Softwareone Holding AG

SIX:SWON

Earnings Call Analysis

Healthy Growth Predicted Amidst AI Focus

The company has performed well in the first half of the year and is confident in achieving its full year guidance. A significant opportunity lies ahead with AI adoption, wherein the firm anticipates a revenue split of 40% in resell and 60% in services. Moreover, prospects look positive, particularly with a growing relationship with Microsoft, expected to enhance growth in core services and joint ventures. Growth predictions for the latter half of the year are optimistic, with an emphasis on operational gains rather than on acquisitions, suggesting a steady, organic growth trajectory.

Company's Strong Revenue Growth Despite Macroeconomic Challenges

Amidst a challenging economic environment, one that even its peers find testing, the company has risen to the occasion. With a year-on-year revenue increase of 8.5% under its belt, they have also reported a robust adjusted EBITDA margin of 22%. This successful performance is projected to blossom into double-digit revenue growth and achieve an EBITDA margin between 24% to 25% by the year's end.

Operational Excellence Driving Cost Savings

The centerpiece of the company's cost-saving endeavors, an operational excellence program, has effectively executed on half of its annual target, amassing CHF 8 million in savings so far against an ambitious goal of CHF 15 million.

Strategic Review to Explore Value Creation

The board has decided on a strategic review, opening the door to multiple possibilities, such as staying as a public entity, engaging in mergers or sales, or other strategic transactions, in a quest to boost shareholder value.

Regional and Portfolio Highlights

In the DACH region, the trust of enterprise clients has propelled approximately 8% revenue growth, predominantly fueled by cloud solutions. In contrast, the APAC region soared with an impressive 23% growth. Services like Cloud, Application, and SAP Services expanded around 20%, highlighting the company's strong service delivery capability.

Microsoft Alliance Accelerating Revenue

A crucial part of the revenue engine, Microsoft billings, witnessed a sound 12% growth, generating USD 10.6 billion in the first half of the year, with promise of further acceleration.

Improving Contribution Margin Amidst Forex Challenges

Despite headwinds from currency fluctuations and phasing out of legacy services, the contribution margin saw an increase in both H1 (0.9 percentage points) and Q2 (1.2 percentage points), highlighting the efficacy of service delivery optimization and the operational excellence program.

ESG Efforts and Net Zero Goals

The company published its inaugural ESG report, pledging to become carbon neutral for Scope 1 and 2 emissions by 2030, underlining its commitment to sustainability and support of client ESG endeavors through their Cloud Sustainability program.

Financial Insights

While the adjusted EBITDA margin took a dip to 46.1%, reflecting increased SG&A, it remains a target area for improvement through the company's operational excellence program. The net debt position stands at CHF 72 million, with a 60% cash conversion rate noted in relation to the adjusted EBITDA.

Market Opportunities and Growth Prospects

The company's SAM is forecasted to burgeon to $30 billion, representing a compound annual growth rate (CAGR) of 14%. This growth trajectory is intertwined with key questions of cloud transformation, generative AI adoption, and controlling cloud costs, which they are poised to address for their clients.

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the SoftwareOne H1 2023 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Anna Engvall, Head of Investor Relations. Please go ahead.

[Anna Engvall, executive]

Good morning, operator. Can you hear us?

[Operator]

Yes, loud and clear.

[Anna Engvall, executive]

Good morning, operator. Can you hear us?

[Operator]

Yes, I can hear you. Can you hear me?

[Anna Engvall, executive]

Now, we can hear you fine. Thank you.

[Operator]

The introduction has been made, Anna Engvall, Head of Investor Relations.

[Anna Engvall, executive]

Thank you. Sorry for the delay. Good morning, and thank you to everyone for joining SoftwareOne's H1 2023 results. 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 H1 results presented by Brian. Rodolfo, will then take us through our financial performance, after which Brian will provide a CEO update. We will finish the session with Q&A, as usual. Before handing over to Brian, please let me draw your attention to the disclaimer regarding forward-looking statements and non-IFRS measures on Slide 2. With that, I will hand over to Brian.

[Brian Duffy, executive]

Thanks, Anna. Good morning. I'm pleased to welcome everyone to our H1 2023 results. We had a solid first half of the year as we continue to successfully deliver across our key markets. This is a testament to the strength of our business model given the challenging macroeconomic environment as evidenced by peers. Revenue for the group was up 8.5% year-on-year, and the adjusted EBITDA margin was 22%. Our operational excellence program is fully on track with CHF 8 million of cost savings achieved year-to-date against our full year target of CHF 15 million. Building on the progress made with operational excellence, we are today enhancing Ignite, Focus, Accelerate to sharpen our execution, particularly our sales effectiveness and deliver enhanced performance as we move into a new era powered by data and AI, and I'll come back to that later.

I would like to reiterate that with these results, we are on track to meeting our targets for the full year, which are double-digit revenue growth and an adjusted EBITDA margin of 24% to 25% of revenue. Before moving on, I would also like to provide an update on the ongoing strategic review. On July 24, the Board of Directors announced that the revised offer from Bain Capital have been rejected and that a strategic review will be launched to consider all options for value creation. These include remaining a public company, a merger or sale or another potential strategic transaction. The review is currently ongoing, and we will provide relevant updates as the process progresses.

In the meantime, the company remains fully focused on the execution of our strategy for the benefit of all stakeholders. Now moving on to regional performance. Our largest market in EMEA delivered a solid half year with revenue up around 8% as our enterprise clients, particularly in the DACH region continued to invest in cloud solutions. APAC delivered an outstanding performance with growth of 23%, with these strong results across the Board. NORAM drove a strong recovery in Q2, particularly in the Microsoft business as this declines transitioned from legacy CSP to the New Commerce Experience model. LATAM was flat following a weak Q2, driven by good momentum in services, offset by softer Microsoft revenue developments in Brazil and Mexico.

Moving on to our business lines. Software & Cloud Services delivered around 8% revenue growth in Q2 and over 12% for H1. Our core service lines, Cloud, Application and SAP Services grew by around 20% in H1, partially offset by an acceleration in the phasing out of legacy services. xSimples grew 22% at a normalized rate in line with our expectations. In terms of cross-selling, we saw good progress compared to prior year, and now we have nearly 16,000 clients purchasing both software and services. Moving on to Software & Cloud Marketplace, which was up 5% in the first half overall. Microsoft billings grew at a healthy rate of 12%, reaching USD 10.6 billion in H1 '23. After a soft Q1, Microsoft revenue growth accelerated in Q2 with customers transitioning from legacy CSP to New Commerce Experience, which comes with higher pricing, more favorable incentives and longer-term subscriptions. In other ISVs, revenue declined in Q2 after a very strong Q1 and a high comparable last year. Now SoftwareOne's greatest strength is our 65,000 clients who place their trust in us, along with our portfolio. And I'm delighted today to present a few examples of how we continue to add value and drive business outcomes for them. In Europe, we secured the renewal of a multiyear contract for the provision of a 24/7 managed service for SPAR's entire business-critical IT environment, helping to ensure a smooth and satisfying shopping experience for all SPAR customers. With our public sector experience and Microsoft expertise, we supported the government of Mexico with the development of a new collaboration hub based on Microsoft 365 to streamline communications between the government and citizens.

We also helped savills with the negotiation of Microsoft license terms across 35 countries to reduce cost and complexity. And finally, in the U.S., we supported Red Roof, a leader in the lodging industry with migration to AWS and the provision of shared services to franchisees to accelerate their transformation to a new business model. I'm very proud to say that today, we reached an important milestone at SoftwareOne and published our first ESG report. As a company, we fully recognize the role that we can and must play in creating a more sustainable future. Importantly, we aim to be net zero for Scope 1 and 2 by 2030 by reducing the carbon footprint that we are responsible for and investing in impact projects for the remaining emissions.

We will achieve this through a carbon reduction plan, which primarily includes reducing emissions from our car fleet and generating energy-efficient workplaces through our green offices initiative. In addition, we will continue helping clients with our ESG journey via our Cloud Sustainability program. That aim to provide clients with accurate emissions data for their cloud solutions and advice on the complexities of cloud emission. I would like to thank our ESG team and all our SoftwareOne leaders and employees who have contributed thus far. Let's keep up that great work and deliver on these important commitments. On that note, Rodolfo will now take us through our financial performance, and I will follow up after it. Rodolfo?

[Rodolfo Savitzky, executive]

Thank you, Brian. A warm welcome from me as well. Revenue growth in H1 was solid at 8.5%, supported by an acceleration in Microsoft as we had anticipated, but we also faced headwinds in other ISVs in the phase out of legacy services. Contribution margin increased by 0.9 percentage points in H1 and 1.2 percentage points in Q2, reflecting optimization of delivery costs in our Services business like as part of our operational excellence program. SG&A expenses grew by 16.2% in H1 with personnel expenses mainly growing in line with wage inflation. This also reflects the impact of operational excellence with the majority of the SG&A increase driven by nonpersonnel expenses. Then I will provide more details on the next slide.

With a strong Swiss franc, ForEx headwinds had a significant impact of over 5 percentage points on revenue growth. However, given our natural hedge with similar exposures on OpEx, the ForEx impact on adjusted EBITDA continued to be small. I would also like to point out that certain restatements reflecting IFRS 15 have been made to the Services business line prior year numbers. For H1 '22, this resulted in a reduction of both revenue and delivery costs by CHF 11 million. The contribution margin in EBITDA of course, remained unchanged. The year-on-year development of adjusted EBITDA is shown in the bridge. The incremental revenue was almost fully reflected in incremental contribution margin given the minimum increase in delivery costs.

Similarly, general admin stayed almost flat year-on-year. The major increases in expenses related to the normalization of nonpersonnel expenses, specifically higher travel in sales and marketing costs as well as one-off co-marketing investments from last year coming from strategic partners. Moving on to the business line deal. Our core service lines continue to grow at around 20% in both Q1 and Q2 with the decline in legacy services accelerating in Q2. The contribution margin in Services was 39% of revenue in H1, up 3.3 percentage points compared to prior year and approaching best-in-class levels as a result of progress with our operational excellence initiatives. SG&A get a lower rate than contribution margin translating into an adjusted EBITDA of CHF 7.1 million and a margin of 3.1%. This year-on-year improvement yet again confirms that we are on track to meet our 15% target for '24.

In Marketplace, while Microsoft delivered a significant rebound in Q2 as expected. Other ISVs significantly slowed down in Q2 resulting in steady overall growth in both quarters. The adjusted EBITDA margin was 46.1%. This is down compared to prior year reflecting increased SG&A, partially driven by the allocation of solution consultants to this business line. We remain focused on getting the full benefits from the operational excellence program. Going through the key pillars. In the commercial broad stream, we continue to rebalance sales resources. We have also scaled up our AI-driven cross-sell pilot in NORAM and initiated similar pilot in APAC. In services delivery, we have made great problem. With the majority of personnel transition is now fully executed. The presale process has also been revamped and the organization-wide rollout is underway.

Finally, in the support functions, country finance transition to shared service centers continue to progress fully in line with plan and standardization of financial processes is rolled out. In HR, we are piloting a shared service center for EMEA with APAC to follow. By June, with good progress across the pillars, we have achieved CHF 8 million of cost savings and are fully on track to achieve the targeted savings of CHF 15 million this year. The bridge illustrates that our adjusted personnel expenses have grown by 7% in constant currency, of which around 5% is due to wage inflation. The minimal increase in FTEs despite the continued solid growth momentum has only been possible, thanks to the improvement in efficiency and effectiveness across the organization.

Working capital ended the half year at CHF 177 million after factoring, broadly in line with our position 1 year ago. I see this as a good outcome given business growth. Our Day Sales Outstanding have increased due to overall market conditions and growth of consumption-based offerings. With these offerings, customers are invoiced later compared to prepaid enterprise. So on accounts payable, we have optimized our payments to align with the longer customer payment types. While we were satisfied with the result, we do see so to tighten working capital management, particularly collections. We have consistently sought to improve the quality of our disclosures and in this regard, we have now simplified our definition of net debt. The new, more stringent definition comprises bank overdrafts, plus current and noncurrent financial liabilities, less cash and financial assets, including our holding debt.

Importantly, these definition no longer includes other noncurrent receivables. This change implies that as of June 30, 2023, we had a net debt position of CHF 72 million compared to CHF 5 million year-on-year. And we have done this to align with industry cash balance. Now on a 12-month basis, and we did that to eliminate seasonality, core operating cash flow, including CapEx was CHF 141 million, reflecting a 60% cash conversion compared to adjusted EBITDA. The CapEx investments of CHF 51 million in to the digital marketplace. And regarding other outflow, CHF 62 million is attributable to M&A, earnout and restructuring, while CHF 71 million related to our dividend share buyback program in financing.

I will conclude this section of our presentation with the full year outlook. We have had a solid start to the year with strong underlying demand across our portfolio. We remain focused on continuing to implement operational excellence across SoftwareOne to step improve our efficiency and effectiveness and to deliver the planned savings. While we recognize the uncertain macroeconomic environment, we generally see healthy demand in our markets and are confident in meeting our guidance for the year. Thank you. And now I will hand back to Brian.

[Brian Duffy, executive]

Thanks, Rodolfo. It has been around 3 months since I joined SoftwareOne and amid unique circumstances, I've taken the time to meet with many of our customers, partners and of course, the wider SoftwareOne team. At this stage, I would like to share my initial perspectives and what makes me excited about SoftwareOne's future. It's fair to say that we operate in a dynamic and high-growth market environment, strongly supported by a whole range of mega trends, some of which you see highlighted on the slide here. The opportunity ahead of us is massive. Organizations continue to prioritize investing in cloud solutions, and there is a long runway to go with only 30% of workloads in the cloud already.

Cloud journeys bring challenges and complexity. Multi-cloud and hybrid environments are generally the norm today. And for over 80% of organizations controlling cloud spend has now surpassed security at the top challenge. Meanwhile, the demand for data and AI is exploding with over 70% of organizations exploring generative-AI opportunities. At SoftwareOne, we have and continue to develop our portfolio of value-adding solutions to manage these highly complex and business-critical cloud journeys for our clients.

Now let's go into more detail on the components that make up this great opportunity for SoftwareOne. The overall market for Software & Cloud spend was nearly USD 640 billion in '22 of this, the reselling serviceable market, or SAM, is nearly $18 billion. By 2026, our SAM is expected to be worth $30 billion. That implies a CAGR of 14%. Digitalization will play a key role in driving this growth as customers trend towards self-serve. We are already well positioned with one of the largest marketplaces globally, comprising 7,500 ISV partners and a number of very different delivery model. Our end goal, however, is to establish 1 digital workplace. Leveraging our investments in Goatpath and PyraCloud, we are launching our SoftwareOne Client Portal for existing PyraCloud clients and providing the opportunity for all customers to embrace digitalization and self-service.

Scaling out services has been a key pillar of our strategy over recent years. Services are critical in a cloud and subscription-driven world with big customer pain points. With unique insights and our integrated born-in-the-cloud portfolio, we are in a strong position to help clients along their entire cloud journey, from advisory to optimizing their cloud environment with a managed service. Our services SAM is worth USD 58 billion today and is expected to grow to over $110 billion by 2026 at a CAGR of 19%. There is, again, a very significant opportunity for us to grow at least in line with the market and to capture share given the high level of fragmentation that exists.

Now in my prior role, I led one of the largest cloud transformations in the industry. We were highly successful in achieving our goals because we had a solid foundation and it was built on clarity, activating the ecosystem and focusing on my favorite word, execution. At SoftwareOne, there is more than we can do to capture the market opportunity. That is why we are initiating our Ignite, Focus, Accelerate approach. And let me walk you through what we plan to do. Firstly, Ignite. 65,000 clients across the world have placed their trust in SoftwareOne. I firmly believe that we are in a position of strength to ignite these relationships as clients look to answer 3 very important questions: firstly, how will we move to the cloud and transform? Secondly, how are we going to embrace generative AIs? And thirdly and very importantly, which has been SoftwareOne strength for so many years, how are we going to keep those cloud transformation costs under control? Now I want to share with you all an example. In Q2, we assisted a large U.S.-headquartered Fortune 500 company as they look to move a critical application to a hyperscaler. They wanted to embrace AI, but unfortunately, they had a transformation with a systems integrator that was running overbudget and behind time. We got stuck in and we assisted them in designing a fresh new blueprint and laying out a road map to allow the business to timely adopt innovation and to do so within budget. This customer story is similar elsewhere across the world.

What's common is businesses can no longer wait. They have to drive innovation now in order to compete and survive. In addition, at SoftwareOne, we have 7,500 partners around the world, and I've spent time with several of the largest ones since joining, and I am energized by the opportunity that we can ignite together. Customers have made it loud and clear they need the entire ecosystem to work together for them. At SoftwareOne, we will mobilize 9,257 men and women to connect partners, to serve our joint customers in the best possible way. Now moving on to our second pillar, Focus. Microsoft 365 Copilot is a massive opportunity for SoftwareOne and our clients to completely reimagine productivity for employees.

SoftwareOne, as you know, was a key partner for Microsoft when Office 365 was launched. And today, we have tens of thousands of 365 customers. I recently attended a roundtable with the CEO of Microsoft, Satya and this week, our team and the Microsoft team are meeting to finalize our go-to-market plan. And my plan is very, very simple. We aim to be Microsoft's #1 partner for Copilot globally. Sales excellence and execution are key to driving growth, and we are now laser-focused on both. I found over the years, the sales team, they enjoy a challenge, they enjoy direction and they enjoy rigor. The changes I am implementing to continuously evaluate our progress and bring the best of the best to support our journey will fully reinforce this.

We have already implemented new cadences, embrace new tools to double down on key initiatives. And let me give you an example. In North America, we launched an AI-driven initiative across the entire region, which directs our teams to a next best action for a client based on customer benchmark data, of which we have tons, and this is showing incredible results so far. And finally, as you would imagine, bolt-on M&A remains a priority to add capabilities and geographical reach. Now finally, Accelerate. In order to win, we will further develop generative-AI offering and pivot as needed. We will also fully embrace AI as much as possible internally to support our own transformation. We see a huge opportunity to scale SoftwareOne Client Portal to leverage our existing base and expand beyond that in a highly cost-efficient digital way.

We have made considerable progress in this space, and we will execute on our road map. We will also continue to invest in our people, and we've a great tapestry of talent to support our customers and partners. I want to take some time to emphasize the great opportunity we have with Copilot and it's huge. We have run some preliminary numbers to estimate the short-term market opportunity. And based on the 12.5 million addressable seats that we have and a conservative, very conservative 15% adoption rate, we estimate a revenue opportunity of over $100 million across reselling and services. Our relationship with Microsoft is something we are hugely committed to and the quote you see here reflects the value Microsoft also places on the partnership journey with SoftwareOne given our global reach, deep understanding of our clients' needs and proven track record.

The opportunity in data and AI extends beyond Copilot, of course. It's also not new to us at SoftwareOne. We already have significant capabilities with 250 data and AI experts and more than 230 projects delivered since 2021 across 7 delivery hubs. But let me be clear, AI is not just a technology. It's an enabler for organizations to achieve significant improvements in efficiency, insights, customer and employee experience and ultimately, innovation. It's about becoming a data-driven enterprise, yet to achieve the full potential of AI many elements need to be taken into consideration: data management, governance, security and adoption and change management to name just a few. SoftwareOne has incorporated this experience into an offering we call SoftwareOne Intelligence Fabric, a powerful foundation to help customers resolve the complexities and transition into data-driven and AI-powered organization. Let me take you through an example of how we helped ACCO, a U.S.-based leader in the HVAC industry, drive operational efficiencies and create predictive capabilities using data and AI. They face a very typical situation of needing to future-proof their environment by consolidating and securing decentralized data after years of rapid growth.

Partnering with AWS, we offered the platform, the tools and the expertise to build the data lake to address ACCO's needs, and we leverage our Migration Acceleration Program expertise. As a result, ACCO is today at the cutting edge of governance and predictive data analysis and able to raise the customer service bar even higher. To conclude with everybody, I would like to highlight the following. We have delivered a solid half year and are on track to meet our full year guidance. Our operational excellence program is fully on track to deliver the promised savings. With Ignite, Focus, Accelerate, we will ignite customer and partner relationships, take advantage of the new market opportunity in AI and sharpen execution to deliver enhanced performance.

And thank you, everybody. And now let's move on to Q&A.

[Operator]

[Operator Instructions] We will now take the first question.

[Unknown Analyst]

A few for me, please. Firstly, on the macro environment, I think you noted that you've been seeing a healthy demand backdrop. Can you just comment on how the current trading in July and August has evolved? And if the strategic review situation has impacted any conversations that you have with your customers? And secondly, on Microsoft, it actually seems that the billings growth slowed in Q2 versus Q1. But you noted an acceleration in the revenue growth. So could you maybe just quantify the revenue growth and comment on how much of that growth came from the price increases. And then finally, it was quite surprising to see that the Services margin was down in Q2, especially given the progress you made on the Services delivery, so could you provide a bit more color there?

[Brian Duffy, executive]

Sure. Thank you for the question, and I'll split this with Rodolfo a little bit. Firstly, in terms of the strategic review, which is ongoing. I guess to answer that question, I'll look through a lens of our customers and also our employees. So firstly, in terms of customers, that has not impacted One relationship or trading with customers. Secondly, in terms of employees, our employees are focused on 1 thing, which is delivering for our 65,000 customers around the world. And then in relation to our -- specifically our trading for July and August, obviously, we can't go into too much details around our July and August numbers specifically.

But what I will say is that given our broad portfolio to deliver solutions across the world, it allows us to navigate through the uncertain times that customers experience and I would also stress that AI is certainly fueling the demand that we see even more and more from customers around the world. And then obviously, our SoftwareOne Client Portal is a huge opportunity for us, and Services is what allows us to differentiate ourselves from the competition specifically. And then I will turn it over to Rodolfo on the remaining questions from you.

[Rodolfo Savitzky, executive]

So on -- let me take the last question first on the Services. When you look at the numbers for the quarter, I think what I would like to point your attention is to the contribution margin. For me, this is the most critical measure. While there will be the slowdown in growth in Services, let me reiterate again, the core services portfolio continues to grow 20%. What we saw is really a drop in the legacy services and what is super encouraging, is contribution margin growth grew to close to 20%. When you see the contribution margin as a percentage of revenue, it crossed the 14% mark, which is ending last year. Now why did the margin declined out? We have a high increase in SG&A. And as you know, from the presentation, this is mainly related to nonpersonnel expenses. There's couple of one-offs that is impacting that.

But going forward, for me, the most critical thing is with this very healthy contribution margin with all the efforts around operational excellence to also reduce and streamline SG&A, the possibility of operating leverage is extremely high. Then I don't know, we missed 1 of your questions, [ Kathinka ].

[Unknown Analyst]

Yes. Just on Microsoft. It seems that the billings slowed there in the second quarter because you reported 13% growth in Q1. But then you mentioned you saw an acceleration in revenue growth. So could you just quantify that revenue growth and maybe give us a sense of how much that growth was driven by the price increases. And then maybe just 1 quick follow-up on the current trading. Did you see an acceleration already in Q3 of growth?

[Rodolfo Savitzky, executive]

Yes. So -- we don't provide a detail on the, let's say, split in our Marketplace business. But we did say last time that revenue growth grew around 13%. I'd like to read a reference from Microsoft decline. And we expected that. And in Q2, I would say, high single-digit growth in revenue for Microsoft. And here, the billings, look, we continue to -- our billings continue to be very healthy, as you say, it's in the -- clearly in the double-digit territory. And it's mirroring very closely the revenue that Microsoft itself is reporting, right? So in this sense, we continue to maintain/gain market share in the kind of rebound in revenue is clearly driven by margins around New Commerce Experience, by the higher pricing and so forth, we talked a lot about in the quarter 1 call that we have been a bit penalized given that we have lost many customers in the old CSP until, let's say, March, April this year, right? And so we're seeing what we expect.

[Operator]

And the question is from the line of Florian Treisch from Kepler Cheuvreux.

[Florian Treisch, analyst]

My question is around the legacy services simply to get a better feeling how big the impact you really -- was better said -- what is or what do you expect the impact to be? What is left basically for H2 to better really understand when the Services growth rate will clearly accelerate, assuming that the legacy drop will at some point in time no longer be such a headwind as it is today? Then a question around Copilot. I appreciate your comment, and I think it is a big opportunity for the whole reseller space or the whole Microsoft camp. Can you mention a bit on assuming today is 0 form Copilot, what you expect it can be in the coming quarters, or let's say, '23, '24 to really get a feeling how kind of realistic is $100 million you put into the display on a short-term case?

And the second one on Microsoft incentive levels. Do you expect, let's say, a stable development in coming quarters for core products like 365, Azure? And what do you think is a fair assumption for incentive levels on the Copilot side?

[Brian Duffy, executive]

Okay. So we'll -- I'll take the Copilot and then the Microsoft and [indiscernible]. So firstly, in terms of the Copilot, as I said, I think we have a massive opportunity. This is a moment for organizations around the world to bend the curve in terms of productivity, firstly. For ourselves, we have enabled our sales force already we have been provided access by Microsoft in terms of access to the product and as a reminder, the product is not generally available yet from Microsoft. We anticipate that to happen within, let's say, early 2024. And then as I said, we have 12.5 million seats in Office 365 who are, let's say, primed and ready to receive Copilot. Then in terms of the opportunity that's available, the $100 million, obviously, is highly dependent on when we -- the product is made generally available.

But $100 million would cut across both Services and the reselling base. And I certainly believe that we have an opportunity to really accelerate on that $100 million as soon as the product becomes available. And then we internally are mobilizing our teams to ensure that we are ready to hit the ground running once it is available. Secondly, in terms of Microsoft, I've spent a lot of time, as I said, with our key partners at -- large ones and some other partners since joining. And I certainly believe that we have an opportunity with Microsoft now, not only to do what we already have done, but actually to reimagine that partnership. I have committed to Satya and team that we will be partner #1 for Copilot.

And like I said, we had the Microsoft partner team here with us this week and really what we're choosing not only is to stabilize the incentives but actually to reimagine what the partner of the future for Microsoft actually looks like. And there is a willingness at top then from Microsoft to have those conversations and explore what good looks like in that space. And then Rodolfo?

[Rodolfo Savitzky, executive]

Yes. Florian, thanks for the questions. And going back to the legacy services. Look, as these portfolio rolls, of course, is comparing against the prior year base, we do expect that we still see an important effect in quarter 3. But by quarter 4, we expect that the effect would be significantly small. And I think, again, let me reiterate the very encouraging development in the portfolio, indeed, a strong growth in the core services side.

[Operator]

We will now take the next question. It comes from the line of Joe George from JPMorgan.

[Joseph George, analyst]

I have 2 just on the AI front, please. And firstly, Brian, on the split of that $100 million-plus revenue opportunity, can you just give us some color on how that would broadly be split between reselling and services and within the services piece, could you just give us some detail on what sort of services you guys will be providing because obviously, this is white space. And then secondly, beyond Microsoft within the AI opportunity, who are the vendors that you see more significant AI opportunities with and why as well?

[Brian Duffy, executive]

Sure. Thanks, Joe, for the question. Firstly, in terms of -- maybe I'll work backwards a little bit. In terms of the opportunity, and like I said, it's massive. I think the challenge for customers now is Nobody is asking why should we transform at a high level? Or why should we embrace AI? They know that they need to do it. Otherwise, they're going to be left behind. The challenge for all of these customers is how? And how are we going to embrace it and how are we going to actually fundamentally change our business with us? And I think the lesson -- many customers have learned lessons from the past in terms of adopting innovation to make sure that now they're going to be set up for success. And that honestly is where we come in to answer that how question.

So right now, in terms of services that we can offer with our Fabric offering, it's really around getting a customer ready to adopt AI. Like I said earlier, from a governance, from a security, from a risk perspective, from a data management perspective, all of these services are available, one, to a customer now, but then obviously, when Copilot comes for and the opportunity that's available is now to one around the implementation and the adoption of the Copilot offering and enablement for organizations around the world. In terms of the split for us, I anticipate that, that would look approximately like a 40-60 split, 40% on the resell side, 60% on the services side. I will say that I believe that those are conservative numbers that we have.

Again, when you look at the 12.5 million users that are available. You had also asked around other partners and that we're looking -- working with and talking with. And we are, as you would imagine, in conversations with AWS as well in terms of their AI offering, which will be announced here shortly to the market. We are in conversations with them in terms of how we can partner with them to further that offering. And then there are -- of the other 7,500, there are many, as you would imagine, who are coming out with other generative-AI offerings, which could be relevant for customers. The 1 thing that we are going to do and hopefully, you pick that up from my commentary earlier, is focus.

We have 7,500 partners. And we have a segment of those partners that are the key ones that are delivering and most revenue for us. And we are going to double down our focus in terms of those partners and the business opportunity that's available. And then also my commitment is at the top of those partners in terms of working on and defining a clear go-to-market with each and every one of them. Thanks, Joe.

[Operator]

We will now take the next question. It comes from the line of Balajee Tirupati from Citi.

[Balajee Tirupati, analyst]

Balajee Tirupati from Citi. Two questions from my side, if I may. Firstly, would you be able to comment on drivers of your expectation of material growth ramp over second quarter in the second half period and what is the expected contribution from M&As within that? And second question on ISV. Could you share color on growth rate with other ISVs in the second quarter period. And should we think that all deceleration was on account of base comp and how should we expect growth with them in second half of this year?

[Rodolfo Savitzky, executive]

So, Balajee, thanks for the question. it was a little bit difficult to -- I think, let me just see if I got the question right. So you're talking about the growth of ISVs in Q2 and then what do we expect for the balance of the year and then in the -- what are the drivers -- overall drivers of growth in H2. Is that right?

[Balajee Tirupati, analyst]

Yes. And also, if you are factoring increased contribution from acquisitions in second half period?

[Rodolfo Savitzky, executive]

Okay. No, thanks for the questions. Look, again, as I said, we don't provide, let's say, specific numbers on the growth for Microsoft and ISVs. But of course, again, if you do the math, you would see that there was not much growth in the ISV portfolio in Q2. Then when you double click the portfolio and this ties nicely with what Brian did before. We see that for many of the key ISVs, the growth continues to be okay, but that it was really the very high, let's say, decline or lack of growth was in the tail end of the quarter. Then here, again, it's sometimes difficult to have the clear good cost analysis. But as we shifted a lot of focus to Microsoft, it was a very important quarter, some of that may have played in the development in the ISV.

Now when you take the average, I think this is a subset that where we see opportunity for very healthy growth. And here, based on what Brian said, he is really driving focus on the key ISVs, making sure we have the right placed with these key partners. So we would expect any way, let's say, when taken on average a similar development in H2 as in H1, but with everything that is on the table right now, we expect an acceleration of growth. I think when it comes to the second half, again, the core services remains growing in [indiscernible] market, which we expect to continue/accelerate very positive momentum with Microsoft. I can only echo what Brian described before.

I mean, we're really coming together. This is -- Brian coming into the organization. He has kind of reset in a very positive way the relationship with Microsoft. I think that should translate into a higher degree of alignment for joint programs that will impact second half, will impact clearly 2024. And so that is definitely part of the growth expectation for the second half. As far as acquisition is concerned, we remain -- this remains a priority for us, bolt on, but none of the guidance is relying on, let's say, any significant inorganic opportunity. We have -- we announced a small bolt-on in the first half. There may be 1 or 2 in the second half, but again, nothing material. So the guidance it's not banking or counting on anymore.

[Balajee Tirupati, analyst]

Understood. Understood. If I may add 1 more question on the cash flow side. Group's working capital has continued to move up, [ have ] the valuation been in line with your internal expectation and how should we think about it going forward?

[Rodolfo Savitzky, executive]

Look, it's a very fair question. When you look at the decline with the net working capital. We see that the development is very similar to the development of last year. Now we did say at the time, we were not particularly pleased with the development in H1 '22. Now a lot of things have changed since then, right? We have a worsened financial environment, this year. We have more -- we are shifting much more into consumption-based offerings where the payment terms are longer. So I would say, and this is what I qualified during my presentation, the fact that the net working capital in H1 '23, it's pretty much in line with '22. I see that as a good development continuing the growth, number one, and the financial situation and the shift in the fourth quarter. The team has done a very good job at making sure we mirror that, with making sure our payment cycle is consistent with the collection and therefore, the impact of net working capital you see in the cash flow, it really meant for the level of growth we have. But we do see with operational excellence, we see an opportunity to improve certain financial processes that will reduce the collection time and we will some of that already having an impact towards the end of the year.

[Operator]

It's from the line of Andreas Muller from ZKB.

[Andreas Mueller, analyst]

I have 2 or 3, one after the other. The first one is, in SG&A when would you expect the normalization of the marketing and travel spend will be washed out on a year-on-year comparison? That's the first question.

[Rodolfo Savitzky, executive]

Well, this one I take. I think clearly in alignment here with Brian, we -- again, look -- this is a business cycle, where we were at COVID. We stopped everything like now following a normalization of business line, you get an upswing in the wrong direction. So we have definitely put measures in place now to get to the right level of spending in travel and some sales activities and so forth. So we expect these 2 impacts as of already a few weeks. So this is in place. And again, it's just normal right, is probably part of the business cycles and measures have been taken to normalize.

[Andreas Mueller, analyst]

Okay. And then the net debt position, what do you expect by the end of 2023, I mean, could it be a net cash position again with these new measurements?

[Rodolfo Savitzky, executive]

Look, we don't provide guidance on cash flow, right? I think I don't want to now start that one. I would say what you know that typically, from a cash flow perspective, our H2 is much stronger, right? And so we will see compared to H2 of last year, we should see a similar evolution as we have -- but again, we cannot -- we will not provide a guidance on cash.

[Andreas Mueller, analyst]

Okay. And then the last question, I was still wondering on this AI-driven cross-selling pilot. I mean, is it now going to be fully rolled out in North America and another pilot will be done in Europe and has it fully fulfilled its expectation? And when would you think that a full rollout would be here in for all regions.

[Brian Duffy, executive]

Thanks, Andreas, for the question. So firstly, it has been fully rolled out in North America. And with this AI pilot that we ran at the time, we basically are taking all of the data that we have on our customers, crunching that data and then with an algorithm suggesting to our sales teams the solutions, which should be provided next to them, the services and the price that it should be sold out. And we have, as I said, seen considerable impact from that in terms of opportunity creation, but very importantly, opportunity closure as well, which is why we move from pilot phase to roll out across the entire region and the plan is for the second half of this year that we will look to embrace that and roll it out to the rest of the world as well, given the promising signs that our pilots show to us, which, again, reinforces the opportunity that AI presents itself to all customers globally.

[Operator]

We will now take the next question from the line of Knut Woller from Baader Bank.

[Knut Woller, analyst]

Looking at LATAM, which was a weak spot in Q2, can you share here from a qualitative perspective, at least, whether you saw here an improvement of the demand momentum in Q3? And the second question, looking at the co-marketing invest headwind in terms of the comparables, we saw that, that came down a bit from [ CHF 5.1 million ] in Q1 to [ CHF 3.5 million ] in the second quarter. Can you please provide you an update on the expected headwind for the second half?

[Brian Duffy, executive]

Sure. I'll take the first part of that question. So Latin America, firstly, a massive geography for us and one which is very important and one, in fact, where the partners rely heavily on us and as a market, it's probably most similar to APAC for us, and you can see the growth rates that we had in APAC. In Q3, we will have a leadership change in Latin America to bring the necessary focus to the business that we need in that part of the world. We are unique in that we have a very significant presence from a services perspective. In that regard, most players in this space don't have such a presence there. That is one of the differentiators for us.

And with this leadership change, I firmly believe that we will have the focus back on the business that we need given the growth potential that we have there. And I would just comment that many partners don't have the same presence in that part of the world that they do in other parts of the world, which is why they would be heavily relying on us. And we plan to make further investments into that space to grow that business. And then I'll turn the next part over to Rodolfo.

[Rodolfo Savitzky, executive]

So on the co-marketing, look, again, we don't provide too many details on these topics. But in general, I would say, the co-marketing investments that we had last year were relatively front-loaded. So I would say roughly 70% would fall under H1. So there's still a remaining 30% that we should expect happening and this would be even in the coming 2 quarters. But again, the impact should be significantly more.

[Operator]

[Operator Instructions] I would like now to hand back over to Brian Duffy for final remarks.

[Brian Duffy, executive]

Great. Thank you, everybody, for joining this morning. I appreciate it. Thank you for your time, and we look forward to following up with you afterwards as well. Thanks, everybody. Bye-bye.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.