REG - Softcat PLC - Half-year Report
28/03/2023 07:00
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RNS Number : 3785U Softcat PLC 28 March 2023
28 March 2023
SOFTCAT plc
("Softcat", the "Company")
Half Year Results for the six months to 31 January 2023
Softcat plc (LSE: SCT.L), a leading UK provider of IT infrastructure products
and services, today publishes its half year results for the six months to 31
January 2023 ("the period"). The results reflect income and profit performance
ahead of expectations, coupled with strong cash generation.
Financial Summary Six months ended
31 January 31 January
2023 20224 Growth
£m £m %
Revenue1 512.4 577.8 (11.3%)
Gross invoiced income2 1,214.7 1,158.3 4.9%
Gross profit 177.1 150.2 17.9%
Operating profit 63.1 64.1 (1.7%)
Cash conversion3 117.8% 85.0% 32.8%pts
Interim dividend (p) 8.0p 7.3p 9.6%
Earnings per share (p) 25.0p 26.2p (4.5%)
Diluted earnings per share (p) 25.0p 26.0p (4.0%)
1 Revenue is reported under IFRS 15, the international accounting standard
for revenue. IFRS 15 requires finely balanced judgements to be made to
determine whether Softcat acts as principal or agent in certain trading
transactions. These judgements, coupled with slight variations of business
models 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.
2 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 Review
on page 6.
3 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.
4 The half year ended 31 January 2022 revenue and cost of sales 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, Accounting policies,
Change in Accounting Policies - IFRS 15.
Highlights for the six months to 31 January 2023
· Growth in gross profit (GP), our key measure of income, was very
strong at 17.9% and ahead of expectations despite a very challenging set of
comparative numbers which included several one-off, high value transactions
with a major customer.
· Operating profit was also ahead of expectations due to the strong
GP performance and, as a result, only marginally below the record achieved in
H1 last year, despite the return of pre-pandemic travel and events costs and
further significant investment in our people.
· Gross invoiced income (GII) was up 4.9%, reflecting the impact of
the high value, low margin hardware business secured with a single customer in
the prior period.
· Revenue, which is GII netted down to just the margin element of
software and some service income streams (see Note 3 to the Condensed Interim
Financial Statements), was below the prior year due also to the reduction in
hardware income from the prior period's largest customer.
· Performance and growth drivers have again been broad-based, with
strong growth seen across all customer segments and areas of technology once
the impact of the prior period's largest customer is adjusted for.
· Closing headcount was up 21.1% on the prior period as we continue
to invest in building the capabilities and scale of operations for long-term
market share gains, in an industry which continues to grow despite a
challenging macro environment.
· The customer base grew by 3.3%, the fastest rate since before the
onset of the pandemic, and GP per customer was up by 17.4%, demonstrating
continued progress against both key aims of our strategy.
· Cash generation was strong at 117.8% conversion from operating
profit. Cash closed the period at £97.7m and the Company remains debt free.
· An interim dividend of 8.0p per share, up 9.6%, will be paid on
24 May 2023 with the shares trading ex-dividend on 13 April 2023.
Graeme Watt, Softcat CEO, commented:
I am pleased to be reporting positive numbers across a whole range of key
performance indicators in a period that has exceeded expectations. We have
reported strong GP growth of 17.9% on the prior year despite very tough
comparative numbers, and we have again taken market share. We have increased
our headcount by 21.1% on the prior period to meet this demand and underpin
future growth, and we have grown our customer base by 3.3% which is the
fastest rate for three years. We have reported strong cash conversion in the
period, continue to be debt free, and are pleased to be declaring an interim
dividend of 8.0p, up 9.6% on the prior year. All this has been achieved in an
uncertain environment.
This performance would be impossible without the amazing team we have at
Softcat. Everyone has played their part, supported by a strong leadership and
management group. Our employee net promoter score rose from 52 to 63 in the
period indicating the positive feelings they have towards Softcat and their
optimism for what we can achieve in the future. A huge thank you to each and
everyone of the team for another set of strong results.
Outlook
Operating profit in the first six months of the financial year is ahead of the
Board's initial expectations. While there is still a lot to do in the second
half and the economic environment remains uncertain, due to the out
performance in the first half the Board now expects that the outturn for the
full year will be slightly ahead of previous estimates.
Analyst and Investor call
The management team will host an investor and analyst conference call at
9.30am UK time, on Tuesday, 28 March 2023. To participate in the conference
call, please use the following access details:
Conference Call Details:
https://register.vevent.com/register/BI3a8a3270f4504945b9e74f297c652311
Please note the pin code that is provided is a unique code for you.
A live webcast of the presentation will be available at:
https://edge.media-server.com/mmc/p/hfvg4whj
(https://edge.media-server.com/mmc/p/hfvg4whj)
Please register approximately 10 minutes prior to the start of the call.
The announcement and presentation will be available at www.softcat.com
(https://protect-eu.mimecast.com/s/1-n1CqjlxiRwJv7TQMT7A?domain=softcat.com)
from 7.00am and 9.00am respectively.
Enquiries
Softcat plc: +44 (0)1628 403 610
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 Financial Conduct 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
Our strategic aims of driving growth from existing customers while also adding
new customers remain unchanged. We continued to execute well against these
targets in the period, recording GP per customer growth of 17.4% and expanding
our customer base by 3.3%.
Broad-based growth
We were able to grow across all customer segments with public sector, small
and medium (excluding the impact of a decline with the prior period's single
largest customer) and enterprise all making good progress despite ongoing
macro-economic headwinds as spending on IT infrastructure has become less and
less discretionary. The need to invest in cyber security, hybrid cloud
environments and end user devices has become an operational imperative and we
were able to grow in each of these categories too. The external challenges of
the pandemic and supply chain constraints largely dissipated in the period,
during which we also successfully managed the key impacts of cost and salary
inflation and vendor price increases. Our growth is ahead of projections for
the industry as a whole and we are confident that we have continued to gain
market share.
Our multinational business has grown at a premium rate as we have invested to
support our UK customers with their needs overseas. Challenges from supply
chain product shortages have eased as customers across a wide variety of
verticals and public sector departments demonstrate that continued investment
in IT infrastructure remains high on their agenda. Our customers continue to
need a lot of help and advice in selecting and implementing the right
solutions as they seek to manage cloud environments alongside their
on-premises infrastructure. Digital transformation and the need to deliver a
secure IT environment continue to be priorities for our customers, and many
tell us that their flexible working policies and supporting technology are
still work in progress and need more investment.
Year-on-year operating profit performance was ahead of our expectations but,
as previously signalled, also reflected the return of pre-pandemic costs and
significant investment in our people to underpin future growth.
Opportunities for further growth
The breadth of our business by technology and customer segment provides
resilience but more importantly there is an opportunity to grow our business
in every single area. The market continues to grow and our investments in
salespeople, specialists, technical experts, service delivery and partners
means we have leverage to deliver further gains. Additionally, we have
opportunities to help our customers in the rapidly growing areas of edge
computing, artificial intelligence, and data management. Despite our long
track record of growth, we still have a relatively low share of the overall
market, so there is significant potential for more progress.
We are delighted with the performance of our multinational business and our
office in the US. Although currently a small percentage of our overall
business, the opportunity for further growth is substantial.
In the UK, we added an additional office in Newcastle earlier this month.
Opening new offices allows us to get closer to our customers and serve as
additional engines for recruitment and development opportunities for existing
members of our team.
We continue to invest in systems, tools, and platforms to provide our
customers and staff with a more refined user experience and have created
strategic initiatives to enhance our digital and data capabilities. These
investments will augment our offering, drive deeper customer and vendor
partnerships, and accelerate growth as a result. Our new financial system and
data warehouse are now fully implemented, and we look forward to driving the
benefits from these investments in the coming years.
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.
Our people and our culture
We have adopted a flexible approach to where and when our staff work which is
proving to be effective and has been positively embraced by our teams who have
enjoyed and benefited from the time that they are now able to spend together.
Our appetite to invest today for future growth remains as strong as ever. We
continue to recruit and invest in people across all functions in the Company
and have added a net 375 employees since this time last year. This represents
a 21.1% increase on the prior period, achieved in a market where we are
finding it easier to recruit again. The pay reviews that came into effect at
the start of this financial year have had a profoundly positive impact on our
ability to attract new talent in a period where we have also seen attrition
rates drop significantly. Our investment plans reflect confidence in our
strategy and the demand environment for IT infrastructure. We believe that
macroeconomic headwinds will provide opportunities to recruit and retain
talented people and further enhance our ability to win more customers and gain
share from competitors.
None of the performance we have delivered would have been possible without the
amazing culture we have established at Softcat. The majority of our
competitive advantage will continue to come from superior customer service,
born out of the unique Softcat culture and our market-leading sales engine.
It's the manner in which we deliver our service, advice and support that makes
us stand out from the pack - culture is our strongest weapon and provides
differentiation in a fragmented market in which it is difficult to stand out.
We continue to prioritise and make sure we listen to how our people are
feeling and we don't let anything get in the way of that as the number one
priority. We want people to enjoy coming to work, to work with people whose
company they appreciate and if their engagement is maintained through
recognition, reward and all the other things we throw into the mix, then our
customers will benefit from the service provided by the most motivated team in
the industry. Our ongoing commitment to the way we act around our values and
beliefs is paramount to our future success and continues to be led from the
top. We are delighted with our most recent employee engagement results and the
ongoing Glassdoor ratings and other accolades around culture, wellbeing, and
progress with community networks.
The leadership team remains key in driving progress, and we are delighted to
have been able to strengthen that team by welcoming Anna Pulisciano as
Operations Director in February 2023. Katy Mecklenburgh will join us as CFO in
June, shortly after which Graham Charlton will become CEO and I will succeed
Martin Hellawell as Chair of the Board. These changes have been carefully
thought through and communicated. We have robust transition, onboarding, and
development plans in place, and I wish all those in new positions every
success.
We have delivered another half of strong performance and that is down to the
entire team at Softcat. The ownership, positivity, commitment and care they
demonstrate to each other, our customers, partners, and the business is
outstanding, and I can't thank them enough.
Chief Financial Officer's Review
Financial Summary H1 FY23 H1 FY22* Growth
Revenue split
Software £83.6m £66.6m 25.5%
Hardware £330.9m £451.5m (26.7)%
Services £97.9m £59.7m 64.0%
Total revenue £512.4m £577.8m (11.3)%
Gross invoiced income split
Software £687.4m £552.2m 24.5%
Hardware £334.6m £459.6m (27.2)%
Services £192.7m £146.5m 31.5%
Total gross invoiced income £1,214.7m £1,158.3m 4.9%
Gross profit £177.1m £150.2m 17.9%
Operating profit £63.1m £64.1m (1.7)%
OP:GP margin 35.6% 42.7% (7.1)% pts
Cash conversion 117.8% 85.0% 32.8% pts
* The prior half 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, Accounting policies - Change in Accounting
Policy - IFRS 15.
Gross profit, revenue, and gross invoiced income (GII)
Gross profit, our key financial metric, rose by 17.9% to £177.1m despite
strong prior period figures which included exceptionally high value,
non-recurring hardware transactions with a major customer.
Revenue was down on the prior period by 11.3%, due to a 27.2% decline in
hardware GII in the period. This decline in hardware GII which is reported
gross within the revenue number (unlike software and some services income
which is netted down) is mainly driven by the reduction in volume of business
with the major customer.
GII was up 4.9% to £1,214.7m driven by strong growth in both software
(+24.5%) and services (+31.5%), partly offset by the decline in hardware
volumes mentioned above. Gross profit as a proportion of GII of 14.6% was up
on the prior period (H1 2022: 13.0%). Once again, this movement is also
mainly related to the impact of transactions with the major customer in the
prior period which diluted the 2022 margin.
Customer Metrics(1) H1 FY23 H1 FY22 Growth
Customer base (rolling 12-month basis) 10.0k 9.7k 3.3%
Gross profit per customer (rolling 12-month basis) £35.5k £30.2k 17.4%
(1)Customer base and the GP per customer are calculated on a twelve-month
rolling basis. This reflects the development of the business over an annual
cycle which is more closely aligned to customer budget cycles than a six-month
view. Customer base is defined as the number of customers who have
transacted with Softcat in both preceding twelve-month periods.
During the period, gross profit per customer grew by 17.4% to an annualised
£35.5k (H1 2022: £30.2k) and the customer base expanded by 3.3%, the fastest
rate since the onset of the pandemic, to 10.0k (H1 2022: 9.7k). The
combination of these effects has driven the gross profit growth of 17.9%.
Company analysis, using data from several sources (including Gartner, CRN and
IDC), suggests our market share continues to expand but remains below c.5%. We
serve approximately 1 in 5 customers in our target market with an average
share of wallet of c.25%. These numbers indicate that both facets of our
simple strategy, to win new customers and sell more to existing customers,
continue to offer significant opportunities for future growth.
Operating costs and operating profit
Operating profit of £63.1m (H1 2022: £64.1m) declined by 1.7%, reflecting
the 17.9% increase in gross profit offset by the 32.4% rise in operating
costs. Cost growth was in line with expectations and is elevated by the return
of travel and event activities that we were unable to perform during the
pandemic.
Cost growth was also driven by increased commissions, commensurate with growth
in gross profit, alongside the impact of an 18.5% increase in average
headcount, and with an average pay award of 11.1% for existing staff. The
increase in existing salaries reflects a 6.8% average award tied to the
general inflationary environment, together with a restructuring of salaries
across the sales teams to ensure we remain competitive in the graduate and
apprentice markets.
Investment in people continues to be the main driver of cost growth and a
21.1% increase in closing headcount on the prior period reflects ongoing
recruitment across all areas of the business. We are delighted that our
operations have now returned completely to normal from the start of this
financial year and while this has added to the cost base as expected, visiting
customers, and running staff events play vital roles in our success.
Corporation tax charge
The half year tax charge of £13.3m reflects the effective statutory rate of
21.0% (2022: 19.0%). This effective tax rate reflects the blended rate in
force across the financial year, including the increase from 19% to 25%
effective from 1 April 2023.
Cash flow and cash conversion
The Company entered the period in a robust cash position with a balance of
£97.3m, and then paid an aggregate final and special dividend of £58.2m in
December 2022.
Cash flow from operations before tax but after capital expenditure was strong
during the reporting period, generating a positive net inflow of £74.3m and,
representing a conversion rate from operating profit of 117.8% (2022: 85.0%).
Cash at the end of the period totalled £97.7m.
The Company targets sustainable full year operating cash conversion (after
capital expenditure) in the range of 85-95% of operating profits.
Dividend
The Board is pleased to declare an interim dividend of 8.0p per share (2022:
7.3p), amounting in total to £16.0m. The interim dividend will be payable on
24 May 2023 to shareholders on the register at the close of business on 14
April 2023. Shares in the Company will be quoted ex-dividend on 13 April
2023. The last day for dividend reinvestment plan ("DRIP") elections is 2 May
2023.
Principal Risks and Uncertainties
Like most businesses, there are a range of risks and uncertainties facing the
Company. A summary is given below detailing the specific risks and
uncertainties that the Directors believe could have a significant effect on
the Company's financial performance.
In assessing the Company's likely financial performance for the second half of
the current financial year, these risks and uncertainties should be considered
in addition to the matters referred to regarding seasonality in Note 16 to the
Condensed Interim Financial Statements, and the comments made under the
heading "outlook" in the Chief Executive Officer's Review.
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 Chief Revenue
Officer ('CRO') & 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 data protection and regulation · 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 · Roll-out of a new ERP finance system to support growth and ease
of doing business
(no change in net risk) · Business interruption
· Operation of back-up operations centre and datacentre platforms
· Reputational damage
· Established and documented processes to deal with incident
· Financial loss management, change control, etc.
· Continued investment in operations centre management and other
resources
· Ongoing upgrades to network
· Regular testing of disaster recovery plans and business
continuity plans
Macroeconomic factors including the impacts of the conflict in Ukraine, · Short-term supply chain disruption · Close dialogue with supply-chain partners
inflationary pressures, interest and foreign currency volatility
· Reduced margins · Customer-centric culture
(no change in net risk)
· 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 regularly reviewed
FINANCIAL
Profit margin pressure including reduction of supplier 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
(slight reduction 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
In our consideration of emerging risks, climate change continues to receive
greater analysis. We are continuing with a process to formally assess 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 Task Force on Climate-related Financial Disclosures ('TCFD'). Climate
change is already a component of the failure to evolve our offering risk with
regard 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
current analysis indicates that no other climate change-related risk is a
principal risk which needs to be incorporated into the above.
These risks and uncertainties have not changed significantly since those
published in the 31 July 2022 Annual Report.
Going Concern
As stated in Note 2 to the Condensed Interim Financial Statements, the
Directors are satisfied that the Company has sufficient resources to continue
in operation for the foreseeable future, a period to at least 31 March 2024.
In preparing this financial information, management has considered the
circumstances impacting Softcat during the period, as detailed in the Chief
Financial Officer's Review, and reviewed projected performance for the period
to at least 31 March 2024; being the going concern period. The Directors also
considered the Company's objectives and strategy, its principal risks and
uncertainties in achieving its objectives and its review of business
performance and financial position.
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 twelve-month
period from the date of this report (the going concern period) until 31 March
2024.
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 January 2023, the Company held instantly accessible cash and cash
equivalents of £97.7m, while net current assets were £184.0m. Operational
cash flow forecasts for the going concern period are sufficient to support
the business. 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 improving and is less severe than
the previous period; and
• higher risk of credit losses.
Despite the impact of these economic challenges, the Company has traded well,
delivering double-digit Gross Profit 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 2022, takes into account the
FY2023 budget process which includes estimated growth and increased costs
across the going concern period and is consistent with the actual trading
experience through to March 2023. 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 FY2022;
• 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
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. Year to date trading to the end of March 2023 is
consistent with the base case forecast.
Severe but plausible
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, compared to the base case include:
• an average 8% reduction in gross invoiced income revenue;
• reduced gross profit margins of 1% in the period;
• additional bad debt write offs of £15m across the forecast period;
• extending the debtor days from historic levels achieved and no change to
historic supplier payment days;
• paying a reduced final 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 Board's desired minimum cash
position, should this scenario occur. The Directors are confident that they
can implement these actions if required.
Mitigating actions
The primary mitigating action management could undertake would be the removal
of the final ordinary and special dividends that are modelled in late 2023.
In addition, 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 an £18m cost reduction on
an annualised basis, before considering the cost of delivering them and the
point in time at which they were delivered.
The actions therefore, which, if implemented, would offset the reduced
activity:
• bonus and commission costs scaled back in line with performance;
• savings in discretionary areas of spend;
• no final or special dividend payable in December 2023;
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:
1. reduction of 13% in gross invoiced income, compared to the base case;
2. reduced gross margin by 3%;
3. additional bad debt write offs of £30m in total across the going
concern period; and
4. extending the debtor days by five 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 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 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
the twelve-month period from the date of this report (the going concern
period) until 31 March 2024. Accordingly, at the March 2023 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 report 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 Interim Management Report should not be relied on
by any other party or for any other purpose.
In making this report, 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.
Directors' Responsibility Statement
The Directors confirm that, to the best of their knowledge:
· the condensed set of financial statements, which has been
prepared in accordance with UK adopted IAS 34 Interim Financial Reporting, has
been prepared in accordance with the applicable set of accounting standards,
gives a true and fair view of the assets, liabilities, financial position and
profit or loss of the Company;
· the Interim Management Report includes a fair review of the
information required by DTR 4.2.7R (indication of important events during the
first six months and description of principal risks and uncertainties for the
remaining six months of the year); and
· the Interim Management Report includes a fair review of the
information required by DTR 4.2.8R (disclosure of relates parties'
transactions and changes therein).
Neither the Company nor the Directors accept any liability to any person in
relation to the half-year financial report except to the extent that such
liability could arise under English law. Accordingly, any liability to a
person who has demonstrated reliance on any untrue or misleading statement or
omission shall be determined in accordance with section 90A and schedule 10A
of the Financial Services and Markets Act 2000.
Graeme Watt Graham Charlton
Chief Executive Officer Chief Financial Officer
27 March 2023 27 March 2023
Condensed Statement of profit or loss and other comprehensive income
For the six months ended 31 January 2023
Six months ended 31 January Year ended
31 July
2023 2022 2022
Unaudited Unaudited* Audited
Note
£'000 £'000 £'000
Revenue 3 512,405 577,820 1,077,946
Cost of sales (335,351) (427,609) (750,736)
Gross profit 177,054 150,211 327,210
Administrative expenses (113,983) (86,078) (191,065)
Operating profit 63,071 64,133 136,145
Finance income 151 6 252
Finance cost (99) 66 (253)
Profit before taxation 63,123 64,205 136,144
Income tax expense 4 (13,280) (12,181) (25,739)
Profit for the period 49,843 52,024 110,405
Other comprehensive income
Other comprehensive income that may be reclassified to profit or loss in
subsequent periods:
Foreign exchange differences on translation of foreign branches (148) - 3,562
Total other comprehensive income
(148)
-
3,562
Total comprehensive income for the period 49,695 52,024 113,967
Profit attributable to:
Owners of the Company 49,843 52,024 110,405
Total comprehensive income attributable to:
Owners of the Company 49,695 52,024 113,967
Basic earnings per Ordinary Share (pence) 11 25.0 26.2 55.5
Diluted earnings per Ordinary Share (pence) 11 25.0 26.0 55.3
All results are derived from continuing operations.
* The prior half 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, Accounting policies - Change in Accounting
Policy - IFRS 15.
Condensed Statement of Financial Position
As at 31 January 2023
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited Unaudited Audited
Note
£'000 £'000 £'000
Non-current assets
Property, plant and equipment 11,166 11,812 11,270
Right-of-use assets 6 5,849 6,550 6,162
Intangible assets 7,575 6,696 7,978
Deferred tax asset 2,306 2,511 2,508
26,896 27,569 27,918
Current assets
Inventories 7,157 44,367 5,104
Trade and other receivables 7 545,501 405,189 541,424
Cash and cash equivalents 97,722 74,283 97,316
Income tax receivable 1,415 459 296
651,795 524,298 644,140
Total assets 678,691 551,867 672,058
Current liabilities
Trade and other payables 8 (437,866) (362,919) (419,108)
Contract liabilities 9 (27,275) (14,907) (31,564)
Lease liabilities 6 (2,722) (2,684) (2,716)
(467,863) (380,510) (453,388)
Non-current liabilities
Contract liabilities 9 (3,426) (3,088) (3,620)
Lease liabilities 6 (3,707) (5,145) (3,950)
(7,133) (8,233) (7,570)
Net assets 203,695 163,124 211,100
Equity
Issued share capital 13 100 100 100
Share premium account 4,979 4,979 4,979
Reserves for own shares - - -
Foreign exchange revaluation reserve 3,414 - 3,562
Retained earnings 195,202 158,045 202,459
Total equity 203,695 163,124 211,100
Condensed Statement of Changes in Equity (unaudited)
Issued share capital Share premium account Foreign exchange revaluation translation Retained earnings Total
Reserves for own shares
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 1 August 2022 100 4,979 3,562 - 202,459 211,100
Profit for the period - - - - 49,843 49,843
Impact of foreign exchange on reserves - - (148) - - (148)
Total comprehensive income for the period - - (148) - 49,843 49,695
Share-based payment transactions - - - - 1,591 1,591
Dividends paid - - - - (58,220) (58,220)
Shares issued in the year - - - - - -
Dividend equivalents paid - - - - (66) (66)
Tax adjustments - - - - (104) (104)
Other - - - - (301) (301)
Balance at 31 January 2023 100 4,979 3,414 - 195,202 203,695
Balance at 1 August 2021 100 4,979 - - 174,065 179,144
Total comprehensive income for the period - - - - 52,024 52,024
Share-based payment transactions - - - - 1,416 1,416
Dividends paid - - - - (69,469) (69,469)
Shares issued in the year - - - - - -
Dividend equivalents paid - - - - (214) (214)
Tax adjustments - - - - (84) (84)
Other - - - - 307 307
Balance at 31 January 2022 100 4,979 - - 158,045 163,124
Condensed Statement of Cash Flows
For the six months ended 31 January 2023
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited Unaudited Audited
Note
£'000 £'000 £'000
Net cash generated from operating activities 12 61,118 46,168 83,644
Investing activities
Finance income 151 6 252
Purchase of property, plant and equipment (1,052) (1,242) (1,890)
Purchase of intangible assets (361) (1,572) (3,334)
Net cash used in investing activities (1,262) (2,808) (4,972)
Financing activities
Issue of share capital - - -
Dividends paid 5 (58,220) (69,469) (84,020)
Payment of principal portion of lease liabilities (983) (1,206) (2,369)
Payment of interest portion of lease liabilities (99) (126) (253)
Net cash used in financing activities (59,302) (70,801) (86,642)
Net increase/(decrease) in cash and cash equivalents 554 (27,441) (7,970)
Exchange (losses)/gains on cash and cash equivalents (148) - 3,562
Cash and cash equivalents at beginning of period 97,316 101,724 101,724
Cash and cash equivalents at end of period 97,722 74,283 97,316
Notes to the Financial Information
1. General information
The Directors of Softcat plc (the "Company") present their Interim Report and
the unaudited Condensed Interim Financial Statements for the six months ended
31 January 2023 ("Condensed Interim Financial Statements").
The Company is a public limited company, incorporated and domiciled in the UK.
Its registered address is Solar House, Fieldhouse Lane, Marlow,
Buckinghamshire, SL7 1LW.
The Condensed Interim Financial Statements have been reviewed, but not
audited, by Ernst & Young LLP and were approved by the Board of Directors
on 27 March 2023. The financial information contained in this report does not
constitute statutory accounts within the meaning of section 435 of the
Companies Act 2006. The Condensed Interim Financial Statements should be read
in conjunction with the Annual Report and Financial Statements for the year
ended 31 July 2022, which have been prepared in accordance with UK-adopted
international accounting standards (IFRS) in accordance with the requirements
of the Companies Act 2006. The Annual Report and Financial Statements for the
year ended 31 July 2022 were approved by the Board of Directors on 25 October
2022 and delivered to the Registrar of Companies. The auditor's report on
those financial statements was unqualified, 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
Basis of preparation
These Condensed Interim Financial Statements have been prepared in accordance
with UK adopted International Accounting Standard ("IAS") 34 Interim Financial
Reporting and the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
The Condensed Interim Financial Statements are presented in Pounds Sterling,
rounded to the nearest thousand ('£'000'), unless otherwise stated. They
were prepared under the historical cost convention.
The accounting policies adopted in the preparation of the Condensed Interim
Financial Statements are consistent with those applied in the preparation of
the Company's Financial Statements for the year ended 31 July 2022.
Going Concern
The Directors are satisfied that the Company has sufficient resources to
continue in operation for the foreseeable future, a period to at least 31
March 2024.
In preparing this financial information, management has considered the
circumstances impacting Softcat during the period, as detailed in the Chief
Financial Officer's Review, and reviewed projected performance for the period
to at least 31 March 2024; being the going concern period. The Directors also
considered the Company's objectives and strategy, its principal risks and
uncertainties in achieving its objectives and its review of business
performance and financial position.
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 twelve-month
period from the date of this report (the going concern period) until 31 March
2024.
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 January 2023, the Company held instantly accessible cash and cash
equivalents of £97.7m, while net current assets were £184.0m. Operational
cash flow forecasts for the going concern period are sufficient to support
the business. 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 improving and is less severe than
the previous period; and
• higher risk of credit losses.
Despite the impact of these economic challenges, the Company has traded well,
delivering double-digit Gross Profit 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 2022, takes into account the
FY2023 budget process which includes estimated growth and increased costs
across the going concern period and is consistent with the actual trading
experience through to March 2023. 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 FY2022;
• 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
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. Year to date trading to the end of March 2023 is
consistent with the base case forecast.
Severe but plausible
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, compared to the base case include:
• an average 8% reduction in gross invoiced income;
• reduced gross profit margins of 1% in the period;
• additional bad debt write offs of £15m across the forecast period;
• extending the debtor days from historic levels achieved and no change to
historic supplier payment days;
• paying a reduced final 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 Board's desired minimum cash
position, should this scenario occur. The Directors are confident that they
can implement these actions if required.
Mitigating actions
The primary mitigating action management could undertake would be the removal
of the final ordinary and special dividends that are modelled in late 2023.
In addition, 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, before considering the cost of delivering them and the
point in time at which they were delivered.
The actions therefore, which, if implemented, would offset the reduced
activity:
• bonus and commission costs scaled back in line with performance;
• savings in discretionary areas of spend;
• no final or special dividend payable in December 2023;
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:
1. reduction of 13% in gross invoiced income, compared to the base case;
2. reduced gross margin by 3%;
3. additional bad debt write offs of £30m in total across the going
concern period; and
4. extending the debtor days by five 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 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 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
the twelve-month period from the date of this report (the going concern
period) until 31 March 2024. Accordingly, at the March 2023 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.
Critical accounting judgements and key sources of estimation uncertainty
When applying the Company's accounting policies, management must make several
key judgements involving estimates and assumptions concerning the future. Key
judgements management have made are those which have the most significant
effect on the amounts recognised in the financial statements. Key sources of
estimation uncertainty are those assumptions concerning the future and other
key sources of estimation uncertainty at the reporting date, that have a
significant risk of causing a material adjustment to the carrying amounts of
assets and liabilities within the next financial year.
The key judgements and sources of estimation uncertainty reported in the
financial statements for the year ended 31 July 2022 are still relevant. There
have been no new areas of significant accounting judgement or key sources of
estimation uncertainly arising from operations in the first six months of the
financial year to 31 July 2023, nor in the months to the date of publication
of this interim report.
Changes to accounting standards
There have been no new standards effective in the period to 31 January 2023.
In the period to 31 July 2022 there was a change in accounting policy and the
financial comparatives have been restated where relevant in line with this
change in accounting policy - IFRS 15 Revenue from Contracts with Customers,
treatment of Software revenue as agent revenue.
Other than those mentioned below, there are no further changes to accounting
policies applicable in the prior period.
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 indicate, in management's 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 interim
financial statements is as follows;
• revenue and cost of sales would decrease by a further £193.1m 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
cash flows and the Statement of changes in equity also remain unchanged.
Revenue as reported IFRS 15 Increase in Revised revenue
net down
Period ended 31 January 2022 £'000 £'000 £'000
Software revenue 259,722 (193,113) 66,609
Revenue 770,903 (193,113) 577,820
Cost of sales (620,722) 193,113 (477,609)
Gross profit 150,211 - 150,211
Administrative expenses 86,078 - 86,078
Operating profit 64,133 - 64,133
Finance income 6 - 6
Finance cost 66 - 66
Profit before tax 64,205 - 64,205
Income tax expenses (12,181) - (12,181)
Profit and total comprehensive income for the period 52,024 - 52,024
Profit attributable to:
Owners of the Company 52,024 - 52,024
Adjusted performance measures
The Company uses three 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. 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. Cash conversion illustrates how efficiently the business has
converted its operating profits to cash and highlights any significant
movements in the balance of working capital. It is shown after capital
expenditure due to the relatively capital light business model. Gross profit
as a proportion of gross invoiced income is presented to reflect the margin on
the gross sales price to the customer. Due to the evolving mix of business
that is recorded as principal or agent (see note 3), the gross profit as a
proportion of revenue metric would be influenced by this mix as well as the
change in margins charged to the customer.
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 of gross invoiced income and
cash conversion.
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 3 of the
Condensed Interim Financial Statements .
Cash conversion ratio comprises of cash flows from operations net of capital
expenditure as a percentage of operating profit. A reconciliation to the
adjusted measure for cash conversion is provided below.
Gross profit as a proportion of GII is presented to reflect the margin on the
gross sales price to the customer.
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited Unaudited Audited £'000
£'000 £'000
Cash generated from operations 75,718 57,323 108,988
Purchase of property, plant and equipment (1,052) (1,242) (1,890)
Purchase of intangible assets (361) (1,572) (3,334)
Cash generated from operations, net of capital expenditure 74,305 54,509 103,764
Operating profit 63,071 64,133 136,145
Cash conversion ratio 117.8% 85.0% 76.2%
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 comprehensive income and statement of financial
position. An analysis of revenues by product, which form one reportable
segment, is set out below:
Six months ended Year ended
31 January 31 July
2023 2022* 2022
Unaudited Unaudited Audited
£'000 £'000 £'000
Revenue by type
Software 83,661 66,609 150,000
Hardware 330,891 451,510 797,897
Services 97,853 59,701 130,049
512,405 577,820 1,077,946
Gross invoiced income by type
Software 687,462 552,183 1,365,343
Hardware 334,580 459,627 810,241
Services 192,686 146,531 331,953
1,214,728 1,158,341 2,507,537
Six months ended Year ended
31 January 31 July
2023 2022* 2022
Unaudited Unaudited Audited
£'000 £'000 £'000
Revenue by type of business
Small and medium 313,891 413,022 535,823
Enterprise 129,712 96,948 222,064
Public sector 68,802 67,850 320,059
512,405 577,820 1,077,946
Gross invoiced income by type of business
Small and medium 584,318 643,312 1,169,255
Enterprise 259,352 206,495 427,249
Public sector 371,058 308,534 911,033
1,214,728 1,158,341 2,507,537
Gross invoiced income reflects gross income billed to customers adjusted for
deferred and accrued revenue items. Softcat continues to report gross invoiced
income as an alternative financial KPI as this measure allows a consistent,
year on year, understanding of gross income billed, business performance and
position and correlates closely to working capital movements. The impact of
IFRS 15 and principal versus agent consideration is an equal reduction to both
revenue and cost of sales.
Reconciliation of gross invoiced income to revenue
Six months ended Year ended
31 January 31 July
2023 2022* 2022
Unaudited Unaudited Audited £'000
£'000 £'000
Gross invoiced income 1,214,728 1,158,341 2,507,537
Income recognised as agent under IFRS 15 (702,323) (580,522) (1,429,573)
Revenue 512,405 577,820 1,077,964
* The prior half 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, Accounting policies - Change in Accounting
Policy - IFRS 15.
The total revenue for the Company has been derived from its principal activity
as an IT reseller. Substantially all this revenue relates to trading
undertaken in the United Kingdom.
During the period, there were no direct customers (H1 2022: one) that
individually accounted for greater than 10% of both the Company's total
revenue and gross invoiced income. In the prior year gross invoiced income and
revenue generated from the largest individual direct customer was £184.4m and
£167.3m respectively. The revenues related to this direct customer in the
prior year were derived within the USA branch of the Company. Substantially
all of the remaining trading of the Company is undertaken in the United
Kingdom.
4. Taxation
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited Unaudited Audited
£'000 £'000 £'000
Current Tax
Current period 13,322 12,232 25,979
Adjustment in respect of current income tax in previous years. - 52
-
Foreign tax effects - - 1
Deferred Tax
Temporary differences (42) (51) (293)
Total tax charge for the period 13,280 12,181 25,739
The income tax expense was recognised based on management's best estimate of
the annual income tax rate expected for the full financial year, applied to
the profit before tax for the half year ended 31 January 2023. On this
basis, the Company's tax charge was £13.3m (H1 2022: £12.2m). The half year
tax charge of 21.0% (2022: 19.0%) reflects the blended rate in force across
the financial year, including the increase from 19% to 25% effective from 1
April 2023.
5. Dividends
Six months ended Year ended
31 January 31 July
2023 2022 2022
Declared and paid during the period Unaudited £'000 Unaudited £'000 Audited £'000
Interim dividend - - 14,551
Final dividend 33,098 28,663 28,663
Special dividend 25,122 40,806 40,806
58,220 69,469 84,020
An interim dividend of 8.0p per share, amounting to a total dividend of
£16.0m, was declared post period end and is to be paid on 24 May 2023 to
those on the share register on 14 April 2023.
6. Right-of-use assets and lease liabilities
Leases - as a lessee
Softcat has lease contracts for various properties and offices across the
country, used for its operations. Property leases generally have lease terms
of between 3 and 10 years. A number of these contracts include extension and
termination options which are discussed below.
Set out below are the carrying amounts of right-of-use assets recognised and
movements during the period:
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited Unaudited £'000 Audited £'000
£'000
Property leases
Opening right-of-use asset 6,162 7,022 7,022
Additions 746 734 734
Depreciation (1,059) (1,206) (1,594)
Closing right-of-use asset 5,849 6,550 6,162
The weighted average incremental borrowing rate as used for the period is
2.7%.
Set out below are the carrying amounts of lease liabilities included under
current and non-current liabilities and the movements during the period:
Six months ended Year ended
31 January 31 July
Property leases 2023 2022 2022
Unaudited £'000 Unaudited £'000 Audited £'000
Opening lease liability 6,666 8,302 8,302
Additions 746 734 734
Accretion of interest 99 126 253
Payments (1,082) (1,333) (2,623)
Closing lease liability 6,429 7,829 6,666
Current lease liability 2,722 2,684 2,716
Non-current lease liability 3,707 5,145 3,950
6,429 7,829 6,666
Softcat had no variable lease expenses or income from sub-leases charged to
the Statement of profit or loss and other comprehensive income, nor any sale
and leaseback transactions.
Softcat has several lease contracts that include termination options. These
options are negotiated by management to provide flexibility in managing the
leased-asset portfolio to align to business needs. Management exercise
significant judgement in determining whether these options are reasonably
certain to be exercised.
Set out below are the undiscounted potential future rental payments relating
to periods following the exercise date of termination options that are not
included in lease term:
Within five years More than five years Total
As at 31 January 2023 (unaudited) £'000 £'000 £'000
Termination options expected to be exercised 4,951 704 5,655
4,951 704 5,655
Within five years More than five years Total
As at 31 January 2022 (unaudited) £'000 £'000 £'000
Termination options expected to be exercised 3,802 1,854 5,656
3,802 1,854 5,656
Lease charges related to low value and short-term leases recognised in the
Statement of profit or loss and other comprehensive income was £nil in both
periods.
7. Trade and other receivables
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited £'000 Unaudited £'000 Audited £'000
Trade receivables 486,326 365,826 497,308
Allowance for expected credit losses (5,767) (3,514) (4,958)
Net trade receivables 480,559 362,312 492,350
Unbilled receivables 35,132 18,951 26,192
Prepayments 3,910 4,540 4,338
Accrued income 8,570 8,641 10,534
Deferred costs 17,330 10,745 8,010
545,501 405,189 541,424
8. Trade and other payables
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited Unaudited £'000 Audited £'000
£'000
Trade payables 330,934 232,550 280,769
Other taxes and social security 17,938 22,483 23,078
Accruals 88,994 107,886 115,261
437,866 362,919 419,108
9. Contract liabilities
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited Unaudited £'000 Audited £'000
£'000
Deferred income 30,701 17,995 35,184
30,701 17,995 35,184
Deferred income is split as:
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited Unaudited £'000 Audited £'000
£'000
Current deferred income 27,275 14,907 31,564
Non-current deferred income 3,426 3,088 3,620
30,701 17,995 35,184
Contract balances
Deferred income includes short-term and long-term goods or services to be
delivered to customers by Softcat for which there is a contractual obligation
arising from receipt of consideration or amounts due from the customer. The
outstanding balances on these accounts has moved in line with the activity of
the business and customer base. As at 31 January 2023, £30.7m remains on the
Statement of Financial Position as a contract liability. Softcat expects that
£27.3m of the balance as at 31 January 2023 will be released in the following
12 months with the balance released within 2-5 years of the end of 31 January
2023. Of the existing balance as at 31 July 2022, £28.5m has been recognised
in FY23.
10. Financial instruments
The Company's principal financial liabilities comprise trade and other
payables including lease liabilities. The primary purpose of these financial
liabilities is to finance the Company's operations. The Company has trade and
other receivables and cash that derive directly from its operations.
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited £'000 Unaudited £'000 Audited £'000
Financial assets
The financial assets of the Company were as follows:
Cash at bank and in hand 97,722 74,283 97,316
Trade receivables, other debtors and accrued income 524,261 389,904 529,076
621,983 464,187 626,392
Financial liabilities
The financial liabilities of the Company were as follows:
Trade payables (330,934) (232,550) (280,769)
Accruals (88,994) (107,886) (115,261)
Lease liabilities (6,429) (7,829) (6,666)
(426,357) (348,265) (402,696)
The Directors consider that the carrying amounts for all financial assets and
liabilities (excluding lease liabilities) approximate to their fair value.
11. Earnings per share (EPS)
Six months ended Year ended
31 January 31 July
2023 2022 2022
Earnings per share Unaudited Pence Unaudited Pence Audited Pence
Basic 25.0 26.2 55.5
Diluted 25.0 26.0 55.3
The calculation of the earnings per share and diluted earnings per share is
based on the following data:
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited Unaudited £'000 Audited £'000
£'000
Earnings
Earnings for the purposes of EPS being profit for the period 49,843 52,024 110,405
The weighted average number of shares is given below:
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited 000's Unaudited 000's Audited 000's
Number of shares used for basic earnings per share 199,157 198,873 198,976
Number of shares deemed to be issued at nil consideration following exercise 499 844 656
of share options
Number of shares used for diluted earnings per share 199,656 199,717 199,632
12. Notes to the cash flow statement
Reconciliation of operating profit to net cash inflow from operating
activities
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited £'000 Unaudited £'000 Audited £'000
Operating profit 63,071 64,133 136,145
Depreciation of property, plant and equipment 1,155 1,182 2,373
Depreciation of right-of-use assets 1,059 1,206 1,594
Amortisation of intangibles 763 78 558
Dividend equivalents paid (66) (214) (215)
Cost of equity-settled employee share schemes 1,591 1,416 2,541
Operating cash flow before movements in working capital 67,573 67,801 142,996
(Increase)/decrease in inventories (2,053) (5,956) 33,307
(Increase) in trade and other receivables (4,077) (75,523) (211,694)
Increase in trade and other payables and contract liabilities 14,275 71,001 144,379
Cash generated from operations 75,718 57,323 108,988
Income taxes paid (14,600) (11,155) (25,344)
Net cash generated from operating activities 61,118 46,168 83,644
13. Share capital
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited Unaudited £'000 Audited £'000
£'000
Ordinary shares of 0.05p each 100 100 100
Deferred shares of 1p each - - -
100 100 100
14. Related party transactions
Dividends to Directors
The following Directors, who served as Directors for either the whole or part
of the interim period, were paid the following dividends:
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited Unaudited Audited £'000
£'000 £'000
M Hellawell 1,227 1,466 1,773
G Watt 23 12 18
G Charlton 33 29 37
R Perriss 4 5 6
V Murria 48 58 70
K Slatford - - -
L Weedall - - -
1,335 1,570 1,904
Except for the above, there were no other significant related party
transactions.
15. Post balance sheet events
Dividend
An interim dividend of 8.0p per share, amounting to a total dividend of
£16.0m was declared post period end and is to be paid on 24 May 2023 to those
on the share register on 14 April 2023.
16. Seasonality of operations
Historically, revenue and profits have been marginally higher in the second
half of the year than in the first six months. This is principally driven by
customer buying behaviour in the markets in which we operate. This increased
weighting in the second half of the year has traditionally resulted in higher
operating profit in the second half of the financial year. Customer buying
behaviour is again expected to follow these patterns in the current year.
INDEPENDENT REVIEW REPORT TO SOFTCAT PLC
Conclusion
We have been engaged by the Company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 31
January 2023 which comprises the Condensed Statement of Profit or Loss and
Other Comprehensive Income, Condensed Statement of Financial Position,
Condensed Statement of Changes in Equity, Condensed Statement of Cash Flows
and Explanatory Notes 1 to 16. We have read the other information contained in
the half yearly financial report and considered whether it contains any
apparent misstatements or material inconsistencies with the information in the
condensed set of financial statements.
Based on our review, nothing has come to our attention that causes us to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 31 January 2023 is not prepared, in
all material respects, in accordance with UK adopted International Accounting
Standard 34 and the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review
Engagements 2410 (UK) "Review of Interim Financial Information Performed by
the Independent Auditor of the Entity" (ISRE) issued by the Financial
Reporting Council. A review of interim financial information consists of
making enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review procedures. A
review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and consequently does not enable
us to obtain assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not express an audit
opinion.
As disclosed in Notes 1 and 2, the annual financial statements of the Company
are prepared in accordance with UK adopted international accounting standards.
The condensed set of financial statements included in this half-yearly
financial report has been prepared in accordance with UK adopted International
Accounting Standard 34, "Interim Financial Reporting".
Conclusions Relating to Going Concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis of Conclusion section of this report,
nothing has come to our attention to suggest that management have
inappropriately adopted the going concern basis of accounting or that
management have identified material uncertainties relating to going concern
that are not appropriately disclosed. This conclusion is based on the review
procedures performed in accordance with this ISRE, however future events or
conditions may cause the entity to cease to continue as a going concern.
Responsibilities of the directors
The directors are responsible for preparing the half-yearly financial report
in accordance with the Disclosure Guidance and Transparency Rules of the
United Kingdom's Financial Conduct Authority.
In preparing the half-yearly financial report, the directors are responsible
for assessing the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless the directors either intend to
liquidate the Company or to cease operations, or have no realistic alternative
but to do so.
Auditor's responsibilities for the review of the financial information
In reviewing the half-yearly report, we are responsible for expressing to the
Company a conclusion on the condensed set of financial statements in the
half-yearly financial report. Our conclusion, including our Conclusions
Relating to Going Concern, are based on procedures that are less extensive
than audit procedures, as described in the Basis for Conclusion paragraph of
this report.
Use of our report
This report is made solely to the Company in accordance with guidance
contained in International Standard on Review Engagements 2410 (UK) "Review of
Interim Financial Information Performed by the Independent Auditor of the
Entity" issued by the Financial Reporting Council. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other
than the Company, for our work, for this report, or for the conclusions we
have formed.
Ernst & Young LLP
London
27 March 2023
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
L Weedall
Secretary
L Thomas
Company registration number
02174990
Softcat LEI
213800N42YZLR9GLVC42
Registered office
Solar House
Fieldhouse Lane
Marlow
Buckinghamshire
SL7 1LW
Auditor
Ernst & Young LLP
1 More London Place
London
SE1 2AF
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