SoftwareOne Holding AG (SWON) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Full Year Results 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Anna Engvall. Please go ahead.

Good morning, and thank you for joining SoftwareONE's 2021 Full Year Results Webcast. My name is Anna Engvall, Head of Investor Relations at SoftwareONE. And joining me today are Dieter Schlosser, our CEO; and Rodolfo Savitzky, CFO. Before handing over to Dieter, let me draw your attention to the usual disclaimer regarding forward-looking statements and non-IFRS measures on Slide 2. With that, I would like to hand over to Dieter.

Good morning and welcome. I'm pleased to report that we are clearly back on a strong growth trajectory. We exited 2021 with very strong growth of 23% in H2 and the full year with close to 18% gross profit growth, delivering the guidance of over 14% that we set 1 year ago. Our integrated model is delivering. Software and Cloud returned to positive territory, up 3% year-on-year and around 9% in H2 2021 with very positive momentum across all customer segments. Solutions & Services grew by over 50% as our portfolio continued to resonate very well with our customers. We delivered 25.7% adjusted EBITDA margin, below our guidance of approximately 30%. This reflects continued investments to support accelerated growth and strategic M&A. Whilst we are capturing the market opportunities and delivering very high growth, we invested in the business to support this trajectory. Looking ahead, we maintain our growth outlook of mid-teens for 2022 and the midterm. In terms of margin, we are committing to a margin above 25% for 2022 and in any given year in the midterm as we continue to capture the highly attractive market opportunity. Let me share a few of the key achievements from 2021, and I'm turning to Slide 5. We clearly delivered from a growth perspective, and our performance in H2 illustrates the momentum in the business. M&A was an important contributor over the year, and we have succeeded in bringing in great talent and capabilities into the organization, scaling out our service business with expertise across the 3 major hyperscalers. We also now support 6.9 million managed cloud users. This is up from 5.4 million 6 months ago and from 1.7 million at the time of our IPO. This is clear evidence of exactly how we want to drive scalability in the business and create a much stickier revenue streams. In addition, we brought in 2 new members to our Executive Board. Rodolfo Savitzky, our CFO, whom you will hear from him in just a few minutes as well as Bernd Schlotter, our President of Services. Finally, we remain confident in the future as the market opportunity ahead of us is massive. The Software and Cloud market expected to grow at 14% and our addressable service market at over 30% per annum until 2025. Let me briefly explain what is driving this outlook. Our customers continue to face challenges as they accelerate their journeys to the cloud post-COVID. Customers do not have the right skills internally. The cloud dynamics have dramatically increased the level of complexity with a huge wastage of cloud spend. Demand for data security and privacy are rising with each bridge costing customer millions. Customers are buying AZURE, AWS and Google GCP, which together with on-premise creates a hybrid in the multi-cloud environment. So given this very healthy market environment, what does it mean for SoftwareONE? It means that we operate in a very healthy, growing market and importantly, it's all about the pull-through of solution and services to address increasing needs of our customers. Customers face a wide range of choice in software and cloud procurement. They are on complex migration journeys and need to manage their hybrid and multi-cloud environments from governance and security perspectives. And that gives us the opportunity to engage with them on an ongoing and recurring basis as SaaS and public cloud spend increases and traditional on-premises declines. We are here to help them on that journey. In addition, we are close to the largest vendors and have a role to play in terms of helping customers adopt and use the technology, which they have purchased, driving consumption and ultimately also driving renewals. Our 2 business lines are highly synergistic and our value proposition is based on combining software and cloud services, because one naturally [ pulls ] along the other, because when our customer buy, they also adopt and use the technology via our service business. This creates stickiness and recurring revenues. In 2021, Solutions & Services accounted for 38% of gross profit. Looking ahead, we expect that to reach 50-50 within the next 1 to 2 years, which is ahead of the plan. Now let's look at the performance of each of the business lines in 2021. Software and Cloud returned to positive growth in '21, in line with our expectations, driven by a recovery across the hyperscalers but also the ISVs. Total Microsoft billings reached close to CHF 15 billion, and our business grew in line with the overall Microsoft market. Cloud, which is Azure, 365 and Dynamics, represented 73% of our total Microsoft volume compared to 67% in 2020. But there was a continued impact from our proactive transitioning of customers towards the pay-as-you-go model. This involves a low upfront payment, which temporarily negatively impact Software and Cloud growth, but significantly increases the lifetime customer gross profit through a combination of higher recurring revenue and more services, mostly recognized in solutions and services. Our Solutions & Service business delivered over 53% year-on-year gross profit growth in constant currencies, with broad-based strong performance across all service lines, customers and geographies. Our cross-selling statistic continued to move in the right direction with now 71% of our gross profit being generated by 14,000 customers purchasing both software and services, that is up from 63% last year. The gross profit multiplier has increased from 7.9x to 8.9x for customers purchasing both Software and Cloud and services compared to those only purchasing Software and Cloud. We continue to see further upside here. Meanwhile, our XSimples or pay-as-you-go offering based on Office 365 and Azure continued to be a key driver of growth for our Solutions & Service business, up over 80% year-on-year, implying a further acceleration over that 70% that we reported for H1 '21. From a regional perspective, performance varies primarily driven by the portfolio mix between software and services. In NORAM and APAC, where solutions and services represent over 40% of total gross profit, growth was very strong. EMEA delivered a solid performance impacted by the transition to pay-as-you-go in the Microsoft business, while the remainder of Software & Cloud and the Solutions & Services delivered strong growth. LatAm grew by over 70% as a result of the InterGrupo acquisition. We have a very global and geographically well-diversified business with 4 regions at scale with NORAM and APAC reporting gross profit now over CHF 100 million, and we expect LatAm to cross the CHF 100 million threshold in 2022. Now let me pause here for a minute to also reflect on current events in the world. On a personal level, I'm angered by the senseless act of war initiated by the Russian government. I'm also deeply concerned about the impact on so many people. To be clear, SoftwareONE stands categorically against the invasion and we will do all we can to support those effected. Our first priority was and is the safety of our people. We have offered to move our team in Ukraine, including their immediate family members to a safe location. And our team members in Russia who are in contracts and confusing situation know that they are also valued members of the SoftwareONE family. From an economic perspective, Ukraine and Russia combined accounts for only approximately 1.5% of our total group gross profit. However, given the unpredictable nature of the situation, you will appreciate it is difficult to fully assess the economic impact of the conflict today. Coming back to our business and performance last year. Let me remind you of our value proposition for our customers. Our portfolio is geared to cover all our customer needs, helping them to optimize their costs in the cloud with [ IP ] as well as adopt and use the end user productivity software like Office 365 with future workplace. We support customers procure software in a digital way with digital supply chain. This application services and SAP on cloud, we help modernize our customers' application landscape and migrate to the public cloud. And once customers are in the cloud, we manage and optimize their technology environment with our cloud service. Some of our service lines are already scaled, while others are earlier in terms of maturity, but enjoy a very strong growth outlook, which gives us the opportunity to drive profitable growth through a number of levers. As we mentioned previously, we are targeting to deliver and exceed CHF 100 million in most service lines based on run rate at the end of 2023. Having taken you through our solution and services portfolio, I would like to move on to M&A. This has been a key enabler in terms of scaling our business line in an accelerated way. You have heard about HeleCloud and Centiq at our Capital Markets Day. And just a few weeks ago, we completed the acquisition of Predica. Predica is an excellent addition to our service business, adding over 300 extra cloud technology experts, serving the attractive Northern European mark and in particular, the enterprise segment, so very complementary to our existing business. We are very impressed with the road journey to date and have welcomed the entire company, including the 4 founding entrepreneurs to SoftwareONE. In the phase of very high growth, we are focused on maintaining a lean and agile organization and ensuring high performance through our Transformance program. Transformation with high growth, only works together with high performance. We mentioned this program already at the CMD and launched it late in the year, so the impact will be evident in 2022. At the heart of our success, our people and ESG has always been a cross trend of our DNA from the start. Our approach to ESG is twofold. On the one hand, we want to help our customers operate in a more sustainable way by using cloud-based solutions, which have a much lower environmental impact. And on the other hand, we want to improve our own internal processes with respect to ESG. We introduced a comprehensive road map, and we are well on the way to executing. In parallel, our local teams around the world are high-engaged risk community services and other ESG-related activities. The SoftwareONE Academy is a learning platform to develop people from all walks of life into digital experts. We have the ambition to make our largest market DACH, carbon-neutral by next year. And various fundraises in the nation for charities around the world. So you will continue to hear more from us on the ESG front as I continue to lead this very important initiative with the full support and direction from the Board. With that, I would like to hand over to Rodolfo to take you through our financial performance in 2021.

Thank you, Dieter. Good morning, and a warm welcome from my side as well. My name is Rodolfo Savitzky, and I joined SoftwareONE as CFO this January. You've heard from Dieter about the attractive market fundamentals and strength of our business. I would now like to take you through how that has translated into a strong financial performance in 2021. In addition, I would like to share my observations on the SoftwareONE business model, which has exceptionally attractive opportunities for accelerated growth. I will only share one technical financial slide, and this relates to our revenue recognition as IFRS guidance is changing. Let me now refer to the graph and only focus on Software & Cloud as Solutions & Services is not affected by the change in [ pops ]. Under the previous recognition policy, we would have recognized the consideration from customers of CHF 8.3 billion as revenue and deducted the cost of purchased software resulting in CHF 534 million in gross profit. Now under the new policy, we only recorded consideration from the customer, net of the cost of purchased software to get to net revenue of CHF 534 million, which is equal to the gross profit. As you can see, our gross profit KPI remains completely unchanged. Let me underscore some of Dieter's messages. SoftwareONE has very positive strong growth momentum with 23% gross profit growth in the second half, resulting in close to 18% gross profit growth for the year. Going back to the growth drivers. Software & Cloud continues to see a transition towards the pay-as-you-go model, which we are also proactively driving. This transition has a negative short-term impact on gross profit growth, but it's a much more attractive model in the long-term. Customer stickiness is higher, and it gives us the opportunity to bundle in additional services to cover more of our customers' technology needs in the cloud. While Solutions & Services benefit from acquisitions in 2021, the underlying growth rate of more than 40%, excluding InterGrupo, is very strong, and the performance was broad-based across our offerings, customer segments and regions. As Dieter explained, we continue to scale up service offerings. Operating expenses increased ahead of gross profit, which reflects a combination of organic and inorganic investments behind commercial capabilities to support our services portfolio as well as building up our global and regional service delivery centers. As we will discuss later, some of these accelerated growth is related to scaling up our operations, but the OpEx evolution will slow down relative to revenue growth in the future. On the margin, we ended below guidance of approximately 30%, which reflects a combination of M&A activity, which had a dilutive margin impact and the limited impact of Transformance in the second half of 2021. Now let's move to the SoftwareONE business model, which has a very attractive growth fundamental, underpinned by the underlying market growth and strong margin upside from efficiency and operating leverage. I will spend the next couple of slides on this. Let's start with the portfolio mix. With the strong growth momentum in Solutions & Services, the portfolio mix will be close to 50-50 in the next 1 to 2 years, which, in fact, if even sooner than anticipated. While Software & Cloud has a very high margin, the short-term growth opportunity is moderate as gross billings are expected to continue to grow double-digit, but our gross profit will grow slower in the short-term. We will change this dynamic in the midterm and accelerate gross profit growth of this business line through disruptive initiatives such as marketplace or digital supply chain, which can transact very high volumes at very low cost. On the other hand, in Solutions & Services, we have an immediate very high-growth opportunity. While the current margin is lower, we are improving it every year as we continue to scale the business. So overall, we combine our huge Software & Cloud platform to upsell IP value-added services to customers. This is a very attractive proposition because as Dieter mentioned, customers who purchased both Software & Services generate nearly 9x the gross profit of customers who only purchase Software & Cloud. How are we expanding margin in our high-growth business? We have a couple of very important levers. One is operating leverage and the other is operational excellence. Operating leverage is very important as the business is expected to grow at mid-teens in the midterm. As we double click on the operating expenses, roughly speaking, the expenses are equally distributed across sales and marketing, operations and G&A. The [ heavy ] bars illustrate the operating leverage across these 3 cost buckets. As you can imagine, the operating leverage on the G&A cost is very high. In high-growth companies such as SoftwareONE, these admin areas have had to grow at an accelerated pace to support the largest case. I am convinced that SoftwareONE has reached the size where we can start to optimize our spending in admin functions. The good news for a high-growth company is that productivity initiatives do not mean capping jobs, but rather growing expenses significantly below sales or gross profit growth. Sales and marketing is the other area where we have reached a reasonable critical mark. While we need to continue to support the commercialization of the different service lines, many areas of sales such as business development, internal sales and key account management are completely scalable. We also have an opportunity to optimize our sales expenses to our sales effectiveness initiatives like next-gen sales, which was launched in 2021. We also have disruptive initiatives for the midterm, such as marketplace and digital supply chain, which can completely revolutionize the way we sell software, cloud and services. Last but not least, we have operations to support our 2 business lines. Let me focus on the services portfolio. At SoftwareONE, our services are configure but not customize, which makes them highly scalable. Standard service packages can be configured for different customer needs without reinventing the [ will ]. We also leverage a global local delivery model that ensures a maximum standardization of global service packages delivered from lower cost centers such as India and Mexico. On operational excellence, the key initiative is Transformance that we introduced at our Capital Market Day and that Dieter mentioned earlier. We have established a 9.1 million provision associated with separation of employees to make sure we have the right capabilities in place, and we foresee to make this initiative an ongoing program. We are reinforcing it with several other initiatives around process standardization automation to continue to drive efficiency. Let me touch on M&A, where we have a very strong track record of not only successfully closing transactions, but also smoothly integrating them into SoftwareONE and creating value. We completed 6 M&A transactions in 2021. The vast majority of these transactions expanded our Solutions & Services business, in particular, our SAP services as well as our cloud services, allowing us to build capabilities in an accelerated way. As we explained at the Capital Markets Day, the impact of most of these acquisitions is margin dilutive in year 1, but most of them quickly scale up as we drive cross-selling on the top line as well as optimize the delivery model and delivered synergies on the back end. Not only the SoftwareONE business model, high growth and high operating leverage, it also generates strong operating cash flow as it is asset light. Despite the very high business growth, net working capital generated CHF 27 million positive cash flow by maintaining receivable days and expanding payable days. Improvement in net working capital was smaller than last year's cash inflow, but this is still a significant achievement for a high-growth company. Operating cash flow in 2021 was CHF 158 million. And while lower than prior year, it still represented a 72% cash conversion relative to adjusted EBITDA. The lower operating cash flow was mainly due to the lower inflow from net working capital. Let's now look at the last piece in any CFO [ parcel ], which is the balance sheet. SoftwareONE maintains an exceptionally solid balance sheet with a positive CHF 0.5 billion net cash position. Our equity to book capitalization ratio stayed at around 25%. Given the strong cash flow generation, we will recommend to the general assembly, a dividend increase to CHF 0.33 per share, fully in line with the higher end of our dividend payout guidance of between 30% to 50% of adjusted profit for this year. In summary, 2021 closed with very strong gross profit growth momentum. Going forward, the combination of strong growth, operating leverage and cash flow conversion will provide the headroom [ printed ] in a disciplined way to capture market opportunities. And now back to Dieter for the strategy and outlook section.

Our strategy remains unchanged, and we remain focused on execution based on the same 5 pillars. Firstly, we will continue to grow and digitize software and cloud. We have seen based on trends that there will be 2 sales motions. Customers want Software & Cloud in a digital way, using a marketplace and self-service or managed using our digital supply chain. We are very well positioned and will be providing that digital experience for our customers. Secondly, we will continue to cross and upsell solution and services. Our biggest asset is our customer base. XSimples is a highly scalable service with a great contribution margin. Thirdly, we will expand portfolio to serve the customers' journey. Our strategic growth areas are based on market opportunity, increasing the ratio of managed services. Fourthly, we will scale our global local operating model for continued profitable growth. We want to de-couple gross profit growth from headcount growth. And lastly, selectively pursue M&A. With this strategy, we remain confident of delivering our guidance of mid-teens growth in constant currency across the Group. This level of growth needs to be balanced with profitability as we continue to prioritize growth to capture the phenomenal market opportunities ahead of us. So for FY '22 and the midterm, we will deliver above 25% adjusted EBITDA margin. As a result of our organic investment and integration of acquired companies like Predica, in the first half of 2022, we will see a slightly lower than 25% margin. But this will be compensated for in the second half as the strong operating leverage flows through. Our dividend policy remains the same. And for '21, a dividend of CHF 0.33 per share will be proposed at the AGM. Finally, I would like to put this guidance into context. As you can see from the Magic Quadrant shown on Page 27, we are one of the very few on the top right quadrant next-generation service providers, where we generate high growth of over 15% and high EBITDA margin of over 25%. In conclusion, SoftwareONE has delivered very strong growth in 2021 with clear acceleration in the second half. We are well positioned to carry that growth into 2022. Our synergistic business model of software and cloud and services and solution resonates very well with our customer base. Our highly scalable business model allows us to invest in a disciplined way to capture the market opportunity and deliver above 25% EBITDA margin with mid-teens growth. Thank you, and now we will take your questions.

[Operator Instructions] Your first question today comes from Varun Rajwanshi from JP Morgan.

I have 3 questions. Firstly, on margins. There has been some flip-flop on margin guidance over the past 12 months or so. I'm just trying to understand what drove this margin reset compared to your expectations 6 months ago? Are you now confident that you can sustainably deliver 25%-plus margins going forward, i.e., have you left yourself sufficient buffer to deliver on this target whilst accelerating services growth? My second question is on the take rate compression that you alluded to. Are you seeing an accelerated pressure on take rates from your key vendors, Microsoft and others? Is there a risk that Software & Cloud gross profit growth slows further to mid-single-digits? And lastly, on capital allocation, you have a solid net cash position which can be further increased if you choose to divest your stake in Crayon. Now this gives you sufficient firepower to do both bolt-on acquisitions as well as initiate share buybacks. So given where the shares are today, is that something you are considering? Or are you looking to do bigger deals in the coming months?

Yes. Thanks, Varun, for the 3 questions. Let me start with the first 2 ones, and then I will hand over to Rodolfo on the capital allocation. In terms of the margin historically, but also in terms of having enough buffer in the future to accelerate growth, let's de-cover this and explain first, why we had the miss on the margin guidance in FY '21. Actually, we had a fantastic growth, as you have seen as well, with 23% growth in H2. In fact, we had an expectation to be 1% to 2% higher, which has slipped over in '22. And then in addition to that, we had a delayed impact of the initiative of Transformance, which we explained earlier. So that explains where we ended up where we landed with 25.7%. Now going forward, we do have now a proven growth momentum. And we -- at the same time, Rodolfo explained this, we have operating leverage in the system. So now we are at the position Varun, where we have a choice to improve the margin or invest in growth. Now let's assume, and I think we can all align on that. If you look at the Magic Quadrant, we are in the leaders quadrant with a 25% margin. So if we are already in that leading quadrant that's the current environment, we obviously would need to invest into growth, provided there are 2 fundamental aspects realistic. The number one, there is growth in the market in the addressable market. And number 2, we have a portfolio which resonates with the customers and we are able to deliver. And both are assured. So we have a high growth in terms of the addressable market. If you just piggyback on the market, it will be always above 30% on solution and services. And it will be above 14% on software and cloud. And as you have seen, our portfolio resonates very well with our customers, and the delivery models have been streamlined and will be further streamlined going forward. On the gross billing and whether that has an impact going forward on gross profit, our margins on software and cloud was always stable, but also always under pressure. We have a competitive advantage with our scale being in 90 markets and providing 9,000 vendors. But of course, with the future of this, our investment in the digital marketplace, which removes all boundaries as well as our digital supply chain, we have an opportunity to enhance this further, and hence, we don't see a compression on that. In terms of capital allocation, Rodolfo, I hand over to you.

Thanks, Dieter, and thanks, Varun, for the question. Look, on the capital allocation, as we have discussed during our presentation, we see many opportunities to accelerate growth, to build capabilities. And so in that sense, the general strategy remains unchanged. We'll continue with our dividend policy as we have reiterated, and we will also continue with our M&A activity. But of course, we continue to reassess other opportunities for capital reallocation as buybacks all the time.

Your next question comes from the line of Ross Jobber from Citi.

I've got a couple of questions, if I may, on Transformance. A couple of things. First of all, what exactly are you spending that money on? Could you give us a little bit more color on that? Secondly, I think you said in your comments that this is an ongoing expense. And if I misunderstood that, how long might we expect there to be a Transformance investment? And the third one is just a point of clarity. I think in the last question, you said that part of the miss on margin was the unexpected Transformance cost, but if I'm right, Transformance is stripped out of the adjusted EBITDA, maybe I'm not right about that. So that's my 3.

So let me start with Transformance as an ongoing initiative and what we are actually spending the money on. So you have seen we have made provisions of around CHF 9 million into adjusted EBITDA for that. And that CHF 9 million is meant to separate from some of our team members who are not fitting anymore in terms of the capabilities, which we require for the future. And that's basically the -- one of the underlying assumptions for Transformance, which is a combination of transformation and performance, it's a made up word for us. And what we want to achieve is, if you are in a high transformation environment, you need high performance at the same time. So you need to have permanently adjusted capabilities and adjusted performance towards that high performance to achieve it. So that's towards the initiative in itself. And as you can see, we are focusing on growth going forward. So we have to make this an ongoing initiative to be able to achieve our targets. On the second point, on why would that have an impact on the EBITDA margin miss, because it's booked under adjusted EBITDA. It's not the provision which we are referring to. It's the impact of the lower OpEx, which we are referring to. You can -- I think there -- you can appreciate if you have CHF 9 million of provision, that's usually you can say what -- around 20% of cost of the overall OpEx cost, and that's basically what we have not been able to achieve in 2021 and see now the full impact in 2022.

Your next question comes from the line of Alastair Nolan from Morgan Stanley.

I just wanted to maybe go back to the Capital Markets Day because maybe just to see in a little bit more detail what's changed? Because I guess the message then was very much that there was an ability to deliver gross -- sorry, EBITDA growth ahead of gross profit growth. Obviously, today, that's changed. What exactly has driven that change, I guess? Because we're getting, in essence, an increase in costs, but there's no additional uplift on the gross profit guidance in the midterm? And then secondly, on the cost-cutting program, can you just articulate and apologies if I missed it, exactly how much cost you expect to be able to take out of the business over, say, a 1, 2-year basis. And again, that doesn't necessarily seem to be showing up in the midterm topic guidance and the fact that, that's been taken down as well today. So maybe if you could just explain that, be much appreciated.

In terms of the first one on the Capital Markets Day, where we affirmed the guidance, what I iterated earlier was that we had an expectation that we had a much higher growth, much higher in terms of 1% to 2% higher growth towards H2. And that slipped through in 2022. You can also appreciate that the last 2 months were basically impacted on Omicron. So that's already -- if you look at a difference on the GP side, that's already accounting around 15% -- sorry, CHF 15 million in terms of differences. And the second point is really the impact of the Transformance. We should have and I clearly state this, we should have accelerated Transformance faster so that we had a faster impact in 2021. Now we have the full impact in 2022. In terms of -- is that reflected in the future, and you don't see the uplift in the future in terms of the mid-teens growth as well as the EBITDA margin. This is exactly where we see now that we are in a position to have that choice where we can either invest into growth or we invest into EBITDA margin. It's up to the market opportunity and our positioning as a company from our portfolio. I think you would tell me that I'm not doing the right job if I miss the opportunity, which we see in the market right now. We have built that engine in a scalable way and are able to capture the market opportunity, becoming a leader in many areas, which we have shown earlier. And that's our choice now. We want to focus on that and still maintain a world-class margin above 25%.

Your next question comes from the line of Andreas Muller, ZKB.

I've got also a question about the personnel cost increase. What was the effect? Or what would you consider is the effect of wage inflation, so salary increases and the other part from the FTE increases this year. Would that accelerate even more this year? That's the first question. Then I have a follow up question on the exposure towards Russia, [indiscernible] and Ukraine. Do you have any assets over there? And then I was wondering what's the size of the SAP business and also the application services, how much gross profit are you generating with the 2 business lines on a run rate basis by now? Is that compliant with what you showed in the graph, this paragraph earlier?

And looking forward to meet you tomorrow. On the wage inflation and the FTE increase, let me start just with wage inflation. We see in certain pockets, we see an increased salary demand. That's absolutely correct. You have heard about the great resignation. And after post COVID, what -- how we have mitigated is that we have a combination of grooming our talent as well as hiring our talent. And this is that we have built it into the budget as it is. In terms of the FTE increase, so just to be precise. So we had an FTE increase last year with 1,450 FTEs from InterGrupo, that's our acquisition on application service, as you remember. And then we had additional 1,000 headcounts or experts brought into the company, and that's a combination of organic as well as acquisitions. We believe going forward, that we will have always around 1,000 FTEs on a yearly basis added to our capabilities. And looking at the market opportunity and looking at how we split headcount relevance from solution and services growth, we believe we are in a good ratio over there. On the second question, in terms of exposure in Russia–Ukraine barriers, and -- so we are asset-light company, right? So we are a people company as well. So we don't have assets in the various countries. We have obviously closed the office in Ukraine and moved the people into safe locations at the border to Poland and across wherever it was possible. In Russia, we are following the sanctions of course, as the as well as the U.S. sanctions, very, very rigidly. And over there, overall, what I mentioned in my presentation, our exposure from a GP from a gross profit is around 1.5% of the overall exposure of the overall business of SoftwareONE. In terms of SAP and Application Services side, you remember we are not splitting our segments yet in terms of run rate and profitability. But you can assume 2 things. Number one, we're absolutely on track on my commitment, which I've given to you last year, which is the CHF 100 million run rate at the end of 2023, and the heavy bars which you see also in terms of reflecting the scale towards it.

Your next question comes from the line of Knut Woller from Baader Bank.

Yes. First, on the transition to pay-as-you-go, when will that be behind us to be a headwind in terms of gross profit? Then secondly, regarding your comment on the weaker first half in terms of the EBITDA margin. Looking at the accounting change and here better feeling for Predica, is it around CHF 100 million in terms of revenues. And looking now at the changed accounting that this is having here on the business model being more on services. Here, a negative headwind for the margin. Is that the right way to look at things? And then lastly, on the net retention rate, you're having -- can you give us here some updates?

The last question on the natural tension towards our people?

No. In terms of the customers, I mean, you're doing a lot of cross-selling and trying to shift it more to sticky business. So what is the net retention rate currently? And how are you expecting that to shape?

Okay. So let me start with the first one on pay-as-you-go and the timing. So we are more than halfway through. So we expect this to be another 1 to 2 years until we have addressed our customer base. Of course, there's always net new customers, which we are hunting, but converting our existing book of business to be as you go 1 to 2 years, you can expect them over that. And then we have all on a subscription base and all on recurring revenue. What's interesting is, of course, that with every pay-as-you-go, you get the attachment of the cloud support as a managed service. These are the 6.9 million users, which we refer to. And that, of course, gives us quite a deep insight into the customer base and the application landscape. On the second portion of the -- second question, which you had on the EBITDA impact, maybe I'll just transfer to Rodolfo.

In terms of the EBITDA margin first half versus second half, what we're seeing is, as we mentioned before, we have certain investments in the first half associated with Predica in some of the service lines. And what we're seeing is the same level of OpEx first half versus second half on this particular investment, but we see significant GP uplift in the second half. And this drives the small asymmetry in the margin between H1 and H2.

Yes. On the net retention, just let's go through the numbers again. We have 65,000 customers, right, which offers a huge existing book of business for the upsell and cross-selling. At the moment, we have reached 71% of our GP through customers who buy both software and cloud as well as services. And that gives us that 8.9% multiplier, which is, of course, a massive opportunity. There is a certain churn both in the lower transaction end of customers, which you usually have, right? They buy in 1 year, they don't buy in the second year and then they buy again in the third year. And that's something which, of course, will in the future be all digitized, so it doesn't impact anymore on our operating efficiency.

Your next question comes from the line of Ben Castillo from BNP Paribas.

A couple from me. Firstly, you had previously commented that you expect the OpEx to be flat sequentially H2 over H1. It looked like that was actually up around CHF 30 million or around 10% or some way off. I'm just wondering what the moving parts were there. How much of that was sort of wage inflation versus discretionary growth investments? Second point, on a kind of contribution margin, it's something we've continued to ask you, but what can you tell us around the level of profitability for the services business that you might be targeting has in comparison to peers. Something on Slide 17, you mentioned about full segment reporting. So should we expect that this time next year? And then thirdly, on the 2022 guidance, with services kind of reaching 50-50 a little quicker than you first thought, that could imply that Software and Cloud gross uplift is pretty minimal from the sort of 3% level that you just delivered. So just if you could give us a steer on your expectations for the software and cloud business for 2022?

Yes. I'll let Rodolfo start with the first 2 questions and then go into the software and cloud, the third question.

Just one clarification, when you talk about the discrepancy in the OpEx, you refer to the 2021 results, right?

Exactly. So yes, the previous commentary was that H1 would be broadly the same, it be flat in H2, but I think it looked like it stepped up in H2 of 2021, yes.

Yes, that's correct. That's exactly -- I mean, I would say the vast majority of the difference is what we already explained. So there was this Transformance initiative for which we created a provision. The expectation was to realize a significantly higher amount of savings already in H2 of last year, that didn't happen, and we will, of course, realize the savings now in 2022. So that is as it relates to 2021. And the commentary I made on 2022 does reflect the overall OpEx. I just mentioned in the certain big investment areas that I mentioned here, we see similar investment patterns H1 and H2. But of course, we get the uplift in the GP in the second half. And then talking about the -- let me take your third point. We want to provide the transparency. So we are aiming for full segment reporting by the end of 2022. I think it's important to have that just to make sure we have all our system and reporting revenues in order to do that. And then as it relates to the services, what we have expected, this is a highly scalable business. We have seen when we monitor the recent progress, we see a huge operating leverage. And you will, of course, get the numbers at the end of the year. We would say right now the services business is in positive profit territory. But more details to come once we provide the segment report.

And on your last, yes, Ben, I think you had one last question on the Software & Cloud in terms of growth opportunity in 2022. So we saw in the second half, we saw an 8% growth on Software & Cloud, and we see this momentum carrying over into 2022 as well. There are certain aspects, which, of course, which we need to consider. One of the aspect is that you have, of course, in 2020, in the second half of the year, also a height of COVID. So then you need to make sure that your baseline against right normal base. We believe that Software & Cloud, the growth opportunity are there, but they are moderate. They will be in the single-digits in mid- to high single digits. But we also believe that with our offerings, which we have on digital supply chain as well as marketplace, we have quite an upside, which is at the moment, not yet built into it.

We will now take our last question, and the question comes from Jad Younes from UBS.

A couple of questions from me as well. So if you're guiding that H1 costs are going to be flat over H2, wouldn't Transformance basically be expected to drive benefits in H1? And then how much exceptionals from the Transformance program would we expect this year? Secondly, can you give us a number on the attrition number that you've seen basically for this year as well? And then lastly, on the M&A, can you also give us a bit of idea about the acquisition pipeline and what's the average gross profit multiple that you're paying for the acquisitions?

Yes. Let me start on M&A. We have a very strong pipeline on M&A. That's always part of our model. As you have seen, it's usually between 6 and 10 acquisitions, which we are able to find the right targets in the market. It has to be clear what -- if you acquire solutions and services, it will be always margin dilutive in most of the cases. And it will take us almost a year to bring them up to a level on the EBITDA margin, where we see our benchmark and where we see our magic quadrant. In terms of attrition, I didn't mention this earlier, but I could share with you that we have true Transformance, we always talk around 5% to 7% in terms of rightsizing capabilities. And then you usually have a normal attrition, which is slightly above 10%. So that's the overall attrition which we are talking about. The first question, Rodolfo, you want to jump in?

Yes, absolutely. So again, it bodes to the same topic we have been discussing so far. As Dieter explained the transforming program, definitely, we want to make sure we keep sharpening the capabilities in the organization. You want to be in the position that will be reduced in H1 of 2022, that's where you will see the bulk of the impact, but we are reinvesting the high growth, many of these segments, right? So this is the decision we are taking in the investments, which should possibility for long-term growth, and we see that as the priority at this stage rather than bringing the savings to the bottom line.

And then on the total level of exceptionals this year from the Transformance program.

No, it just typically in many companies is this Transformance or restructuring provision of CHF 9 million that we had this year. This is the only exceptional, let's say, associated with this particular focus.

That does conclude today's conference call. Thank you for participating. You may now disconnect.

Thanks, everyone.

Thank you. Bye.