Good morning and welcome to the Softcat half-year results presentation. This is for the six months ended the 31st of January 2025. Thank you very much for joining and for your interest in the company. I'm Graham Charlton, Chief Executive, and I'm joined today by our CFO, Katy Mecklenburgh, who you'll hear from shortly. Before I hand over to Katy, I'll begin with a quick reminder of who we are and what we do. Katy will then headline the results for the period. I'll come back after that and give you an update on the strategic progress that we've made in that time as well. Softcat is the largest provider in the U.K. and Ireland of technology infrastructure solutions. This includes extensive capabilities across consultancy, implementation, and other related services.
Our market-leading portfolio is incredibly well diversified, covering the breadth of cybersecurity, hybrid cloud infrastructure, networking, workplace technologies, as well as data, AI, and automation. We do all of this across hardware, software, and services. We currently have more than 2,600 employees, and our consistent strategic execution, coupled with a disciplined long-term investment strategy, has enabled us to grow our gross profit and operating profit by an annual average of more than 15% over the last decade. We work with all the biggest and best-known technology vendors globally, often as their largest or one of their largest partners in our domestic markets. We are also regularly approached by new emerging vendors as a primary route into the lucrative and quickly growing U.K. and Ireland markets. This provides us with fantastic access and insight to the very latest in IT solutions and customer demand trends.
The success and resilience of our business is demonstrated by the diversity of our customer base, with more than 10,000 customers ranging across the mid-market into enterprise and from the corporate into the public sectors. We continue to grow our overseas presence as well, driven by the demands of our multinational customers. As I said, I'll come back more and talk about how we're developing those capabilities and shaping our business to capitalize on significant growth opportunities ahead of us. For now, I'll pass you over to Katy, who'll give you an overview of the first half results.
Thank you, Gram, and good morning, everyone. I'm pleased to share with you Softcat's results for the first half of FY25. In summary, our results for the period reflect the resilience of our business model and consistency in strategic execution. Despite the backdrop of continued macroeconomic uncertainty, we've once again delivered double-digit gross profit growth, which is our key measure of income, alongside double-digit growth in operating profit, which was slightly ahead of our expectations. Gross profit growth of just over 12% reflects a 1.4% increase in our customer base and a 10.7% increase in average gross profit per customer, demonstrating further good progress on our two key strategic goals. Operating profit of GBP 73.7 million, which is an increase of 10.4% versus H1 FY24, was slightly ahead of our expectations due to a slight overdelivery on gross profit during the period.
We continue to invest in future growth, with average headcount growth of 6.6%. As planned, this is a more measured level of investment compared to the last few years, as we have been able to leverage the more significant headcount increases we have made in the previous periods. We thus remain well placed to deliver on the considerable future market growth opportunities across our market. We've also maintained a strong balance sheet, delivering cash conversion of 110.9% and ending the period with GBP 141 million in cash, with the board approving an interim dividend payment of GBP 0.089. Moving on to the summary income statement and starting at the top. Gross invoiced income grew by 19.3% to GBP 1.5 billion. This was driven by particularly strong growth in software, up 22.5%, and hardware, up 18.5%.
Software growth was broad-based, while hardware performance was largely driven by strength in data center and networking sales, alongside server and compute. Services GII grew by 8.8%, supported by strong growth in internally delivered services, particularly support services. Revenue grew by 16.8%, largely driven by the increase in hardware GII. Hardware is reported gross under IFRS 15, and thus revenue growth is materially in line with GII. Services revenue growth of 17.6% was ahead of GII growth, reflecting a higher share of internally delivered services in the period, which were reported on a gross basis. While software revenue grew behind GII, causing total revenue growth to be lower than GII growth due to a lower software gross margin, reflecting product mix and a mix shift into high-volume, low-margin transactions. Gross profit, which is our primary measure of income, grew by 12.1% to GBP 220 million.
This is consistent with the full-year guidance we set at our FY2024 results for low double-digit growth and slightly ahead of our expectations for the first half. Gross profit growth was broad-based across our customer segments of enterprise, mid-market, and public sector, and on a product basis of hardware, software, and services, with each growing either high single-digit or double-digit. Across our technology groups, growth was driven by security, reflecting the continued prioritization by customers' investment in cyber, together with growth in data center and networking, where demand was broad-based and where we continue to see a strong pipeline. In workplace, client devices recovery continued to be slow and thus is still not a strong contributor to our growth. Overall, gross margin declined by 100 basis points year on year, reflecting the impacts of several higher volume, low-margin sales in the period, together with the decline in software margins.
Operating profit grew by 10.4% to GBP 73.7 million, slightly ahead of our expectations, reflecting the GP overdelivery. Operating costs grew by 12.9% year on year, with increased commissions, which grew broadly in line with gross profit and circa 11% increase in wages and salaries, driven by average headcount growth of 6.6% and average increase in cost per head of 3.9%. Moves to new offices, including the dual running of sites during the fit-out periods, also contributed to the operating cost growth. Our continuous investment in the long-term future of our business is reflected in a small decline in our operating profit to gross profit ratio. This investment in our capacity and capabilities puts us in a strong position to build on our current momentum and to further improve our market-leading U.K. position.
Lastly, net interest income in the period increased to GBP 3 million due to improved cash management, while tax increased in line with profit growth, resulting in profit after tax growth of 12.5%. Touching now on our customer base and portfolio offering. Our growth is supported by a diverse customer base and the breadth and depth of our customer offering, which is a key strength of our business and underpins the sustainability of our growth model. On the left, you can see the latest customer segmental view of our business, which remains very well balanced. Around half of our gross invoiced income is generated by the public sector and enterprise segments, with mid-market accounting for the other half of the business. The middle chart shows the spread of our activity between our traditional technology resale business and our service offering.
On the right, you can see that we generate significant income from all areas of technology, ranging from the cloud and data centers through networking, security, and end-user compute, with balanced growth across all three segments in the period. This diversity provides us with significant competitive advantage and is one of the factors we believe underpins the continued growth in what has been a more challenging market, and we will continue to support our ability to scale. Moving on to our customer metrics, the chart on the left shows the growth in our entire customer base and growth in GP per customer on that basis. These are the key measures of the two elements of our strategy: adding new customers and selling more to existing customers.
During the period, we've grown our customer base by 1.4% to almost 10,300 customers and grown gross profit per customer by 10.7% to GBP 43,000. The graph on the right shows a more detailed view of those customers with whom we have an established relationship and experience lower churn rates. This view focuses on the more than 8,000 customers that deliver at least GBP 1,000 of gross profit each year. In this cohort, there is a more balanced profile of growth between customer growth of 4.9% and GP per customer growth of 7%. The longer tail of transactional customers continues to represent an important source of future growth for us, but our established customers continue to account for around 99% of the group's gross profit. Now moving on to cash.
We ended the period with a cash balance of GBP 141 million, an increase of GBP 28.5 million year on year, after the payment of ordinary and special dividends totaling GBP 78 million. Cash conversion of 110.9% reflects good working capital management, together with a GBP 60 million prepayment by a single customer. Excluding this advanced customer payment, cash conversion would have been 89% in the middle of our target range of 85%-95%. CapEx increased to GBP 7.9 million in the period, primarily reflecting investment in new office openings. In line with the income statement, higher cash tax reflects the growth in profits, while interest income, which is included in other, improved compared with last year, driven by better cash management. The next slide covers the interim dividend. We've announced an interim ordinary dividend of GBP 0.089, which is up 4.7% year on year. This reflects our slightly amended policy.
We will now pay out one-third of the previous year's ordinary dividend as an interim, whereas previously we paid out one-third of the estimated current year dividend. Our full-year dividend policy remains unchanged, and we continue to target paying out between 40% and 50% of profit after tax on an annual basis. Touching now on capital allocation. We have a disciplined approach to capital allocation, and our framework remains unchanged. Our top priority remains investing in future organic growth, which enables us to continue to take market share in a growing market and helps us scale our business over the long term. Our second priority is to maintain a progressive ordinary dividend policy. Any excess capital is then either allocated to strategic investments or returned to shareholders.
We continue to actively explore acquisition opportunities, and our current core focus centers around bolt-on acquisitions that could help enhance our technology proposition in the U.K. market. Finally, moving to the outlook. Based on our performance in the first half, we are slightly upgrading our guidance for operating profit this year. We continue to expect to deliver another year of double-digit gross profit growth in FY2025, with operating profit growth now expected to be low double-digit, up from high single-digit previously, supported by an encouraging second half pipeline. With that, I'll now hand over to Gram to run through the strategic update.
Thank you, Katy. As you heard there, we're really happy with that strong performance in the first half, but we're also very pleased with the progress we've made on implementing our strategy over the last six months. I'll now give you a recap of what that is and an update on how we're doing. You can see here an overview of that strategy, which is shown and is unchanged from the one that we used last year. It's a simple illustration of the virtuous cycle of growth and investment that is powered by our special culture at Softcat. That is what has underpinned our success to date, and it will continue to drive our growth into the future as well.
Our culture creates passionate teams of people who work collaboratively as they strive to meet the needs of their customers in a way and with a tone that we think our competitors cannot match. This creates a cycle of trust and loyalty that results in customers placing more and more of their requirements through us each year. That fuels further investment in our proposition and reinforces our competitive advantage over time. As we have said before, our culture and the positive attitude shown by our people will always be the main driving force of our success. In an increasingly complex technology landscape, it is the breadth and depth of our offering and our wealth of expertise too, which is becoming an ever greater source of advantage as well.
That is why our strategy demands that we continue to develop both of those elements and ensure that we continue to be a sustainable and market-leading growth business. I will touch now on each of these areas in more detail. Firstly, our culture. At Softcat, we believe it is a truly special place to work, full of talented, dedicated people who demonstrate that positive attitude day in, day out. This unique culture forms the basis of a differentiated customer service that helps us retain and strengthen customer relationships over the long term. I have tried to highlight here some of the key elements that make our culture so special. Of course, trying to capture culture on a PowerPoint slide is a bit like trying to bottle mist. Our culture is a vibrant, living thing that our people would probably each have slightly different ways of describing.
What we do not do is paint values and corporate slogans on the wall and try and get people to recite them. Hopefully, what we have captured here gives you a flavor of it because our culture is very open. People can speak freely. They know that their views and opinions matter to the company. Senior leadership are very visible, very accessible. We do not have offices and symbols of power to hide away behind. We do tons of recognition, especially for people who show that great attitude, go out of their way to help each other and to help our customers. Low ego, coupled with very high drive, is a key combination that we are looking for.
have always been keen to create vibrant and welcoming office environments too, providing the facilities that enhance the connection between our people and also between our vendors and customers when they come to visit us. As much as anything else, we put trust in our people to do the right thing for their customers, and we keep the business as simple as we possibly can as well so their efforts do not get bogged down by unnecessarily complex processes and systems. We have seen the results of this culture in our performance over the past 32 years. You can see at the bottom of the slide there some of the external recognition we have received for it over the past six months. Culture is a driving force, but these days, it is powering what we believe is the fullest and most complete offering in the market too.
We will turn now to the components of that customer proposition. You can see here how we segment that internally to enable us to form clear plans for its strategic development. Each area is coordinated and led by a member of the senior team. That enables clear ownership, but also facilitates really strong teamwork as well. Our vision is to build a business which is increasingly automated, smarter, and easier to work with. This will improve both the customer and employee experience and ensure that our uniquely rich combination of products and technical and service offerings can be delivered to the right customer at the right time in a way that works for them. Our sales strategy with targeted go-to-market motions built in partnership with our vendors then carries that offering wrapped in the unique Softcat culture into the market.
In the past six months, we've been especially active in maturing our approach to large and complex customers in both the corporate and the public sector space. Partnership with our vendors has always been a key strength of ours too. During the first half, we've worked on evolving the framework through which we do this. This will allow us to work even more closely with our very top strategic vendors, such as the likes of Microsoft, who are evolving and innovating their technologies and offerings faster than ever. All of this is enhanced by the new digital platforms and data insights that we're developing. Just as many of the customers we serve are looking more closely at the way their data is organized, we're enhancing our own database architecture, the integration layers between our different systems to enable us to leverage innovative analytics and insights.
Microsoft Copilot is one good example of an application that we've started to harness the benefits of, particularly through the automation of back-office processes and improving productivity and, importantly, the quality of work. We've also recently selected Microsoft's Dynamics platform to replace our current sales system, and this will ultimately enable our salespeople to leverage integrated AI functionality between these core systems. This next slide brings all of this together and illustrates how our customers can benefit from a clearly organized set of products and services presented to them through a clear framework built around the common building blocks of modern infrastructure. You can hopefully imagine how each of these vendors' product sets are segmented across that technology proposition, supported by our teams of specialists and solutions architects.
Each of these areas then has all of those service disciplines playing through it, carrying a tailored approach to customers in the mid-market, enterprise space, and public sectors. This gives our account managers the confidence and credibility to deal with customers, knowing that whatever issues or challenges that customer is currently facing in whichever part of their technology stack, that Softcat is the best partner to help them with that over the short, medium, and long terms. Because of the richness and breadth of our business, we're valued by our customers for the insight that we can give them into the challenges being faced by other organizations and what solutions are being implemented. This next slide gives you a flavor of some of those hot topics that we're currently helping customers with.
I will not go through all of it, but Microsoft Copilot continues to be of interest to customers who are keen to hear the user cases being developed in different industries. In the data center space, the architecture of both storage and compute has never been more important as the age of AI really starts to dawn. Carefully balanced considerations have to be made around the type, cost, and location of the right processor for each individual workload, as well as issues such as data sovereignty and latency. Good data engineering is increasingly important too if that data is to be fit for use within complex emerging systems such as agentic AI. For that reason, we are investing significantly in both our own capabilities and building a strong partner network in the data and AI segment of our proposition as well.
All of this activity, of course, gives new approaches and new avenues of attack to the cybercriminals. Consequently, we continue to see very strong growth and investment in our security practice. For our customers, having a single partner who can range across all of these issues with them is a huge advantage. The benefit for the customer is advice on integrated solutions that can be implemented as part of a long-term strategic roadmap where the individual components work together and do not conflict with one another. For our account managers, they can focus on doing the right thing for the customer in the long term, knowing that that will also bring them their very best earning opportunity. That alignment of interests has always been a really powerful force in the sustainability of Softcat's growth.
This next slide, which will be familiar to those of you who saw our last full-year presentation, hopefully illustrates the point I was just making nicely. It shows how we evolve our relationships with our customers and add value to them over time by doing exactly what I just talked about, by focusing on using the full breadth of our offering to help them over many, many years of partnership. Each layer of the pyramid that you can see here is defined by the amount of gross profit delivered by the customers. What you can see as you work up the pyramid is that the longer we work with a customer, the more vendors we tend to sell into them, the more business we do with them, and the lower the churn rate becomes as we build that lasting trust.
In the bottom layer, what we've called the customer pool, are customers with whom we're either not yet trading or have just made a start with. These customers generally represent new opportunities, predominantly for our junior cohort of account managers, but also for senior people as well, who will typically always maintain a small pool of prospects. As you move up through the layers, the relationship builds towards that trusted advisor status. Interestingly, at the very top, where we show customers yielding more than GBP 100,000 of gross profit a year, we've seen some of the fastest growth in that cohort recently. This is not purely a reflection of the size of customers' and IT budgets in that layer. In fact, only around a third of customers in that top layer are enterprise-scale customers.
This shows that we've got significant scope to do more in the enterprise space, but also how successful we are in the mid-market as well. It also shows that the size of IT budgets now is very significant across all different shapes and sizes of organization. In terms of growth in customer numbers, the number of customers in total that we're working with has been growing at around 1% or 2% per annum in recent times. The rate at which, though, that we are converting customers through that pyramid, customers with whom we've just made a start, converting them into more significant relationships, that has been accelerating. This reflects our strategic aim to go deeper with existing customers and will continue to be a focus for us over the next three to five years.
To summarize then, we've continued to successfully execute our strategy during this latest period, delivering results slightly ahead of expectations over the past six months and giving us good momentum heading into our second half. We've made some really exciting progress and have ambitious plans to further enhance that customer proposition and match the ambition and innovation that we're seeing from our vendor partners. Our unique culture continues to be the bedrock of our purpose and the sustainability of our growth. That sustainability is further supported by an incredibly healthy balance sheet and cash flow dynamics. As I said at the start, thank you again for your time today and interest in Softcat. We're very happy now to take any questions.
Thank you. If you would like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. If you change your mind and want to withdraw your question, please press star two. Please ensure your lines are unmuted locally as you'll be prompted when to ask your question. The first question comes from a line of Tintin Stormont from Deutsche Numis. Please go ahead.
Can you hear me okay?
Loud and clear, Tintin.
Hello. Yeah, cool. I'll go for three. I'll just be cheeky. Sorry. First one is, are you able to give more color in terms of Q1 versus Q2 performance if there's anything to call out there? Two is regards to headcount growth. I think you're sort of kind of flagging 6%-8% headcount growth for the full year, having done 6%. Is there anything to comment on that with that headcount growth versus double-digit gross profit growth? Is this something that sort of kind of going forward you feel that you could do, obviously sort of being able to generate more of that sort of kind of GP with less kind of, to some extent, one-to-one on the headcount side? And then thirdly, on pipeline, is that pipeline relative to sort of kind of previous years?
Is that trending higher in terms of are you getting just involved in larger opportunities that's giving you a little bit more visibility in terms of the projects being larger and you being able to see a bit further out?
Okay. Hi, Tintin. Let me kick off.
Hi.
Gram can jump in. On Q1 versus Q2, the growth in Q2 was higher than Q1, but really that was sort of just a manifest of the base period. We were the difference in comps. If you looked at the two-year, it would be really pretty similar. Short answer is no, nothing really to call out there. As I say, just pleasing progress across the half. On the headcount question, yep, you're right. Full year, 6%-8% sort of guidance and similar range for H2, so we expect H2 to pick up a little bit, but probably land, I guess, in the midst of that range for the full year. In terms of that relationship to gross profit, we, I think, clearly sort of messaged we've invested quite hard in headcount the previous two periods.
It was always our plan as we entered FY2025 to continue to invest in heads but to slow the growth rate down and sort of embed the heads that we've recruited over the last couple of years. We're also continuing to invest in our IT as well to try and really drive sort of efficiencies as well across our model as we continue to scale. I think moving forward, like Gram to comment, we'd expect to see sort of a tightening of headcount, but I think that's sort of a general trend.
Yeah, thanks, Katy. Hi, Tintin. Thanks for the question as well. Yeah, the headcount, we said during through the cycle, we'd continue to invest. Over the past few years, while the market's been tough, we've grown headcount very significantly and said last year that we'd take time to digest that growth, drive a return off it, and to expect lower growth this year. I think you can expect lower headcount growth from us next financial year as well compared to GP, hopefully. It doesn't need to be a one-to-one relationship, certainly not at all. There's a lot of productivity and, as Katy says, system investments that can keep GP growing faster than headcount in the future, we hope. You asked about the pipeline.
Our pipeline's a difficult thing to measure because we've got 800, well, it depends how you count them, but hundreds of nearly 1,000 sellers out in the market talking to 10,000 customers. There is some clear appetite amongst some of our customers for big infrastructure projects that's been bubbling away for a while now, so it's not concentrating on any one customer or any one vertical, but encouraged by the number of conversations that AI and other topics is developing. We think that will come to fruition with some good business in the second half. We are excited about that.
Great. Thanks, guys.
Thank you.
The next question comes from a line of Damindu Jayaweera from Peel Hunt. Please go ahead.
Thanks, guys. And well done on good sort of results. I just wanted to ask a little bit more on the headcount piece. So you're calling out the following year, the headcount growth will continue to lag GP growth. But can we assume the commissions will continue to grow in line with gross profits as they did in the first half? That's my first question. The second question I wanted to ask was, you flagged a survey where customers were obviously calling out cybersecurity as one of their primary concerns. Could you remind us and talk to us about your internal cybersecurity services capability? I saw when you kind of called out the internally provided services growth in the GII, it didn't necessarily mention cybersecurity. Was that part of the bid that grew?
The last question I wanted to ask was, you talk about how you want to evolve the U.K. vendor management framework. Is there anything more to add there? I mean, what are you launching next year? I'm just intrigued. Thank you.
Thanks, Damindo. Yeah, and I'll try and answer all of those. Katy, you'll chip in if I miss anything. Firstly, on headcount commission, so yeah, we think headcount growth will lag GP. I think commission growth will probably continue to be closely tied to GP growth. I say probably because it does depend on the mix of products that we're selling, and we don't mandate that. We follow customer need. Yeah, commission growth will likely remain closely pegged to GP growth, would be my expectation. Security practice, yes, it's growing. Our security services is growing in breadth and capability and in terms of the revenue and profit it delivers to the company. Our security practice covers assessment services, implementation services, and support and manage services. It's a really rich offering now.
It includes some complex services in there, such as managed SIEM and MXDR, and it's highly accredited with the likes of Microsoft, which we use as a platform for that as well. A strong capability for us, a source of rich conversations with customers and developing both service growth and product growth as a result of our having that capability. We have lots of partnerships in that space as well to complement that. Our vendor management framework, it's really just a tightening up of how we work with vendors, having spent time more clearly defining what we offer to customers, which makes it easier for them and for our salespeople and the rest of our business to organize ourselves and present that to customers. The way that we play vendors in through that framework has been revisited and tightened up as well.
I wouldn't make too much of that. It's really just about operational excellence, but also it is a response to the quality, the richness, the innovation that's happening in those vendors' portfolios and making sure that we're doing their innovations justice with our customers and making sure that we've got the time to spend planning and developing our accounts with those top strategic vendors as well. It is not a fundamental change in how we operate. It's just an evolution.
Thanks.
Thank you.
The next question comes from a line of Andrew Ripper from Panmure Liberum. Please go ahead.
Yeah, good morning, everybody. Well done on a good set of results. A couple from me. I wanted to start with software, please. I wonder if you could explain a little bit more what happened to software margins. I think you mentioned, obviously, you do not disclose the GP numbers, but you mentioned the hiking or I presume that relates to software. Can you contrast that with what has happened to GII and explain whether that is a sort of a short-term impact or a more sort of permanent shift in the mix?
Yeah, hi, Andrew. I'm sure you remember we focus on absolute gross profit, and GII is largely just sort of an output of what we're selling. Our margins can fluctuate quite a lot just depending on product mix and also sort of the channel that we're selling in. If it's sort of large, complex transactions, they tend to come with a higher margin. If it's something that's simpler and high volume, lower. Nothing to read into it in terms of trend, just really much more sort of just reflective of what we sold in that particular period. Overall, really pleased with the way that software performed.
Great, thanks. Second one, the SME growth really stood out to me compared to enterprise and public sector in an environment where the U.K. macro has been pretty tough and companies, if anything, have been more cautious, I think, in terms of investing, given the increase in wage costs, particularly, that's affecting some sectors. Could you basically expand on that? Have you consciously put more of your sort of sales capacity focused on sort of customers with sort of 2,000 seats or less?
Yeah, hi, Andrew. It's Gram. No, we don't move effort around based on sort of short-term trends that you might see in the economy like that. We often get people worried about our mid-market business when times are tough because they think credit risk or demand dries up faster. We often see mid-market perform well in those periods. Big corporate organizations tend to have a more structured approach to budgeting and can get swayed by business sentiment, perhaps a bit more. Really, it's hard to read too much into any trends that we might present over six months. We're the biggest player in the market, but we're only 5% market share. It's much more a reflection on the collection of customers that we work with, the idiosyncrasies of their budgets. You'll notice that all three of our customer segments grew strongly.
That is really what I'd emphasize, the fact that we've got diversity in the customer base, diversity in the offering that we've got, and seeing growth in all parts of that matrix and mosaic as well. No, the mid-market continues to perform well for us. I think our opportunity in the mid-market and the enterprise space and public sector are all of a pretty similar size going forward as well.
Thanks, Gram. Final one. Can you give us a bit of color on what Copilot adoption has been like across your Microsoft customer base, please?
It has continued on a similar trajectory, which I think we were seeing in the second half of last year, which is customers interested in it, trying it out, creating budget for it, creating use cases for it, and the quality of the products developing as well. We are getting on really well with it in Softcat, able to talk to customers about that and seeing customers increasingly adopt it. I think we said this before, we are not expecting suddenly a big inflection point. I think it will be a gradual build, and that is what we are seeing. It is a good source of conversation and more and more customers starting to use it and get value from it.
Thanks, Gram. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. The next question comes from a line of Dina Abu-Rahmeh from Morgan Stanley. Please go ahead.
Hi, good morning. Congrats on your results, and thanks for taking my questions. Just two on my end. First, in regards to the end market of your clients within SMB and enterprise, could you please touch on which sectors or industries you see are driving most growth? Secondly, I understand that GP growth is broad-based in terms of your customer groups, but are you seeing any differences in client attitudes in terms of IT spending, particularly when you're comparing SMBs versus your enterprise customers? Thank you.
Thank you. In corporate, which sectors are driving strongest growth? Again, hard to generalize, but if you think about the sectors in the economy that are doing well and those that are under pressure, it broadly reflects in what they're spending on IT, I think. Areas for us that have done well, kind of financial services, not hospitality and retail, but very hard to generalize again, but yeah, broadly reflecting what you're seeing in business confidence in the different sectors, I would say. Sorry, could you just try the second question again? I'm not sure I fully understood it.
I think any change.
Yeah, of course. I suppose just in terms of client attitudes, in terms of IT spending, can you maybe give us more color on how you're seeing that? Has attitude changed since 2024? Just to get an idea of the spending environment.
Right, yeah. Thank you. Sorry. No, is the short answer. Not really seeing any change yet. I think the sentiment from customers has been broadly the same over the past six months as it was over the 12 or 18 months prior to that. I think the change in government that we've seen in the U.K., the change in approach, change in taxation and government spending, and what's been happening in the broader world led to a fall in business confidence, or rather has kept business confidence a bit lower than it might otherwise have been. I think the conditions have continued to be somewhat challenging. We're lucky in inverted commas to be in the industry that we're in, which I think, despite that, has been in structural growth, but I don't think we've seen a material shift in customer sentiment yet.
The next question comes from a line of Anwar Chopra from HSBC. Please go ahead.
Hello, good morning. I have two questions. In terms of could you give a sense of productivity ramp-up of new employees who have joined in the last 18 months- 24 months? Basically, where are we with more tenured salesforce and more generally in the past hiring plans? Just wanted to get a sense of that, please. Second question is around basically, again, just coming back to in terms of market growth, could you give us what is your view of the market growth more generally within the public sector and corporate side? Just want to get a sense of basically market share and performance versus Softcat's growth here. Thank you.
Okay, thanks. The line wasn't great, so I think I've got the questions, but if I've misunderstood them, let me know and we'll try again. New employees, I think you're asking where are they? Which departments are they going into? Where are we investing in headcount? The answer to that is, again, it's broad-based like it always has been. We're building our sales teams and the technical and service teams that support those and investing in our back office capability. Like in previous periods, that growth has been skewed towards the technical and service side of our organization as we aim to go deeper and provide a fuller service and expand our capabilities into new areas for those customers. The market growth, really hard to do this even with the benefit of hindsight. I think we're growing quicker than the market.
We've generally thought we're growing two or three times the rate of the market. Still, I think a pretty reasonable estimate. I'm not sure that I can discern a big difference between the growth in those guesstimates between corporate and public sector. Maybe slightly biased towards corporate over the most recent periods, but again, it's very different in different verticals and different parts of public sector. I think our performance and gaining of market share in both the corporate and public sector space has been good and probably pretty similar, but very hard to quantify exactly. Did I get the questions right, or was there any expansion on that you need?
Thanks, Gram. I think my first question was generally in terms of the productivity changes in the new employee versus previous hire. That was probably the core of what I wanted to get through.
Yeah, sorry. No. No real difference. I think you're referring there really to the salespeople that we're bringing in and how they're doing against targets. The people we're bringing into sales, their productivity, their ability to hit targets has broadly followed historic norms. Because the market has been tougher, that maybe presents them with a few more challenges at times like this, but no, they're performing well and new recruits making a good start.
Thank you very much.
Thank you.
The next question comes from a line of Joe George from JP Morgan. Please go ahead.
Yeah, hi. Morning, guys, and thanks very much for taking my question. I think with the full year results in October, you gave us a little bit of color on how Q1 was trending versus the guidance at the time. I am just wondering now how Q3 has trended versus the updated guidance. Just as a follow-up question as well, just looking at the public sector GII growth through H1, it is still close to double-digit, but it is a bit slower than H1 GII growth in public sector has typically been over the last few years. Obviously, there has been a lot of headlines around efficiency of government spend and allocation of funds right now.
With that in mind, as you look to April, which is typically a larger public sector month, what are the sort of early indications you're seeing there with regards to public sector spend?
Thank you. Q3, what we're seeing, it's really too early to say. A lot of our sales cycles close, as you might imagine, as the quarter ends. These earlier stages of a quarter are less meaningful. Too early to really give you any insight into how Q3 is trending. Sorry about that. Public sector GII growth a bit slower. Again, hard to form conclusions about short periods and what we're seeing, relatively speaking. I think our public sector business is in really good health. Our offering's very good. Remember that a lot of IT spend, infrastructure spend, particularly whether it's public sector or corporate, is recurring by nature: software licenses, renewals, hardware that needs refreshing or adding to. We're still seeing good growth and demand from our public sector customers.
Yeah, maybe with the change in government and the rhetoric about the need to find efficiencies, some government departments are being affected by that. We are still seeing strong demand and growth because their IT infrastructure is critical to them. I think come what may for public spending, our public sector business has a great opportunity going forward, and we would expect it to remain in growth.
Great. Very clear. Thanks very much.
The next question comes from a line of Harry Read from Redburn Atlantic. Please go ahead.
Hi, good morning. Just one from me. Curious because obviously gross profit per customer remains the key driver of gross profit growth. You said in the past that your share of customer wallet is kind of mid-20s percentagewise . I'm curious if you have any estimates of what the ceiling for that could be, i.e., the amount of IT procurement that an end customer is willing to allocate to the channel and then the growth potential there because your runway for growth seems quite large given that context. Maybe a follow-up is that does services and investment in services help open the conversation to procuring new IT that you maybe didn't have a footprint in before? Thank you.
Thank you. We try, and again, it's not a perfect science, but we try to define our opportunity in what is truly addressable. In theory, we could do a 100% share of wallet with each customer because we've tried to make sure that that share of wallet, that market share is couched in those terms. Now, clearly, customers will choose whether or not they want to put everything through one provider and whether that's healthy for them. We do see a share of wallet in some of our longer-standing customers of 70%-80% and upwards. That trust that we gain with them can be very powerful over time. I don't see any reason why in the way that we define this that we can't get to 60% share of wallet with every customer over time.
I think that would be a reasonable goal for us to aim for in every account. Our service business is really important, yes, in opening up that opportunity. When we see technology evolving, customers need help and advice on that. Us being able to respond to that need for help and advice is a crucial part of how we win their business, how we win their trust, how we show them that we're a provider that can go on the journey with them over a very long term, no matter what happens to their infrastructure and what innovations come through in technology. The way that you phrase the question around how much would a customer put through the channel, customers do not really think of it in that way. They look at where they can get the best advice from.
Really, really large customers will have capable internal teams, and vendors will create a capability to talk directly to those internal teams for the very, very large customers. They've always done that. Really big enterprise-grade customers will put probably less of their spend through the channel than the smaller players who need the interaction that we provide more than some of the bigger ones. What we don't see is that proportion of business going through the channel move significantly period on period. You'll get different plays from different vendors at different times in different segments. If there was a trend, I'd say more business has been going through the channel in recent times. The one exception to that is a lot of investment in the AI data center space has been done by the hyperscalers, and a lot of that work goes directly.
Some of that recent AI-driven growth has not been via the channel, but everything else tells me that the channel, the service, the value that we add is as healthy as it's ever been. The complexity of IT infrastructure plays into that, and I think that's why you're seeing strong growth in Softcat as a result.
Great. That's very clear. Thanks. If I could just do a quick follow-up question on a different topic. I heard from a competitor that obviously there's a lot of uncertainty around Microsoft commission changes, but there was a positive surprise on public sector rebates. I'm not sure if you're seeing that as well. If you have any additional color you can give there.
Same as what we've said in the past on this topic. Different people were surprised by it. I don't think we were. I think Microsoft have made changes that they've signaled for a long time now. They make good sense. We understand where they're going. What they're demanding from us is very, very clear. It is a challenge to respond to. We've got to move things around. We've got to change some sales motions, but we love that because we think Softcat's ability to respond to it is as good as anybody's. Yeah, the effect of those changes is in our forecast, in our expectations, and we're very positive about what that's doing for our relationship with Microsoft as we work with them through those changes. I think there's a lot of opportunity in that for Softcat.
Great. Thank you very much.
As a final reminder, if you would like to ask a question, please press star one on your keypad. We have another question from Damindu Jayaweera from Peel Hunt. Please go ahead.
Thanks, guys. Just a few, if you will, if we have time. One is on the capital allocation policy. I think for the last few years, you've had this kind of semi-active, you've been semi-actively looking at the two avenues of M&A bolt-ons and what you can do more for the overseas customers. I assume nothing materially changed in that strategy, and therefore, how should we think about if there's no change to your special dividend policy, I assume, because you always returned excess cash beyond what you considered you should keep on the balance sheet. That's my first one, and then I have two quick follow-ups.
Okay. Thanks, Damindu. Kate will maybe comment in more detail on special dividend, but there's been no change in our stance on M&A. The way that we consider it as an option is the same as it has been over the last two or three years. We look at different areas. I call it a no-lose effort because we'll either find something really compelling, act on it, bring it into Softcat, and it will accelerate our capabilities in some way, or we'll learn a lot about capabilities that we're trying to build by looking at targets, and that will inform our organic growth strategy. No change in our stance, still an option for us.
Yeah. On the capital allocation point, Damindu, I mean, our capital allocation policy is quite clear. Excess cash, if there was a brilliant opportunity and we have a pretty high bar there and we needed the cash, then yeah, the cash returned to shareholders could go down, but obviously it would just depend on the size of any opportunity. Historically, that cash has always come back to shareholders.
The other one, Gram, this actually relates to the IT Channel Oxygen interview you gave where you called out the no-lose M&A policy. You called out cybersecurity profit growth in excess of 20%. I just wanted to verify that number. Is that accurate at gross profit level?
In our cybersecurity services business, I think.
Yes, go on.
Yeah. Cybersecurity services we've invested in over the last three or four years, and the growth in the contribution from that has been around about 20% or above over the last three or four years. It was a generalization over a long period of time. Of course, the service part of our cybersecurity offering is a relatively small proportion. It does lead to a lot of product sale, but growing very strongly as we've invested in new capabilities there over recent times.
Yeah. The last one is just an observation. I just noticed that if you do operating profit over gross invoiced income, it's remarkably stable at around 5% since kind of 2022 in every single half, it feels like. I just wanted to check, that's not a metric you necessarily monitor, right, operating profit over gross invoiced income? Because it almost feels like you managed to it because of how stable it's been despite the mixed changes and sometimes low-margin software sales.
No. I do not think I have ever looked, well, indirectly we look at that because it is one of the moving parts, but as a direct comparison, it is not something we monitor. Certainly not something we manage to. Does not surprise me. It has been quite stable. We do say that our gross margins move around depending on customer demand more than anything else. Customer demand goes from one place to another and that evening out over time. It makes perfect sense to me, but we do not manage to that metric at all.
Yeah. Thank you. Amazing London offices, by the way, the new offices. Look forward to seeing them in person.
We might have you there for the full year results. We'll see if we can make that work. It's a great space, and it reflects what we're doing with some of the other locations as well. We're moving Manchester to a city center location. It's really important that in the way that modern work works, that people have that collaborative space. Yeah, really pleased with that. Thank you for noticing.
Thanks.
There are no further questions,F so handing back to Gram for closing remarks.
Thank you. Just to reiterate our appreciation for your time and interest in Softcat. Really pleased with the first half momentum we've developed. Good confidence going into the second half, most importantly. Lots of exciting investment into the business's long-term future, and the opportunity that we think exists for us in the markets that we're in is as vast as it ever has been. We look forward to keeping you posted on progress. Thank you for your time today.