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 2023 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 first speaker today, Graeme Watt, Chief Executive of Softcat. Please go ahead.

Thank you, Nadia. Graeme, over to you.

Thank you. 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 2023 results and take this opportunity to thank you for your interest in Softcat. We're pleased to report that in the first half of fiscal 2023, 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 navigate the business really well in an uncertain environment. We'd like to thank each and every one of the team for their contributions to our performance, their agility, their great care for each other as well as their great care for our customers in the business.

Speakers, your line is open. Please continue. Participants, please standby. We'll resume shortly. Thank you.

Nadia, can you hear us?

Yes, I can hear you.

Sorry, we've had a problem with audio, and we've just switched devices, and we're hoping that this one should be okay. What I'd recommend is we probably just start again because I don't even sort of gone through the first paragraph. So if you could just -- if you could ask everybody just to kind of bear with us. And do you want to just do the opening again and just say we're back online and we'll just hand over to Graeme Watt.

Yes, of course, not a problem. Just give us a moment.

Thank you. Can you hear us okay?

Good morning, everybody. I'm going to start from the top again. I would just like to apologize for the audio challenges we had a few minutes ago. Hopefully, we switched devices and hopefully, this should be strong and stable. So Graham Charlton and I would like to welcome you to this morning's Softcat briefing on our first half fiscal 2023 results and take this opportunity to thank you for your interest in Softcat. We're pleased to report that in the first half of fiscal 2023, we've 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 continue to navigate the business really well in uncertain environment. And we'd like to thank each and every one of the team for their contributions to our performance, their agility, their great care for each other as well as their great care for our customers and the business. Remarkably, this is the first full half we've reported with no pandemic restrictions since the first half of fiscal 2020 and has given everyone a great boost getting back together again as life has returned to normal. If we could move to Slide 2, please, for the first half summary results. We'd like to take a moment to summarize some key achievements in our first half. We've again delivered strong double-digit organic gross profit growth of 17.9% in the period, whilst driving strong investment in internal systems, tools and people across the whole of the company. Operating profit is down year-over-year as forecast, but only by a small amount and significantly ahead of expectation. The reason this down is mainly down to the year-over-year impact of our largest customer, which Graham will cover in more detail later. Our reported GP growth or gross profit growth of 17.9% was also ahead of expectations despite those largest customer compares. And when adjusted out of both years, we delivered an even more significant underlying year-on-year growth in gross profit of 27%. On a non-adjusted basis, gross profit per head rose by 17.4% year-over-year, and we are pleased to have grown our customer base by 3.3%, which is the fastest rate for 3 years. 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 19%. Context market data confirms that we continue to take market share as we benefited from strong and focused execution. We closed the period with a cash of GBP 98 million and no debt. The balance sheet is strong, and you can see cash conversion of 118% returning to its previously higher levels. And on top of all that, we're pleased to announce an interim dividend of 8p per share, up 9.6% on the prior year. In summary, I'd say we were pleased with the performance and particularly pleased with the underlying performance of the business. If we can turn to the next slide, please, for the business, continuing the business update. You can see from our first point here on this slide that on an adjusted basis, we've delivered strong double-digit growth across all segments and technology areas, all of them by 20% growth or more. As you probably know, 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. We believe that [ breadth ] is a great source of competitive advantage to the business, and it's also a source of great resilience. So when demand challenges emerge in a particular area, then we're very well positioned to compensate with growth in other parts of the business. We were also able to deliver double-digit growth across the majority of our top 20 suppliers, and all of the key verticals that we measure grew during the period. It seems that business-to-business organizations like ourselves have fared better than the consumer sector. Our business has adapted well to a flexible working model. We've worked hard to ensure that there's been no compromise to our internal external service levels, no compromise the way we nurture our talent, particularly our new starts and no compromise the important close working relationships we enjoy with our customers and suppliers. And I think our performance reflects that. We invested, as I said before, further in head count in the period, adding an additional 375 heads in the last 12 months. We're likely to be the only value-add reseller recruiting at this level. Our financial system did implementation from May 2022, continues to bed down nicely, which allows us to turn our attention to some new projects around data, digital and IT service management. We're making good progress to across all areas of the business. The market is growing and our focus around our IT priorities of cybersecurity, workspace and cloud and hybrid infrastructure continues to serve us well. We work hard to deliver experience and expertise in all these areas and maintain the relevance of our portfolio to our customers. Our multinational business, while still relatively small, is growing well as another important part of providing capabilities to match our customer needs. We've delivered market share gains and estimate that we've grown 2 to 3x the market whilst growing the gap over our competition. And we were delighted to be recognized again in 2022 as the #1 value-add reseller in the U.K. And we're seeing continuing demand across all segments for all of our IT projects I mentioned and services, and the technology needs of our customers remain largely consistent. Organizations are continuing to enhance their customer and employee experiences through digital infrastructure spend, and they need to manage their distributed workforces in hybrid working environments, whilst at the same time, look for areas where they can deliver productivity improvements. Cloud migration continues to be a driver of growth for us, most often in a hybrid multi-cloud environment, and there's growing demand for data insights and customers need to protect and secure their systems and their data. We feel that there's a lot to look forward to in our space. And we've worked really hard to manage the challenges the market has thrown at us, and these include cost inflation, foreign exchange volatility and vendor program changes. And you will recall that many vendors raised their prices, and we pass them on to our customers. And with the exception of networking, the supply chain issues appear to be behind us. So if we can move to the next slide, please, and just tell you a little bit about who we are. This slide shows a snapshot of the business to give you a view perhaps of some of our scale and our half year position. I think most of you are pretty familiar with who we are in our business by now. So I'm not going to go into the same detail as we have done in previous briefings. You can see our full year fiscal 2022 key numbers for gross invoiced income, gross and operating profit, together with half year reported numbers on our headcount, customer base and cash. We operate -- and out of now 9 offices in the U.K., having just opened an additional office in Newcastle, we have 1 in Ireland and 1 in the U.S., and we have branches in Singapore, Hong Kong, Australia and The Netherlands. The offices and branches outside of the U.K. and Ireland are set up to support our multinational business. Think of that business as a mechanism to sell, fulfill and facilitate the overseas needs of existing and potential customers in the U.K. and Ireland. And we look forward to celebrating our 30th year anniversary next week and throughout that time, our growth has been wholly organic. Our cash conversion, as previously mentioned, is strong. We're debt-free and we're strongly cost conscious, but that cost consciousness 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. And I think that provides a nice segue into our next slide. So if we can move to the next slide, please, and our sources of competitive advantage. This is a slide that internally we refer to as our strategy on our page as we think it captures the essence of what we're about. If you start on the left, we have a strong value set and culture that thrives on putting our people first. We believe very firmly that by working hard to deliver the highest levels of employee motivation and happiness that they will provide what is ultimately our biggest competitive advantage, exceptional customer service backed up by our market-leading technology and services portfolio. That portfolio is serviced by the appropriate skills and expertise. And at the same time, we make sure that we can assist our customers in making the right choice of technology, the right choice of vendor, and we help them keep pace with the rate of change of technology. The account managers have a whole range of technical and sales specialists that they can lean on to provide value to the customer and deliver the outcome they require, and we seek to grow the loyalty interest with our customers over time. And typically, the gross profit generated from a customer grows in line, too, as the customer is exposed to and consumes an increasing range of our technology and services portfolio. Our customer base of 10,000 comprised a broad range of different businesses and the insights we gained from delivering their intended outcomes are available to be plowed into our future engagements with existing and new customers. And the growth and performance success of our model allows us to invest further in developing our technical and service capabilities. This success and these investments feed our competitive advantage and keep our team highly engaged and motivated. Our employees have multiple ways of sharing and participating in that success financially, developmentally and in the various events and incentive trips we hold during the year. And that way, there are incredible levels of motivation and engagement are maintained. Our business and ethos is deliberately simple and with focused execution is incredibly effective. We often ask what is our secret or magic sauce. While the sauce isn't secret or magic, we delever against this ethos by driving a constant and relentless focus on our people. We let nothing get in the way of this as a priority. The constant formal and informal dialogue and the connection we have with our teams and our people throughout the company allows us to identify and remove any barriers to success and direct investment to the right areas. And there is no doubt in a fragmented market where it's difficult to differentiate that our culture is our #1 weapon. If we can move to the next slide, please, where we're going to talk about our strategy and execution. Our strategies remain reassuringly consistent with previous years. We aim to grow our customer base by introducing new customers to our capabilities and at the same time, expand our share of wallet with existing customers. It's straight forward and relies on focused execution in a period where we've reported the customer base up by 3.3% and a growth in our GP per customer of 17.4%. Technology and consumption models are continually shifting, so we're constantly evolving our approach, but very much within this strategic framework. As I said earlier, we opened a new office in Newcastle just earlier this month with 12 existing Softcat personnel. Ambitious people from other offices who know the ropes, live the values and understand the importance of our culture and weaving that into the Newcastle office identity. We've since added 6 new starts from outside Softcat. And just a note as to why we open additional offices or why we are opening the additional offices in the U.K., well, for a modest increase in costs. It drives further growth as we get closer to our customers. And at the same time, it opens up new pools of talent for recruitment and creates additional career opportunities for our existing staff. The opportunity for further organic growth is significant. We operate in a fragmented market. We believe as market leader, we still only have around 5% of the available market by sales and around 20% by customer number. That means, on average, we've got around 25% share of wallet of our customers. Our aim is to keep driving that figure up over time to be typically the leading partner for our smaller customers and one of the leading partners for our largest customers. The market is growing, and we've got clear opportunities for incremental growth as we build that share of wallet, add new customers and over time, look to expand our addressable market. 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. And we said before that we strongly believe that IT infrastructure solutions have become fundamental to the success of business and public sector entities. Investing in technology has become part of the fabric for companies to operate and stay ahead of the pack, and that spend is largely no longer discretionary. All corporates and public sector rely on IT to varying degrees. And the world is becoming ever more connected and the demand for digital infrastructure will only grow. So we'll just touch on the pillars now briefly for people starting with people and culture. We've previously announced a few leadership changes to the market, and we've welcomed Anna Pulisciano into the company in February as Operations Director and she has settled in well. And the changes are all part of a well thought through succession plan and designed to take us to the next level. And I know I'm a little early, but I would like to put on record my thanks and huge appreciation to Martin Hellawell for his role as both CEO and Chairman of the company. And I wish Anna, Katy Mecklenburgh and Graham Charlton every success in their new roles, but more words and thanks on those changes near the time as we've got 4 months to continue in our current roles and focus on closing out FY '23 successfully. Interestingly, our ability to recruit and retain staff has been eased by 2 factors in this half. First, we've seen a strong positive impact from our pay reviews in August, which reflected the jump in cost of living for all staff, and we also made some market corrections in particular, for our sales staff, which has improved recruitment, it's improved retention and it's improved employee engagement. We've also witnessed an improved graduate market. And together with the increased focus we have, we've placed on the apprentice opportunity means that our recruitment has been strong. We are a sales and services business, so growing and developing our team are key elements that support our strategy. As I said earlier, we aim to be constantly in tune with our people through informal and formal mechanisms such as our annual employee engagement survey, and we're delighted with our Net Promoter Score this year of 63 with almost a 90% participation, and we enjoy high Glassdoor ratings, too. Our staff participates in the surveys because they have trust that we will continue to listen and take appropriate action as we have done in the past. The tangible positive mood in the company was most evident at our kickoff event last September at the ICC in Wales, where we were able to welcome the entire company to what was a memorable event, which we held for the first time in 3 years. Moving to customer experience and ease of doing business. As previously touched on, our new financial systems are now fully implemented and operating on a business-as-usual basis. And we've now turned our attention to driving the benefits from these investments in the coming years. We also have a comprehensive road map of further investment and development in areas such as IT service management, CRM, order processing and digital tools and platforms to augment our offerings and drive deeper customer and vendor partnerships. The appetite for financing options we offer our customers through industry third-party partners has grown nicely, too, and that's not unusual to see at times of macroeconomic uncertainty. And our most recent customer engagement feedback was again positive with a Net Promoter Score of 55, and we look forward to updating that feedback again in the next couple of months. One of the outcomes of our financial systems implementation is that we now have a structured and well-governed data set. This gives us an excellent platform to accelerate the development of our data capabilities and provide deeper insights to our commercial teams to augment and accelerate their current sales efforts. We're also investing in our digital capability to consolidate and develop our existing tools and provide more information and improve and modernize our customer and employee experience. And on the final column of maintaining relevance and expanding our addressable market, it's important that our technology and services portfolio evolves and remains relevant as things move very quickly in our industry. We take direction from our customers through the interactions they have with our account managers and the technologists and specialists that support them. We plan to put more emphasis on the technology team through the recruitment of the Technology Director to drive and support our portfolio evolution and collaborate with our vendor and service partners in that process, too. Our U.S. office is already having a positive impact on our ability to serve our customer needs in North America. We have a mixture of sales and operational people in the office and have been able to deliver additional vendor accreditations as a result of our presence there, and we see plenty of opportunity for further growth with both existing and new customers in that territory. And we've -- as we continue to prioritize organic growth, but in parallel, we will monitor M&A expansion opportunities, too. Both the possibility of entering a new market or to add emerging capabilities in our core domestic market. And as you know, we've never acquired in our history, so any opportunity would have to be highly compelling and have a strong cultural fit. All of these key aims and pillars of our strategy are underpinned by a focus on the desire to keep moving our inclusion and sustainability agendas forward, but more on that later. I'd now like to hand over to Graham Charlton to cover the financial highlights in more detail. Graham?

Thank you, Graeme. And we'll turn on to Slide 8 now and have a look at the summary income statement. And as always, we'll begin at gross profit, which is our most important measure of income, and we flagged during both our half and full year results last year that we had some exceptionally high-value transactions with a single customer in FY '22. And most of that income was concentrated in the first half of FY '22. But despite that, and as Graeme has already mentioned, we were able to grow GP over the first 6 months of this new financial year by 18%, up to GBP 177.1 million. And if we adjust the impact of that large customer out of both periods, then that gross profit growth was, in fact, 27%. And that's well ahead of what we believe the market to be growing at. And so once again, represents that progress that we're making in terms of taking share from competitors. And that GBP 177 million of GP reflects a margin of 14.6% when measured against gross invoiced income, and that's up from 13% in the first half of last year. And this increase is entirely due to the reduction in that high value but lower margin income from the major customer. And adjusting for that effect, then margin is stable year-on-year. Revenue, which is our gross income, netted down to just the margin element for software and some of our service income streams, that revenue declined in the period, but again, that was entirely due to the reduction in the hardware income from the major customer. If we adjust the major customer of both periods, both revenue and gross invoiced income were growing in excess of 25%. If we look now at how then the gross profit growth translated down to the bottom line, and you can see that in line with our guidance coming into the year, the operating profit was below the record that we set in the half 1 of FY '22. In the end, however, it was only a marginal decrease, down 1.7% compared to what we thought would be a double-digit reduction. So that upside is due entirely to the strength of the GP growth, which almost managed to entirely offset a 32.4% increase in costs. Operating costs were themselves largely in line with our investment plan that we set coming into the period, albeit elevated by the marginal nature of the GP performance and the effect that has on commission costs. Commission costs were up on our plan due both to the absolute value of the gross profit generated but also because we were paying out at a higher blended rate than plan due to the number of account managers and specialists and other commission staff achieving target and, therefore, activating rate kickers in the schemes. And in addition to that, we had a record number of qualifiers from both sales and the non-sales groups for our half year incentive trips. And those of you that know us well, I won't be surprised to learn that we're delighted by that kind of development deprived as we were through the pandemic for me able to send groups away on trips like that. And those activities play a key part in the creation of the special culture that we think is the basis of all of our success at Softcat. As well as increased commissions, the growth in costs year-on-year has been driven by investment in the fixed salary cost of the team. Closing headcount is up 21% and average headcount up almost as quickly by 19%. So the recruitment and retention stats that we've seen in the business recently have been very healthy indeed. And that, of course, has been supported by the pay awards that we made as we entered this year. The average award across the non-sales roles was in the region of 7% once promotions and benchmarking adjustments are included, but we also uplifted starting salaries in the sales department by 20%. And that latter measure has a ripple effect across most of the sales organizations such that the overall effect is a blended average increase across the whole company period-on-period for existing staff of around 11%. This level of investment in the team is commensurate with the underlying growth that we're seeing in trading, but it also builds us towards the huge opportunity that we see ahead in the coming years in a market which continues to exhibit strong structural growth even during uncertain times. And despite being the U.K.'s biggest player, we still only have an estimated 5% share of that market. And then finally, on the income statement, the effective tax rate is up from 19% in the prior period to 21% this financial year, and that reflects the increase in the statutory rate that will come into force next month. So if we turn now on, please, to Slide 9. We can look at the latest correlation between cumulative sales force tenure and the company gross profit overall. And we made good progress again here in the latest period, and you can see an especially large step forward on the cumulative tenure access, which reflects the strong recruitment and retention stats that I was mentioning earlier. This increased productivity of the salespeople that you can see over a long period of time also reflects the trend that we have towards increasing the ratio of specialists and technical staff in the business to capitalize on the share of wallet opportunity we have with existing customers. So while we continue to build the capacity in the frontline sales teams, our rate of growth in those supporting functions continues to be at an even faster rate, and that, in turn, gives us a really sustainable runway for growth for many, many years ahead. Turning on to Slide 10, and the effects of that investment in the breadth and depth of our technical proposition can be seen also in this chart, which shows how GP per customer has evolved over time, and that's the purple line alongside the expansion in the customer base, which is represented by the bars. As you can see, the very strong growth in GP per customer has continued up by 17.4% in this latest period. And you can also see that the growth in customer numbers has continued to step up, increasing by 3.3% on the first half of FY '22. Our latest estimates suggest that we are trading with around 1 in 5 of our target customer base in the U.K. And with that 1 in 5, we've got an average share of wallet in the region of 25%. So we think the market will continue to grow in the range of 5% to 10% per annum in the medium to long term. But the opportunity that we've got to continue to grow both of these KPIs is really vast and the try and tested strategy for executing against that opportunity is and will remain unchanged. Turning on to the cash flow on Slide 11 now, please. And once again, it's a period of very healthy cash generation with a 118% conversion of operating profit into cash after capital expenditure. Capital expenditure fell to slightly down on the period-on-period, reflecting the fact that the element of the finance system development that we could capitalize completed during last financial year and further optimization work on that system now goes straight to operating costs. There's also a slightly net positive movement in working capital balances, which reflects normal phases of payments and receipt balances. The cash generated from operations was offset by payments of corporation tax and dividends, but notwithstanding that the company closed again, with a very healthy cash balance of nearly GBP 100 million in the bank. And as Graeme also said, we continue to be entirely debt-free as well. Turning briefly on to Slide 12, so we can confirm the details of the interim dividend that Graeme has already mentioned, the 8p per share totals GBP 16 million payment in total, which will go out on the 24th of May to shareholders on the register at the close of the 14th of April. So the shares will therefore trade ex-dividend from the 13th of April. And then moving on, we'll say a few words on inclusion and sustainability on our approach to both of those. And if we go to Slide 14, please. Just shows here how we take a holistic approach to both topics as part of a wider ESG strategy that involves our people at every level of the organization. The community groups that we've established in recent years have broadened our collective understanding of some of the issues facing society and the planet and build empathy and allyship which we think are key ingredients for progressive action here. On Slide 15, if we turn over, please, we can take a specific look at our targets and progress in the environmental sustainability space, where we've got 4 key areas of focus. Firstly, in respect of Softcat owned internal operations, where we've already achieved carbon neutrality across our operational Scope 1, 2 and 3 emissions. The next one is a much more difficult target, of course, which is extending that to all Scope 3 emissions, but we have a plan approved by the science-based targets initiative that will see us achieve that by 2040. That will involve deep and lasting collaboration with our vendors and distributor partners, and we have a dedicated team working directly across our supply chain to innovate, not just for Softcat, but to hopefully move industry practice in the right direction as well. And this collaboration plays into our next target, which is based upon supporting our customers in their journey towards net zero by ensuring that we can bring them the very best advice and support on the low-carbon innovations that they can deploy within their own IT infrastructure. This includes assessment services using our own in-house platform in [ exocircular ] economy services and products manufactured with sustainable materials. And finally, we're committed to implementing all new and emerging regulations in the space, including the target that we have for full compliance with the requirements of TCFD within the current financial year. I'll now hand you back to Graeme Watt, who will talk a bit more about our efforts to become an inclusive organization, and then we'll wrap up and take questions. Graeme, back to you.

Thanks, Graham. And if we could move to Slide 16, please. Inclusion at Softcat is embraced and led by everyone and embedded in everything we do. Last year, we added Community as a fifth company value to represent the following sentiment, which is we believe in the power of people encouraging collaboration to provide support and positively contribute to our internal and external communities, which was also our word of the year, and our word of the year is proudly displayed on the front of this presentation and on our annual report and is an anchor point for behavior or a behavior or an emotion we want to promote and encourage throughout the year and is a theme that we can all support and relate to. Our focus on inclusion has led to a steady increase in our gender composition, where women now make up 34% of the workforce compared to 29% 5 years ago. And we've reinforced this progress with a number of recent appointments, which we think will help us accelerate things further. We're making steady progress and remain committed to further diversifying our workforce particularly in our leadership teams and not just around gender. I mentioned Community already, and we have 7 of what we call Community network groups supported by over 1,000 employees covering a number of areas, including ethnic and cultural diversity, empowering disability and neurodiversity, pride, supporting women in business, ex-armed forces, a faith group and a family network group, too. And our allyship program, awareness program is still running after its creation 3 years ago. And in parallel with all of that, we were delighted to hold our charity ball again this year, where we raised over GBP 550,000 for a number of charities, including our 2 lead charities, Young Lives vs Cancer and [indiscernible]. More recently, the team and the company have contributed to the earthquake disaster victims in Syria and Turkey. And just as a reminder, we're also a founding an active member of TC4RE, which is an industry group working to achieve racial equality inside and outside of the business environment. We're delighted -- as you can see on the slides, we were delighted to have received a large number of awards and accolades from Glassdoor, from Great Places To Work and CRM for all the work we do around inclusion and charities. And at the end of the day, these awards are the ones that please us most. If we could move now to closing remarks and then skip on to Slide 18, please, with our summary comments. Our market is growing, and our customers continue to prioritize spend on IT infrastructure, with a market-leading VAR in the U.K. with an average of 25% share of wallet in our customer base and 20% of the addressable market. So we have a wonderful opportunity ahead of us to take share and maintain our strong growth trajectory. We've again delivered broad-based growth in the period, and we're able to report further positive progression on our metrics of customer GP, which grew by 17.4% to GBP 35,000 per customer, and our customer base increased by 3.3% to 10,000. We were amply recognized by our vendors in the industry for our achievements in the most recent period. Too many to mention here. And it's increasingly obvious that there's a strong positive impact on customer relationships when we collaborate on things outside of IT infrastructure such as staff development, apprentice programs, charitable work, inclusion, recognition and sustainability initiatives to mention just a few. And I think we can put the drivers of our success. I think we can put down to a number of key areas. We have a very active and distinctive culture that drives our behavior with 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. We have a straightforward strategy where our focus is on keeping things simple and executing to commitment to give the customer the best experience possible. And we have really valuable and strong relationships with a large number of customers and gain deep insights into the solutions that they need. This is very important to us and to our vendors. We have a great range of technologies and services to offer existing and new customers with the skills and the expertise to back it up. We are customer and people led, and we're always investing as much as we can afford today to deliver tomorrow's growth. And last but not least, 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. So if we can move finally now, please, on to the last slide, Slide 19. I'm sure many of you will have already seen our outlook this morning, but let me repeat it to you. Operating profit in the first 6 months of the financial year is ahead of the Board's initial expectations. And while there's still a lot to do in the second half, and the economic environment remains uncertain, due to the outperformance in the first half, the Board expects that the outturn for the full year will be slightly ahead of previous estimates. In closing, we've delivered another half with strong organic revenue and income growth. We've gained share. We've declared an interim dividend and executed well against our strategy. Softcat is on track as a business and continues to perform well and all that despite some really challenging prior year compares. We're confident in our strategy and the market opportunities that are available to us and are excited about the future whilst taking nothing for granted. It's almost exactly 5 years that I've been part of the team at Softcat and it's been an amazingly positive and fulfilling experience. I'd like to thank all of those who partnered with Softcat in various ways, but especially those that work for Softcat. You are a remarkable team. I love how we work together, and thank you for delivering another strong set of results, very well done and a massive thanks to you all. And that's it for our prepared remarks this morning. This results roadshow will be my last. And Graham and I look forward to talking to many of you in more detail in the coming days. But for now, I'll hand back to Nadia, our operator for any Q&A. Thank you.

[Operator Instructions]

Sorry, we'll just wait a moment while we can get Nadia.

And the first question comes from the line of Chandramouli Sriraman from Stifel.

Can you hear my question? Can you hear me?

Chandra, please stand by. Thank you. Dear speakers, can you hear us?

I can hear you, if it helps.

Chandra, thank you for confirming. We're just checking the line for our speakers. Thank you, so much for standing by.

Nadia, are you able to hear us?

Yes, I can hear you. Can you hear me?

We can. So if you could ask -- I believe, Stifel was the first to ask a question, but I'm afraid we couldn't hear it. So if you could ask Chan to ask it again, we'll take it on.

Perfect. Chandramouli Sriraman, please ask your question.

Yes. Great. Perfect. Congrats on a good first half. So just a couple of questions from my side. So we're hearing a lot of news on the macro slowdown, of course, but your services saw some acceleration. Just wondering if there were any pockets of particular strength. And also, are you seeing some signs of slowdown in specific segments that we should be aware of? That's my first question. And then in terms of M&A, obviously, you highlighted that you've not made any M&A in the last many, many years. So is there any sweet spot in terms of the size, EV or an IRR that you're looking for with respect to M&A?

Thanks, Chandra. It's Graham Charlton here. I'll take the services or the macro question and then Graeme will respond on the M&A question. So, yes, services performed well as did software. In fact, actually, if you adjust the effects of that large customer and the hardware deal year-on-year, we saw strong double-digit growth kind of from each customer sector and from each area of technology. So as always, we don't see any particular hotspots or particular weak spots. We definitely get period-on-period different customers doing different projects, and that plays into the trend. But it tends to be customer-specific rather than something that we see consistently across all different customers. So security, hybrid working, hybrid cloud, they continue to be topics that are driving growth. But equally, we're seeing strong growth in on-premise data center, end-user compute work as well. Services in the period. Yes, also strong, strong on the internal front, strong demand for our security services and from a low base, the cloud management services that we're building too. But no, no one particular area driving it, and we're certainly not seeing any areas of concern in the portfolio either. Graeme, on the M&A side?

Yes, thank you. I think in response to your question around M&A, I mean, as we've kind of stressed, it's an organic first strategy that we're pursuing, but I do think that we have a responsibility to understand better than we have historically, what's out there from an M&A perspective. We've talked about the options being in our interim statements about possibly a new market or adding some emerging capabilities, niche capability we don't have probably on the services side. But I would say in terms of kind of key metrics, IRR and other key metrics around what we'd expect from any potential M&A that would only really come out at the time that we found something. And as we said before, that's something would have to be very compelling from a commercial point of view and have a strong cultural fit. So I think we'd only get into that type -- level of thinking as and when we perhaps came across a target that match those criteria.

Great. And maybe a quick follow-up. The headcount increase was very strong. I'm just wondering, is there some plan to reduce the pace of hiring for the second half. And also, we see a lot of news from other players going through some cost optimization efforts, do you see any need for that given the level of growth you're seeing?

I think our headcount investment reflect both the current demand that we're experiencing and obviously building capabilities for future growth. I agree that it's quite steamy but it will naturally reduce over the year. I think there's 2 things to take into mine. One is our first half of the year recruitment is normally a lot heavier than the second half just because of the way graduates and the apprentices come on to the market. And then secondly, this time a year ago, the market was completely different. We were struggling to recruit. So our recruitment capabilities in the first half of last year were down on where we wanted them to be. So if you take that sort of year-over-year factor, it does look like the headcount is sort of top end of the range. But I would expect that 21% absolute increase in headcount that we've reported for the first half, that might be looking more like 15% by the end of the year -- 15%, 16%, something like that, by the end of the year.

[Operator Instructions] And the next question comes from the line of Kathinka de Kuyper from UBS.

Congrats on the good start of the year. A couple for me, please. First of all, can you comment on the visibility that you have into the second half? Secondly, on the pricing, how much of the tailwind have the price increases been? And what are your expectations for the full year? And have you seen customers starting to push back on the price increases? And then finally, on your costs, what kind of levers do you have to control your costs given that you've had quite a significant OpEx increase in the first half? How are you managing that in the second half?

So we've got visibility, pricing and costs as far as if I take the visibility, I mean, we don't have, at any point in time, huge visibility of what's going on. I think the fact that we've managed to grow at the rates we have, both absolute and underlying, is a positive in the face of lots of question marks people have about the macroeconomics. I think 2 things have kind of helps us in a sense. One is the fact that we're not consumer-orientated business. And so I think consumer business has been hit harder than business to business. And secondly, a lot of the growth or a decent proportion of our growth in that period has been due to us taking share. So there's just a couple of things to note there. In terms of the visibility for H2, Q3 and Q4 are both bigger month quarter, should I say, than Q1 and Q2. So we've got a lot to get done. And in any particular moment in time, we've probably only booked around 1 month of gross profit book but not bill. So the rest of the business that we will report on for the second half at the close of the year will be business that we both generated booked and billed during the period. So a lot to get done visits -- so not easy to give visibility, but happy that we've got a good model, a good strategy and good execution in place, and we can continue the success in H1.

It's Graham Charlton. So on the pricing side, pricing changes in our industry, what often happen around currency fluctuations. So we definitely saw some of that in the first half when Sterling went through its weak dip and vendors respond to that. Now customers in our market understand that our -- we don't have an ability to soak up those price changes. So their acceptance of them being passed through is absolute and pretty immediate as well. You always get deals in flight at the time that might have been quoted, particularly around currency movements where there's some horse trading. But generally speaking, therefore, the price increases have a mildly net beneficial effect to us if we can hold stable margins off that higher cost price, impossible to quantify because each deal gets handled in different ways. So what kind of tailwind was it for the first half, I would say, there probably was some, but it was fairly immaterial. Into the second half, currency is more stable. So price rises probably be less prevalent in the second half, but hard to say. It's not something that distracts us or it's something to deal with. It's a tactical issue, but it doesn't really play into the strength or give us a challenge on the overall year-end results. On the cost side, 35% of our cost base roughly is commissions, which obviously are flexible with income. So that's a natural swing factor for us when trading is strong or perhaps more challenged. We are planning to continue with the recruitment drive that we mentioned, although also in the previous answer, you saw that full year headcount growth will moderate a bit in the second half just because we're running against strong comparatives. So cost growth will definitely slow in the second half because we don't have the year-on-year impact of return of the pre-pandemic costs as well. So cost growth in the second half will be a lot slower than the first half. And we do have that natural variable factor of commissions within it as well. But make no mistake about it, our intention is to keep hiring and building the scale of the team for the very long-term opportunity that we see as well.

[Operator Instructions] And the next question comes from the line of Andrew Ripper from Liberum.

Well done on the numbers. This is Andrew Ripper from Liberum. A couple for me. First one, I wonder if you could talk a bit about cash flow, Graham. It's been a bit sort of up and down the last 18 months. Working capital inflow in the first half of this year, which is unusual. Can you sort of give us a sense of what you think the sort of steady state working capital will be going forward relative to GII and maybe make some comments on sort of where you expect that the values to settle?

Yes. Thanks, Andrew. I mean our cash flow can be volatile at reporting period just because of the snapshot nature of taking the balance sheet, which obviously the cash flow pops out of. So we saw at the end of last year, we mentioned some challenges in the new finance system that given us in terms of receivables and process around receivables. So we saw an aging of receivables at last year-end. We've made good progress against that. We've got more work to do against it in the second half as well. Particularly in the first half, we saw a shift in mix towards enterprise business and software as well, and we get longer payment terms with some of our largest software suppliers and we afford longer payment terms to some of our larger enterprise customers as well. So there's an inflation in the payables and receivables balance as a result of that mix shift in the first half this year. But we continue to target cash generation on a structural basis that's in the range of 85% to 95% of the operating profits after CapEx. If you look at the proportion of working capital to GII over a period of time, it suggests that we should be able to continue in that range. The more the business moves towards enterprise that might be at the lower end of the range because as I say, those enterprise customers get 60-day terms more than our mid-market customers do who are more standard on 30-day terms. So there's a few moving parts, but underlying cash generation is strong, and we expect it to continue to be. So we're not seeing any major changes in payment habits by customers against those terms. So we're in a pretty stable situation, I would say.

Yes. And just the beginning of the comment that you referenced the finance system, obviously, there's been a blowout on receivables last year. Have you got more to recover that in the second half of this year on the receivables?

Yes. More work to do there. So some of the larger, particularly public sector customers that we're working with on larger complex projects, getting invoices and POs to match up exactly working through a backlog created by a new finance system there. There's still work ongoing on that. But we've made good progress in the first half, but more to do in the second half.

And then just a follow-up just quickly on GII, you got the disclosure by sort of customer type and SMB was down sort of year-on-year, I think, by about sort of GBP 60-odd million on GII. Can you just talk to that? Did that relate to the IT hardware contract? Or was there something else going on there?

No. So yes, the very large customer we had in the prior period is in the mid-market as we consider that. So If you exclude that impact, it was 27%, I think, period-on-period without that impact growth.

Yes. So in terms of sort of SMB versus enterprise, what you're seeing? Obviously, you've got a bit of a shift to enterprise, but the main impact you had half-on-half was that hardware dropping out on the SMB side. Yes?

Correct. Yes, if underlying -- so we're moving to that underlying enterprise and SMB both growing very strongly at over 25% in gross invoiced income, yes.

[Operator Instructions] And the next question comes from the line of Charles Brennan from Jefferies.

Great. I'm not going to get many chances to ask Graham some finance questions. So I'll try one today. You spoke about increasing your finance capabilities for customers. Can you give us some details on that? Is that part of the sale process with customers and the pricing of that visible at the point of sale? Or is that something that you employ post the sale to manage your working capital, and then is there any receivable factoring that goes on as part of that, that influences your cash flow?

Thanks, Charlie. Yes. It's -- so it's very much presales work. So it display the options to customer if they want to find and it can be straightforward financing. It's always by a third party. So it's not via us. So it's usually via vendor financing houses, particularly Dell and HP and the likes and tied to their own products as well. So making the options and the cost of that visible to the customer upfront. Sometimes we do it through a managed service contract as well. So for example, we're doing managed print or managed infrastructure, then the payment for the hardware can be spread over time. And again, that would be done by a third party. So it's always presales and it's always entirely visible to the customer. What we don't do is sort of factor debt after the sale. So we get paid out upfront in the cases where we're financing, and we might act as a collection agent. But in the event that the customer hits a default, then we have no exposure to that. The vendor finance house would have to step in directly for the recoverable there. So we're able to recognize upfront, receive the cash upfront. So it's not denting our cash flow and reflects the underlying nature of the transaction. Does that give you the clarity you're looking for?

Yes, yes, that's perfect. And then just as a separate question, you've been talking about doing some IT platform upgrades. We've obviously seen some minor disruption as you move towards NetSuite, but can you just talk about some of the other programs you've got ongoing at the moment? And is there any risk of disruption with those programs, either internally or in terms of customer experience with some of the other system upgrades?

No, we don't think so is the short answer. We are working on reimplementing a service management platform that we use internally and on a customer-facing basis as well. The order processing systems that we use is something that we'll look at in the next couple of years as well. The NetSuite project that we implemented was done very carefully over a long period of time with a dedicated team, and we'll take exactly the same approach to any other system changes that we make as well. So we're very, very careful and put the right cost and the right team in place around those sorts of sensitive projects. So the finance system implementation, although it created a few small issues for us on the receivables side of things, was a very, very successful project and gives us a platform now not just for scaling the way the system -- the business is administrated, but gives us a lot of good data capabilities that we can use on customer-facing initiatives in the future as well. So you're right. I mean those system projects come -- need to come with a degree of caution, but we're taking a premium grade approach to implementation and management of that, I would say.

[Operator Instructions] And the last question comes from the line of Damindu Jayaweera from Peel Hunt.

Thank you, guys, for proving good companies can grow by gaining market share even when there is so much macro uncertainty. I got 3 questions. I'll go one at a time. It was nice to see the customer number growth improve. I know it's probably not going to go to 4, 5, 6. But that improvement, is that post-pandemic effect? Or have you done something to improve the retention or in fact, changing the -- changing transactional customers into kind of more solid relationships?

It's Graham here. And thanks for your question. I think it's both actually. I think what we've been doing or what we found since the pandemic, the ability to see customers has obviously been enhanced. And I think on top of that, the customers desire to kind of take on or at least think about taking on a new partner in the IT infrastructure space has been enhanced. I think during the pandemic, people were behaving very cautiously and kind of hunkering down with existing partnerships and now, the possibility of looking at other partners and finding out what they can deliver their existing partnerships couldn't -- has opened up again. So I think that's been an important part. I think on the other side, we've been working really, really hard, and over the last, I'd say, 2, 3 years, we had a sales development program that we put in place for our new starts in public sector, expanded that to our corporate team. And that was really just totally designed to make those first-time career, new starts, graduates and apprentices get them spun up to speed as quickly as possible. And at the same time, to your point, reduce attrition. We don't mind attrition in that space because that's part of the selection process. But if we could do more to help people be successful quicker, then that's what we've been focusing on. So I think the STP program and the lower attrition rates associated with it. You saw in one of the charts that Graham went through, we've got a growing sales tenure in place now. And I think that's all helping us acquire new customers. So we don't think the acquisition of new customers going forward -- look going forward will ever be a huge number. But I think if it stays at around its current rates or maybe even nudges up to 4% to 5%, that's probably where we'd like to see it land in the coming years.

Very clear. So the second question I wanted to ask was about this thing that industry press has been talking about for the last kind of 12, 18 months where some of these Microsoft billing types and services on offer have become extremely complex, which probably plays to your advantage because you obviously there to reduce that complexity and perhaps plays to the advantage of the larger VARs. And I just wanted to understand whether that statement is correct, i.e. if an advantage for you to get close to the customers. And secondly, related to that, are there any other vendors who are making such shifts in the same way, Microsoft has done with the NCE as an example?

Well, Microsoft -- some of the complexity that Microsoft -- well, I wouldn't argue necessarily that they've become more complex. What they've done is move from a CSP platform to an NCE platform. A little bit like Graham was saying about our own platforms, they've taken the opportunity to upgrade and offer more functionality. So I think they've always been complex their programs. And as you say, that's given us an ability to help our customers manage through what's the -- how can they be compliant and what's the best value for money in terms of the configuration of those licenses, what's best for them. But I think it is -- within NCE, there's now in the short-term-price advantages and rebate advantages for us for switching customers from CSP to NCE. And I think the issue is that we don't always understand the full implications of what's on NCE versus CSP. So whilst they can renew on CSP, it's actually better -- in most cases, it's better for them to move to NCE because there's a price advantage. And on top of all that, there's going to be 9% price rise from Microsoft on the first of April across all platforms, whether that's CSP or NCE. So I think it's really -- it's Microsoft upgrading their platform so that they can produce a better customer experience going forward. And it's the rest of us having to deal with the changes that are involved around that. But Microsoft changing programs frequently, and we're always having to be quite nimble and agile to work out what that means and where to direct our own staff and how we help our customers. And I don't think -- Graham, I don't know if you can think of any. I don't think there's anybody that's been changing their programs and platforms to the same extent as Microsoft that I'm aware of.

No. I mean, obviously, a big licensing mode shift from Microsoft there. I think consumptive billing generally is more complex. So the move towards Software as a Service and certainly public cloud, so Azure, but also AWS as well. They're more complicated for customers to understand and the simplicity that they're sold under and the reality of that there's probably a bit of jarring in the market. And you're right, I mean, it does give us another way to add value to the customer because concentrating the skills to understand those licensing schemes and to understand consumptive billing is something that we can and can do and certainly do that across more vendors in a way that the smaller VARs can't do. So I think there is a small net advantage there. It's like anything that's challenging to respond to operationally is an opportunity for us because we can do a better job of it than some of the other players, particularly with this rate of investment and the ability we've got to build the teams to support all of that. So yes, I think it is a small advantage for us, one that we're determined to make the most of. And it probably does bleed into other SaaS offerings, but Microsoft is particular -- particularly complex at the moment.

I think they've made a platform change, haven't they, which has added the complexity for Microsoft. So I think, I mean, to the other -- the kind of the consumptive billing point that Graham is making is right, we see that much more prevalent. We've got GreenLake with HPE and how they operate around GreenLake, we've got APEX with Dell. And so there's a number of models that, frankly, we're all getting used to, and we will need a bit of help to make those transitions.

Change is always good for you guys. And my last question. Yes. My last question is on M&A, kind of coming off the last question. I just wanted to clarify something. I think you are very clear and you are obviously -- you don't want to say too much about the parameters, but you're clear about new capabilities in U.K. and about new markets. If you look in the market in the U.K. today, however, you see people like SCC making acquisitions to just scale the U.K. sales force as an example. I just want to confirm that that's not something you guys are looking to do in the U.K. Or you don't want to rule that out?

Nadia, we've lost Damindu. Can you still hear us?

I can hear you. Can you hear me? Can you hear me, guys? If it is not, don't worry. Hi, Nadia, I think I can just e-mail the last question to them. That's all right.

Okay, perfect. Thank you so much, Damindu.

Damindu, we hope you might ask your third question again, and we'll give you a shorter answer again for you.

Can you guys hear me now?

Yes, we can. Sorry. Yes.

The last question was just a clarification on the M&A strategy because you were very clear about new capabilities in the U.K. or new markets elsewhere. And obviously, you don't want to say too much in detail, but I just wanted to clarify something because if you look at some of the other -- the top 5 vendors like SEC as an example, they've been doing acquisitions to scale what feels like the sales force in the U.K. I just wanted to understand that that's not what you are talking about when you talk about new capabilities in the U.K., it's not scaling for scaling sake?

That's absolutely right. We've happily explained that, that's not -- I mean we think opportunity and track record for scaling the business organically is proven, and that's going to continue to what we do. So we wouldn't get it. That's why we talk about in our core markets, perhaps considering niche capabilities. So maybe some skills and services that we don't provide either at all today or we provide them through third parties today. All growing our addressable market by being in another market, but probably in all likelihood following customer demand. What we're not interested in doing is building scale, buying customers, buying salespeople, buying stuff that we can -- that's already within our reach. That's not part of our thought process at all.

Speakers, there are no further questions at this time. And I would like to hand over to yourself for any closing remarks.

Yes. Just very briefly. Thanks, Nadia. And I'd like to start off by apologizing for the glitches at the start and the end of this call. It's been unfortunate. So hopefully, you might have been able to bear with us, apologies again. But thanks for attending today's presentation and for your questions. The roadshow now begins. We look forward, as I said before, to seeing many of you in the coming days. And it just remains for me or for us to wish you a jolly good week. Thank you very much indeed.

That does conclude today's conference. Thank you for your participation. You may now all disconnect.