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Edited Transcript of SCT.L earnings conference call or presentation 23-Oct-19 8:30am GMT

Full Year 2019 Softcat PLC Earnings Presentation - London

London Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Softcat PLC earnings conference call or presentation Wednesday, October 23, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Graeme A. Watt

Softcat plc - CEO & Executive Director

* Graham L. Charlton

Softcat plc - CFO & Executive Director

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Presentation

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Graeme A. Watt, Softcat plc - CEO & Executive Director [1]

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Good morning, everybody. Good morning to you all, and welcome. My name is Graeme Watt, I'm CEO of Softcat plc, and together with Graham Charleston, CFO, we'd like to thank everybody for coming here today to listen to our 2019 results briefing, and thank you also for your ongoing interest in Softcat.

From a personal point of view, it gives me great pleasure to present another fine set of results in what was my first full fiscal year in charge of Softcat. And I need to start my remarks with a huge thank you to the Softcat team for their outstanding performance. Our people and teams across the entire organization have worked very hard together to deliver success and make further progress across all functions, from business operations to sales to sales specialists, sales support and our technical and services teams. Thanks to you all. You've been magnificent, and every single person has contributed positively to the results of 2019.

So if I can just start off and say a few words, take a moment to describe our business. For those of you who are less familiar than others, Softcat is a leading provider of infrastructure solutions, technology products and services to the business and public sector community. In 2019, we served over 12,000 customers. And what we do is we make designing, sourcing, implementing and supporting organizations' IT infrastructure both simpler and more effective. We aim to help customers simplify the complexity of their options to deliver a solution, where cost efficiencies and risk are managed most effectively. Our mission is to be the world's best-performing company in our sector in employee engagement, in customer satisfaction and in financial returns. I'm pleased to say that this year, and you can see that at the bottom of the slide here, we've added a company purpose statement into the mix so we can talk about why we exist and what we're trying to do. And that purpose statement is, we help customers use technology to succeed by putting our employees first. And I think that really captures our company ethos extremely well.

In 2019, we operated out of 8 regional offices, 7 in the U.K. and 1 in Ireland, focusing on the customer segments of enterprise, SMB and public sector. And as many of you know, we opened a ninth office in the U.K. in Birmingham just a couple of -- few weeks ago.

A key differentiator for us continues to be our culture. We foster a culture that thrives on putting our people and customers first, and believe that by working hard to deliver the highest levels of employee engagement, that this in turn delivers exceptional customer service. Our customers continually remind us that our culture and customer service are key positive differentiators for us in the marketplace. And it's clear that this drives customer loyalty. We work very closely with a strong portfolio of vendors, providing our customers with choice and solutions that are fit for their specific needs. We continue to operate also a straightforward model with a clear strategy, which we believe has been very effectively executed. And back to vendors, we enjoy strong partnerships in a strategic alignment with those vendors, and we're very pleased to be recognized with a number of U.K;, EMEA; and, particularly pleasing, global awards throughout the year for our work with those vendors and the value we bring to them through our substantial network of customers.

Our focus is firmly on the generation of gross and operating profit. We're fiercely cost conscious, but we balance that with a clear eye on the future with an appetite to invest now to manage and deliver both current and future growth. Our growth has been wholly organic to date and our cash conversion is over 90% and we're debt free.

So moving to the summary of our 2019 results. It gives me, again, great pleasure to report on these results. And just for clarification, all the percentages are reported against the same period in the prior year. And I'm not going to go through them individually, but I would like to highlight some of our key measures.

So we generated gross profit up 20.5% to GBP 211 million, which grew faster than costs leading to reported operating profit up 24.3% to GBP 84.5 million. Revenue, as stated under IFRS 15, was up 24.4% to GBP 991.8 million. [And] very much in line with our strategy and focus on new and existing customers, we're able to report 400 net new customers added in the period, that was up 3.4% on the prior year. And gross profit per customer was up 17%, where we're able to deliver growth per customer in both our new customers added during the year and our existing customers.

Graham will cover the numbers in further detail, but a significant highlight is that we've now recorded 14 consecutive years of organic income and profit year-over-year growth. And that's something we're very proud of.

So that's the raw numbers. Let me add some color for you now. I think the first thing to note is that the market continued to perform well and offers opportunities to grow. Our customers are continuing to digitize their business and are constantly updating their technology landscape to remain relevant and competitive. Some of the drivers for customer spend include desires to embrace mobility, strengthen security, move to the cloud and update and refresh legacy systems and improve user experience for both customers and employees. Lending to spend that we saw across hyper converged, software-defined, digital workspace, security, cloud adoption often in a hybrid environment, and we're starting to see edge computing now feature more and more heavily in demand. Our model is dependent on offering new skills and scale through our recruitment and development of talent, and we work very hard to attract and retain the right talent for our business, people who'll flourish in our environment and who have strong capacity and willingness to learn the sales, technical and other skills required for their roles.

We recruited net new 142 new people into Softcat in 2019 and continued to invest heavily in their induction and their ongoing development in the company. And at the same time, we continued to invest heavily in sales specialists and technical roles to support both our account managers and the customers directly. And I can't stress enough the importance of our 25-strong human resources team that supports our managers and underpins our ongoing commitment to growing our organization and our capabilities.

The demand that we've seen and growth continues to be broad-based across all technologies, customer segments and Softcat offices. And we believe that this healthy demand for infrastructure, hardware, software and services is set to continue through the medium term. I'm sure also we've been building our credibility to great effect in the market around our ability to deliver high-quality design and deployment projects, particularly in our enterprise and our public sector accounts.

We grew our sales, GP and OP, year-over-year through all 4 quarters of 2019, and this growth was particularly pleasing, given that we created very tough compares from the prior year, especially the sales we reported in the second half of last fiscal.

Now I just want to say a few words, if I may, about our strategy, just to update you on where we are on strategy and some of those key priorities.

Our strategy and priorities remain largely as before, and we think this consistency is serving us well, as indeed, the focus on high-quality execution of this strategy. We continue to look to build our customer base through new customer acquisition, whilst also exposing our existing customers to further elements of our technology and services portfolio.

I won't say too much here because Graham will cover it in more detail shortly, but I was extremely pleased with our GP per customer progressions that I mentioned earlier. During the year, we channeled our sales teams to put more focus into fewer accounts, and this appears to have paid off in our GP per customer performance.

The market we address is fragmented. We made up only 6.9% of CRMs top 100 reported last year. And what this means is that there's plenty of room to acquire new customers where we think the addressable market is closer to 60,000, and in parallel, increased penetration in our existing customers where we believe we've got a share of wallet of somewhere around 25%. Given the breadth of our technology and services portfolio, we're well positioned to benefit from the trend of customers looking to deal with a smaller number of technology partners, noting that there are only a limited number of competitors who are able to offer the range that we do.

On people and culture, I often get asked what we're doing to make sure that our highly valued culture doesn't get diluted or lose its shine and impact as we grow the number of people and offices we have at Softcat. And the answer is simple. We make sure that our people and our culture are always top of the agenda. The culture that we have creates an environment that I believe gets the best out of us all. We encourage dialogue and challenge at all times and have formal mechanisms to get feedback through responses to our quarterly management questions and annual employee satisfaction survey and other ad hoc poll surveys in the questions we put to the team. We had over 90% response rate to the employee satisfaction survey last year, which led to a number of initiatives, which we took, including a plan to refurbish and expand our 2 largest offices in Marlow and Manchester, which should start and finish in this fiscal.

We've also updated the approach we take on working hours and flexible working. And perhaps unsurprisingly, all those and other initiatives that we took on were positively received by the workforce, in particular, the working practices, which have helped many employees improve the management of their work-life balance.

We're always asking ourselves what we can do better. And this is a very healthy approach to our internal workings as well as how we work with our customers and our partners. And many of our initiatives and priorities stem from answering this question. It also serves to prevent any sense of complacency in the team.

And I'm also pleased to tell you that we've just completed our 2019 employee engagement survey, and extremely happy that the employee Net Promoter Score has risen sharply from an already strong 44 to 53 this year.

We added to the leadership team with the arrival of Rob Parkinson in January as CIO. Rob's experience as CIO, particularly around analytics and systems transformations, were key reasons he got the role, as well as providing a great fit to our culture.

And you may not be aware that we have a word of the year every year. Last year, it was next level as we look to kick on and find ways of enhancing performance.

Our 2020 word of the year is care, which is designed to capture the essence that we care about the company, we care about each other, we care about our customers, we care about our partners, we care about elements outside the company as well our environment and various charitable charities that we support. And I think care is also reflected in the number of initiatives we're running in the company aimed at proving -- improving diversity and inclusion. We now have a dedicated manager in HR for diversity inclusion, talent and employee engagement. And we have a number of initiatives and support groups to make improvements in gender and ethnic diversity and make sure we're identifying and dealing with any mental health issues as effectively as possible. Whilst we have room to improve the diversity in the company, it will take time. And I'm delighted with the energy and appetite the various groups have in tackling these complex areas to drive change.

On operational excellence, as previously mentioned, we were fortunate enough to win a whole host of awards during the year, including the coveted CRN Reseller of the Year award and Canalys EMEA Growth Partner of the Year for the second year in a row. And just last week, I was very pleased to see Carola van der Sommen win Manager of the Year at the CRN Women in Channel (sic) [Women of the Channel] Awards.

We continue to invest in our systems and tools to drive efficiency and accuracy as well as employee and customer satisfaction. Our online sales platform, eCat, has been developed further this year and allows customers to transact and reach a menu of information about their account and their status with us. We're pushing ahead with our systems project to upgrade our financial systems, having selected the application with help from PwC. We're now entering the project planning phase with implementation starting early 2020.

Key benefits of the new system include automation, support for multinational business, scalability as we continue to grow and management of the subscription and consumption models of software and cloud services.

And last but not least, we've been -- we continue to look at ways of expanding our addressable market. There's 2 main initiatives that we've invested to expand in this area. One is the opening of an office in Ireland last year. And this year, we further developed our multinational capabilities.

Looking at Ireland first. After the initial setup phase in Ireland, we've grown headcount in sales down -- there. We've now got a team of 28 people in Dublin addressing the market there in both the North and South of Ireland. We expect business to continue to ramp up in 2020, together with further investments in heads in a market which we believe is around 8% of the U.K. market and where we have ambitions to be a top 5 reseller.

During last financial year, we opened branches in Singapore, Hong Kong, Australia and the U.S. to support our U.K. and Irish multinational enterprise customers with their overseas procurement and deployment. Think of these branches as operational hubs that have local relationships with vendors and distributors in order to create local capabilities for procurement, for pricing and sales tax management, just to name a few. The locations are driven by customer demand, and we have 1 employee in Singapore and 1 in the U.S. to deal with day-to-day matters on the ground on the same time zone as our customers' local operations. Where we can't reach the countries directly through our growing multinational branch network, then we continue to export or use a network of local partners. The investments in the branch network is quite modest and easily exceeded by what we see as a significant incremental sales opportunity. And just to be clear, because I know you will always ask me this question every year, what we are not doing is opening up new international markets and selling to net new customers in those markets just for the sake of it. Hopefully, that clarifies.

We also intend to build on the progress we've made in 2019 around cybersecurity services and our cloud intelligence services that we highlighted this time last year, and we're making further investments in public sector where we're looking to grow our presence in central government and defense in particular.

So with that, I'd like to now hand over to Graham Charlton, Softcat's CFO, to run you through the financials in more detail.

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Graham L. Charlton, Softcat plc - CFO & Executive Director [2]

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Thanks, Graeme. Good morning, everyone. So I'll work through the key aspects of our income and profit performance for the year, including the sales team productivity and customer KPIs that sit behind that performance. Then we'll look at the cash position and confirm the details of the dividend that Graeme's already touched upon.

So here's the summary income statement. And I think everyone is now aware, from our half year result communications, that we've adopted IFRS 15 and that significantly reduces our reported revenue number, but it doesn't impact any measure of profit or cash.

Like I did at the half year, I'll detail the IFRS 15 adjustments to revenue on both years on the next slide. But here, you can see the IFRS 15 figures and that we increased revenue by 24% to just under GBP 1 billion. Gross profit continues to be our primary measure of income. This is the basis upon which we plan and budget the business and is, of course, the number upon which our sales teams earn commissions. It's a growth here of 20.5% to GBP 211 million. It's the single best barometer for how our business performed in FY '19, and Graeme's already given some flavor to that.

That growth reflects the combined impact of the 17% increase in GP per customer and just over 3% increase in customer numbers. And I'll come back to those metrics in a bit more detail in a few slides' time.

Gross profit margin was slightly down year-on-year. This is due mainly to strong growth in our public sector business, and particularly software licensing deals. They are large software licensing deals, which typically carry lower margin. It's quite a big effect this year, actually. And it's more visible when you look at the gross invoiced income our old IAS 18 revenue measure in a few moments. But gross margin reduction, however it's presented, is something that worries us. As we've said before, we focus on delivering incremental gross profit that's also accretive to the bottom line. And any gross margin dilution that may occur as a result is largely incidental and doesn't put us off what are otherwise very good deals and good business.

Moving down to operating costs, which increased by just over 18%. That's a lot of investment, but of course, is slightly slower actually than the growth we saw in gross profit and consequently, operating profit grew fastest of all, up 24%. That results in the margin which we do monitor most closely, the ratio between operating and gross profit rising to exactly 40%. That's up from 38.8% in 2018, and that (inaudible) also up from the 36.8% we reported in 2017. And I mentioned this trend specifically because it's the exact opposite, actually, of what I've consistently told you to expect from us. We've all said, and I will continue to say, that we expect that profitability ratio to trend slightly downwards to -- downward slightly in the medium-term future. And the reason for that is we remain convinced about the long-term opportunity for growth in our industry. Variety infrastructure providers like ourselves, who are willing and able to invest in new capabilities and greater scale, there's an opportunity to support customers through all the challenges that Graeme talked about. And if we can do that, we believe we continue to gain market share.

For that reason, we set out each year with a plan to make big investments in our people and skills. And this is why our headcount grew by 15% during 2019. And in fact, our headcount has now increased by 80% in the 4 years since IPO. But we've been surprised on the upside in each of the last 2 years by just how strong income and gross profit growth have been. And that pleasant surprise has driven up that profitability measure, but it's not something that we have specifically looked for. We remain super cost-conscious as an organization. But we also love what I refer to as good cost, which is investment in people and skills that will sharpen our competitive edge in a great market. We'll continue to invest in those people and skills in the coming year. And that will be to build for the future. But there will also be an element of that -- in that of catch-up (inaudible) place of resources going forward now to support the size of the business that we've become over the last 2 years.

The 18% growth in costs in 2019 was driven by the usual factors. So we have a 15% increase in total headcount, ;plus the effect of pay rises on top of that; and of course, a higher commission bill resulting from the 21% growth in gross profit. And our non-people costs have continued to broadly scale in line with business growth.

Everything below operating profit remains very uncomplicated. Interest income was up slightly, but very modest in the grand scheme of things. And our corporation tax bill rose in line with operating profit, with the effective tax rate unchanged at 19.3%, just above the applicable statutory rate.

I'm turning, as I mentioned, for a quick look at the difference between IAS 18 revenue and the new standard. Last year, under IAS 18, we reported revenue of GBP 1.08 billion, which you can see there at the top right of the slide. Without the new standard this year, we would have reported revenue of just over GBP 1.4 billion, which represents growth of 31%. The IAS 18 revenue number is something that we will continue to report going forward. It's an alternative performance measure, and we will call it gross invoiced income. It represents the full value of the products and services that we are billing to our customers, and it's therefore an important metric in understanding our working capital movements and also things like our credit risk and so on.

And I know some of you'll be interested to examine our gross margin with respect to this measure going forward as well. In the bottom half of the slide, you can see how the difference between revenue and gross invoiced income breaks down between software, hardware and services. And from that, you can see that the biggest impact of the new standard is on software and services, and that effect is bigger in 2019 compared to the 2018 comparatives. This primarily reflects the netting down of cloud-based software and partner-delivered services in which we are deemed to be acting as an agent rather than principal. And all other things being equal, we expect the gap between the 2 measures to grow in the future as more software becomes cloud-based and that netting down effect gets bigger.

Moving on to a chart that you're all familiar with. Here, you can see the updated trend of the relationship between the cumulative tenure of our sales team and the total gross profit delivered by the company. In 2018, we saw a shift upwards away from our historic norm. And you can clearly see here that we're able to maintain that new level of productivity in 2019. And we believe 2 factors working together have driven this uplift. Firstly, our broader and deeper technical capability, brought about by our investment in people and skills since the IPO, that enables us to gain a bigger share of wallet with customers. And secondly, the general strength of the market that we operate in over the last 2 years, and especially the coming of age of exciting new technologies and the willingness and need of customers to adopt new models of storage, compute, security, data management and so on.

The breadth and depth of our capability is something that we've already said we're going to continue to invest in, and the strength of the market and the need for customers to embrace digital infrastructure transformation is something that we believe has longevity as well.

Another familiar set of data next, but in a slightly different format this year. Represented here are the twin trends of our customer numbers and GP per customer. GP per customer is the line and the customer numbers are represented by the bars. And if you multiply these 2 metrics together, it gives you our gross profit result in any 1 year. And so it gives an important insight into what's been driving our growth over this very long period all the way back to 2007. And for me, this continues to be the best single source of insight into the sustainability of our model, remembering that all of our growth has been organic. The longevity of our customer relationships; our ability to add to and retain that customer base over time; and our ability to gain those customers' trust and loyalty for the long term is captured, I think, in this simple picture.

What's also revealing by showing the 2 metrics together like this is the shape of our recent success. The acceleration of growth in GP per customer, which you can see there in 2018 and 2019, is a reflection of the increased productivity that we looked at on the previous slide. We've achieved this acceleration as a result of our strengthened capabilities and the coincidence of that strengthening with the desire and need of customers to embrace change. We've accentuated this by an internal focus on going deeper with individual accounts. And the results of that are, I think, clear in the chart. Our focus on going deeper with accounts is not exclusive to existing customers. To illustrate this, you'll note, I've already mentioned, we had a 3% increase in customer numbers during the year. But that translated to a 16% rise in the gross profit we obtained from new customers year-on-year. And in fact, GP per new customer has grown very strongly over the last 2 or 3 years.

But to put that another way, our early-stage salespeople are achieving very, very similar gross profit numbers in total to our historic norm, but they are doing it with fewer customers. They're able to go broader and deeper earlier with our improved proposition. So the increase in GP per customer that you see here on overall level has a contribution from both existing and new customers.

And despite the growth in both metrics, we think that there remains a huge opportunity to grow both of these KPIs over the medium and long term. Our market remains highly fragmented. Our estimate of our market share is around about 7%, probably slightly lower than that, actually. We served 12,000 customers from an addressable market of around 60,000 last year. And we estimate, on average, that we have something like a 25% share of wallet with those 12,000 customers. So there is much more for us to aim at in 2020 and well beyond that as well.

A quick look at the cash position and a familiar story again. So our business model and strategy are, as we've said, evolving, but otherwise, very stable around a strong core. And as a result, our business remains highly liquid with very modest capital reinvestment and working capital requirements. We continue to use the same basis of defining our cash conversion, which is actual operating cash movement, net of capital expenditure compared to an unadjusted operating profit measure. And on this base -- on this basis, we've again converted more than 90% of our operating profit into cash within the year. The exact figure is 92%, that's slightly down on the 98% in the previous year. But cumulatively now since IPO, over the 4 years, our profit to cash conversion is around about 95%. And our target is to maintain that cumulative average at or above 90%.

The balance sheet remains very simple in its makeup, again reflecting the nature of the operations. Trade receivables and trade payables comprise the vast bulk of our working capital balances, and they're up by around 38% and 41%, respectively, year-on-year.

That growth is slightly ahead of the 31% growth in gross invoiced income because of a very strong close to the year and some large deals that we closed out in the last few months at a slightly lower margin actually as well.

Outside of working capital movements, the increase in tax payments reflects our sharp increase in profits over the last 2 years, and our payment plan obviously adapting to that. So despite record dividend payments of over GBP 55 million in the year, our closing balance -- our closing cash balance grew by GBP 6 million to GBP 79 million. And that, of course, enables us to announce some further good news today in terms of cash returns to shareholders, the details of which are on the screen now. The interim dividend of 4.5p was paid out in April. And today, we're recommending a 10.4p final dividend, which would bring the total normal divi up to 14.9p, which is 23% in total, up year-on-year. And we're also announcing an increased special dividend of 16p. The total cash outlay from those payments will be just over GBP 52 million and will be processed in December.

That's it from me. I'll hand you back to Graeme Watt to wrap up.

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Graeme A. Watt, Softcat plc - CEO & Executive Director [3]

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Thanks, Graham. Just a summary of closing remarks and our outlook, if I may. We've got a -- what we consider to be a powerful business model and a fairly straightforward strategy. And coupled with strong execution, I believe we're well placed to deliver further growth. As in 2019, that growth will come from the market as well as market share gains as we displace competition as we acquire, look to seek to acquire more new customers and develop deeper engagements with existing customers. And as Graham has shown, as those relationships grow over time, we get further opportunities to demonstrate our capabilities with those customers. There's significant headroom for further growth, and we're encouraged by the fact that demand continues to be broad-based so we have a good contribution to performance across the board and no real dependencies to speak of.

Our plan is to add around a further 200 heads in 2020 as we continue to invest in further people across all disciplines in the company to support both our current growth and our future growth plans. We'll continue to invest in multinational strategy to deliver operational capabilities in additional countries to support our enterprise customers in the U.K. and Ireland. The locations we choose are entirely customer led. And as you've heard, we've invested a new office in Birmingham. And as before, we've started that office with a kernel of 13 experienced Softcat people to which we'll add over time. And although we can deliver customer needs effectively from different offices, this does mean that we've now got a more robust presence in the Midlands to attract talent and service our customers more locally and now with a higher touch in that part of the country.

And you may recall, about this time last year, we opened our Irish office in Dublin, as we referred to earlier. We'll continue to ramp up our business in Ireland and have that clear medium-term ambition to become a top 5 reseller in that market.

So turning to the outlook. Softcat's in great health and, we believe, strategically well positioned. We think the structural drivers for growth in our industry will continue, despite current political and economic uncertainty. The Board remains confident in the company's ability to gain market share, and therefore targets further growth during 2020. Trading in the first 11 weeks of the new financial year has been on track and we look forward to the rest of the year with confidence.

And I'd like to just close, once again, thanking the Softcat team for their outstanding performance yet again in FY '19. It's safe to say that expectations were exceeded and we took more of our offerings to more customers than ever before. We had fun doing it, and we have a great sense of achievement, too.

So thank you not just to everybody at Softcat, but all those with whom we partnered to achieve what we achieved last year.