SoftwareOne Holding AG (SWON.SW) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the SoftwareOne Q3 2025 Trading Update Conference Call and Live Webcast. I am Valentina, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Kjell Arne Hansen, Head of Investor Relations at SoftwareOne. Please go ahead.

Good morning, and thank you for joining SoftwareOne's Q3 2025 Trading Update Presentation. My name is Kjell Arne Hansen, Head of Investor Relations at SoftwareOne. Joining me today are Co-CEO, Raphael Erb; and Melissa Mulholland; and our CFO, Hanspeter Schraner. In terms of agenda, Melissa and Raphael will start with a summary of our Q3 performance. Hanspeter will then take us through our detailed financial performance. And finally, Melissa will share an update on integration and closing remarks before going into the Q&A. Before handing over, please let me draw your attention to the disclaimer regarding forward-looking statements and non-IFRS measures on Slide 2 and 3. And with that, I will hand it over to Melissa.

Good morning, everyone, and welcome to our Q3 2025 presentation. In Q3, we continued to build momentum as one integrated organization. Our focus remains on execution across our operational business performance, delivery on synergies, supporting customers and partners and positioning SoftwareOne for sustainable, profitable growth. Let's look at our Q3 performance. On a reported IFRS basis, revenue grew 46%, reflecting the consolidation of Crayon from July 1. I will emphasize the combined like-for-like view as it best reflects the underlying performance as well as what we have framed our 2025 outlook on. On a combined like-for-like basis, I am very happy to report that SoftwareOne is back to growth. Our revenue grew 0.6% year-over-year in constant currency. Adjusted EBITDA increased 18.1% to CHF 65.2 million with margins improving 2.9 percentage points to 19%. This reflects early benefits from integration and previously initiated cost reduction programs. Additionally, on a like-for-like basis, our reported EBITDA improved from CHF 30 million to CHF 42 million, reflecting a growth of 39.6%. Slide 7 illustrates the combined growth performance since 2024. Following 3 quarters of negative growth as we have implemented the go-to-market model, navigated Microsoft incentive changes, close the transaction between SoftwareOne and Crayon and started the integration, we returned to positive growth in Q3. The trend is improving quarter-on-quarter since 2025 driven by stronger service growth and early signs of cross and upsell opportunities materializing, also reflecting stabilization across NORAM, go-to-market as well as easing of the negative impact from Microsoft incentive changes. Turning to our businesses, direct channel and services. We continue to see steady progress and improved growth trend across the combined model. Each business plays a distinct role and together, they give us a balanced exposure across segments, regions and customer buying behaviors. Our direct business declined by 8.2% in constant currency in Q3 as changes in incentives for enterprise agreements continue to weigh on the business throughout 2025. Meanwhile, the enterprise agreements to CSP conversion is gaining strong momentum, supported by Microsoft's commercial changes, which are expected to further accelerate customer migration and strengthen the CSP value proposition. Revenue in Software & Cloud Channel increased 18.3%, driven by strong Microsoft CSP performance, continued AWS momentum and the successful investments in large, high-potential markets such as NORAM and APAC. Software & Cloud Services delivered revenue growth of 5.9%. The performance on a regional basis is supported by solid improvement in the Nordic services business as well as strong growth in APAC and rest of EMEA. We see continued demand for cloud optimization as well as AI and cybersecurity services. Customers increasingly focus on hybrid and multi-cloud environment, and we see strong growth in AWS in particular. In bringing the organization together, we continue to leverage the combined capabilities and have increased the usage of internal resources in our project delivery, resulting in higher utilization. I will now hand it over to Raphael, who will give you an overview of the regional performance, including a closer look at our strategic focus and importance of our NORAM business.

Thank you, Melissa. I will now walk you through the regional development based on a combined like-for-like performance. In Q3, NORAM grew 0.3% in constant currency driven by strong performance across the Crayon business. Turnaround measures to improve performance are materializing at a slow but steady pace in the legacy SoftwareOne business. We have taken the right actions and we see a clear improvement in the underlying growth trend. Under the new regional leadership, the strategic focus has been refined. I will give you some additional color on this in the next slide. Performance in DACH region is improving, and growth ended at a negative 0.8%, mainly driven by a decline in the direct business. As a reminder, our largest exposure on enterprise agreement incentives is in the DACH region. So this was expected. Yet, this was partially offset by strong growth in our multi-vendor business. Revenue in the rest of Europe grew 1.6% supported by improved performance in the Nordics as both direct and services business grew high single digits. APAC grew 8.6%, driven by robust performance in Australia and India supported by strong performance in our channel business across the region. The 5.2% revenue decline in LATAM is primarily driven by weakness in the direct business as changes to incentives remain a challenge in many markets. A favorable market has been Brazil, which continues the strong performance, delivering double-digit growth in Q3 2025 driven by strengthened Microsoft partnerships and digital investments to support faster CSP growth. In NORAM, we are making slow but steady progress. The region is transitioning to an aligned GTM, leadership changes and commercial refocus. And we are now beginning to see the groundwork translate into more stable performance and selected pockets of growth. We now have a combined leadership in place with an organization of 590 fully operational employees. Our sales pipeline visibility has improved. Moreover, it's trending to support our full year 2025 outlook. Under our new regional leadership, we have sharpened the strategic focus towards segments and routes to markets where we see the strongest return potential. We are scaling the proven Crayon partner model in the U.S. expanding relationships with managed service providers, [ hosters ], solution integrators and digital-led partners. This gives us reach in high-velocity SMB and mid-market demand with lower cost to serve and faster sales cycles. We are prioritizing accounts with meaningful cloud renewal cycles, supported by our IP portfolio management and FinOps capabilities. Focus is on deepening wallet share and expanding service penetration in existing customers. Public sector modernization and cloud adoption trends in federal, state and education are structurally strong. We are investing in dedicated go-to-market motions and certifications to accelerate traction here. We continue building a more digital and partner attention for SME customers. This alliance with Microsoft Cloud and AI priorities and provide scalable growth potential over time. Market environment is volatile with U.S. tariffs and government shutdown affecting multiple industries. We are confident that U.S. presence is essential to serve global enterprise clients. NORAM remains the world's largest cloud and AI market. While competitive, it presents a significant long-term revenue and profitability opportunity. Slide 11 shows an example of how we partner with our public sector customers. We are supporting the federal government of Germany in advancing the modernization of Germany's public administration and ensuring its IT landscape is fit for the future. The agreement has an initial term of 1 year with the option to renew it for up to 3 1-year extensions. The total potential volume amounts to EUR 1.5 billion. This is a significant win and reflects our competitive position in the public sector in the region. I'll now hand over to Hanspeter to walk through the financial results in more detail.

Thank you, Rafi, and a warm welcome to everyone joining us today. In this session, we are presenting the IFRS figures in reported currency. The numbers reflect that the acquisition closed on 1st of July, with Crayon being included for 3 months and SoftwareOne for 9 months. On a reported IFRS basis in Q3, revenue grew 46% year-over-year, driven by the Crayon consolidation. Reported EBITDA margin ended at 12.2%. While the EBITDA development also reflects the impact from the Crayon acquisition, it is also driven by continued disciplined spend management, impact from the previously initiated and completed SoftwareOne cost reduction program as well as early cost synergy capture. On a 9-month basis, revenue increased 8.6%, with an EBITDA margin of 15.3%. I would also like to mention that contribution margin and delivery costs are not presented this quarter as Crayon and SoftwareOne have historically applied different approaches to cost allocation and reporting. As of Q4, we will resume reporting contribution margin and segment level profitability on an adjusted EBITDA basis. In this slide, I will take you through the adjusted to reported EBITDA bridge. Our reported EBITDA ended at CHF 42 million in Q3. Adjustments mainly related to Crayon transaction and integration cost of CHF 13.7 million and CHF 7.8 million, respectively. Excluding these, adjusted EBITDA was CHF 65.2 million. We remain on track with our integration cost target and are committed to keeping non-Crayon adjustments for financial year 2025 below CHF 30 million, reflecting our focus to materially lowering the level of adjustments. As a reminder, restructuring expenses of CHF 19.2 million year-to-date relates to the previous cost reduction program initiated in 2024 and closed in Q1 '25. Slide 15 provides an update of our cost synergy realization. We are progressing well towards our CHF 80 million to CHF 100 million run rate cost synergy target by end of 2026, with CHF 21 million run rate savings achieved by early November. In the last few months, we continue to streamline the organization by removing roles, leadership duplications and enhancing efficiency. We are tapping into the combined internal resources to defer noncritical hirings, capturing additional near-term savings. We have also mapped out overlapping office locations to be consolidated or closed. Finally, we have eliminated third-party contractor spend in IT and customer platform and are currently streamlining and optimizing our combined internal licensing costs. Before I hand back to Melissa who will take us to the closing perspective and 2025 outlook, I want to briefly walk you to the adjustments we have made to the '24 like-for-like financials following the alignment of accounting policies between the 2 companies. Previously reported Crayon figures have been aligned to SoftwareOne's accounting policies mainly in relation to IFRS 15, principal versus agent applications to services contracts. Overall, this led to a reduction in revenue of CHF 31.1 million compared to the revenue figure we have provided as a basis for our full year outlook during H1 '25. The revenue adjustments have a minimal impact on revenue growth given that the magnitude is very similar in the first half of '25 compared to the first half of 2024. This change is purely technical, reflecting accounting policy alignment under IFRS and does not affect underlying performance or outlook. With that, I will now hand over back over to Melissa.

Thank you, Hanspeter. As we have come together as one organization, it is important to illustrate how we support our customers across the entire software and cloud life cycle from optimized to innovate. We start with optimize where we help customers manage and optimize their software and cloud spend through advisory, IT asset management and FinOps services. This is core to our roots as a combined business. We then move to source, giving customers access to a broad range of multi-vendor reselling and procurement services. From there, our services business helps clients build, migrate, implement, manage and modernize their cloud environments. Finally, in innovate, we help customers to unlock new business value through data and AI-driven solutions. Together, this creates a continuous flywheel from optimize to innovate, a customer-centric life cycle approach that defines how we engage with our customers, fostering long-term retention and help them grow sustainably over time. It is this combined offering that makes SoftwareOne stronger across our 3 strategic pillars: growth, scale and innovation. First, growth. In direct, we are focusing on enterprising corporate customers with large renewal cycles, attaching our full service portfolio. In channel, we are leveraging Crayon's ecosystem and partnerships with solution integrators, hosters, managed service providers and digital partners. Within services, we offer deep expertise across data and AI, digital workplace, cloud migration and modernization, ITAM, FinOps and cybersecurity. And across all motions, cross-sell remains central. Every contract and renewal represents a services opportunity. Second, scale. Shared platforms, Marketplace and Cloud IQ provide our capability to scale, including pricing tools, delivery hubs and digital sales capabilities, drive consistency, speed and efficiency across the organization. And finally, innovation. Our services are increasingly AI-enabled from FinOps automation and ITPM analytics to secure AI adoption across Microsoft and the hyperscalers, inclusive of multi-cloud platforms. We are scaling co-sell and hyperscalers as key ISVs supported by improved data and life cycle insights. And internally, we are deploying agenetic AI workflows to raise productivity in both sales and delivery. Now turning to our revenue synergy ambition. Alongside cost synergies covered by Hanspeter, we are laying the foundation for substantial revenue synergy realization. We have launched multiple sales plays to drive cross-selling, complementary services and multi-vendor licensed solutions. A joint digital sales strategy is being developed to win new clients through coordinated, aligned and targeted marketing campaigns. We are improving renewal rates and tender win ratios through better sales execution, streamlined tender handling and optimize account management. As a combined company, we continue to strengthen vendor alliances and have already achieved higher status amongst several vendors like Adobe and ServiceNow by bringing the 2 companies together. We leveraged Crayon's channel business to capture further revenue streams, cover additional markets like Canada through SoftwareOne's country portfolio and optimize the SMB sales strategy. We confirm our 2025 outlook, which is based on combined like-for-like financials. Revenue growth is expected to be flat in constant currency and adjusted EBITDA margin to be over 20%. We expect positive momentum in Q4 driven by acceleration in CSP across both our direct and our channel businesses. In addition, we see strong services momentum as shown in Q3 and carried over to Q4 by bringing the organization more efficiently together, increasing utilization and taking advantage of the services opportunity we see in the market. Continued benefits of go-to-market improvement, including the North America turnaround, further reduced impact from the Microsoft EA incentive changes, which, as we have indicated, will bottom out in Q4. Strategic initiatives launched to drive cross and upsell across our expanded customer base and a more favorable comparable period. Margin development is driven by reduced spend, ongoing cost control as well as early impact from cost synergies. To summarize, we are very happy to be back on a growth trajectory. We are focused on improving profitability by continuing cost discipline and delivering on both cost and revenue synergies. We are strategically strengthening our vendor agreement status, which I'm pleased to confirm we continue to benefit from. Progressing well on the integration, we are positioning the company for sustainable, long-term value creation. With this, I'll now hand it back to the operator for the Q&A session.

[Operator Instructions] The first question comes from Chris Tong from UBS.

Maybe just 2 from my side. On the Microsoft incentives and the EA impacts, can you just talk a little bit about the impact and add a bit more color on the direct business? And how has the sort of removal of EA discounts impacted the CSP transition? And maybe I'll leave it there before I go on to my next question.

Thanks, Chris. Great question. The Microsoft and EA impact, as a reminder, a majority of that has already been covered from Q1 through Q3 with the final remaining amount in Q4. For 2026, we do not see any negative impact from the Microsoft incentive changes as the real emphasis has been focusing on CSP growth, which, as stated, we are seeing strong CSP growth overall. And this is important to state because as we reconfirmed our outlook and guiding for the year, we see that acceleration across the business in Q4. And this has really been a focused effort across the entire organization. Microsoft continues to emphasize CSP is the hero partner-facing motion. And the reason for that is it provides more value-added capability, driving services growth across the overall portfolio. The pricing changes that Microsoft implemented November 1 actually helped to create parity across the enterprise agreements in CSP, giving more capability to service our customers through CSP adoption. And hence, why we remain confident based on our ability to execute across the overall business.

Got it. And maybe just a comment on current trading. So I mean it implies -- I guess the guidance implies a bit of an acceleration in Q4. Can you just talk about what you're seeing in October and maybe November?

Great question. Q4 has been an important quarter for us as it is our largest quarter throughout the year. We are seeing acceleration in terms of the early signs of the quarter, hence, our reconfirmed guidance. It's also important to state that we see the growth potential across all our business lines, direct channel and services. So this continues to be a focus across the organization as we capture revenue opportunities with co-selling and bringing our organization closer together.

The next question comes from Ines Mao from BNP.

Just a follow-up question on the Microsoft contract. Can you just give us more color in terms of products delivered and whether this will mostly fall within the services segment or into the channel category? And what will be the impact of the potential revenue if, for example, the contract length remains range bound within 1 year or if it actually extends towards 3 years?

Can I just ask you to repeat the second part of your question? I heard your question around the kind of overall Microsoft, let's say, where does it fall across the business lines, but it would also be just good to understand the last part of your question because you cut out.

Yes. So my second question was more in terms of revenue opportunity if the contract length is range bound to 1 year or if you actually extend it towards 3 years? What could be the range actually of the contract in terms of quantum? Could you say EUR 1.5 billion but is it impacted if the contract is shorter than 3 years?

Yes. Thank you for the question. Let me take this one. So it's -- basically, the revenue is impacted for our software and cloud direct business as this is a Microsoft framework agreement, licensing agreement, which we successfully renewed with the German Federal Ministry of the Interior. It's a large framework agreement where all these ministries over time can buy the licenses through. So we will see this gradually over the next 3 years, we will see the 1.5 -- up to EUR 1.5 billion gross sales impacting.

And are you just -- are you seeing a lot of opportunities in Germany, notably on further public spending on IT modernization? Or do you think it's just a one-off and you benefit from this renewal?

No, in general, our public sector business in Germany is a very, very big and important business for us. It's growing very well. And we see, yes, continuous focus and growth potential in the public sector area in specifically also Germany.

The next question comes from Kristian Spetalen from Arctic Securities.

I just have a few questions on the cost base for me. First, it looks like the underlying cost base declined into Q3. Can you provide us with an updated head count? And second, how do you see this headcount developing into Q4? Should we only account for the kind of synergy trajectory? Or is there any notable increase in the head count from -- aside from this? It's just that your margin guidance at the very low end could imply a jump in cost in to Q4. And lastly, a short 1 on the one-offs. Will the transaction costs from the Crayon acquisition come down towards low single digits or 0 in Q4?

So let me start with the -- thanks for the question. Let me start with the transaction cost. Yes, the transaction cost will come down to close to 0 in Q4. So it means the majority of the cost is in the P&L. Regarding the FTEs, I mean, FTEs are reducing as part of the synergy program. And you see the FX already in the P&L in the OpEx line, and this will continue in Q4 and in 2026.