Softcat plc (SCT) Earnings Call Transcript & Summary

Good morning, everybody, and thank you for joining us today. We're going to be discussing the acquisition that we announced yesterday by Softcat of GDT and also give you an update on our current trading as well. I'm Graham Charlton, Chief Executive of Softcat, and I'll start by talking about the transaction, the strategic rationale around that. And then I'll hand to Katy Mecklenburgh, our CFO, who will take you through some of the structure, funding and financial aspects of the deal as well. We'll have plenty of time for Q&A after all of that, too. I think most of you know the company very well and have had a chance to look at the presentation deck that we put available online and a chance to digest that afterwards. What I'm not going to do today is walk through all of the slides individually. We'll light on a couple of key ones, which will allow me to explain the reason that we've taken this step, some of the key aspects behind it as well. So if we could turn to the first slide, please. We'll use this one to set the step that we've taken in the acquisition in the context of our strategy because, of course, the important thing to appreciate is that this is not a change in direction for Softcat. This is an acceleration of a path that we've been on for a long time now. And this slide is the best way that we can capture our strategy on a single page. And we very deliberately start with why, as you all know, our people and our culture are the most important thing about Softcat and they have been the driving force behind our success, and that's an important part of the steps that we are taking today as well. But in recent times, the next slide we used, I think, last year in our full-year results presentation to lay out as succinctly as we can the direction that we are now taking. So we're very clear within this about what we do, for whom, where and how we do it. And within the where and within the ambition that we have to provide a leading global offering, we've been very explicit about the interest that we have in the U.S. market for some time now. And that interest is entirely customer-led. As our business has grown, become broader, more complex and capable for larger customers, the demands from those customers to do work for them in international markets has grown and grown, particularly in the U.S. And so for 5 or 6 years now, we've been building capability there and looking at the market in what I previously called a no-lose effort because by looking at the market, becoming familiar with providers there and how that market operates, the similarities and differences to the U.K., it's informed the organic build that we've been doing there anyway. And we've always been very clear that if and only if we found the right target, one that met a very high bar of criteria that we set, then we have the ability to act and accelerate as well. So some people have asked me during the course of the last few days, why now? It's not a question of timing. This is a question of having found the right group of people with the same operating ethos, a very similar strategy that wants to join forces with Softcat and be part of this vision and ambition that we have for the future. And so we have these 4 growth engines within our strategy. And the combination with GDT materially strengthens all of them. In the sales side, we get a scaled, capable, proven sales team on the ground in the U.S. able to serve our customers across the U.S. and the broader Americas. Within the broader offering, GDT has a strategically important deep capability in a very, very relevant part of modern infrastructure. Their depth of networking and data center capability complements Softcat's own. They have a carrier-grade integration center that they own and operate and bring a level of architecture and delivery capability that we do not have. On the operational excellence side, this is something actually that we weren't looking for within our criteria, but the Bangalore operation that GDT has built and established over the last 5 years gives us an access to one of the most exciting technology talent markets in the world. And once we've spent time with the GDT team out in Bangalore, which is 250 people, with about 180 of those working on the service delivery side, right from architecture through implementation and into the managed service side and also 60 people on the business operations side. Once we've seen the way that team has been built, the integration it has with the U.S. offering, the affinity it has for the GDT brand and culture, it was something that we realized that even if this acquisition didn't go ahead, it was something that we, Softcat, if we ever wanted to achieve our true potential, would need to try and replicate in some regards as well, and so that talent center in Bangalore, those 250 people is something we can invest in and continue to build to serve not only the U.S. market, but our U.K. and Ireland customers in time as well. And then special culture, I've already alluded to this. But again, we've been clear that we would only ever make an acquisition like we did with the business that we bought a few years ago in the U.K. around data services, Oakland. The affinity of operating ethos and culture has been a key factor in this deal. And that combination that we did with Oakland and the 70 people from that business, which has gone fantastically well over the last 2 years, there's a very similar feel about this deal. The strategy that GDT has is exactly the strategy that Softcat has been pursuing over the last 20 or 30 years to broaden its offering, look after customers, but it's like we do that through starting with a focus on our own people. When I first met the GDT leadership team in Texas, it reminded me very much of walking into the Softcat senior leadership team for the first time 11.5 years ago. You could tell this was a group of people who enjoyed working together, were enjoying winning together. There was no politics at play. There was a real feeling of team spirit. And the more that we've spent time with them, and I'll expand on this probably more as well in the Q&A, but we've been -- we've known GDT for 4 years. I first met their CEO, Shawn, 4 years ago as he was taking up the role back in New York on some market research that we were doing. And we could see the strategy that they were laying out, and we followed their story since. And when we proactively engaged with them back in January or February, and we met the broader team, there was an immediate excitement on both sides about what we could build together. And we've worked very closely with Shawn, his leadership team, and layers of management over the last 6 or 7 months, building the joint value creation plan that we think our businesses can now execute together. So we have gotten to know their people in real depth over that time. And the ethos that they have around people, care for people, care for customers, and doing both of those things to drive a successful business, there's a strong resonance between us on the cultural side. So we're really excited about all of the aspects of the deal for that reason. And so if we move on to the next slide, I'll summarize, therefore, what we think GDT brings to Softcat. So they bring a highly capable leadership team with that cultural alignment that I've mentioned. They, the leadership team and the broader business, have a proven track record in the U.S. market. They bring deep networking and data center skills that they've applied into an established customer base across the upper mid-market and Enterprise Corporate segments. They have terrific partnerships with key vendors, such as Cisco, NVIDIA, NetApp and top-level accreditations across them and other vendors. And I've mentioned the business or the operation in Bangalore, which provides us with access to a talent market and helps create across the 3 service centers that we'll now have in the U.K., the U.S. and in Bangalore, an ability to provide 24/7 service delivery and support to our customers. And so to summarize what the combination brings to all parties, if we turn on to the next slide, we think that this is a combination that's so complementary that we end up with a stronger Softcat, a stronger GDT. And together, we provide an offering to customers that neither business can replicate in isolation. Softcat is stronger because our U.K. and Irish customers get immediate access to the fulfillment capabilities and capacity in the U.S. and the broader Americas that GDT brings. They bring a deeper level of infrastructure and networking capability that fits right in the heart of areas where we already operate, but bringing incremental parts to that offering. And they have vendor relationships that are in common with ours. And immediately, we're a stronger business for our partners that we're already working with. GDT gets immediate access to the Softcat vendor relationships. I mentioned that GDT are building their capability and broadening their offering. They've been doing that very successfully over the last 4 years under the ownership of H.I.G. And we are the perfect owner to help them with that effort, whether it's vendor relationships or on our broader IT solutions offering. The path they are on is the one that Softcat has been treading for the last 20 or 30 years. So moving into new vendor relationships, creating new service offerings, creating new sales motions is something that we have been doing for a long time now, and we can help GDT build their offering in exactly the same way. And of course, the U.S. customers get the benefit of Softcat's fulfillment capability in the U.K. and Ireland, Europe and the Eastern Far East that we've been building that capability in as well. And together, we can provide for large and complex customers with international needs one of only a handful -- we're one of only a handful of providers now that can do true global fulfillment around deep capabilities across the whole span of modern infrastructure. And of course, all of this is underpinned, as we've mentioned a few times now, by the alignment of culture, the people-first ethos that we have and the customer-centric nature of our operations. So very happy to take more questions on all of those aspects later in the Q&A. But for now, I will hand you to Katy, who will talk through some of the financial aspects of the deal.

Thank you, Graham, and good morning, everyone. Importantly, GDT brings increased scale and value to Softcat, enhancing our U.S. proposition and allowing us to improve our global relevance and delivery capability. On a U.S. GAAP basis, in the current financial year to December '26, forecast gross profit is expected to be circa $240 million and adjusted EBITDA around $80 million. And the group is strongly cash generative with a structurally similar cash conversion to Softcat. We also note that the accounting policy used by GDT and their U.S. peers differs from Softcat's, with the core difference relating to revenue recognition on multiyear contracts. When this change is applied to GDT, it will have the effect of lowering GP and EBITDA growth in FY '26 and increasing the growth rates over the next few years with the impact washing through over a circa 3-year period. Our policy more closely aligns profit with cash. As you'll see on the right, the acquisition of GDT will provide us with greater networking and security capabilities while retaining strong incumbent positions in public cloud and data center and workplace. And while the U.K. will remain the core focus of the business, the acquisition provides greater diversification with a fifth of the combined business in the U.S. I'll now touch on the financing and structure of the deal. Softcat will pay a confirmed purchase price of $1.05 billion or GBP 785 million in cash on a cash- and debt-free basis with normalized levels of net working capital. The consideration will be financed through cash on the balance sheet of GBP 100 million, new debt facilities that include a GBP 100 million term loan and an expanded RCF of GBP 450 million. And in terms of the margin, it is circa 100 bps over SONIA when leverage is below 1.5x. There has also been a successful equity placing via an accelerated bookbuild of circa GBP 350 million, representing less than 10% of the issued share capital. The business will continue to deliver organic growth across both the U.K. and the U.S., with the GDT acquisition expected to deliver in the range of high single-digit to low double-digit underlying EPS accretion in the first full fiscal year of ownership, assuming a completion during FY '27 and a medium-term tax benefit. On closing, we anticipate net debt leverage of 1.3x with a clear pathway to below 1x by July '28, in line with our new target leverage range of 0.5 to 1x. Our capital allocation policy is not changing. We will continue to prioritize organic growth and maintain our progressive ordinary dividend policy with any excess cash once we're at a net leverage range, then allocated to strategic investments or returned to shareholders. And we've also announced a trading update, which I will run through next. Softcat continued to trade well during the fourth quarter, delivering broad-based growth across technology areas and customer segments. As a result, the Board now expects to deliver high-teens growth in full-year underlying operating profit, up from mid-teens previously, with gross profit growth moderately above this. The group also remains strongly cash-generative with FY '26 cash conversion expected to be towards the top end of our guided range of 85% to 95%. Softcat operates in a significant and growing market and continues to invest to drive future market share gains. Looking ahead and excluding the contribution from GDT, the Board expects to deliver high-single-digit underlying operating profit growth in FY '27. I'll now hand back to Graham to summarize.

Thank you, Katy. So yes, hopefully, very clear rationale for why we're taking this step, something that we've talked about for a number of years now. As I mentioned in the opening comments, it's not a question of timing. This is a question of having found the right group of people that we think can accelerate the path that Softcat was already on with the capabilities, but also the cultural outlook and ambition that matches our own. We are both experiencing strong growth, have good momentum in our business. So this combination is coming from a position of strength, and we're bringing together highly complementary businesses as well. So we're very excited about the future, both on the Softcat side and the GDT side of this combination and looking forward to a long and successful future together in a market that we think is as exciting as any in the world to operate in right now. So looking forward to taking your questions as well. We'll hand it over to the lines.

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

Congratulations on the acquisition. A few questions from me, please. Firstly, just on GDT. On the 30% gross profit growth rate through 2026, you touched on the U.S. GAAP to IFRS conversion. But is there anything else for us to strip out or add back there? I'm just trying to get a sense of a normalized gross profit growth for this business. So it would be great to get your views on that, please. And then secondly, just on GDT. Graham, could you just maybe expand on exactly what attributes of GDT stood out and cleared that very high bar that you set for acquisitions? And then the last question is just on the organic side of the house. The FY '27 guidance for high single-digit EBIT growth, I guess it's in line with the usual outlook, but also I'm aware that we're kind of growing off a larger base of FY '26. So can you talk about some of your assumptions built into the guide, particularly relating to larger deals, component pricing, supply chain, that, sort of, thing? That would be great.

Thanks, Joe. Let me just kick off on the first one, then I'll hand over to Graham for the second and then maybe come back. So the simple answer is there are no one-offs in the GDT FY '26 numbers. So we'll have the complexity of moving it on to our own year-end and under our own accounting policies, but nothing else to call out.

Yes. And thanks as well, Joe, for the questions. On the attribute side, in summary format, capability, cultural alignment, scale and established nature of their business, the Bangalore operation, as I mentioned as well, and also the ambition of the management team and the company. So on the capability side, we knew that any target that we look at in the U.S. would have a narrower range of capability than Softcat almost by definition. I've talked many times about how I think our capability is broad and deep as anyone in the global market, certainly for customers in the U.K. and Ireland. And we've been establishing that business over 34 relentless years of organic growth and building that offering. So we knew we'd be starting in a narrower set of capabilities. But the capability that GDT has is profound, and it's in the right place, and we can build from there. It's got high relevance to modern IT infrastructure. They have already, over the past 4 years under the management team that's in place, been pursuing that strategy of broadening out. They've added compute, storage, and security capabilities, and we can accelerate that as well. So strong capabilities in the right place, building out from there. The Bangalore operation, the access to talent is a huge plus point in the deal for us, met the team, spent a couple of days with that team out there, love the culture of that team, the way it's integrated with the U.S. So that was a fact that once we've seen it, as I mentioned, we couldn't unsee it. The potential that, that gives to Softcat for us to realize our ambition over time is really very exciting. The most important point was that cultural alignment as well, though, like I said, this is a team of people who enjoy working together, got great momentum, reminds me of Softcat in many, many ways. And we know those people now, having worked with them very closely over the 6 or 7 months. So that was an absolute gating factor. We had to find a group of people who are excited to join us, shared that care for people in their culture and had huge ambition. And also the established scale. So again, I talked previously, there's a couple of logics that you could apply to Softcat acquiring in the U.S. One says, start small, you've not done it before and build around it. That creates an awful lot of single points of failure and effort and also doesn't make you scaled and relevant in what is the biggest market in the world until a lot of time and effort has passed. So what we've acquired with the scale and track record of GDT is not just a leadership team, but a broader management team with real depth with established customer and vendor relationships with an established brand built around capability and engineering. And we can put wind in the sails of that already very successful operation. I mentioned a few times that the management team are very excited to join Softcat. We're very excited to join forces with them. I know the reaction in both businesses yesterday was terrific. The broader teams are really excited about what we can create together now on a global scale. So the ambition and scale is also a big factor. The practical points as well like them being they operate coast to coast, which is a terrific first step to be able to take. But the fact they're based on the east side, largely based on the east side of the U.S., was something we needed so that there's overlap in the working day as well because while we don't intend to crash together and integrate the businesses, we do want to work very closely and build deeper collaboration over time to drive value out of the joint value creation plan that the 2 teams have built over the last 6 or 7 months of working together. So those are the key factors. They were laid out, and we've been looking at them for 5 or 6 years, and they've met the bar and added other things in there that we weren't even really sure that we needed and wanted. But once we saw the GDT operation, we knew that it was exactly the right fit for us.

Shall I answer the third question? So Joe, we'll give more color when we do the results in October, so just under a month's time. But clearly, you're right, we have had brilliant growth for the last couple of years, both on the base business, but supplemented by a couple of those extraordinarily large deals. We don't have anything of that scale in the current FY '27 pipeline, but those deals that we've referred to recently above GBP 0.5 million of gross profit that we continue to get really strong growth in and a great trajectory there. So we're sort of confident of that number. We've seen great base business performance as well as those extraordinary deals in FY '26. So yes, confident in the number, but we'll give you more color in October.

Next we'll be going to Charlie Brennan of the Jefferies.

I'm actually just going to ask a couple of clarifications, if I can. You've referred to the difference in accounting a couple of times. I guess you won't have finalized the full accounting detail. But can you just give us a broad sense of the magnitude of the benefit from multi-year deals in the latest period? And I guess following on from that, I haven't heard you articulate what you think the forward-looking normalized growth rate is going to be for GDT. And then on a separate topic, I guess you said you're not going to integrate the businesses, so it doesn't really matter. But I'm under the impression that U.S. sales commissions are typically much more generous than they are in the U.K. Do you think that's a problem for the culture integration? And do you have any plans to harmonize those commission structures going forward? And just very lastly, apologies, you referred to the management of GDT a couple of times. Can you just talk to the incentives that you're putting in place? I guess share-based payments are perhaps more common in the U.S. Should we assume that there's a share-based comp implication of incentivizing the management to stay going forward?

Perhaps, let me kick off. And you're right, Charlie, we have not yet managed to work through the accounting policy. We're going to need to go contract by contract. So what we have done is sort of estimate. But worst-case condition that we think and we imagine this is prudent, but the number that we've used and we've used it in those EPS numbers that we've given as well, is a GBP 10 million reduction in FY '26, that's GDT's FY '26, but then that will sort of smooth over the next 3 years. So you see a decline in the '26 growth rate and then an increase in out a couple of years. And as I said, it kind of washes out in that time period. So clearly...

Does that drop all the way through? So it's GBP 10 million less on gross profit and GBP 10 million less on EBITDA?

Yes, that's an EBITDA. Gross profit number is slightly different, just your net of commissions, but you can say GBP 10 million on both. It won't be far wrong. And as I say, at this point in time, it's an approximation. So yes, we will obviously give more information when we've had a chance to work through all of the details. In terms of how we're thinking about sort of that medium- to long-term growth rate, so you'll be very familiar with the Softcat growth formula of low double-digit gross profit growth, high single-digit operating profit growth. Make complete sense. We're less than a 5% market share in a growing market and therefore, being able to have that headroom to invest to build future market share has been one of the things that has absolutely underpinned our long-term success. And if you think now about the big business, it's as relevant as ever before. We have now a larger addressable market, a smaller market share. And therefore, that formula, we will now apply to the larger business as well, so a bigger base. And that's how we're thinking about it and really excited about being able to deliver on that. In terms of the short term, the next couple of years, we're going to plan prudently around mid-single-digit operating profit growth, gross profit just slightly ahead of that, to make sure that we have got the absolute focus to make sure we set everything up for the future. Those numbers are the GDT numbers for the next couple of years, and that's the way that we're thinking about it, a good, prudent assumption.

And I'll pick up on the other 2, Charlie. Can you just clarify the third one? Was it solely around sales commissions? Or was there a broader aspect to it as well?

No, just sales commissions, I'm guessing there's a higher payout ratio in the U.S. How are your U.K. salespeople going to feel about that? And do you think over the medium term, you need to harmonize those onto the same commission stream?

So we've mentioned that the management team, we intend to retain all of the people and the operating structures that exist in both businesses. So we're not going to change the way either business operates. The beauty of this is that both have a structure that works in that local market. And what we're going to do as we build the businesses together is retain the operations that work in those local markets. So the earnings potential that our people have in GDT in the U.S. and in Softcat in the U.K. is profound. They've got a great chance to earn good money for good performance on both sides of the fence. So we don't see the need to change the way that they operate. There will be new mechanisms that we put in place because the way this creates value is by centralizing and creating shared services where and only where it creates value. So there'll be evolution to those schemes as there always is within our business, our business never stands still in the way that we do commission schemes or anything else for that matter. So there will be evolution and a chance for us to innovate that operating model as we go forward. But we're not intending to harmonize the 2 businesses onto one common set of operating rules. Then you asked about management incentives. Yes, we thought very carefully about retention and incentivization because, as I've mentioned a few times now, we want to retain all of the people in GDT. That's the leadership team, the management team and everybody else. And so the structure that we have for our leaders and managers and people in Softcat will enable us to put in place a very attractive earnings opportunity for people in GDT as well. For our leadership team, there is a strong stock-based element to that, and we've got some good mechanisms within that, that we can use for GDT too. So that will be over the short-, medium- and long-term horizons as well with different aspects of those schemes applying, as you might expect.

And just for our modeling purposes, should we assume that you'll take the cost of those share schemes through the P&L as you currently do? Or should we assume that they're big enough that you'll call them out as perhaps separate line items?

So Charlie, within sort of the base -- the historic financials, there was the GDT scheme. And then -- so we just will replace that with a Softcat scheme, the quantums will be roughly the same magnitude.

Next question will be coming from Tintin Stormont of Deutsche Numis.

First on GDT. Historically, they delivered minus 7% GP growth in '24, then flat in 2025. And obviously, on the basis -- on the same basis, they're now on track to deliver 30% GP growth in calendar '26. Can you just talk about what has changed the trajectory? And I guess, a different way of asking some of the similar questions that was asked already. What's the assumed GP growth rate in FY '27 and FY '28 that you're making implied by the high single-digit, low double-digit EPS accretion in FY '28? And then just secondly, I'll just ask it now. Prior to the more recent contribution of large solution deals in Softcat, there was strong diversification at Softcat with no one customer accounting for more than 2% of GP. What's the current concentration -- customer concentration like at GDT on that $240 million of GP in 2026? And finally, an integration question, not on comp, but obviously, you're making significant investments in your CRM and HR systems as well as AI tools. Could you comment perhaps on, sort of, kind of, the level of sophistication of the systems within GDT and if there's anything that you're doing on that side of things?

Okay. Thanks, Tintin. I'll have a go at a lot of those elements, but I'm sure Katy will top up on a few, particularly on the go-forward guidance. So H.I.G.'s owned GDT for the past 4 years. H.I.G. acquired a mature, very capable and scaled business around networking capability into telco carriers. The strategy over the last 4 years has diversified what was a large and cyclical business into something with more sustainable growth pathways. That is what appeals to us. And as we know very well, when you bring in cohorts of new account managers and broader offerings, broaden offerings, you need time to develop customer intimacy and trust in those new offerings, and you build strong growth, but off a very low base. So in the work that we've done to look through the top-line P&L numbers, we can see evidence of customer growth, GP per customer growth, broadening revenue streams underneath what were some big comps in the legacy business in the '23, '24 years. So you get a profile that looks -- well, as you've described, which is flat, to then increasing and strong growth in more recent times. But our diligence work, both around looking at the metrics under those numbers, but also the commercial due diligence with customers and their partners, shows how strong the sustainable growth pathways coming through have been. And we see that in our business. It's a pattern we recognize. And so we are very confident in the growth that they are delivering and how we can build upon that. And I'll maybe just pause slightly as Katy talks about how we think about that going forward, and then I'll come back on some of the other points.

Sure. Thanks, Graham. So Tintin, as I said, for GDT for the next couple of years, we are taking a prudent approach, and we're going to plan at mid-single-digit operating profit growth with gross profit sort of slightly above that. Hopefully, that makes sense.

And on customer concentration, I mean, GDT is a narrower and smaller business than ours, as we've said. And so there is a degree more customer concentration, again, because of the history that, that business has had, too. But it's not wildly different to Softcat's customer concentration. I think GDT's top 10 customers account for something like 30%, 35% of gross profit. The equivalent number for Softcat is about 15%. They have 700 customers. We have 10,000. So customer concentration, we're entirely comfortable with, and we're very excited about the growth potential in that existing customer base as we broaden the offering, but there's a whole ton of new customers that we can help them work into as well. On the systems side, they're in very good shape. So the due diligence work we've done there has shown they've got modern systems in place. We do not need to carry out any remedial work or heavy lifting integration. They've got a good modern contemporary base of systems to work from.

Next question will be coming from Bharath Nagaraj of Cantor Fitzgerald.

Hope you can hear me. Broadly speaking, could you talk about why you think this is the right timing? I appreciate that you said it's not exactly about the timing, but in the context of the ongoing debate around ROI on the AI data center CapEx, given that we've already seen a few years of large CapEx deployments? And thirdly, worries -- recent worries regarding how resource-intensive the data centers are, why do you think this is the right kind of timing for it, especially given the growth rates have been a bit lumpy as the previous person mentioned? And secondly, could you provide some color on the medium-term tax benefits that you mentioned? And also any color on the broad split of software, services and hardware for GDT?