SoftwareOne Holding AG (SWON) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the SoftwareONE Conference Call and Live Webcast. [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 the call. I'm Anna Engvall, Head of Investor Relations at SoftwareONE. As you will have seen, SoftwareONE is pleased to announce the appointment of Raphael Erb as new CEO. We also released an update on current trading and financial guidance this morning. In terms of agenda for this call, Raphael will start by saying a few words. Rodolfo Savitzky, CFO, will then provide an update on our Q3 2024 performance. Finally, we will hold a brief Q&A session. We expect the call to take no longer than 30 minutes in total this morning. Our full Q3 trading update will take place on the 13th of November as planned. Before handing over to Raphael, please let me remind you that information provided on this call include forward-looking statements, which reflect the best of our current knowledge. Actual results may vary. With that, I will hand over to Raphael.

Good morning, everyone. A very warm welcome also from my side, and thank you for joining us at such a short notice this morning. As the new CEO of SoftwareONE, I very much look forward to our future interactions. Given today's announcement, I would like to share my perspective on SoftwareONE and some of my immediate priorities with you. I joined SoftwareONE more than 25 years ago in our sales organization. Over the years, I've had the joy and the privilege of working in different leadership roles across regions and with that, got the chance to develop a deep understanding of our business. SoftwareONE, in short, it's all about being a trusted adviser. This means that serving our global and diversified clients as well as our partners with excellence is absolutely core to our success. To understand and keep up with their evolving needs, it's, therefore, imperative for us to stay close to them and to listen to and empower our regional leadership and teams across our 60-plus country organizations. As CEO, my #1 priority will, therefore, be to enhance our focus on the customer, empower our frontline and improve our commercial model to drive growth. We have a strong foundation in place, which I'm very proud of, a large loyal customer base, deep partner relationships and a talented team of more than 9,000 colleagues worldwide. At the same time, we have experienced challenges in recent months that we will need immediate attention and actions. Some of the recent affects the entire industry as we are seeing a more cautious corporate spending environment with lower sales cycles in certain key markets. We are also adapting the organization to vendor incentive changes. And on the other hand, we have had sales execution issues with the implementation of our new GTM approach, which, by the way, is a model I fully support. We are actively working to resolve those and are making adjustments to the rollout in remaining markets. Beyond this, I personally see a clear need to respond swiftly to client demands and make the right strategic decisions at a faster pace. I also see significant scope for driving efficiencies towards a more customer-focused organization and aligning our cost base to the current environment by reducing costs, including overheads. Rodolfo will shortly go into a bit more detail on our results and outlook. And I hope you understand also given my first day in the new role will be tomorrow, that we will only present a fuller picture with our Q3 trading update in 2 weeks. Let me close by saying that I'm absolutely convinced we can get software run back on its growth path. As I step into my new role tomorrow, there is certainly work to be done and it will not happen overnight. I look forward to keeping you posted on our progress as we shape the next chapter together with our excellent team. With this, I will now hand over to Rodolfo to take you through our performance in the third quarter. Thank you.

Thank you, Raphael. A few words from my side as well regarding our financial performance. Revenue growth in Q3 was 3.1% year-on-year in constant currency, below our own and market expectations. Foreign exchange headwinds impacted revenue growth by around 1.7 percentage points. The adjusted EBITDA margin was 16.6%, down 4 percentage points compared to prior year, primarily reflecting the lower-than-expected revenue growth. In terms of regional performance, APAC delivered another strong quarter with 24% growth in our largest region DACH, was up 11%, supported by large customer within the enterprise and public sector segments. However, revenue in rest of EMEA, NORAM and Lat Am declined. The underperformance of these markets in Q3 was driven by a combination of factors. Firstly, a reduction in certain vendor incentives in Q3 was not compensated for with new incentives, as was the case in the first half of the year. Secondly, the implementation of our new go-to-market model, which was rolled out on an accelerated time line in mid-2024 led to some disruption and challenges with sales execution. These issues were particularly pronounced in key regions such as North America, where we now expect the benefits of the transformation in terms of improved sales productivity to take longer. Finally, this was compounded by a more cautious spending environment in certain key markets, which we expect will persist through the fourth quarter. As mentioned by Raphael, we are taking decisive action to address the issues and have also revised both our guidance for the year as a result of our performance in Q3 and outlook for Q4 as well as our targets for 2026. We now expect full year revenue growth of 2% to 5%, down from 7% to 9% and an adjusted EBITDA margin of 21% to 23% of revenue, down from 24.5% to 25.5%. There has been no change to our dividend guidance. Our 2026 targets have been adjusted to double-digit revenue growth, previously mid-teens, with an adjusted EBITDA margin approaching 27%, down from 28%. We will provide further detail on the Q3 numbers at our planned trading update on November 13. And with that, I'll now hand back to Anna to manage the Q&A.

Thank you, Rodolfo. We now have time to take a limited number of questions. Operator, could we please have the first question?

[Operator Instructions] The first question is from Reto Huber with Research Partners.

Thank you for updating us this morning. I have a few questions. The first one would be on the expected compensations that we did not receive. I was wondering to which products or services are they relating? Then secondly, in which account -- IFRS accounts would you have booked them? And then my third question would be on why are you not also publishing the revenues by segment this morning?

Thank you, Reto. Maybe let me start and then, Rodolfo, maybe you can add on. I think as we mentioned, we have in 2 weeks our Q3 announcement, and we will certainly go there into more detail on revenues by business line and so on. And that's why we haven't got into so much detail in this call. But maybe, Rodolfo, you can add on this and elaborate a little bit more on the specific questions.

Yes. Thanks, Raphael. Thanks, Reto. When you said compensation for products and services, I think you mean the -- what we referenced as incentives, right?

Exactly, yes.

Yes. So incentives are part of -- maybe it's a word that could be confusing. This is part of our intrinsic business model. This encompasses incentives from our different vendors for either sales performance or specific campaigns that we do. And these are recorded in revenue. This is part of the famous back-end fees that we talk about or front-end fees and then those special incentives for achieving certain KPIs or in some situations for having a special marketing campaign and then they support these programs. And not all, but the vast majority are recorded in revenue.

Okay. And the other part will be in other operating income then?

So in case some programs are more directed to funding specific resources, this we book under local sales, for example, because they are really linked to one-to-one to the funding of resource.

Okay. And then can you say something about which products or services this relates to?

So I think we -- look, again, as Raphael mentioned, we will go into a bit more detail during quarter 3. I think it's less per se -- it's more, I would call it, vendor related. And as you can imagine, given the big impact of Microsoft in our portfolio, the majority of these incentives are related to Microsoft. So here, again, just to be clear, it's not that all of a sudden this -- we hadn't anticipated certain changes per se in incentives. I think the key point is that during the first half, with a combination of getting additional incentives, either from Microsoft or other vendors, doing some of the big deals, we have managed to offset the incentives and this was not the case in quarter 3.

Yes. So maybe let me elaborate a little bit more on these incentives. And yes, it's mainly related to Microsoft, which is the biggest impact, for sure. We generated high incentives in Q3 2023. And while we knew that these incentives would be lower this year, most likely, we expect it to compensate for the changes. But unfortunately, we could not do so with full extent in Q3 to make that happen.