REG - Softcat PLC - Final Results
25/10/2022 07:00
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RNS Number : 9488D Softcat PLC 25 October 2022
SOFTCAT plc
("Softcat", the "Company")
Preliminary results for the year to 31 July 2022
Another year of strong organic growth, profitability, and good cash generation
Softcat plc (LSE: SCT.L), a leading UK provider of IT infrastructure products
and services, today announces its full year results to 31 July 2022. The
results demonstrate continued strong growth alongside sustained investment,
and both a progressive ordinary dividend and special dividend.
Financial Summary Year ended
31 July 31 July
2022 2021 Growth
£m £m
Revenue(a) 1,077.9 784.0 37.5%
Gross invoiced income(b) 2,507.5 1,938.4 29.4%
Gross profit 327.2 276.4 18.4%
Operating profit 136.1 119.4 14.0%
Cash conversion %(c) 76.2% 89.9%
Total ordinary dividend (p) 23.9p 20.8p 14.9%
Final dividend (normalised, p) 16.6p 14.4p 15.3%
Special dividend (p) 12.6p 20.5p (38.5)%
Basic earnings per share (p) 55.5p 48.4p 14.7%
Highlights for the twelve months to 31 July 2022
· Strong performance across both first and second halves of the
year, extending our record of unbroken organic year-on-year growth in gross
invoiced income, gross profit and operating profit.
· Further growth in both the customer base (+2.1%) and average
gross profit per customer (+16.1%), demonstrating good progress against each
key aim of our strategy.
· Headcount up 14.3%, delivering investment across all areas of the
business.
· A final dividend of 16.6p, up 15.3%, and a special dividend of
12.6p.
· Strong balance sheet position maintained with net cash at year
end of £97.3m (2021: £101.7m).
· Outlook: the company is in a strong competitive position
heading into the new financial year, which has started well.
( )
(a) Revenue is reported under IFRS 15, the international accounting standard
for revenue. IFRS 15 requires finely balanced judgements be made to determine
whether Softcat acts as principal or agent in certain trading transactions.
These judgements, coupled with slight variations of business model between IT
Solutions Providers, means the impact of IFRS 15 across the peer group is not
uniform. Income prior to the IFRS 15 adjustment is referred to as gross
invoiced income. Revenue for 2021 has been restated due to a change in
accounting policies in relation to the recognition of software revenue during
the year as detailed in Note 2.
(b) Gross invoiced income reflects gross income billed to customers adjusted
for deferred and accrued revenue items. This is an Alternative Performance
Measure (APM). For further information on this, please refer to the CFO Report
on page 7.
(c) Cash conversion is defined as cash flow from operations before tax but
after capital expenditure, as a percentage of operating profit. This is also
an Alternative Performance Measure.
Graeme Watt, Softcat CEO, commented,
"I am pleased to report on our 2022 results, which represent another record
achievement for our business. Thanks to the hard work and dedication of our
entire team, we have now achieved 68 successive quarters of organic year over
year income and profit growth. Our focus on being the best place to work and
delivering outstanding customer service continues to serve us well.
Our strong and unique culture enabled us to manage the challenges of the
pandemic and we emerged in an even stronger competitive position, continuing
to grow faster than the market. Our sales growth was delivered right across
the board with double digit growth in all segments and technologies as we
continued to manage hardware supply chain constraints.
We made excellent progress selling deeper into existing customers and saw
gross profit per customer improve by 16.1%, while also attracting new
customers driving 2.1% growth in our overall customer base.
Our people continue to be the primary focus of our investments. Despite the
tough talent market, we were able to grow headcount by 14.3% and, since year
end, this has grown further to 2,060 which sets us up to drive future success
by continuing to take share of a growing market. We do this by providing the
broadest portfolio of leading-edge technology solutions and services,
listening to our customers, and leveraging the largest commercial team in our
space in the UK market.
I am delighted that the Company is again able to recommend the payment of a
special dividend this year.
Thank you to all those with whom we enjoy a partnership, and, of course, a
huge thank you to the Softcat team for your amazing energy, ambition,
execution and dedication to each other and our customers. During the
challenges of the pandemic the business didn't miss a heartbeat thanks to your
passion and the care you took to look after everyone around you."
Outlook
The Company is in as strong a competitive position as ever heading into the
new financial year and we expect to continue to deliver double-digit gross
profit growth and deliver market share gains.
Demand has remained strong and customer behaviour across all segments is
normal. That said, the comparative first half period to January 2022 was
exceptional and, as highlighted at the time, benefitted from a very high
volume of business from our largest customer. In addition, Covid delayed the
resumption of internal events and travel to see customers until March 2022,
while this new year has seen the Company award significantly higher pay
increases across all departments, including an increase to the starting
salaries of new sales recruits to reflect market conditions. We have also
increased the rate of recruitment into the Company as we remain focussed on
the enormous and growing opportunity the IT infrastructure market presents.
We are confident that operating profit for the year will be in line with
expectations and at levels similar to 2022, but the factors mentioned above
mean cost growth is likely to outstrip gross profit growth in the first half.
To date, and throughout previous periods of market upheaval and uncertainty
(including Covid), customer demand has been robust and growing but we
nevertheless plan carefully for all possible scenarios. Our business model
has significant agility; approximately 35% of our operating cost base is made
up of sales commissions that naturally flex in a linear fashion with gross
profit, while hiring plans are reviewed on a weekly basis to react to market
dynamics. Our balance sheet remains strong, and the Company carries no
external bank debt. Consequently, we are confident that the business is in a
very strong position to continue to outperform the market.
Analyst and investor call
Management will host an analyst and investor conference call and webcast at
09.30 today. Access details for the conference call and webcast are:
Conference Call Details:
To dial in to the conference call and participate in the Q&A please click
on the link below to register for the call and receive your details:
https://register.vevent.com/register/BIdbd8eb70878e4a5a901c80206c2fe11a
(https://protect-eu.mimecast.com/s/npklCDRQkHPXky5uWCX2C?domain=register.vevent.com)
Please note the pin code that is provided is a unique code for you.
Webcast Link:
https://edge.media-server.com/mmc/p/ctmspknz
(https://edge.media-server.com/mmc/p/ctmspknz)
Please register approximately 10 minutes prior to the start of the event. The
announcement and presentation will be available at www.softcat.com
(https://protect-eu.mimecast.com/s/1-n1CqjlxiRwJv7TQMT7A?domain=softcat.com)
from 07.00 and 09.00, respectively.
Enquiries
Softcat plc: +44 (0)1628 403 403
Graeme Watt, Chief Executive Officer
Graham Charlton, Chief Financial Officer
FTI Consulting LLP: +44 (0)20 3727 1000
Ed Bridges
Matt Dixon
Forward-looking statements
This announcement includes statements that are, or may be deemed to be,
"forward-looking statements". By their nature, such statements involve risk
and uncertainty since they relate to future events and circumstances. Actual
results may, and often do, differ materially from any forward-looking
statements.
Any forward-looking statements in this announcement reflect management's view
with respect to future events as at the date of this announcement. Save as
required by law or by the Listing Rules of the UK Listing Authority, the
Company undertakes no obligation to publicly revise any forward-looking
statements in this announcement following any change in its expectations or to
reflect subsequent events or circumstances following the date of this
announcement.
This announcement has been determined to contain inside information.
Chief Executive Officer's Review
Sales Strategy
Our sales strategy remains reassuringly consistent and straight forward as we
look to drive greater share of wallet in existing customers and acquire new
customers. Our gross invoiced income performance was broad-based again last
year, growing by 29.4% and reflecting significant market share gains. All of
our key sales segments grew revenue by more than 15% and we were delighted to
be awarded CRN's Public Sector VAR of the Year for the third year running.
Market data from Context, an industry research body, suggests we outgrew the
market by over three times.
We were able to effectively navigate the ongoing hardware supply chain
challenges throughout the year. More recently there is some evidence that the
supply chain situation is improving, at least for end user devices, although
shortages on some storage and networking hardware lines look set to continue
well into the new year.
Gross profit growth was also very strong at 18.4% and we were pleased to
convert 41.6% of our gross profit to operating profit. This conversion was a
little ahead of our expectations and operating profit growth overall stood at
14.0%.
We are a customer-led organisation and continue to listen to feedback and
adjust our portfolio of technology and services accordingly. Our annual
customer engagement survey, completed by a larger set of customers than ever
before, delivered very positive results with an NPS of 55 (2021: 59) and
demonstrating improvements in every category. This was despite the backdrop of
industry-wide supply chain challenges and the implementation of our own new
finance system.
We have the largest commercial team in the UK market and continue to invest
heavily in both salespeople and supporting roles. We are always looking at
ways to improve and have a number of initiatives in play including 'Elevate',
our new sales training and development programme. We are also looking at ways
we can use internal and external data to augment sales activities and
accelerate sales and the acquisition of new customers.
Customer number growth was 2.1% and we continue to leverage the insights from
engagements across our nearly 10,000-strong customer base to deliver high
quality solutions and drive further investment and support from our vendor
partners. Gross profit per customer, one of our most important metrics, grew
by 16.1% in the year as we continued to focus on delivering high quality
service and solutions for both existing and new customers. We remain very
excited about the opportunity we have in our core markets for further share
gains, and in 2023 we will open a further office in Newcastle which will offer
career development opportunities for some of our people, extend our
recruitment reach and bring us closer to local customers.
We are very pleased with the progress we have been making on our
multi-national business, where we look to support the international needs of
our UK and Irish customers. Our opening of a series of international branches,
including an office in the US, are entirely customer-led and have augmented
our sales growth by driving wallet share gains with existing customers and
attracting new ones.
Our business is broad-based from both a technology and customer vertical
perspective which provides resilience to any pockets of weakness in demand.
Our market-leading organic growth enables continued investment and this
strength relative to our competition brings opportunities to hire new talent
and expertise as well as gain customers. We have less than 5% of a growing
market and continue to be excited by the opportunity ahead.
We have seen similar patterns in our customers' consumption from the previous
year. They continue to invest in IT infrastructure to support their growth
ambitions and to remain competitive and productive. Their need to be secure,
support their flexible working policies and deliver on and off-premises
storage and compute solutions to their businesses are greater than ever.
Customers continue to invest in digital transformations, and we are seeing
increasing needs for connectivity, collaboration, IT asset management and
cloud adoption.
We recognise that the UK economy is currently experiencing significant
volatility and uncertainty, particularly in relation to interest rates and
foreign currency exchange. These factors have the potential to impact our
trading and operational activity, but our experience suggests demand for IT
infrastructure is robust even in extreme circumstances. The breadth of our
solutions and services means we are very well placed to deliver on our
customers' needs in such changing and challenging times.
People and Culture
Our culture remains as strong as ever and we emerged from the pandemic in very
positive fashion. We have transitioned well into the world of flexible working
and have empowered our people to do the right thing for themselves personally
and for our business. We have created a good rhythm of balancing remote and
office working whilst maintaining the highest levels of internal and external
customer service levels. We remain focused on giving our new employees the
best possible start to their Softcat career and continue to prioritise the
importance of face-to-face customer and vendor interactions. Our word of the
year for the new financial year is 'Connect' and getting our people together
with each other, our vendors, customers and other partners remains a
fundamental element of building successful relationships.
In a really tough talent market, we continued to be resolutely focussed on
investing in and growing our employee base and, as a result, were able to
increase headcount by 14.3%. For the new financial year we announced a series
of fixed pay adjustments and provided a clearer link between pay,
responsibility, and career progression in sales. We are pleased with the
profoundly positive impact these changes have already made to recruitment and
retention.
Our learning and development initiatives continue to bear fruit and we are
delighted with the number of employees going through our various programmes
including the Sales Development Programme, the Specialist Acceleration
Programme, our Tech Starter programme and various management modules.
We are delighted to have recently held our first face-to-face Kick Off event
for three years which was a great success and very motivating for the 1,900
employees that attended. We are also looking forward to the re-instatement of
our Partner Forum and Charity Ball events later in the year.
Our annual employee satisfaction poll is the most important survey in any
given year. Being the best possible place to work is very important to us to
attract great talent into the business, to retain that same talent as they
grow and develop and to always provide an outstanding customer service. We are
pleased to report our employee NPS at 52 as surveyed in October 2021 (FY2021:
58), clearly demonstrating that despite our growth we continue to maintain our
strong culture and have a highly motivated and engaged workforce. Our
employees reported that they were particularly happy with the culture, our
approach to remote working, wellbeing and our community network groups.
As announced on 12(th) July 2022, I will be stepping up to the Chair role at
the end of the current financial year and Graham Charlton will become CEO.
These changes, effective 1(st) August 2023, are a result of a considered
selection process and represent the orderly execution of a carefully developed
succession plan. We have also begun a process to appoint a new CFO and a
clear transition plan is in place to ensure there is no disruption to the
leadership and running of the business.
Ease of doing business
During the year we successfully implemented a new finance system which gives
us a platform to deliver further growth, be more productive and provides a
basis upon which to implement a strategy for the digital age, to support our
customers with new offerings and to address the challenges of adopting
multi-cloud and consumption-based technology.
We will also aim to capitalise on the new data storage and management
infrastructure, created alongside the development of the finance system, to
augment our sales capabilities. Further system developments are also planned,
including a major upgrade of our service management system which is likely to
begin in the second half.
Addressable market
We are very pleased to have opened a small US office in Arlington, Virginia.
The team there is focused on delivering local sales and support to customers
with whom we have a relationship in the UK and Ireland. As well as delivering
more business to existing customers we think that over time, we will be able
to attract new UK and Irish customers who have needs in North America as well
as take on North American customers with international operations. This
presence in the US will enable us to better understand that market, providing
insights that will benefit our wider operations and inform future strategy.
We will continue to monitor inorganic expansion opportunities too, both the
possibility of entering a new market or to add emerging capabilities in our
core domestic UK market.
Diversity, Inclusion and Sustainability
Our word of the year was community, and it has been really pleasing to see so
many employees getting involved in our, now seven, community network groups.
We have made further progress this year with over 1,000 employees
participating in our Allyship programme and we were very pleased to be ranked
4th in the UK's Great Places to Work for Women. From a gender diversity
perspective, we are getting very close to our first stage target of 35% women
in the business, well ahead of schedule, and we would be very pleased to raise
this bar to a new target next year. We continue to work hard to achieve
greater diversity in our leadership team and are aiming for this to be
representative of the of the company as a whole.
Despite being unable to hold our annual Charity Ball again in 2022, we were
delighted that our teams across the company were able to raise more than
£96,000 for charitable causes.
With carbon reduction high on our agenda, Softcat has made environmental
sustainability a core element of our business strategy. We are committed to
helping develop a more efficient industry, pledging to become carbon net-zero
across scopes 1,2 and operational scope 3 by 2030 and have a net-zero value
circle by 2040. We have been pleased with the initial adoption of Enexo
(https://www.enexo.io/introduction/welcome/) , our in-house developed carbon
emissions reporting platform, which launched this year and enables
organisations to quantify, monitor and plan reduction strategies for their
emissions. We now have over 150 users from 120 customers and partners taking
advantage of the value this platform offers. We are delighted that the Science
Based Targets initiative (https://sciencebasedtargets.org/faqs) (SBTi) has
officially approved our targets to take urgent climate action and contribute
to halting the rise in global temperatures. We are the first IT company in
Europe to receive this and one of only 35 companies in the world to have
their net-zero targets approved by the SBTi. This is a significant
achievement especially as only six companies, across all sectors, in the UK
have had their targets approved. Finally, we were awarded the Tech
Sustainability Partner of the Year at both of the two recent main industry
awards: CRN (for the second year in a row) and Candefero (on an EMEA-wide
basis), recognising the industry leadership we are generating in this space.
In addition, we continue to work towards full compliance with new TCFD
disclosures.
Chief Financial Officer's Review
Financial Summary (restated) FY22 FY211 Growth
Revenue £1,077.9m £784.0m 37.5%
Revenue split
Software £150.0m £128.4m 16.8%
Hardware £797.9m £556.5m 43.4%
Services £130.0m £99.1m 31.2%
Gross invoiced income (GII) £2,507.5m £1,938.4m 29.4%
GII split
Software £1,365.3m £1,109.2m 23.1%
Hardware £810.2m £566.3m 43.1%
Services £332.0m £262.9m 26.2%
Gross profit (GP) £327.2m £276.4m 18.4%
Gross profit margin 30.4% 35.2% (4.8)% pts
Operating profit £136.1m £119.4m 14.0%
Operating profit margin 12.6% 15.2% (2.6)% pts
Gross profit per customer2 £33.0k £28.4k 16.1%
Customer base3 9.9k 9.7k 2.1%
Cash conversion 76.2% 89.9% (13.7)% pts
1 The prior year financial comparatives have been restated where relevant in
line with the change in accounting policy - IFRS 15 Revenue from Contracts
with Customers, treatment of Software revenue as agent revenue. Further
information can be found in Note 2.
2 Gross profit per customer is defined as GP divided by the customer base.
3 Customer base is defined as the number of customers who have transacted with
Softcat in both of the preceding twelve-month periods.
Gross profit, revenue and gross invoiced income
Gross profit (GP), our primary measure of income, grew by 18.4% to £327.2m,
reflecting strong growth in both the first and second halves of the financial
year. Customer demand was robust and consistent, with double-digit gross
invoiced income (GII) and GP growth generated across each of software,
hardware and services.
Revenue was up 37.5% due to a strong performance across all areas of
technology, with each of software, hardware and services growing in excess of
15%. The application of IFRS 15 to revenue was amended during the year in
response to a clarification issued by the IFRS Interpretation Committee.
This is detailed in note 2 but, in summary involves a switch from recognising
some elements of software income on a gross basis as if Softcat were principal
in the transaction, to recognising all software income streams on a net basis
with Softcat acting as an agent to the transaction. As a result, revenue
figures for 2021 have been restated in line with this new treatment.
We continue to report GII, which is unaffected, alongside revenue as taken
together this allows a fuller understanding of commercial profit margins and
cash flow dynamics.
GII grew by 29.4%, ahead of the 18.4% expansion in GP due mainly to a series
of large, low-margin hardware projects completed with a major customer.
Hardware comprised 32.3% of total GII, up from 29.2% in the prior year.
Overall performance was once again very well diversified, with each area of
technology and each customer segment delivering growth in both GII and GP.
The large hardware projects with the major customer comprised mainly
datacentre projects, but we saw very strong performance across the customer
base in networking, security and workplace technologies too. Double-digit
growth was delivered in both GII and GP from the public sector, enterprise and
mid-market customer segments. Growth was strongest in mid-market which
comprised 46.6% GII in the period, up from 43.3% in the prior year. Growth
in GII from enterprise customers was 27.2% and public sector delivered 19.4%
growth in GII for the second year in a row; a very similar rate of expansion
to that seen in the prior year.
Customer KPIs
During the year average GP per customer grew by 16.1% to £33.0k (2021:
£28.4k) and the customer base increased to 9,922, up 2.1% on the prior year.
Despite this further strong progress and being confirmed as the largest
reseller in the UK by CRN, our industry remains highly fragmented. Our
latest estimates, based on multiple industry sources including CRN and
Gartner, suggest we have less than a five percent share of total addressable
market value. This comprises a trading relationship with c.20% of potential
customers with whom we have an average share of wallet of c.20-25%. As a
result, we continue to have a fantastic opportunity for future growth by
continuing to concentrate on our simple strategy of seeking to sell deeper
into existing accounts by building trust and loyalty over time, while
gradually expanding our customer base year on year.
Operating profitability and investment in future growth
Total operating costs for the year were up 21.7% reflecting headcount growth
of 14.3% and the return of events and travel costs during the second half of
the year. The post-pandemic restart of these activities is a significant
boost to our operations, comprising as they do a material element of our
business culture and enabling us to deepen our interaction with customers.
Headcount growth of 14.3% reflects our ongoing investment across all areas of
the business, both in building scale and capacity to our sales operations as
well as expanding our technical capabilities. We continue to recruit
contemporary skills across the full range of infrastructure specialisms,
including for example security and cloud services.
As a result of our headcount investment and the return of events and travel
costs our operating to GP margin fell slightly year on year to 41.6% (2021:
43.2%). This is expected to reduce again in the year ahead reflecting the
annualisation of the headcount investment and the normalisation of event
related costs in the first half. This is expected to then increase in H2
following the anniversary of the end of lockdown restrictions in March 2023.
Corporation tax charge
The effective tax rate for 2022 was 18.9% (2021: 19.2%), reflecting a stable
UK statutory rate of 19.0% in both years, together with the relatively
marginal impact of non-deductible expenses and share based payment
transactions. Our tax strategy continues to be focussed on paying the right
amount of tax in the right jurisdiction, at the right time.
Cash and balance sheet
Cash conversion, defined as cash flow from operations before tax but after
capital expenditure, as a percentage of operating profit, was 76.2% (2021:
89.9%). The reduction on prior year reflects a transient expansion in
year-end trade receivables following the implementation in the fourth quarter
of a new finance system. Whilst successful, the system implementation
created some temporary disruption to collection procedures, but this is
expected to return to normal during the first half of the new year with
collections already strengthening in August and September.
Dividend
A final ordinary dividend of 16.6p per share has been recommended by the
Directors and if approved by shareholders will be paid on 19 December 2022.
The final ordinary dividend will be payable to shareholders whose names are on
the register at the close of business on 11 November 2022. Shares in the
Company will be quoted ex-dividend on 10 November 2022. The last day for
dividend reinvestment plan ('DRIP') elections to be received is 28 November
2022.
In line with the Company's stated intention to return excess cash to
shareholders a further special dividend payment of 12.6p has been proposed.
This has been calculated to increase the minimum cash holding of the business
from £45m to £60m and is due to the significant increase in GII since this
was last adjusted in 2020. If approved this will also be paid on 19 December
2022 alongside the final ordinary dividend. This will bring the total amount
returned to shareholders since becoming a public company to £401.2m.
Alternative Performance Measures
The Company uses two non-Generally Accepted Accounting Practice (non-GAAP)
financial measures in addition to those reported in accordance with IFRS. The
Directors believe that these non-GAAP measures, set out below, assist in
providing additional useful information on the underlying trends, sales
performance and position of the Company.
Consequently, non-GAAP measures are used by the Directors and management for
performance analysis, planning and reporting and have remained consistent with
the prior year. These non-GAAP measures comprise gross invoiced income (or
'GII') and cash conversion.
1. Gross invoiced income is a measure which correlates closely to the
cash received by the business and therefore aids the users understanding of
working capital movements in the statement of financial position and the
relationship to sales performance and the mix of products sold. Gross invoiced
income reflects gross income billed to customers adjusted for deferred and
accrued revenue as reported in the IFRS measure. A reconciliation of IFRS
Revenue to gross invoiced income is provided within note 2 of the financial
statements.
2. Cash conversion ratio is cash flow from operations, net of capital
expenditure, as a percentage of operating profit. A reconciliation to the
adjusted measure for cash conversion is provided below:
2022 2021
£'000 £'000
Cash generated from operations 108,988 113,797
Purchase of property, plant and equipment (1,890) (2,265)
Purchase of intangible assets (3,334) (4,199)
Cash generated from operations, net of capital expenditure 103,764 107,333
Operating Profit 136,145 119,416
Cash conversion ratio 76.2% 89.9%
Principal Risks and Uncertainties
The principal and emerging risks facing the Company have been identified and
evaluated by the Board. In summary, principal risks include:
Risk Potential impacts Management & mitigation
BUSINESS STRATEGY
Customer dissatisfaction · Reputational damage · Graduate training programme
(no change in net risk) · Loss of competitive advantage · Ongoing vendor training for sales staff
· Annual customer survey with detailed follow-up on negative
responses
· Process for escalating cases of dissatisfaction to MD & CEO
Failure to evolve our technology offering with changing customer needs · Loss of customers · Processes in place to act on customer feedback about new
technologies
(no change in net risk) · Reduced profit per customer
· Training and development programme for all technical staff
· Regular business reviews with all vendors
· Sales specialist teams aligned to emerging technologies to
support general account managers
· Regular specialist and service offering reviews with senior
management
OPERATIONAL
Cyber and data security, including GDPR compliance · Inability to deliver customer services · Company-wide information security policy
(no change in net risk) · Reputational damage · Appropriate induction and training procedures for all staff
· Financial loss · External penetration testing programme undertaken
· ISO 27001 accreditation
· In-house technical expertise
· All employees issued with corporate devices with standardised
access monitoring and controls
Business interruption · Customer dissatisfaction · Operation of back-up operations centre and data centre platforms
(no change in net risk) · Business interruption · Established processes to deal with incident management, change
control, etc.
· Reputational damage
· Continued investment in operations centre management and other
· Financial loss resources
· Ongoing upgrades to network
· Regular testing of Disaster Recovery plans and business
continuity plans
Macro-economic factors including the conflict in Ukraine, inflationary · Short-term supply chain disruption · Close dialogue with supply-chain partners
pressures, interest and foreign currency volatility
· Reduced margins · Customer-centric culture
(slight increase due to ongoing external factors outside of the Company's
control) · Reduced customer demand · Breadth of proposition and customer base
· Reduced profit per customer · Additional customer credit review processes introduced
· Higher operating costs · Focus and resources allocated to cash collection procedures
· Customer insolvencies and cash collection challenges · Customer base is well diversified in terms of both revenue
concentration but also public and commercial sector exposure
· Operating costs are budgeted and reviewed regularly
FINANCIAL
Profit margin pressure including rebates · Reduced margins · Ongoing training to sales and operations team to keep pace with
new vendor programmes
(no change in net risk)
· Rebate programmes are industry standard and not specific to the
Company
· Rebates form an important but only minority element of total
operating profits
PEOPLE
Culture change · Reduced staff engagement · Culture embedded in the organisation over a long history
(no change in net risk) · Negative impact on customer service · Branch structure with empowered local management
· Loss of talent · Quarterly staff satisfaction survey with feedback acted upon
· Regular staff events and incentives
· Enhanced internal communication processes and events
Poor leadership · Lack of strategic direction · Succession planning process
(no change in net risk) · Deteriorating vendor relationships · Experienced and broad senior management team
· Reduced staff engagement
Climate change
In our consideration of emerging risks, climate change continues as an area
requiring greater analysis. During the year, we started a formal assessment
of the potential impact of climate change to our business and supply chain.
Our analysis will support more comprehensive evaluation and reporting in line
with the approach of the Task Force on Climate-related Financial Disclosures
('TCFD'). Climate change is already a component of the failure to evolve our
offering risk with regards to the products and services our customers consume
and how they might be affected by the drive towards carbon neutrality. We also
have robust business interruption plans in the event of a disruption to our
business. Our initial analysis suggests that no other climate change-related
risk is a principal risk which needs to be incorporated into the above.
Going Concern
Overview
In considering the going concern basis for preparing the financial statements,
the Directors consider the Company's objectives and strategy, its principal
risks and uncertainties in achieving its objectives and its review of business
performance and financial position, which are all set out in the Strategic
Report (see pages 1 to 64 of the Annual Report) and Chief Financial Officer's
review sections (see pages 32 and 33) of the Annual Report. Given the current
macro-economic environment and considering the latest guidance issued by the
FRC the Directors have undertaken a fully comprehensive going concern review.
The Company has modelled three scenarios in its assessment of going concern.
These are:
• The base case;
• The severe but plausible case; and
• The reverse stress test case.
Further details, including the analysis performed and conclusion reached, are
set out below.
The Directors have reviewed detailed financial forecasts for a thirteen-month
period from the date of this report (the going concern period) until 30
November 2023. All the forecasts reflect the payment of the FY22 dividend of
£58.2m which will be paid in December 2022 subject to approval at the AGM.
The Company operates in a resilient industry. Our UK Corporate customer base
spend is increasingly non-discretionary as IT continues to be vital to gain
competitive advantage in an increasingly digital age. Public Sector, a large
and fast-growing area of the business, continues to invest in technology to
provide efficient services to the public and this has continued apace despite
the pandemic and recent turbulence in the UK economy. The Company strategy
remains unchanged and will continue to focus on increasing the customer base
and spend per customer during the going concern period.
Liquidity and financing position
At 31 July 2022, the Company held instantly accessible cash and cash
equivalents of £97.3m, while net current assets were £190.7m. Note 21 to the
financial statements in the Annual Report includes the Company's objectives,
policies and processes for managing its capital, its financial risk management
and its exposures to credit risk and liquidity risk. Operational cash flow
forecasts for the going concern period are sufficient to support the business
with the £60m cash floor set by the Board not being breached.
There is a sufficient level of liquidity headroom post mitigation across the
going concern forecast period in base and severe but plausible scenarios
considered and outlined in more detail below.
Challenging economic environment
Management have, in all three scenarios, considered the principal challenges
to short term business performance which are expected to be;
· An economic downturn in the UK economy, aided by high broad-based
inflation and increasing interest rates;
· Continued impact of hardware supply constraints, resulting from
the global semi-conductor shortage, although this is forecast to improve and
is isolated to a select few vendors; and
· Higher risk of credit losses
Despite the impact of Omicron and further lockdown period on the year just
finished, the Company has traded well, delivering double-digit year-on-year
growth. The Board continue to monitor the global and national economic
environment and organise operations accordingly.
Base case
The base case, which was approved by the Board in October 2022, takes into
account the FY23 budget process which includes estimated growth and increased
cost across the going concern period and is consistent with the actual trading
experience through to September 2022. The key inputs and assumptions in the
base case include:
· Continued revenue growth in line with historic rates;
· rebate income continues to be received in proportion to cost of
sales as in FY22;
· employee commission is incurred in line with the gross margin;
and
· increased levels of cost to reflect continued investment in our
people, the businesses IT infrastructure as well as a return of travel and
staff entertainment costs more in line with pre-covid levels than we have seen
in the past twelve months.
The Company has taken a measured approach to the base case and has balanced
the expected trading conditions with available opportunities in an
increasingly resilient area of customer spend, which is supported by the
current financial position. In making our forecasts we balanced our customer
needs alongside employee welfare. We have in place a hybrid working model with
a balance of remote working and return to the office, which has not had a
noticeable impact on the operational performance of the Company. Year to date
trading to the end of September 2022 is consistent with the base case
forecast.
Severe but plausible case
Given the current economic challenges facing our customer base and supply
chain, we have modelled a severe but plausible scenario. In this case we have
modelled a decline in revenue, versus the base case, which is below any
historic trend and more severe than experienced during the height of the
pandemic. Further impacts of this scenario such as reduced margins and
greater credit losses have also been considered.
The key inputs and assumptions include:
• an average 7.5% reduction in revenue, compared to the base case;
• reduced gross profit margins of 1% in the period;
• additional bad debt write offs of £5m across the forecast
period;
• extending the debtor days from historic levels achieved and no
change to historic supplier payment days;
• paying a reduced interim dividend in line with lower
profitability but still within the range set out in the dividend policy; and
• both commission cost and rebate income adjusted downwards in
line with reduced profitability and cost of sales, but at the same percentage
rates as in the base case.
The purpose of this scenario was to consider if there was a significant risk
that the Company would move to being cash negative in any of the months in the
going concern period. Even at these lower levels of activity, which the
Directors believe is a highly unlikely outcome, the Company continues to be
profitable, and maintains a positive cash balance at all times. Despite this,
management have modelled further cost saving and working capital action (see
mitigating actions) that will enable the Company to mitigate the impact of
reduced cash generation further and achieve the Boards desired minimum cash
position, should this scenario occur. The Directors are confident that they
can implement these actions if required.
Mitigating actions
There are several potential management actions that have not been included in
the severe but plausible forecast and it is estimated that the total cash
impact of these actions is in excess of a £18m cost reduction on an
annualised basis and additional annual working capital savings of £30m,
before considering the cost of delivering them and the point at time at which
they were delivered. The actions which if implemented would offset the reduced
activity:
· bonus costs scaled back in line with performance;
· no interim dividend in H2 of FY23;
· savings in discretionary areas of spend;
· delayed payment to suppliers foregoing early settlement discount;
and
· short term supplier payment management.
The mitigations are deemed achievable and reasonable as the Company benefits
from a flexible business model with a high proportion of costs linked to
performance.
Reverse stress test
The Directors have performed a reverse stress test exercise to see how extreme
conditions would need to be for the Company to become cash negative within a
twelve-month period. The conditions go significantly further than the severe
but plausible scenario and reflect a scenario that the business consider
remote. The four combined stresses modelled are as follows:
· reduction of 15% in Gross invoiced income, compared to the base
case;
· reduced achievable gross margin by 3%;
· additional bad debt write offs of £10m per year across the
forecast period; and
· extending the debtor days by three days from historic levels
achieved and no change to historic supplier payment days.
All four inputs are greater than the business has ever experienced in its
history. In the modelled scenario, prior to mitigations, the business could
become cash negative within twelve months.
Whilst the Board considers such a scenario to be extremely remote a programme
of further actions to mitigate the impact, in excess of those set out above,
would be actioned should the likelihood of such a scenario increase. The Board
considers the forecasts and assumptions used in the reverse stress test, as
well as the event that could lead to it, to be extremely remote.
Going concern conclusion
Based on the forecast and the scenarios modelled, together with the
performance of the Company to date, the Directors consider that the Company
has significant liquidity headroom to continue in operational existence for
twelve months post the date of this report. Accordingly, at the October 2022
Board meeting, the Directors concluded from this analysis it was appropriate
to continue to adopt the going concern basis in preparing the financial
statements. Should the impact of these conditions be even more prolonged or
severe than currently forecast by the Directors under the severe but plausible
case scenario, the Company would need to implement additional operational or
financial measures.
Cautionary Statement
This preliminary announcement has been prepared solely to provide additional
information to shareholders to assess the Company's strategies and the
potential for those strategies to succeed. The preliminary announcement should
not be relied on by any other party or for any other purpose.
In making this preliminary announcement, the Company is not seeking to
encourage any investor to either buy or sell shares in the Company. Any
investor in any doubt about what action to take is recommended to seek
financial advice from an independent financial advisor authorised by the
Financial Services and Markets Act 2000.
Statement of Directors' responsibilities in relation to the financial
statements
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable United Kingdom law and
regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have elected to prepare the
Company's financial statements in accordance with UK-adopted international
accounting standards ('IFRSs').
Under company law the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Company and of the profit or loss of the Company for that
period.
In preparing these financial statements the directors are required to:
· select suitable accounting policies in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors and then apply
them consistently;
· make judgements and accounting estimates that are reasonable and
prudent;
· present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable information;
· provide additional disclosures when compliance with the specific
requirements in IFRSs is insufficient to enable users to understand the impact
of particular transactions, other events and conditions on the Company's
financial position and financial performance;
· state that UK-adopted international accounting standards have
been followed, subject to any material departures disclosed and explained in
the financial statements; and
· prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will continue in
business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the Company financial statements comply with the
Companies Act 2006. They are also responsible for safeguarding the assets of
the Company and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a strategic report, directors' report, directors' remuneration
report and corporate governance statement that comply with that law and those
regulations. The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the Company's website.
Fair and balanced reporting
Having taken advice from the Audit Committee, the Board considers the Annual
Report and Accounts, taken as a whole, is fair, balanced and understandable
and that it provides the information necessary for shareholders to assess the
Company's position and performance, business model and strategy.
Responsibility statement pursuant to FCA's Disclosure Guidance and
Transparency Rule 4 (DTR 4)
Each Director of the Company confirms that (solely for the purpose of DTR 4)
to the best of his or her knowledge:
· the financial statements, prepared in accordance with UK-adopted
international accounting standards give a true and fair view of the assets,
liabilities, financial position and profit of the Company;
· the Annual Report, including the Strategic Report, includes a
fair review of the development and performance of the business and the
position of the Company, together with a description of the principal risks
and uncertainties that they face; and
· they consider the Annual Report, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the Company's position, performance, business model and
strategy.
Statement of Profit or Loss and Other Comprehensive Income
For the year ended 31 July 2022
2022 2021*
£'000 £'000
Note
Revenue 3 1,077,946 784,049
Cost of sales (750,736) (507,691)
Gross profit 327,210 276,358
Administrative expenses (191,065) (156,942)
Operating profit 136,145 119,416
Finance income 252 28
Finance cost (253) (477)
Profit before taxation 136,144 118,967
Income tax expense 4 (25,739) (22,782)
Profit for the year 110,405 96,185
Foreign exchange differences on translation of foreign branches 3,562 -
3,562 -
Total comprehensive income for the year 113,967 96,185
110,405 96,185
Profit attributable to:
Owners of the Company
Total comprehensive income attributable to: 113,967 96,185
Owners of the Company
10 55.5 48.4
Basic earnings per ordinary share (pence)
Diluted earnings per ordinary share (pence) 10 55.3 48.2
All results are derived from continuing operations.
*The prior year financial comparatives have been restated where relevant in
line with the change in accounting policy - IFRS 15 Revenue from Contracts
with Customers, treatment of Software revenue as agent revenue. Further
information can be found in Note 2.
Statement of Financial Position
As at 31 July 2022
2022 2021
£'000 £'000
Note
Non-current assets
Property, plant and equipment 11,270 11,753
Right-of-use-assets 6,162 7,022
Intangible assets 7,978 5,202
Deferred tax asset 2,508 3,149
27,918 27,126
Current assets
Inventories 6 5,104 38,411
Trade and other receivables 7 541,424 329,666
Income tax receivable 296 432
Cash and cash equivalents 97,316 101,724
644,140 470,233
Total assets 672,058 497,359
Current liabilities
Trade and other payables 8 (419,108) (293,528)
Contract liabilities 9 (31,564) (12,759)
Lease liabilities (2,716) (2,598)
(453,388) (308,885)
Non-current liabilities
Contract liabilities 9 (3,620) (3,626)
Lease liabilities (3,950) (5,704)
(7,570) (9,330)
Total liabilities (460,958) (318,215)
Net assets 211,100 179,144
Equity
Issued share capital 12 100 100
Share premium account 4,979 4,979
Reserves for own shares - -
Foreign exchange translation reserve 3,562 -
Retained earnings 202,459 174,065
Total equity 211,100 179,144
Statement of Changes in Equity
For the year ended 31 July 2022
Share Share Translation Reserves Retained Total equity
capital premium reserve for own earnings
shares
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 1 August 2020 100 4,979 - - 135,668 140,747
Total comprehensive income for the year - - - - 96,185 96,185
Share-based payment transactions - - - - 2,267 2,267
Dividends paid - - - - (60,815) (60,815)
Dividend equivalents paid - - - - (196) (196)
Tax adjustments - - - - 1,117 1,117
Other - - - - (161) (161)
Balance at 31 July 2021 100 4,979 - - 174,065 179,144
Balance at 1 August 2021 100 4,979 - - 174,065 179,144
Profit for the period - - - - 110,405 110,405
Impact of foreign exchange reserves - - 3,562 - - 3,562
Total comprehensive income for the year - - 3,562 - 110,405 113,967
Share-based payment transactions - - - - 2,541 2,541
Dividends paid - - - - (84,020) (84,020)
Dividend equivalents paid - - - - (215) (215)
Tax adjustments - - - - (317) (317)
Other - - - - - -
Balance at 31 July 2022 100 4,979 3,562 - 202,459 211,100
Statement of Cash Flows
For the year ended 31 July 2022
2022 2021
£'000 £'000
Note
Net cash generated from operating activities 11 83,644 91,252
Cash flows from investing activities
Finance income 252 28
Purchase of property, plant and equipment (1,890) (2,265)
Purchase of intangible assets (3,334) (4,199)
Net cash used in investing activities (4,972) (6,436)
Cash flows from financing activities
Issue of share capital - -
Dividends paid 5 (84,020) (60,815)
Payment of principal portion of lease liabilities (2,369) (2,125)
Payment of interest portion of lease liabilities (253) (291)
Net cash used in financing activities (86,642) (63,231)
Net increase in cash and cash equivalents (7,970) 21,585
Exchange gains/losses on cash and cash equivalents 3,562 -
Cash and cash equivalents at beginning of year 101,724 80,139
Cash and cash equivalents at end of year 97,316 101,724
Notes to the Financial Information
1.1 General information
Softcat plc (the "Company") is a public limited company, incorporated and
domiciled in the UK. Its registered address is Fieldhouse Lane, Marlow,
Buckinghamshire, SL7 1LW.
The annual financial information presented in this preliminary announcement
does not constitute the Company's statutory accounts for the years ended 31
July 2022 or 2021 but is based on, and consistent with, that in the audited
financial statements for the year ended 31 July 2022, and those financial
statements will be delivered to the Registrar of Companies following the
Company's Annual General Meeting. The auditor's report on those financial
statements was unmodified, did not contain an emphasis of matter paragraph and
did not contain any statement under section 498(2) or (3) of the Companies Act
2006.
2. Accounting policies
2.1 Basis of preparation
These financial statements have been prepared in accordance with UK-adopted
international accounting standards (IFRS) in accordance with the requirements
of the Companies Act 2006. IFRS includes the application of International
Financial Reporting Standards ('IFRS') as issued by the International
Accounting Standards Board ('IASB') and the IFRS Interpretations Committee
('IFRIC') interpretations.
These financial statements have been prepared under the historical cost
convention and are presented in the Company's presentational and functional
currency of Pounds Sterling and all values are rounded to the nearest thousand
('£'000'), except when otherwise stated.
The Company applied all standards and interpretations issued by the IASB that
were effective as at 1 August 2021. The accounting policies set out below
have, unless otherwise stated (see below), been applied consistently to all
periods presented in these financial statements.
The potential climate change-related risks and opportunities to which the
Company is exposed, as identified by management, are disclosed in the
Company's TCFD disclosures in the annual report. Management has assessed the
potential financial impacts relating to the identified risks and exercised
judgement in concluding that there are no further material financial impacts
of the Company's climate related risks and opportunities on the financial
statements. These judgements will be kept under review by management as the
future impacts of climate change depend on environmental, regulatory and other
factors outside of the Company's control which are not all currently known.
Going Concern
Overview
In considering the going concern basis for preparing the financial statements,
the Directors consider the Company's objectives and strategy, its principal
risks and uncertainties in achieving its objectives and its review of business
performance and financial position, which are all set out in the Strategic
Report (see pages 1 to 64 of the Annual Report) and Chief Financial Officer's
review sections (see pages 32 and 33) of the Annual Report. Given the current
macro-economic environment and considering the latest guidance issued by the
FRC the Directors have undertaken a fully comprehensive going concern review.
The Company has modelled three scenarios in its assessment of going concern.
These are:
• The base case;
• The severe but plausible case; and
• The reverse stress test case.
Further details, including the analysis performed and conclusion reached, are
set out below.
The Directors have reviewed detailed financial forecasts for a thirteen-month
period from the date of this report (the going concern period) until 30
November 2023. All the forecasts reflect the payment of the FY22 dividend of
£58.2m which will be paid in December 2022 subject to approval at the AGM.
The Company operates in a resilient industry. Our UK Corporate customer base
spend is increasingly non-discretionary as IT continues to be vital to gain
competitive advantage in an increasingly digital age. Public Sector, a large
and fast-growing area of the business, continues to invest in technology to
provide efficient services to the public and this has continued apace despite
the pandemic and recent turbulence in the UK economy. The Company strategy
remains unchanged and will continue to focus on increasing the customer base
and spend per customer during the going concern period.
Liquidity and financing position
At 31 July 2022, the Company held instantly accessible cash and cash
equivalents of £97.3m, while net current assets were £190.7m. Note 21 to the
financial statements in the Annual Report includes the Company's objectives,
policies and processes for managing its capital, its financial risk management
and its exposures to credit risk and liquidity risk. Operational cash flow
forecasts for the going concern period are sufficient to support the business
with the £60m cash floor set by the Board not being breached.
There is a sufficient level of liquidity headroom post mitigation across the
going concern forecast period in base and severe but plausible scenarios
considered and outlined in more detail below.
Challenging economic environment
Management have, in all three scenarios, considered the principal challenges
to short term business performance which are expected to be;
· An economic downturn in the UK economy, aided by high broad-based
inflation and increasing interest rates;
· Continued impact of hardware supply constraints, resulting from
the global semi-conductor shortage, although this is forecast to improve and
is isolated to a select few vendors; and
· Higher risk of credit losses
Despite the impact of Omicron and further lockdown period on the year just
finished, the Company has traded well, delivering double-digit year-on-year
growth. The Board continue to monitor the global and national economic
environment and organise operations accordingly.
Base case
The base case, which was approved by the Board in October 2022, takes into
account the FY23 budget process which includes estimated growth and increased
cost across the going concern period and is consistent with the actual trading
experience through to September 2022. The key inputs and assumptions in the
base case include:
· Continued revenue growth in line with historic rates;
· rebate income continues to be received in proportion to cost of
sales as in FY22;
· employee commission is incurred in line with the gross margin;
and
· increased levels of cost to reflect continued investment in our
people, the businesses IT infrastructure as well as a return of travel and
staff entertainment costs more in line with pre-covid levels than we have seen
in the past twelve months.
The Company has taken a measured approach to the base case and has balanced
the expected trading conditions with available opportunities in an
increasingly resilient area of customer spend, which is supported by the
current financial position. In making our forecasts we balanced our customer
needs alongside employee welfare. We have in place a hybrid working model with
a balance of remote working and return to the office, which has not had a
noticeable impact on the operational performance of the Company. Year to date
trading to the end of September 2022 is consistent with the base case
forecast.
Severe but plausible case
Given the current economic challenges facing our customer base and supply
chain, we have modelled a severe but plausible scenario. In this case we have
modelled a decline in revenue, versus the base case, which is below any
historic trend and more severe than experienced during the height of the
pandemic. Further impacts of this scenario such as reduced margins and
greater credit losses have also been considered.
The key inputs and assumptions include:
• an average 7.5% reduction in revenue, compared to the base case;
• reduced gross profit margins of 1% in the period;
• additional bad debt write offs of £5m across the forecast
period;
• extending the debtor days from historic levels achieved and no
change to historic supplier payment days;
• paying a reduced interim dividend in line with lower
profitability but still within the range set out in the dividend policy; and
• both commission cost and rebate income adjusted downwards in
line with reduced profitability and cost of sales, but at the same percentage
rates as in the base case.
The purpose of this scenario was to consider if there was a significant risk
that the Company would move to being cash negative in any of the months in the
going concern period. Even at these lower levels of activity, which the
Directors believe is a highly unlikely outcome, the Company continues to be
profitable, and maintains a positive cash balance at all times. Despite this,
management have modelled further cost saving and working capital action (see
mitigating actions) that will enable the Company to mitigate the impact of
reduced cash generation further and achieve the Boards desired minimum cash
position, should this scenario occur. The Directors are confident that they
can implement these actions if required.
Mitigating actions
There are several potential management actions that have not been included in
the severe but plausible forecast and it is estimated that the total cash
impact of these actions is in excess of a £18m cost reduction on an
annualised basis and additional annual working capital savings of £30m,
before considering the cost of delivering them and the point at time at which
they were delivered. The actions which if implemented would offset the reduced
activity:
· bonus costs scaled back in line with performance;
· no interim dividend in H2 of FY23;
· savings in discretionary areas of spend;
· delayed payment to suppliers foregoing early settlement discount;
and
· short term supplier payment management.
The mitigations are deemed achievable and reasonable as the Company benefits
from a flexible business model with a high proportion of costs linked to
performance.
Reverse stress test
The Directors have performed a reverse stress test exercise to see how extreme
conditions would need to be for the Company to become cash negative within a
twelve-month period. The conditions go significantly further than the severe
but plausible scenario and reflect a scenario that the business consider
remote. The four combined stresses modelled are as follows:
· reduction of 15% in Gross invoiced income, compared to the base
case;
· reduced achievable gross margin by 3%;
· additional bad debt write offs of £10m per year across the
forecast period; and
· extending the debtor days by three days from historic levels
achieved and no change to historic supplier payment days.
All four inputs are greater than the business has ever experienced in its
history. In the modelled scenario, prior to mitigations, the business could
become cash negative within twelve months.
Whilst the Board considers such a scenario to be extremely remote a programme
of further actions to mitigate the impact, in excess of those set out above,
would be actioned should the likelihood of such a scenario increase. The Board
considers the forecasts and assumptions used in the reverse stress test, as
well as the event that could lead to it, to be extremely remote.
Going concern conclusion
Based on the forecast and the scenarios modelled, together with the
performance of the Company to date, the Directors consider that the Company
has significant liquidity headroom to continue in operational existence for
twelve months post the date of this report. Accordingly, at the October 2022
Board meeting, the Directors concluded from this analysis it was appropriate
to continue to adopt the going concern basis in preparing the financial
statements. Should the impact of these conditions be even more prolonged or
severe than currently forecast by the Directors under the severe but plausible
case scenario, the Company would need to implement additional operational or
financial measures.
Accounting policies
The preliminary announcement for the year ended 31 July 2022 has been prepared
in accordance with the accounting policies as disclosed in Softcat plc's
Annual Report and Accounts 2022, as updated to take effect of any new
accounting standards applicable for the year.
Change in accounting policy - IFRS 15
The IFRS Interpretation Committee (IC) recently concluded on a response to an
industry request to clarify whether a company should recognise revenue from
the resale of standard software licenses on a gross or net basis under IFRS 15
- Revenue from Contracts with Customers. The fact pattern provided to the IC
was very similar to that faced by the Company when transacting software sales
with customers. Whilst not providing a direct clarification on the topic, as
they stated that the specifics of each case may vary and must be analysed in
detail, the IC provided further guidance on the "control" criteria which is
used to determine whether revenue is recognised on a principal or agent basis.
The staff paper, the published discussions within the IFRS IC and the ultimate
decision indicates, in managements view, support of revenue recognition on a
net basis.
Prior to this conclusion, Softcat recognised cloud-hosted and security
software revenue on a "net" basis, together with other lines of business where
its role is considered more aligned to that of a billing agent or introducer.
The remaining software lines of business were recorded on a "gross" basis.
However, this gross conclusion required significant judgement and consisted of
elements that were indicative of either net or agent treatment with the
ultimate conclusion being dependent on an assessment of the relative weighting
of the various factors.
The guidance provided by the IC set out the following factors that previously
aided the principal conclusion for software, specifically:
- The removal of pre-sales advice as an explicit or implicit promise
in a contract. Softcat did not previously consider pre-sales advice as a
separate performance obligation but factored these services into the
consideration of control of licenses.
- In the case of software products, there is no inventory risk before
the customer is provided with the licences, the risk arises after that point
until the customer accepts the licences.
- In the case of software products, the software manufacturer is
responsible for the software's functionality, in addition to issuing and
activating the licenses, and is therefore responsible in those respects for
fulfilling the promise to provide the licenses to the customer.
As a result of this guidance in favour of agent, the Company has amended its
finely balanced judgement in favour of principal (and gross) presentation and
concluded, considering the facts presented, that an accounting policy change
in favour of agent (and net) presentation should be adopted for all software
products that were previously recorded as principal and presented gross.
As prescribed in IAS 8, the business has applied this accounting policy change
retrospectively, so the prior year and current year are presented
consistently.
The impact of this change in accounting policy on the prior year financial
statements is as follows.
- Revenue and cost of sales would decrease by a further £372.6m on
top of the current IFRS 15 software adjustment net down; and
- Gross profit, operating profit, and profit before and after taxes
will be unchanged in all periods. The Statement of financial position,
Statement of cashflows and the Statement of changes in equity also remain
unchanged.
Revenue as reported under IFRS 15 Estimated increase in net down Revised revenue under IFRS 15
Year ended 31 July 2021 £'000 £'000 £'000
Software revenue 501,058 (372,618) 128,440
Balance at 1 August 2021 31 July 2021 As originally presented £'000 Impact of change of policy £'000 31 July 2021 as restated £'000
Revenue 1,156,667 (372,618) 784,049
Cost of Sales (880,309) 372,618 (507,691)
Gross Profit 276,358 - 276,358
Administrative expenses (156,942) - (156,942)
Operating Profit 119,416 - 119,416
Finance Income 28 - 28
Finance Cost (477) - (477)
Profit before tax 118,967 - 118,967
Income tax expense (22,782) - (22,782)
Profit and total comprehensive income for the year 96,185 96,185
Profit attributable to:
Owners of the company 96,185 206,919 96,185
3. Segmental information
The information reported to the Company's Chief Executive Officer, who is
considered to be the chief operating decision maker for the purposes of
resource allocation and assessment of performance, is based wholly on the
overall activities of the Company. The Company has therefore determined that
it has only one reportable segment under IFRS 8, which is that of "value-added
IT reseller and IT infrastructure solutions provider". The Company's revenue,
results and assets for this one reportable segment can be determined by
reference to the statement of profit or loss and other comprehensive income
and statement of financial position. An analysis of revenues and gross
invoiced income by product, which form one reportable segment, is set out
below:
Revenue by type
2022 2021
£'000 £'000
Software 150,000 128,440
Hardware 797,897 556,472
Services 130,049 99,137
1,077,946 784,049
Gross invoiced income by type
2022 2021
£'000 £'000
Software 1,365,343 1,109,198
Hardware 810,241 566,305
Services 331,953 262,937
2,507,537 1,938,440
The prior year revenue comparatives have been restated where relevant in line
with the change in accounting policy - IFRS 15 Revenue from Contracts with
Customers, treatment of Software revenue as agent revenue. Further
information has been included in the accounting policies.
Revenue and gross invoiced income can also be disaggregated by type of
business:
Revenue by type of business
2022 2021
£'000 £'000
Small and medium 535,823 471,076
Enterprise 222,064 164,468
Public sector 320,059 148,505
1,077,946 784,049
Gross invoiced income by type of business
2022 2021
£'000 £'000
Small and medium 1,169,255 839,398
Enterprise 427,249 336,013
Public sector 911,033 763,029
2,507,537 1,938,440
Gross invoiced income reflects gross income billed to customers adjusted for
deferred and accrued revenue items and is consistent with our previous
application of IAS 18. Softcat will continue to report gross invoiced income
as an alternative financial KPI as this is a measure which correlates closely
to the cash received by the business and therefore aids the users
understanding of working capital movements in the statement of financial
position and the relationship to sales performance and the mix of products
sold. The impact of IFRS 15 and principal versus agent consideration is an
equal reduction to both revenue and cost of sales.
During the period there was one direct customer (FY21: none) that individually
accounted for greater than 10% of both the Company's total revenue and gross
invoiced income, and a considerably lower proportion of Gross Profit. Gross
invoiced income and revenue generated from this customer in FY22 was £251.3m
and £227.5m respectively. (FY21 £80.3m and £74.2m).
Reconciliation of gross invoiced income to revenue
2022 2021
£'000 £'000
Gross invoiced income 2,507,537 1,938,440
Income to be recognised as agent under IFRS 15 (1,429,573) (1,154,391)
Revenue 1,077,964 784,049
The total revenue for the Company has been derived from its principal activity
as an IT reseller. Substantially all of this revenue relates to trading
undertaken in the United Kingdom.
4. Taxation
2022 2021
£'000 £'000
Current Tax
Current income tax charge in the year 25,979 22,909
Adjustment in respect of current income tax in previous years 52 80
Foreign tax effects 1 -
Deferred Tax
Temporary differences (293) (207)
Total tax charge for the year 25,739 22,782
5. Dividends
2022 2021
£'000 £'000
Declared and paid during the year:
Special dividend on ordinary shares (20.6p per share (2021: 7.6p)) 40,806 15,100
Final dividend on ordinary shares (14.4p per share (2021: 16.6p)) 28,663 32,981
Interim dividend on ordinary shares (7.3p per share (2021: 6.4p)) 14,551 12,734
84,020 60,815
A final dividend of 16.6p per share has been recommended by the Directors and
if approved by shareholders will be paid on 19 December 2022. The final
ordinary dividend will be payable to shareholders whose names are on the
register at the close of business on 11 November 2022. Shares in the Company
will be quoted ex-dividend on 10 November 2022. The dividend reinvestment plan
('DRIP') election date is 28 November 2022.
In line with the Company's stated intention to return excess cash to
shareholders, a further special dividend payment of 12.6p has been proposed.
If approved this will also be paid on 19 December 2022 alongside the final
ordinary dividend.
The Board recommends the final and special dividend for shareholders'
approval.
6. Inventory
2022 2021
£'000 £'000
Finished goods and goods for resale 5,104 38,411
The decrease in stock is predominantly driven by stock in transit for a
specific customer yet to be delivered as at the end of FY21 as well as timing
of the balance sheet date.
The amount of any write down of inventory recognised as an expense in the year
was £Nil (2021: £Nil).
7. Trade and other receivables
2022 2021
£'000 £'000
Trade and other receivables 497,308 300,058
Provision against receivables (4,958) (3,415)
Net trade receivables 492,350 296,643
Unbilled receivables 26,192 10,500
Prepayments 4,338 3,584
Accrued income 10,534 8,171
Deferred costs 8,010 10,768
541,424 329,666
8. Trade and other payables
2022 2021
£'000 £'000
Trade payables 280,769 220,305
Other taxes and social security 23,078 12,378
Accruals 115,261 60,845
419,108 293,528
9. Contract liabilities
Contract liabilities are comprised:
2022 2021
£'000 £'000
Deferred income 35,184 16,385
Deferred income is further broken down as: 2022 2021
£'000 £'000
Short term deferred income 31,564 12,759
Long term deferred income 3,620 3,626
35,184 16,385
10. Earnings per share
2022 2021
Pence Pence
Earnings per share
Basic 55.5 48.4
Diluted 55.3 48.2
The calculation of the basic and adjusted earnings per share and diluted
earnings per share is based on the following data:
2022 2021
£'000 £'000
Earnings
Earnings for the purposes of earnings per share being profit for the year 110,405 96,185
The weighted average number of shares is given below:
2022 2021
000's 000's
Number of shares used for basic earnings per share 198,976 198,559
Number of shares deemed to be issued at nil consideration following exercise 656 884
of share options
Number of shares used for diluted earnings per share 199,632 199,443
11. Notes to the cash flow statement
2022 2021
£'000 £'000
Cash flow from operating activities
Operating profit 136,145 119,416
Depreciation of property, plant and equipment 2,373 2,332
Depreciation of right-of-use assets 1,594 2,263
Amortisation of intangibles 558 297
Loss on disposal of fixed assets - 76
Dividend equivalents paid (215) (196)
Cost of equity settled employee share schemes 2,541 2,267
Operating cash flow before movements in working capital 142,996 126,455
Increase in inventories 33,307 (26,667)
Increase in trade and other receivables (211,694) (15,544)
Increase in trade and other payables 144,379 29,553
Cash generated from operations 108,988 113,797
Income taxes paid (25,344) (22,545)
Net cash generated from operating activities 83,644 91,252
12. Share capital
2022 2021
£'000 £'000
Allotted and called up
Ordinary shares of 0.05p each 100 100
Deferred shares* of 1p each - -
100 100
*At 31 July 2022 deferred shares had an aggregate nominal value of £189.33
(2021: £189.33).
Deferred shares do not have rights to dividends and do not carry voting
rights.
13. Post balance sheet events
Dividend
A final dividend of 16.6p per share has been recommended by the Directors and
if approved by shareholders will be paid on 19 December 2022. The final
ordinary dividend will be payable to shareholders whose names are on the
register at the close of business on 11 November 2022. Shares in the Company
will be quoted ex-dividend on 10 November 2022. The dividend reinvestment plan
('DRIP') election date is 28 November 2022.
In line with the Company's stated intention to return excess cash to
shareholders, a further special dividend payment of 12.6p has been proposed.
If approved this will also be paid on 19 December 2022 alongside the final
ordinary dividend.
Corporate Information
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the United Kingdom governing the preparation and dissemination
of financial information differs from legislation in other jurisdictions.
Directors
M Hellawell
G Watt
G Charlton
R Perriss
V Murria
K Slatford
L Weedall
Secretary
Luke Thomas
Company registration number
02174990
Registered office
Solar House
Fieldhouse Lane
Marlow
Buckinghamshire
SL7 1LW
Auditor
Ernst & Young LLP
1 More London Place
London
SE1 2AF
Softcat plc LEI
213800N42YZLR9GLVC42
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