Good day, thank you for standing by, and welcome to the Q1 2023 update of SoftwareOne. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question, you will need to press Star one one on your telephone. I will now hand the conference over to the speakers today, Anna Engvall, Head of IR. Please go ahead.
Good morning, and thank you to everyone for joining SoftwareOne's Q1 2023 trading update. My name is Anna Engvall, Head of Investor Relations at SoftwareOne, and joining me today are Brian Duffy, our CEO, and Rodolfo Savitzky, CFO. Brian will kick off by saying a few words on his first impressions and priorities after 10 days at SoftwareOne. The presentation of the results and Q&A will then be hosted by Rodolfo. Before handing over to Brian, please let me draw your attention to the usual disclaimer regarding forward-looking statements and non-IFRS measures on Slide 2. With that, I'll hand over to Brian.
Good morning. I'm pleased to welcome everyone to our Q1 2023 trading update. It's a great pleasure to be here today for my first call with you as CEO of SoftwareOne. I will use this occasion to share a few of my very first impressions and priorities. Since joining 10 days ago, I've taken the opportunity to spend time with my team and the executive board here in Switzerland and to meet new colleagues across the company. I'll soon be leaving for a five-week global connect tour to meet with local teams around the world, as well as clients and partners. It's still very much early days, but I'm pleased to say my conversations so far have confirmed my initial impression of SoftwareOne.
Firstly, there's an incredible team of talented men and women here at SoftwareOne and a huge amount of passion within the organization, which I could feel immediately. In prior roles, I've been part of driving large transformations, and these are rarely easy, but I can see that SoftwareOne has the right people and culture to continue embracing change, and this will inevitably be a part of our future in the technology sector. The long-term opportunity in cloud is massive for us at SoftwareOne. Customers deciding that approximately 30% of their workloads have moved to the cloud only so far. At SoftwareOne, we have a powerful global software and cloud solutions platform, and there's still untapped potential to fully capitalize on this opportunity. To get there, we have to put the customer at the center of everything we do to ensure their journey to the cloud is successful.
Enhancing our partner relationships will also be a priority for me. Our independence, our global reach, our local presence and expertise create a unique value proposition. We have much to offer both old and new partners as we build strong and mutually beneficial relationships. I'm also convinced that embedding operational excellence across the organization in our go-to-market, delivery, and support functions will bring significant value and make us stronger and more scalable for the future. To conclude, I would add that I'm incredibly excited to lead SoftwareOne's next chapter together with the team. I look forward to reporting back to you soon again on our progress, and I'll now hand over to Rodolfo to take you through the business development and financial performance in Q1. Rodolfo?
Thank you, Brian. A warm welcome from my side as well to our Q1 trading update. We have had a solid start to the year. We continue to see healthy demand as our clients remain focused on cloud-first digital transformation. Q1 revenue for the group grew by nearly 9% year-on-year in constant currency to CHF 239 million, with both business lines contributing to growth. Our core service lines, cloud, application, and SAP services, continue to show particularly strong momentum. In Marketplace, underlying demand was strong across both our Microsoft business and ISV portfolio. Adjusted EBITDA was nearly CHF 40 million, with a margin of 16.6%, down 1.8% points compared to prior year, in line with our expectations.
With this solid performance, we remain confident in our full- year 2023 outlook as communicated in March to deliver double-digit revenue growth in an Adjusted EBITDA margin of 24%-25% of revenue. Before moving on, I would also like to welcome the team from Beniva Consulting, an acquisition announced today, and I will come back to the details later on. By region, EMEA delivered a solid quarter with revenue up 9%, driven primarily by strength in large enterprises in the DACH countries. APAC remained very dynamic, up 23% as a result of strong results in key markets such as China, Singapore, and Malaysia. Meanwhile, NORAM saw revenue decline of 3% on the back of more cautious customer spending and soft results in Microsoft.
LATAM was up nearly 4%, driven by good momentum in services, partially offset by softer Microsoft revenue in Colombia, Brazil, and Mexico. Moving on to our business lines. Software and Cloud services delivered over 11% revenue growth. Our core service lines, Cloud, Application, SAP services, grew by over 20%, partially offsetting the expected decline in certain legacy services. Ximus grew 20% in Q1, down from over 70% last year, reflecting that we have reached the end of the shift to pay-as-you-go from existing multi-year agreements. Growth in Ximus was also impacted by changes to Microsoft's cloud service provider or CSP platform. Moving on to software and cloud marketplace, which grew by over 6% in the quarter.
Microsoft billing through 13%, reaching $4.2 billion in Q1, up from $3.7 billion last year, with solid momentum across customer segments. As flagged in our Q4 results call, Microsoft revenue was negatively impacted by the shift from legacy CSP to New Commerce Experience. After a transition period with lower incentives on the legacy CSP platform, the NC model comes with higher pricing, more favorable incentives, and longer-term subscriptions. Our portfolio of ISVs continue to show strong growth momentum, with revenue growth of approximately 30% driven mainly by our hyperscale portfolio and strong demand for IT security and virtualization solutions. As I mentioned at the beginning, we have today announced the exciting news that we will acquire Beniva Consulting Group, an elite ServiceNow partner with around 75 experts in North America.
Beniva is a provider of professional services and brings deep capabilities and know-how around ServiceNow, a preferred vendor for IT workflow management solutions in enterprises moving to the cloud. The strategic rationale for this acquisition is compelling. It expands our ITAM service line from a $2 billion addressable market to be over $7 billion IT service management market within the broader IT operations management space. Complementing our existing ITAM practice, it will enhance our ability to help clients reduce costs by improving their IT operations. In terms of financial impact, Beniva has an excellent growth track record, and its attractive margins will be immediately accretive to our Services business line. Let's move on to the detail around the numbers. As I have already shared with you the headline numbers, let me characterize the quarter first.
The Q1 results are fully in line with our expectations and are consistent with our plan for an acceleration of growth through the year, particularly in the second half. As a result of the strong Swiss franc, forex headwinds had a significant impact of approximately 4% points on revenue growth. Given our natural hedge with similar exposures on OpEx, the forex impact on Adjusted EBITDA was again minimal. Contribution margin increased by 2.3% points, reflecting optimization of delivery costs, compensating for the continued shift in business mix towards Services. SG&A expenses grew by 19%, and the adjusted EBITDA margin was 16.6% of revenue, 1.8% points below prior. The year-on-year development of adjusted EBITDA is shown in the bridge.
Revenue growth and slightly lower delivery costs had a positive impact, SG&A increased faster than revenue due to a normalization of commercial activities, as well as increased headcount and wage inflation of around 5%. The normalization reflects a planned higher level of travel and sales and marketing activities compared to prior year, which was partially impacted by COVID and also included one-off co-marketing investments from strategic partners. Moving on to the Business Line View. Before diving into the numbers, it is important to explain certain adjustments to the allocation of sales expenses, which have been implemented in the context of our operational excellence program. Specialized sales resources are now assigned to the respective Business Lines, while key account managers continue to be allocated based on contribution margin.
The contribution margin in services was 36.4% of revenue in Q1, comparing favorably to peers and up 4.1% points versus prior year, driven by the operational excellence initiative. SG&A grew at a materially lower rate than top line, translating into an adjusted EBITDA of CHF 2.3 million. The margin in Q1 was 2%, partially reflecting seasonality, this year-on-year improvement yet again confirms that we are on track to meet our 15% target. In marketplace, the adjusted EBITDA margin was 42.5%, down compared to prior year, reflecting an improved contribution margin, offset by increased SG&A, partially driven by the allocation of solution consultants to these business lines. I would also like to provide an update on our operational excellence program. As a reminder, this is an organization-wide initiative to drive effectiveness and efficiency.
We're targeting savings of CHF 50 million this year and a full run rate of CHF 50 million next year, with up to 50% being reinvested in innovation and growth projects. Deployment began in January. As of to date, we are on track to deliver these savings in operational improvement. In the commercial workstream, sales roles and the organization model have been defined and implementation has started. We have also launched an exciting artificial intelligence-driven cross-selling pilot in November. In delivery, we have made great progress completing the review of spans of control and layers. Up to 80% of personnel transitions have already been implemented. Finally, in the support functions, the shift from country finance teams to shared service centers have started, and in HR, we're piloting a shared service center in March. I will conclude our presentation with the full- year outlook.
We have had a solid start to the year with strong underlying demand across our Microsoft business, ISV portfolio, and core service lines. We remain focused on implementing operational excellence across SoftwareOne to step into our efficiency and effectiveness and to deliver the planned savings. While we recognize the uncertain macroeconomic environment, we generally see healthy demand in our market and are confident in meeting our guidance for the year. Thank you. We will now go to the questions.
Ladies and gentlemen, we now begin the question- and- answer session. As a reminder, if you wish to ask a question, please press Star one one on your telephone. If you wish to withdraw your question, please press Star one one again. We are now taking the first question. The first question from Katinka De Keukeleire from UBS. Please go ahead. Your line is open.
Hi. Thank you very much for taking my questions. A couple for me. First of all, welcome from my side, Brian. I'm looking forward to working together with you. In terms of the strategy, it's always good to get a new perspective from a new CEO. Maybe could you comment on what parts of the business are gonna be a priority for you? Have you already seen some opportunities where you can take advantage of? Secondly, a question for Rodolfo on the margin. Especially in Marketplace, the margin was quite weak, while the top line actually improved if we compare it to Q4. Can you just comment on the moving parts? Is it just the sales rules which impacted that? If so, where can the margin then get to longer- term? Thank you.
Sure. I will take it, and then I'll hand it over to Rodolfo. Firstly, I would say that, in terms of the organization itself, I am extremely excited about the passion that our employees have to serve our customers, firstly. Secondly, I would say that, we are in a unique opportunity given the independence that SoftwareOne has within the ecosystem. Customers know that they need to transition to the cloud, but the opportunity, obviously, for us is to help them in that journey. I believe the answer of why to transform has been answered by many customers around the world, and now our opportunity is to help them to move from A to Z in a constructive manner.
Secondly, I would say that I hope with my experience and partnerships that I have within the ecosystem, that one area we will be able to look at in time will be establishing further partnerships with new players and in addition, deepening the partnerships that we currently have. In addition, I am 10 days in, so over the next 100 days we will be reviewing the overall strategy and coming back to you later in the year with an update specific to that. I'll turn it over to Rodolfo.
Yes. Thanks, Katinka, for the question. Look, a couple of observations here. As you know, quarter one tends to be smaller in terms of revenue across the company, but particularly Marketplace.
Q2 and Q4 are the bigger quarters. Here we clearly see a significant rebound on the margin. Also, with this transition in Microsoft program for CSP, we expect a particularly strong quarter in quarter two. We see the opportunities of, as I mentioned, before, of higher pricing, higher margins for us, both translating to improved revenue and to an extent, a little bit contribution margin. Yes, the reallocation of sales resources did have an impact, right, on the, particularly on the SG&A evolution. This business line, once we look at the full year numbers, will go back into the 50% Adjusted EBITDA margin that we saw in 2022.
Great. Thank you very much.
Thank you for your question. We are now taking next question. The next question from Please go ahead. Your line is open.
Yeah, thank you. Regarding the one-off marketing invest you cited to have been basically a tailwind in Q1 2022, and hence missing in Q1 2023, Rodolfo. Are there any further incremental marketing invest that have to be digested that will be missing in 2023 versus the last year? Then looking at the cost run rate, if we strip out the acquisition of Beniva, is it fair to assume that we should have now a pretty fair cost run rate on the back of the Q1 results? Lastly, on the Microsoft price increase, you already touched a bit about it in the previous answer on the question.
The full run rate of this price increase, is it fair to assume that we should see that in the third quarter or from the third quarter onwards? Thank you.
Absolutely. Take the questions in reverse order. We have seen or we're seeing a very good transition to the New Commerce Experience, the new platform, already in April, and we expect further acceleration in the coming months. I would say we will start seeing the pricing impact already as of Q2, but definitely I would say pretty much the full impact in quarter three. A clarification on Beniva. We announced today the acquisition, meaning the signing. Closing will still take a few weeks. We will see the impact in our P&L most likely in the second half. This you do not see in the current P&L.
When it comes to the cost run rate, we do expect the marketing and travel partially to remain in the coming quarters. I would venture to say roughly half of that. The other half is related to the internal face events that we normally had hosted in the past, but which we didn't have in 2022 as we still were under partial COVID restrictions or with COVID restrictions. In the one-off co-marketing investments, they were particularly significant in Q1. They probably represent half of the effect for the full- year, we will see a reduced effect in Q2 and a very limited effect in the second half. They were front loaded, right?
I would say out of these normalization activities, Well, way less than half, we will see in the balance of the year.
Great. Thank you, Rodolfo.
Thank you for your question. We are now taking the next question. The next question from Joe George from JP Morgan. Please go ahead. Your line is open.
Yes. Hi, good morning, guys, and thanks very much for taking my questions and welcome Brian as well. I just have two, please. Firstly, on the Services line, you said that growth was impacted by the legacy services. Could you just give us a little bit more detail here? What specific services were the weakest, and what are you expecting through the remainder of the year here? Secondly, just on Beniva, could you talk around the absolute uplift that we should see to the adjusted EBITDA through the financial year and any sort of other financial color that you can give on that? Thanks.
On the first, what we call legacy, these are services associated still to on-premise, to companies which have on-premise activities. There are some specifically on-campus training that we do for companies. Again, these are clearly not priority. I would almost define legacy as something that is not part of the core lines that we have flagged. Here, almost by definition, we expect a decline over the coming quarters. Having said that, we do expect and this is also helped by the commercial operation-leading program. We do expect to continue the acceleration or to ramp up the acceleration of our core services as mentioned. As an example, application services, SAP Cloud services.
Even though the growth was quite healthy at 20%, we expect to take this level of growth even higher in the balance of the year. As it relates to Beniva, we do mention that the growth is healthy. I would say roughly in line with our portfolio. When it comes to the margins, they're close to what we see as the target margin for our Services line, right? Around 50%. In that sense, they are immediately accretive. Again, we do not disclose specific numbers when it comes to bolt-on, so we will not disclose this one either. We'll start seeing the effect in H2. I mean, the order of magnitude is also the typical Bolt On in the sense that the...
It of course, it has a super big effect in terms of bringing capabilities in order to address the IT Service market and IT Operations market. From a size point of view, it's a relatively small impact.
Perfect. Thanks very much.
Thank you for your question. We are now taking the next question. The next question from Ben Castillo-Barnaus from BNP Paribas. Please go ahead. The line is open.
Good morning. Thanks so much for taking my question. Welcome to Brian as well. Two from me. Firstly, could you just give us a sense of the impact from the reallocation of the sales headcount from services to marketplace? Looks to me like a kinda mid-single- digit million amount. Is that broadly what you saw? Second question, on the services growth slowdown, just coming back on the legacy services, what was the sort of quantum of the decline there you saw? If you can add some color there. How big are legacy services in the mix of your total Services business? Thank you.
Sorry, I'm not sure I got the full... If you could repeat the first part of your second question.
It was more. I think you called out the decline in legacy services. I just wondered, like, what sort of growth rate was that? Was that down five, double digit? That was the first part of that question.
Okay. No. Look, here the decline in legacy is relatively steep, right? Again, it's by design in a way. I mean, we're prioritizing one of the key service lines, here we're talking decline in the order of magnitude for around 20%, right? Again, this is all by design. We don't disclose the revenue for the different banks. Of course, if you do the math, you realize it's enough to represent the headwind on the overall growth. Sorry, remind me. Your first question then was?
Yes. It was just around the reallocation of the sales headcount from services into marketplace. I was just looking for an indication of what the amount was in Swiss francs. It looks like a kinda CHF mid-single- digit million amount to me. I just wondered if that was reasonable to assume.
Yeah. It's even a touch lower than that. It's a good assumption. At the end of the day, it is what I flagged during the call, right? We have these solution specialists that we are now assigning to marketplace. Before they were allocated between the two lines. I would say the overall number indeed is right, CHF mid-single- digit million, but before it was partially allocated to the two lines. It's a small-ish number. Of course, as part of the overall operational excellence, we have been refining roles, also the number of roles, right? Therefore, when you see the new data & AI allocations, right, it really reflects the complete new operating model, particularly for sales.
It's a lot of moving parts, right? It reflects the new reality. The main impact was these solution specialists and your assumption is correct.
Understood. Thank you.
Thank you for your question. We are now taking the next question. The next question from Andreas Müller from ZKB. Please go ahead. Your line is open.
Yes. Good morning. Hello, Brian. I have a question to you. Since you have been responsible at SAP for bringing customers into the cloud, can you share with us, your view about the potential for SoftwareOne here? You mentioned that 30% is not on the cloud, or 30% is of, say, the publishers are yet on the Cloud, and there is still a remaining 70%. Does this apply for SAP, for example, as well?
Sure. Thank you for the question. I guess at the outset I would say, I believe in the market there is a unique opportunity for SoftwareOne, given the pent-up demand that there is across many customers in terms of moving to the Cloud. We will be taking time to review that overall strategy and ensuring that we have the correct go-to-market in order to best serve our customers. I'll repeat what I said at the outset, which is everything that we will design moving forward will be built knowing what is it that our customers are looking for. We start with our customers, we design for them, and then we come back, internally.
What I would say, in closing is that customers for a long time were asking, Why do we need to transform? Why do we need to change? Why do we need to embark on a digital transformation? I firmly believe, from my prior life and, from customer conversations that I've had since I've been here at SoftwareOne, that that question has been answered by most customers. The opportunity for SoftwareOne is to now help customers not define a why, instead to look at how are we going to move from, where they currently are to the cloud. We're in a unique position to do that, and then we will ensure over the next 100 days that we build a strong go-to-market in order to support our customers in that journey.
Okay, thanks. I have another question on the integration of future integration of AI into the products of Microsoft. What does that mean to you? Also, if that change to Windows 11, if you can benefit from that going forward?
Sure. Personally, you know, specifically to Microsoft, obviously we are the largest partner for Microsoft, so that puts us in a very unique position. As we've seen over the past couple of weeks and months, many players in the market have been making announcements specific around AI, and our customers are looking to us in order to help them decide how they can best capitalize on the technological investments and advancements that have been made particularly in that space. We have kicked off an initiative internally to see how we will best support our customers moving forward and specifically around the integration of AI into their business.
Mm-hmm. The change to Windows 11, is that an event or not?
No, not that I'm currently aware of. As I said, 10 days in, but not that I'm currently aware of.
As a last question on the efficiency program charge, I was expecting more of a front-loaded charge here in Q1. Is there any particular reason why it's not that much that I was maybe expecting?
You mean the restructuring charge in Q1?
Exactly. Yeah. Yeah.
Yeah. We are in the process of finalizing the full restructuring provision, which we will communicate. It's definitely order of magnitude in line with what we have shared so far, would be around CHF 25 million, and we will communicate in quarter two. Since the program already started in January, if you see the impact, it's around CHF 4 million in quarter one. Absolutely, you're right. I think we will see the fuller impact in the coming quarters and the provision as such for the full- year, we will communicate in quarter two.
Okay. Great. Thanks a lot.
Thank you for your question. As a reminder, if you wish to ask a question, please press Star one one on your telephone. There are no further questions. That concludes the conference for today. Thank you for participating. You may all disconnect.
Thank you.
Thank you.