold stock. The stock that we have is either in transit or it's held at third-party warehouses against purchase orders, customer delivering large projects for customers and they're called off over a period of weeks as part of those projects. So the accruals build is really just another classification for trade creditors, where we perhaps have stock shipped or sent to us, but the purchase invoice hasn't been raised yet. And usually, that's related to the building stock as well. If you look at -- if you add up stock and all of the trade and other debtors and you compare that to trade payables and contract liabilities, you'll see they both tend to move in a very similar fashion, so the working capital cycle tied together and their short-term balance is, of course, 50 to 60 days at most. I think your other question was about the types of hardware we've seen shortages on. Graeme, you might want to develop this further. But certainly, we were talking to some salespeople recently, and networking seems to be one of the recurring things, data center as well, also client devices. But it really is across the piece but different depending on vendor, different depending on the size and nature of the project and how long a customer has ably been working with us on a project, so lead time is quite variable. But Graeme, I think...

That's broadly it, Graham. I think on devices, it's probably we've seen on laptops and tablets, we've seen some of that supply free up a little bit. Some vendors are a little bit ahead of others in that respect. I'd say hardware and server storage hasn't changed too much. And the technology that you referred to around networking is probably going to free up. They have the longest lead times, so it's probably going to free up the latest. So nothing -- we don't expect there to be material changes in the second half of our fiscal. But in the following fiscal, we -- given the direction our vendors are giving us, we expect to see things start to free up but over time. It won't be a sudden release, it will happen over time, we hope.

Okay. And lastly, maybe on the increase in unbilled receivables, it also went up from GBP 11 million to GBP 19 million. Does that also relate to what you mentioned regarding the accruals? Is that -- does that relate to the deal with the mid-market customer on the hardware side?

It does, actually. Well, in part, our trade balances in general look at what's the movement in gross invoiced income in the period. And that should be the major guide, of course. We reported 33% growth in gross income over the 6-month period. Our trade balance is at 30 to 60 days. So the size of movement in those working capital figures really depends upon the trading in the last few months. We did have some big deliveries for that major customer in December and January. So those balances will be overhanging at year-end as well. So yes, with strong trading, particularly around hardware in the last couple of months of the period, just means that they've grown a little bit quicker than gross invoiced income.

[Operator Instructions] The next question comes from the line of James Zaremba from Barclays.

I had a couple of questions on labor and the impact, both internal and external. Internally, I was just wondering if the challenge is more on the hiring or attrition side. And I guess, on attrition, is this still very limited amongst those that have been with you for a number of years? And externally, just wondering what the impact on your business is from, I guess, the talent issues your customers are facing, be them being increasingly under-resourced or the churn of your counterparts.

James, it's Graeme Watt here. I think on your first point, I mean, we're seeing -- I've commented already on recruitment and how we've been able to -- I mean, I think we will recruit probably at close to record levels this year. So our ability -- whilst it's not getting any easier, our ability to recruit has remained strong. And as I said, we've put in a number of measures to enhance our ability to recruit. On the attrition side, attrition has gone up. It went down in the pandemic. And there's been a bounce-back. And I think that bounce-back is partly those who perhaps wanted to do something different during the pandemic but weren't prepared to take the risk and the jobs were unavailable. And secondly, I think it's driven by the overdemand and undersupply for talent that we're all seeing in the market right now. Attrition rates have -- they're probably about 4 percentage points higher than we would want right now. But they're at the same rate as they were 4 years ago, when I joined the company. So they're not widely out of control, they're a little bit more than we want. And in terms of how -- where are we seeing that, it's in different areas. It's not really -- it's always been -- the market has always been difficult from a technical point of view, both from recruiting and retaining so that continues and has been even pre this war for talent that we're seeing and -- but we're seeing a little bit more in sales and some of our kind of sales specialist areas, too. So it's something that we're managing. It's something that we're adjusting to and reacting to. But it's under control. As I say, I think we'll still be able to recruit headcount to that double-digit expectation that I referred to earlier on in our -- as a previous question. In terms of the external impact, you're right to point out -- and perhaps I should have pointed that out a bit more proactively earlier on. You're right to point out that some of the feedback that we're getting from our customers is that they, too, or they're suffering from the market and are unable to pull onboard the skills that they would like to pull onboard as quickly or as effectively as they did previously. So we are hearing from a number of customers about a skill shortage at the customer level. And that is translating into demand for our services, particularly the services element of our portfolio. And so we're seeing demand for our managed services and some of our other services increasing in response to the skills gap we're seeing with our customers. So that's providing some incremental levels of demand in customer engagement for us, too. So hopefully, that answers your question.

Dear participants, thank you very much for all your questions. There are no questions at this time. I would like to hand the conference over to our speakers for closing remarks.

Thank you very much. It's at this point that I realized that I haven't prepared a closing remark for the end of the Q&A. But that's okay. I think we've been very pleased in delivering a strong organic growth story, both from the market and our ability to grow above and beyond the market. We're pleased with the results. And we're really pleased to have your interest in Softcat. So thank you very much for attending the call and for your questions this morning. Thank you.

That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.