Bytes Technology : Half Year Results 31 August 2024

About this update from Bytes Technology Group Plc

15 October 2024 BYTES TECHNOLOGY GROUP plc ('BTG', 'the Group') Results for the six months ended 31 August 2024 Strong performance, capitalising on continued demand Bytes Technology Group plc (LSE: BYIT, JSE: BYI), one of the UK's leading software, security, cloud and AI services specialists, today announces its half year results for the 6 months ended 31 August 2024 (H1 FY25). Sam Mudd, Chief Executive Officer, said: "I am pleased to report another set of positive results for BTG, with a strong increase in operating profit, driven by continued demand for our broad range of software, solutions and services. Despite the challenging economic climate and political uncertainty over the past six months, we have increased our share of wallet amongst our existing customers as they continued to invest in their IT needs. We have also expanded our client base in both the public and corporate sectors." "The Group has again made strategic investments in personnel, internal systems, and new vendor accreditations to drive future growth and support our customers in navigating the complexities of agile, yet secure, IT environments. Our strong relationships with Microsoft and other top tier vendors allow us to seize exciting opportunities in cloud adoption, workload migrations, storage, security, and virtualisation technologies. Meanwhile, we continue to collaborate with our customers to enable their teams to roll-out the use of emerging AI technology, such as Copilot. With sustained demand in all these areas, and our expanding technical capabilities, these will be our key focus areas in the remainder of FY25 and beyond." "Our passionate, talented, and experienced staff continue to position BTG to provide high-quality licensing advice, technical enablement and support to meet our customers' needs. This differentiates us from the competition and underpins our confidence for continued growth during the remainder of the year." Financial performance £'million H1 FY25 (six H1 FY24 (six % change   months ended 31 months ended 31 year on year   August 2024) August 2023)   Gross invoiced income (GII) 1 £1,230.2m £1,081.6m 13.7% Revenue 2 £105.5m £108.7m (2.9)% Gross profit (GP) £82.1m £75.3m 9.0% Gross margin % (GP/Revenue) 77.8% 69.3%   GP/GII % 6.7% 7.0%   Operating profit £35.6m £30.6m 16.3% Operating profit/GP% 43.4% 40.6%   Cash £71.5m £51.7m 38.3% Cash conversion 3 56.2% 54.0%   Cash conversion (rolling 12 months) 3 112.6% 119.7%   Earnings per share (pence) 12.67 10.60 19.5% Interim dividend per share (pence) 3.1 2.7 14.8%         1 . Financial highlights GII increased by 13.7% to £1,230.2 million (H1 FY24 : £1,081.6 million), primarily driven by software. There continued to be a strong contribution from the public sector and the large prior year contract wins from NHS & HMRC have seen further growth. Revenue reduced by 2.9% to £105.5 million (H1 FY24 : £108.7 million) primarily due to a decrease in hardware GII (all of which is booked as revenue) and which exceeded the growth in software GP (where only the GP is included in revenue rather than the full GII). This has resulted in an increase in gross margin % (GP/revenue) from 69.3% to 77.8% with GP increasing against the slight decline in revenue. Growth in GP of 9.0% to £82.1 million (H1 FY24 : £75.3 million) in part reflects a greater weighting towards aggregated public sector sales under competitive tendering processes. This led to a corresponding small reduction in GP/GII from 7.0% last year to 6.7% this year. Behind this figure however we saw growth in our two key income streams, software and internal services, by 11.3% and 28.1% respectively. Operating profit increased by 16.3% to £35.6 million (H1 FY24: £30.6 million), with a corresponding rise in the ratio of operating profit to GP from 40.6% to 43.4%, reflecting the balance achieved between investing in the business whilst driving efficiencies. Earnings per share increased 19.5% to 12.67 pence (H1 FY24: 10.6 pence). Half year cash conversion of 56.2% is in line with our expectations reflecting the seasonal timing of cash flows, with a stronger weighting in the second-half of the financial year (H1 FY24: 54.0%). Our rolling cash conversion for the 12 months ended 31 August 2024 stood at 112.6%, meeting our sustainable annual target of 100%. Closing cash was £71.5 million (H1 FY24: £51.7 million). Interim dividend Interim dividend of 3.1 pence per share, a 14.8% increase on last year's interim dividend (H1 FY24: 2.7 pence). Operational highlights Customers that traded with BTG in H1 FY24 contributed 98% of our GP in this half year (H1 FY24: 98%), at a renewal rate of 107%. Increased headcount in the period by 7% to 1,130 (29 February 2024: 1,057) with particular focus on bolstering sales and service delivery teams. Continued to grow our physical footprint with the opening of offices in Sunderland and Portsmouth and expansion of floorspace in London. Sold over 130,000 Copilot licenses across our client base to date, generating annualised GII of circa £39 million, and Copilot now also used widely within our business. Renewed our Microsoft Azure Expert MSP status and secured further security and cloud specialisms. Received multiple vendor awards including from Palo Alto, HP, Nutanix, Checkpoint, Sophos, Cato Networks, Bitdefender, Adobe and Druva. Both Bytes Software Services and Phoenix Software named among the UK's top 50 Best Workplaces 2024. Vesting of our first Share Save Plan from 2021 which has seen participating staff able to exercise their options to become shareholders in BTG. Current trading and outlook The Group traded strongly in the first half of FY25 whilst operating in highly competitive markets and despite challenging macroeconomic conditions. Our focus remains on executing our growth strategy by nurturing customer relationships, extending our strong vendor partnerships, and leveraging the technical and commercial skills of our teams. We are well positioned to benefit from the structural demand drivers we see in our markets including cloud computing, cyber security and AI for the remainder of FY25. 2 . Analyst and investor presentation A presentation for sell-side analysts and investors will be held today at 9:30am (BST) via a video webcast that can be accessed using the link: https://brrmedia.news/BYIT_HY_24 A recording of the webcast will be available after the event at www.bytesplc.com . The announcement and presentation will be available at www.bytesplc.com from 7.00am and 9.00am (BST), respectively. Enquiries   Bytes Technology Group plc Tel: +44 (0)1372 418 500 Sam Mudd, Chief Executive Officer   Andrew Holden, Chief Financial Officer   Headland Consultancy Ltd Tel: +44 (0)20 3805 4822 Stephen Malthouse   Henry Wallers   Jack Gault   Forward-looking statements This announcement includes statements that are, or may be deemed to be, 'forward-looking statements'. By their nature, forward-looking statements involve risk and uncertainty since they relate to future events and circumstances. Actual results may, and often do, differ materially from forward-looking statements. Any forward-looking statements in this announcement reflect the Group's view with respect to future events as at the date of this announcement. Save as required by law or by the UK Listing Rules of the Financial Conduct Authority, the Group undertakes no obligation to publicly revise any forward-looking statements in this announcement following any change in its expectations or to reflect events or circumstances after the date of this announcement. About Bytes Technology Group plc BTG is one of the UK's leading providers of IT software offerings and solutions, with a focus on cloud, security, and AI products. The Group enables effective and cost-efficient technology sourcing, adoption and management across software services, including in the areas of security and the cloud. It aims to deliver the latest technology to a diverse range of customers across corporate and public sectors and has a long track record of delivering strong financial performance. The Group has a primary listing on the Main Market of the London Stock Exchange and a secondary listing on the Johannesburg Stock Exchange. ' Gross invoiced income' (GII) is a non-International Financial Reporting Standard (IFRS) alternative performance measure that reflects gross income billed to customers adjusted for deferred and accrued revenue items. GII has a direct influence on our movements in working capital, reflects our risks and shows the performance of our sales teams. 'Revenue' is reported in accordance with IFRS 15 Revenue from Contracts with Customers. Under this standard, the Group is required to exercise judgement to determine whether the Group is acting as principal or agent in performing its contractual obligations. Revenue in respect of contracts for which the Group is determined to be acting as an agent is recognised on a 'net' basis (the gross profit achieved on the contract and not the gross income billed to the customer). Our key financial metrics of gross invoiced income, gross profit, adjusted operating profit and cash conversion are unaffected by this judgement. 'Cash conversion' is a non-IFRS alternative performance measure that divides cash generated from operations less capital expenditure (together, 'free cash flow') by operating profit. It is calculated over both the current 6 month reporting period and over a rolling 12 months, the latter taking the previous 12 months free cash flow divided by the previous 12 months operating profit, in order to reflect seasonal variations between the two halves of the year. _______________________________________________________________________________ 3 . Chief Executive Officer's review A strong performance delivering on our strategy H1 FY25 was another set of strong results for BTG, with a 13.7% increase in gross invoiced income, a 9.0% rise in gross profit, and a 16.3% increase in operating profit. Despite the challenging economic climate, we have delivered a strong performance underpinned by our diverse range of software and IT services offerings from leading vendors and software publishers, and reflecting the robust nature of IT spending across the UK and Ireland. Our continued success in securing large public sector contracts again illustrates our credibility and strength in bidding for significant government software opportunities under the Crown Commercial Services and other framework agreements. While these sales are initially won at reduced margins, due to the competitive tendering process, we have a strategy and track record of growing the size and profitability of these contracts over time as they predominantly take the form of multi-year agreements. This provides confidence in our future growth prospects and the potential for up-selling and cross-selling opportunities. Customers choose to partner with BTG because of the broad range of solutions and services we offer, including multi-cloud migration and adoption, digital transformation, storage, and a wide array of security products. Many have built long standing relationships with us over many years underpinned by our excellent software advisory expertise and knowledge around procurement routes, which enables us to guide customers on best value. We intend to double down on this strength by investing further in pre-sales and specialist technical skills, allowing us to service a larger market and scale up to meet our customers' needs. Examples of our services delivery capability includes a consultancy team with expertise across the entire Microsoft Cloud and AI portfolio and our Security Operation Centre (SOC), plus Governance, Risk and Compliance (GRC) and Software Asset Management (SAM) offerings, including licensing spend optimisation supported by our own IP in the form of Quantum and Licence Dashboard. The expansion of our IT services capability is further enhanced by the renewal of our Microsoft Azure Expert status for the provision of managed services, along with attaining 11 service delivery specialisations (4 in security solutions) and 6 solution partner designations from Microsoft. We have seen strong interest in AI products, including Microsoft's Copilot for M365, selling over 130,000 licenses into our customer base since its launch in H2 FY24, and we continue to develop associated in-house services to support customer readiness and adoption. We will further expand our existing in-houseAI-dedicated teams, creating repeatable sector specific solutions with broader data and GenAI services across our vendor offerings as this income stream continues to grow in the second half of FY25 and beyond. In addition to our partnership with Microsoft, we have also continued to deepen our relationships with other key partners and are especially pleased to have been recognised by leading industry vendors including Palo Alto, HP, Nutanix, Checkpoint, Sophos, Cato Networks, Bitdefender, Adobe and Druva, reflecting the status and high esteem that the Group has with global technology leaders. These awards are highly competitive and our success is testament to the expertise of our staff and the customer success stories that we deliver. We work with our vendors to align our sales efforts and service offerings with their strategic objectives, and they incentivise us accordingly. While not yet finalised, a change to one of the key vendor's incentive plans is scheduled to take effect from 1 January 2025 as part of the evolution of their partner program, and while this might result in lower incentives in a few areas, the overall incentive opportunity is expected to grow. We have a long track record of successfully adapting to such changes and do not expect there to be a material impact in the current or next financial year. We are proud of the energy, enthusiasm and professionalism demonstrated by our people, now totalling 1,130 staff across multiple offices and regions. They do a tremendous job supporting our customers and providing outstanding service. We continue to focus on targeted recruitment and training, and attracting talent into front- end sales, delivery teams and all supporting areas, and from apprentices through to senior roles to help with our ambitious growth plans. As a management team, we are extremely pleased with the way our people continue to work hard in these challenging times, and embrace our collaborative, team-based culture. Our flexible working regime continues to deliver positive results for our business, while also meeting our people's aspirations for a healthy work/life balance. In August 2024, we launched our fourth Share Save Plan, which has again been well received by our employees, with over 50% participating in one or more of these plans. August 2024 also saw the vesting of our 4 . first Share Save Plan which was launched in 2021, with participants now able to exercise their options and become shareholders in the BTG Group. To support the growth in sales and people, we are investing in both our internal and customer facing systems, and in our office environments including expanding our regional presence. This will improve our staff user experiences and drive internal efficiencies, whilst more closely supporting our customers and making it easier for them to do business with us. We are committed to executing our strategy in a responsible manner, with sustainability rooted in everything we do. Our sustainability framework aims to deliver positive impacts for our stakeholders across the key themes we have identified as most relevant for the environment in which we operate. Within each theme - financial sustainability, corporate responsibility, stakeholder engagement and good governance - we set ourselves focus areas that drive our activities. Through our staff-led working groups, we allocate time and resources to various environmental initiatives and to corporate social responsibility activities. We remain committed to supporting diversity throughout our business and are proud of the balance represented across our people. We continue our efforts to align with broader diversity targets to reflect the society in which we, and our stakeholders, operate. More details in respect of our sustainability initiatives are set out below. Our dividend policy is to distribute 40%-50% of the Group's post-taxpre-exceptional earnings to shareholders by way of normal dividends. Accordingly, we are pleased to confirm that the Board has declared an interim dividend of 3.1 pence per share to be paid on 22 November 2024 to shareholders on the register at 8 November 2024. I have been hugely impressed by the commitment and professionalism of all of our staff as they remained focused on delivering our strategic priorities in the first half of FY25 and wish to extend my gratitude for their hard work and dedication to the business. Finally, I would like to thank our clients for their support and entrusting their business to us; together, our staff and customers are our lifeblood and will always be our top priority. Continued focus on environment, social and governance (ESG) Our approach to responsible business and ESG is aimed at helping to build a sustainable future and create long-term value for the Group and its stakeholders. Our strategy is underpinned by our purpose and values, which foster an aligned culture across the organisation. During the period, we further progressed our ESG initiatives in the following ways. Achieved Science Based Targets initiative (SBTi) validation At the end of June 2024 we received SBTi validation for our near-term and net zero carbon reduction targets and, further to this, we continue to align our activities to our Scope 1 and 2 targets for FY26. As part of the continual publication of our net zero efforts, we have submitted our annual Carbon Disclosure Project (CDP) for FY25. We continue to monitor the progress of the IFRS S1 and S2 standards being adopted by the UK Government, through the UK Sustainability Disclosure Standards and will align to these as required. The standards will incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), so we expect to be in a good position to transition, having fully complied with the TCFD's recommendations in our last Annual Report. Within our businesses, we are supporting the evolution to greener transport to reduce business travel and commuting emissions. The Group successfully implemented an electric vehicle scheme in FY24 which has expanded further in H1 FY25 across the business. Early in FY25 our York office saw the addition of solar panels, which further supports carbon reduction and increases energy security. Self-generated energy is also being assessed for our other owned offices. Unity through diversity and inclusion Employee support and wellbeing continue to be key focus areas for the Group, with wellbeing days an important part in driving a healthier and happier workforce, which we continue to measure through the annual employee Net Promoter Score (eNPS) survey. Understanding diversity within our business has also been a focus across the Group, with the roll-out of voluntary self-reporting for gender, ethnicity, disability and neurodiversity. A more detailed understanding of the demographics of our business will aid in attracting and retaining talent and support innovation through diversity of thought. 5 . Our strong culture remains a driving force behind our successful growth. We continue to support this through staff events, incentive trips and the development of our people with continued learning and training opportunities. There has been an expansion of our apprenticeship scheme into more areas of the business and into degree-level apprenticeship programmes. We engage with staff through various channels and several improvements are made based on their ideas and initiatives. During H1 FY25, we have continued to support our communities through donations, fundraising events and volunteer days, such as with the Wildlife Aid Foundation, the Rainbow Trust and St Leonard's Hospice. Board composition and committee memberships In H1 FY25 there have been some changes to the composition of the Board and committee memberships. On 25 March 2024, Erika Schraner was appointed as Senior Independent Director and Interim Chair of the Audit Committee, replacing Mike Phillips, who resigned as an Independent Non-Executive Director. At the same time Shruthi Chindalur assumed the role of Designated Non-Executive Director (DNED) for employee engagement. On 10 May 2024 Sam Mudd was appointed as CEO. On 1 June 2024 additional Board appointments were made, and the ESG Committee was established. Ross Paterson was appointed as an Independent Non-Executive Director, Chair of the Audit Committee, and member of the Nomination, Remuneration and ESG Committees. Anna Vikström Persson was appointed as an Independent Non-Executive Director, Chair of the ESG Committee, and member of the Audit, Nomination and Remuneration Committees. Following the aforementioned appointments of Ross Paterson and Anna Vikström Persson, we are now again compliant with provisions 24 and 32 of the UK Corporate Governance Code 2024. 6 . Chief Financial Officer's review         H1 FY25 H1 FY24     Change Income statement £'m £'m % Gross invoiced income (GII) 1,230.2 1,081.6 13.7% GII split by product:       Software 1,187.2 1,027.3 15.6% Hardware 12.5 24.1 (48.1)% Services internal 1 16.6 15.5 7.1% Services external 2 13.9 14.7 (5.4)% Netting adjustment (1,124.7) (972.9) 15.6%         Revenue 105.5 108.7 (2.9)% Revenue split by product:       Software 74.7 67.1 11.3% Hardware 12.5 24.1 (48.1)% Services internal 1 16.6 15.5 7.1% Services external 2 1.7 2.0 (15.0)%         Gross profit (GP) 82.1 75.3 9.0% GP/GII % 6.7% 7.0%   Gross margin % 77.8% 69.3%           Administrative expenses 46.5 44.7 4.0% Administrative expenses split:       Employee costs 37.2 35.7 4.2% Other administrative expenses 9.3 9.0 3.3%         Operating profit 35.6 30.6 16.3% Operating profit/GP% 43.4% 40.6%   Add back:       Share-based payments 2.5 2.9 (13.8)% Amortisation of acquired intangible assets 0.4 0.4 0.0%         Adjusted operating profit (AOP) 38.5 33.9 13.6% Interest income 6.0 2.9 106.9% Finance costs (0.2) (0.3) (33.3)% Share of profit of associate 3 0.1 0.1 0.0% Profit before tax 41.5 33.3 24.6% Income tax expense (11.1) (7.9) 40.5% Effective tax rate 26.7% 23.7%   Profit after tax 30.4 25.4 19.7% Provision of services to customers using the Group's own internal resources Provision of services to customers using third-party contractors Cloud Bridge Technologies 25.1% share of profits 7 . Overview of H1 FY25 results H1 FY25 has continued to see customers engaging with us for our core software licencing offerings. We have experienced increasing demand in areas such as cloud computing, cyber security and AI, which we have responded to by expanding our technical and service solutions. This demand contributed to operating profit increasing by 16.3% to £35.6 million (H1 FY24: £30.6 million) and profit before tax rising by 24.6% to £41.5 million (H1 FY24: £33.3 million). Gross invoiced income (GII) GII reflects gross income billed to our customers, with some small adjustments for deferred and accrued items (mainly relating to managed service contracts where the income is recognised over time). We believe that GII is the measure which best enables us to evaluate our sales performance, volume of transactions and rate of growth. GII has a direct influence on our movements in working capital, reflects our risks and demonstrates the performance of our sales teams. Therefore, it is the income measure that is most recognisable among our staff, customers, suppliers and shareholders for them to understand our business. GII increased by 13.7% year on year, with growth coming from our core software and internal services income streams. Software remains the largest contributor, providing 97% of the total GII for the period (H1 FY24: 95%). Whilst growth has reduced compared to FY24, the prior year saw some exceptionally large public sector contracts won. These are now in their second year in H1 FY25, with the agreements running over five years. Hardware, whilst not the primary focus for the Group (representing only 1% of GII), has seen a 48% reduction, reflecting the more one-off nature of sales as they typically reflect the timing of large infrastructure projects by customers, and a more general reduction in hardware spend across the IT sector. We have seen a small reduction in GII from external services delivered in the period, which will fluctuate according to customer requirements and whether we have the capability and capacity to deliver these projects in house. Correspondingly we have seen a rise in our internally delivered services figure and will continue to invest in this part of the business to meet future demand. The continued high level of government investment in IT, and the Group's success in winning those new contracts, has resulted in our public sector GII increasing by £141.0 million, up 19.5%, to £862.8 million (H1 FY24: £721.7 million). Our corporate GII has been more impacted by the ongoing economic uncertainty but still increased by 2.1% to £367.4 million (H1 FY24: £359.9 million). This means that our overall GII mix has moved slightly compared to last year, with 70% in public sector (H1 FY24: 67%) against corporate of 30% (H1 FY24: 33%). Revenue Revenue is reported in accordance with IFRS 15 Revenue from Contracts with Customers. Under this reporting standard, we are required to exercise judgement to determine whether the Group is acting as principal or agent in performing its contractual obligations. Revenue in respect of contracts for which the Group is determined to be acting as an agent is recognised on a 'net' basis, that is, the gross profit achieved on the contract and not the gross income billed to the customer. It should be noted that GII, gross profit, operating profit, and profit before and after taxes are not affected by these judgements, and neither are the consolidated statements of financial position, cash flows and changes in equity. Our judgements around this area are set out in notes 1.4 and 1.10 of the financial statements for FY24 but in summary, software and external services revenue is treated on an agency basis while hardware and internal services revenue is treated as principal. With software being our dominant income stream, this therefore gives rise to our GII being subject to a substantial "netting adjustment" to arrive at a much lower revenue position. This reporting of revenue as a mix of GP and GII across the four income streams has given rise to a 2.9% reduction to £105.5 million (H1 FY24: £108.7 million) as the growth in software GP (where only the GP is included in revenue rather than the full GII) is outweighed by the reduction in the hardware GII (all of which is taken to revenue). Hence, due to revenue being a mix of metrics, we focus on GII to provide a consistent measure of our sales performance and billed income. 8 . Gross profit (GP) GP increased by 9.0% to £82.1 million (H1 FY24: £75.3 million). Breaking this down by income stream, for the Group's two most strategic focus areas, we have seen both achieving double digit growth, software GP up by 11.3%, and with only a very small decline in its GP/GII%, while internal services GP is up by 28.1%, driving it's GP/GII margin up to over 20%. Against these positive trends, the declining hardware GII noted above, and to a smaller degree the reduction in external services, have brought about corresponding reductions in GP for those income streams. Looking across our two main customer segments, the Group has seen strong growth in public sector GII, bidding under highly competitive tenders, either for single contracts or for several public body contracts in aggregate, the latter enabling us to gain multiple new clients from a single bid. Despite more pressure on margins under this process the public sector GP has grown by over 20%. Against this, the relatively low growth in GII from the corporate sectors is mirrored by GP growth there of 3%. Lower margins in public sector are as expected but in fact our GP/GII% for both public and corporate sectors has improved slightly from the previous year. However, the greater mix of GII derived from public sector has resulted in an overall reduction in GP/GII from 7.0% in H1 FY24 to 6.7% this year. When comparing GP to revenue, we have seen an increase in the gross margin % from 69.3% to 77.8% due to the GP increasing against the slight decline in revenue noted above. The growth in the public sector again demonstrates the Group's strategy of winning new customers and then expanding share of wallet. Our objective is to ensure we build our profitability within each contract over its term, typically three to five years, by adding additional higher-margin products into the original agreement as the customers' requirements grow and become more advanced. Adding AI products such as Copilot will become part of these contract expansions going forward. This process is further enhanced by focusing on selling our wide range of solutions offerings and higher-margin security products, while maximising our vendor incentives through achievement of technical certifications. We track these customers individually to ensure that the strategy delivers value for the business, and our other stakeholders, over the duration of the contracts. Our long-standing relationships with our customers and high levels of repeat business was again demonstrated in H1 FY25 with 98% of our GP coming from customers that we also traded with last year (H1 FY24: 98%), at a renewal rate of 107% (which measures the GP from existing customers this period compared to total GP in the prior period). Administrative expenses This includes employee costs and other administrative expenses as set out below. Employee costs Our success in growing the business continues to be as a direct result of the investments we have made over the years in our front-line sales teams, vendor and technology specialists, service delivery staff and technical support personnel, backed up by our marketing, operations, and finance teams. It has been, and will remain, a carefully managed aspect of our business. In addition to continuing to hire in line with growth and to ensure we have the expertise required to provide our clients with the best service, our commitment to develop, promote and expand from within the existing employee base, giving our people careers rather than just employment, is at the heart of our progress as a business. This has contributed to long tenure from our employees which in turn supports the long relationships we have established with our customers, vendors, and partners. During the half year we have seen total staff numbers rise to 1,130 on our August 2024 payroll, up by 6.9% from the year-end position of 1,057 on 29 February 2024 and up 10.1% over the full year period since 31 August 2023. Employee costs, included in administrative expenses, rose by 4.2% to £37.2 million (H1 FY24: £35.7 million). However, this figure has been impacted by the effects of: 9 . a reduction in share-based payment charges by £0.4 million as our first three share option schemes issued post-IPO have now vested and the cost of the new schemes launched in FY24 and FY25 have been slightly lower. capitalising £0.7 million of staff costs onto the balance sheet. This relates to the salaries of employees who are developing new IT platforms, one to provide a 'marketplace' gateway for our customers to more seamlessly purchase products online from a range of vendors and the other to enable us to improve our operational processes around customer order processing. This treatment is in line with our accounting policy for intangible assets which can be found in our Annual Report and Accounts. Without the impact of these two items, the underlying increase in our employee costs is 7.3%, hence in line with the increase in headcount and less than our GP growth, reflecting the balanced and proportional way in which staff investments are made. Other administrative expenses Other administrative expenses increased by 3.3% to £9.3 million (H1 FY24: £9.0 million) including continued investment in staff welfare and internal systems. As part of the software development project referred to above, we have also spent £0.9 million with a third party development company to supplement our own internal resources. This engagement was taken wholly for this purpose, hence not in the prior year figures, and the cost has been capitalised in full alongside our own salary costs, making a total of £1.6 million added to intangible software assets during the period (see balance sheet below). Operating profit and adjusted operating profit (AOP) Our operating profit increased by 16.3% from £30.6 million to £35.6 million, which shows the balance we have achieved between growing GP in a challenging market whilst effectively managing our cost base. Some of this increase has been positively impacted by the £0.7 million capitalisation of software developers staff costs noted above (previously expensed in the prior half year when their work was focused on maintaining legacy systems). Even after adjusting for this, the increase remains very positive at 14.1% with a like for like comparative operating profit figure of £34.9 million in H1 FY25. Our operating efficiency ratio which measures operating profit as a percentage of GP is a key performance indicator in understanding the Group's operational effectiveness in running day-to-day operations. We aim to sustain it in excess of 40% and have achieved this, with an increased ratio of 43.4% (H1 FY24: 40.6%). Excluding the capitalised staff costs, the ratio for this period is 42.5%. In previous results announcements we have also focused on AOP which removes the effects of share-based payment (SBP) charges and amortisation of acquired intangibles, notably due to the growth of the SBP over the time since IPO from a near zero starting position in FY21 of £0.3 million to £5.7 million in FY24. Given that we have now moved out of that growth cycle (as older schemes vest and new schemes are introduced), the current SBP are now viewed to be stable and normalised as business as usual recurring expenses. Similarly, our amortisation charges are stable at £0.4 million for the current and prior half year. Hence AOP is no longer considered to add value to understanding our results. We will therefore now focus on operating profit which brings us in line with other similar businesses in our market segment. For reference, our AOP has increased by 13.6% to £38.5 million (H1 2024: £33.9 million) and the ratio of AOP to GP increased from 45.0% to 46.9%. Interest income and finance costs This half year has seen significant interest being earned from money market deposits, totalling £6.0 million (H1 FY24: £2.9 million). Whilst last half year included only four months of earnings, we have nevertheless substantially increased this income stream, backed up by our strong cash management which has enabled us to place more cash on deposit and for longer periods. This effort has been so effective that our half year figure has already exceeded the £5.1 million we generated in the whole of FY24. There is some seasonal impact here, due to the timing of the largest Microsoft enterprise agreements which primarily transact in our first six months, and hence our interest earnings will be lower in our second half. 10 .

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