SoftwareOne Holding AG (SWON) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the SoftwareONE Q1 2024 Trading Update Conference Call and Live Webcast. I am George, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Anna Engvall, Head of Investor Relations of SoftwareONE. Please go ahead.

Good morning, and thank you to everyone for joining SoftwareONE's Q1 2024 Trading Update. I'm Anna Engvall, Head of Investor Relations at SoftwareONE. Joining me today are Brian Duffy, our CEO; and Rodolfo Savitzky, CFO. In terms of agenda, we will kick off with a summary of our Q1 2024 trading update presented by Brian. Rodolfo will then take us through our financial performance. We will finish the session with Q&A as usual. Before I hand it over to Brian, please let me draw your attention to the disclaimer regarding forward-looking statements and non-IFRS measures on Slide 3. With that, I will hand over to Brian.

Good morning. I'm pleased to welcome everyone to our Q1 2024 trading update. Before diving into our Q1 numbers, I would like to recap on our updated strategy, Vision 2026, which we presented 3 months ago at our Capital Markets Day. With Vision 2026, we will drive accelerated growth, margin expansion by leveraging our value proposition, pursuing strategic growth opportunities and sharpening execution. On today's call, I'll detail the significant progress that we've already made in Q1, including laying the foundations for our cutting-edge go-to-market transformation. Coming back to Q1 results. We delivered solid results in the first quarter against the backdrop of uncertainty in the macroeconomic environment. Revenue for the group was up over 7%, driven by demand for digital transformation. The breadth of our portfolio and our focus on mission-critical, fast-ROI offerings continue to address our clients' priorities around software, cloud, data and AI. The adjusted EBITDA margin was 18.4%, up 1.8 percentage points, which is a material improvement compared to last year, supported by a continued focus on operational excellence. Looking ahead and based on year-to-date performance, we reiterate our guidance for the year of 8% to 10% revenue growth in constant currency and an adjusted EBITDA margin of 24.5% to 25.5%. Now taking a look at the regional performance. EMEA grew by 3%, driven by good momentum in Southern Europe, Benelux and CEE, particularly within our services. APAC delivered a strong quarter with growth over 14%. Meanwhile, North America, under new leadership, was up by an outstanding 26% supported by several large customer wins in the region. As we emphasized in February, North America is a priority market for us, and we intend to continue strengthening our organization in the region to ensure we have the right capabilities to succeed there. LATAM grew 4%, delivering a second quarter of positive growth on the back of leadership changes in 2023. Turning to our business lines. Software & Cloud Services delivered over 10% revenue growth in Q1. Growth was driven by strong momentum in AWS and Azure Cloud Services as well as Software Sourcing & Portfolio Management. Legacy services continued to impact growth in Q1 but have now reached single-digit in absolute revenue terms. Software & Cloud Marketplace was up nearly 5% in Q1. Microsoft billing reached USD 4.3 billion, up 6% year-on-year, which translated into revenue growth at a similar level. In other ISVs, momentum has improved slightly in Q1 compared to Q4 2023. We continue to believe there's a significant opportunity to cross and upsell our broader portfolio across our clients and our installed client base. In Q1, we prioritized a set of ISVs and began signing global partner managers to work with these partners to build joint business plans, go-to-market programs and shared target as a means of driving profitable growth through improved portfolio penetration. Now as you know, in January this year, Copilot availability was expanded to all customers. Based on our early client engagement last year and our first-to-market offering, we've been able to hit the ground running with great results so far. As of the end of Q1, we have over 325,000 Copilot users and have delivered over 325 services engagements, helping clients understand use cases, quantifying the investment and ROI, addressing data security and compliance concerns and, finally, creating effective training and adopting programs for our customers. Now it's still early days, but we are on track in terms of becoming Microsoft's #1 Copilot partner and achieving our $100 million revenue target. And a great example is the work that we're doing with QNET. This illustrates how we are supporting clients at our GenAI journey and the approach many organizations are taking in their adoption of Microsoft 365 Copilot. QNET is a great company, a global wellness and lifestyle company based out of Hong Kong. We have been their trusted partner for over 10 years, and we've helped them implement 365 and other Microsoft solutions in the past. They wanted to explore with us the potential of Copilot to drive productivity and innovation, but they were also acutely aware of the regulatory and ethical considerations. As part of our SoftwareONE Copilot advisory service, we delivered workshops to help key individuals gain a better understanding of the capabilities of Copilot and address their concerns. A decision ultimately was taken to start with a small group of early adopters from different departments prior to an organization-wide rollout. This allows for hands-on experience with multiple use cases and tailored solutions before making a larger investment. And in the meantime, we continue to support QNET on their AI journey. Transforming our go-to-market model is key to our ambition to build a world-class organization, which leverages our existing scale and reach to expand market and wallet share in every segment that we operate in. And in Q1, we made significant progress towards a transformed GTM approach based on our new client segmentation and coverage model with key markets, including DACH, North America, UKI and India up and running by July 1. Those markets represent 65% of our revenue. This includes the launch of a new digital sales hub in Nashville for North America mid-market segments. This is a digital-first approach aimed at a significant and growing small and medium enterprise segments. Our major partners are absolutely thrilled with this new structure and the opportunity that it presents. We are transforming our approach also in our enterprise and corporate segments, offering them a more personalized high-touch service to match their significant IT spending and the potential that they represent for us. This is reflected in the large wins that we've seen in North America in Q1. We've also taken measures across the portfolio to improve commercial excellence, for instance, driving better and faster renewals and pricing adjustments. Our Marketplace platform is, of course, key to our transformed GTM, allowing us to drive growth in a scalable way. We continue to see the platform gaining traction. And in Q1, we saw improving KPIs with the number of price subscriptions growing to over 34,000 and LTM gross sales increasing to CHF 668 million. In 2024, we plan to expand our platform by launching a self-service vendor portal, introducing new self-service transactions for clients and streamlining SoftwareONE's operations for increased efficiency and growth. Additionally, with the release of version 2 of the Marketplace platform in May 2024, we've enhanced subscription management and ordering modules, supporting the latest Microsoft and Adobe models and laying the foundation for further improvements later in this year. To conclude, I'll say that it's great to see how much we have been able to progress even in the short 3 months since our Capital Markets Day. There is a lot of work to do, but this progress gives us the confidence that we will deliver on our Vision 2026. And on that note, I will now hand it over to Rodolfo to take us through our financial performance.

Thank you, Brian. A warm welcome from me as well. Let me start by taking you to our financial performance at group level. Revenue growth in Q1 was solid at 7.4% with all 4 regions in both business lines contributing to this result. We continue to see the positive impact of the operational excellence program on our costs. While revenue increased significantly, delivery costs decreased by 1% in constant currency as we successfully optimized our delivery network. This resulted in a 2.7 percentage point improvement in contribution margin, more than compensating for the impact of portfolio mix. SG&A expenses grew by 10.3% as a result of investments in our sales force and marketing, in particular in the U.S., to reignite revenue growth momentum. It was really great to see that this is already translating into improved performance in North America. Adjusted EBITDA margin was 18.4%, up 1.8 percentage points, a strong development particularly as Q1 2023 already reflected a normalized cost base. With the strong fees from foreign exchange headwinds had a significant impact of around 4.2 percentage points on revenue growth for the quarter. However, given our natural hedge with similar exposures on OpEx, the impact on adjusted EBITDA margin was negligible. The year-on-year development of adjusted EBITDA is shown in the bridge illustrating how we drove margin expansion through revenue growth, productivity improvement and reinvestments in the right areas. Starting with delivery costs. We continued to improve productivity by reducing higher-cost external resources and bringing capabilities in-house. In sales and marketing, the increase in costs predominantly reflects the investments we've made in North America and an increase in our marketing activity. For admin, we kept headcount flat while continuing to transition resources to our lower-cost shared service centers and investing in IT systems. Moving on to the business line view. Growth in services was driven by Cloud Services and Software Sourcing & Portfolio Management. We reported a materially higher contribution margin at 42.1% of revenue, up an impressive 5.8 percentage points compared to prior year. SG&A increased by nearly 25%, driven by investments in business development executives to drive growth, translating into an adjusted EBITDA of CHF 4.4 million and a margin of 3.6%. The Marketplace revenue growth in Q1 was 4.6%. Microsoft grew mid-single digit while quarter-on-quarter, momentum in other ISVs improved. We expect higher growth in the coming quarters as our GTM or go-to-market transformation progresses. The Marketplace contribution margin was 86.1%, improving by 1.2 percentage points, while SG&A expenses were broadly flat. Adjusted EBITDA margin was 46.1%, up 3.6 percentage points versus prior year. It is worth pointing out that the EBITDA margin for the business lines may fluctuate quarter-to-quarter as SG&A is allocated based on a combination of contribution margin and revenue. But of course, group EBITDA margin is unaffected by this allocation. It is now over a year since we initiated our organization-wide operational excellence program to drive efficiency and effectiveness. Thanks to the outperformance of the program in 2023, we raised our target cost savings from CHF 50 million to cumulative CHF 70 million for 2024. We remain firmly on track on the initiatives we outlined, including importantly, our go-to-market transformation. For services delivery, developing modular and standardized service packages continues to be a focus area. Meanwhile, in Marketplace, we're ultimately aiming for end-to-end process automation. On the rightsizing of our support functions, we have scaled up the HR service centers, leveraging Workday, which went live a few weeks ago, and are completing the transition of finance organizations to shared service centers with around 30 more countries transitioning this year. In Q1, we achieved around CHF 7 million of additional cost savings, implying that we are on track to reach our cumulative CHF 70 million target this year. We plan to report the final savings and related costs with our half year results in August. As Brian already mentioned, based on our Q1 results and a stabilizing market environment, we remain confident in achieving our guidance for the year, which is 8% to 10% revenue growth in constant currency and an adjusted EBITDA margin of 24.5% to 25.5%. Given the implementation of the go-to-market transformation in Q2, we foresee similar growth in Q2 as in Q1 and an acceleration of growth once the new sales organization is fully in place. Likewise, we expect savings associated with the go-to-market transformation and increased delivery cost efficiency in the second half of the year, translating to a higher improvement in EBITDA margin in the second half. I'll now hand back to Brian for his closing remarks.

Thanks, Rodolfo. As we progress through Q2, we continue to focus on executing on Vision 2026, and I'd like to conclude by highlighting 3 points. Firstly, we have delivered solid results in Q1 with revenues of 7.4% and a strong adjusted EBITDA margin of 18.4%. Implementation of Vision 2026 is progressing as planned, and we have -- we're successfully capitalizing on strategic growth priorities, including Copilot. And finally, very importantly, we are sharpening execution through our go-to-market transformation and operational excellence initiatives. Now with that, let's move on to Q&A.

[Operator Instructions] Our first question comes from Woller, Knut from Baader Bank.

Just a couple of questions to start with. When you look at the cost for the go-to-market restructuring, also the termination of the vertical cloud solution MTWO, can you give us some color here, what we expect in the coming quarters is? And the termination costs, are they now over with Q1? And also what should we expect for the restructuring in the coming quarters? Looking at North America, where you saw already first green shoots of your initiatives that you have taken to accelerate growth, are you confident to be able to maintain this growth? And can you give us some color which kind of solutions the new live customers adopted? Has it been mainly Microsoft or other solutions? And then just a final one. And looking at the continuation of operational excellence, is that required to achieve the target of achieving approximately an adjusted EBITDA margin of 28% in 2026?

Okay. So I will take the North American comment -- question, and then I'll turn it over to Rodolfo on the first and your last question around operational excellence. And firstly, thank you for the question. And maybe before diving into North America, let's put this in context a little bit. And as part of the go-to-market changes that we have implemented since 2023, we have made a series of changes. We have had a COO who will join us in January of this year. We have had a Chief Partner and Strategy Officer that has joined us in January of this year, and we are seeing the impact that they are already having. We made leadership changes in Latin America last year, and we called out the positive momentum in Q4 and, again, movement in the right direction in Q1. In North America, as you know, we had a leadership change and obviously have delivered very impressive results of a 26% increase. This is on the back of numerous changes that we have made, both in terms of the segmentation model, our corporate model and also the large deals that we secured in Q1. And North America is the largest software market in the world. We are continuously focused on how we can penetrate that market. As I called out, we are investing in Nashville because we have a large SME segment for us to go after, and we will continue to focus on making the right investments in North America to accelerate our growth. Specifically on Q1, we had a large win both on the Marketplace side and also on the services side, and -- not only related to Microsoft but also related to other hyperscalers as well. And we will continue to have that multi-cloud approach across the company and especially in North America as well given that most of our customers are no longer one-hyperscaler shop. Instead, they are multi-clouds. And with that, I'll turn it over to Rodolfo.

Thanks, Brian. Knut, thanks for your questions. Let me start with the last one because I'll provide the context for the first one. So operational excellence, as you all know, we started the program -- or we started the implementation of the program back in 2023. We outperformed in terms of delivering our savings target or savings result against the target. We achieved CHF 47 million savings against an initial target of CHF 50 million. The idea was to get to a level of savings of CHF 50 million this year. With the outperformance, we increased the level to CHF 70 million. And already now in quarter 1, we have achieved CHF 7 million incremental, right, over the 2023 base. If you annualize it, it's like CHF 28 million for the year. And what we will do is report the numbers at the end of quarter 2, so with the H1 results, see where we are in terms of savings. In terms of restructuring, we have booked CHF 4 million for this operational excellence program. We believe there will be some minor additional costs associated with this. And then we would like to close this program. Now your question was to get to the approaching 28% margin target, do we need to continue with operational excellence. And the answer is absolutely yes. You saw it in the presentation at the Capital Market Day. We need to continue to control cost, improve productivity because operating leverage and operational excellence, meaning continuing to drive productivity, should be part of our business model. But as such, we will not necessarily have a program that we are specifically tracking year by year or quarter by quarter. As it relates to what is coming up next is the go-to-market transformation. This is a big initiative. Brian already went through it in detail. And here, we expect the implementation in the key markets by Q2 and then a continued rollout so that the implementation is fully in place at beginning of 2025. And here, you see some initial costs. We will confirm savings and costs associated with this program by quarter 2, so with -- again, with the H1 results. Maybe just a final comment on the restructuring. The other one you referred to, which is a discontinuation of the MTWO line, this is pretty much the last restructuring expense associated with that.

And just a quick follow-up. Rodolfo, I understand that you will disclose the detailed numbers on the restructuring in the coming quarters. Just from a tendency, do you expect them to move up from Q1 levels or rather to decline or remain the same?

Well, as mentioned, we will provide a full picture of the go-to-market transformation with Q2. I don't want to anticipate that. Of course, the implementation will happen -- is happening as we speak. So these are the Q1 numbers. So we will already see some of the additional restructuring costs happening during Q2. Since we're covering over 60% of our revenue with the programs that would be ready by July, I think Q2 will give us a good indication of what we've done in terms of restructuring. I would say, I don't want to speculate too much. Probably the number would be along the lines -- a bit along the lines of what we are seeing in Q1, but we will confirm in July or in August when we report.

Our next question comes from Michael Briest with UBS.

Brian, I recall after the full year results when we were talking about Copilot adoption, you sort of said there's a lot of workshops going on, but it felt like it was going to be gradual. That 325,000, is that sort of in line with what you were talking about then? Or has there been an acceleration? And can you just remind us the time line for delivering on the sort of $100 million opportunity? And then a question on the sort of bid situation. Can you give an indication of how many bidders potentially if any of these names have been involved previously? And are they at the due diligence stage? Are there any strategics? Or are they all financial bidders?

Thanks, Michael, for the question. So firstly, as I said, we have had 325 services engagements with our customers and 325,000 Copilot users we have sold. And two, as a reminder, Copilot, as you know, was made available mid-January. So those numbers are from January 15 through March 31. So obviously, 75 days effectively of trading. We made our first sale in terms of a Copilot customer within 72 hours of availability of Copilot. We are very happy with the traction that we are seeing, especially on the services side. And it is still very early to tell given that we have had, let's say, 75 days of trading with Copilot. But the level of interest from our customers is high. The level of engagement that we have with our customers and from a services perspective is high as well. And we expect to see continued traction towards reaching our $100 million targets. And on your second question, and as you saw in the press release, the Board has established a Transaction Committee, which is made up -- or chaired by Till Spillmann, and then all Board members are members of that Transaction Committee. This has been set up to ensure that we will have an orderly follow-up to any inquiries which are going to be made. And at this point, we can't disclose how many bidders there are. And some of them are parties from the past either, as you can imagine. But when we have any updates, we certainly will be providing those updates to the market. And as a reminder, this -- the committee is made up of all Board members, including the new independent Board members as well.

And just a follow-up on Europe. I think you called out Southern Europe as being strong. So by implication, is sort of DACH and Northern Europe weak? Was it sort of growing or negative growth?

So in Southern Europe, we had strong traction specifically around our services business as well. This is related to Microsoft and the other hyperscalers as well. Specifically in DACH, we had a tough year-over-year compare. We did not -- there was no negative growth specifically in DACH. We don't disclose the DACH numbers by -- per region. But we did have, as I said, a tough year-over-year compare, but nothing which is a red flag for us for full year guidance at this stage.

Our next question comes from Balajee Tirupati with Citi.

Two from my side, if I may. Firstly, could you elaborate the Board's engagement on the business side? And how should we see the comment on view of accelerating the transformation and growth plan? And the second question, on the ISV, while the momentum has improved versus fourth quarter, it is still undergoing the double-digit growth rate we have seen in [ past ]. Should we expect the momentum to continue to increase towards double-digit growth in second half of this year?

Sure. Thanks, Balajee, for the question. So I'll take your second one first, and specific to the ISVs. And in Q1, and under the leadership of Brad Berry, our Chief Partner and Strategy Officer, we prioritized a set of ISVs. We began assigning global partner managers to work with these specific partners to build joint business plan, go-to-market program. We have shared targets between ourselves and those key ISVs to ensure that we're going to be driving profitable growth for both sides. We are making considerable progress in that. And again, we have prioritized a set of partners out of the 7,500 partners. And to give you a little bit of context, and that is approximately 15 partners in total globally that we have prioritized. We expect to see an uptick and an impact given the focus and drive that we have there, specifically in the second half of the year. And to your first question, we are, at the Board and the Executive Board, very happy with the engagements that we have with the Board. And obviously, we have some founding Board members who have returned having known the business very well. We have been spending time with the new independent Board members and to onboard them and to give them a better understanding of the business as well. But again, the conversations and the dialogues have been very productive. And we look forward to working in partnership with the Board and to accelerate the transformation and growth of the company as well.

Our next question comes from Martin Jungfleisch with BNP Paribas.

Two questions, please, from my side. First one is just a follow-up on the growth in Europe. I think it was quite soft, 3% in Q1, and it's decelerating. Your peer, Crayon, has reported quite solid quarter in Q1 and also talks about market share gains. So is the softer Q1 mainly relating to market weakness and higher comp base in certain markets? Or do you have a sense that you're also losing some market share there to smaller competitors? That's the first one. And then just a follow-up on Copilot, the 325,000 that you're talking about, is that sold licenses? Or is that users you're managing? And then you mentioned that you're on track to become the #1 Copilot partner. Is that already the case that you're #1? Or is it your aspiration?

Thanks for the questions. I'll take the Copilot one first. You had mentioned our peers, I'll call it, that I believe we're the only player here who's actually calling out our numbers. You can read into that specifically around Copilot, what you would like. But 325,000 as licenses is what has been sold, and 325 services engagement is what we have. We are well on track given the traction that we see with our customers. Next week, we will be in Seattle, meeting with the Microsoft executive management team, specifically underscoring our commitment and our plans to accelerate around Copilot. So very happy with the traction that we have and very much on track. And then specifically to your question around Europe, we -- there is nothing per se showing pressure from other peers in the market specifically. As I called out, we did have a tough year-over-year compare in DACH. DACH is as the larger part of our European business. DACH is now currently under new leadership as well since the beginning of this year, but nothing which is a red flag to us in terms of, one, competition and, secondly, overall market sentiment.

Any other comments, Mr. Jungfleisch?