Earnings Call: H2 2020

Mar 25, 2021

Yes, warm welcome from my side. Dieter Schlosser speaking. Thanks for making time for our FY 20 20 results presentation. As usual, I point you to the disclaimer. Please read it carefully, and then we start going into the presentation. There will be maybe a slight delay when I walk. Then I switch slides, so there is a delay of a few seconds. So bear with me on this. Today, I'm joined by Hans Gruter, our CFO as well as Alex Alexandros, our Chief Operating Officer. I will start to give you an overview on the FY 2020 summary results. Hans will then guide you through the financial performance, followed by Alex, who will give you an update on the strategy. And I will then conclude with the outlook of 2021. As usual, we will have time for Q and A, which will be at the end of the session. Before I go into the details, allow me to briefly summarize what you will hear today from us. We have successfully navigated the COVID-nineteen pandemic for our customers and employees, all our employees, I see. We are very excited to share with you our acceleration of our solutions and services portfolio and the story behind. As you might have already seen this morning in the separate press release, We will update you on a considerable groundbreaking partnership and co investment with Microsoft. Hans, our CFO, will demonstrate to you our strong financial performance and momentum heading into 2021. I will start now on the left side on this slide. Overall, the GP growth stood at 4.4% on constant currencies, essentially what we guided for the year. Personally, I'm not satisfied with the software and cloud line of business, which was weaker during the pandemic, and I will provide you more details in the following slides. Solution and services heavily accelerated throughout the year, demonstrating the success with our integration, but also the investments we have made. Our EBITDA grew 5.1% on constant currencies. This was a combination of achieved cost synergies and COVID savings combined with a reinvestment into strategic areas in the business that we will cover later. Let me share with you some other highlights. We have had a successful year On finding, but also equally important, on closing strategic acquisitions. You will see a very strong cash flow driven by our financial discipline and an asset light business model. We will be increasing the dividend, which Hans, our CFO, will cover later on. Essentially, we completed the Comparex integration, and we are confident we will deliver on our commitment, on our committed synergies as previously communicated. We are thrilled to share with 2 some of our initial insight with our digital platform, Piragloud. We now have more than 50% of our customers with success to the platform and the actual usage has grown 87% year on year. We are really thrilled about this. This is not only an exciting journey on our efficiency, but also 20 strategic partnership and co investment program. Allow me to dive into the and cloud business segment and specifically in here with Microsoft. Coming out of COVID-nineteen, with this overview, we wanted to provide some additional insights into the business. As you know, our business is oriented into 3 customer segments. We have enterprise, public sector, SMEs, which are small and medium enterprises. Each segment behaved in a very specific way during COVID. And that has different impact on gross billings, which is what Microsoft reports and on our cross profit within SoftwareONE. Enterprise continued to grow during COVID, but for us at a lower margin. Public sector trends. We experienced a very strong growth fit by governments around the world. Some of our competitors are benefiting from temporarily. However, for us, this is a very small segment within SoftwareONE. Finally, our growth engine, which is the SME segment, suffered the most during COVID. However, SME still makes up almost 50% of our gross forward. And even during a COVID year, we were able to deliver higher margins. For us, this growth engine will drive significant growth in 2021 and in the upcoming years. Overall, our Microsoft billings grew in line with Microsoft in the channel, while our gross profit was impacted by the customer segment mix. We feel very confident and optimistic that our portfolio And our sales engine is set up for success based on the market dynamics, based on the shift to pay as you go and the Microsoft Directional Wall. Coming to our Solutions and Services. And you remember, we communicated during 2019 that we needed to complete several integration milestones going in order to start growing again. All the hard decisions were made in 2019 and have been realizing the acceleration of 2020. Alex will leave you in the strategy session on our positioning as a provider of IP and tax paid solution in a cloud now world. It's not anymore cloud first. It is cloud now, partially driven also through the experience through the pandemic. We will also share with you the exciting part on the customer transformation journey. You will see our portfolio, which will support the customer on their transformation, whether it's on the commercial side, on the technology side and on the digital side. I'm also very excited to share with you that we have become a leader in Gartner's Magic Water and for SAM managed services and turn. Terra Cloud is one of the few platforms which have been certified as a FinOps platform. Partnership with Microsoft. The largest core investments for us and Microsoft. It is based on 2 fundamental growth streams, which we see exponential growth in the next 5 to 8 years. Allow me to briefly Summarize the opportunities here on hand, and I start on the left side. Application Services, Basically, application modernization, you see a huge number, 50,000,000 applications in the legacy world. Depending on who you ask, But it's Gartner, IDC or Forrester, it's between $60,000,000 to $100,000,000 legacy applications out there. Any number is big enough for us. Every company now needs to decide what they have to do with those legacy applications. Are they able to sundown them? Or do they require a new lease of life, which is the most slightly scenario, and we would need to cloudify and help the customer to migrate those transactions into the cloud. The beauty in this domain is if you do the project of modernizing the applications, 2018. It is very natural that this is a kind of a presale for managed defos, which is turning the revenue, quality of revenue in a recurring revenue and in a more sticky revenue. When I move To the right side, on SAP Critical Workloads, we see a similarity to the application services. But over here, we have now an additional parameter, which is very important to understand. By 2027, SAP has announced the on premise version of their SAP is out of maintenance. You will not receive any updates anymore going forward. That was already extended from originally 2025. So the assumption is this is staying quite firm. So now the similar situation, every company, who has SAP today, needs to either replace SAP, which is a big project, Or what's more likely, move SAP in the cloud and go on as for HANA. Similar, like on the left side, trends. We have a unique selling point with our optimized conversion and migration approach. But also over here, We want to catch the customer, and we want to offer the managed service after the project and run SAP in the cloud on behalf of our customer, again, switching the revenue, the quality of revenue to a recurring revenue. If we to recurring revenue. The good thing is with the cloud dynamics, You don't need any more 50,000, 100,000 people on the ground like You might remember from the global system integrators. It is now important that you have the right born in the cloud experts, maybe a few 1,000, and then you 18 to become a leader in that space. So to summarize, we have a clear customer need. We have a massive addressable market. And with the substantial co in that by Microsoft, We are able to ramp up our capabilities very quickly, already contributing to our double digit growth in 2021 and our midterm guidance where our EBITDA We grow faster than our gross profit. As mentioned initially, On the M and A side, we have been very successful on finding and closing out the right targets to accelerate our capabilities ramp up. As you can see, we have had acquired 2 companies In the SAP, Critical Workload space, 1 company in the application modernization and services space, 2 tech IP and cloud platform management companies, 1 Google company based on the hyperscale GCP. So it's trend, a very efficient addition to our acceleration. Let me also say a few words 20. Fundamental transformation has to come to the core business process of any organization. To achieve that, we need to partner with a strong leading ISV in a particular industry. With our exclusive agreement with RIB on presales, sales, implementation and even managing the solution in the cloud, we achieved our ambitions on digital transformation for our customers. AEC, Architecture, Engineering and Construction as an industry is around 13% of the global GDP. They are in desperate need to transform digitally. They have a very strong tailwind now with sustainability and green. But for us, also equally 20. We can use this as a template for market expansion service for other industries in the future. I mentioned in the beginning, we executed on our commitment on the Comparax integration, and we had additional COVID related cost savings. We have made a strategic decision to continue to invest into strategic areas in our business. We have done this 2 fold. Through our recent acquisition, accelerating the growth trajectory with the SoftwareONE engine and also through investments into our new strategic incubation initiatives. 100 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet Es through the Intergroupo acquisition. It is very important to understand that those investments have landed, and we're already seeing positive financial results in 2021. To summarize the key takeaways, again, for you to take, we as mentioned, we have Successfully navigated the COVID-nineteen pandemic, not only for our customers, but equally important for our employees. Software and Cloud was impacted by COVID-nineteen. But remember, my statements on the SME segment, Our market position and strategy remains strong. The acceleration in solution and services is continuing, trend. Accompanied by significant investments, we see already the positive momentum happening in 2021. We have unparalleled strategic agreement and co investment with Microsoft announced today. That's an exciting space to watch. Our strategic incubation initiatives and our M and A initiatives are accelerating our growth strategy. And last but not least, dollars very strong financial position and momentum heading into 2021. And that's the right takeaway to hand over to transition. I'll see you in a few moments again when we talk about the outlook 2021. Hans, over to you. Figures 2019 2020 do represent the audited figures in our annual report. Please note that for 2019, the acquired company, Comparex, is included for 11 months only as we acquired Comprex at the end of January 2019. More important than the reported are the adjusted figures because the adjusted figures do represent trends. According to our internal policy, we stick to this policy, and it's also presented in the annual report under alternative performance measure. We have achieved a gross profit from software and cloud of CHF 519,500,000, which corresponds to a decrease of 1.9 percent at constant currency compared to prior year. The gross profit from solution and services achieved CHF 2 CHF 10,000,000, which is an accelerated growth of 23.9%, as Dieter just mentioned before. The gross profit in total is EUR 729 point €6,000,000 which is an increase compared to prior year at 4.5% also in The operating expenses increased on a lower rate. Then the gross profit was 4% at constant currency to CHF 506,500,000. Profit of the year is CHF 125,700,000. This corresponds to EBITDA margin of 30.6%. The EBITDA margin It's the EBITDA divided by the gross profit. With this slide about the bridge from the reported profit to the adjusted profit of the year. We would like to give full transparency what adjustments we are making between reported euros 26,800,000. In prior year, we had the adjustment pro form a adjustment from Comparex, Mainly, this 1 month to add in addition, which this year, of course, no additions to be made. There is an adjustment on the share based payment. These are 2 programs for this CHF 24,200,000. The one is the management equity plan called MEP, which was fully funded pre IPO by the major shareholders. We've had no cash and no equity impact to the company. But due to IFRS, we had to the company. But due to IFRS, we had to run that through our books. And the second Share based compensation is the free share grant we have given to all our employees in SoftwareONE, Which is also connected to the IPO. Going forward, this EUR 24,200,000 will decline in 2021 to CHF 14,000,000 approximately and in 2022 to CHF 5,000,000. Additional adjustments are the IPO expense, which we had a small number at the very beginning of 2020, Integration expenses of €7,200,000 which basically are integration cost of 3rd party For the making the integration happen, but as well onetime costs such as severance costs. Last but not least, we have M and A and earn out expenses of $3,400,000 we do adjust. So total adjustments are €35,000,000 which is significant below of the adjustment made in 2019. And all the adjustments we are doing is the adjustment for the appreciation of the Crayon shares. In total, it's €83,000,000 And then we calculate as well the tax impact of all these adjustments, which is 3 point EUR 1,000,000 and this leads to the adjusted profit for the period of EUR 125 point €7,000,000 In 2020, we have achieved 20. Strong cash flows. This is driven by net working capital improvement. This is driven by increased net profit Tinder. When it comes to the capital expenditure, we have expensed EUR 22,800,000 in 2020, which is a standard level and demonstrates the low level of what we have with our asset light business model. Of this CHF 23,000,000 roughly CHF 9,000,000 is for PureCloud, our platform, which is the center of our activities internally but also customer facing. Improvements have made in the net working capital. You see here the change in net working capital of 50 3,000,000 last year and this year of CHF 100,000,000. So in that sense, an improvement of CHF 50,000,000. Thanks, Frank. The cash flow from operating activities achieved 276,300,000 which is about €60,000,000 up compared to 2019. Our main balance sheet assets, the accounts receivable, are diligently managed in And the risk associated with that is well controlled. The risk itself is very diversified by the broad customer base we have by the geographical diversification, but also by the industry diversification. We do mitigate the risk with insurance and have an insurance coverage in 2020 of 47%. And when you take this in short accounts receivable plus The very secure accounts receivable, which are AAA plus and government activities, 2 third of our accounts receivable are with a low risk. We have made We have seen very minor impact from the collection in 2020 despite the year of COVID. We have made the provision based on the Expected credit loss model on one hand and added individual risk assessment meant for each of our lines at a certain number of amount, but also to certain industry. And we have increased the bad debt provision slightly from 0.9% to 1% in 2020. SoftwareONE has a very strong and unlevered balance sheet With a net debt of about €500,000,000 which is very well increased to the €200,000,000 last year, it's 20.9000000 is at a record low level. And when we compare that as well with prior year, then we have made an improvement of about CHF 100,000,000. With the business growth And also with this record low level, I think it's difficult to sustain that low level, and we need to expect that with this growth, The net working capital will increase. We could see that it will be increasing to a level which we have seen 2019. Last but not least, we will propose a dividend to the AGM of 0.30 percent per share. This is a nice increase of 43% compared to the prior year level of 21% 'twenty. And with this, I would like to give the word to Alex. Please take over. Thanks, Hans, and hello, everyone. Also a very warm welcome from me to our annual earnings call. Happy to spend just the next few minutes with you on the strategy update. First, just a quick recap of the topics we'd like to cover today. What we see with our customers is certainly COVID accelerated their digital transformation, but also placed a number of new demands on what customers are experiencing. As we look at our strategy and as we look to build on top of our successful software and cloud business, We're looking to leverage IP and create services and solutions that really support our customers in their entire transformation journey. What we will cover and Dieter alluded to it earlier is, as we look at our portfolio, We're adding and enhancing that services portfolio and we're calling these our 5 incubation initiatives. And finally, I'll quickly touch on how we're supporting this effort with M and A. In the post pandemic normal, You hear lots of different words to describe where we are today. What we see is customers Are increasingly facing complexity and demands on their technology environments or technology needs. Initially, we spoke a lot about how technology powered and enabled our customers to transform their business models to be able to compete to defend. What we saw over the last 12 plus months is the distributed workforce of our customers created more complexity. That initial complexity is very clear on the security side. There are a lot more touch points, a lot of ways in which data can leak or get Out of an organization. What we also saw is our customers had to become hybrid overnight. They basically had to have And on premise or a physical and a cloud presence. And the concept that Typically in retail of omni channel, we now see with essentially most of our customers, Whether it's a bank, an insurance company, a car dealership, doesn't matter. The organization has That's all enabled and works really well with the technology development that are taking place. And The enablement that, that technology has provided to customers has really allowed them to be much more agile, has allowed them to innovate much faster and provide a more complete, a more richer experience for the end customer and for their employees. The ecosystem is seeing explosive growth on top of the hyperscalers, The major platforms that are kind of the essentially the rails on which everything is running. We see large ecosystems of ISVs And these ISVs are innovating at pitch of fast pace. They're often industry specific or function specific. And it no longer comes down to just a few companies to innovate. The innovation is now distributed across so many different players in this ecosystem. For SoftwareONE, this means that we operate in large and fast growing markets. We've shared this with you before. Our software and cloud market is a very attractive market. We believe that it has long Secular tailwinds. It has lots of growth behind it. What we see is a greater than a CHF 500,000,000,000 market June. Experienced a very slight decline in 2020 and is forecasted to grow between 9% 10% over the next 2 years. What we also shared with you is in our solutions and services business line is a cloud only market. So it's a subset of the overall IT services market and it's a smaller subset because we only focus on cloud services and we really have focused portfolio as a natural extension of software and cloud. What we will share with you today is how we're expanding That addressable market with our strategic incubation initiatives. And so while before we believe that this was CHF 30,000,000,000 market. We believe it's a much bigger addressable market for us today. And the high teen Growth rate of this market, we believe is also enhanced by the addition to our portfolio. Our customer facing transformation, we speak a lot about transformation. And so I want to be clear, our customer facing transformation means That we're building on our strength in the commercial segment. Over the last 20 years, SoftwareONE has helped customers Unlock their software assets, unlock their software investments, get more out of them. We continue to build on that commercial transformation. Here, the goal for customers is to help them reduce Their software and cloud spend, ensure they have transparency and predictability. And here on the top right, you see our portfolio that's Pointed at that customer need. You still see the marketplace. You see the digital way of how customers can do this business in the future that we call digital supply chain. You see the addition of FinOps, which I'll cover in a minute. Transformation. This is no longer siloed inside our customers. The software and cloud decision It's very closely aligned and linked with their technology decision. And this is what we're helping customers with, which is Not only selecting and buying the right technology, but then implementing it, using it and getting business value out of that technology. On the bottom right, you see our portfolio that's pointed at this technology transformation of our customers. And here we speak about digital workplace, we speak about the hyperscale cloud and then some of the additional areas, incubation area that I'll talk about next. Finally, to put all of this together, if we are successful In helping our customers with commercial transformation, then we're successful with helping them with technology transformation. We can then put all of that together and help them with their overall digital transformation. As you heard from Dieter, digital transformation for us means being able to help customers trends. Understand their business, understand their business strategy, understand how to innovate Using their business process and inside their industry vertical. The goals of digital transformation are To allow our customers' employees to be more effective, to allow their Our customer facing portfolio, this is our customer facing transformation. We power all of this with ParaCloud, our own digital platform. I wanted to spend a couple of minutes trends. And the momentum of the platform and today we'd like to share both. First, what is PuraCloud? PuraCloud for us It's the glue. It's the connective tissue that ties all of the SoftwareONE offerings towards the customer. It is the connected experience for our customers. Additionally, it's also a way in which we are digitizing our own business. And this is what you see here in the 3 focus areas of our platform. The first one is also on digital and this is really a way for us to digitize our customers' experience using our platform. In the second focus area, marketplace, We're after an intuitive experience for customers. 1st, customers always ask, is it a superstore? Can they find anything? And the answer is yes. But very quickly customers realize that what they need and what they would like is a customized experience, something that suits their needs, that's based on their history or very specific to the different roles in their organization. And this is what we Is cloud platform management. And this is the ability for customers to not only visualize all of their cloud spend, but also to manage and optimize it to ultimately automate some of those activities around management and optimization. The progress we've had with ParaCloud is very exciting, and this is why you see us talk so much about it, at least why you see us invest so much around ParaCloud. We now have more than 50% of our customers activated on the platform and the actual usage we see from our customers is increasing 87% year on year. Let me now spend a few minutes On the strategic incubation initiatives that we have mentioned throughout this presentation. First, we are focused on the hyperscaler opportunity. We are already very strong with the Microsoft hyperscaler Azure. We are building up a very exciting practice with AWS and the Google Hyperscaler GCP. The strategy for us is always multi cloud because this we are after we're always supporting customers in their needs. Well, we see significant amazing developments in the hyperscale world, How quickly the hyperscalers themselves are evolving. And our approach here is very much a platform approach. The platform allows customers to see, to visualize, operate, manage, as well as various Professional services helping customers get to the cloud and then manage them once they're there. The second pillar here Dieter spent some time on in terms of our Microsoft investment and that is SAP in the cloud. We see a large opportunity with customers moving their most valuable, their most critical workloads to the cloud. So much attention here. And this is no longer just a financial system discussion. The ERP The future is powering all parts of a digital business. And that's why we see customers have so much focus and attention on This topic, we have successfully built up organically as well as added with multiple acquisitions in this area of SAP to the cloud. The 3rd pillar, the 3rd strategic initiative for us is application services, Also something that you heard from Dieter, which is this was the genesis of the Intergroupal acquisition was to say, We want to support our customers modernizing their legacy applications, allowing them to move those applications into the cloud world. We believe we bought the market leader out of Latin America to allow us to do this. And now we have turn. An effort as well as a collaboration with Microsoft on how we scale and significantly expand our capabilities in application services. The 4th strategic initiative is Managed Synops. The word Synops Financial Operation It's really for us building on our strength that we have had for many years, what we used to call softer life cycle management. Softer Lifecycle Management is the analogy that I've often used is helping customers clean up their house. And we're now using very similar approach to say to customers. Not only can we help you Get your software and cloud spend under control in the on premise world, in the hybrid world. We can apply that same discipline in the cloud world. And this is what we're able to help customers do, which is we're able to help them get their entire Software and cloud spend under control, irrespective of whether they're in the cloud or in a hybrid world. And we very much do this with a platform approach of helping customers digitize how they Conduct themselves and how they manage their overall software and cloud spend. Finally, the industry verticals. As I mentioned, the key what we believe is the key to digital transformation Is having industry expertise. Our approach here is to partner with industry leading players, industry leading ISVs to bring those cloud solutions, those transformational solutions to our customers. We supplement Our organic efforts, we supplement what we're building on the portfolio side with acquisitions. I think you've seen us be very active on the acquisition side. We completed 6 acquisitions over the course of 2020 And already off to a fast start in 2021. Our strategy on the acquisition side remains consistent, which is We are very opportunistic, very much we look at the software and cloud segments. Here, we're very selective Because we already have market leadership and we are very value sensitive in this segment. At the same time, we have a very proactive and strategic focus on how we go after acquisitions of capabilities. And this is over the last 2 years Where you see so much focus from our side is making sure that as we build out our portfolio Organically, we supplement it, we accelerate it with acquisitions. When we put all of this together, when we put Our existing business together, which is the foundational pillar of software and cloud, we 20. We expect this segment to grow, but the way we would like to grow this segment is increasingly Expanding our portfolio, as I mentioned, we're always thinking about this in terms of IP based services and solutions. Our existing portfolio of services and solutions is in the dark blue. We expect that to grow significantly. And then on top, we're adding The 5 incubation initiatives that I just walked through. The goal for us is that over the next 5 years, We will increase further increase the quality and the recurring nature of the SoftwareONE revenue base. And services and solutions, these IT based services and solutions will make up almost 50% of our total gross profit. Finally, execution. How do we execute on this? And this is a critical point of SoftwareONE because strategy is nice on slides, but for us, It is very much about how do we bring this to life. So what we're after is to build the next generation Solutions and services leader powered by a platform. Our goal here is to take our foundational pillar, Our existing strength, our existing market leadership in software and cloud. We are building on top With our customer facing portfolio, our customer facing transformation that takes that commercial strength, expands into technology transformation for our customers and then takes all of that together into digital transformation. We believe we have an amazing base of customers around the world. And the way we're approaching this, the way we're building our portfolio and building up our Expertise is focused on the largest cloud and software players in the world. You're seeing it today already with Microsoft. We're building so much change. Behind the scenes with AWS and Google. And this is very much, again, our focus for years years, which is we want to be category We want to be experts in what we do. And that's why you see so much focus from us. We power all this. We turn all this into actual intelligence With ParaCloud, for us, ParaCloud is not only an engagement with customers, it's also a way to reach our customers better with recommendations, with insights. And finally, on the bottom right, our model, our operating model is very much Still a hyper local model. We believe that we need to be close to customers. We need to be local with our sales efforts. We have amazing colleagues, the best sales and customer support colleagues around the world. We support them in a regional format for either skills or availability. And finally, we have a large support network, a large support backbone globally. When we put all of those blocks, Lego pieces together, we can create this Customer experience, which it can be tailored whether by country or whether by solution. It can be a Lego block approach of local, regional or global. And again, the consistency for us is always to the customer. It is one experience and it is always 20. Thank you for spending a few minutes with me, and I turn it back over to Dieter. Yes. Thank you, Alex, and thank you, Hans, for the overview. Let me conclude now with the outlook. I go straight into the 20 21 outlook slide. We've seen improved operating environment, but As you all know, COVID related uncertainties are persisting and expected to impact on the macroeconomic recovery. You have seen that our increased pace on investments is driving the return to a double digit growth. With that, we are able to give a 20 1, where we say the gross profit growth is above 10% for the group on constant currencies. Our Adjusted EBITDA margin of approximately 30%, and the dividend payout ratio remains in the range of 30 50 against the adjusted profit for the year. If I then go to the next slide and moves to the mid teens growth in constant currencies. You see the trends kicking in more and more over the next couple of months. We have on the adjusted EBITDA margin. As the midterm guidance, the EBITDA growth in excess of gross profit growth 20. And the dividend policy will remain on the 30% to 50% adjusted profit for the year. With that, we have 20. We concluded the presentation today. Thanks for your attention. Thanks for joining us. We have now a Q and A session. And I'm handing back to the IR and the moderator. FY turn. The first question The first question is by Stacy Pollard of JPMorgan. Thank you very much. So a couple of questions. Well, maybe three questions from me, please. First of all, you once said teens growth for 2021. And now you're saying just greater than 10%. Is that really is that mostly coming from carryover COVID lag Or is that sort of SMEs that are slow growth for you? And maybe how much of the impact is coming from Perhaps some revenue recognition shift towards subscriptions. So that was number 1, just to kind of break that out. Number 2 is why was North America relatively weak? And number 3 is, in your midterm outlook, you suggest more gradual margin improvement As compared to sort of the previous mention of a 35% target, why is that? Is that associated with extra investment From your strategic update, maybe just to understand that. Thanks. Yes. Thanks, Stacey. Alex, do you want to cover the first one? Yes. I would hello, Stacy. Trend. So we are coming out of a COVID year. And so I'd say, we are seeing strong momentum On services and solutions, and I'd say here we performed the offerings and we performed very well during COVID. And so we continue to see strong momentum there. We have A bit more a bit less visibility and a bit more concern on SoftBank Cloud with continued COVID In the 1st several months of this year. And that's probably why you see us kind of saying we will be greater than 10%, But not reaching but not providing you comfort that we will be all the way to the mid teens that we were talking about before. So I'd say It's kind of mixed up very strong confidence in one side of the business and still seeing how is COVID going to impact the 1st 6 months of this year. Yes. I think to add over here, Stacy, yes. We are still in the COVID phase. We you remember what we have discussed in for 2020, how the software and cloud business is evolving during the COVID year and How the budget burn downs are happening or not. We believe there is a there has been a delay to shift to 2021, but trends. We are cautious about that. We see a very Huge momentum on the service and solution side. We have an extensive backlog. But again, we are cautious in terms of the COVID situation. From a second question point of view, where you asked about North America, we have In North particularly in North America, a stronger growth engine on the SME side. And during COVID, of course, then also a stronger exposure on the SME side. With regards To the EBITDA margin, where you mentioned that we are getting more gradually. Churn. Yes, we are getting gradually. We are focusing on the gross profit growth, But we are committing absolutely, and that's already visible in terms of growing faster on the EBITDA growth than the gross Sorry, so that was Do you think it's reinvestment? Are there some extra investments that are pushing this out? Or you think it's the macro that's causing the Slower margin uplift. Yes. So we what Alex mentioned and what you have seen throughout the presentation, trend. If we invest into SoftwareONE, we always want to have a return within the running year. Churn. So we our investments are usually impacting positive financial results already in the year. So it's rather a sequence and a consequence out of being cautious this COVID for the first couple of months. Okay. Thank you. Next question is from Michael Reiss of UBS. Thanks. A few from me as well actually. Just on Microsoft, I think the direct business was down 42% in the second half of the year. It was up 6% in the first half. And just as a really stark change of direction, if you could just give some explanation on that. In terms of gross profit growth this year, I think Intergroupo added a €5,000,000 and others a couple of 1,000,000 2 months. And you've done more deals. So it feels as though you've probably got 5% or more of acquired gross profit growth already in the book. Are acquisitions embedded in the guidance? And I'm talking not just 2021, but out to 2025, There seems to be an M and A strategy or would they be incremental, so you would raise target if you did further acquisitions? And then just finally, on the Intergroupo business, you took a 40% stake in 2019 just before the IPO. So I think the buyout was probably always expected by you. But you've tied into these new strategic incubation initiatives that have been caused by COVID. So why didn't you introduce the idea that you'd be buying out this business earlier given that investment in 2019. Thank you. Yes. Thanks, Micah. Trends. On the first topic on the direct business, you remember we discussed during the second half of this aside. We see a shift in particularly on the enterprise side, where they Instead of moving to a rather long term commitment and getting a better price, they are moving rather to term. Short term commitment and pay as you go. In terms of acquisitions, yes, And Alex, you can jump in over here. We have considered what you have seen so far turn. On acquisitions, please remember that the acquisitions are 2 fold as Hold on acquisitions, which are capabilities and strategic add ons, but we have not considered Any larger acquisition in that guidance. Alex, you want to add something on this? Churn? No, yes, exactly. I think when we look at our portfolio and how we'd like to evolve over the next 5 years, trends. We certainly see acquisitions as playing a role because really the recipe that works well for us is we Organically incubate, start to grow. Once we understand the customer dynamics, the business, we then add to it with market leading capabilities on the acquisition side. And then we scale those acquisitions. We really we are excited to bring the entrepreneurs, the teams on board with SoftwareONE And grow, put a lot of growth behind them. I would say acquisitions are part of this 5 year plan, but it's I would not say that it's a material part of what we're putting on here, I'd say 10% to 20% is how we think acquisitions will add to the overall organic growth. Thanks, Alex. And last on the question regarding Entegruppo. Michael, it's a big difference whether you acquire a company where you have a greenfield approach in your own organization or you add something to a brownfield. If you have a greenfield, you need to be rather On the integration approach, where you first standardize and industrialize the portfolio and then bring it over and after Learning, bring them over into the organization. So that's what we have done. What we have done is Intergroupo. We spent 12 months To make sure that there is alignment in learning and standardization so that when we bring them over completely into the organization, We have a faster traction on our application services. But it implies, Peter, that There was always this intent to make some big investments in application services. I mean, it's 1500 people. It's a quarter of your pre existing headcount. So it's not a new idea created by COVID. It's something you were planning 2 years ago or not? Churn. No, no. I mean the application services is not created by COVID. That's not a new idea change. Which came from that. The application services is in general, you have the desperate need. Every company has now We need to migrate their current legacy applications into the cloud or replace them with a sub solution, Michael, If they have a solution. But there are so many which are featuring the core process of the organizations that they actually cannot do business. So they need to give them new leads of life and clarify them. So we have seen this opportunity for quite some time. And that's why we started off with our stake in Intercoupe. But since that was a new field for us, we wanted to make sure that on one side, it's standardized and not just LatAm centric. It's standardized. And on the same time, we are also learning on our side how to really scale it out and burst it out globally. Okay. Thank you. Next question is by Alastair Nolan of Morgan Stanley. Hi, there. A couple of questions for me as well. Just firstly on the Microsoft partnership, It seems to entail 5,000 hiring of 5,000 new headcount, which It's obviously quite meaningful over the space of by 2023. Can you just talk about how that what The implications are there. You're talking about EBITDA growing ahead of gross profit in the midterm. I'd imagine that can't take place 20. Until post 2023. So first of all, does the 35% midterm margin stand? And also what is the updated time frame for What is midterm, if you like? The second question is, I understand on the greater than 10% gross profit growth for 2021, that's ex Intergroupo, but there's also 5 other deals that you completed in 2020. So just trying to get a better understanding Of the expected inorganic contribution for 2021 to try and ascertain the actual underlying organic growth you're looking at for this Coming year. And then thirdly, the $48,000,000 increased investments June. In 2020. I mean, I'm just struggling a little bit given the kind of change in or shift in strategy, which Appears to have taken place for quite short notice. I mean, at the end of the first half, we were broadly in line on EBITDA and then there's a large miss in the second half. So just trying to better understand what happened there because I think a lot of the themes that you mentioned around app modernization, shift to cloud, hyperscalers We're all kind of part of the narrative anyway. So just trying to better understand what really prompted that short term change in direction, if you like. Thank you. Yes, thanks. Alex, do you want to talk about the acquisition side and the on. Inorganic or Hans, if you may, you can also jump in. Sure. Trends. Happy to. Hi, Alistair. We continue to see, I would say, The M and A activity as part of our overall growth story, unless it's kind of transformational Or substantial M and A and then we would kind of break it out. So that's one piece of it because often what we're doing is We're acquiring smaller companies and that's what you can see in our disclosure. We'll acquire smaller assets. You might have headcount of 50 employees, 100 employees. But what we then do is we significantly invest behind them. Churn. We love the entrepreneur, we love the portfolio that they bring to the table. And then we say, let us now scale it. And so this is very much our growth strategy. And so of course, we could parse the number and say, well, churn. We provided the detail in our results, almost $5,000,000 came from InterRUPO, approximately $2,000,000 came From acquired gross profit. And that's my point here is the acquisitions are really part of trends. Our overall growth story and we would like to keep it this way because we are often acquiring small assets that we then provide fuel to really Double, triple, quadruple inside SoftwareONE. And that's what we see in 2021 as well, which is yes, we will have kind of the year on year impact of the deals that we have done. But we're significantly investing behind them and that's what you see on the investment side, which is the personnel that we add to these acquisitions is significant and this creates our overall growth story. So I understand your point, but I would say we should break out kind of substantial or transformational acquisition And the rest become just a part of our growth story given how much fuel, how much we're adding to make these acquisitions successful. Thanks, guys. Antti, you want to quickly say something on the guidance? Yes, of course. I think what Alex said is absolutely right about the acquisition side. So churn. I think you said something on the on when we are coming back to the EBITDA ratio of 35%. And just Purely from a guidance point of view, we have said that we will have an EBITDA growth in excess of the GP growth, And we have not reconfirmed the 35%. So perhaps that I would like to say because It's a guidance and needs to be correctly set. What is important for me is that we have given this term of Exceeding the gross profit growth because the profitability is something we really focus on SoftwareONE. Trends. And we really want it's part of our DNA to all what we invest needs also to bring a positive impact on the profitability. So we have that really as a focus. This is what I really like to hear to emphasize to you. Churn. And just a quick follow-up, when should we expect you mentioned mid term is when we should expect EBITDA growth to outstrip gross profit growth, when is midterm, just so we know, because previously it was 2020 To 2022. So I'm just not sure when that time frame kicks in, if you like. Yes. For me, it's the guidance is for me the 2021. And thereafter, it's valid to what we say in excess of the gross profit growth. Okay. Thank you. Yes. I can reconfirm that certainly, and we covered our trend, you're saying, too. Also, trends. What you asked in addition on various drivers, EUR 48,000,000 on OpEx investment and the same time in the second half on the FDA, what's happened. Turn. It's clearly you remember our discussion on in the last month of the year, which is the burn down of the IT budgets. Turn. That's something which we always put the caveat on how under 2020, under COVID, Companies would really burn down their IT budgets and spend on software and cloud and we would Benefit from that seasonality. So that didn't occur in last year. For us, this is rather a shift, not a cancellation. You see this also from the expectation on the growth churn. The other point that you had, this is not something new. You're absolutely right. Of services. We have shared over the past 12 to 18 months. On a regular basis, the Microsoft partnership agreement It was not something which was done over the last couple of weeks. That has been also in the making for the last 9 to 12 months To really make sure that we are conquering this market in a way that we can really push it on. Thank you. The next question is from Ross Jabbour of Citi. Good morning. Thank you very much. A couple of questions, if I may. First of all, I'm intrigued by the I wonder if you could give us some sort of sense of the absolute size of revenues that may have appeared in software Last year, were it not for the fact that there was this switch to pay as you go, I. E. How much of the effect on the software revenue Top line, do you think, is related to pay as you go and whether or not it's going to continue at the same level or greater? Churn. My second question is really around your guidance for the current year. And I'm interested to know what kind of assumptions you're making Vis a vis a return to more normal trading for your SME customers. So does your SME customer base need to return to more normal Trading by the half year, for example? Or can you wait until the second half of the year in terms of your guidance? And my final question is just around the SAP opportunity, a very quick one. And that is the extent to which you believe the rise with SAP initiatives that the company announced not that long ago Actually creates a new competitor for you in the S4HANA migration opportunity. Thank you. Sorry, could you just repeat the last question? I didn't catch it. Yes. Whether or not SAP's new initiative rise for SAP, where they're trying to offer customers An ability to migrate to S4HANA with SAP as a single point of contact actually creates, in a way, a competitor For SoftwareONE wanting to offer a similar sort of solution to their customers. Yes, fully understood. Okay. On pay as you go, Alex, do you want to jump in there? Churn. Yes. No, it's a very relevant question and actually ties in to the SME topic as well. So trends. Just as a recap, customers are buying SaaS and cloud based software. They're buying 365, they might be buying Azure. So the underlying software and cloud assets that they're buying already kind of the latest generation, their software as a service or their public cloud structure. The way they buy in the market is still has not fully developed, which is most of the market in In the Microsoft world, still buy on a commitment basis. They still want to buy with a discount for the next 3 years. Trends. That's the behavior. That's the corporate behavior still. You see a very different behavior on the AWS side. Funny enough, AWS is also now introducing discounts for commitment buying. So when you look at our Very either the gross bookings that Dieter showed or what you see in our books as revenue, trends. Most of that volume is still the commitment based volume. And the pay as you go phenomenon is very strong and growing at significant growth rates for us. But if we just speak about volume, it's still a very small number. What's more interesting is what happens then when we come down to the SoftwareONE gross profit. And here we make a significantly more margin, more profitability from the pay as you go business. The reason is when customers are paying monthly, quarterly, they are much more Engaged and attuned to their spend and they engage much closer with us. So If I'm paying monthly, I'm very interested to say, what am I using? How much do I need to use? How do I optimize it? If I'm paying every 3 years, churn. I'm not as focused on it to manage it every month. And this is the value that we bring to customers, which is we say In situations where pay as you go makes sense, we were able to really help customers with that equation. And that's where we, SoftwareONE, the terminology we use here are our simple bundles. Our simple bundles combined Pay as you go software, with support, with platform. Those three ingredients is our bundle and that's how trends. We support customers in that world. The impact, the financial impact, we've said trend is emerging and growing very nicely. And we saw that accelerate during COVID. The reason it accelerated during COVID is because companies were much more focused on How do I save money now as opposed to how do I get a discount for the next 3 years? So that created some additional acceleration to pay as you go. And then finally, maybe on the financial side, pay as you go today contributes or I'm sorry, the gross Profit, the softer one makes from the pay as you go model is more than 10% of our overall gross profit now. So that Even though on a revenue basis, it will be single digit percentage of the overall revenue across all of our publishers, From a gross profit level, it's already greater than 10% and growing very fast. Trends. Yes. And that's what we all have said here over the last few rounds. Churn. Once we are double digit on the pay as you go, you start feeling the impact in the overall P and L. And with the growth rate and you might remember, we always had on the pay as you go, we have around 3x to 4x in the higher margin, plus a different stickiness factor to the customer from our quality of revenue. So that's, of course, our strategic direction. Now on SAP rights, that's a very interesting question. I personally, I think to us. We see that coming up when it comes to the Fortune 500 to the big enterprises. And over there, we asked a consultant and advised them whether it's the right approach or not. We don't see it in across the board. And we believe that the agnostic view to the hyperscalers It's massive, where most of the customers we're pivoting to. So I'm not cautious on our Competition over here. Maybe a confusion on the enterprise side, so on the S500 Similar, but not really as a compete in the segment that we are looking at. Thank you. And on the recovery of SME, what's your best guess at the moment as to when that might occur? Aleksandra, you covered that on SME side? Yes. No, I'm sorry. Yes, what we see with SME is We do see them continue to be cautious. So we have 2 dynamics with SMEs. I would say in the first half, We still have yet to see if SMEs will recover. At the same time, we are seeing even though, call it, The billings, the volume from SME is down. We continue to essentially make Higher margin on this business with the mix shift. So volume is down. We continue to make higher margin on the mix shift because they are switching to, call it, smarter solutions, smarter ways for them to spend and that It fits very well to our own business model. So our assumption specifically, our assumption is, Yes. By the end of the first half, so that's kind of June spending cycle. We're assuming that SMEs are in much better shape. But at the same time, and this is maybe back to Stacy's original question, We're not assuming that we're back to completely to the pre COVID level. What our model now assumes is We are in the current format and with the current pay as you go kind of switch for the SMEs, we're able to make these higher margins. And maybe one additional point just to highlight, we have this in our slides and Dieter mentioned it. In When we engage with customers on pay as you go and we offer them our X simple solution, 365 simple, Azure simple, simple for AWS, trends. The profit margin becomes split across Services and Solutions And software and cloud. So we have kind of a double impact. On the one hand, you don't have the big upfront. That's a benefit for software and cloud. The additional impact is the much higher profitability that we have with that customer is also split Because we are delivering that as a service. And so we're booking the profit for that as a service on the services and solutions side And booking portion of the profit on the SoftBank cloud side. Trend. Yes. In essence, we haven't really baked in a recovery position of the SME side into the guidance. There is no considerable recovery position which you took as an hypothesis for the guidance. The next question is by Knut Voller of Baader Bank. Thank you. You highlighted that we should from next year on to see better EBITDA growth than gross profit growth suggesting at least that the investment will be more 2025 targets. Are you ready again also to do larger acquisitions? And how should we think about your view here? Thank you. Yes. So a very good question on both sides. We have 20. In terms of investments, what you should see is a progressive investment over the years according to the partnership, the extended partnership and the co investors, Microsoft. But again, 20. That is a coinvest, right? So that's not something which strategy. We always said once we have done invested with Comprex, we would be open for large 20 acquisitions. But again, this depends on how suitable they are and depends on the geography, on the to the mix as well as on the transformation of the customer base. So if there are opportunities coming along, then we are The next question is by Ben Castielbenhaus of Exane BNP Paribas. Hi there. Good morning. Thanks for taking my question. I had a question on the Solutions and Services business. And if you look at Actually, the revenue growth there was only up about 6% in constant currency. It seems like a lot of growth in the gross profit line actually came from lower 3rd party delivery costs. Maybe you touched on it in the previous question, but I just wondered if you can explain the moving parts there. And Really, was solutions was the demand actually as strong as the or not as strong as the 24% gross profit growth implied? And then second question on the Microsoft side of things, they're co investing with you here. I just wondered if you could elaborate a bit more on that practically. How are they constituting? How is the cost burden shared in this new partnership? Thanks. Yes. Maybe I'll start with the Microsoft partnership and then Alex, you might want to jump in on the first part of the question. On the Microsoft partnership, so that's from March to 2023. It's in those both areas, which you mentioned, application modernization as well as SAP critical workloads. It's a win win agreement in the center of Microsoft Fund, that's its transformation in that space, and that's the investment in the capability in that space. And with that, We produce an outcome, which is in essence consumption on Azure and customer wins on Azure trend for Microsoft. As you know, if you modernize applications, it drives consumption. As you know, SAP is one of the largest percent consumption driver when it comes to the hyperscalers. We are not able to share with you Financial details of the arrangement, but it's significant. And for sure, it's for us, trend. It's a very exciting coin as planned, has been asked Yes. Just probably a quick point. We saw some of this effect even in the first half when we were speaking about the Year on year comparison. And really this has to do with the 2019 cleanup that we did as a result of the Comprex integration. So When we acquired the Comprex business, in the services portfolio, there were a lot of custom trend. There was a lot of custom work, there were a lot of subcontractors and third parties being used. We really streamlined what we go to customers with As well as streamlined how we deliver that. And so that cleanup was really done over the course of 2019. The hardest we talked about Hard decisions that we made at the end of 2019. And that's what you're seeing in 2020. So for us truly, it's we run the business based on gross profit. And the reason you're still seeing some of this coming out from the 3rd party cost is just the complex clean up. But yes, for us, kind of is this true demand we're seeing? Absolutely. I mean, when we look at our KPIs around Number of customers with whom we engage on services and solutions is up in a very healthy way. We think about Cross sell a number of customers with which we've engaged on both software and services. We look at number of 365 subscriptions that we're now managing. We look at Azure workloads, Azure customers, AWS workloads and all of those kind of, call it, very operational KPIs, we're seeing significant growth. So no, we truly believe that this is a good Representation of the momentum we're seeing. Yes. And I'm going to hand over there. Turn. It's by no means a I think what you're alluding to a bit this would it be a conversion from 3rd party to OpEx and hence you have an impact on the GP. It's really the cleanup on the portfolio. So we in essence, we actually had to compensate because we really canceled contracts, right? They were not part of our portfolio and strategy and the customers were basically also not on a rush over the next 3 to 5 years to move to the cloud. So we actually used it and we had to compensate this additional GP. So it's a clear effect on the GP 21. Okay. Thank you. The next question is from Martin Jungfleidehuk, Kepler Cheuvreux. June. I have 3 questions, please. The first one is on synergies. Why have the contracts Synergies on OpEx not further improved in the second half. And then what makes you confident in reaching that EUR 40,000,000 target by the end of this year? And then also you talked a lot about OpEx synergies, but what about these synergies on gross profit? If you could provide an update on that side? And second question is on the gross profit per customer. During the IPO, you presented the gross profit per Customer from new and existing customers. Could you provide us an update here if that has changed and if growth has been more driven by existing and new customers since then? And the final question is more on the public side. If you could provide us a rough exposure to and the performance of the public side here. And How much of that is your yes, that's basically it. So these 2 questions, synergies, gross profit and public side. Churn. Yes. Thanks, Martin. On the synergies, Hans, you want to take that, please? Yes, yes. Yes, I can. So we have you're rightfully to say, we have, on the last month, not made big progress on the synergies That was planned and in line with where we are today because we have already, I would say, midyear Almost everything is working on our common ERP system. And what in 20. Small number of subsidiaries, the final step, the merger legally to make it only 1 company per country Towards the end of 2020, but also as we communicated to you. Okay. All right. On the public sector 9. We have seen the mix on Slide 6. The past is a small segment. It's certain exposure past. Is rather on the education side of things, and that's a mixture between public education and private education because that's on post COVID from a spend that we're rather used to the normal growth which you have seen before. Churn. On the customer side, I think what you're alluding to was our capability of upwards mobility. Are we able to add services to customers who transaction with us and how the profitability looks if we are able to do this. So we have continued On that, we overall, we had a nearly 20% growth on attaching We more and more acquire new customers through the service portfolio directly and then attach to the digital supply chain and put out loud in 6%. Okay. Helpful. Thank you. The last question for now is by Andreas Muller of ZKB. Yes, good morning. Cantu, 20. Three questions, if I may. One is on FTEs. I mean, can you give us a figure how much new hires percent. You do for 2020. Is that also sufficient for 2021? Or is there any change You envision here for 2021? And the last question about the cash pile, this €500,000,000 has the priorities to use this cash file In any ways changed going forward in terms of internal investment, external And also distribute the cash flow. Thank you. Thanks, Andreas. On the bad debt We do that really diligent process to assess the bad debt provision. It's by a model. We are running this by the expected credit loss model. Plus, what we do is we review each outstanding accounts receivable. So this is, of course, the moment in place of the end of December, what you see there. And from all what I see today, This is an assessment which is still valid today. And if you would have asked a question to me a year ago, pre COVID, I was really a bit not so optimistic by that. But now the situation where we have today and what we have seen In the last 12 months, I see that this position and this risk assessment is the one which I feeling very comfortable with today. On the net debt or let's say the financing or the financing needs, which we have available or the cash which we have available. This is not different than it was in the past. So churn. We have this at the moment. We are a growing company. We have merchant acquisition on the table on the strategy. As Alex presented to you, There can be smaller acquisitions, which we will be able, as in the past, to pay out of our cash where we are generating. But when it comes to bigger acquisitions, then such financial needs are available also to 2nd bigger acquisition in the future. We have, as you've seen, not come up with Other means of distribution, then the dividend and the proposal of the dividend you have seen, churn. It's in line, I would say, with the guidance we always have provided. And it's that, it's not more. But that's because of the growth of the company, and that's our position right now. Churn. Sorry, Andreas. And on the last question, which you see in the FDA, so there are 3 buckets which you have to consider. The first bucket is associated with the Microsoft co invest. That's where the net new headcounts. The lie and this again, this is progressive and in line with the business demand and The customer demand coming in. But again, you don't you would not see that in an impact. Trend. On the second bucket, which is replacement. Replacement is our normal attrition rate. Usually, it's around last year. I think it was around 500 to 700 which we replaced. Churn. And that's always making sure that we have the right performance in the system. Trend. On additional capabilities, additional capacity, that really goes in line and grows. So we are at a stage where the engine and the scalability and through the platform, we can scale out. So we don't need to invest in advance on headcount. We can grow the business. And then after the growth, we can invest further into headcount. So we would Only in line with this growth and not with any provisioning. Okay. Thanks. And by the end of 2021, how much full time employees would you have on the payroll then? We don't share this number, but you can You have seen on the press release that we are talking about around 5,000 Additional headcounts when it comes to the Microsoft agreement over that 3 years period. So you will see proportionate trend. Something in 2021 rather there's a delay because we are not talking about the full year anymore. Okay. Currently, there are no further questions. Yes. Then I think it's hard to close the session. Thank you very much for spending time with us. Thank you very much for the active contribution during the Q and A. We are all looking forward seeing you in the next couple of days. I think there are many roundtables and direct 101s booked, And we are looking forward to have further debate around what you already have raised results. So thanks again, and have a great rest of the day. Thank you very much. Bye.