Softcat plc (SCT) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Softcat Half Year Results Call. [Operator Instructions] I would now like to turn this conference over to our host, Graham Charlton, CEO. Please go ahead.

Thank you very much. Good morning, everybody. And thank you for joining Katy and I for Softcat's first half 2024 update. And we are delighted to be sharing another strong set of results with you, which puts us in a slightly better position than we expected to be in at this point of the year. You'll hear about how we continue to make progress and just how excited we are about the future of our industry. And we'll also talk about how confident we are that Softcat is in the very, very best position to capitalize on the huge opportunity ahead across all areas of IT, as we see yet another revolution, this time kicked off by AI starting in technology and its underpinning infrastructure. But first, if we can turn to the next slide, please, we'll start with our usual reminder of who we are and how we got here. We are the largest provider in the U.K. in our space, now achieving that from a standing start 31 years ago, with an entirely organic track record, and no debt in the company's history. Today, we are just under 2,500 employees spread across 11 locations globally. We only service customers from the U.K. and Ireland, but we work with them in their overseas operations too. And we've now established a presence in the U.S., on Mainland Europe, as well as in the Far East and Australia. We work with all of the very largest technology vendors in the world, to each of whom we are the largest or one of the largest or one of their largest U.K. partners. And we're also actively sought out by many of the up and coming players from the world of cybersecurity, data, AI, cloud computing and so on, because we're a prized route into the lucrative and growing U.K. market for technology. And as a result of all of that, we have our finger on the pulse of the very latest and contemporary IT solutions and trends. And to our customers, we're able to offer the very best support, advice, and solutions available in the market. Nobody else in the U.K. has the depth of expertise that we do across so many areas of tech, And nobody else has the trust of such a large pool of customers of all shapes and sizes from the mid-market to enterprise and from the corporate world into the heart of the public sector. And this gives us unrivaled experience across the different sectors and solution areas in an age when that experience has never been more valuable to customers, who are desperate to not get left behind. And the breadth of our offering means that today we're very hard to put a label to. We'll always be happy to be called a bar or a reseller. But the reality today is that, we're also a consultancy, an implementation partner, and a multifaceted MSP as well. And to illustrate that point about the breadth and depth of our business and expertise, if we can turn the slide again, please, you can see the latest view of some of the segmentations in our business. And on the left here, you can see that, while we started in the mid-market, today we're very well balanced with just over half of our gross invoiced income coming from public sector and enterprise combined. And in the middle, despite the scale of our technology retail business, 17% of our income comes from services. And in total that was a more than GBP 400 million service organization during the last financial year. And on the right, we can see that we generate significant income from all areas of technology, from the data center and cloud, through networking, security and end-user compute. And it's this diversity, combined with the scale and the ongoing growth of our business, that's a theme we'll come back to when looking ahead to the opportunity in front of us. But first, before we do that, we'll review the most recent period and the progress that we've been able to make during the last 6 months. So, if we can turn the slide again, please, I can headline some of the summary results from the first half of the financial year, and I'll fly through these briefly as Katy will come back to them in more detail later. But you can see that we were able, despite very strong comparative figures, to grow gross profit by 11% in the first half. And that's in the context of a prior period when we grew GP by 18% on a reported basis, but by 27% if we exclude the impact of a single large customer. Operating profit was up by nearly 6%, and that was ahead of our expectations, reflecting both the strength of the gross profit performance and also costs coming in slightly under plan too. We were able to make good progress as well on our customer KPIs, once again expanding the customer base as well as significantly increasing gross profit per customer. And despite the weakness of the PC and devices market, gross invoiced income expanded too, up by 4%. Revenue is not a meaningful metric in our industry now, given changes in accounting standards, but Katy will explain how that's netted down and how changes in the income and hardware mix impact that later. Cash conversion was once again very strong too, as expected, up just above 100%. So those are some of the financial highlights. And if we turn the slide again now, please, I can show you some of the business highlights underpinning that performance and the progress we've made against our strategy. So as we said, we've been able to generate sustained growth against tough compares, and we're seeing that be driven by broad-based demand once again, coming from a wide range of technology areas and well-spread across the customer segments. Generative AI and Microsoft Copilot have been big topics of conversation with customers. Everyone's really keen to understand what it can do for their operations and how it might transform their sectors. And therefore, even where customers are not trialing the technology directly yet, they are considering their readiness to do so. And this, of course, plays directly into our unique scale and breadth. Whatever the next step any particular customer needs to take on AI, we are very, very well placed to support them. Security also remains a hot topic, and we've seen more and more opportunities for us as well around the multinational capabilities we've been building, and we continue to engage with larger and more complex customers. The client device market was challenging again during the first half, but we've relatively outperformed in that space too, and expect a corner to be turned here as the rest of this calendar year progresses. It's clear that, there are a very large number of aging laptops in circulation now, and with Copilot and the Windows update cycle both adding stimulus, we think the volumes will start to pick up here. On the customer front, as I mentioned, we expanded both the base and penetration again. The competitive landscape in our industry remains highly competitive and very fragmented, but that fragmentation doesn't serve customers' interests well. And we continue to see IT managers and CIOs needing partners who can work with them and address complex and overlapping problems, able to help them think through their options and create a road map providing integrated solutions over time. And turning on to the next slide, please, we can look at how we continue to invest in our people for future growth. Our culture remains our most prized asset. And so we're delighted to be recently ranked #5 in the latest edition of the Great Places to Work list. And that's up from 10th in the previous release. At the start of this financial year, we held our biggest and most successful annual keep-off event ever. And during November and December, we had a number of groups away in South Africa. And so employee feedback is as strong as ever, and head count is up 14.6%, bringing the team to nearly 2,500 overall. That's a slightly slower rate of growth than last year in head count and half 2 will likely be a bit slower again. This doesn't reflect any less optimism that we have in our future. We've very successfully built the team over the last few years adding and retaining talent well. And so our focus over the next 18 months or so will be on adding to that at a steady rate while generating returns from those investments that we've already made. And as well as investing in people, we've got ambitious programs running across our operations aimed at modernizing our use of data and digital platforms to improve employee and customer experiences, as well as making us a more efficient outfit as well. Many of you will remember we talked about the successful finance system implementation that was completed during 2022. And as part of that, we also updated our internal database architecture and application integration layers. And we're now starting to capitalize on all of that by enriching our own data with external insights to feed clever analytics and implement automation and AI over time as well. The first iterations of some of those efforts will be trialed in the second half of the financial year. And we're creating a road map of developments over the coming periods that will drive our own digital transformation. And this will also encompass the interlinking of our systems with new distribution routes emerging in our industry, which includes marketplaces and other vendor as-a-service offerings. And if we turn the page again, please, you can see those developments that I've mentioned set within the framework of our broader strategy, alongside some other recent milestones and initiatives that I haven't mentioned yet as well. For example, you see that we've been awarded both Retailer of the Year and the Sustainability Champion of the Year by the main industry commentator CRN and customer NPS is up to 62 from 55 as well. But not resting on our laurels, we're also working to develop new strategies to target and win new customers across the corporate and the public sector. And in our efforts to ensure we realize the full potential from that existing customer base and remain relevant into the future, we're taking a fresh look at our technology offering, making sure it's presented to customers in a way that's intuitive to them and easy to engage with. And importantly, we'll ensure that it evolves in the direction that AI and other trends are moving the market. And all of this sits on the foundations of our approach to ESG, which both Katy and I will expand upon later. And before we do that, however, I'll spend a little time on AI, and how we're beginning to see that opportunity unfold and what we're doing to address it. So if we can turn the slide again, please. We try to lay that out here, starting with a view actually from Satya Nadella at Microsoft. And Microsoft are, of course, leading the way with some of the potential applications of generative AI, specifically with Copilot. But you can see how Nadella expects these applications to require huge investment in the foundational infrastructure in order to operate, which is exactly what we've said before from the data center, whether that's in the cloud or on-premises all the way to the edge, via the network. Core architecture has to evolve to power this revolution in productivity, which is great news for Softcat because that is exactly our business in a nutshell. And Softcat with the depth and breadth of our capability across hardware as well as software and extending into solutions, design, implementation services as well as managed and support services. Softcat is uniquely placed to capitalize on all of that. Right now, this means helping customers understand the possibilities for their operations and assess their readiness for implementation. And then at different times and in different ways, based on their unique circumstances, we can help customers through the implementation of the plans that we can co-create with them. But right now, we are just in the very smallest foothills of this opportunity. This is the beginning of many years of innovation and evolution and one that will help customers, the one that we will help customers with, but also one that we will engage with, as I mentioned, in our own operating model. I talked a minute ago about the modern data and digital architecture we've been implementing. And with hindsight, we couldn't really have timed this any better because we now have internally an excellent foundation to work with. And we look to exploit this by deploying Copilot and other more bespoke tools within our own processes. And you can see some of the ideas that we'll be exploring on the bottom of the slide there. But if we turn over the slide again, we've tried to illustrate in brief just why this is such an interesting opportunity and why we think it will be such a long-term trend. So we try to illustrate here how generative AI is just one sub-branch -- of a sub-branch of the huge multi-faceted discipline that is artificial intelligence. As a concept, AI has been around for decades now, but some of its most powerful applications are just beginning to mature into workable and deployable solutions. Other branches of AI are already at work in many applications, including being embedded within underlying IT infrastructure, for example, being used in security and network management applications and also in more bespoke and highly specialized proprietary systems, for example, in weather forecasting or in the medical industry for imaging and so on. And so the usage of all types of AI is likely to grow exponentially in the years to come, transforming the power and efficiency of many existing computer models. And this is the future that Satya Nadella and many others see for the IT applications and infrastructure industries. And this is the future that, we are arranging our resources and investments around as the #1 partner in the U.K. market for the manufacturers of those technologies, because the key message here really is that generative AI is just the tip of the iceberg in terms of the opportunity it presents to providers like us. The breadth of the offering that we at Softcat have stretching across all areas of technology from software to hardware and from end user compute into the data center, across the network, the security estate and the services around all of that, AI will touch all of it and we are able to help customers with all of it, too. So if we can now turn the slide again, please, and move from that sustainable growth opportunity of AI to our approach to sustainability more generally, where I'll cover an overview of our ESG strategy and a few comments on inclusion, and then I'll hand to Katy to give us more detail on our progress in other areas. So the Softcat culture has always been very firmly rooted in doing the right thing for our people and our customers and partners and trying to play a really positive role in the communities in which we operate. The long-term sustainability of our models is an increasingly joined up effort that touches on each strand of environmental social governance and our sustainability vision shapes both the environmental and social strategies and is underpinned by a very clear and strong focus on effective and responsible governance. And looking at the middle column and our efforts around our people and communities, we are very, very proud of the many vibrant internal network groups at Softcat, for example, our green teams, our Softcat women in business group. We have a neuro diversity group and many, many more. And these groups help promote the core values of Softcat and ensure that different perspectives on how we can keep improving and evolving our culture are heard. And as a leadership team, many of us are directly involved within these groups to contribute and listen very hard to the feedback we're getting as well. We're really proud of the progress that we have made on diversity, 2023 SOILs achieved. The goal that we set of 35% gender diversity across the business a year ahead of target. So we've now raised the bar again there and are looking to be at 40% by 2030 at the latest. Our Board now has over 60% female representation, which puts us right at the very top of the FTSE 250 in that regard. And across the business, our ethnic diversity is slightly higher than the U.K. population as a whole. So I'll now pass you to Katy. We'll update more on some of the environmental parts of our strategy and progress and then move on to financial performance. Katy, over to you.

Thank you, Graham, and hello, everyone. Our environmental strategy addresses how we can act more sustainably as a business through our supply chain and how we can support our customers' own net zero journeys via our technology offering. We have been carbon neutral since 2021. We have 100% renewable energy in our offices and our car fleet since 2023. And we have an unchanged, ambitious goal to be net zero by 2040. This aspirational goal drives us to play a leading role in the net zero transition in our industry. And in November, we hosted our first sustainability forum for our partners. We're also pleased that the efforts of our teams have been recognized with 3 awards, CRM, Sustainability and Tech Awards earlier this year, plus awards from some of our largest vendors. Finally, and briefly, turning to the governance pillar. We continue our focus on underpinning all we do with effective and appropriate governance policies and procedures. We are committed to complying with all of our obligations and do so with openness and accountability. We've just recently appointed a data protection officer and have re-launched our management risk committee. If we can now please move on to Slide 12, I'll run through our financial results. I'm pleased to be able to present a really positive set of results for the first half of FY '24. Growth in invoiced income increased by 4% to just under GBP 1.3 billion. With strong growth in software and services up 11.9% and 13.3% respectively. Partially offset by hardware, which was down 17.6% due to a market driven decline in low margin client device sales and a reduction in low margin server and compute sales, which were linked to a handful of sizable transactions in the base period and materially impacted the corporate segment. Revenue declined by 8.8%, driven by the hardware decline. As software and services are largely reported net under IFRS 15, hardware has a much more significant impact on revenue than the other reported metrics. Growth profit, which is our primary measure of income, grew by 11% to GBP 196.5 million in the first half of FY '24. This is in line with the guidance we set for that FY '23 result, a double-digit growth across FY '24 and despite a tough comparator. With first half FY '23 base period gross profit growth of 17.9%. Great profit trends were, as expected, largely in line with the second half of FY '23. Growth was broad based across our customer segments of enterprise, mid-market and public sector, and our technology groups of data center and cloud, networking, security and workplace. With all of these segments growing gross profit, either high single digit or low double digit. Software and services gross profit also grew strongly, while hardware gross profit grew marginally despite the decrease in GII, with strong growth in margin rich data center infrastructure solutions offsetting the decline in low margin client device sales and a reduction in low margin server and compute sales. These positive mixed impacts within hardware also drove the increase in gross margin, which expanded by 98 basis points, thus the prior period. Cost grew by 13.9% year-on-year, driven by increased commission in line with the gross and gross profit, alongside the impacts of a 16.7% increase in average head count and an average cost per head increase of 2.9%. This continual investment in head count reflects our strategy to grow our staff base, ensuring we are well positioned to capitalize on great opportunities in the medium term. However, current growth is more in line with historical levels after significant catch-up investment in FY '23. As a result of this investment, our operating profit to gross profit margin decreased to 34%, which was slightly better than we had expected. These trends resulted in operating profit of GBP 66.7 billion, an increase of 5.8%, which was ahead of our expectations at the start of the year. And lastly, interest income in the period increased due to a higher interest rate and improved cash management, while the tax rate increased in line with the statutory rates change. If we can now move on to the next slide, please. This chart will be familiar to anyone who's been following Softcat. As you can see, the correlation between growth in gross profit and the cumulative experience of our account managers remains strong. We continue to invest in technical and support functions, which enable our account managers to operate more effectively and efficiently and increase our share of volume with customers. Despite some challenging market and macro conditions over recent years, we've continued to deliver consistent productivity gains. Moving on to the next slide. You can see how we continue to deliver against both aims of our strategy. Winning new customers with customer numbers up 1.3% compared to the same point a year ago and by selling more to existing customers. We've grossed profit for the customer up by 9.6% to nearly GBP 39,000. We estimate that our market share is circa 5% of our addressable market, with our average share of wallets around 20% to 25% and our customer base estimated to be around 20% of the total number of customers in the U.K. We thus have a significant runway for future growth through continuing to grow market share by increasing customer penetration and increasing our share of wallet with existing customers supported by a growing market. Our continual investment in our capabilities will put us in a very strong position to leverage the market trends that Graham has spoken about and thus we are very positive about the long-term opportunity ahead of us. Now, moving on to cash on the next slide. We ended the period with strong closing cash of GBP 112.5 million, a decrease of 7.2% in the period, which included the payment of final and special dividends totaling GBP 59.1 million. This equates to cash conversion of 101.1%, which is higher than our guided range of 85% to 95% because of strong phasing of receipts at the end of the period, which is in line with normal variability in our net working capital cycle. As a reminder, H1 FY '23 was impacted by an unwind of longer dead days following the implementation of our new finance system at the end of FY '22. Capital expenditure, whilst still relatively small, was out first this prior year, behind investments in new tools and platforms that pass our data and digital strategies. Whilst in line with P&L, cash tax increased behind a statutory increase, while interest income, which is included in other, improved year-on-year behind increased rates and improved cash management. Taking us to the next slide please. Moving on to our proposed interim ordinary dividends. Our capital allocation objectives have not changed. Our primary objective is to invest back into the business to optimize for the fantastic organic opportunity in front of us, followed by maintaining a progressive ordinary policy with any additional excess capital then either allocated to strategic investment or return to shareholding. Consistent with this, I'm pleased to announce an interim dividend of 8.5p per share, payable in May this year. This is in line with our ordinary dividend policy to pay between 40% and 50% of after-tax profits, with 1/3 paid as an interim dividend and the balance as a final, and equates to an increase of 6.3% from the prior period. This is ahead of the growth in profit after tax due to a split of the dividend payment in the base period. The dividend is payable to shareholders on the register at the close of 12 of April 2024 and the shares will trade ex-dividends from the 11th April. Now moving to the next slide, please. Finally, I'll cover the outlook for this full year. As a reminder, our gross profit comparator gets easier as we move into H2, with second half FY '23 gross profit growth of 11.1% compared to 17.9% in H1. In addition, our positive performance over the first 6 months of the financial year reinforces our expectation to deliver on our full-year guidance of double-digit gross profit and high single-digit operating profits. We continue to see significant and expanding opportunity in our markets and will maintain our investment approach to building the team. However, as Graham has mentioned, we will slow the rate of investment in H a little, in H2 and into FY '25, as we look to embed and drive results from the growth of the past 2 years. We will also continue our investments in systems, including our data and digital strategy. Cash guidance remains unchanged and is in line with our target cash conversion of between 85% and 95%. And on that note, I'll now hand back to Graham to conclude.

Thank you, Katy. And if we could turn on to the final summary slide, please, we'll wrap things up. And to conclude, performance in the first half has been very positive. We're very pleased to be slightly ahead of where we expected to be at this stage of the year, driven by strong GP growth and a well-managed approach to our investments for the future. Income drivers have again been broad-based with the range of our offering allow us to more than offset some of the weaker areas of the market currently with good growth from elsewhere. Our dialogue with customers is showing their appetite to invest in IT is unabated and we are working with them to plan their AI, security, device refreshes and other investments in the years ahead. We're seeing more and more opportunity to make our scale and breadth an increasing part of our competitive advantage as IT becomes more interlinked and more integrated than ever before. We're investing behind that opportunity with the team now approaching 2,500 and further steady investments planned for the future. How our people feel about Softcat and the company they work for is and always will be the beating heart of our success and feedback on that score is as strong as ever. And all of this reinforces our confidence in meeting those full year expectations as Katy has said, and we'll look forward to reporting back to you on that in the months ahead. And so that concludes the prepared remarks for this morning. We can turn the call over now to any questions the audience would like to ask us. Thank you very much.

[Operator Instructions] So our first question comes from the line of Tintin Stormont of Deutsche Numis.

3 for me. A bit greedy, but I'll have a go anyway. First for Graham, you talked about the evolution of your role and you mentioned consultancy. Can you give more color on these engagements in terms of kind of how long are these engagements? Are there capabilities you still want to build? Should we expect a change in the charging arrangement for these types of engagements? And then I'll rattle through the 3. For Katy, appreciate GP is really the key metric you guys track and measure the business on. And you guys obviously talked about broad-based growth there. But if we look at the GII, the growth has really come from public sector, more flat, slightly down in SME and corporate. Can you just talk to us through the dynamics of those 2 numbers? And then lastly, and I suspect this is a Graham one, if you look at the vendors, apart from Microsoft, who do you think are the early movers most prepared with a product set to monetize the AI opportunity?

Tintin, we'll take them in the order that you laid them out. So I'll start with the question around consultancy and the evolution of the role we're playing. I mean, this has been a gradual and kind of very long-term shift for us, really starting, I guess, many years ago when we began to move just out of being a Microsoft mid-market specialist and broadening across software and then moving into hardware and starting to wrap that and lead it with services as well. So we've progressively been investing in functions like design, different parts of our service operation, an organization that we call OCTO, which is Blue Sky Evangelists, the art of the possible thinkers that can work with the CIOs in our organization to really rethink how they do their IT, especially in the age of AI that we're heading into now. So much of that service that we provide, that consultancy service, we don't charge for. So a lot of us often say that our services business is much, much bigger than our financials make it look because a lot of the value that we create through that work that we do in the pre-sales, in the architecture, in the design and advisory stage, then manifests in the margin that we can make on selling the software and hardware for solutions that we can co-create with the customers as well. So our service business now, we have different towers to it, but it works all the way from that advisory and architecture function through to management and support via implementation. And that's an evolution that will continue for us. We'll continue to invest in all of those parts of that service business. And particularly, as I mentioned now, it plays really, really well into the breadth and depth of the capability that we have. Our account managers are in a very luxurious position of being able to say to our customers, look, what are you tackling right now? Where are you having problems in your IT infrastructure? Because customers are tackling things at different times in different ways and being able to fit our offering around their needs, led by some of the best technologists in the field and able to guide them through it at the right time. It's a really powerful part of our offering. And I see that part of our offering getting bigger and becoming more important into the future as well. And charging for that can happen in different ways. But our account managers have a lot of flexibility into how they work that service into the customers and how we charge for it. And that can be done in different, flexible manners. So hopefully that helps. I'll pass you to Katy to talk about GP and how we're seeing GII across different customer segments.

Tintin, so you're right in terms of GII growth. In the period, it all fell to public sector. And this is basically because the hardware decline impacted both corporate segments and had little impact on the public sector. So I talked about earlier the handful of large transactions of low margin server and compute sales. They were all in corporate in the beta period. That impacts the corporate growth rate. And the client devices decline that we talked about as well happened to manifest itself more in corporate in the half. Again, as you rightly say, we care much more about gross profit. And that's where we focus, where account managers focus on as well. And that grew either high single digit or low double digit across all of enterprise, SMB, and public sector. So we really did see that, that broad-based growth where we wanted to see it. Do you want to hand back to Graham for the last one?

Yes, so I think the question was which vendors do we see being well-positioned and think about the AI opportunity? And I'm not sure, there's any vendors I talk to these days who aren't thinking about that. And it does manifest in different places. So you rightly mentioned Microsoft with Copilot. That's a very obvious one. Microsoft's devices and all the other laptop manufacturers, so HP, Dell, Lenovo, are all thinking about their AI, intelligent laptops that will come to market and deploy neural processing units, NPUs rather than CPUs in devices. So they're all sensing that opportunity and thinking about the road map there. We've seen HPE recently announced the acquisition of Juniper and how they're thinking about how they incorporate Juniper's AI technology into their networking offering and AI technology being deployed in software, particularly security software. That's something that's been happening for a long time now as well, and I think we'll see that continue to be the case. So as I say, I think it's going to become pretty ubiquitous in its application, both within the infrastructure, firmware and software that we see, but certainly obviously in the applications that sit upon that as well with the likes of Microsoft. And I'm sure Adobe have things that they will want to do with AI as well. All of our big vendors are looking at it.

The next question comes from the line of James Zaremba of Barclays.

3 questions again, please. Firstly, regarding your various technology investments, please can you put that into context where they're important? Are these more nice-to-haves or might they be real differentiators? And if the latter, any examples of how would be great? Secondly, in terms of your comments on the customer benefits of scale and breadth and fragmentation not serving customers well, how does that vary between mid-market enterprise and public sector customers? And then lastly, on headcounts, just on attrition, particularly in the sales force, how does that compare this year versus the highs a couple of years ago and the more recent lows?

James, I'll try and tackle probably the first 2 and then maybe Katy can talk about attrition in the sales force and how we've been seeing that play out. So firstly, you asked about tech investments that we're making and are they nice-to-haves or are they real differentiators? It's quite nuanced answer. So on the one hand, I think we've always said that, we're selling other people's technologies and the same technologies as our competitors. And our differentiation comes from the manner in which we do that, the quality, the enthusiasm, the togetherness of the teams that we put together to work for customers on that. That really is the majority of how we differentiate. But increasingly, the breadth and depth of what we can offer and the fact that it is under one roof through one organic organization that deploys one set of systems, the way that customers can access that breadth and depth of expertise, I think, is a differentiator as well. So we're investing in cloud, public cloud design and management, but so are other people. We're also investing in security and assessment services, security managed services, but so are other people. We're investing in helping people use the Microsoft estate to its fullest extent and how they integrate Copilot and how they think about AI more generally and so are other people. But nobody else is doing all of that together under one roof across mid-market and enterprise and public sector to the extent that we are. And so it's that combination of all of those progressive investments in all of the emerging and exciting areas of technology happening by one team in one place with the ability to draw the experience of the single biggest customer base in the U.K. and apply that for our customers' benefits. That's where the fragmentation in our industry doesn't help. We are the standout consolidator organically of the industry and our customers benefit from that. There are significant network effects for our customers when they access that range of expertise and experience. And that's why I am so confident in the future of Softcat, because if and only if we can keep the culture special, make our people feel like the team that they are and working for customers on that behalf, our ability to bring that proposition to bear for them through the very best team in the market gives us a terrific advantage. So I'm very confident of that. But I don't think it's any one investment in any one technology that's our differentiator. It's the combination of all of that wrapped in our very special customer service. And I think, I've addressed your second point there about fragmentation to some extent. I think, if I'm honest, the fragmentation probably -- I think actually the mid-market and enterprise-grade customers need an integrated supplier equally. You'll find that different customers have different internal capabilities and in the enterprise space, they will have more and broader capabilities generally. But they still want to talk to 1 provider who can help them think about how their network interacts with their data center, interacts with their end-user compute environment, how the security threats around all of that can be handled, how they might apply AI in different ways. So I think the fragmentation maybe hurts enterprise customers slightly less but only slightly less and plays strongly through all of those spaces and certainly into the public sector. I think the fragmentation doesn't help them at all actually. They've got some of the biggest milestones to move through in the modernization of their IT and that breadth really, really helps us in that space. Hopefully that's helpful and Katy can maybe talk about attrition in the sales force.

Yes. Sure. So overall in FY '24 H1, attrition was running total company around 13%, which is actually a couple of percentage points better than the same period a year ago. And same trend in sales organization, probably fractionally better improvement in retention as well. Hopefully that answers your question.

The next question comes from the line of Joe George of JPMorgan.

I've got 3 questions as well. The first one would just be on head count growth. This is obviously expected to slow sequentially through H2, but can you just help us with how this dynamic will impact the absolute pound sterling amount of OpEx through H2? So just in the context of OpEx being up 14% in H1, could we just get your views on expectations through H2? That would be really useful. And then the second question would then just be on a sense of an exit rate of GP growth into H2, particularly given the comment that there were some signs of client device stabilization towards the end of the period. Is this just a result of the even comp? So are you seeing anything more fundamental with regard to customer send here? And then the third question would just be on AI, and particularly Microsoft Copilot. Where you're seeing customers dedicating investments here, is this incremental pounds being added to their IT budget, or is it a case of pounds being allocated from elsewhere within the budget? And if so, do you get a sense of where is losing out to this AI investment?

So, let me kick-off #1, then I'll hand over to Graham for 2 other questions. So in terms of head count growth, as we said, we expect to add fewer heads in H2, but in terms of that average head count, because of the way that heads faced into the base, I'd expect that wages and salaries growth rate is pretty equal in H1 versus H2. The other thing, as I'm sure you know, that commissions is quite a big part of our OpEx costs as well, and that we'd expect to move in line with gross profit, which is, we know, again, that the growth in gross profit would be higher in H2 than H1. So all-in-all, we'd expect the cost growth to probably increase slightly in H2 versus what we've seen in H1.

And on the exit growth, GP growth, and particularly how client devices might affect that, so we're all definitely lapping weaker comps now on the client device side, so growth or the declines in that particular line of income will definitely stabilize. Talking to the key vendors in that space and the distributors that we work with, because even with our scale, we've only got 5% market share, and so we're probably the best bellwether in the reseller space, but it's hard for us to say exactly what's happening more broadly with client device volumes. But the anecdotes are that demand is sequentially beginning to stabilize and pick up there. There's all sorts of predictions about how that will unfold as the year goes on, so what we've said is that we see it as something that will strengthen across this calendar year. So it could be in half 2, it could be some signs of that, but it's less than 10% of our gross income, so it's only one relatively small part of how we grow and make money more generally. AI, Copilot, very hard to answer your question in general terms because the reality is we see different customers engaging with it in very different ways, even in the same sector, so it depends upon how their business is growing, what budget's available, the state of their underlying database, architecture, application layers, and how they can fit it in. So we're seeing customers trial it in all sorts of different ways. For some of them it is incremental spending, so we've got some customers who have found extra budget to go all in with Copilot, very excited about what it can do, generating good results from it. We've got some people who are having to borrow from elsewhere. I couldn't honestly generalize about where they're pulling that money from. Again, that's customer-specific rather than something that I could generalize about. But all customers are interested in it and how they could deploy it. We're working very closely with Microsoft to develop those use cases, help them through the training and learning phases, and deploy it. But I think it will be a slow and steady growth rate behind that in terms of how it manifests in the number of licensees being deployed.

The next question comes from the line of Rahul Chopra of HSBC.

Yes, so my question is on AI readiness. You talked about AI readiness. Could you talk a bit more about how it differs in terms of big market versus enterprise versus public sector, in terms of what are the top priorities you have in mind in terms of the cyber hygiene versus hardware spend versus software? I just want to break it down by different end markets and how they're thinking about it, given the different hygiene in terms of infrastructure in place. The second question in terms of your thoughts about, obviously, your cross-public customer has grown faster than customer growth. I want to understand your thoughts in terms of land and expand strategy, which is expand at this stage. Just how you're thinking about it going forward.

So, AI readiness. Again, I'd love to be able to generalize, but it's just not what we're seeing, that mid-market or enterprise or public sector is taking the lead. It's different for different customers across all of those segments. All of the customers in those different segments are interested in it, working with it, having good conversations across it. It depends upon their operations, the nature of their business, the nature of their budgets, where they are with data, and data security and indexing of that data for use with something like Copilot. So I would say the interest is high everywhere and not dominated by 1 customer segment. I think it therefore, obviously, Copilot feeds into our software layer. We are seeing some organizations, and actually we've been seeing this for years now, some organizations building big AI-capable data centers that are GPU-intensive rather than CPU-intensive. And I think that kind of opportunity will grow. We are seeing some organizations spring up that are looking to build AI-ready data centers to rent those out to other organizations that will create bespoke applications to run in those data centers. So starting to see that AI opportunity stretch into hardware. It will come to client devices in time as well as the data center. We mentioned earlier how it's being deployed within the firmware, within the infrastructure layer, and how networks are managed and how, I think, compute and storage will be managed as well going forward. Customer penetration, GP per customer, the land and expand strategy. Continuation of probably the things we've talked about in the past, which is we have such a breadth and depth of expertise that what we can do with individual customers now is pretty much across all of their infrastructure estate. And so the share of wallet that we can provide a quality service upon is very, very high indeed and approaching 100% of many customers. And so taking the average share of wallet that we have today from about 20% towards 40%, 50%, 60% over time, we have individual customers who are well north of 80% share of wallet. And so that's a huge opportunity and latent potential in that huge customer base that we already have. And so we keep nudging our strategy towards going deeper there. So we're encouraging our account managers to fully service smaller number of customers in their portfolio, pass on those accounts that we can't fully service to up-and-coming, hungry, bright salespeople who will be able to go deeper. So what we don't do is target customer growth of X and GP per customer growth of Y. We develop a strategy that allows us to fully service the opportunity in those customers that we are building loyalty and trust with. And so the customer growth and the GP per customer growth is an outcome of that. My expectation on the back of the success we've had with that strategy is GP per customer growth will continue to dominate our overall growth. And we will maintain probably the largest new business hunting sales force in the industry. But they will also be picking up accounts that are coming back down the tree from account managers who are going deeper with fewer as well. So I expect low single-digit customer growth and higher GP per customer growth for the foreseeable future.

Just to add to that one briefly, the number of additions in customers is a net number. And the numbers that churn out are the ones that we have done least business with. So there's also a bit of a virtuous cycle. The more that we do with the customers, the stickier they get as well. So that's another focus that we've got. I guess depending on how you measure the customer's, it will increase the number of customers that are transacting with us to a higher degree as well. It also shifts that metric.

Our next question comes from Balajee Tirupati of Citi.

Balaji Tirupati from Citi. Two questions from my side, if I may. Firstly, entering fiscal '24, you had cited noticeable slowing of customer investment and complex deals being delayed. How has that trend progressed? And how do you see that progressing in the second half of fiscal '24? And then second question is, at this stage, would it be possible to roughly quantify the opportunity you can imagine on account of generative AI? And based on your commentary from release, while it is not likely to be a material contributor in fiscal 2024, should we expect it to be one of the wheels of growth in fiscal '25?

Let me kick-off with your first question, which is about, and this is what we said, the FY '23 full-year results that we've seen, pockets of customers have stricter procurements, and that lengthened the time that deals took to close. We've basically seen that play out in the first half, as we expected. So nothing has got worse. The time line has stuck, which is what we have built into the forecast. And we don't expect, slash, need anything changed to deliver our H2 numbers either. So it turned out as we expected, and that's what we are assuming carried on for the rest of the financial year.

Balajee, I'm sorry, I couldn't hear your second question. The line was bad. Would you mind repeating it, please? Sorry, Balaji. I think Katy did hear it. It was to quantify the impact of Gen AI on our FY '25 expectations. Is that right?

Would it be possible to share any quantification, not necessarily just for FY '25, but in the sense that do you expect this technology evolution to drive a higher over-the-cycle growth potential for your business? And then entering FY '25, should it already start reflecting in the growth numbers?

Okay So, I mean, there's always stimulus to our industry because there's always things that we change. We've talked in the past about window cycles, about things like GDPR and so on. So I think AI and Gen AI is another very helpful stimulus to our industry, predicting exactly how it will play out and how all of our different customers' budgets will respond to it in the context of their broader businesses is really difficult to do. We've consistently laid out our optimism and confidence in the future of our industry because we know things like this are always coming. And we know that there's more data in the world every day that goes by. The need for faster compute power goes up. The need for more storage that's more cleverly organized goes up. So when things like AI come along, we invest around that because we know it's those things that will be the very, very long, and I think in decades, growth opportunity that Softcat has in the U.K. So right now, what we're not doing is expecting it to generate a period of super growth. The kind of guidance that we've laid out and the way that we see our business evolving and growing over time, it is seizing upon opportunities like AI that will drive that for us. So there's no change to our longer-term expectations as a result of this, but our confidence in those longer-term expectations is absolutely founded on this kind of development.

Our next question comes from the line of Chris Tong of UBS.

Chris from UBS. Two questions from my side. So the first question is on the upcoming election. How do you think this will impact public sector spending? My second question is on kind of your share of the market. So some of your competitors have had a slightly more cautious message on the market. How do you think you have performed versus the overall market?

Chris, well, the election's helpfully away from public sector year-end. So later on this year, public sector had a big period of spending right about now, this week, in fact, as the fiscal year closes down. And we've seen the impact on public sector spending be fairly muted around elections recently because so much of IT estates are ongoing renewable spend and emission-critical applications. So that kind of spend continues throughout an election cycle. Some of the discretionary spend and the way budgets are organized clearly is impacted by the election cycle, but it's not something that we build specifically into our forecasts. It's something that we work with and work around. So not expecting it to be a material factor in how the coming 12 months play out for us. Your share of the market and how that's developed, I mean, I think the commentary around what's happening in our market has been pretty consistent. I think we were very transparent and open at our year-end in saying, as Katy has previously discussed, how we were seeing procurement cycles lengthen. And I think a few others have mentioned that recently as well, and that is a factor in the market. I am certain that we continue to gain share and perform well and grow faster than our competition. Again, there's different measures of this, but gross profit is our primary, almost single measure of income. And by that standard, the growth that we've delivered in this first half, on top of very, very strong comps, I think it's a reflection that we, once again, continue to gain the trust of more and more customers and gain market share. So, very pleased with our performance in that context and very confident about half 2 in that regard as well.

The next question comes from the line of Charlie Brennan of Jefferies.

Yes. I'm going to go with 2 quick ones, if I can. Graham, can I just bring you back to your commentary on the customer growth? I know you always expect the majority of the gross profit growth to come through from spend per customer, but you framed expectations for customer growth in the low single-digit bracket. That feels much more like 2% or 3% than 1% to me. Was there any sense of disappointment with the customer numbers in the period? And indeed, Katy referenced the frequency of trading. Was there any particular portfolio pruning or anything like that, that contributed to the mass? And then secondly, in terms of vendors, you flagged up some consolidation with Juniper and HP, but we've also seen Splunk and Cisco. We've seen VMware, Broadcom. Is there anything we need to think about here in terms of changing terms of trade or anything like that as we go through any of these big M&A transactions?

No, honestly, no sense of disappointment with 1% customer growth. As I mentioned before, it's an outcome for us. One thing that I think we will start to do is to give you a bit more information probably on the existing customer base and how we're developing that. We'll have to think about other KPIs that we might be able to share with you to illustrate the growth that we are making, because I'm not playing with semantics here, but how you define a customer, and the extent to which we're developing that customer base is probably moving beyond the very simple method we have of showing you that and talking to you about that right now. So we'll probably come back with some more metrics on that at the full year to give you a view of the depth of penetration of that existing base, because I'm not disappointed at all with the 1% because I know what's happening. The story that's underneath that GP per customer growth is very, very exciting indeed for us. So we'll talk to you more about that in the full year, but there's no portfolio pruning going on except that, as I mentioned, we're making sure that the good accounts we're gaining trust with can be properly and fully served by the organization. And then the vendor consolidation is an interesting one. I think what you're seeing there is how excited the likes of HPE and Dell and others are around the breadth of portfolio they can build and some of those traditional hardware providers are thinking about the data center in its hybrid cloud form and how they can offer solutions around the increasingly disparate estate that people are having to grapple with. So the investments that I think you're seeing by the likes of HPE mirror the excitement we've got about the integration and growth of IT infrastructure more generally. There are so many vendors and vendors' technologies in the market. There's new ones coming to market the whole time. So I think this reflects more of a build than it does a consolidation. I think you've got growth in the vendor base is much more rapid than consolidation through M&A at the top end of it. But that consolidation is driving exciting developments in the portfolios of the likes of HPE. That's a strong basis upon which we can grow around as well as we take those integrated offerings into our customer base and give them the benefit of the strength of relationship we have with those vendors but the breadth of expertise we have to engage with all of their portfolio. And that's what we're seeing from vendors. We're not seeing a change in trade but we are seeing them look for partners like us that can fully articulate the breadth of value that they're now adding with the investments they're making in that portfolio. So very, very excited about that. And we have top position on all the partner advisory boards of these vendors. We have the accreditations and the sales specialists and the technical specialists that they need for us to take that portfolio to market. So I think it's a positive development for Softcat. I was going to say people like Softcat. There's not many. So that's the point. It's a very positive development for us.

The next question comes from the line of Martin O'Sullivan of Shore Capital.

Yes. Obviously quite a bit of focus on AI and you say great customer engagement on Gen AI. Could I ask you actually to give us a sense for what percentage of your customer base are actively asking about AI or expressing some kind of interest in deploying generative AI? I assume it's fairly low at this point, but building rapidly. But are you able to put an approximate or very approximate percentage on it? And are they more skewed towards the commercial sector than the public sector at this point? What are your thoughts there?

Martin, yes, I can try and give you a sense of that. The proportion of customers that are interested in it is close to 100. The proportion of customers that are actively deploying and trying it is more like 10% or 20%. But the number of seats licenses that they're trialing it with varies very, very widely from all in. Give it to everybody. Make it work. Approach to trial it with 1 or 2 and see how we get on. So a huge range of different experiences there. As I said in the prepared remarks earlier, I think we're right in the foothills of what is a really big opportunity here. And we'll work with Microsoft and others to make sure that the developments in that technology, this technology is released now and developed on the fly. It will become verticalized in different ways of consuming it. So I think -- I think it -- hopefully some of those numbers give you an idea of where we are with it. But I just think it will continue to build this great momentum behind it. And I do think as a technology will become ubiquitous. It's just a case of it'll be different time and speed for different customers.

Our next question comes from the line of Harry Read of Redburn Atlantic. Harry, unfortunately, we're not getting any audio, so we're going to have to skip to the next question. Our next question comes from the line of Damindu Jayaweera of Peel Hunt.

I think this question has been answered a few times already, but I wanted to kind of rephrase it if you don't mind. One of the things I noted is how your GIA on services was relatively more strong? And you mentioned how you are doing larger and more complex or dealing with larger and more complex customers. And in your hiring commentary, you also said you are hiring with a particular focus on specialist and technical roles. Does that mean that you are now going to be able to and strategically you will want to do larger and larger IT solution sales as opposed to kind of technical sales on hardware or license upgrades? And then related to that, in the commentary, it suggests that some of the digital CapEx that you are doing is going into improving customer visibility, what the customers have bought, and so on. So, related to that focus on larger solution sales, does that mean that you are going to be better at referenceability, finding gap analysis, and having those higher-level conversations with customers than you were able to do even 3, 4, 5 years ago? Or am I making too much of this solution sales thing?

Damindu, no, I don't think you are making too much of it. The only thing I would say is, well, a couple of things, but firstly, we are not moving away from anything. So, tactical sales of license renewals, absolutely not moving away from it. Continue to execute that as the bedrock of our business. Customers absolutely need our support on that. No license renewal these days is straightforward with everything that's going on. So, the need for advisory around just that renewal of existing estates is a really important part of our offering. But yes, we have been building into larger solution sales with larger customers over many years. We see that continuing. We see it as a key strength now. And the developments in our digital and data platforms are absolutely designed to help us do more of it, help us be more efficient with it, and make sure that our account managers are able to share experiences and referenceability, as you say, much more readily across the customer base. Because we have a huge base, bigger than anybody else in our market, deeper range of experience. And so, putting that to good use and advertising that to our customers is a key part of what we can do. Because with these investments, our ability to feed modern marketing techniques and help our account managers find both new customers and opportunities for existing customers is definitely what it is aimed at. So, it's not a cliff-edge transformation. It's a continued evolution along the lines that we've been making. But also, as I said in the prepared remarks, the foundations that we have in our own operations to do that now have been through a bit of a transformation in the last couple of years. And it won't be that these things that will start to drop and trial in half 2, will suddenly be a panacea. But it is the beginnings of an iterative build into being a very contemporary, modern organization. We've always had this challenging mentality that we're not going to be complacent. We're not going to keep just -- I think a lot of people look at Softcat and think, keep doing what you're doing. We've never kept doing what we're doing. We've always been involved and we've never sub-stilled. We still have that challenging mentality and we apply it to the technology proposition that we have for customers, but also those internal methods of operation. The combination of those 2 developments is very exciting for us in the coming years.

Shares are up like 5 more percent more -- extra 5 more percent since the call started, so you guys are saying the right things.

Our next question comes from the line of Harry Read from Redburn Atlantic. Harry, we're still not getting any audio, please can you check you're not on mute? Unfortunately, there's still no audio.

We can try to take that question offline, if Harry wants to share it with us direct, we'll make sure we answer it.

No problem at all. As there are no additional questions waiting at this time, I'd like to hand the conference back over to Graham for closing remarks.

Thank you. Thanks, everybody, for your interest in Softcat. If, like with Harry, there are any questions that we weren't able to get to, please do get in touch. Otherwise, we'll look back to coming back and keeping you informed with progress during the second half. Thanks for dialing in today, appreciate it.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.