Softcat CEO on international expansion, revenue impact after IFRS 15 and why macroeconomic uncertainty has yet to materialise

Josh Budd
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Softcat CEO on international expansion, revenue impact after IFRS 15 and why macroeconomic uncertainty has yet to materialise

Graeme Watt claims worries over Brexit and US-China trade tension have yet to materialise as Softcat posts 28.5 per cent growth to gross invoiced income

Softcat exceeded its growth targets for the first half of its fiscal year ending 31 January 2019. Gross invoiced income jumped by 28.5 per cent to £607.8m while operating profit surged by 40.4 per cent to £33.9m.

Softcat CEO Graeme Watt (pictured) and CFO Graham Charlton reflect on the last six months and discuss the UK-based reseller's growth plans for 2019.

What are your key takeaways from H1?

Graeme Watt: After a good year last year I think it's very pleasing. That's partly down to the fact that we've got good demand for technology in the marketplace, and we are taking share in the market. Our focus on adding new customers and selling deeper into customers continues to deliver, so that's down to great execution from the team as well.

We feel there are a lot of legs in the business and it's consistent with previous discussions we've had with you and others. We think our market share is still relatively low; although we are the number two by revenue in the market, we've still got only 6.9 per cent of the top 100 VARs, so we've got quite a lot of share to go after.

And if you measure the amount of businesses out there that we think are in our addressable market, north of 6,000 and last year we reported 11,900 as a customer count, so strong growth driven by great execution and continued application of those strategies, adding new customers and selling deeper into more markets.

What do you make of the IRFS 15 standard that came into effect for your H1 results? Has it created any nervousness and are you pleased with how the results have turned out under the new standard?

Graham Charlton: It creates a presentational change to our revenue and it's nothing more than that. So we continue to report what we call gross invoicing alongside it, which is the gross revenue number that has actually flown through our books on the old basis of recognition.

The reason we've done this is because the new standard forces us to net down certain revenue streams, because they've changed the rules on how you determine if you're acting as the principle or just an agent in that transaction. It kind of creates a movement in the revenue number that is a bit confusing, so we just report the old figure to give people clarity on that.

And honestly, we've always regarded gross profit as our primary measure of income and all the analysts that follow us really look at that gross profit growth figure to work out how the business is doing and how it's moving forward. I wouldn't get distracted by the revenue change. It's just presentational.

GW: We did our analyst presentation this morning and Graham has been talking to the analysts too and I think it was a mild concern that perhaps IFRS 15 would take over the discussions of today and the next couple of days, but that hasn't materialised. People understand that it's presentational and it doesn't change operating profit or gross profit.

When Softcat posted its H2 results last October, you suggested that market demand could soften due to macroeconomic and supply chain uncertainties. But judging by your H1 results, this hasn't happened. Did this come as a surprise?

GW: I think our caution was around one or two things. Firstly it was around the trade war stuff we saw principally between the US and China and there were some concerns about how any decisions made on Brexit or the sentiment around Brexit might affect demand. But [the UK] hasn't made any decisions on Brexit. There were also some concerns about tough compares, because we did have a performance last year that was ahead of where we ourselves anticipated. So with that backdrop to your question, no, we think demand has remained very healthy.

So we think the demand environment seems to be pretty good, as evidenced by our performance. I don't think the market is growing at our revenue rate, our growth rates represent a good market and a strong market share performance too.

Regarding some of those potential headwinds we flagged up, we were just uncertain, it was just an area of uncertainty and we weren't sure if they'd take effect and, if they did, how they'd take effect. It seems at this point there hasn't been any material impact on demand from customers.

How has business in Ireland developed since you expanded there last year?

GW: It's on track. It is a little bit different setting up something in Ireland than in the UK because we had to set up new processes and accreditations and new relationships with the vendors that we work so closely with in the UK. That takes a little bit of time. But I am pleased with the recruitment, and I'm pleased that we've now secured all the major accreditations that we wanted in the marketplace and we're talking, selling and in some cases in advanced discussions with a lot of new logos in Ireland as well, so we're on track.

Will Softcat be making another international expansion move any time soon?

GW: The market share we see in new customers and selling into existing customers in the UK and Ireland has a lot of potential, so that's where our focus is going to continue. As you'd expect any leadership team to be doing, we're continually challenging ourselves about what's next, and where's the growth coming from, where do we need to invest, and we have those discussions regularly. We do discuss the merits and risks of setting up internationally but we have no plans to go outside the UK and Ireland right now.

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