Softwareone Holding AG

SIX:SWON

Earnings Call Transcript 2020-Q2

[Dieter Schlosser, CEO & Member of the Executive Board]

Thanks to everyone joining us for the first half year results of financial year 2020. This is Dieter Schlosser, CEO of SoftwareONE. I'm here together virtually with Hans Grüter, our Chief Financial Officer; and Alex Alexandrov, our Chief Operating Officer. Real pleasure to have you on the call. I will walk you through the first half year results, which is also available online on our Web page. I will start with the key highlights and the business update. Hans will then give you a detailed update on our financial performance. And thereafter, I will turn to our outlook and take you through what we see in the second half of this year. Alex, Hans and myself will then round off with Q&A at the end of the session. So let's start with the presentation. First point, as always, to the disclaimer on Page 2. The forward-looking statements as well as non-IFRS measures. Please read them carefully, and let me straight jump into Slide 5. I'm really happy to share strong results in an extremely difficult environment. A global pandemic, a global crisis, where we wanted to make sure and that's our top priority is that our employees are safe, our customers can operate and continue to operate their business. We stick to what we have told you in the last results presentation and come out much stronger of the crisis than we entered in. You will see this throughout the presentation when it comes to our progress on the transformation, when it comes to the progress on the integration side with Comparex, but also on the financial metrics. Starting off with our great results on solution and services. Our customers really relied during that period and in general, on cloud and trusted us completely on our services, and we were able to achieve an acceleration and the year-to-year growth of 15.1%. We were also able not only to increase our EBITDA level to 18.2%, but also our margin above 32%. You might recall, we ended up last year with around 30%. So that goes towards the midterm guidance, which we guided to with 35%. Our run rate on Comparex-related cost synergies have reached now CHF 31.9 million. That's ahead of the plan, ahead of the curve, and I will give you further details later on. Also, very pleased that our business model, which we always told and shared you, is a resilient business model. We are able to grow, and we are able to benefit when the economy and environment is good. But we are also pulled from our customer into the business when the environment is in a difficult situation because of our portfolio. So we were able to leverage that business model and continued on our strategy, invested into acquisitions and into talent. There's a saying, never waste a crisis, and we have been able to utilize that and acquire companies which are on the market, interesting companies, helping us on our future transformation and our growth, but also very good talent across the globe. We hired so far in the first half year, 380 new collaborators, and that's a journey which is continuing for the rest of the year. On the financial side, further unlevered balance sheet, significant liquidity and a cash flow generation, which Hans will share with you in his part of the presentation. If I go a bit deeper on Slide 6 into our 2 lines of business, very solid performance on software and cloud. We have seen customer rushing into everything, which is COVID relevant, renewals of mission-critical software. But on the other side, also certain scrutiny of whatever is discretionary. On the Solutions & Services side. Here, we really benefit that our entire service portfolio is geared up to the cloud and customer consuming increased consumption on the cloud also our services. And that's across our 2 practices, which is software life cycle management. I'll give you an example, for instance, cost takeout advisories to relieve the customer with certain OpEx challenges, or on the technology services, where we helped our customer on cloud optimizing and on cloud management. You see below on the revenue. There's a discrepancy. We look at the revenue of H1 2019 compared to H1 2020, that's an intended consequence of our portfolio cleanup, which we shared with you earlier in this year. You remember, we have exited and run down whatever services are noncore for us and nonprofitable or low profitable. So the results you see over here with less revenue, we are able to achieve higher gross profit. If I then go into Slide 7 and show the Software & Cloud business into more detail. We see a strong demand from customers when it comes to renewals, and to mission-critical software. So whatever is relevant to keep on the light has continued to grow. But on the other side, discretionary spend , which is focused on innovation, which is not at the same time, relevant for the -- during the crisis and project-related software has been delayed in that sense. On the Microsoft side, we are now 75% of the GP and customers buy from us. When I go deeper into the products, 60% on cloud and 40% on-premise. On-premise is something which we maintain, which we keep as a running book of business, even though the growth is much slower over there and it's limited gross profit opportunity. But as you can imagine, this is -- these are the cloud journey travelers of the future. And by maintaining them in our book of business, we will benefit in the future when the customers are ready to migrate to the cloud. Talking about 60% in the cloud. It's always split between the 3 different clouds Microsoft is providing. It's the productivity cloud, which is Office 365; it is the Azure cloud, which is -- which are the workloads; and it's the Dynamics clouds, which is the ERP of the future. Given our portfolio mix on customer segments, we do have around 50% on SME. We experienced a lower growth in that particular segment because SMEs were the ones which were hit first during COVID. Also during H1, we had fewer upfront deals where customer pre bought to get larger discounts. That's usually happening in Q2 during the year-end of Microsoft, and such deals are usually very healthy for us. Customers that focused on pay-as-you-go, which in the long run is very positive for us. You see we have a growth over here above 50%, and that's promoting the customer relationship, which we have, the transformation, but also on the software cloud, subscription revenue, a huge upside for us with the adoption of the cloud products. Looking into the services and instead of showing you some numbers, I thought I'd share with you a real case. There's also a video out there on social media. We are talking about a customer who is one of the largest food distributor in the U.S. When they entered into COVID, they faced dramatic challenges, not only from enabling remote working, but really maintaining the service level to their customers, which is the modern trade, the general trade, the mom-and-pop shops. And so we partnered very quickly with them. We migrated them completely to Azure, and we deployed the Windows Virtual Desktop, enabling them to not only keep their employees safe and maintain the business, but really have to shelve, stopped on an ongoing basis and benefit from the COVID scenario as well. There are many, many customers like those which -- which you do see as a reflection in our performance on Solutions & Services. Coming to our synergies and to our major acquisition and integration efforts on Comparex. Beginning of the year, we shared with you that we made the hard decisions in 2019. We harmonized the Solutions & Services portfolio in the beginning of the year, right from the get-go from January, we started with one portfolio. We aligned the sales enablement. We harmonized compensation, which is one of the most important topics if you are a taxes organization. And the ongoing concern at that time was the integration and harmonization of the ERP systems. So I'm very happy to share with you that we basically have, by now, the entire SoftwareONE company, on our ERP or on our harmonized ERP system in place. That's a major step forward, so we can make a tick in the box in terms of the integration effort with Comparex. The synergy realization is, of course, ongoing. And you can imagine from next year onwards, when you have a full financial year, calendar year in one harmonized process and back office, we will also have a further traction on the synergies. If you look at the numbers on the right side, the monetary aspect. We finished with -- in the first half year with CHF 15.6 million on synergies on a run rate projected for 12 months, that's CHF 32 million, which is far ahead of what we guided initially. We said we would achieve around 60% of the CHF 40 million target. So we're already ahead of the curve. And just to already share this with you, we will also adjust the guidance on that which I will share with you later on. When it comes to acquisition, it's -- again, it's a proof, it's an evidence, it's a validation of our resilient business model. We didn't change the strategy. We continued on our strategy to really utilize the crisis and acquire companies which are in the market. And the same goes later on for the talent. So happy to share with you that on top of the 8 acquisitions, which we have done til the end of last year, we added another 3: B-lay is a Dutch organization, which is focusing on software life cycle management and gives us strong additional capabilities on Oracle and SAP; make it noble are extremely specialized experts on Microsoft, who joined us in our Swiss office; GorillaStack has capabilities in IP, which provides cloud cost management and event monitoring on AWS. We will -- we are currently integrating that into our platform into PyraCloud, which will boost up our cloud platform management to a complete different level. And we are also on the verge of making that as a feature parity for Azure in the same way. So we're really hyperscaler on the platform management. With -- We always said, we will wait until we are through with the Comparex integration before we open the opportunity on acquisitions on scale. As I have shared with you earlier, we are well on track. We're actually done with the integration on Comparex. And so the window of opportunity for such acquisitions would open up by year-end 2021. On talent, same scenario, the prices offered to us a unique chance to hire talents in the market, and we did this very aggressively in our growth streams. We have 3 growth streams. One is the cloud-managed services, where we are fast-growing now on AWS. But of course, further utilize our opportunity being the #1 player on Azure. We have furthermore application modernization where we help to really our customers on -- embarked on their digital transformation, replatform, refactor and reengineer their legacy applications, which is a necessity if you want to maintain those in the future. And at the same token, our critical workload practice, which is SAP on the cloud, which we also reinvested heavily into this practice. These are growth streams, which we believe are growing for the next between 8 and 15 years, depending on which one we are talking. And for us, it's very crucial that we continue to invest in them. But equally, also in our back end, which is a scalable business model, as you know, to our global delivery model and also paired with our platform, which helps our customers to really optimize their digital software supply chain. There is -- we are getting many awards on a yearly basis, as you can imagine, but this one I wanted to share with you for the simple reason, or actually 2 reasons. Number one, this is the first time that Gartner really produced the Magic Quadrant on software life cycle management. And what it means is that there is now an acceptance that software life cycle management becomes even more strategic in the future because when you have every IT resource in the cloud, every single IT spend becomes OpEx and the management of those digital assets become more and more important to make the right decisions to go faster on digital transformation, but also to optimize and leverage your spend so you can focus on innovation and reuse your discretionary spend to the right things. There's one more award, which I quickly want to share with you, which is an SAP award through the CIOReview magazine, where we have been named as one of the most promising SAP consulting and service company in the cloud. And that's exactly where we build up the practice with our acquisition last year on BNW, but also organically with our own practice buildup and help our customers now to move SAP onto Azure and AWS. So with that, I'm handing over to Hans Grüter, our Chief Financial Officer, and he will give you more detailed information on our financial performance. Thank you. Hans, over to you.

[Hans Grüter, CFO & Member of the Executive Board]

Thank you, Dieter. And also from my side, I'd like to welcome you to this conference call. I'm pleased to go through the financials in more detail. Let's start with Page 14 and an overview of the profit and loss statements. The IFRS reported figures, H1 2019 and H1 2020 represent the figures in the half year report. To remember for you, in H1 2019, the Comparex figures have only included for 5 months, as we have acquired Comparex at the end of January 2019. So more important to assess the performance of our business are the adjusted figures, which you see on the right side of this slide. We make adjustments based on our alternative performance measure, it's highly controlled, and it's in line with our internal rules. These adjustments include pro forma adjustments for Comparex. It would have been with us since the beginning of January 2019. It includes the bad debt presentation in line with IFRS as part of OpEx in 2019. This presentation is going on in the future and OpEx adjustments for share-based payments, IPO, Comparex integration, M&A and earnout. I will come back to these adjustments later on and would like to say some words about the figures itself. We had achieved in the line of business gross profit from sale of software and other revenue, CHF 274.6 million gross profit, which is a growth in constant currency of 0.9%. On the gross profit for Solutions & Services, we have achieved CHF 96.2 million, a growth of 15.1% compared to prior year, and the total gross profit of CHF 370.8 million, a growth all in constant currency of 4.3%. The EBITDA increased from CHF 107.4 million to CHF 120 million, which is a growth of 18.2% and represents an EBITDA margin of 32.4%, well above the 28.3% we have achieved a year ago. The profit of the period is CHF 67.9 million, a bit higher than it was last year for that period. On the next page, we would like to give you the full transparency of all the adjustments made and show you here the bridge from the reported profit for the period to the adjusted profit of the period. We start with the reported period and made the adjustments for 2019 for Comparex.So this figure is CHF 5.7 million, which is -- represents basically the January of Comparex. We adjusted share-based payment in 2 areas: one is the equity management program, which we disclosed during the IPO. To remember here, it's financed by the share -- by the major shareholders, but we need to present due to IFRS trend to P&L. The second part is a free grant. We have granted to our employees a number of shares and offered them to all of our employees with a vesting period for 2 years. The adjustment made for these 2 programs are CHF 12.4 million. Going forward, we expect this figure to be for the full year 2020, CHF 24 million. It will continue in 2021 with CHF 13 million and expected in 2022 to be CHF 4 million. Further adjustments we have made for IPO expenses, CHF 1.9 million in '19 and CHF 0.5 million in '20. Integration expenses for the acquisition of Comparex of CHF 2.9 million in '19, respectively, CHF 4.4 million in 2020, and M&A and earn-out expenses net of CHF 0.1 million in '19 and CHF 0.4 million in 2020. So further adjustments we have made for the appreciation of the Crayon shares, which was CHF 11.5 million in '19 and it's CHF 13.3 million in 2020, and made all the tax impact of these adjustments reflected in the adjusted figures, which is an expense of CHF 0.6 million in 2019 and CHF 3.2 million in 2020. Going into the performance of our line of businesses. We have achieved GP growth and acceleration GP growth in our line of business Solutions & Services of 15.1% as well as a solid growth in sale of software and revenue of 0.9%, all at constant currency and overall, a growth of 4.3%. Going to the EBITDA. As earlier mentioned, we have increased the EBITDA of CHF 107 million to CHF 120 million and the EBITDA margin of 28% to 32%. This was possible with improvement, basically, one, on growing the GP with less growth in -- on the cost side with realization of our synergies with some savings, for example, on the travel expenses, but also as offsetting some of this is the investment made in key talents and M&A as Dieter explained to you earlier. We have achieved a strong cash flow from operating activities for the period at an amount of CHF 206.7 million compared to a negative CHF 15.1 million in the period a year ago. The main driver of that was the change in net working capital, which you see here in the middle part, all these figures are based on reported figures. We have benefited from a vendor payment program that made a big, big impact on this, where I will come back to in more detail in another slide. The capital expenditure is about CHF 10 million for half of the year. So for full year, about CHF 20 million. It's on a low level, as we always said. It demonstrates the asset-light business model that SoftwareONE has. I would also like to remind you that in this investment, the bigger part is for investment in our PyraCloud, the platform for interacting with our customer and the platform for enrollment of our business. Important to note here as well is our good position and managing the customer credit exposure in this not so easy time of COVID-19 situation. First of all, I would like to remind you that we have a very diversified customer base a diversification based on geography, but also on industries. We have a centralized process in place for credit line and payment terms with our customer and try to ensure as much as possible. And then you see the chart on the left, we have in our portfolio 80% of our portfolio is all insured or really high-rated customer. So this position is very solid and a very good situation in particular in this time. We have increased the bad debt provision for our accounts receivable from CHF 16.2 million to CHF 18.5 million. I would like to note here that this is increased -- is an increase based by management assessment and is a provision only. Coming into the balance sheet. We can present to you a very strong balance sheet with a very good cash -- net cash provision of CHF 333 million, up from a net debt of CHF 35 million a year ago at the same time. The net working capital, which has -- is a big part of our balance sheet is at minus CHF 173 million at the end of H1 2020 compared to CHF 104 million 1 year ago. As mentioned to you, this net working capital was supported by a vendor deferred program we have in place. We expect that this program will end in H2, and we will expect as well that there will be a cash outflow of that in the magnitude of about CHF 250 million. This vendor program helped us extremely to support our customer in this difficult time. I would also like to mention to you that we have made some progress in the underlying net working capital, mainly on the collection side on it and expect this positive cash generation that we can do that also in H2. We have -- as we have in the -- at the beginning of the last year, continuing unused bank credit lines going forward, we do have an equity ratio consistently on about 20%. And that's a summary of this slide, we really have a strong balance sheet, which is good positioned for continuing growth being internally all through acquisitions. And with this, I would like to give the word back to you, Dieter.

[Dieter Schlosser, CEO & Member of the Executive Board]

Thank you, Hans. So let me go into the outlook for the remaining part of the year, for the second half of 2020. With regards to COVID-19, of course, the future development remains highly unpredictable, it's difficult to judge. But we have -- we see trends in our customer operating environment, which really suggest certain normalization. This is, of course, depending on which geography. We see a faster pickup in Europe and parts of Asia compared to the U.S. And of course, it's also related -- dependent on the industry segment we are referring to. Looking at the guidance and assuming no material deterioration in the environment through COVID, we expect that we can keep the gross profit level as we have seen in the first half of the year, also followed in -- for the full year of 2020, and that's on Software & Cloud and Solutions & Services. Again, it's -- this time, and the crisis is evidence that our business model is resilient. And only the practical experience of this year has really proven the foundation of our business model. And that's why we are able to give you that guidance. If I go further into detail how this looks in terms of breakdown. On Software & Cloud, we would be talking about GP growth on the same level than in H1, which is around 0.9%. As you know, the usual behavior with corporate customers is that there is a certain burn down on the IT budgets depending on the financial year. And if the financial year is aligned with the calendar year, you usually see this happening in the last quarter, in Q4, particularly in December. The question is, of course, is that happening? Will that happen in the same way as it usually happens in the past? And will it happen also during a COVID phase? Or will be there a really reduction of the OpEx and the reduction of the baseline for the future? So we are rather conservative from this. And hence, we are expecting to grow on the same level than we have proven in H1. On the Solutions & Services side, we also assume that we have -- and we guide that we have a growth of 15.1% for the rest of the year. Actually, the signs are really evident over there. Now I shared this with you also in the beginning of the year that we assume a creeping up of the backlog. And that's why it was so important not to reduce capacity and capability, but really reinvest into capacity and capability so that we are able to deliver that. So that has really occurred. We -- the backlog is at the highest level on the professional services now as well as on the managed services side. So we are very confident on that guidance. In terms of synergies, we uplifted the guidance of the year from the 60% to 80% to 85% of the CHF 40 million OpEx synergies, which we guide to achieve by FY '21. And as I mentioned earlier, the entire company is now on one system, and one process and one back-office. Once you have a full calendar year, full financial year on the back-office, of course, there is further upside for us visible. On the EBITDA margin, we will be approximately on the same level we have achieved in H1 2020, and -- for the full year, and that's, again, it's an evidence that the business model is moving towards targeted one and the guided one in the midterm, which is 35%. Dividend policy hasn't changed, and it will be between 30% to 50% profit for the year. So that was the end of our presentation. So I'm happy to refer back to Stuart, our operator, and we go to the Q&A session.

[Operator]

[Operator Instructions] The first question is from the line of Stacy Pollard from JPMorgan.

[Stacy Elizabeth Pollard, Head of Software and IT Equity Research]

I have a few, actually. So first of all, you mentioned 50% SMEs grew a bit slower. Can you maybe quantify that? And then what progression are you seeing in the pipeline for sort of Q3 and Q4? That's one question. Maybe my second one. Do you mind just talking about other vendors? So you talked about Microsoft being 75% of your GP for Software & Cloud. Just some color on what other vendors are strong or weak in pipeline there? Third question, do you mind just reminding us of the share ownership and when lockups end? And then last question, really, for CFO, can you talk about expectations for cash from operations in H2? There were a few moving parts, so I was hoping to kind of settle that.

[Dieter Schlosser, CEO & Member of the Executive Board]

Thanks, Stacy. So we have 4 questions. Let's start with the last one. Hans, do you want to quickly address the last one?

[Hans Grüter, CFO & Member of the Executive Board]

Yes. Dieter, I can do that. So it was the question about the cash flow from operation, what we expect it to be in H2. So as I always say, it's very linked to the net working capital and, of course, the performance of the underlying business. But I think that the net working capital is the more topic you would like to get some color in. The net working capital does underlie a trend in our business, which is linked to the trend of our business with peaks in June, in December, in March and September. And we see reflecting in the net working capital a month or 2 later on. We have had in H1 this vendor deferral program, which has helped the networking -- for the net working capital to this level I have provided to you, which is CHF 173 million negative. We expect that these programs will end, and it's a magnitude of CHF 250 million. When you say -- when I'm coming back to this regularity, which I see, then I would refer to the cash flow we have generated in the last year and think there we will see some pattern going forward also in this year, and it will depend as well on when we close the balance sheet, have the custom really paid at that -- to really that day or is a day later or whatever. So this micro management topic is a topic which always is with us and will be a bit decisive what happens at the end of that period. But I think this is more what happens there, but I see positive in all what I've seen here in this COVID situation since March until today, we have seen a constant flow of cash-in of our collection. We have even improved compared to what I have seen in the last year and made some progress. And I have no doubt today that this will continue on the caveat that the situation stay as is. But I see the strength going forward also for H2. I hope that helps you a bit, Stacy.

[Dieter Schlosser, CEO & Member of the Executive Board]

Right. So Stacy, let me quickly share something on of the non-Microsoft as well as the small and medium enterprise in the customer segment. What we see on the non-Microsoft is everything which is UCC, unified communication collaboration, everything which is related to remote working, virtualization, virtual desktop, digital workspace. What we see in terms of cloud enablement, whether it's the Red Hat of the world. And then on the other side, also the security posture and particular cyber security and policies and control. Because as you can imagine, during the first phase of COVID, many, many companies threw out the security policies off because they had no chance then maintaining their business by following them. So they're obviously gaining control back, and that's something which is also visible. In terms of the small and medium enterprise, I shared with you that 50% of our customers segments, 50% is enterprise. We have a higher profitability on the SME side versus the enterprise side. What we have seen is that the SME were tougher hit, and the more hit and faster hit than the enterprise level. But we also see from our pipeline and from our backlog that they are coming out faster again. So that's a positive sign for us. And as I said, for us, it's really important that we keep up with our results and capabilities requirement to deliver on the backlog which has been creeped up over the last couple of months. On the shareholding lockup there, Patrick, you want to quickly give the exact dates, one is end of October. Can you just confirm that, please?

[Patrick Zuppiger, Chief Communications Officer]

Sure. So the first lockup will end on the 21st of September. That's for the selling shareholders, KKR, Raiffeisen and the heirs of Patrick Winter. And then on the 25th of October, the lockup will end for the founding shareholders and also for EB members. And please be reminded, then on 25th of October, 1/3 of the MEP of EB members the lockup will end. So these are the dates currently.

[Dieter Schlosser, CEO & Member of the Executive Board]

Thanks, Patrick. And thanks, Stacy for the questions.

[Operator]

Next question is from the line of Alastair Nolan from Morgan Stanley.

[Alastair P. Nolan, Equity Analyst]

Just a couple, if you don't mind. Maybe first, could you maybe comment on a little bit more around the kind of trajectory of growth through the first half? Give us an idea of kind of how much of and when COVID had the biggest impact and maybe something around exit rates towards the end of the period? And then secondly, on the synergies, sorry, it feels as though, obviously, progress is pretty solid, ahead of expectations. And as a result, is there any thought or any possibility from what you've seen so far and the fact that maybe those targets may ultimately end up higher than where we are or where you've currently outlined? And then, finally, just on the commentary around an increase in pay-as-you-go contracts. Could you maybe give us a little bit more detail around this? My understanding from what you mentioned was that previously, there was more multiyear deals done in the second quarter and maybe COVID impacted that, so more people shifting towards pay-as-you-go? Or is that something more structural that's not really impacted by COVID? So just those 3 questions, please.

[Dieter Schlosser, CEO & Member of the Executive Board]

Yes. Thanks, Alastair. So on the first question, in terms of the trajectory with regards to the COVID timing. When we did the FY '19 presentation, end of March, we shared with you that we see actually a pickup in certain aspects on the business, particularly through the work from home. So that really went through the end of first quarter, end of March. But then in April and May, we saw rather a reduction on -- particularly on the discretionary spend for the customers. And June again was a much stronger month for us. And that's -- coming to the third question on the pay-as-you-go as well and happy for Alex to answer here and the second part of it as well. But what we usually see is that particular enterprises are going on prepurchase and pre-buying commitment to achieve larger discounts and utilize that window, it's either in the financial year's end of the publisher of the year's end in general, the calendar year's end. So Microsoft is end of June and hence Q2 is usually -- that is the quarter for that kind of purchasing behavior, and particularly, June is something which we expect. That's not something which will go away. That will always happen as long as they have the financial year in that month. But this year, we solve much fewer of such deals coming in, but the customers were rather pivoting to the pay-as-you-go, which is then -- you need a full year cycle to recover on that from a revenue recognition. On the synergy side, yes, I mentioned we are ahead of the curve. We also see that the CHF 40 million are very, very realistic. But I don't want to commit now beyond that. You can have your hypothesis on it. If we run the full year of the entire company on one process and then one back-office, that there might be upside, but I don't want to commit beyond.

[Operator]

Next question is from the line of Michael Briest from UBS.

[Michael Briest]

A couple from me as well. Can we look at revenues for a moment. Just in terms of the Microsoft business, I think, on Note 5, Page 27, the Microsoft's indirect revenues are up 1%. And I guess with currency, it's maybe 6% or 7%. But I know Microsoft has called out SME weakness, but the 365 business was up 20%; Azure was up 50%; Dynamics, up 40%. So within your revenues, I appreciate gross profit is skewed towards cloud. But is it fair to assume that the majority of revenues are on-premise, and that's why you're somewhat divorced from the trends that Microsoft is seeing? And then looking into next year, obviously, you're guiding for a reacceleration to high single-digit growth in software gross profit. What is the driver of that? Is it that margins will improve? Is it that the revenue growth will reaccelerate? Can you just talk about what's the assumptions behind that? Is it macro? And then I've got one on cost.

[Dieter Schlosser, CEO & Member of the Executive Board]

Yes. Thanks, Michael, and thanks for your report which you send out this morning. The second question is on the macro, and that leaves the first question to Alex to answer. We -- as you remember, our guidance was high single teens on the Software & Cloud and -- high single-digit on the Software & Cloud and high teens on Solutions & Services. On Solutions & Services, for us, the accelerator of digital transformation was really COVID, right? And we believe that, that is something which will not only continue but rather exponentially grow in FY '21. On the Software & Cloud, what we're already seeing here that we can -- it's visible the hard dollar of cost savings of the customers. So in usual ways, you -- it's very tough for you to save more than 10% on an ongoing basis without shutting down part of your business, as in part of your operational function as an organization. So you will see the majority of our book of business coming back to enormous spend behavior. And again, Michael, this is dependent on how COVID progresses or whether the light at the end of the tunnel is really the light, right? If what we see currently is from the customer side, there is an improvement already there, are we going into a full recovery in Q4? Most likely not yet. Is it something which is globally across any geography? I think it's rather for few geographies, U.S. will be a bit on the backbone as well as LatAm, particularly in Brazil and Mexico. And with that, I would say, for FY '20, if COVID develops as we have the hypothesis, then that's our midterm guidance. On the first one, Alex, you want to answer on that?

[Alex J. Alexandrov]

Yes. Hi, Michael. So on the Microsoft side, we see ourselves on the top line, on the revenue line, which includes -- what we look at is both what you see on our P&L as well as the direct purchase volume, which does not hit our P&L. I'd say, the entire volume for us is in line, slightly faster-growing than what Microsoft is seeing. The reason you then see and why we try to lay out Page -- Slide 7 is it is a combination of on-premise and cloud. And our gross profit is very much geared towards the cloud segment of the Microsoft spend for our customers. And in the cloud segment, that's where we see a number of these intersecting lines, which is as customer -- as SME customers were more impacted, that impacted our mix and we naturally make more gross profit in the SME segment. As customers -- to Alastair's question, as customers did more pay-as-you-go rather than a commitment, while that had an immediate impact in the first half, we still -- we really like that model because, again, it attaches us very closely to customers, allows us to add value to them every day, every week. So we believe the long-term prospects of that business are very healthy. And finally, even on the Azure side, we made gross profit as customers are consuming. So that consumption trend continues to accelerate. And there's a slight nuance because in the market, what's being reported is build Azure and again, we continue to see a very strong, very healthy runway of cloud consumption, and that's how our gross product is geared.

[Michael Briest]

Right. And just a follow-up. I think at IPO, 60% of the cloud gross profit from Microsoft was 365 related. Has that changed much? Has it moved more to Dynamics and Azure?

[Alex J. Alexandrov]

No. Well, I don't have the specific number for you today. I would say, just given the growth Dynamics or Azure, I would say Azure is going to be picking up, let's say, our -- share of our gross profit because the growth trajectory there, as you see from us and for Microsoft is much higher than 365. But 365 continues to be a major contributor of very healthy growth. As we probably mentioned on some other calls with 365, even though it's highly penetrated, we see a very big opportunity with customers to actually on adoption. So many customers are on 365, but they may be on a kind of initial or basic version of 365. And as they get to know the functionality, they are able to adopt more and more. So they can go from something basic to something that allow them to utilize unified communication collaboration to even something that allows them to utilize security. So we see quite a healthy runway for 365.

[Michael Briest]

And just a final one on costs. A lot of other companies have reported benefits from lower travel, marketing and things like that. Has that affected your profitability this half? Or do you expect a tailwind from that in the year?

[Dieter Schlosser, CEO & Member of the Executive Board]

I think Hans mentioned a bit during this presentation. But Hans, do you want to elaborate further on this?

[Hans Grüter, CFO & Member of the Executive Board]

Yes, Michael, there is a travel where we benefit as well. So we have in the first half year, there was probably 3 or 4 months, where we had no possibility to travel. And it seems so that this will continue as well going forward. So this has an impact for us as well. I would say the magnitude in H1 of travel expense savings was about CHF 4 million.

[Operator]

Next question is from the line of Charlie Brennan from Crédit Suisse.

[Charles Brennan, Research Analyst]

If that's okay, I'll carry on the tradition of asking a few questions. Just two on Microsoft quickly. Last year, for the full year, I thought that Microsoft was 54% of the gross profits. And in these H1 numbers, you're talking about it being 75%. Does that reflect some significant Microsoft seasonality with their year-end being June? Or have you changed the way in which you're defining the Microsoft gross profit? Secondly, related to Microsoft, you seem to be attributing your performance to exposure to SMEs and some shift to the cloud. But those dynamics are presumably relevant for Microsoft as well and yet Microsoft is still reporting faster growth. Across the industry, I've heard some suggestion that Microsoft is looking to go direct with more business. Now I understand if they go direct, they'll still pay you an agency commission, but maybe that's slightly lower than you would get if you were managing the relationship. Is that a dynamic you've seen? And can you comment on that? And then, thirdly, can I just turn to the services business, the way in which you report your gross profit is to exclude third party costs. So if you just internalize the way in which you deliver some of those services, you can increase gross profit. In light of what's happened to revenues in the services line, how do we get comfortable that the gross profit growth is a genuine underlying growth as opposed just to the way in which contractors are delivered?

[Dieter Schlosser, CEO & Member of the Executive Board]

Thanks, Charlie. On the first one, on 54%, which we showed to you for last year, that was against the entire business. And the 75%, which we showed you today in that slide is again software line of business Software & Cloud, and I guess that explains the difference. On the incentive side, I mean, Alex, it continues in the same discussion. Do you just want to add on that?

[Alex J. Alexandrov]

Yes. So yes -- and it's exactly still 54 -- Microsoft is still 54% of the total and 75% of the Software & Cloud. And yes, I mean, just -- Charlie, to your point on kind of how does it compare to Microsoft. Microsoft doesn't really -- to my knowledge, doesn't disclose their own mix of enterprise and SME. But what we can just say is that in our own model, the gross profit is really geared to make more gross profit, both incentive and upfront margin from the SME. And so as the SME market is usually very healthy, we benefit, when it takes a hit, as it did in the first half, that's what kind of -- that's what hurt us, relatively speaking, relatively speaking to Microsoft, but I'd say relatively speaking to what's going on in the market, we think the results were fairly strong. It's...

[Charles Brennan, Research Analyst]

And also, the trend of Microsoft going...

[Alex J. Alexandrov]

Oh, go ahead.

[Charles Brennan, Research Analyst]

The trend that's hurting the industry Microsoft going direct and some of the larger accounts. Is that something you've seen across your customer base?

[Alex J. Alexandrov]

It's -- go ahead.

[Dieter Schlosser, CEO & Member of the Executive Board]

I think, Charlie -- yes. What is different, right, is that you see a Microsoft, obviously, what they have is billed revenue. We benefit on the consumed revenue, the consumption itself. And that's what you also see from our portfolio, we all get up in our transformation is really driving towards building, driving and transforming consumption. So with that we cater to the pain points and the road map of customer. But at the same time, we also participate on the economics with the publisher ecosystem. So for instance, application modernization, every dollar that you spend on cloudification of it will end up in round about $3 to $5 on the consumption side, the same on sticky workloads like you have on SAP, it drives to consumption. So that's -- this is exactly the scenarios where our transformation on the services side and our practices, which we have built up is going to. On the last question on -- what you had on the third party. So it is true that the gross profit is below third party. What -- and we gave you some examples also for last year, we really shut down individual teams, right, which were on hardware, which were on on-premise services, which were not strategically relevant for us. And we -- if those customers were not willing or had no roadmap or plan to go to the cloud in the next 3 to 5 years, and we didn't see any profitability, we really made those hard calls and run down and transitioned out of that. So that's what you see as an impact on the revenue stream. Whatever is core for us, we will do ourselves. But whatever is non-core for us, we rather have the negative hit in the year of integration, which was last year, than carrying it on.

[Alex J. Alexandrov]

Maybe just to follow up and add to this point on services. Charlie, what you'll see in our gross profit chart on Solutions & Services is that because we did the cleanup in the second half of 2019, you already see us taking that adjustment in the second half last year. And so the growth -- we believe we look at growth kind of year-over-year. But if you wanted to look period-over-period, you can also look at that versus second half, and we grew revenue and gross profit there in this cleaned up format.

[Operator]

Next question is from the line of Andreas Müller from ZKB.

[Andreas Müller, Research Analyst]

Yes. One is on sales synergies. Have you achieved already something there? Or still -- is that still kind of a midterm target, the CHF 20 million wanted to achieve on the sales synergies? And then could you size, please, the organic growth impact of the pay-as-you-go shift? And then do you see that development also to continue in the second half? What was the impact there? That would be interesting. And then the last question is on the competitive environment. Do you see any shift in the industry due to COVID on the competitiveness of certain business model? I'm thinking about dimensions such as large global volume players versus local or regional players, or pure-play software and cloud resellers versus the one with hardware content as well. Do you see there any shift in your industry?

[Dieter Schlosser, CEO & Member of the Executive Board]

Yes. Thanks, Andreas. On the sales synergies, we always said that towards the end of our guidance, which is CHF 21 million. We already see certain development in that, and we believe that we have not only an achievement of this CHF 20 million, but really the individual points going on that number and even an upside possible. On the pay-as-you-go, Alex, you want to refer to this?

[Alex J. Alexandrov]

Yes. I mean we -- what we see is this will really -- I think we've mentioned before, it takes us less than 6 months to make up the difference when a customer switches from an upfront commitment buying to a pay-as-you-go model, for us in terms of our gross profit impact because we're able to attach much more services and solutions and platforms, the PyraCloud platform when customers go to a pay-as-you-go format. Our gross profit dynamics are actually reasonably favorable. So we are able to kind of do the crossover and breakeven within 6 months. So we -- again, we really like that business. And while it does have very near-term impact, we think, within 6 months, we're already above that breakeven. So we continue to see that accelerate. We would say it's still a small part of our gross profit because, again, customer's buying patterns, customer preferences are still to do the commitment, upfront commitment to get a discount. But as we see with many other publishers and even with Microsoft, that's continuing to change gradually over time. And so while it's still a small percentage, it gives us a pretty long runway.

[Dieter Schlosser, CEO & Member of the Executive Board]

Yes. And I think it's fair to say, Alex, on this that we wish that everything will become pay-as-you-go because if you look at the stickiness towards the customer, there are 3 levels of stickiness: one is the relationship, the customer relationship; the second one is a process integration; and the third one is a tool integration. And with pay-as-you-go and our bundles, which we are providing through that, we are covering all 3. So fair to say that this is definitely a journey for us in the future. In the competitive environment, we have seen a completely different picture in the first half of the year. Whilst those ones which are mixed portfolio, they had some issues after -- post March when the supply chain went down. And on the hardware side, delivery was a difficult event because it was all physical assets. Also on the -- those who are focusing on-premise as well as cloud. You saw the on-premise side it was a mixed picture. In terms of consolidation, we have seen a few acquisition happening, but we believe that there will be further consolidation in the market in the near future. What is currently visible is that quite a number of companies are out there, which are really on a revenue multiplier, which is, of course, always an indication that there is not much EBITDA and profitable business model behind it. So the question is whether that is moving forward or whether that's something which is changing in the future. Alex, from a landscape, you want to add something?

[Alex J. Alexandrov]

I would say the only -- just to add to your comment. The only thing -- other thing we see is where we see smaller consulting or services firms they really struggled in this environment. What really allowed us to accelerate was the managed services side because, as you'd imagine, the professional services side ended up being kind of start and stop and in waves depending on the country, depending on COVID. But the managed services side, because it's so well suited to the cloud environment, grew very strongly. And that's kind of a big difference that we saw to some of the other players in the industry. And to be honest, they're really great players. They have great skills, great talent. And so we love to partner with them and bring them on board. But through the current environment, they might struggle if the model is really set up in a professional services in a project-based way. And then, yes, as Dieter mentioned, I don't have anything to add on the hardware versus pure play. I think both formats, some great competitors out there. But as you've seen, on the hardware side, they become quite difficult after the kind of the COVID buying finished up.

[Operator]

[Operator Instructions] Next question comes from the line of Ross Jobber from Citi.

[Rosslyn Antony Jobber, Research Analyst]

I just wanted to dig a little deeper on a few of the issues that have been read so far, just two. First of all, my sort of long-term question. I'm interested in your thoughts on what long-term impact the pay-as-you-go model has on the dynamics of the business in terms of increasing sensitivity to consumption over and above the sensitivity that you would have historically had from the link between IT spending and customer trading activity. So my first question really is a longer-term question about how do you think -- or does it increase the group's sensitivity exposure to consumption in a way that wasn't always the case? And if so, are there things that mitigate that? And my second question goes back to the point about the third-party service delivery costs and that saving half year on half year of CHF 50 million. I understand what you say about the fact that you've done some cleaning up, and so that's one reason why that's falling. But some of your peers have also enjoyed quite significant savings because they haven't used third-party contracting much in the period. And of course, that could -- should come back in more normal "trading." So do you think that some of that savings would actually be under more normal pre-COVID trading conditions actually come back? And if so, how much?

[Dieter Schlosser, CEO & Member of the Executive Board]

Yes. Thanks, Ross. And it was a bit difficult to understand. But I heard the long-term impact on the consumption model versus the conservative, the conventional model. I believe that our consumption-based model in the long run is more predictable simply because it's not a commercial construct, but there's real technology resources behind it and it always takes an event and a migration out strategy of a customer to change that. So from that angle, I prefer this as a model. On the second point, on the third party, remember that we have quite a majority of our services on managed services. So even during COVID, we could not change that, right? We had to deliver the service level towards our customers, and we're very happy that we were able to do so. So whatever resources and capacity was in place was always utilized during that period. So that would not resonate for me what your hypothesis on that.

[Rosslyn Antony Jobber, Research Analyst]

I guess if I rephrase my second question, apologies. I suppose if I could take it this way. Is the H1 2020 run rate for third-party service delivery costs a typical run rate that you would expect all else being equal to be the same once COVID conditions have reversed?

[Dieter Schlosser, CEO & Member of the Executive Board]

So I -- again, our strategy is very clear. If we have our -- we have a standardized portfolio, standardized service catalog across our 90 countries, whatever is in that catalog is to be delivered from SoftwareONE internally and -- because it's core. If there are contracts which are -- which bound us to a longer delivery and which -- where there is a certain lock in, then that would be a migration out strategy. But it's not related because of COVID, it's related of what is core and what is noncore for us.

[Operator]

Next question is from the line of Martin Jungfleisch from Kepler Cheuvreux.

[Martin Jungfleisch, Junior Equity Research Analyst]

I have three questions, please. The first one is on your guidance for this year. You expect the similar gross profit growth rate in the second half as seen in -- at constant currencies, which would likely mean lower stated gross profit growth due to stronger ForEx effects in the second half. On my numbers, assuming a similar margin, this translates into lower absolute EBITDA in the second half of '20 compared to the second half of 2019. Is that assumption roughly correct? And can you provide some color what the drivers behind these expectations are, and also touch a bit on how currency impacts your bottom line, so I think the impact should be a little bit less than on the top line? That's the first question. And then I'll go back in the queue.

[Dieter Schlosser, CEO & Member of the Executive Board]

Okay. Thanks, Martin. Hans, can you take that question, please?

[Hans Grüter, CFO & Member of the Executive Board]

Yes. The guidance we have provided on the growth. If we say, we see similar growth in the total fiscal year 2020 as on H1 2020. And that's a bit -- the reference you make -- you need to make. Underlying the H1 and H2 businesses are not the same. The H1 is a bit stronger than the H2, and that probably may be the reason for your questions. But the guidance goes in to say, we see the similar growth for the full year 2020 compared to 2019, as we have seen to compare the first half year this year versus the first half year last year. And we see that the ForEx part being the same as we have seen in H1 2020.

[Martin Jungfleisch, Junior Equity Research Analyst]

Okay. And the drop-down to the bottom line in terms of ForEx, can you provide some color on that, please?

[Hans Grüter, CFO & Member of the Executive Board]

I have not really understood the mechanics why you're saying then there is a drop-down to...

[Martin Jungfleisch, Junior Equity Research Analyst]

What kind of the sensitivity is on the EBITDA from changes in currency?

[Hans Grüter, CFO & Member of the Executive Board]

Well, I mean, you have seen, I think we have given some guidance in the deck how in that currency, our operating expenses are. And you see as well in the result, H1 versus H2, where we have provided the growth rate in constant currency. I think it was about CHF 17 million, which the OpEx in 2020, H1 was lower based on the currency part. Perhaps this helps for you.

[Martin Jungfleisch, Junior Equity Research Analyst]

Okay. Yes. And second question is a bit on the enterprise agreements and subscriptions. Can you provide some color how these have changed? Were there any true downs during the first half of the year in the enterprise agreements? Or would you expect any true downs in the coming quarters should the economy not improve materially?

[Dieter Schlosser, CEO & Member of the Executive Board]

Yes. Good question, Martin. True down is not a word which exists in the vocabulary of publishers. They don't have it. They only have a true-up officially. But yes, I think isolated. I mean there's some outliers in there. But it was really not visible across the board. And there were some 1 or 2 exceptions where they really struggled in the business and went into liquidation. But -- and that's not anymore true down. That's rather going towards the Chapter 11 section. And so overall, I would say, it's really more an anomaly than the norm. But there's not -- the true-up scenario has changed, of course, right?

[Martin Jungfleisch, Junior Equity Research Analyst]

Yes. Okay. And then the final question is on PyraCloud. If you could provide some detail how that has performed in the last couple of months. And also, if you could provide some detail on monetization of this solution to your clients, please?

[Dieter Schlosser, CEO & Member of the Executive Board]

Yes. And that's a really exciting story for us, and I'm very passionate about that because I believe that PyraCloud will really become the game changer in the industry. So we narrow it down to 3 areas. We have an aspect of cloud platform management, where we are really neutral across hyper scales and help our customers to manage the cloud and secure the cloud at the same time, and we have our digital software supply chain aspect, where for the customer, it just becomes a more efficient and more transparent and automated way of digitizing the software supply chain. That is all underpinned by our, what we call IDP, our intelligent data platform based on AI and machine learning, where we give the customers the insights on the spend behavior and on the vulnerabilities and on the optimization potential. That's really, in the meanwhile, next to -- second to none in the industry. There's none existent who will be able to deliver that or provide that. But we refocused in terms of our monetization to rather make it viral and give it to every customer, than purely direct sales play and become a kind of a product on our key company. So for us, it was more important to put PyraCloud into every bundle which we have, in every engagement, every service customer who receives result on managed service through their quarterly business review on a daily basis, uses the PyraCloud as a user interface. Every order which comes in this is digitized through PyraCloud. Every communication customer has with us is going through the digital assistant, and that's rather where we want to be. So we want to use that also for us internally to digitize our enterprise. So it's the monetization is rather in bringing it to 65,000 customers. And Alex, I'm not sure whether we have newer numbers. But the last number I was aware of that we have around 7,000 customers on PyraCloud right now.

[Alex J. Alexandrov]

No, that's right. Yes. And we -- I would say we will -- we've held off on disclosing exact PyraCloud numbers while we transition everyone on the same system. And I think once -- as we -- as Dieter mentioned, once this is completely cleaned up this year, I think we will be able to report very cleanly across this. But yes, the opportunity is really to completely differentiate and digitize our business. And as Dieter said, that opportunity is our entire customer set.

[Operator]

Next question is from the line of Stefan Slowinski from Exane BNP Paribas.

[Stefan Julien Henri Slowinski, Research Analyst]

Just on Comparex. Can you tell us in the first half of the year, what the growth trends were like between kind of the legacy SoftwareONE business and the Comparex business? And if that business was kind of growing 1%, is it fair to say that Comparex is still underperforming the whole business? And then how do you see that evolving going forward? When we look out to 2021, obviously, potentially there's upside from the macro improving. But what is maybe a bigger driver? Is it getting the Comparex business to kind of reaccelerate? Or is it just some of these pay-as-you-go and subscription-type pricing that will drive kind of an acceleration in growth into next year?

[Dieter Schlosser, CEO & Member of the Executive Board]

Yes. Thanks, Stefan. We, from the Executive Board, we spent so much time to have convinced everyone in the organization that from 1st of January 2020, there is no Comparex and there is no SoftwareONE. There's only SoftwareONE. Everything is integrated. And the account plans are harmonized and the system in the back end from a reconciliation are harmonized as well. So in essence, we are not looking anymore into separate views on that. And it's also not what we want to discuss internally and externally. That's -- it's one organization. It's now harmonized. And going forward, it's only SoftwareONE. On the growth drivers, which you mentioned, you're absolutely right. There are multiple growth drivers. One of them is our book of business. We continue to transform our book of business towards services attached. We were quite successful also in the first half of the year and made good progress to convert transactional customers and attached services with a higher profitability, and that's definitely the growth driver for the next couple of years. But then also aside of the macro, we have those growth streams, which we are participating from a window of change, which is happening on the hyperscalers and the workload, which is happening on SAP and which is happening on application modernization. Just to give you a number, there are like 52 million, the 50 million to 100 million legacy applications out there, and nobody really knows the exact number. But it's fair to say that in the high double-digit million. And those legacy applications, every single customer needs to make a decision whether they require them in the future. And if they require them in the future, they need to cloudify them. And that's where DevOps practice like we have acquired within the group comes into play and where we see one of the fantastic growth opportunities in the next couple of years. That's an ongoing journey for the next 8 to 10 years, for sure.

[Operator]

Next question is from the line of Chandra Sriram from MainFirst.

[Chandramouli Sriraman, Managing Director]

Just a couple of quick ones. The multi-vendor business was up quite nicely in the first half. I just wanted to check if you'd like to flag any specific vendor with some particular strength? And also I wanted to clarify if it's largely cloud based? My second question is on the Solutions & Services business, which was up H1 on H2. So I just wanted to reconfirm that the strategic process of cleaning up low-quality contracts. All those is done and we are moving forward from H1 to H2.

[Dieter Schlosser, CEO & Member of the Executive Board]

Yes. So on the last Sriram. And as -- we have done that. And actually, it was part of our budget process in '19 already, when we identified that, and maybe there was a lag because of termination clauses and exit conditions. But that exercise has been done and we don't carry any burden on this anymore. On the multi-vendor, which are the ones, it's -- I mean the Eccentric CEO went out there and was very happy in presenting how they have grown, right? And -- but so have many of the security providers, so as Splunk, so has Red Hat, Adobe, there are multiple publishers, which have benefited from -- even during this. The logical ones are -- is all these 4 aspects during a crisis -- during that crisis. And that's the one which are related to the workspace. That's the one which are related to scalability. That's the one which are related to business contingency. And that's the one which are related to security. Now if you are in those 4 buckets, you could assume there is an upward trend.

[Operator]

That was the last question, and I would like to turn the conference back over to Mr. Dieter Schlosser for any closing comments. Please go ahead.

[Dieter Schlosser, CEO & Member of the Executive Board]

Yes. Thanks, Stuart, and thanks to everyone on the call. Thanks also for the lively debate. We are all looking forward to see you also in life again and in person again and aside of having the audio calls and the video calls. So hopefully, that can be done sooner than later. Now we wish you a very good day. And again, thanks for the attention and for participating in that result presentation. Thank you very much, and have a great day.