Softcat this morning unveiled market-busting first-half results showing a 19.3% rise in gross invoiced income and 10.4% hike in operating profits.
The results statement also saw CEO Graham Charlton moot potential M&A.
IT Channel Oxygen caught up with Charlton in the wake of the results. Here’s what he had to say…
In your prepared remarks, you referenced potential M&A activity. What would be the rationale for departing from that organic growth strategy you’ve had for 32 years?
Our position on M&A really hasn’t changed for probably three or four years, but we’ve been semi actively looking at two avenues that could accelerate our strategy. One is bolting on to our core business. The other is our accelerating our capability to work overseas for our customers.
We’ve done a lot of work over the past couple of years to re-articulate our technology offering to customers to put it into a clearer framework. And as part of that we’ve carved out more clearly the work we’re trying to help our customers with around their data, AI and automation efforts. How we expand that technical and service capability into that area is obviously then one avenue we could look at.
Cybersecurity services – we spend a lot of time building those, and there’s more we can do there. Public cloud architecture and design management – that’s another service and technical capability we’ve been building, so there’s always interesting targets in that space as well.
I’d describe it as a no-lose effort, because if we’re looking at targets and understanding what things people are doing in these spaces, we could either reach a compelling situation and bolt that into Softcat, or it can just inform how we’re building organically anyway.
We’ve continued to look at those opportunities for the last few years, and if we saw something that was truly compelling, and had a management team with an ethos that was similar to ours, would be excited to join the Softcat group, and would materially move our offering to our customers on in an important way, then we could do it.
But we have no need to, because we’ve got strong double-digit gross profit growth, that’s driving lots of investment back into our business so we can pursue those things anyway in the absence of M&A.
Is there a number from your first-half results that particularly pleases you?
Gross profit is obviously the one that’s most important to the health of the business, and there was double-digit growth there again for us. We’re less bothered about gross invoiced income, which grew strongly. We don’t get overly excited about it when it’s ahead of GP growth.
In the results you said your growth was powered by Softcat’s “special” culture. Is it harder to retain that culture now you’re approaching 3,000 employees?
No, I don’t think it is. On the one hand, it’s a bigger organisation, so any one messianic individual can’t have the effect they would have done when it was 300-400 people.
However, Softcat has institutionalised that culture and has hundreds of people who care passionately about it who are doing work on it every day. We have all sorts of rituals and mechanisms, to preserve that culture.
Your headcount was up 6% in the first half, and you think it’ll be up six to 8% for the full year. Will the national insurance hike next month have any bearing on your recruitment plans?
Not really. Any movements in the cost base, whatever they’re driven by, have to be factored into our budget. We will not pull back from hiring and investing in our business because of it.
We’ve built the team very strongly over the past few years, and we always said that the rate of our recruitment will drop this year and next year as a result of that – so that’s what you’re seeing in the 6%.
But we’re investing in many other parts of the business as well. You might have seen on LinkedIn people getting giddy about the new London office. That’s a really exciting space we can use for our people, vendors and customers. We’re doing upgrades across a lot of the other offices as well. We’re going to be moving to a city centre location in Manchester, which will be a huge shot in the arm for that team, and we’re investing a lot in our own systems. We’re implementing a new finance system, we’ve rolled out Copilot, created a new data warehouse, we’re investing in Dynamics as our new sales system.
So our appetite for investment won’t be dimmed by things like the NI increase – we just have to work it in.
You said in the results that the recovery in the PC market has been “slower”. How would you size the opportunity around PC refresh for the rest of the year?
I would have hoped to have seen it contributing more to our growth by now – it’s been slightly delayed to where I thought we’d be October last year.
I don’t expect it to be a material factor now until maybe the second half of this calendar year. There are signs in pockets that it’s getting going but we’re a bit behind where I expected it to be at this stage, just because of the knock to business confidence that we saw at back end of last year and into the early part of this year.
It’s a big opportunity. We’ve always said though as well that our business is so diverse that if that goes absolute gangbusters, it [only] has the potential to add 1% or 2% to our GP growth. So it’s not in itself going to make or break our year.
You said you GP growth in H1 was driven by cyber. How fast is that cyber business growing for Softcat?
Our cyber business has been growing at around 20% – slightly over 20% in this half depending on whether you’re using gross income or gross profit. It continues to be one hottest topics for our customers alongside how they grapple with hybrid cloud, what they’re doing with AI.
VMware was in the channel’s bad books a year ago, but it appears to have done a partial U-turn. How would you evaluate your VMware business?
The VMware pricing has moderated somewhat, but it’s still an expensive option for customers. There’s lots of innovation from other vendors in that hypervisor space because of the price challenges customers have faced there.
We can support customers on VMware and we can support them on all the alternatives. We can help them migrate from one to the other – it’s a really tricky migration that takes years. So it’s good source of conversation for us with customers, but still a pain point for customers as well.
In the results, you characterised the market as “challenging”. Is the market getting better, or worse?
I think it’s flat. I think it’s been flat on the last 18, maybe even 24 months. There’s lots of caution in many customers. I’m ever the optimist, so I think it will improve as this calendar year goes on.
Doug Woodburn is editor of IT Channel Oxygen
