SoftwareOne Holding AG (SWON) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the SoftwareONE H1 2024 Results Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] 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 Anna Engvall, Head of Investor Relations of SoftwareONE. Please go ahead, Madam.

Good morning, and thank you to everyone for joining SoftwareONE's H1 2024 Results. I'm Anna Engvall, Head of Investor Relations at SoftwareONE. Joining me today are Brian Duffy, our CEO; and Rodolfo Savitzky, CFO. In terms of agenda, we will kick off with a summary of our H1 2024 results presented by Brian. Rodolfo would then take us through our financial performance. We will finish the session with Q&A, as usual. Before handing over to Brian, please let me draw your attention to the disclaimer regarding forward-looking statements and non-IFRS measures on Slide 3. With that, I will hand over to Brian.

Good morning, everyone, and thank you for joining the call. Let me begin with some key highlights for the first half of the year. In H1, we delivered solid results with 7% growth and an improved margin against the backdrop of continued macroeconomic uncertainty. Our performance was supported by the implementation of Vision 2026, which is progressing according to plan. We successfully launched our transformed go-to-market model in key markets with our new sales hubs set to capture share in the growing under-served SME segment. We also completed our operational excellence program, exceeding the initial targets that we set last year. While we saw improved momentum in many of our growth markets in H1, and most remain fully on track, the macroeconomic environment continues to affect clients' purchasing behavior, specifically in DACH. Secondly, our public sector Application Services business in Colombia has been impacted by the change in government. Consequently, we have revised our revenue guidance to 7% to 9% growth, down from 8% to 10%. We have maintained our adjusted EBITDA margin of 24.5% to 25.5%. Now before moving on, I would like to briefly comment on the update from the Board of Directors. The Board has received indications of interest for a potential going-private transaction. Discussions, although challenging given the business environment, are progressing, and the Board will provide further updates if and when required. Now looking at our financial results in more detail. We delivered solid growth of 7% in H1 with a similar level in Q2, benefiting from our global footprint, the breadth of our portfolio, and improved execution across the business. Adjusted EBITDA grew by over 11% with a margin of 23%, up 1 percentage point, reflecting our focus on profitable growth. Moving on to regional performance. DACH grew over 3%, primarily driven by lower results in the Microsoft business. Momentum improved in Q2, up 6%, driven by other ISVs and a few excellent customer wins in IT Portfolio Management and SAP Services. With new leadership in place since January, we have very good visibility on pipeline progression in Q3. Although as mentioned, we do see the uncertain macroeconomic environment, having a slightly larger impact than anticipated. The rest of EMEA was up over 4%, driven by strong momentum in Southern Europe, particularly within services, and Central and Eastern Europe. France and Italy both grew double digits with same surpassing 20%. APAC delivered a strong H1, up over 10%. Growth slowed slightly in Q2, driven by China, which is currently a challenging market. Nevertheless, we have a broad presence in the region and remain confident in delivering a strong performance for the year. Meanwhile, NORAM was up by 15%, supported by several large customer wins in both quarters. And as we emphasized in February, North America is a priority market for us, and we intend to continue strengthening our organization in the region to ensure we have the right capabilities to succeed there. LATAM grew by 10% with an outstanding 15% in Q2 and improved results across the majority of markets in the region. Clearly, the turnaround measures which are being implemented by our new leadership team are working, and we see further upside to the ongoing launch of our new go-to-market model. Turning to our business lines. Software & Cloud Marketplace was up over 6% in H1. Microsoft billings reached USD 11.9 billion, up 8% year-on-year, which translated into a revenue growth at a slightly lower level. In other ISVs, we delivered double-digit growth in Q2, supported by successful renewals and pricing initiatives launched earlier this year and an increased focus on our prioritized partners. Software & Cloud Services delivered over 8% revenue growth in H1. Growth was driven by strong momentum in Cloud Services across all 3 hyperscalers, IT Portfolio Management as well as SAP Services. Meanwhile, Application Services was impacted by weak public sector results in Colombia following the change of government. Transforming our go-to-market model and driving sales productivity are key to building a world-class organization, which leverages our existing scale and reach. In H1, we made significant progress completing the implementation of our new go-to-market model in key markets, including DACH, North America, U.K. and Ireland, Mexico, Brazil, and India. These markets account for around 60% of our revenue and the remaining 40% will transition during H2. As part of the new model, we launched hubs in Nashville and Barcelona to effectively target the growing and under-served SME segment with a digital-led sales motion. We are also opening hubs in Bogotá and São Paulo to serve the Latin American market. These hubs will initially focus on the Microsoft tech stack, including Copilot and security solutions before offering a broader portfolio. Meanwhile, we reorganized our client coverage for the enterprise and corporate segments to enable our account managers to go deeper with our larger customers to gain wallet share as well as fund for new logos. Additionally, we strengthened our global alliance teams with strategic hires. The team is working with our prioritized partners to build joint go-to market programs and share targets to cross and upsell our broader portfolio. And as we mentioned, we've seen early results on this with our other ISVs accelerating to double-digit growth in Q2. Finally, we implemented an AI-based renewal model for the Marketplace business line and we'll roll it out across managed services in H2. We are also driving pricing excellence with successful pilots in DACH, the U.K., Nordics and Benelux. Supporting our digital-first go-to-market approach, our Marketplace platform facilitates bringing customers and vendors together to disrupt our industry. Our existing relationships and decades of [ tribal ] knowledge are significant advantages versus the many generic marketplaces that are out there today. The platform continued to gain traction in Q2 with the number of cloud subscriptions growing to over 35,000 and LTM gross sales increasing to CHF 825 million. This translates to around CHF 100 million of revenue or 10% of group revenue for SoftwareONE. We continue to add new features to enhance the customer experience. For example, split billing for multiple customer entities and scale up the platform by adding new vendors. We are also focusing on automation of all back-end processes and aim to reach an end-to-end automated chain by the end of 2025. Over the medium term, we expect this platform to become a key driver of both top line growth and margin for SoftwareONE. Copilot 365 has now been generally available for around 2 quarters. Our focus remains on being the #1 partner for Microsoft, while supporting clients with exploring use cases, addressing data security and compliance concerns, and creating effective adoption programs. By June 2024, we have reached around 600,000 Copilot users, nearly double the number of users by the end of Q1. We have also delivered an additional 240 services engagements in Q2. Now let's turn to some examples. Arendt, our Luxembourg law, tax and business services firm, is a great example of how we've been partnering with clients to explore use cases for Copilot 365 to transform the way they are working. As part of our holistic Copilot advisory service, SoftwareONE brought together the firm's most relevant stakeholders to showcase Copilot's capabilities. We demonstrated its integration with the 365 suite, highlighting its potential to streamline content creation, data analysis, legal research and translation. The SoftwareONE team also proposed new innovative uses such as the chatbot to support the legal teams. And that based on these results, Arendt intends to expand the use of Copilot throughout its entire organization. In addition to Copilot, we continue to focus on our expand services in high-growth segments such as data and AI, supporting mid-market clients getting their data in order. An example of this is AmRest, a restaurant operator in Europe, managing a diverse portfolio of well-known franchises such as KFC, Pizza Hut and Starbucks. They were looking to enhance their data infrastructure to better analyze and utilize data for improving sales and marketing operations. As a solution, we help them build an enterprise data warehouse on Microsoft Azure. Today, AmRest has a scalable solution which accommodates their growing data needs and provides them with deeper insights into customer preferences and behaviors and enabling them to deliver a more personalized and effective marketing strategy. Now with that, I will hand over to Rodolfo, who will take us through our financial performance in H1.

Thank you, Brian. I'd like to extend a warm welcome from my side as well. Let me begin by discussing our financial performance at the group level. Revenue growth in H1 was solid at 7%, in line with our expectations with broad-based growth across the regions and business lines. Our focus on operational excellence continued to yield positive results. We reduced delivery costs, offsetting the effect of portfolio mix changes. This resulted in a 3 percentage points increase in contribution margin, both in H1 and in Q2. SG&A expenses increased by 13% in H1 with productivity improvements largely offset by growth investments. Our adjusted EBITDA margin stood at 23% for the first half, reflecting a 1 percentage point increase versus last year. In terms of foreign exchange, the Swiss franc continued to strengthen in Q1, but remained relatively stable compared to key currencies in Q2. Overall, this resulted in a negative impact on revenue of 2.4 percentage points in H1. However, thanks to our natural hedge with similar ForEx exposures in expenses, the impact on the adjusted EBITDA margin was once again minimum. This bridge illustrates the year-on-year changes in adjusted EBITDA, highlighting how we achieved margin expansion through revenue growth and enhanced productivity while investing in the business. Beginning with delivery costs, we continue to improve productivity by cutting down on higher cost external resources and shifting more internal resources from local to remote delivery kits. Decrease in sales and marketing was due to ramp-up investments across key countries as part of our revised go-to-market model. Admin expenses grew due to investments behind Vision 2026, organic personnel cost increases and certain one-offs. These were partially offset by productivity gains as a result of operational excellence. Moving on to the business line review. In Marketplace, revenue growth in H1 was 6.1%, as in Q1, the Microsoft business maintained revenue growth in the mid-single digits, while growth in other ISVs accelerated to double digit in Q2, benefiting from an increased focus on prioritized partners. Thanks to a strong decline in delivery costs, contribution margin in Marketplace was 88.4%, reflecting an increase of 2 percentage points versus last year. The adjusted EBITDA margin stood at 50.2%, up 1 percentage point compared to the prior year. In Services, growth was primarily driven by Cloud Services, IT Portfolio Management, and SAP Services. We achieved a notable increase in contribution margin, reaching 43.7% for H1, which represents a 4.8 percentage point improvement compared to the prior year. SG&A increased at a lower rate and contribution margin, resulting in an adjusted EBITDA margin of 7.3%, 4.2 percentage points up from last year. It is worthwhile mentioning that Services achieved an 11% adjusted EBITDA margin in Q2. I am pleased to report that we have now completed our operational excellence program launched in early '23. Final annualized cost savings amounted to CHF 76 million compared to the CHF 70 million target, of which CHF 7 million have been reinvested in growth initiatives. This program has laid the foundation for a stronger, more resilient organization, ensuring we continue to benefit from its impact in the future. While we will no longer report our savings related to the program, we will, of course, continue to control costs and drive productivity improvements. Among the initiatives ongoing, we will increasingly utilize AI-driven recommendations to drive sales force effectiveness. We will continue to internalize and [indiscernible] delivered resources. And lastly, in our fine shared service centers, we will further standardize and automate processes with increased focus on the order to cash process. As Brian outlined earlier, we have completed the implementation of the new go-to-market model across our key markets, representing the majority of our revenue. The remainder will be done in H2. With the new coverage model, we expect productivity to increase across the sales force through optimization of customer-facing and support resources, more effective client coverage, improved lead generation and AI-driven cross-sell. We expect to see these benefits come through already in H2 with local sales and marketing costs approaching 21% by '26. On a 12-month basis, to eliminate seasonality, our cash conversion to the CapEx was CHF 169 million or 66% of adjusted EBITDA. The CapEx investment into our Marketplace platform. In terms of our net cash development, we had further outlook, including M&A and earnout payments, significant return to shareholders in the form of dividends and the share buyback program of combined over CHF 90 million as well as restructuring expenses. This led to a net debt position of CHF 208.7 million at June 30 this year. At the end of the half year, net working capital was at CHF 182.6 million, a level similar to our June position last year. Our days sales outstanding have risen due to current market conditions, and the growth of consumption-based offerings, which involved accrual for the fixed commitment and invoicing later compared to enterprise agreements where the invoice is issued upon delivery of the license. To better match the extent of customer payment cycle, we have managed to optimize our ISV payment terms. Working capital management remains a top priority. Some of the operational excellence measures we are putting in place will allow us to expedite collection by increasing the percentage of accurate invoices as well as providing greater transparency on overdue invoices to our collectors. As Brian already mentioned, as a result of continued macroeconomic uncertainty impacting clients' purchasing behavior, and developments in our Application Services business in Colombia, we now expect revenue growth for the full year of 7% to 9% in constant currency, and we confirm our adjusted EBITDA margin target of 24.5% to 25.5%. We anticipate a positive impact on growth in the second half of the year as the new sales organization becomes fully operational. Also, as mentioned, we expect to maintain a productivity improvement in delivery and support functions which, in addition to operating leverage, will lead to continued EBITDA margin improvement compared to prior year in line with guidance. Our midterm guidance remains unchanged. I'll now hand back to Brian for his closing remarks.

Thanks, Rodolfo. To conclude, we have delivered a solid set of results in the current environment and the implementation of Vision 2026 is well on track. We are not yet finished, but our progress in H1 adds to our confidence in delivering on our 2026 targets, which is mid-teens revenue growth and a margin approaching 28%. Thank you. And now let's move on to the Q&A.

[Operator Instructions] The first question comes from Florian Treisch from Kepler.

Maybe 2 on my end. The first one, I simply assume that you will not give a deeper insight into this potential going-private transaction, but maybe just one on -- if wording around challenging environment, do you want to flag simply that we don't or should not expect any near-term solutions to that and that these discussions will simply take several months to go? Or is it just reflecting which kind of environment we are at the moment? The second part is around your confirmed EBITDA guidance. So if you look at Q2 margins, so the first question on would be, can you elaborate a bit on the one-off item in there, the CHF 5-something million? Is that recurring also going into H2? And with that, you simply imply a nice margin uptick in H2. So can you give us some more details on the bridge from H1 margin to H2 margin?

Okay. Florian, I'll take the first part, and then I'll hand it over to Rodolfo. So as you know, in May, we established a transaction committee. That transaction committee is made up of the independent board members. And the Board is committed to completing everything in a timely manner. And when and if there is a further update to be provided, the Board will be doing so. And that is the extent that we can comment specifically in terms of a potential transaction. And then I'll hand it over to Rodolfo.

Yes. So Florian, thanks for the question. So a couple of questions here. One is around the EBITDA guidance. As I mentioned in my remarks, we expect an acceleration of revenue growth in the second half. This goes hand-in-hand with improved sales force productivity behind the new go-to-market model. And the other important reference point is, if you look at our H1 results, our margin at 23% is 100 basis points ahead of prior year. So here it's very important, you know our business has certain seasonality and certain patterns, it's important to keep an eye on the improvement year-on-year. And therefore, we are confident to deliver the guidance of 24.5% to 25.5%. Then on the one-off, this is associated with primarily a couple of bigger cases in emerging markets, South Africa and China. And we definitely do not expect that this will be recurring in the second half.

[Operator Instructions] The next question comes from Martin Jungfleisch from BNP Paribas.

I have a couple. Maybe we can go one by one. First one is really on the guidance. I mean, you delivered 7% constant currency in H1, and that requires obviously a bit of a step-up in the second half. You mentioned that it's primarily driven by go-to-market, but would this also underpin a macro recovery in Europe as well? That's the first one.

I can take the first question, Martin, and thank you for it. So we didn't see momentum in many of our growth markets in H1. We specifically called out and were very specific while we're driving the revised guidance change, and that is 2 things. Firstly, that slowdown that we saw specifically in DACH in Q2 in terms of customers' buying decisions. And then in addition, in our Application Services business in Colombia only, and that was tied specifically to a government change and the end of a contract that we had and then the nonrenewal specifically of that contract on the heels of a government change. Now having said that, we are very happy with the pipeline progression that we have seen at the end of Q2 and into Q3, specifically in DACH. And with the new leadership that we have in place since January, we're very confident in terms of a strong performance in DACH specifically in Q3.

And then the second question is on Services. I mean, it has decelerated quite a bit to mid-single digits now. Is it also more macro? Or is it also market share driven, because when you look at the other resellers that have reported in the last couple of quarters, they have actually reported an acceleration in their services. So would you agree there is also a bit of market share issues there?

No. Again, specifically, that is tied to one line of business, our Application Services business, and tied to one geography, Colombia, and as I said, based on the government change and certainly not part of a larger macroeconomic environment that has led to a slight tweak in terms of our guidance.

Okay. And then the last one is just on Copilot. I mean, you've reported users almost doubling, so that's pretty great. But then can you talk a bit about the market share that you have in Copilot seats? Would you say that it's greater than your current market share in Microsoft reselling? Or is that more or less in line?

So, thank you. We're very happy with the numbers in terms of the 600,000 users, and that's doubled, as you know, since the end of Q1. We now have around 240 additional services engagements, and we're very happy with those services engagements, where we are going deeper and deeper with our customers to explore how they can get the full benefit from Copilot to help them bend the curve of productivity. It's still very early days in that we are only reporting 6 months of trading, because, as you know, Copilot became available on January 15. We have been very clear that we aim to be partner #1 for Microsoft. We are the only partner that I'm aware of that discloses our Copilot numbers. And I will say that we are well on track to being partner #1 for Copilot. We are very happy here and they are very happy in Seattle with us.

So that's 300,000 users per quarter. Would you say that's a decent run rate that you could expect also in the Q3 or Q4?

I think what we've seen is customers, some have started small. And now in terms of the example that we gave you, we're announcing the customers deciding to do a mass rollout across the entire organization for Copilot. And we expect to see the momentum with Copilot continuing and accelerating into the second half of the year.

[Operator Instructions] We have a follow-up question from Florian Treisch from Kepler.

Then 2 follow-ups on my end. So the one on Copilot as well. So you're obviously happy with the adoption rate now clearly going up towards a decent level, I would say, as you said, only 6 months in the market. Can you give us also, let's call it, first indication on ROE indication or kind of performance to really get an impression that or to get a feeling if your 15% adoption rate you assume and you branded as conservative in the past, is that really still a very conservative number from your end, i.e., is it really a game-changing solution for the client for a respective price tag? And the second one would be, in general, around Microsoft. You mentioned around 5% growth dynamic. Can you provide some feedback where is this coming from? Is this driven by lower underlying demand, by lower commission levels for key products, or really to understand if that is a headwind for the coming quarters as well?

Thanks, Florian. So as you know, and as I said, we're very happy with the progress that we were making. And we do anticipate, as I said to Martin, that we will see a continued acceleration as for demand from our customers around Copilot. What I can say is, given that it's still early days, if we continue to see that acceleration through the second half of the year, it is fair to assume that we will be issuing a new target for ourselves. In terms of the conversion of our users, as you know, we have 12.5 million users that we're supporting from a Microsoft perspective, and we issued a target to convert 15% of those. If we continue to operate as we have in the first 6 months of this year, it's fair to assume that we will see a change in target that we will issue to our teams internally and then externally as well. And then I would also comment that Copilot can be viewed 2 ways. Firstly, there's the out of the box Copilot. Then secondly, there is specific use cases that customers can explore around Copilot that are customized for their business. We're very fortunate that, one, we have a diversified portfolio; secondly, the relationship that we have with customers and our understanding of their business. That's where we now get to hold the hand of a customer and help them explore how they can use Copilot to truly change their business and receive a return on that investment and much quicker than they would have been used to in the past. And then I'll hand the second part of your question to Rodolfo.

Yes. So Florian, on Microsoft, if we step back and look at the -- first, we start with the billings for the half year. Billings grew by 8%, which is a healthy level. And as we have communicated before, our focus is to accelerate what is called the subscription base, the examples of CSP. If you agree, we saw a very healthy growth in billings, significantly above the average. Not all of that translated into revenue growth. When we look at the examples, it was ahead of billings. Part of that was a play to reduce a little bit the front-end margin to accelerate the volume growth. So all in all, we see the development in Microsoft as quite healthy, consistent results quarter-on-quarter as we communicate in the mid-single digit. And yes, this is in line with our plan.

The next question comes from Christian Bader from ZKB.

I have 3 questions, please. Firstly, what is your amount of interest income and interest expense?

Okay. So that's a very specific question. Maybe I have to -- I think part of that you can see in the cash flow statement, right? Because, of course, this is something we report. Let me follow up separately with you, Christian, if you don't mind. I will give you the breakdown on the details.

Okay. Then secondly, what do you expect in terms of net working capital development for the second half of the year?

Yes. So look, the net working capital is very cyclical. When you look at the graph, it's absolutely clear that the level in the half year by June is very different from the level we see in December. And here if you saw, actually, we had a negative net working capital last December. So we expect a similar level as in December '23 to have in December '24.

All right. Okay. And finally, what is your amount of factoring?

Factoring remains constant at around -- it's below CHF 200 million.

[Operator Instructions] The next question comes from Vinay Bhardwaj from Cantor Fitzgerald.

Just one question on your go-to-market restructuring expenses for the full year. I think I see CHF 14 million for the half year. Can you give some guidance for the remainder of the year, please?

Yes. We expect a similar level. The mix will change. You, of course, cannot see inside the components of the mix. Of course, part of the CHF 14 million you see in H1 is expenses associated with the adviser supporting us on the program. That will phase down during the second half. And of course, you will see the full reorganization impact in the second half. But we expect a similar impact and that should be for the go-to-market program.

And maybe, Vinay, I would just also add that our focus as an organization when it comes to the go-to-market transformation is growing our market share and growing our wallet share. That means having the right coverage model, both from the sales and presales perspective. We talk a lot about the digital sales on the SME segment, and that is an investment that we're making, where we certainly expect to see it pay off. But already, we are seeing a payoff in terms of the investments that we're making at the top of the pyramid in terms of our enterprise and our corporate customers. And this is the second quarter in a row where we have called the large wins that we have had in North America. And I expect, based on the progression of our pipeline in Q3, that we will be seeing a similar result in Europe as well.

And maybe just a final comment on that topic, because I think it's an important one. When we look at the evolution of our sales expenses as such, we expect them to be either in line or slightly below the current level. So this program as such does not translate into higher cost, but rather in the net productivity. But even more importantly, as Brian also mentioned, the biggest value is in the growth acceleration and the improvement in productivity as measured by sales per FTE. And here also, as indicated in one of the graphs, we expect already in H2, a significant acceleration of productivity as measured by sales per FTE. So it's a program with a very high rate of return.

Understood. That's very clear. And sorry, I may not have caught the beginning of the Q&A session. But just on the progression of the go-to-private transaction, I mean, since the new Board has come in, you've had sort of 4 to 5 months to take a look at the sort of advances that you've received. I mean, what is it that's sort of taking a longer time than expected in order to sort of reach an agreement? I know you sort of referenced the deteriorating environment. And I think potentially that reduces the probability of deal completing. But I mean, I just wanted to get your sense on why it's taking longer than expected?

Well, firstly, I'd say, Vinay, that the new Board joined us in April time frame, the transaction committee was established in May, which we communicated too with our Q1 results. The Board has then received interest May through the end of June. And now in the summer months, we have disclosed the indicative offers, and the Board is in discussions with each of those parties that have submitted offers. So I don't think necessarily that it has taken so long when we really look at the time line here. But as we also said, when there is an update to provide specifically on this, the Board certainly will be providing that in due course.

Gentlemen, so far there are no further questions. Back over to you for any closing remarks.

Great. Well, thank you, everybody, for joining. We appreciate you taking the time, and have a great day.