SoftwareOne Holding AG (SWON) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the SoftwareONE Full Year 2022 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Anna Engvall, Head of Investor Relations. Please go ahead.

Good morning, and thank you to everyone for joining SoftwareONE's Full Year 2022 results. 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 will hand over to Dieter.

Good morning. I'm pleased to welcome everyone to our full year 2022 results. 2022 was yet another year of achievements to be proud of. Firstly, we delivered a record year, reaching CHF 1 billion in revenues for the first time. In addition, our service business hit a CHF 500 million revenue run rate by Q4. Importantly, we are also ahead of schedule on our 2025 target of 15% adjusted EBITDA margin for services. We continue to attract talent, reaching over 9,000 FTEs and made great strides improving gender diversity at all levels, including at the Executive Board with the appointment of Julia Braun as Chief HR Officer. Lastly, I'm very proud of our successful rebrand, which reflects our transformation into a global software and cloud solutions provider, supporting clients over their entire cloud journeys. Moving on to the numbers. Gross profit for the group was up 14% to CHF 940 million in 2022. Adjusted EBITDA was CHF 240 million with a margin of 25.6%, broadly stable compared to prior year. Looking at Q4, growth was 7% due to a weak December. We saw clients taking a more cautious approach to spending their budgets. This was particularly evident in EMEA, especially in our Microsoft business. On the demand side, we are seeing is that the organizations continue to push forward with cloud first digital transformation to drive agility and efficiencies. They want to move to the cloud, but in an optimized way with control over their spend from the beginning. We are in the best position to help them to do so, being a leader in FinOps and application modernization. At the same time, we are taking measures to accelerate our growth momentum and optimize our cost structure. Rodolfo will take you through these initiatives later in his presentation. On regional performance, all four regions are now at scale. Also, our growth markets generated revenue around or above CHF 100 million. Each region also delivered double-digit growth in the year. EMEA grew by nearly 13%, including the acquisition of Predica. In Q4, growth was 4%, driven by weaker results in our Microsoft business as mentioned earlier. NORAM delivered a strong performance with gross profit up 15% and momentum continued into Q4. APAC delivered growth of nearly 14% in 2022. Q4 growth was driven by China as well as Australia and Hong Kong. Also, for smaller size today, we see that China has the potential to become a growth engine for the region. LATAM grew by 12%, but Q4 was impacted by slowdowns in key markets, Brazil and Colombia, due to political environment. In summary, it's great to see continued momentum across many of our key strategic and high-growth markets, including NORAM and Asia Pacific. Diving into our business line, Software & Cloud Services delivered over 27% growth. Cloud Services, application business and SAP services delivered high double-digit growth in the year. Also, growth in Q4 was impacted by a lower contribution from acquisitions. xSimples grew by 56% in '22 and over 40% in Q4. As mentioned last year, growth in xSimples has come down from over 80% in '21 as we are reaching the end of the shift to pay as you go from existing multiyear agreements. In terms of profitability, adjusted EBITDA margin was at 9.6% in Q4, up from 3.3% last year, driven by a very competitive contribution margin and operating leverage. This confirms that we are ahead of schedule in terms of meeting our 2025 adjusted EBITDA margin target of 15% of revenue. Now turning to Software & Cloud Marketplace. Microsoft billings reached CHF 17 billion in 2022, growing at 13%, which translated into gross profit growth of nearly 6%. In Q4, Microsoft billings growth slowed to 2%. This was driven by weakness in EMEA, the public sector, in particular. Also, the enterprise segment was also impacted. Meanwhile, other ISVs continue to show strong momentum, growing double digit through Q4. As for margin, you see that marketplace was at a sector-leading level of 53% with a slight improvement over last year. This is a testament to the scale and the high level of efficiency that we have reached in this business. Whilst we see some softness in growth in Q4 related to current environment, the drivers remain fundamentally robust, and we are confident in the long-term growth. Now let's look at some examples of how we win business by helping customers on their cloud journeys across our whole portfolio, across the hyperscalers and across the regions. Our U.S.-based global manufacturing company chose SoftwareONE to achieve operational efficiencies and reduce compliance risk with our item and our ESG services. A large Asian insurer selected us to assess, to migrate, and centralize the IT estate more than over 800 workloads on AWS. Finally, we won a framework agreement for 10,000 universities and educational institutes across 42 European countries. On the right, you also see recognitions from some of our partners. After signing a strategic collaboration agreement with AWS last year, we also achieved premium tier services partners status. We are one of a handful of their most strategic partners and have so far overachieved our commitments with them. We were also recognize by ServiceNow as partner of the year and see scope for expanding the opportunity around ServiceNow in 2023. I would like to provide a short update on our sustainability journey. Our ESG strategy was created with a passion for our people, our communities and our planet at its call. We want to build on the success of ongoing local initiatives to create a strategy and vision to be embedded across SoftwareONE's businesses. To that end, last year, we conducted an in-depth materiality assessment and developed 5 ambitions in alignment with specific sustainable development goals adopted by the United Nations. In our ESG report to be published in H2 this year, we will share our progress and 2030 targets in relation to each of these ambitions, including our carbon footprint and reduction measures. Finally, it's our people that deliver our technology solutions. For that reason, we continue to invest in our talent base last year with some excellent results. We grew to over 9,000 FTEs worldwide with over 300 net new hires to capture the right talent and replace key customer-facing roles. As shared before, we look to different ways of closing the talent gap while also making a meaningful contribution to society. It was therefore great to have 300 academy apprentices transitioning to full-time hires over the year. We made progress in terms of improving gender diversity at all levels. Senior female leaders now represent 27%, up 5 percentage points compared to 2021. We also developed our employees by supporting them in gaining certifications, alone in Microsoft and AWS, more than 1,000 new certifications were achieved. In addition to ensuring that our employees are empowered, well-trained and given the right career opportunities, we also want them to be properly incentivized. In 2022, we made certain key changes to compensation plans to increase growth and profitability. With that, I would like to hand over to Rodolfo to take you through our financial performance in 2022 and Q4.

Thank you, Dieter. A warm welcome from my side as well. Let me summarize what I see as key achievements for 2022. We delivered on guidance and we continue to scale Software & Cloud Services. We launched our operational excellence initiatives, which I will cover in more detail later on. We also maintained tight cost and working capital control. Finally, we continue to execute on our balanced capital allocation strategy with growth investments and bolt-on M&A, while also returning funds to our shareholders in the form of a proposed CHF 0.35 dividend for this year and a CHF 70 million share buyback. Let's move on to the numbers. I would refer to the new metrics, which we will focus on in 2023. Revenue contribution margin and EBITDA margin now as a percentage of revenue. Starting with the full year results. Revenue grew by 14%, in line with gross profit. Contribution margin. The difference between revenue and internal and external delivery costs increased by only 11% in constant currency due to the impact of business line mix. Finally, our SG&A expenses grew by 10%, mainly reflecting tight cost control, with quarterly costs flat since quarter 4 2021. Adjusted EBITDA margin as a percentage of revenue was 23.8%, which is equivalent to 25.6% margin as a percentage of gross profit, fully in line with our guidance. As Dieter already mentioned, our business slowdown in December are customers took a more cautious approach to spend, particularly in Microsoft, in EMEA. Revenue growth was up nearly 8% in quarter 4 with a high adjusted EBITDA margin of 28% of revenue in line with seasonality. As a result of the strong Swiss francs, ForEx headwinds had a significant impact of approximately 4 percentage points on our revenue and gross profit growth. However, given our natural hedge with similar exposures on OpEx, the ForEx on adjusted EBITDA was again minimal. The next slide shows the business line view. Services revenue grew 26% for the year, reaching CHF 0.5 billion run rate by quarter 4. The contribution margin in services was 35.5% of revenue in 2022 comparing favorably to peers and up by 0.5 percentage point versus prior year. SG&A grew at a materially lower rate than the top line, translating into an adjusted EBITDA margin of 2.9%. The margin in Q4 was 7.8%, driven partially by seasonality of cost, but we expect this to continue increasing over coming quarters towards our 15% target. In marketplace, we saw solid growth of 5.7%, a stable contribution margin and a strong adjusted EBITDA margin of 53%, a level which we see as being both healthy and sustainable. We have now launched a wide-ranging program to embed operational excellence across our organization to optimize both growth and efficiency. This program will touch three key areas: Commercial effectiveness, our service delivery model and support functions, such as HR and finance. As indicated on the slide, the planned measures will have different degrees of impact on both growth and productivity. Let's start with commercial effectiveness. Here, the majority of the impact will be on growth. Leveraging our data insights, we want to target the right customers with the right offerings to gain share for us. To achieve this, we need to optimize our mix of business development executives and account managers. We will also make sure noncustomer-facing roles to improve efficiently. On service delivery, we'll capitalize on standardized high-volume offerings for SMEs to scale profitably. We've had great success with our xSimples, which we will seek to further enhance and standardized globally. We're also already progressing towards assuring mix for optimal utilization rates across local, regional and global delivery centers. Finally, we will improve productivity across our support functions by transferring transactional activity to our shared service centers, a leveraging functional center of excellence at global or regional levels. With these measures, we aim to reduce fragmentation of resources across country organizations and improve functional impact. These initiatives will allow us to drive mid-teens revenue growth in the midterm while generating annual cost savings of CHF 50 million. We then plan to reinvest a maximum of 50% of the savings in strategic growth areas, while the other 50% or more will fall directly to our bottom line. Turning to pricing. We plan for 1/3 of or CHF 50 million of the cost savings to materialize this year with the full run rate of CHF 50 million already next year. We're moving fast in implementing the plan and expect to see progress in H1. We will communicate the restructuring provision in the region of CHF 25 million to be confirmed in quarter 1. As part of enhancing our competitiveness, we will reinvest some of the operational excellence savings in 5 strategic areas. We will invest in leveraging external and internal data to further enhance lead generation and conversion as well as in improving account-based marketing to increase share of wallet. We're also using AI propensity models to predict buying behaviors to facilitate cross-sell and upsell. We will continue to simplify and digitize our processes. We're also enhancing our training curricula to strengthen capabilities such as consultative solution selling as well as remote delivery upscale. Finally, we will invest more in IP to improve both our high-volume SME service offerings as well as our core service lines, end-to-end digital solutions. Working capital ended the year at a favorable negative position of CHF 158 million after factoring. This was driven by particularly effective working capital management in the second half, which reversed the first half negative outflows coming. Organic sales outstanding have increased due to growth of consumption-based offerings where customers are invoiced later compared to prepaid enterprise agreements. Importantly, the overdue ratio has not changed. On accounts payable, we optimized our payment cycle and ended up with a share based payable as in 2021. Our net cash development is down. Operating net cash increased by around CHF 150 million, reflecting cash flow from operations, CapEx investments, mainly in our Goatpath platform, as well as increased long-term receivables. These are interest-bearing receivables related to multiyear contracts where customers have been granted extended credit terms. In return, we're in a higher margin to finance these contracts. On the nonoperating outflows, we invested in two bolt-ons in our services business line and paid out a dividend of CHF 51 million, equivalent to 46.5% of our 2021 adjusted profit for the year. Finally, the net cash development was significantly impacted by a decrease in value of our Crayon shareholding. All in all, we ended the year with a strong net cash position of CHF 461 million. Let me recap our capital allocation policy. Reinvesting in growth will continue to be our #1 priority. On the operational side, we will focus on executing our organic growth strategy, including the reinvestment opportunities I mentioned earlier. As for CapEx, our main investment is our Goatpath marketplace to capitalize on the digital reselling opportunity. We will also continue to do bolt-on M&A to have capabilities and build geographic presence. Any potential acquisitions will be measured against high internal rate of return hurdles and benchmark transaction multiple. And finally, we will continue to return funds to shareholders in the form of attractive dividends. We will occasionally complement these with other forms of return, such as the share buyback already announced last year. I will close my section with the outlook and midterm guidance. We continue to execute on our well-defined strategy in order to capitalize on our attractive addressable markets. While we believe our customers will continue to prioritize digital transformation in the coming years, we remain cautious on 2023, given the uncertain economic environment. Based on the new reporting methodology, with growth in margin based on revenue rather than gross profit, our 2023 outlook is double-digit revenue growth for the group in constant currency, adjusted EBITDA margin of 24% to 25% of revenue and a dividend payout ratio of 30% to 50% of adjusted profit for the year. The improved adjusted EBITDA margin midpoint guidance reflects the positive impact of our operational excellence program. The midterm guidance has also been adjusted to reflect the full impact of this program, which, together with operating leverage, fully offset the negative business line mix impact. The guidance also reflects our commitment to the company's profitable growth strategy and enhanced returns to shareholders. Let me now hand over to Dieter for his closing remarks.

Before we end the presentation, I would like to leave you with 4 key takeaways. We operate in a large and attractive market with the cloud opportunity offering long-term sustainable growth. Secondly, technology doesn't deliver impact on its own. It's our people who deliver solutions that work. We have built a 9,000 strong expert team at SoftwareONE, and we'll continue to invest in our talent base. Thirdly, we must also find ways to work smarter and reduce complexity in the organization. And finally, continuing to innovate is critical. We cannot stay still. We must continuously reimagine how the world buys, builds and manages everything in the cloud. Thank you, and we will now take your questions.

[Operator Instructions] Now we're going to take our first question. And the first question comes from the line of Kathinka Kuyper from UBS.

A couple for me, please. First of all, on the macro, I think you mentioned that the weakness that you saw started in December. Can you comment on how the current trading in January and February has evolved? And then secondly, what gives you the confidence that you will get back to double-digit growth for the full year, especially with Microsoft and other vendors kind of seeing deceleration? And then how should we think of the growth between the two divisions of software and services? And then finally, just a quick follow-up. Did you mention the restructuring expenses were CHF 25 million?

Kathinka, thank you for the questions. Yes, we mentioned the CHF 25 million restructuring costs, to start with the last question. On the first one, on the macro side, how we saw December and how we see January and Q1. October-November was absolutely strong and in line with our previous months and our previous quarters. We always say that our guidance will -- the landing on our guidance, whether it's on the lower or the mid-high end of the guidance, will depend on this budget flush, which is the usual situation happening in December and so we were cautious whether this year it will happen or not. So we have seen that, that budget flush did not occur. And we don't see that as anything else, and a more cautious approach from our customers to retain some spend for the 2023 year. In terms of trading for Q1, we are ramping up to the double-digit growth. That is also supported by a few changes, in particular also on the marketplace. We will be seeing a change in Microsoft, which will come in March where they remove the price lock, which they have initiated last year. And with that, we can accelerate on the Microsoft side to move the customers to that new commerce platform, which will accelerate the growth as well. That is one part of the answer also for the confidence on the second question. We see fundamentally and structurally no headwinds in the market. In fact, our ISV segment is very, very strong also in Q4. It was strong and it's continuing to be strong in Q1. And also, on the services side, our portfolio absolutely supports the current pain points of the customers, and we will continue to utilize that. And in terms of growth, between the two lines of businesses, we have said we always want to grow along the market on the services side. So we -- our growth is obvious between 20% to 30%, which we intend on the services side. And in -- on the marketplace side, it is single digit -- mid- to high single digits. Do you want to add something, Rodolfo?

No, I think you covered everything, Dieter.

Maybe a quick follow-up. How should we think of the seasonality between H1 and H2 this year?

Here, we see a stronger second half compared to the first half. So while we guide for the double-digit growth for the year, we do see a ramp-up throughout the year.

Now we're going to take our next question. And the next question comes from the line of Knut Woller from Baader Bank.

Some aspects have already been touched, and you also touched already a bit on the price lock, Dieter. When I listen to conference calls, competitors of yours, they were saying -- highlighting that particularly price increases on the software side should help in 2023. Can you shed here some light also looking beyond the Microsoft price lock that you cited on your expectations to which extent price increases can be a tailwind, helping you to grow in 2023? And also on the xSimples side, what should we expect with you mentioning that it should be phasing out that, in terms of growth from xSimples in 2023?

Knut, yes, absolutely clear. So there is, of course, there is a move after the price lock on Microsoft, which will accelerate post March. And then generally, we see across the board, we see price increases from most of the ISVs. And as you know, we -- our margin is a percentage against this price or against discounted price, hence, we cause when they increase the price, we would have to tailwind in the marketplace as well. And secondly, in that space, if you talk about price increase, it's always like me, as a private person as well, right, if somebody increases the price, you want to assessment that there are other options. And perhaps, that means we can help and we can support the customer to evaluate the entire cloud spend or the entire application on technology landscape. So it's always a trigger point to also upsell and cross-sell services. So we love both of those scenarios. On the xSimples side, yes, after the price of that will increase again as well, of course, but we are hitting the end of our existing book of business. Remember, we went from the old commercial model to the new commercial model. And of course, once you go to the tail end of it, it is slowing down. But the xSimples, as such, has such a success that we are, of course, now broadening the customer base and going instead of the farming rather to net new hunting. And that's what Rodolfo also mentioned in the presentation that we will reinvest into the xSimples is to further standardize and grow and penetrate them.

Great. And so just some more color on the growth rate, if possible, Dieter. What -- of xSimples, I think it should be substantially lower. But what kind of growth do you still expect from the funding momentum that you're expecting going into 2023?

Yes. I would say it will be around 30% to 40% growth on the xSimples. You have seen one indicator on the xSimples, if you look at our numbers, you can almost look it back to that users, which we are supporting. You have seen it's now 8.8 million users where we have a 24/7 support. So we are reaching also over there, now slowly the 10 million in the next 12 to 18 months, which is great. And so that will continue to grow. Overall, in the services, you remember we always said we want to be with the market, which is 20% to 30% on growth.

Now we're going to take our next question. And the next question comes from the line of Andreas Müller from ZKB.

I was wondering why, with the Microsoft business there was such a huge difference between EMEA and the U.S. we hear in other cycles? That's the first question. And then I was wondering, what do you expect for wage inflation this year and also the development of the FTE? Can you stabilize still OpEx also throughout the quarters this year? And then last question is tax rate. What do you expect for next year -- or for this year, actually?

Tax rate, Dieter? Yes.

Okay. So let me take the first one, wage inflation and tax rate. I will hand over to Rodolfo. So from a customer segmentation, you look at the different geographies, we have the largest customers in EMEA. And then, of course, if you talk about blue birds, which are basically the budget flush, then, of course, it would be also factored in EMEA, plus our public sectors is mainly focused on EMEA as well. So that's the explanation on Microsoft, why it was geography preferably. And I hand over to Rodolfo for wage inflation and tax rate.

And there was also the comment on FTEs. Maybe I tackle that as well. So Andreas, thanks for the questions. Let me take one at a time. On the FTE front, right, with the operational legends program, as I explained, it's a combination of growth and efficiency, right, to improve cost effectiveness and then productivity in the organization. So as such, we are investing in certain areas. So we're expecting to, in the sales side to, let's say, maintain slightly increased resources, but do more with the resources. And then, of course, in certain areas, like finance, HR, we'll be shifting transactional activities to shared services, we expect reduction. So all in all, we expect FTEs to remain stable, maybe a net increase, right? It's more or less increase, like we saw this year. Then on the tax rate, we basically expect a similar tax rate as we have seen in 2022.

Now we're going to take our next question. And the next question comes from the line of Ben Castillo-Bernaus from Exane BNP Paribas.

So just on the Cloud Solutions & Services business, growth slowed quite materially in Q4. Can you just remind us about how much of that segment is recurring in nature? How much is kind of project-based one-off? And so what drove that slowdown? And I guess what did you see there, was that a cutting of projects? Or was this sort of pushing out to a later date? Was this reducing scope of existing projects? Just help us come to that slowdown from Q3 and Q4, please? And then you commented on that services segment. You're ahead of schedule in terms of your 2025 margin target. Can we get you to comment just on when you think that might become in reach of it is slightly sooner than 2025?

Ben, thanks for the questions. On the growth on services, which you rightfully saw in Q4, so we have -- there are mainly three reasons -- there are three reasons there. So first, of course, there's always a lot of effect if the Microsoft business is also slowing down then there's the upsell and cross-selling and knock-off effect. Second, we had some legacy services rolling off, which is also intentional to a certain extent as we want to focus on our core services business. And then towards the year's end, of course, you can't really put those people on a different project. And third, you saw that we haven't done really any acquisition in 2022, except in the beginning of the year, which was Predica. Then, of course, you compare to 2021 Q4 where we had actually two acquisitions with Symantec and Predica. We don't see this as something which continues. It's an outline for us. We see the pipeline and the backdrop that a very stable growth for the upcoming quarters. Now ahead of schedule, and this is, of course, this is very exciting for us that we can share this with you because we always believe that our strategy is the right one. And it's also the right time for the strategy and to see now the proof points really being realized, and the Q4 is an indication on the margin of 9.6%, even though there is a certain seasonality, but the data point is absolutely going in that right direction. And we believe we are ahead of schedule, up to 1 year ahead of schedule on a 15% margin. And this is really, as said, it's an exciting situation for us because if you look at our exit run rate of CHF 500 million revenue, right, and if you look at our growth rate, and then if you look at our target of 15% and achieving this earlier, we talked about the service business of CHF 100 million EBITDA in due time, right.

[Operator Instructions] Dear speakers, there are no further questions at this time. And I would like now to hand the conference over to our management team for any closing remarks.

So thank you for spending time with us today, and I'm looking forward to meet you individually, of course, over the next couple of days and looking forward to our conversations one-on-one. Thank you very much.

Thank you.

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.