Softcat plc (SCT) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Softcat FY '26 results presentation. I'm Graham Charlton, Softcat's CEO, and I'm really pleased to be taking you through an exceptional set of annual results today, joined as always by our CFO, Katy Mecklenburgh, who you will hear from shortly. As you'll recall, a little under a month ago, we announced the acquisition of GDT. The response to that transaction from our customers, from vendors and employees has been very positive indeed. And the acquisition will add significantly to our offering, create new capabilities and growth pathways for our business. Today, our focus will mainly be on the progress that we've made in the U.K. and Ireland business over the past year. But I will touch on what GDT brings to the opportunity that we have looking forward towards the end of the presentation, and we'll happily take questions across all of that at the end as well. Before I hand to Katy, I'll do the usual recap of who we are and how the business is evolving. This year, we've again extended our position as the U.K. and Ireland's leading provider of IT infrastructure solutions. We've delivered a year of exceptional growth across an increasingly broad and differentiated customer offering. So this slide shows that we are -- that we operate across the entirety of the modern infrastructure stack with the broadest offering and the largest and most diverse customer base in the U.K. Increasingly, we've been asked by customers to support their international operations. We serve more than 10,500 recurring customers across both the private and public sectors. I mean it's a combination of those trusted relationships and the breadth of our offering, combined as well with the outstanding customer service ethos that we've always had. Those are the things that drive the sustainable growth that we continue -- and aspects financial review, I'll explain how I think we are uniquely positioned for the relentlessly expanding opportunity in front of us and how the acquisition of materially augment the existing strength that we have. And aside from the acquisition of GDT, during the year, we've continued as well to invest more than ever before in our own business, our technology our people and our workplaces. At year-end, we have over 3,000 soft caters now based across 12 offices in the U.K., Ireland and internationally. We've strengthened all teams across again this year, added new capabilities, more capacity and equipped our people with a very best enterprise applications and tools. As a result, we've begun and will continue to deploy innovative AI functionality to transform over the coming years, both our operations and our customer proposition. We're not just seeking to extend the competitive advantage that we have with these investments. We are looking to define what world-leading value-added customer service looks like in our industry today. And I'll come back to all of that in more detail later. But first, I'll pass you across to Katy, who will take you through the details behind the exceptionally strong year we just closed.

Thank you, Graham, and good morning, everyone. I am very pleased to share Softcat's results for FY '26, reflecting another year of successful execution and strong profitable growth. alongside significant reinvestment to drive our future performance. In summary, we've delivered another very strong year of growth, which was ahead of our expectations at the start of the year. This growth is supported by the previous investments that we've made in our offering, our people and capabilities and systems and office network, which have enabled further market share gains and improved our internal operations. Gross profit, our key measure of income grew by 24.7%, primarily driven by the strength of our underlying business performance, supported by the contribution from larger solutions projects and the pull forward of some orders due to memory shortages. Underlying operating profit growth increased by 19.4% to GBP 215.1 million, reflecting strong growth in gross profit partially offset by a significant increase in underlying operating costs, which includes both ongoing and one-off investments that we made in the year to support future growth. Underlying cash conversion of 93.6% for the year is towards the top end of our target range, and we ended the year with GBP 199.9 million of cash, having returned GBP 45 million shareholders through our first ever share buyback during the year. And the Board has proposed a final dividend of 21.6p per share, taking the total ordinary dividend for the year to 31.5p. This is an increase of 7.5% in line with our progressive policy and underlying basic earnings per share increased by 19.7% to 83.2p. So turning to the summary income statement and starting at the top. Gross invoiced income grew by 30.5% to GBP 4.7 billion. Hardware GII increased by 41.6%, supported by strong data center and networking sales, including the contribution from large solutions projects and pull forward of some customer orders due to memory shortages. Services grew by 30.1%, driven by growing share of partner supported business or software increased by 25.3% with strength in cybersecurity, licensing and Microsoft CST. Revenue grew by 35.4% ahead of GII, largely due to hardware, which represents a higher share of revenue as it is reported on a gross basis under IFRS 15. Software revenue growth of 22.6% was slightly behind GII growth primarily reflecting a mix shift into lower-margin products. Services revenue growth of 21.1% was also behind GII growth, reflecting a higher share of externally provided services, which are reported on a net basis. Gross profit grew by 24.7% to GBP 616.3 million, reflecting broad-based strength across our technology portfolio and customer segments. Gross profit growth was particularly strong across our corporate business with both enterprise and small and medium customers delivering strong double-digit growth and public sector grew by high single digits. Technology area, growth was driven by data center infrastructure, networking, security and client devices, while hardware, software and services all grew double digits. Overall, gross profit as a percentage of GII declined by 60 basis points year-on-year, reflecting a mix shift into lower-margin products, the impact of the Microsoft EA changes and the diluted impact of large solutions projects at lower margin. The higher-than-planned gross profit growth and more moderate employee growth drove gross profit per employee to increase by 12.5% almost GBP 211,000. Moving on to the next slide. Underlying operating costs increased by 27.7% ahead of gross profit growth as we reinvested strongly back into the business. Commissions grew in line with commissionable gross profit, while wages and salaries increased by 16%. Average head grant growth grew by 10.8%, including Oakland reflecting continued investments across technical specialists, sales support and back office roles. We also continue to invest in our internal IT capabilities, systems, data and digital and office refurbishments which will support our future organic growth, while we also built out our corporate development capability. Cost growth included the annualized impact of higher employees at national insurance contributions. And thanks to our outstanding performance, we were also able to award all of our share -- of our employees with a one-off share award. This recognizes the role our people play in delivering our consistent outperformance and gives them a way to share in Softcat's future success. Other one-off costs advisory costs relating to the GDT acquisition and outperform elements of other variable pay. Underlying operating profit grew by 19.4% to GBP 215.1 million, as operating costs grew ahead of gross profit, the underlying operating profit to gross profit ratio reduced to 34.9% from 36.4% last year. During the year, we incurred GBP 18.7 million of non-underlying costs. These comprised of GBP 15.6 million of development costs relating to the implementation of our new cloud-based sales and HR systems, which could not be capitalized. These systems projects were delivered in line with budget and an important part of the foundational platform supporting Soft caps data, digital and AI transformation. The balance of GBP 3.1 million related to Ocean acquisition-related contingent consideration and amortization of acquired intangibles. After deducting these non-underlying costs statutory operating profit GBP 96.4 million, an increase of 13.6% year-on-year. Looking forward to FY '27, non-underlying costs were increased by a factor of around 2x to 2.5x with lower costs relating to system development, but including GDT acquisition and integration costs. Net interest income increased to GBP 6.4 million from GBP 5.3 million last year. reflecting higher interest income earned on cash and cash equivalents despite lower average interest rates. And finally, the effective tax rate increased to 25.8% from 25.4% primarily reflecting the additional all deferred consideration relating to Oakland and a small impact from other nondeductible expenses. Profit after tax increased by 13 points to GBP 3 million. And now turning to our customer base and portfolio offering. These charts illustrate the balance and breadth to underpin our performance across customers, products and technology areas. Our customer mix remains well diversified across corporate and public sector organizations, ranging from smaller businesses through to larger enterprise customers. This breadth reduces reliance on any individual segment and gives us to growth. We also retain a balanced mix of software, hardware and services supported by a technology proposition, spanning public cloud and data center, networking and security and the hybrid workplace. Together, this diversification and breadth of capabilities strengthen our resilience, deepen our elements to customers support further sustainable growth and will be further enhanced by the GBP acquisition. And moving slides and on to our customer metrics. The chart on the left shows the continued growth in our top customer base and average gross profit per customer, demonstrating our ability to acquire new customers and to deepen our existing relationships. During the year, our customer base grew by 3.4% to over 10,500 with net new customers added across all segments, led by small and medium. This is an acceleration over our last 5-year average growth, demonstrating the greater support customers need as the IT landscape becomes ever more complex. Gross profit per customer increased by 20.6% to GBP 580 reflecting further progress in selling more to existing customers across our technology portfolio. The chart on the right focuses on customers with , we have a more established craving relationship measured as those generating at least GBP 1,000 of gross profit in the year. These customers tend to buy across more technology areas and a broader range of vendors. The number of customers in this cohort grew by 7.1%, again above the 5-year average, while gross profit per customer increased by 16.5% to GBP 7,000. The longer tail of transactional customers remains an important source of future growth, while customers generating at least GBP 1,000 of gross profit account for approximately 99% of the group's gross profit. And now turning to cash. Underlying cash conversion was 93.6% towards the upper end of our target range of 85% to 95%, reflecting continued good working capital management. Cash generated from operations before tax and after capital expenditure was GBP 101.4 million. Depreciation and amortization increased slightly year-on-year following our recent investments in offices and internal technology while CapEx more than halved primarily reflecting lower spend on new office depots compared with the prior year. Cash tax was GBP 50.5 million, broadly reflecting the great impact profit. During the year, we returned GBP 137.5 million of cash to shareholders, comprising of GBP 92.5 million in dividends and GBP 45 million through the share buyback program completed in February this year. We ended the year with cash balances of just under GBP 200 million, an increase of GBP 17.6 million year-on-year after funding the aforementioned shareholder returns and our continued investment in the business. Overall cash generation remains strong and provides a solid foundation as we continue to invest for growth, both organically and through the acquisition of GDP. The next slide covers the ordinary dividend. The Board has proposed a final ordinary dividend of 21.6p per share based on the number of shares outstanding following our equity placing for the acquisition of Combined with the 9.9p per share that we paid at the interim stage, this results in a total ordinary dividend for the year of 31.5%, which is up 7.5% on last year and in line with our policy of paying out and 50% of profit after tax on an annual basis. In the second half of the year, we established a new revolving credit facility of GBP 50 million, which remained undrawn after the year end and transaction, we have negotiated an extension of the RCF to GBP 450 million, together with a term loan of GBP 100 million as well as supporting the acquisition of GBT, the RCF reflects a 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 facilities. The cash flow is currently GBP 90 million and unchanged from last year, but will be reviewed after the GDT acquisition closures to take into consideration the requirements of the enlarged group. And now turning to capital allocation. We have a disciplined approach to capital allocation. Our top priority remains unchanged and is to invest in future organic growth, which supports our ambition to take further market share and enable us to continue to scale the business, delivering long-term shareholder value. Our second priority is to maintain a progressive only dividend policy and any remaining excess capital is then either allocated to compelling inorganic investments or return to shareholders. Moving forward, outside of temporary requirements support material strategic investments, the group will target a net debt-to-EBITDA ratio of 0.5x to 1x. Following completion of the estimated net debt leverage is forecast to be at 1.3x and expected to be below 1x by July 2028. And finally, moving to the outlook. Excluding the contribution from GTT, the Board expects to deliver high single-digit underlying operating profit growth in FY '21 slightly ahead of gross profit growth following a very strong 2-year growth across FY '25 and FY '26. In terms of phasing, we expect GP to be first half weighted given the strong second half performance in FY '26 with underlying operating profit more balance across the year, reflecting one-off costs in the second half of the prior year. And with that, I'll now hand over to Graham to run through the strategic update.

Thank you, Katy. And I will talk about two main things now in this section. Firstly, the growth and investment that Softcat has achieved and made during the past year. And we'll look at what's been driving the performance. We'll also look at how we've been investing for the future in that time as well. And we'll start by looking at why I think we performed strongly this year. And firstly, our core strategy clearly continues to work well. Our focus on outstanding customer service and the breadth quality of our offering differentiates Softcat in the market and deepens trust with both our customers and vendors. By sustaining investment across market and economic cycles, we've continued to compound double-digit growth, and we've expanded and modernized our capabilities relentlessly. Execution has remained strong as well, which comes from our special culture, the energy, alignment commitment of our people from the top to the bottom of the organization has been exceptional again over the past few years. Our market conditions have also been good for those with the right skills and offering. Procurement scrutiny remains high -- very high as prices have escalated, but customers have continued to invest in their technology. And in these conditions, we've been able to use the quality of our proposition to add new customers at an accelerating rate and grow GP per customer as you saw in KT's slides. Then we have the supply constraints around memory chips, which have been a net stimulus in the period. As the year has gone on, that situation has become more stable with price rises still happening, but in a more controlled way. supply of memory chips is highly likely to remain constrained across all of 2027 calendar year and probably well beyond that, too. Whilst this isn't a great situation for customers, it is something that we are particularly well placed to help them with due to the breadth and depth of our offering and vendor relationships. And finally, AI is benefiting our business in two very clear ways. Firstly, it's beginning to transform how we operate and go to market. the modern foundations of data and systems that we've implemented over the past 5 or 6 years have created an actionable platform for our own AI innovation, a little more on which later. But in addition, it AI is also building demand across all five of our technology towers. And I'll spend a few minutes now illustrating that point and how I think it will be a driving force in our industry for many years to come. So turning the page, I'll start with the slide we've used before to show how the modern technology stack can be considered to exist in two distinct players. Firstly, the applications where AI innovation is starting to accelerate. And secondly, the infrastructure required to run those applications securely and at scale. Now we don't do too much in the application layer, although some of our largest vendors cross into that space with our product range, most notably Microsoft. But the infrastructure layer, the software, the hardware and the services in that infrastructure layer. That's where we mainly we're helping our customers design procure, deploy and manage their operating environment. And as the application layer becomes more demanding, more data hungry, the infrastructure required underneath uronic must respond. And I'll illustrate now this in a little more detail with the next slide, which gives a flavor of what I mean. And while this is a busy slide, it really only shows the mirrors tip of the iceberg in terms of the scale and complexity of what's beginning to happen here. We start with applications at the top. AI functionality requires huge amounts of data, well organized data to run effectively that data has to be moved around networks and processed in the right way at the right time. And that data has to be secured through all of those movements and stages. It has to be accessed in different ways by different devices and it must be contained and updated and tagged within contemporary storage architecture. And AI is also creating new demands, such as the provision of and management on consumption of the language models to bespoke applications and [indiscernible] optimization of inference consumption. But as I say, this is just to shine a light on the very tip of a very simplified iceberg challenges our customers face to evolve their infrastructure and functionality of that are significant. And the solutions to all of that will be a work in progress for years and years to come. And in this environment, our role as a trusted adviser with broad capability has never been more valuable. We have deep customer intimacy. We understand their business and their legacy architecture. We have access to the latest products and developments of hundreds of the leading vendors. We have top-tier accreditations with those vendors, and we co-invest with them in the skills and services needed to design and deliver the new technologies. So we augment the capability of both customers and vendors with the skills that they need to do all of this. And in summary, the more complex and rapid that pace of change becomes the stronger, I think our proposition is as well. And I'll try and show now where I think the market will provide a very sustainable source of growth for us as well. And in fact, this isn't one investment cycle. I'll argue as well that it's not really a cycle at all. This slide shows that the 3 distinct overlapping elements of what is generally being referred to as AI investment. Firstly, there were a huge build-outs being done by the hyperscalers, and we're seeing massive infrastructure spending there, and the current forecast suggests it will continue to grow. At some stage, the pace of that investment may moderate, and there may be volatility along the way. At Softcat, we've got very little exposure to that hyperscale scale of investment. We do, of course, resell the products of that investment, such as Copilot, Microsoft Foundry, Azure, OpenAI, Fabric, Amazon Bedrock and many others. But we are not selling any hardware into the hyperscalers. We are dealing with some of the Neoclouds, and that's an interesting market for us, but we're selective with who we target in that space. And during the past year, we got less than 2% of our gross profit from that space. Our core market is the corporate and public sectors from the small to the large and complex. All of those organizations are at the very beginning of their investment in AI capable infrastructure. And this isn't just my view. It reflects what we hear every day from our customers, and our vendors, and it's supported to by the forecast of both IDC and Gartner. IDC reckon that edge computing spend will grow at an annual rate of 15% over the next 3 years and I think Gartner have it at 14%. So Softcat, I think it's clear that we have the skills and the momentum, and we are in 1 of the most attractive parts of the market. The GDT acquisition augments this position by bringing complementary skills and services right at the heart of the data center and networking core of modern infrastructure. So how do we plan to seize upon this massive opportunity ahead of us. Well, this next slide showcases the familiar flywheel that's driven Softcat's growth over many years. Our culture drives exceptional customer service, that service builds trust and loyalty and the resulting performance allows us to reinvest in our people and the proposition. Over time, this cycle has created 2 enduring advantages. Firstly, market-leading customer engagement; and secondly, the breadth and quality of the offerings that we have performance over recent years. And certainly, as you've seen in FY '26, shows that, that model continues to work. Yes, our share of a large and growing market remains relatively modest despite being the largest in the U.K. and Ireland only around 5% or maybe 6%. This leaves enormous scope for us to grow to win new customers and to deepen existing relationships and sustain growth over decades to come. And so this next slide is a reminder of the strategy that we have to build around the same four engines of growth that have been driving us over the past few years. This structure remains unchanged, but as well as with our organic investments, the GDT acquisition and the Oakland acquisition a few years ago has accelerated our progress across a number of these areas. And I'll walk through each of these four engines in turn now and list the progress that we've made organically, and then I'll come back to GDT at the end and explain how that fits within this and create some exciting new synergies and opportunities for us. So we'll start with sales and customer excellence. This pyramid illustrates one of the core strengths of our model, which is how our account managers build and nurture their customer relationships over many years. And as that trust develops, we can address more and more of their needs and gain a greater share of wallet. During FY '26, we continue to strengthen this approach across every segment. from the SMB and mid-market customers in the corporate and public sector through to large or complex enterprise organizations. Our modernized systems, data and analytics are helping us to allocate accounts and resources much more effectively, while new tools such as CAT NAV are enabling our people to access our capabilities, vendor relationships and pricing structures with greater speed and relevance. Alongside this, we continue to build our multinational capability. And even before the addition of GVC and developed more tailored go-to-market approaches in selected verticals, including financial services and insurance. These investments are supporting growth at every level of this pyramid and our total customer base, as Katy has already mentioned, which remember, includes only those customers who have traded with us in 2 consecutive years. That customer base increased by 3.4% and gross profit per customer was up by 21% almost. The number of customers who are generating more than GBP 1,000 of gross profit increased by 7.1%, and GP per customer in that group was up by 16.5%. And on the right-hand side of this slide, you can see that the number of transactions generating more than GBP 0.5 million of GP rose by 17% in '26. So every level, the strength of our relationship with the customer base continues to improve, delivering good outcomes for those customers and sustained growth and more future potential for soft care. We'll move on now to the broadest offering. And on this slide, you can see the interplay between the five technology towers within our proposition, the vendors we work with across those areas and the service disciplines, which span all of that as well. During the year, we've seen broad-based growth again across the whole portfolio, and we continue to invest in new skills and services within each of the towers, working closely with the vendors to bring their innovations to market into practical outcomes for customers. The acquisition of Oakland has worked brilliantly for us over the past 18 months alongside this organic evolution and helped accelerate our capabilities in data, automation and in AI. The integration of Oakland is progressing very well and to plan and is enabling us to engage at an earlier point with customers as they assess their data and the organization and governance of that data to set the foundation required for AI adoption at scale. We'll turn on now to operational excellence. And as you know, we've invested significantly in the systems, the data and the processes needed to support our next stage of growth. Those foundations are pretty much in place now, and we're moving from platform enablement into optimization with new analytics, new automations beginning to improve the speed, quality and scalability of how we operate. We're bringing together cleaner internal data with external insight on customers, markets and products. Microsoft CoPilot is providing an increasingly important access layer across all of these applications while the proprietary tools that we're creating within all of that allow us to innovate processes further. [ CatNat ] and our cross-sell analytics are among the first examples of this. They're helping people -- our people navigate the offering access our vendor relationships and pricing structures and identify relevant opportunities faster. We've continued as well to enhance our customer portal, ECAP through direct integrations to internal and vendor systems providing an improved internal user and customer experience. And during FY '26, we also completed the rollout of our new HR platform, while our new sales system as well is also now live for an initial group of users and ahead of a wider phased rollout. Together, both of those new systems will enable greater automation, better experiences and more scalable processes across the group. And we are at an early stage, but the direction is really clear. The combination of third-party AI functionality, proprietary tools, stronger end-to-end process ownership, all of that is beginning to transform our operating will create meaningful opportunities for us to improve productivity, execution and most importantly, customer service. And finally, we'll consider our special culture. So the essential elements of this culture are shown here and remain the foundation of all of our success. As the business grows, we've continued to evolve how we preserve that culture, giving our people a genuine voice, trusting and empowering them and keeping leadership accessible recognizing great attitude results and maintaining the straightforward and informal environment that makes Softcat distinctive. During the year, we invested in and developed local leadership teams in each of our offices, giving them greater support and autonomy to shape the employee experience that we're developing in each location and maintaining our transparency of communication, recognition and continuous feedback. As a result, our employee Net Promoter Score increased to 56% from 55% last year, and our employee engagement score was up from 88% to 91%. We also ranked fourth in the U.K.'s Best Workplaces for 2026 in the super large category. And we retained our Great Place to Work certification in the U.K. and in Ireland and the U.S. as well. We continue to invest in workplaces that bring our people and our customers and vendors and other partners together alongside the relocations that we've done for Manchester and Dublin and the interim refresh of the Mallow headquarters. We've also refurbed in Newcastle, South Coast and the leads offices during the year. And we are now bringing together the insight from our employee surveys and the extension benchmarks that we have access to, to shape the employee experience priorities and agenda for FY '27. And now before I finish with a summary, I'll come back to GDT and the acquisition there and explain why we are so excited about the combination of the two businesses. At its heart, we think this is a very complementary combination. Softcat will be stronger as a result, GDT will be a better business, too. And together, we will be able to offer customers something that neither business could provide in isolation. The softcat, our customers in the U.K. and Ireland gained access to GDT's fulfillment capability across the U.S. and the wider Americas also brings deep expertise in infrastructure and networking right at the heart of the market opportunity that I talked about earlier. Their complementary skills and services and strong relationships make us a more valuable partner from day 1 for both customers and vendors. In fact, since we've announced the deal, I've been on 4 or 5 customer calls and GDT has been a material factor in 3 of those conversations, the latest of which actually was last night with a U.S. procurement team from a global communications business. And I can tell you for a fact that as a direct result of the acquisition, we've already won new business with our U.K. customers. And for GDT, the opportunity is just as clear. They gain access to our broader portfolio and our experience of having built that organically over time. And what I think is the most comprehensive solutions business in our industry. GDT has made excellent progress already on this track over the past 4 years, but I believe that we are the best possible owner now to accelerate that journey with our experience and know-how. Additionally, U.S. customers will benefit from our fulfillment capabilities across U.K., Ireland, Europe and Asia Pacific. And together, we will be one of only a handful of providers able to support large and complex customers with truly global needs. And most importantly, all of this is founded upon a strong alignment of Ethos between the two businesses, the shared people first culture and an absolute focus on customer service. So we'll summarize now. FY '26 was an exceptional year, as we've said, for Softcat. We delivered strong growth across the business. We added new customers at a greater rate. We've deepened our existing relationships and continue to take market share. Just as importantly, we've kept investing in our people, the proposition that we have, our systems and our international capability. So the business exits this year is stronger and with more momentum and opportunity ahead of it than ever before. AI is expanding the infrastructure opportunity significantly. It's also giving us new tools and techniques to take our offering to market more efficiently and effectively. And the four growth engines of our strategy have been enhanced as well, both organically and through acquisition. So as I said, we entered this new financial year with great momentum, a proven strategy and real confidence in the long-term prospects in large group. And I'll finish by thanking everyone at Softcat for the energy that they brought, again, the commitment and brilliance that they've shown. They are what makes Softcat a truly special business, and they have delivered a fantastic year of performance but it is what they will do next and in the future that excites me most. That gets us to the end of the prepared remarks. Thanks again for your time. And we will now move to take questions from the room, and then we'll look at what we have coming in online and answer those as well. Thank you.

I am D. Jayaweera from Peel Hunt. I've got three questions, but I'll only ask one. I'll come back to this later on. The first question is actually, if I look at consensus forecast from beginning of the calendar year, adjusted operating profit expectation was around GBP 190 million. Obviously, you've come at GBP 215 million. But if I use that GBP 190 million as my base and looking at the very low end of the guidance you are giving for the following year, the 5 gross or adjusted operating profit growth rate is actually 20-plus percent. So you are essentially adjusting out what it feels to me that you're adjusting out the large projects and the memory pull forward that you experienced mostly in the first half. What I want to understand is if you kind of dig into the details in the Q4 numbers or H2 numbers, what's the trend you see there? Because if I just look at the GIA numbers, Software GAA is up 30-plus percent, services up 30-plus percent. Hydris only 25% because maybe the large project is in the kind of the second half. Is there anything in the second half that subject to things have slowed down or not?

No, there's nothing in the second half that suggests things have slowed down. We've seen customer behavior be consistent, which is, as we talked about, the very careful with what they're spending money on and where they're investing, but they are investing. And I think that the need to continue investing in infrastructure will remain as well. So what we have here an unchanged market dynamic, customer demand, our skills continue to build, and I think are absolutely well positioned, but we're just trying to create sensible guidance for the year ahead as well.

Carla Courthial from Bank of America. I just wanted maybe to touch on the 2017 guidance on gross profits. You're guiding to a small moderation. How much of that is due to the tougher comes from '26? And what other factors are you seeing for this moderation? And just maybe a second question on underlying demand. You've kind of touched on that already, but 2026 growth was broad across technology areas and customer groups going into 2027, are you seeing some areas where maybe you expect some normalization? Or on the contrary, some areas accelerating?

Got that. I mean, I think the first part of the question goes to where do mind was. So it's not to do with overarching business momentum. In FY '26, we've had these a couple of sort of extraordinarily large deals, which we don't have a comp for in the pipeline moving forward. H1 benefited from some pull forward bound neutral in H2, but overarching brilliant business performance as well. So just overarching a tougher comp. We don't, as I say, Graham just outlined the base business is performing really well.

Thank you, Balajee Tirupati from Citi. Could you share color on implication of Microsoft's latest updates on the partner incentive program? And how is that factored within your 2027 outlook? And the second question on something that you mentioned in the release this morning where you are -- while mentioning a conducive demand environment for IT infrastructure, you have also cited a higher degree of scrutiny on discretionary projects. So a question would be, did you see that strictly increase in recent months? And how is prioritization of spend to our IT infrastructure visible demand that is not directly linked to AI and AI adoption?

Okay. Thank you. The Microsoft changes Microsoft fee structures are complex as befits their breadth and diversity of their product range. The changes they've made this time are a continuation of the evolution in that they've been making over the past few years. So they were expected, and they are factored into our forward guidance. And we see them as a slight net positive for our business in the year ahead. They are moving an opportunity to earn towards solutions providers with capability to drive adoption of their technology. And that is exactly what we have and have been building over many, many years now, performance with Microsoft and our momentum with Microsoft is terrific. So yes, factored into our forward guidance and a slight net positive. The continued demand and high scrutiny on infrastructure investments has been building for years now, and it's been building because the investment that organizations need to make there is significant and relentless so making sure that they are putting the money in the right places to drive a return is something our customers have been increasingly focused on for the last 2 or 3 years. it increased again. I would say that script 12 months ago when we got the price changes. We're now in a new normal, as I mentioned, around those price changes where I think we are particularly well positioned to help them architect the right solution be innovative around how to do that, manage the affordability of the solutions that they're putting in place. So it gives us a particularly rich vein to show the strengths that Softcat has. And I think that scrutiny is here to stay because I think the level of investment that they need to make is here to stay as well, which is why we are continuing our investment in the skills to support that. And I think our positioning is very strong to do so.

It's Charlie here from Jefferies. Just a few questions for me actually. Firstly, when we look at the components of growth, most of the growth obviously comes from your existing customers. It implies NIR of 120% or something. So you're growing with existing customers well ahead of the IT budget growth. Can you give us some color into where you're gaining share with those customers? Is it displacing other resellers? Is it taking spend that customers were doing internally themselves? Can you just give us some color on that. And then secondly, you called out some one-off costs that you've incurred during -- can you give us some quantification around the magnitude of those one-off costs and how we should think about that going into '27? And then I'll just sneak a very quick one in and broaden the conversation beyond Microsoft. I think you called out in the statement a helpful benefit from vendor rebates, was there anything unusual that happened in '26 that we need to think about for '27?

Okay. Should I tackle growth of existing customers, and I'll pass on to Katy for costs. So the growth that we're seeing from existing customers is particularly strong. We accelerated actually the growth in the new customer base as well, which is really pleasing to see in the year. And I think that reflects the resonance of the offering that we have in the market. So -- but the growth with existing customers is coming from both their increase in investment and infrastructure. the lesser portion of that growth. The bigger portion of the growth that we're getting is from mainly displacing competition. So our model has always been to get foot all with the customer in one part of their infrastructure. And then over time, we can improve our quality and we can prove out the breadth, and we can displace other providers in the account over time. And that is exactly what I think we've continued to do, not just this year but over the last 20 years. That's exactly how our business has grown. And I think the particular strength of the performance we've seen over the past 2 years does reflect that fact that being able now not just to operate in narrow and isolated parts of the infrastructure, but being able to see the whole -- help a customer think about a road map over 3 and 5 years, manage the complex problems they've got in an affordable way is a rare and highly valuable skill set, which I think is driving the growth that we've seen in share of wallet. I'll cover off the rebate point quickly as well because it's not unrelated to that because what we've seen Microsoft but other vendors increasingly do as they broadened their portfolio into the expanding advantage is make sure that they're rewarding partners with the right skills to take customers on that journey and not just sell them the kit, but support it and evolve it over time as well. So consumption and support is increasingly how vendors are rewarding partners. And as I said, I think we have the skills to do a great job of that. And you can see it in that growth in the rebate income that we are earning as well. But Katy, I'll take -- pass you to the costs.

Yes. And just to add on rebates more resource into making sure that we're managing it really well. And making sure that we leverage them and sort of bring them through to the bottom line as well. So not one-offs at all. In terms of the 1 off costs all H2. So we talked about the free share awards that we've given to employees. So it was a 10-year anniversary of our IPO. We've had an extraordinary year, and we wanted to find a way for the whole company to sort of participate in that, and we've got an awful lot of benefit and goodwill from that. In the numbers as well, after advisory costs around the GDT acquisition that we closed so late, we didn't sort of strip that underlying, it will be nonunderlying in FY '27. And then due to the performance as well, incentives were, I'd say, sort of higher than they would normally be higher than the going rates as well. In terms of quantification for all of those combined sort of low teens millions in H2, that's helpful.

If we take your top 10 customers, I think you said they were about 15% of GDT. So in aggregate, that's about GBP 100 million, GBP 10 million per customer. When you take those more successful relationships where do you think you've got to with your share of wallet with those bigger accounts?

Well, I don't think they're necessarily actually our most successful relations what those -- because the top 10 customers change year-on-year. So absolutely, they're strong relationships. But what makes our business so strong and sustainable is the depth of those relations ships to. Now customers at the very top end of our income each year will be carrying out some large projects, and we'll be helping them with that, too. But I think our share of wallet with not just those top customers, but with the broader range of customers where we are most entrenched and have built most loyalty. We're probably -- we can get as high as 80%, 90% share of infrastructure wallet. And that's because of the skills we have. You don't jump straight to that. You build that trust over many years by improving the quality as well. But we certainly have customers with whom we're doing 80%, 90% and upwards of share of wallet. I'd say the average for a mature relationship is probably more in the 70% or 80% range. Yes, the share of wallet we have on average across the customer base can go orders two, threefold higher than it is today, for sure.