Bytes Technology Group (LSE:BYIT) Q2 2027 Earnings Call

0:01 So good morning and welcome to Byte Technology's half year results for six months ended the 31st of August 2026. I'm Sam Mudd the CEO and I'm joined this morning by Andrew Holden our CFO. When we presented our results last May we set out a series of changes we were making to the business and we said those changes would show through in our performance during this financial year. I'm pleased to say this morning that they have. BTG is building the UK's leading trusted advisor on AI, cloud and cyber, providing technical expertise and managed services to capture a greater share of our customers' technology spend. I'm going to start with the highlights of the half year and how we've delivered against what we set out. I'll then hand over to Andrew who'll take you through the numbers in detail. And I'll come back after that to talk to you about our market, our strategy and the outlook for the rest of the year.

1:01 So turning to slide three and the highlights of the half, this has been an encouraging six months for the group with broad-based growth across both our businesses, across our product set and across our vendor portfolio. Grossed invoice income grew by 19.6%, gross profit grew by 17.8% and operating profit grew by 6.6%. Trading was ahead of our expectations through the period and as a result we were able to upgrade our guidance for the fall year in September. There are four key points I want to draw out on this slide. The first is that we grew in both sectors.

1:46 Public sector gross profit was up 23.1%, private sector gross profit was up 14.6% and that balance is worth a moment. because the changes we made last year was to our private sector sales organisation and the fair question to ask was whether we had given up ground with customers whilst we made those changes and we had not. Both businesses have grown double digits. The second point is that this growth extended well beyond Microsoft. Microsoft grew broadly in line with the group as a whole and our security and hybrid platforms Businesses, they grew alongside it. So no single vendor, sector or product line carried the half, making for a more resilient, balanced portfolio.

2:39 The third point is capability. We have increased our technical delivery headcount by 17.4% year on year to meet the demand to manage services. And today we announced the acquisition of CyberOne. I'm excited to share more detail on that later. And the fourth point is guidance. As announced in our trading update last month, we now expect gross profit growth for the full year in the low to mid-teens with low to mid-single digit growth in operating profit. You will also see Microsoft on this slide. The next set of partner incentive changes take effect this month, and we've planned for them, and we have the opportunity to benefit from them. Later in our presentation, I'll share more detail on this.

3:26 Alongside all of that, we returned £41.3 million to shareholders during the half, completed the £25 million share buyback we announced in May. Moving on to slide four, I want to be quite specific about how we have delivered against what we told you in May, because we made a number of commitments in that presentation, and we are delivering on them. We said that the new sales structure in our private sector would support growth. and Gross Profit is up 17.8% with double digit growth in both sectors. We said that services would grow the share of the group and the services grossed invoice income is up 41% and the acquisition of CyberOne now accelerates that further.

4:13 We said that Bytes and Phoenix would align to the sectors they serve. That work completed in July and it completed with every single customer retaining continuity of account manager. We said that this financial year we would carry around 4.5 million cost normalisation and that operating profit would be broadly flat as a result. Operating profit is up 6.6% and we guided to high single-digit to low double-digit gross profit growth for the year which we have since upgraded to low to mid-teens. I am confident at the end of this presentation you will understand where BTG is going and Why the organizational changes were made, why we're investing and acquiring in CyberONE, why AI matters, and why growth will continue with software licensing at the core.

5:09 With that, let me hand over to Andrew who'll take you through the numbers in more detail.

5:22 Excuse me if I have to blow my nose, so good morning and thank you Sam. I'm pleased to be here to take us through the set of numbers for the half year. Turning to slide 6 and the headline numbers for the first half. Gross invoice income increased 19.6% to £1.6 billion with growth coming through across software, hardware and services. which as you know is our primary measure of performance was up 17.8% to £97.1 million. Operating profit grew 6.6% to £35.3 million after absorbing half the cost normalisation we set out in May. Innings per share were up 6.1% to 12.76 pence and we ended up the half with a net cash of £68.4 million having returned £41.3 million to shareholders during the period. Cash conversion was 46% which compares favourably to the 34% for the same period last year.

6:24 This equates to 109% on a rolling 12 month basis. I'm pleased to say that the board has declared an interim dividend of 3.3 pence per share, an increase of 3.1p cent from last year. Moving on to slide 7, an income statement in more detail. Starting at the top, gross invoice income grew 19.6% to £1.6 billion, gross profit grew 17.8% to £97.1 million. Overall, gross profit to gross invoice income margin was broadly flat at 6.0% against the 6.1% last year. Administrative expenses increased by 24.7% and within that, employee costs rose 22.3% to £48.2 million. Our total headcount for the first half only grew 2% to 1,353 employees, so the driver for this cost increase was more to do with normalisation than headcount expansion. These costs were all flagged at the full year and include the developer salaries that were capitalised last year, and now recognises expenses as those platforms are now complete.

7:39 Bonuses have returned to a normal level having been suppressed last year where we fell short of our internal targets and commissions were up in line with gross profit which as a reminder was up 17.8%. Other administrative expenses increased 34% to £13.8 million which includes amortisation of those platforms Continued systems investment, as well as once-for-fees related to sector alignment, the executive changes and the board changes announced. Taken together, these are the components of the £4.5 million worth of cost normalisation we set out in May, with around half of it having landed in the first half. Operating profit grew at 6.6% to £35.3 million.

8:26 and our OP as a percentage of GP was 36.4% against 40.2% in the same period last year. I'd like to address this ratio directly as we expect this ratio to be a low point this year. As the cost normalisation annualises from FY28 onwards and we make full use of the sales and technical capacity that we've already built, we expect operating profit to grow broadly in line with gross profit from FY28 with the ratio recovering from there. Below operating profit, interest income of 4.9 million was lower than last year, both on lower rates and a lower average cash balance. Profit before tax grew 3.6% to 40 million pounds and our effective tax rate was 25.3% which is broadly in line with the UK strategy rate.

9:21 Profit after tax grew 3.1% and earnings per share grew at 6.1%, with the difference reflecting the shares that we'd repurchased during the period. Turning to slide 8, where we break down the first half of products and sector. Taking the sector first, public sector gross profit grew 23.1% and private sector gross profit grew at 14.6%, so both sectors delivered double-digit growth. Public sector margin edged up from 3.4% to 3.5%, and the private sector margin moved from 12.5% to 12.2%. We don't see this as a negative, but rather as an indication of our success in our ongoing efforts to move customers from Microsoft Enterprise Agreement programs, where Microsoft invoices a customer and pays us a fee, and therefore a 100% margin, As you move across the CSP where we invoice the customer, carry the cost of sales and the reported margin comes down even though the gross profit does not.

10:24 It is therefore a mix effect and not a pricing one and this is a good example why we prefer gross profit as our primary growth indicator. Looking at the product split, software gross product grew 15.8% with its margin broadly stable at 5.4% and hardware More than doubled, albeit off a small base. Services gross invoice income grew 41% and the services gross profit grew 12% to £9.3 million, against a comparative period that itself grew by more than 40%. You will note that the services margins moved from 24% to 19%. This is because we brought in capacity ahead of the revenue that it would carry, with technical delivery headcount up 17.4% since this time last year.

11:16 We expect that capacity to generate high returns in the second half as utilisation builds, with security a strong area of customer demand. Our renewal rate was very strong at over 115% as we continued to grow our share of wallet from existing customers. We also brought in £1.8 million of gross profit from new customers, a figure that we would expect to annualise at a similar rate. Turning now to cash flow on slide 9. Cash conversion for the first half was 46% against 34% in the same period last year and 109% on a rolling 12 month basis. As a reminder, our cash conversion always follows the same seasonal pattern. Our largest billing months fall around the UK government's fiscal year end of March and April, and Microsoft's year end in June.

12:09 The working capital associated with those months unwinds towards the end of our first half, so a number below 100% is entirely normal for us, and this year it's a cub to be ahead of where we were a year ago. After the final dividend of £16.3 million and £25 million of share buybacks, We close the first half with $68.4 million of cash and no debt Moving on to the balance sheet in slide 10 We carry very large gross receivables and payables which is inherent in our business model and our $68.4 million of cash sits against a negative net working capital of $54.6 million so then two need to be looked at together We continue to collect from our customers faster than we pay our vendors with debtors days of 39 against creditor days of 51, helped by our weighting towards the public sector. So we hold a strong cash position deliberately and we remain comfortable with where it sits.

13:13 Slide 11 is a reminder of how we think about allocating capital. Our priorities are unchanged. Organic growth comes first and Sam will come back to this. but investing in sales and technical capacity remains where our capital works the hardest. Second is our ordinary dividend and our policy is to distribute between 40% to 50% of post-tax pre-exceptional earnings and as I mentioned before the board has declared an interim dividend of 3.3 pence per share. Third is acquisitions and we've said consistently that we would only act if something met our criteria on strategy, quality and valuation. and we announced this morning the acquisition of CyberOne that has met all three. This is our first acquisition as a listed business and we continue to explore strategically aligned opportunities. Sam will speak more about the deal in more detail shortly.

14:07 The fourth is we return excess cash where we've completed a £25 million share buyback during the first half. And then finally from me on Outlook. We upgraded our guidance in September and guidance is unchanged this morning. We continue to expect gross profit growth for the full year to be low to mid teens with low to mid single digit growth in operating profit. Two things to bear in mind for the second half. First, we are measured against a stronger comparative because the second half of last year is where our recovery began. And second, some of our costs are weighted towards the second half. with Commission Accelerators applying once targets are exceeded and the November sales intake are joining part way through the half.

14:57 We expect Cyber 1 to be earnings enhancing in the first full financial year of ownership and our guidance for this year Thank you Andrew.

15:31 Before I turn to what we did in the half, I want to spend a couple of minutes on slide 14, explaining why our model is so well positioned in the market currently. Because there are two things happening at the same time, and both of them work in our favor. The first is on the left. AI is increasing the portion of total business spend allocated to technology. Currently, technology accounts for approximately 10% of typical business spending. While labour accounts for under 50%. As AI absorbs labour-intensive tasks, technology spend is projected to move toward one-third of total expenditure. To give you a sense of the scale, global software spend is around $1.4 trillion, while global labour spend is around $65 trillion.

16:21 So the pool AI is beginning to address is many times the size of software market that it's been sold into. The second is on the right. There is a notable shift in how software reaches customers. Direct sales by a vendor team fell from 74% to 59% while partner-led distribution rose from 20% to 33%. Vendors are intentionally moving towards partners because they cannot hire direct sales coverage fast and they can't meet the demand and self-service models are often insufficient for buyers that require governance, and Negotiated Terms. So AI native vendors are leveraging scale partners like BTG rather than relying on direct sales to achieve reach.

17:09 What I would take from those two charts together is that through every one of these transitions, whether it's the internet, the cloud or now AI, the margin in our industry has moved steadily away from the product itself and towards the expertise around it. and that's the direction that we've been investing in for the last three years. And next I'm going to talk about where that investment has taken us. So let me show you on slide 15 where the growth actually came from. The chart on the left shows the shape of our recovery. On the right we have set out the picture by income stream. Software growth invoiced income was up 18.8%, Hardware was up 39.7% with gross profit more than doubling and services was up 41%.

17:58 Microsoft accounted for 52% of our gross profit in the half and grew broadly in line with the group. While our non-Microsoft business grew alongside it, led by security, by hybrid platforms, as customer refresh infrastructure projects alongside their cloud investments continued. I want to take on one question directly here. Is the recovery the market or is it us? And my answer is that it's a bit of both and I would not pretend otherwise. The UK technology spend has improved this year and we would expect to benefit from that. But a stronger market on its own does not deliver 23.1% in one sector and 14.6% in the other. This is a result of our driving customer centricity.

18:46 Numbers like those are the sum of individual customer relationships, and I'd like to share a few examples of this on slide 16. Samsonite is a new customer, and it's a good illustration of where we're heading. We're consolidating around 300 of their sites onto a single managed network platform over five years, taking around a third out of their network costs, with a path to around 1,000 sites globally. That's around a £6.5 million project total contract value. and this is International Services. It's services-led partnership and it does not include Microsoft. Howdens, we've been working with them for 10 years and we're now their strategic cyber partner advising on security transformation governance, AI security, risk management across the whole group.

19:35 And we're proud to also work with the University of Oxford, one of the best universities in the world. We support more than 40 of their vendor relationships, increasingly advising on how the whole estate fits together rather than just on a single product. And then finally, Defra, where we renewed the Microsoft licensing for a further three years on a substantial contract. So, no one logo, sorry, one new logo, one continuation, two relationships, and two of them getting deeper. two great public sector customers and two great corporations evidence of our strategy working for us in different ways. Turning to Microsoft on slide 17 who remain our largest vendor and our most strategic partner looking back first in January 2025 Microsoft reduced their incentives available on enterprise agreements and you can see on the chart what that did to our growth rate.

20:33 These changes are now fully annualized with return to material GP growth. Looking forward, there's a further set of announcements coming into effect from October this month. Microsoft set out to reduce commissions available on certain legacy products whilst increasing growth on products around enhancing incentives that are available on CSP. The growth products carry higher margins and they're precisely what we're built to advise on, security, AI and cloud workloads. and because those enhanced incentives are largely orientated around CSP, they reward moving customers onto longer multi-year commitments which deepens the relationship and improves the visibility of the gross profit that comes with it.

21:20 We have the sales readiness in place to go after that. It will take time. It will not all land in a single year but it's a real opportunity and one that we've been building towards. What I would say is that we go into this change very prepared for three reasons. Our segmented sales, that structure, now puts specialists in the front of exactly the customers most likely to need those growth products, which was not the case 18 months ago. We have seller insights, which we launched this half, and it gives every account manager a live view of the funding available on each account and that evidence from the customer's own usage and why the conversation is timely. and our services capability now extended by Fiber One attaches directly to the products that Microsoft has chosen to reward.

22:09 This change is already reflected in the guidance that we upgraded in September. So moving on to slide 18 and the second of the two structural changes we announced last year which completed in July. Bytes now serves the private sector and Phoenix serves the public sector. Bites was already generating 87% of its gross profit from the private sector and Phoenix 97% from the public sector. So in practice, it's affected a minority of relationships. The rationale is straightforward. Public and private sector organisations buy differently and need different support around what they buy. Our major vendors already separate their own sector teams, so this makes it easier for them to work with us and it removes any internal competition for the same customer.

22:58 Getting closer to our customer calls for an adaptable organisation that can absorb shifts and I'm proud of how our group continues to show up. As we refined our execution, no customer accounts changed hands. Account managers moved with their customers and that is the reason you'll see growth in this half rather than another period of adjustment. And it reflects a great deal of careful planning by the teams involved. Driving customer centricity doesn't stop. The big changes we've made this year are in place and have delivered, but the real prize is what we unlock going forward. Which brings me onto services on slide 19. Services is the advice, the design, the implementation and the ongoing management that our customers need in order to get value from the technology they buy, bolstering customers to what comes next.

23:52 It is where the vendor funding is increasingly being directed. It carries a higher margin than product and the managed element of it gives us a deeper and considerably longer and more strategic relationship with the customer. Services grossed invoiced income grew 41% in the half and services grossed profit grew 12% to 9.3 million. We built the delivery capacity to support that with technical delivery headcount up 17.4% year on year. and with the two businesses each focused on a single sector we can now build a services capability once and sell it through public and private. Build once, sell twice. Every pound we invest in a new service now has twice the addressable market it had before and we stop duplicating the same investment in two places.

24:44 Andrew's already covered the services margin which moved from 24 to 19% against the comparative that grew by more than 40%. What I would add to this is that we have deliberately brought capacity ahead of the revenue that it will carry and we expect the second half to reflect that. Our ambition here is a simple one. We want to be the single point of accountability for the technology our customers are running, covering cloud, platform and how their people access it, the endpoints they use and the security around it. Security is an area of very strong customer demand. and with the CyberONE acquisition, we now have that delivery capacity to keep scaling. Which brings me on to slide 20 and the acquisition of CyberONE, which is an AI-enabled managed cybersecurity services provider built on Microsoft technology. It gives bytes its own accredited 24-7 security operations center, a SOC, delivering managed detection and response.

25:46 The business has been established and has a strong position with the Microsoft security ecosystem, including recognition as a Microsoft security elite partner and a member of the Microsoft Intelligent Security Association, NISA. The initial consideration was $19.4 million, funded entirely from existing cash, with further performance related payments over the following 16 months. To give you a sense of the business, Cyber One has been operating since 2005, employs more than 80 people across the UK and the Philippines. It's generated revenue of around 10 million in 12 months to July, growing at high double digits with an expanding gross margin.

26:31 Around 90% of its income is reoccurring under multi-year contracts, so the quality of the earnings is high, and it sits as a UK cyber We expect the acquisition to be earnings enhancing in the full financial first year of ownership and our guidance for this year excludes any contribution from it. Let me explain why we chose to buy rather than build. Apart from the incredible team at CyberOne that we're looking forward to working with, An accredited security operations centre takes years to stand up because the accreditations, the people who hold them and the delivery track record that customers look for are all earned over time. But meanwhile our customers are buying this capability now as security is moving fast and it's in line with their budgets.

27:27 Until now we have fulfilled much of that work through third parties. and we can now deliver far more of it ourselves at a better margin and with better control of the customer experience. It also unlocks something we've been talking about internally for some time. Great many of our customers already hold Microsoft Security entitlements that they've never switched on or are not getting the best value from and now we're able to take them from licensed through to fully managed service while owning both ends of that conversation. Microsoft Publi welcomed the acquisition in our announcement which demonstrates how they see the combination of Cyber1's accreditation in our customer reach. Phoenix will continue to operate its own security capability for public sector customers where the accreditation and the tenancy requirements are different.

28:20 This is the kind of acquisition we said we would look for. Strategically aligned, culturally compatible and funded entirely from cash. Turning to AI on slide 21. AI is the largest single item on our customer technology agendas at the moment and it's now driving growth across our core business rather than just sitting alongside it as a separate activity. The point I'd make is that adopting AI is not a single purchase. Before an organisation can deploy it at scale, It means identity. It means access controls in order. It means it's data governed and it's security tested and it's people trained and supported through that change. We sell and deliver every one of those things.

29:07 And because Microsoft sits at the center of most of our customers' workplace technology, a good deal of that governance framework already resides in the licensing that they own today. So our role is to get customers to the point where AI can be adopted safely and then to make sure that the value lands with their people. Our ongoing work with the NHS is the clearest example. We first shared the full year results in May that we are supporting the deployment and adoption of Copilot for around half a million employees. This followed one of the largest Microsoft end customer investment fund awards globally. And most of that work sits in establishing the use case, setting guardrails, training users, supporting the change, and Microsoft recognises us as a frontier partner for it and our ability to deliver at scale.

30:01 There's a second opportunity emerging behind the first, and I think it's currently underappreciated. For 30 plus years, helping customers manage software spend has meant helping them manage licences, which are countable and broadly predictable, but AI is charged by consumption which is neither and customers are asking us how they control it. The discipline is shifting from counting what an organization owns to managing the performance of what it actually uses which happens to be our heritage. Software asset management and licensing is what the business was built on and it's the right foundation for helping customers manage the economics of AI. We're also applying AI inside our own business with agents built by our own teams now supporting technical consultants scoping work, reviewing and completing pieces of work before it reaches the customer. And we have our own quote comparison agent that's reduced quote review time from 30 minutes to 7 minutes.

30:59 That's a 77% reduction. These are just a few examples of how we're modernizing our own processes to remain efficient in how we grow our business. Moving to our people on slide 22, our hiring in the first half was deliberately measured, with headcount increasing 1.7% since the full year to 1,353, reflecting our prudence in this period. Over the previous two years, we've added a significant amount of sales and technical capacity, and this half was about making that capacity productive rather than adding further cost. Within the total, frontline sales headcount is up 4.4% since the fall year and technical deliveries up 17.4% year-on-year, or sales support headcount was reduced as we completed the reorganisation of the two sales teams.

31:51 You can see the effect of that discipline in our productivity with gross profit per employee increasing 13% year-on-year. So having made good use of the capacity that we already had, we will now add more with sales intakes joining both businesses and we expect those people to be carrying full quota by the year end and covering their costs in year two. As you know, new sellers take time to reach full productivity so this is an investment into FY28 and beyond and we would not be making it without confidence in the demand that we see. With our London office expansion moving into new premises in August this year, that doubled our capacity, we're now being present in major cities and it helps us stay close to our customers and attracts talent for the future. Our engagement, Phoenix was ranked 51st in the best small to medium workplaces in Europe list and has also been named the UK's largest public sector reseller for the second year running. And both businesses were named on the Great Places to Work Best Workplace for Tech UK 2026 list.

32:57 I'd like to thank all our people. They've observed a great deal of change over the last two years while continuing to deliver for their customers. And this half is very much their result. So to summarize, our growth in the first half was broad-based with double-digit growth, profit growth in both sectors with Microsoft and other vendors. The business itself is now simpler with the sector alignment complete and a common services capability being delivered across both our brands. Services is accelerating with delivery capacity up 17.4% and cyber one will add our own security operations. The demand drivers in our market are strengthening with software spend growing ahead of IT budgets as a whole, AI, cybersecurity and infrastructure attracting most of the incremental investment.

33:52 And our balance sheet remains strong with no debt and 41.3 million returns to shareholders in the half. I hope from this presentation you now have a clear understanding of how BTG has been driving customer centricity in everything that we are doing. To reiterate, BTG is building the UK's leading trusted advisor on AI, cloud and cyber, providing technical expertise and managed services to capture a greater share of our customers' technology spend. Thank you. Andrew and I will now take questions. I saw three handled girls at the same time. I think so. Go on, Tintin.

34:43 Sorry, guys. Hi, Tintin. I'm not brave enough.

34:47 Morning. I won't be greedy. I'll just do two questions. They're both relating to Cyber One. How should we think about the potential revenue synergy? If you think about your current Microsoft customers and maybe the readiness of those to take the Cyber One proposition, how should we think of who you're targeting, for example, for kind of the next 12 months and the Cyber One have the capacity in terms of the infrastructure to support that? Secondly, again, on Cyber One and related to that, when we think about the 18 million potential kind of earn out, directionally, Andrew, can you give us a sense of what needs to be achieved for you to pay that out as well?

35:28 Shall I start with the first questions, which hopefully then provides the justification for the latter? Just to give you a little bit of background, we've spent nearly a year, as of November this time last year, getting to know the SizerOne team. So this has been a relationship and, if you like, a due diligence that we've worked hard to understand. As a business, they are absolutely fit for purpose in terms of mid-market, which, as you know, is our sweet spot in terms of selling up to maybe 5,000 seats. They have some international clients and In terms of the capacity, one of the main due diligence areas that we of course wanted to investigate was were they ready to take what could be the machinery of the sales private sector bites team in interest and leads that were generated and we were satisfied that they have built, automated the AI enabled platform in preparedness for that so we are comfortable they can scale as our growth with them continues. So we will be focused on addressing the private sector mid-market in the UK opportunity with that Cyber One partnership.

36:48 Thanks Sam.

36:49 So the earn out is based on two February 28 numbers, so approximately 16 months, assuming that the NSIA clearance comes through as expected in 10 days time. We have based the earn out on their own forecasts not on forecasts including us so that should be seen as an accelerator and when we look at the capacity to grow it's quite interesting is that they built the company with a significant management overhead where they are sitting at the moment so they're able to run their company with probably a Five less managers than what they currently have and that's one thing that attracted us to the business is that built it to grow so we feel that absorbing the growth from ourselves would not enhance their cost base as a management level and then most of their delivery capacity sits within the Philippines so very easy to grow the appropriate staff within the Philippines environment. What we're hoping to do is to accelerate that earn out over probably nine to ten months and if we are and so internally if we're extremely successful we would probably have completed the earn out by October next year rather than the full year of February and that would obviously be the one plus one equaling three hopefully.

38:20 Thanks very much. Just a couple of questions for me, Julian from Investec. You put up the slide with Bytes and Phoenix now obviously very separated on the two end industries. Can you talk to us a little bit more about the sharing of best practice that can now happen between those both divisions now they don't need to effectively compete on certain deals. Is that important? Is that nice to have? Is that making a difference or not? And also on your services commentary around Build once, sell twice. Phoenix is obviously much more services driven. Are you effectively meaning you're taking service from Phoenix and pushing it into bytes and how does that link into the cyber one piece? Thank you. And I've just got a follow-up.

39:01 Yeah. So the best practices approach between the two operations for sure is much easier now with our distinct go-to-market strategy. I will say that we already had forums of engagement where we were trying to encourage that, but this just makes it much more streamlined and much more purposeful. So we're doing that around a range of areas. Services is obviously one of the core, but you can also imagine there might be other areas like HR and so on. We want commonality across the group. But from the services perspective, the build once strategy, you might think that the cyber one is therefore an anomaly. But I think I covered that off in my slide that you have very specific requirements around sovereignty in the UK public sector for data management, etc., Private sector less so and hence Philippines and having a more global approach is fitting for the private sector mid-market.

40:01 The types of services that we are The two operations are sharing with one another vary. You might have one stronger around virtualization, Broadcom and higher ranking in terms of capability and the other being weaker or you might have the other side being stronger around another vendor. So it's about how you bring that together and if the vendors are open to it, actually having a group consolidated approach to how you skill up and how you actually drive those certifications to a higher level of accreditation with them so we've got that going on and we have had for a few years but this now just drives it a bit more aggressively Other areas where we've taken one practice and shared it into another is pen testing.

40:47 As an example, we had licensed dashboard, which was IP that was written within the Phoenix business that was also offered to private sector clients. So over the years, we've had a number of those examples, but I think now we can start to move much more intentionally with it. Thank you. And just shifting on to the renewal rate, materially 150% versus what, 98% last year. Can you just give us a little bit of, I guess, the dynamics behind that? Renewal rate number, clearly that's obviously the thing that's driving close profit because you're mainly from the store-based customers. How should we see that sort of going forward? Does that trip back a little bit? New customer acquisition goes up. Does it stay around those sorts of levels? Anything particular to add around to give context to that number?

41:32 Yeah, I'll start off and Andrew can sort of layer in. So not just Microsoft, but all of the vendors have obviously made their propositions and and so on. They're technology much more comprehensive. There's been a lot of acquisition going on in the vendor world, companies buying more companies and then obviously consolidating that into an offering for the customer. So the renewal rate as a reflection of that is customers being given the opportunity to go from what was their old historic SKU to a much more powerful premium version that might incorporate more of the technology that the vendor has bought or you know to go wider with the commitments.

42:17 Of course we're also driving hard with our own services attach and so on so there's a mix of attributes going on there.

42:25 So I think the 115% is a couple of sort of I don't think the customers are spending 115% more on IT. That's not what we're saying. I think they're spending 115% on IT with us and that's a big difference. One of the sides that Sam had up is the sort of the move from direct to indirect and so the customers might have been spending direct with with Google or with AWS and now they're spinning it through us. We've spoken about in the past with AWS stated intention is to move from they were born direct obviously they've started moving towards a channel friendly environment and they stated objective is 50-50 so you can see that shift happening and then you know the two of the Sam put up was deepening relationships so a move from maybe the smaller vendors to us as well so there is some dynamics within those that make up the 115% Is it sustainable? I would think not at 115% obviously I'd love it to be but I have to be honest about it. There is awful lot of comparatives obviously H1 last year to where we are this year that was at 98% Julian that you referenced last year off the back of the EA changes so we are if you have a look at our consensus forecast we're probably high single digits on GP growth for the second half making up

43:58 a sort of a mid-teens overall growth for the year so I would hope that new business would continue to grow and the reason for that and why the hope is there is that you do need to fill in the funnel from the top right so new customers generally you land with one sort of service offering and then over the subsequent years you expand that so it is important that we continue to focus on both of our notions.

44:28 Hi there, thank you. It's Charlie Brennan here from Jefferies. Three very quick questions from me, two number clarifications and a more general one. Firstly, going forwards, you're incentivized to sell more multi-year CSP deals. Can you just remind us on the revenue treatment for you? Do you still recognize that rateably or are you obliged to pull more of that forwards? Secondly, there are still some cost line items that feel relatively low in the P&L like share-based comp. Is there further cost normalization to come next year? And when you say that you expect operating profit to grow in line with EBIT growth from 28, does that mean in 28 or does that mean in 29?

45:20 And then just as a higher level question, it's very encouraging to see more of the industry going through the partner channel. But have you spent any time interrogating the data that you showed us? The partners going from 20% of the market to 33% of the market implies the partner channels grown 60%. Now, the direction of travel is probably right, but the order of magnitude feels wrong. Can you just bring to light what you think that chart is telling us?

45:55 If I may, I'll start on that last point around the channel. I think Andrew's already alluded to that. You've got players like Google and AWS who are becoming more laser focused and have over the years been somewhat not consistent with their channel strategy. And then you've got players like Microsoft who are consistently very channel orientated and have been for 40 years. I think there is, so to answer your question, have we done Manushai research around that? No. Do I, from my gut and from my overall sense of interacting with some of the larger vendors on this planet and some of the new entrants like Anthropic and others, are they looking to channel to reach their customers? Yes, they are. and I think we sort of spoke about that on the slide.

46:43 And this has gone in waves over the decades. You've had Dell being in and out and hokey pokey and all the rest of it. But again, there is a sense that as they have taken their investments more into their own AI investment strategy, they've pared down their channel teams, they've pared down their direct sales forces. We've seen those announcements, Charlie, over the years. and therefore they're relying much more on the channel to give them that reach and that proximity to customer conversation. So that's my answer on the channel. In terms of the multi-year CSP deals, yeah, that's an opportunity for customers. In terms of recognition, it's as and when we take the consumption report, isn't it, on a monthly finance?

47:32 So on that CSP basically the pricing to the customer is more favourable if you commit for longer periods of time and that just gives Microsoft and others sort of are guarantees that their volumes will continue to grow but our recognition would be monthly in arrears of the invoicing so we take the data in Microsoft's caseload of the Microsoft portal we'll condense it and we'll produce an invoice back to the customer and just as a reminder we have two income streams of CSP one is our genuine margin the difference between our cost price and our selling price and the other one is obviously the rebate environment and the rebate is now moving more towards that sort of growth initiatives and so you would expect maybe to have a little bit more of earnings accretive as you move the customer from an E3 to E5 it's a little bit front-loaded on those rebates right because you're moving to E5 get a an accelerated growth in year one or as you move them and then that will dissipate over a period of time but it's not it's not that meaningful right then your Second question was share based payments and Charlie you did right. So last year we were building towards sort of a fully expensed share based payments environment and then our lack of performance last year removed a lot of the forward-looking on the share based payments so we're almost having to restart again rebuilding that so

49:03 you see in this year We'll probably have one year and a bit in next year you should expect in your modeling to probably add another million pounds to whatever we end up in the year and then the following year another million pounds will be back to sort of a fully funded three-year cycle. Then your question around FY28 and beyond So we will absorb the share based payments into next year so the growth in the share based payments and then we are looking to equalize in FY28 our OP growth and GP growth and then from FY29 onwards and so on. So UCFS coming in is his problem or her problem.

50:01 I'm only joking.

50:02 Can I just ask a follow-up there? Obviously, SoftCat have a different strategy, which is to over-invest in OPEX and for gross profits very fast.

50:13 Sorry, Charlie, there's the microphone right there.

50:17 Sorry, just a paraphrase.

50:19 Paraphrase.

50:22 Thank you for joining us.

50:40 Yeah, so it's an interesting question and it's not about a comparative to Softcat. What we see happening in our books for the last two years, if you look back to H2 of FY25, we grew headcount in that half at 17.8%. We ended up the year with a growth of 19% in headcount and the following year we had no growth or very little growth around the GP. So we had this capacity inherent within our business that is unutilized. We took the view last year not to start removing that capacity and trim back because obviously that capacity is hard won in the first place and we've put a lot of training and effort into it and we're absorbing that capacity now. If you're going to invest ahead of the growth curve, at some stage you have to start flattening off that investment because if you're investing ahead, that implies that you've got an exponential growth curve.

51:39 And we're not seeing an exponential growth curve like this. We would see a growth curve being more flat. So we acknowledge the fact that we're bringing in sales capacity ahead but you can see some of our other activities so the services capacity is above the GP line so it doesn't affect that ratio that we've been talking about and then where we've been having a lot of sort of drivers around our process enhancement around putting in the AI is in our sales support environment which you can see we've removed costs out of there so I think there's a bit of work to be done and that will start expanding in their scope as well Our offshore capacity within the Philippines that we've just acquired through Cyber One adds another dimension of probability or possibility for the business.

52:25 So having a look at the average cost for resourcing, it's probably 40% of what the UK's currently is. So it adds that sort of lens to it that we need to take into account. So I do expect for the next four or five years that we can eat back. Bear in mind that one of the things different from Softcat, they've been consistent in their delivery of 36 to 38 percent. We've dropped down from 40 percent to 36 percent. So I think it is supposed to increase it. Maybe not, I'm not going to promise back to 40 percent, but certainly what I'm going to attempt to do is that sort of one percent a year.

53:09 Morning. Morning. It's Andrew Ripper from Palmio Liberum. Just a couple from me, just building on that last one, Andrew. I mean, if the mix of the business changes and bytes shifts more towards services over the next sort of two or three years, does it change the sort of the potential conversion rate on a like-for-like basis if the mix changes versus having you historically having been more software orientated?

53:38 So that's a very interesting question. If you have a look at what is sitting in overheads, so what is typically sitting in overheads is your sales, your pre-sales, finance, HR, IT. So those don't change as a ratio to your GP. If we were skewing more towards hardware you would need to incur additional costs within the hardware element because now you've got warehousing, you've got reverse logistics, you've got project management that all sits below that. All of our technical capacity and our utilisation sits above the GP line so I don't expect that to differ. but what you can see is that as we move into some more focus on the services environment and as a reminder last year we ended up with 10% of our annualised GPE on services the average GPE last year was 24 this year is 19% but it is more margin-rich than the software environment so typically although the ratios don't change the margins derived from it should be better

54:39 and then for Sam, for various reasons bias has been through, sort of has had some challenges the last couple of years and thinking about sort of the sales team, how would you sort of describe the new music within the business and when you sort of look forward obviously we talked a lot about conversion rate here but when you think about the sort of GP growth opportunity and the capacity required to sort of fulfill that how do you think about the need to expand capacity from here in terms of how you go to market obviously you referenced you know the intake coming in in H2 what do you think it looks like over the next couple of years in terms of capacity expansion?

55:26 Yeah so first and foremost I think of our sales teams and I'm talking both operations as hugely resilient they have produced these results alongside all of that transformation that we've been undertaking this year so I think that is the first point to underscore it's been a tough Period, because we've also had changes going on, not just within our own business, but also absorbing new incentives. So we're enabling, we're training, we're skilling up. But I think what it proves is that it's like every other player in this industry. We are in such a fast moving period of our time, more so than any other era that I've worked in.

56:18 and the demands from our customers are only increasing. So we've got to be prepared to be responsive, knowledgeable, capable, we've got to have capacity, we've got to have the teams behind us. So when you talk about how does that team look and feel going forward and how we're going to build it out, when Andrew's role, when he moves from the CFO into the group operations officer, that is going to be a dedicated strategic motion for us. as a business to consider how we get much more efficient at driving processes. We're already doing some of that. We've alluded to it. There is opportunity to do a lot more and thus free up more of our sellers' time to be engaged with customers and driving those conversations deeper into the more complicated areas that we're having to own.

57:10 and then of course partnering up with the right specialist at that moment in time so that we go into the customer and arm ourselves with the right value add. In terms of bringing on new sellers, that doesn't differ. In terms of how we then blend in the Cyber One team, that's going to be something that we look to do over the next few years. We have bought this business because we highly rate their capability but they've also got some great sales people as well and it's about how we then cross-fertilize that knowledge and that skill back into the Bites business. I come over to the Phoenix side and equally their resilience has shown up as they've absorbed a whole division coming over to them this July, the Bites Public Sector Team, you know, lifted and shifted and now into those reporting lines. And it's going great.

58:00 So it just engenders confidence that as long as we remain customer-centric, devoted to what our customers need from us, we reserve the right to keep tweaking and doing whatever we think we need to make that customer experience really valuable.

58:16 Just something that Sam said to you is that

58:19 Last year when we had a renewal rate of 98% on existing customers, inherently that meant that the salespeople probably earned slightly less than the prior year, right? So one of the good news stories in this year would be the 115% renewal rate, given that the account managers Thank you very much. to pay the sales people more in services so that sales people are very pound driven and so I think this corrects the low of last year I think so if you're earning 15% more it's always good.

59:22 Thanks very much.

59:26 Just the last thing about the effects. I think one of the areas that we are conscious of is the cash conversion. So when we are running a 109% year on year, we do know that interest rates will probably increase, so we will continue to have pressure from the vendors to collect their money from us a little bit faster. We've managed that in the past and I don't see any big problems with that but also as you move to services you do have to expect that the cash conversion slows down right because services inherently are cash artisan resources and month one we will invoice at the end of month one and collect at the end of month two so you do see a little bit of a slowdown in cash conversion but I'm not ringing alarm bells I just want to make sure that we are not penciling at 109% cash conversion forever more.

1:00:14 Thank you. I guess if it's okay, I've got three questions online, if that's okay. First two are from Joe. Given the EBITDA growth was tracking it broadly flat through the first four months of the period, this would imply a significant step up in earnings growth through the latter two months of the period. Can you talk around the factors that drove this sharp increase in earnings growth? Was it gross profit related or OPEX related? And to what extent should we extrapolate this very strong exit rate through the second half?

1:00:45 I'm not sure that we would have classified the growth as broadly flat for the first four months up until the AGM statement. So up until the AGM statement we've consistently said that what our GP growth is going to be high single digit, low double digit growth. So there's probably an accelerator from there into the sort of 18% that we've shown today. The exit rate from that growth I would go back to our outlook statement of saying that you know sort of high single-digit growth for the second half and therefore our exit rate for the full year would be more like the the mid teens and why I keep on Emphasising this is that our customers typically renew once a year onto the EA agreements or the CSP agreements run out and we have to renew them so it's easier to measure on a 12-month rolling cycle that gives you a genuine view of what your exit rates would be for the full year.

1:01:46 Great, thank you. His following question is can you provide more detail on some of the assumptions that were built into the guidance relating to the new Microsoft incentive programs?

1:01:57 Yeah, so the growth incentives is geared towards the areas that we've spoken about in the presentation. Microsoft are driving hard for ambitious growth around AI co-pilots, the E7 suite security and Azure additional workloads. The business that we have been building over the last few years, all of our teams, the enablement and support specialists and our capability behind that has been geared into those buckets. So we're not having to suddenly organise ourselves differently. We've got the go-to capability to engage with the customers. I talked about the propensity data, the modelling that we're doing with some of our agents in-house so sellers are really well equipped to know when's the right time to have that conversation with a customer. have they got the propensity to take advantage of the growth incentives and they are quite lucrative so if we do all the right things if we work with our customers strategically and I alluded to this in my reference it doesn't all land in the one year you don't just go and engage and grab hold of the incentive in that moment you can perform a whole set of discrete activities and behaviors to drive up the different trigger points.

1:03:18 So this is actually quite a nice set of areas that our sellers can engage into along with our team. So the summary answer is we're well structured, the sellers really get it, we've got the data, we've got the customer book of business and it's just down to the appetite of customers who want to work and actually take full advantage of some of these offerings. Thank you Sam. Question from George at Senior Capital Markets. Thank you George. He says thank you for your detailed presentation. Can you comment on the new business proportion of GP and was that in line with your expectations? Also acquiring managed services, the presses group operating margins, do you have a target operating margin model over say a three year period?

1:04:09 So the new business, we're obviously reporting on six months and we've got ambitions to have higher numbers. What we typically find is with our new sales teams, the intake that we bring into the business around November, we train them hard, we unleash them onto the phones, onto the systems to start prosecuting new opportunities and winning new logos but that takes time you don't you don't you don't do that in a matter of weeks or months sometimes it can take up to a full year and I mentioned that they normally become cost covering in year two so that that new business is a ramping effect but we've also got within our teams our existing teams who've got live customer accounts they're also targeted to go and win new business and you find that sometimes if somebody's moved from one organization and they've enjoyed the experience of dealing with Bites or Phoenix they want to go and repeat that that relationship again so again customer centricity making sure we do the right things by the customer should show up in more customer wins as we move forward and Samsonite by the way is an example of that that was a relationship for one of our enterprise sellers that had followed the individual into this global opportunity and it was it was you know based on our track record and that relationship so hopefully

1:05:41 more logos more more new business wins in the future is it in line with expectation yes given the last year but you know this is now a building scenario I think and we'll have some more news on that in at the end of the fall year

1:05:56 Just looking at that sort of margins question, and we haven't disclosed the figures around Cyber 1, but just from a sort of a clues point of view that is in the presentation, we look at we're approaching $10 million We have a look at our services margin at 20% you have to assume their services margin will be higher because of the labor arbitrage running out of the Philippines and then when you look at the sort of implied multiples in which we paid and we talked about the earn out right so they they are not so your EBITDA multiples or your EBITDA percentage as a percentage of Thank you.

1:07:05 Thank you very much. That concludes the questions online. Certainly, I don't know if there's any others in the room. If there's not, Sam, before I redirect those on the online stream to give you the feedback, I wonder if I just come back to you for a couple of closing comments.

1:07:18 Yeah, thank you. Well, first and foremost, thank you for joining us this morning. I feel very proud to have shared the results with you and, you know, the Thunder One news is exciting as we've indicated. Really look forward to coming back at the full year and giving you an update on how that's progressing and obviously some of the other areas that we've spoken about today. So thank you very much.