Softcat plc ($SCT)

Good morning, and welcome to the Softcat First Half Results for FY '26. I'm Graham Charlton, Chief Exec at Softcat, and I'm delighted today to be able to take you through an exceptional set of results and period of growth for Softcat, and to help me with that, I'm joined by our CFO, Katie Mecklenburgh, who you'll hear from very shortly. But before I hand over, I'll begin with our usual quick reminder of who we are and the dimensions of our business today. These metrics continue to change quickly as we grow and this latest period has seen an acceleration in that expansion as we've stretched our lead further as the U.K.'s largest provider of IT infrastructure solutions. We operate across the entirety of the modern infrastructure stack and as well as having the broadest offering, we've also got, by far, the largest and most diverse set of customers in the U.K. And the growth in that customer base has also accelerated in this latest period. Recurring customer count now stands at nearly 10,500. And it's the combined breadth of our offering and the strength of that customer base that is behind the acceleration in our growth. It's also that combination that provides us with such a huge opportunity in the future, and I'll talk after the financial update from Katie about how we plan to seize upon that and how AI is enhancing it in a few very specific ways. And against that opportunity, we've continued to invest. Those investments have been targeted our own technology, our people and our workspaces. Headcount is now just shy of 3,000. We've relocated the majority of our offices to prime contemporary city center locations over the past few years, and we're in the process of completing the rest of them. We've grown our teams across all areas, again, built leading-edge skills and capacity into those teams, and we've given our people access to a full range of modern applications and tools. As I said, I'll talk more about our strategy shortly, but for now, I will pass you to Katie, who can give you the detail on a very strong set of half 1 numbers.

Thank you, Graham, and good morning, everyone. I'm very pleased to share with you Softcat's results for the first half of FY '26. In summary, we have delivered strong growth in GII gross profit and underlying operating profit in the year, all of which are significantly ahead of our expectations at the beginning of the year. This strong performance reflects the strength of our business model and excellent execution in the period. We have also benefited from the sustained investments that we've made over recent years, including investments in the breadth of our offering and capabilities and in improving our internal operations. Gross profit, which is our key measure of income, grew by 22.6%, reflecting strong underlying business performance, supported by the delivery of previously announced larger solutions projects and a pull forward of some customer orders due to memory shortages. The gross profit growth was delivered by a 3.5% increase in our customer base and an average gross profit per customer growth of 19%. Underlying operating profit of GBP 93.8 million was an increase of 27.3% versus half year last year and reflects the slowdown of the gross profit over delivery, together with further investment to drive future growth. Underlying operating profit excludes the impact of GBP 8.5 million of nonunderlying costs and I'll run through these items in more detail shortly. We've also maintained a strong balance sheet in the period with underlying cash conversion of 147.6%, and we've ended the period with GBP 206 million in cash. During the period, we announced a GBP 45 million share buyback program to return excess capital to shareholders, and the Board has approved an interim dividend payment of 9.9p per share. Finally, underlying basic EPS increased by 25.8% year-on-year. Turning to the summary income statement and starting at the top. Gross invoice income grew by 33.3% to just over GBP 2 billion. This was driven by particularly strong growth in hardware, up 78.7% with services up by 29% and software up by 18.6%. Hardware growth was driven by strength across data center, networking, server and compute sales, supported by the larger solutions projects. However, only half of the large data center projects that we were expecting to complete by the 31st of January is reflected in the period, with the balance now expected to be recognized in quarter 3. Software growth reflects strength in cybersecurity licensing software and Microsoft CSP deals, while services growth was primarily driven by partner provided businesses in this period. Revenue grew by 53.5% ahead of GII, largely due to a higher share of hardware, which is reported on a gross basis under IFRS 15. Software revenue grew ahead of GII, primarily due to a shift in mix towards higher-margin security licensing. Services revenue growth of 6.9% was behind GII growth reflecting a higher share of externally provided services at lower margin, which are reported on a net basis. Gross profit grew by 22.6% to GBP 269.9 million. This exceeded our expectations at the start of the year and reflects broad-based strength across our portfolio of technology solutions and customer segments. Gross profit growth was particularly strong in our corporate segment during the period with both enterprise and small and medium businesses growing strong double digit, with public sector growing high single digit. On a product basis, hardware, software and services all grew double digit. And by technology area, growth was driven by continuing customer demand, the cybersecurity solutions alongside extensive growth in data center and networking supported by the largest solutions projects. In workplace, GP growth is more modest, reflecting continued improvement in demand for client devices and the impact of Microsoft incentive changes, which we have now annualized. Overall, gross profit as a percentage of GII, declined by 120 bps year-on-year, primarily due to the impact of larger solutions projects at lower margin, while gross profit per employee grew 15% year-on-year. Moving slides, please. Underlying operating costs grew behind gross profit growth. Commissions and other variable pay grew broadly in line with commissionable gross profit while wages and salaries grew by 15.4%, driven by average headcount growth of 10.5% in the period. This was 7.7%, excluding Oakland, and average cost per head growth reflecting an annual pay increase of 4% and the continued increased mix of specialists. We expect full year headcount growth, including Oakland to be low double digit. The growth in underlying operating costs also reflects the impact of the step-up in employees' national insurance contributions together with investments in our internal IT team, data and digital capabilities and increased costs associated with office moves to larger sites. Underlying operating profit grew by 27.3% to GBP 93.8 million ahead of gross profit and as a result, the underlying operating profit to gross profit ratio improved to 34.8% from 33.5% last year. In the first half, we incurred GBP 8.5 million of nonunderlying costs. These include system implementation costs of GBP 7 million relating to the new cloud-based sales and HR systems, which despite being one-off development costs cannot be capitalized. In addition, there is a GBP 1.5 million charge relating to the acquisition of Oakland, which consists of contingent consideration of GBP 1.2 million and GBP 0.3 million of amortization of acquired intangibles. We now expect FY '26 nonunderlying charges at the bottom of our GBP 20 million to GBP 25 million guided range, with the majority relating to the sales and HR systems implementation, as we continue to build our foundational platform for Softcat data, digital and AI transformation journey. After deducting non-underlying costs, statutory operating profit was GBP 85.2 million, an increase of 15.6% year-on-year. Net interest income from the period was marginally lower year-on-year at GBP 3 million. This reflects an increase in interest income due to improved cash management more than offset by the increase in interest costs from the new office lease liabilities. And lastly, the effective tax rate increased by 60 basis points due to an increase in nondeductible expenses, resulting in profit after tax growth of 13.9%. Turning now to our customer base and portfolio offering. Our growth continues to benefit from the diversity of our customer base and the breadth and depth of our customer offering. On the left, you can see the latest customer segmental view of our business, which remains very well balanced. The public sector and enterprise segments of our business together account for just under half of gross invoiced income with small and medium businesses accounting for the balance. The middle chart shows the range of our activity between our traditional technology resell business and our services offering. And on the right, you can see that we continue to generate well balanced income across all areas of our technology portfolio, stretching from the cloud and data centers through networking security and end user compute. The diversity of our customer base and comprehensive breadth of expertise, product offering and services remain a key strength of our business, and this underpins the sustainability of our growth model and our opportunity to further scale. Moving slides and on to our customer metrics. The chart on the left shows the growth in our total customer base and growth in average gross profit per customer, which demonstrates our ongoing ability to acquire new customers and sell more to existing customers. During the period, we grew our customer base by 3.5% to more than 10,400 customers with net new customers added across all of our segments. Gross profit per customer over the last 12 months grew by 19% to GBP 52,200, reflecting progress throughout all of our technology towers. The graph on the right shows the growth of customers with whom we have an established trading relationship as measured by customers delivering at least GBP 1,000 of gross profit each year. These customers tend to buy across more technology areas and the greater range of vendors, enabling us to transact higher levels of gross profit. In this cohort, there is a more balanced profile between customer growth of 5.7% and GP per customer growth of 16.5%. The longer tail of transactional customers continue to represent an important source of future growth for us, but our established customers account for over 99% of the group's current gross profit. Now turning to cash. Underlying cash conversion was 147.6%, reflecting continued good working capital management, together with a timing benefit of a GBP 42 million customer prepayment. Excluding this upfront customer payment, underlying cash conversion would have been 102.4%, still ahead of our target range of 85% to 95%. Depreciation and amortization stepped up year-on-year due to the recent investments in offices and internal technology, while CapEx halved during the period reflecting lower spend on new office fit-outs compared to the prior year. Cash tax was slightly lower year-on-year due to phasing. And in the period, we have returned GBP 95.4 million of cash to shareholders, reflecting GBP 73 million via the FY '25 final ordinary and special dividends, together with GBP 22.4 million of the GBP 45 million share buyback that we announced in January and that subsequently completed on the 13th of February. Thus, we ended the first half with a cash balance of GBP 206 million, an increase of GBP 65 million year-on-year. We continue to expect cash conversion to be towards the lower end of our guided range of 85% to 95% in FY '26 due to the cash outflows related to implementations of the sales and HR systems. This next slide covers the interim dividend. The Board has recommended an interim dividend of 9.9% -- 9.9p which is up 11.2% year-on-year and is in line with our policy of paying out 1/3 of the previous year's ordinary dividend as an interim in the current year. As a reminder, our full year dividend policy is to pay out between 40% and 50% of profit after tax on an annual basis. Finally, after the period end, we established a new revolving credit facility of GBP 15 million. This facility is undrawn and reflects the maturation of our liquidity management approach, providing the group with the flexibility to maintain our operating cash flow through a combination of cash on hand and available credit lines. And turning now to capital allocation. We have a disciplined approach to capital allocation and our framework remains unchanged. Our top priority is to invest in future organic growth, which supports our ambition to take further market share and enables us to continue to scale the business. In H1 FY '26, we invested in our core systems and IT capabilities, expanding our office footprint, increasing head count and capabilities and developing our data and digital platforms. Our second priority is to maintain a progressive ordinary dividend policy. Any excess capital is then either allocated to a compelling strategic investment, which could include bolt-on acquisitions to expand our portfolio offering or expansion in international markets or is returned to shareholders. During the period, we initiated our first share buyback to return GBP 45 million of excess capital to shareholders. This completed in mid-February and reduced the issued share capital by 1.7%. And finally, moving to the outlook. Based on our performance in the first half, we now expect to deliver high single-digit growth in underlying operating profit, which is an increase from our guidance at the beginning of the year of low single digit. We are entering the second half of our financial year with good momentum. However, we face a tougher comparator due to the contribution from larger solutions projects in the second half of FY '25. In addition, the net impact of ongoing memory shortages remains uncertain through the remainder of this year and into next year. And we're also mindful of the evolving macroeconomic and geopolitical situation. And with that, I'll now hand over to Graham to run through the strategic update.

Thank you, Katie. So as you've seen there, very strong progress indeed during the first half, and there are a number of clear factors behind the strength of that growth and acceleration, which I'll take a few moments to highlight now before we move into the strategic update. So firstly, I think it's clear that our core strategy continues to work, the competitive advantages that we've created in customer service, and the breadth and quality of our offering continue to differentiate us. They create loyalty and trust with our customers and vendor partners. And we've maintained our investment in that strategy through the slightly tougher market conditions over the past few years and stretched those advantages further. We've also continued to execute well. The morale and attitude, alignment of our people and leadership has been fantastic throughout and the market has become a little easier in these past 6 months as well, inflation, interest rates and wage growth have moderated, and that's helped our customers unblock some investment. To be clear, we do continue to see intense scrutiny on ROI, but customers are moving ahead with new projects, including, but not limited to, preparedness for and implementation of AI, which I'll come back to. And as Katie mentioned, we've seen some deals accelerate due to the component shortages that are ongoing. It's very hard to predict how that will play out over the next 2 quarters and beyond, but it was a slight net positive during our Q2. And then we've got AI, which is beginning to manifest in very positive ways in our business. Firstly, AI is becoming a strong tailwind across all 5 of the tech towers that we use to frame our full stack infrastructure offering. Customers are at different stages, but we're seeing demand for AI-capable infrastructure build across all areas. And the other aspect of AI that's been positive for us in the period and which will develop much more momentum is its effect on our own operations and proposition. As we've mentioned, we've been hard at work on our own systems and technology for years now. And we're beginning to see the dividends from those investments as we bring on stream new AI functionality and automation and develop our own agents. And because it's been of such clear interest to investors over the past few months, I'll pause on the AI topic specifically for a few minutes now because the upside we've seen in half 1 is just the thin end of the wedge and so we'll look at each aspect in turn. Firstly, the opportunity in what we sell, as AI transforms the applications we all use at work and at home, the infrastructure, those applications operate on and within needs massive investment. And secondly, the opportunity in how we sell. As Softcat's become bigger, our offerings become the broadest in the market and the need for better tools, analytics, automation, to take that offering to market with full effect, the need for those tools has grown exponentially. And now just when we need the most, AI is giving us the means to transform the quality and effectiveness of our go-to-market motions and other processes. So let's start with the innovation and demand that AI is creating within the infrastructure space. And this slide shows in a simplified way, how the application and infrastructure layers of modern technologies are each being affected. Firstly, if you consider the application layer, there's no doubt that we are and we'll continue to see huge innovation from AI within both enterprise and consumer apps. This is not where we play, although some of our vendors have products which stretch into this space, Microsoft probably being the best example. But the vast majority of the software, hardware and services that we trade in sit within the infrastructure layer. But AI applications require more compute power of a different nature to a traditional sequential CPU processing. They demand more and better structured and cleaned data. They need that data to be available in low latency environments, whether it's in the cloud or the edge. And this also creates the need for bigger and faster networks, creates new cyber attack and defense mechanisms and so on and so on. In short, as applications become embedded with and enabled by AI, they demand more power, speed, capacity, flexibility, governance and security from the infrastructure they work on. And that infrastructure layer, that is where we, Softcat, operate. We have the broadest and deepest offering in the market. We serve the largest and most diverse set of customers and the growth in that customer base and our share of their IT wallet is growing at an accelerating rate. So our positioning is perfect. We've illustrated on the slide here the 5 technology areas that frame our technology proposition, as I said before, spans the entirety of that modern infrastructure. And we're seeing AI have a positive effect on the demand within all 5 of those towers. IT infrastructure is about to get a lot bigger, even more complicated, and this will be fantastic for our business and our industry. And whether customers are clear or not yet on the applications and use cases that they'll rely on in the future, they know that they will depend upon quality infrastructure, fit for the age of AI, and we are helping them get to work on building exactly that. The help and support that we provide them has therefore never been more important. For example, our access to the latest innovations and road maps of all the key vendors. Our deep understanding of the hugely complicated never-changing infrastructure maps of our customers, which, by the way, will usually contain the technologies of at least 50, 60, maybe 100 different vendors and have been constructed over many, many years. Our access to the best pricing and rebates through our top-tier accreditations and the co-investment programs we're collaborating with the vendors on to build the support and service structures they need for us to deliver and run this new breed of technology. And the ways in which we augment the skills and capabilities of both our customers and our vendor partners has never been more sought after by both parties. So we're bringing decades of proprietary data, know-how and investment together to create the proposition of the future for our industry and make sure that Softcat remains the very best partner for both customers and vendors. And this leads us to the next area in which AI is creating huge benefits for us. So on this next slide, we'll flip the direction of travel around and now talk about how our internal technology investments have made us AI-ready. And as you're aware, we've been modernizing our data and systems for at least the past 5 years, the investments we've made are now worth their weight in gold. The importance of AI readiness applies to us in just the same way as it does to our customers. And in this latest period, we've begun to move beyond readiness and into deployment. For example, we've built a new data lake house with the help of Oakland. Over the past few years, this has cleaned our own extensive internal data and augmented it with multiple sources of external data on customers, market spend, product information and so on. And this is now searchable using AI tools and is serving up new insight, driving new marketing techniques and sales processes within Softcat. We've also built the database of our own capabilities and resources, combined this with the customer and product data we have, and this is transforming how quickly our people can interpret customer challenges, bring forward appropriate options and solutions from within our range and align available resources from both Softcat and vendors and ensure best pricing and rebates are applied as a matter, of course. And so forgive us the terrible name, but we've called one of these new tools, CatNav. And hopefully, that gives you an immediately clear impression of what it does. It's filled with proprietary data on our skills, capabilities, vendors products, customers, IT environments and so on. And it's giving us a step change in the effectiveness with which our people can navigate and deploy the extensive offering that we have. It's helping both our most senior and our most junior people match customer problems with Softcat solutions faster and more successfully than ever. And we're also experimenting with many other new agents created in-house across our key business processes such as order fulfillment and rebates. And in addition to our own internal developments, we've been embracing the tools that are becoming embedded within the enterprise systems that we use as well. So Copilot, the most obvious example of this, but we're also seeing AI functionality be released into our finance, service management and other systems. And these new systems will become increasingly integrated as we released this summer, our new Microsoft Dynamics sales platform and our new HR platform as well. Both of those systems are now in user acceptance testing. And while we've seen tangible benefits already from these initiatives, we're only just beginning to tap into the full potential of what's possible here. And so those are the two ways that we're seeing AI benefit our business right now, through growth in the demand for our services and products and in the transformation of our own operations. What I'll do now is update you on the things that we're doing more broadly within our strategy as well. So on this next slide, I remind you first that the core of that strategy, the flywheel that powers our growth engine is unchanged. Our special culture delivers market-leading service, that creates trust and loyalty with our customers, has enabled us over many years to invest in and build this broad offering that we have today. And so those are the two sources of advantage, best customer service and the highest quality offering. Despite that, we only still have around a 5% share of a market that's growing and accelerating. This model has decades of opportunity in it still. But if we turn the page again, you can see that we've sharpened the framework that we use to channel the investments we're making back into our business. The clarity of what we do and for whom and where and how we will play is absolute. And we've created what we call our 4 engines of growth, which you can see in the different colors at the bottom of the page. And we'll invest in those to drive our future growth, and they are sales and customer excellence, the broadest offering operational excellence and a special culture. And I'll talk about what we're doing with each of them -- within each of them briefly now. So firstly, sales and customer excellence. And we've used this pyramid before to show how our account managers win and nurture new customer relationships right from the very early stages of their careers with Softcat and as they mature over time. And as that relationship develops, trust builds from the foundation of the brilliant customer service we provide and the customer puts more and more of their IT spend through us as we displace incumbent competition within the account. And during this latest period, we've been focused on enhancing the differentiation that we can bring to the various different customer segments in which we operate from SMB and mid-market in both the corporate and public sectors, through to large and complex enterprise grade accounts. We're looking to enhance all of our go-to-market motions, but especially in that large and complex space where we've got relatively less maturity. We're also working hard to ensure that our systems and procedures for the oversight of customer account allocation continue to evolve. And this is another area where new data analytics and AI are producing significant benefits for our sales managers. And as we've continued to build our multinational capability and honed our focus around some of the verticals as well, such as financial services and insurance. And all of those efforts have accelerated the overall growth in the customer base and ensure that the progression of customers through this pyramid is proceeding well, too. So for example, growth in total customer count stepped up from 1.6% last year to an annual run rate of 3.5% this first half. And within that, customers delivering more than GBP 1,000 of GP grew by nearly 6% and customers delivering more than GBP 100,000 of gross profit, the layer right at the top of the pyramid there, grew by 11.5%. And on the right-hand side, you can see another step up as well in the number of deals transacted with gross profit of GBP 0.5 million or more during the period. And while I mentioned we're building new capabilities to mature that offering in the large and complex customer space, remember that these stats cover the whole of the customer range and some of our mid-market customers have requirements just as big as that enterprise segment. So these stats therefore, show that we're continuing to grow across all areas of the customer base. We are not pivoting away from anything. Certainly, we're not reducing our focus on the mid-market. We are adding, as we've always done to our offering, increasing the addressable market as we add new capabilities all the time as well. And if we turn on now to the broadest offering, I'll give you a reminder here of the scale and depth of our product portfolio and services. The 5 towers of the tech proposition include all of the key and emerging vendors from the likes of Microsoft and NVIDIA through to smaller and newer players. We continue to build our skills and service offering towards those new and emerging areas. For example, we've made excellent progress on the integration of the data engineering consultancy we acquired last year Oakland. So far, we've linked the sales motions of Softcat and Oakland very carefully and selectively. And the pipeline we're building in their cycle is really significant. And the reputation that their services brings to Softcat is strengthening significantly our credibility with some of our best prospects. And in addition to new offerings, we're also ensuring that our core strengths don't decay. And we're co-investing heavily around the changes that Microsoft and other vendors have made to their programs in recent times and see huge opportunity there as well. And if we turn on again, we'll come now to operational excellence. I've talked about this area already in relation to the positive effects from our investment in our own technology. So I'll just reiterate a few key points briefly. Firstly, the foundational development and platform enablement we've invested in these past 5 years or more has encompassed core systems and data and built on those foundations, we're now beginning to deploy new analytics, agents and automation to increase the quality of what we do for customers. The new CatNav tool I mentioned, the agents that we're creating across processes like fulfillment and rebates, the propensity to buy analytics that we're feeding into sales dashboards and new marketing techniques. These are just the first wave of those innovations. These are developments will accelerate as we complete the delivery of the sales and HR systems this summer. And we're just only at the beginning of what I think is going to be a really exciting transformation in our model over the coming years, driven by both the adoption of Core AI functionality in our core systems and proprietary developments on top of and around that enterprise stack. And we're doing this in a very coordinated way. We've got much more proactive oversight of our end-to-end processes than ever before, and we're leading that as always, by well-tenured Softcat people who understand our business and the industry well. And turning on again, we come finally to our special culture. You can see the essential elements of that culture listed here, and it really does continue to be the single most important foundation for all of our success. During the period, we put a lot of time and attention into strengthening the framework of support and freedom we give to our local office leadership teams and investing, as I said right at the start, in the fabric of our workspaces. You can see at the bottom there that we've completed in this latest period, the relocation of both Manchester and Dublin offices, and we've refurbished our headquarters in Marlow as well. And also shown at the bottom there, I'm really pleased to say that we've just placed fourth in the latest survey of the Best Workplaces in the U.K. And we're now hard at work on creating a formal employee experience strategy. This will bring together all of the rich feedback we received during the year, both formal and informal from our people, we'll aggregate it against external benchmarks and other insight to ensure that our people continue to get the very best working environment, training and support that we can offer them. So in summary then, if we turn to our final slide, we've delivered exceptional performance in the first half of the year, and we carry good momentum across all fronts into the second half. There are new elements of uncertainty creeping into the macro, of course, but notwithstanding that, we're very confident of our prospects for the full year. And this confidence is fueled by the positive effects of AI on both customer demand and our own operations, together with the traction that we're getting from investments across all areas of our strategy. So we'll continue to invest in those 4 growth engines, the most important of which continues as well to be our people and culture. They remain at the heart of everything we do. And so I'll finish as always, by saying that I cannot thank them enough for their efforts and brilliance so far this year. That brings us to the end of the remarks that we prepared for today. So thank you again for your time and attention. We'll turn the call back now to the operator to take some questions.

[Operator Instructions] The first question is from Joe George from JPMorgan.

Yes. Just two for me, please. Can you guys hear me, okay?

Hi, Joe.

Hello?

Hello, can you hear us? .

Katie, can you guys hear me, okay?

Yes, we can, Joe. Thank you.

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

Yes, we can.

Okay. Perfect. Sorry about that. I think it was an issue with the line. Sorry, just two for me. Perfect. Just firstly, on the drivers of outperformance. It sounds like we have some impact from a larger deal and some pull forward from memory pricing. If we strip those impacts out, it sounds like there's still some outperformance versus expectations on an underlying basis. Could you just unpack the drivers of this underlying outperformance? Was it a wider market sentiment being a bit better than expected? Any specific product or customer groups to call out? Just any color would be great there. And then secondly, just on H2 expectations as a whole. I think the new guidance would imply that H2 EBIT growth could actually be down slightly year-over-year. Could you just comment on how Q3 has trended so far and how we're tracking against that rate so far into H2, please?

Thanks, Joe. Let me kick off, and then Graham can chip in. let me sort of try and give you a breakdown, but I'll do it on year-on-year because obviously, everyone's got different expectations as well. And I'll do OP and then maybe I'll go into GP as well. As you say, we talked about a number of factors. So the deals pull forward because of the RAM shortages, the big deal that we talked about at the end of the year, but we've also clearly seen brilliant performance on the base business as well. So if I sort of split those down in terms of growth from operating profit, we would say, and this is caveated that trying to identify exactly what's been brought forward because of RAM is obviously not an exact science. But roughly at the OP level, about 40% of growth because of RAM and the big deal and 60% of base for gross profit level, it would be sort of 15% to 20% due to RAM and big deals and then the balance from the base, which would give you on both metrics, still high-teen growth year-on-year. So as you say, base business is performing really well. We've seen particular strength in corporate but public sector also still grew from a gross profit basis, high single digits. So we're pleased with that as well. But the outperformance was predominantly in corporate too. But as we've said, really broad-based across technologies, broad-based across hardware, software and services as well. And then in terms of EBIT being down year-on-year, yes, I mean, that was always sort of the case in the guidance at the beginning of the year. Core driver for that is that big deal that landed in the second half last year and we are, at the moment, just mindful of the RAM shortages. We've obviously seen a pull forward how it's going to impact H2 and next year is still pretty uncertain. We've got a couple of dynamics. Number one, we could see more pull forward, but at some point, we think that lead times will push out as well. So uncertainty coming from that and then the sort of the macro and the political situation at the moment is layering on top of that as well. So that's why, at the moment, we're sort of guiding to leave H2 pretty much as it is. We started the momentum that we've talked about has continued, but we think quarter 4 is still more of the unknown at this point in time, as you would expect.

We'll now move to our next question from Tintin Stormont from Deutsche Numis.

Probably a similar question, but a slightly different angle. Again, about just allocating that outperformance in the first half. If I just stay on the gross profit level and estimate that versus an original expectation of low double-digit growth in the first half, I estimate there was like a GBP 20 million, GBP 25 million GP beat. Is that what you referred to KP as sort of like 15%, 20% of that would be mainly from the pull forward? And 6 weeks into H2, what level of pull forward are you continuing to see? And then just a second question. Can you also remind us about the timing of the delivery of the large solutions. Katie, you mentioned some had slipped and will be delivered in Q3. Would that sort of kind of be the end of it?

I'll try and cover those, but do remind me if I forget any of your points. I think if we take it versus consensus, which wasn't far off what we guided to at the beginning of the year. On the gross profit level, we've probably seen about 15% over delivery versus that number. And if we break that down in terms of over-delivery between the RAM impact was obviously positive. The large deal has slipped. So it's positive year-on-year, but not quite as much as we expected. So if you netted those off, I would say, about 1/4 of that over-delivery was because of the net of those two items with the sort of the balance due to base business performance as well, if that makes sense. In terms of the pull forward from RAM, I think we're still definitely seeing some momentum behind that, but it's really difficult to quantify as well. And as you will know from the business, in every single quarter we've got, it's the last month is everything to play for. So we still need to sort of wait and see how Q3 will finish.

And just on the timing of the delivery of the large solutions, obviously, Q3 some said, as you said, has slipped into Q3. And then post that, as far as you can tell in terms of our backlog pipeline.

Yes. So you're right. Initially, we assumed all of that sort of big deal to remember, it's low margin, and you can still see it on the balance sheet as well on the bits which are left. So about 50% of it has been recognized, and we're expecting the remaining of the 50% to be recognized in Q3. The vast majority of that is with the customer, but there's a few more steps before we can recognize it. So we're confident, but as I say, it took a little bit longer than we were expecting. And in terms of pipeline, nothing else big that we've got in sort of a solid pipeline at the moment.

It's the final one, just super greedy. In terms of AI, if you look at the pipeline and the level of activity in the business, are you tracking what percent of kind of the business -- the new business is kind of being created or in fact, some of the acceleration in new customers? How much of it has an AI change can lend to it?

Tintin, it's Graham. It's really very difficult to quantify that accurately. In very general terms, what you can be sure of is that infrastructure investment has been held up the past few years by more difficult macro interest rates, inflation and so on. And two things are happening right now. The demand for strong infrastructure to cope with AI applications is building and those difficult conditions have abated comparatively. Now clearly, there's new uncertainty creeping into the macro right now as well. So that and the component shortages will have an effect. But the demand on infrastructure coming from AI applications is significant. So when someone is upgrading a network, is that because they're anticipating more traffic as a result of direct AI applications or is it a future proofing or is it fixing a problem, impossible to kind of track all of those impacts directly. But it's definitely fair to say that AI demand is a strong tailwind to what we're seeing from customers.

We'll now move to our next question from Charlie Brennan from Jefferies.

I'll do a couple, if I can. Firstly, just on your AI comments there, Graham. Is it fair to say that the vast majority of AI demand today is being felt through the infrastructure side of your business? Or are you seeing it balanced across software, whether that's Copilot or security? And then if I think about AI, maybe through a stock market lens, we're seeing investors jump to the conclusion that AI is going to disrupt traditional vendors. Are you getting any sense from your customer conversations that people are trigger happy to use AI as an opportunity to replace traditional vendors? And do you think your most important vendors for the next 10 years are going to be different from the vendors that you've enjoyed for the past 10 years? And then as a follow-up, separate issue. Can you just talk a little bit about vendor partnerships and particularly Microsoft? We've seen Microsoft price rises coming through. We've seen volume discounts reduced. We've seen the new launch of E7. Can you just give us any sense on Microsoft, whether that's changed any customer behavior, whether it's pulled forward orders or whether it's created any distortions we should be aware of?

Okay. Thanks, Charlie. And dive in if I miss stuff or if you've got follow-on questions, I'll try and work through them. So are we seeing AI demand concentrated in infrastructure or balanced across software and other things? So this is why we tried in the deck there to distinguish between application layer in the infrastructure layer. So the infrastructure layer isn't just hardware, it's software, hardware and services. So in your data center, it's the servers, the storage. But it's also the virtualization software, the hypervisors, the hyperconvergence software and so on as well. So we are seeing AI drive demand in the data center, in the network in security, in connectivity, in the device estate, and we're seeing it drive it across software, hardware and services. So the full design of modern infrastructure encompasses all of that. And our unique breadth and quality across all of that, I think, is a huge strength at this time. So we're seeing it everywhere, certainly, in software, security software, but also data center software, workplace software as well. And in terms of stock market reaction and disruption of traditional vendors, it depends on what you mean. So infrastructure estates are huge and complex and evolve slowly, and they're having to respond to this challenge. That means that all of the vendors that we work with are creating new products and solutions to meet this demand. You've seen whether it's Dell or HPE or Lenovo, Microsoft, everybody has been broadening their offering to meet these new opportunities and new demands. And we are very, very well placed to work with them across that. So whether it's HPE folding in Juniper or whether it's Microsoft developing Copilot and other tooling within the Azure stack, the investment that we can make in our organic capabilities and the scale and reach that we have make us prime positioned to capitalize on these new opportunities and offer them the partnership that they need. Yes, I think it's going to disrupt some of them. There's always disruption happening there as well. Security is a great space to be, but that's been a tough ground to compete in for security vendors. The same argument to us applies as always, which is we will follow customer demand and sell the winners of that race. And so I'm sure there'll be some disruption and displacement to happen, but that's good for our business. That's conversations with customers and support that we can offer them. Remember that what we do for customers is many things. We understand their legacy systems. We help them design new solutions. We implement, support, manage that. We optimize and evolve them over time. We can start to use AI tools to help us. With all of that, we've got proprietary data and expert use of agents that we can overlay across all of those areas. And we can deliver real-world outcomes because if you're a CIO or an IT Ops manager in this situation, when you design those new solutions and you turn them on if it doesn't work, who are you going to call, and that's where our service really comes in, in these times because people are evolving and iterating as the demands of AI build. So I think this will create some disruption amongst traditional vendors, but I think it creates huge net opportunity for them, and our partnerships, therefore, as I've alluded to, are going from strength to strength. So the changes Microsoft are making, the price rises, the volume discounts that are being withdrawn, they're all to enable them to invest in the offering of the future that their customers are demanding for them. And I've mentioned before about how that creates a challenge for us to move our operations around their new motions but that is a net competitive advantage for us because I think the capability we have to do a good job of that for them is a huge opportunity in the competitive market space, and that's why we've been investing so much in our people, our technology and our workplaces as well because the changes we've made to our offices are bringing customers and vendors together with our people more strongly than ever before. So I'm very positive about all of this. There will definitely be some winners and losers in it. I think you've seen in these results that we're determined to be a winner from all of that.

We'll now move to our next question from Christopher Tong from UBS.

I guess just one question from me on the margin. So basically, with the new guidance, it does imply that margins can be flat, and you've been making a lot of investments kind of internally into IT and offices. I was just wondering how are you thinking about gross profit growth and EBIT growth going forward? Do you think you can decouple the growth between these two?

So I guess short answer is that on a structural basis, no change. We always plan to grow costs ahead of gross profit because it gives us the headroom to invest in the business today for and basically build up our capabilities so we can win in the future. We have less than 5% market share. We're in a growing market. The future potential is huge. And one of the reasons that we think we're posting such good results at the moment is the fact that we have invested over the last couple of years, which has set us up really, really well and it served us really, really well. So we're not going to move away from that approach at all. Now when we do over deliver, as we've seen in H1, then the over-delivery on gross profit flows down and the margin improves. But in terms of our planning assumptions, we will continue to invest in the business in the areas that we've outlined today. And I think it will serve us as well moving forward as it has done in the past.

And our next question is from Oliver Tipping from Peel Hunt.

So I just wanted to touch on the sort of trend in AI spend in infrastructure. between -- the split between enterprise and SMEs because there's been a lot of talk about how the enterprise is moving towards private cloud and outside of sort of quant funds that have made up a bulk of the SME spend on that. Is this also the case the broader tail of SME clients that you're seeing? And then lastly, a point on capital allocation. I think these results are a clear indication that you guys must be undervalued at the moment. Are you considering potentially doing a buyback instead of a special dividend this year? And how is your progress in looking at opportunities, broad and diversifying into the U.S.? How is the pipeline looking for those?

Would you mind just reiterating that first question a bit, I want to make sure I answer it properly. So yes, just have another go at it, just so I can make sure I don't miss the mark with it, if you wouldn't mind? And then I'll pass to Katie for capital allocation after that.

Sure. That's absolutely fine. So broadly, the trend in terms of enterprise clients has been moving back towards private cloud from sort of the public cloud. I was just thinking in terms of the infrastructure build-out for SME clients, excluding sort of quant funds, which I think because a couple of the larger deals you guys have done. Is this something you're all seeing for your broader SME client base?

Okay. Thank you really clear now. I think you were clear in the first place, by the way, it's my issue anyway. So I don't think enterprises have been moving back to private cloud. I think they were hugely unbalanced in the first place because they had no public cloud. So there was a natural rush to put workloads in the public cloud. And what we've seen is that turn into a more thoughtful approach of which workload fits best where. Some organizations started with that. Some did just ideologically rush to the cloud and therefore, have had to repatriate things. But on balance, I think what you've seen is the hybrid environments that most architectures are now depending upon, which involves the right workload in the right place are both getting developed. So there is a strong use case for public cloud with many applications, but they are really important issues about why on-premises, low latency, data sovereignty applies to some workloads as well. So I expect to see growth in both private cloud and public cloud from large enterprises. And I expect to see the same from mid-market. And again, the size of the customer is a factor, but more important factors are things like how old are they, what is their IT legacy, what vertical are they in? What's the scale of their business? What are their security requirements? So the private cloud is a very, very strong offering in -- for some cases, and the public cloud absolutely has a strong role to play in this as well. So for us, with capabilities across both of those, and the network and security on a holistic basis. This is why the integration of modern infrastructure, I think, is such an exciting place to be. But the short answer to your question is, I think we'll see growth for large and medium organizations in both private cloud and the public cloud. I think if there was a distinction to be made maybe public cloud is a great place for mid-markets to start with some of this. And then yes, you might see some production environments moving back on premises over time, but who knows, it would be different for every customer.

So in terms of a question on capital allocation and buybacks, so we agree on your point on the share price. We've clearly just completed our first-ever buyback. And I think any further -- well, we'll get to year-end as we normally do, and then we would decide together with the Board what we do them, but following the normal capital allocation principles. Clearly now, we've built the capability to do both buybacks and specials and we'll sort of evaluate what we do at year-end. But I guess, we appreciate what you're saying in terms of buybacks and where the share price is at the moment. And then I think do you want to take the U.S. acquisition point?

Our stance hasn't changed on that, which is M&A is something that we could use to accelerate our strategy in one of two directions, about new capabilities like with the Oakland acquisition or with geographic expansion. And particularly, we said that the strong demand we're seeing from our customers in the U.S. market and the strength and size and attractiveness of that market as well means that acquiring in the U.S. could be a good option for us. Could be a good option if and only if we find the right target. We've said as well that the affinity of culture and ethos is the most important factor, capabilities and management team that would be excited to join Softcat who we could build a long-term future partnership with. That would be an exciting step for us to take. But we're no nearer to doing a deal. We're not in any active processes. We are continuing to do our research and look at the options there. So capability bolt-ons, U.S. expansion are both still good options, but we don't have to do them, and we are maintaining a very high bar against the targets that we look at.

Our next question is from Florian Treisch from Kepler Cheuvreux.

I have a follow-up to the memory situation. You mentioned RAM shortages at a time when I believe availability is probably not yet the bigger issue, it's probably more the pricing increases filtering through. So do you really believe that supply will be disrupted at some point in time? And with respect to pricing, when do you believe higher prices are turning into a net negative for Softcat in the market? And the second one on mean you mentioned copilot several times in the presentation. I'm sure if you ask Microsoft, they will pitch the idea that Copilot is a massive success. But if you look into the market overall, I mean, it's probably much more noise coming out of the field of Anthropic and all the other peers here. So I mean, if I'm not wrong, I think Anthropic actually introduced the partner initiative recently. I mean do you expect to be part of it? Do you really believe let's say, that these players are becoming more and more -- playing more and more into the channel and with that providing revenue opportunities for you? Or do you believe it's really more coming out of your, let's say, historic partnership companies?

Okay. We'll start with the memory one then. So yes, I think it's probably fair, not in all situations, but probably fair to say that right now the impact from the shortages is more on prices than on supply. That will start to develop and change over time. So lead times will go out as prices continue to go up. Quite how this plays through is impossible to predict because the channels that those memory manufacturers sell into, they have a choice about how they do that, and that will depend upon the demand they're seeing from consumer, from hyperscalers from other corporates. So there's different channels that they'll be selling into and how that will play out, it'd be a dynamic situation. And so that's something that we're going to have to watch and manage carefully. However it plays out, I see it as an opportunity for Softcat because the breadth of our offering, the strength of our vendor relationships, the scale and quality of operations we have mean that there's a lot of help we can apply to customers in that situation. If their projects are delayed, we can help them with other things. We can make sure they get access to best prices. Our scale in the U.K. market will give us a priority of allocation in some circumstances as well. So lots of challenge to come there, quite when it will turn from a net positive to a net negative if it does, and in what form that takes, I don't know, but I back us to do the best job for customers in this environment. So I'm relishing that challenge. On Copilot and Anthropic, other AI tools, Copilot's a different beast to things like ChatGPT and some elements of Anthropic. And I think it is playing a strong part in what customers are doing with their IT. It's playing a strong part in what we're doing with our IT, and we're using it alongside other tools, as we've said. And I think this is -- what's most exciting about AI is I don't think there'll be one tool or one use case that dominates. And we're working with other partners like IBM, who are creating strong orchestration layers for these tools to work closely together. This is where our breadth of partnership comes in again because as Anthropic and others start to make their products available on platforms like AWS, with whom we have top-tier accreditations and strongest partnership in the U.K. through their marketplace offering, then our ability to help customers get access to the full range of tools, choose, design, implement, manage, evolve the ones that are right for them. That's where our strength of offering, I think, is the best in the market as well. So like I said, I think earlier, we will support the vendors that we have relationships with, we'll support new and emerging vendors. Our priority is to get customers the solutions and outcomes that they want. We will use AI to help us design and deliver that. But the expertise we provide in the first and the last mile of that around whichever products are suitable for their outcomes is where we'll continue to add value. So I do believe Anthropic and others will increasingly become an opportunity for us. But I think the likes of Copilot from Microsoft will absolutely coexist with that as well.

We'll now take our last question today from Damindu Jayaweera from Peel Hunt.

If I could squeeze three questions in there fairly short answer, I hope. First one is the rollout of the new sales system going? If you started, I know you are going to run in parallel. Specifically, I just want to understand that there is no impact on pipeline visibility over the 12 months as you roll that out? That's the first question. Second question is, there are 25 large deals of GBP 0.5 million. It was super impressive guys, well done, it's 10 more than last year. I just wanted to understand the mix in there in terms of verticals to the extent you can talk about. My assumption was it was dominated by financial services, maybe that's not correct. And then the third one I wanted to ask is that we know from recent set of results from HP, Cisco and the like that they are changing their Ts and Cs to allow them to change prices even after you guys have issued POs to customers. I know you are almost always on top of these things and almost always the first to address these things in the market. So is this a share gain opportunity for you guys if you can deal with those things better than your competitors? And is there anything that we need to be aware of from a GII to GP conversion perspective in those changes on the Ts and Cs? Just those 3 questions.

Thanks, Damindu. I'll try and not disappoint you on the length of answers then. So the rollout of the sales system is going really well. In fact, I was just talking this morning to one of the UAT team that's sitting not far from me now, very positive reaction through the early stages of that. No, we do not expect to have any issues with visibility of pipeline, the project's proceeding really well and getting good reception from the users that are now getting to grips with it as well. The 25 large deals over GBP 500,000, the mix from those is more diverse than you imagine. So financial services is a strong vertical for us, but there's many others too. So those large deals are spread across corporate, public sector and a whole range of verticals. So really nice diverse growth in those larger deals as well. The change in terms and conditions, dynamic pricing, yes, another operational challenge, love those because, again, I think our culture, our scale, our relationships with the vendors, the intimacy we have with customers, massive opportunity for us to help guide customers through it, deliver for vendors. So I do see it as a share gain opportunity. I don't think that issue in and of itself is going to mess around significantly with our GII to GP ratios and margins. So yes, lots of work to do there, but that's good news for us, good outcomes for customers, hopefully as a result.

And also thanks for the great slide showing that you are AI winners both externally and internally.

Thank you. This concludes today's question and answer session and today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.