Solid performance during integration year
SoftwareONE delivered solid performance in 2019, the year of its acquisition and integration of Comparex, which is included in the group’s results from 1 February 2019. In overall healthy markets for the group’s Software & Cloud and Solutions & Services business lines, reported revenue more than doubled to CHF 7.6 billion compared with 2018.
On a like-for-like basis including Comparex’ standalone results for 2018 and 2019, gross profit increased by 4.3% on a constant currency basis to CHF 737.2 million, in line with the 2019 guidance of 4-6% provided during the IPO. Management considers gross profit to be a meaning¬ful metric for the group’s earnings capacity as it excludes flow-through costs from revenue, specifically costs for software purchases on behalf of clients as well as third-party service delivery costs. Software¬ONE continued to deliver very strong gross profit growth rates in its own book of business in 2019, while the progressing integration affected the Comparex book of business, as anticipated.
Gross profit from sale of software and other revenue grew by 2.8% on a like-for-like basis at constant currency in 2019, at the upper end of the IPO guidance range, reflecting the successful integration of the two salesforces. Solutions and services achieved gross profit growth of 9.2%, lower than the guidance due to the harmonization of Comparex’ services portfolio with SoftwareONE. As planned, the combined services portfolio has been rolled out and the incentive plans have been fully aligned as of the beginning of 2020, which positions the combined group for the next phase of growth.
In geographical terms, the group’s EMEA region contributed 68% to overall gross profit in 2019, while NORAM, APAC, and LATAM contributed 15%, 10% and 7%, respectively, including Comparex.
Cost development reflecting Comparex integration and efficient business management
On a reported basis, personnel expenses increased to CHF 439.9 million in 2019, from CHF 224.3 million in 2018, and other operating expenses rose to CHF 115.3 million in 2019, from CHF 57.4 million in 2018, reflecting the Comparex acquisition. Total headcount (FTE) stood at 5,442 as at the end of 2019, compared with 5,377 on a combined basis and 2,636 on a SoftwareONE standalone basis as at the end of 2018.
On a like-for-like basis, overall operating expenses increased by 6.3% at constant currency. Overall operating expenses (on an adjusted like-for-like basis) comprised 69.7% of gross profit in 2019, compared with 74.2% in 2018. This reflects SoftwareONE’s disciplined, efficient integration and business management, leveraging its global shared service centers and regional hubs as well as lean operating structure.
Strong increase in profitability
As a result of SoftwareONE’s continued gross profit growth, cost discipline and cultural alignment of the combined organization, adjusted EBITDA increased by 23.1%, on a like-for-like basis at constant currency, to CHF 223.6 million. The adjusted EBITDA margin as a percentage of gross profit increased from 25.8% in 2018 to 30.3% in 2019 on a like-for-like basis, above the group’s 2019 target range of 28-30%.
Adjusted EBITDA excludes the following M&A, integration and IPO-related items:
- CHF 1.4 million M&A and earn-out costs related to previous acquisitions
- CHF 13.9 million in costs for the Comparex integration
- CHF 10.5 million IPO-related costs
- CHF 21.4 million charge related to the 2017 management equity plan concluded with the IPO (non-cash with no equity impact, fully funded by the major shareholders)
Including those items, EBITDA for 2019 was CHF 176.4 million, compared with CHF 185.7 million in 2018, on a like-for-like basis. On a reported basis, earnings before net financial items, taxes, depreciation and amortization were CHF 170.3 million, compared with CHF 129.8 million in 2018
Profit for the year was up 59.9% to CHF 125.0 million on a reported basis in 2019. This includes a significant appreciation of CHF 38.9 million in SoftwareONE’s 13% stake in the software company Crayon.
Strong cash generation and unlevered balance sheet
Full-year 2019 net cash flow from operations amounted to CHF 216.3 million, including a positive impact of CHF 53.3 million relating to net working capital. Average net working capital (including factoring) over the course of 2019 was 38% of gross profit, but was brought down to a satisfactory level of 13% by year-end.
Capital expenditure totaled CHF 20.7 million, mainly relating to investments in PyraCloud and purchases of IT equipment. Net cash inflow relating to acquisitions and investments in joint ventures was CHF 42.5 million, including the cash balance of acquired companies.
Free cash flow amounted to CHF 192.6 million as at year-end 2019. Net cash position was CHF 190.7 million as at the end of 2019.
Good progress with Comparex integration and synergy realization ahead of target
Since the closing of the Comparex acquisition on 31 January 2019, SoftwareONE has completed several key integration steps, for example: the customer-facing integration phase, including brand refresh and website relaunch, leadership appointments, harmonized Solutions & Services portfolio, aligned go-to-market and sales enablement and harmonized compensation; as well as certain back-end integration phases, such as the combination of all group functions, the launch of a joint learning and development platform and many country-specific system migrations.
Integration activities are on track and realized synergies reached CHF 10 million in 2019, ahead of the CHF 7 million original plan. Remaining integration activities in 2020 include country-specific system migrations. SoftwareONE is confident that it will complete the integration process as planned and achieve the targeted synergies of approx. CHF 60 million p.a. (consisting of CHF 20 million in gross profit synergies and CHF 40 million in cost synergies) on an adjusted EBITDA level in 2021.
At the Annual General Meeting on 14 May 2020, the Board of Directors will propose a dividend of CHF 0.21 per share (to be paid from capital contribution reserves), taking into account the uncertain environment due to the Covid-19 situation, while also reflecting SoftwareONE’s confidence in the strength of its business model. The proposed dividend is in line with the IPO guidance of a 30% pay-out ratio in 2019, when excluding the one-off non-cash items relating to the management equity plan and the Crayon revaluation.
SoftwareONE has seen continued business momentum in 2020, with only limited effects of the Covid-19 situation so far, although the likely impact since mid-March is still unclear, and developments are rapid and unpredictable.
The group currently sees increased demand from customers for unified communication and collaboration solutions as well as software asset management assessments, both to help them operate virtually and to control and reduce their existing software spend. With technology and software as excellent work enablers, SoftwareONE expects businesses and institutions around the globe to continue to invest in their digital capabilities.
Although some deferral of purchases could take place, the Software & Cloud business line is thus expected to remain relatively strong as customers continue to renew and purchase business critical software and subscriptions. In Solutions & Services, the managed services business is expected to remain relatively stable, while the professional services business could see some disruption due to limited mobility and travel restrictions being enforced at customer locations.
In light of this, SoftwareONE reaffirms its mid-term (2020-2022) guidance provided at the time of the IPO. However, due to the Covid-19 situation, it is currently not possible to predict whether it can already reach gross profit targets in 2020, as expected during the IPO.
Key mid-term guidance includes:
- Double-digit gross profit growth resulting from high single-digit growth in sale of software and other revenue and growth in the high teens in solutions and services
- Adjusted EBITDA margin approaching 35%, with adjusted EBITDA growth in excess of gross profit growth
- Progressive dividend policy with a pay-out ratio of 30-50% of the profit for the year
The globally distributed and digital nature of SoftwareONE’s business allows it to conduct significant parts of its business remotely. All staff, including global shared service centers, are currently working in a full work-from-home program without any interruption to the business or customers. With its strong net debt-free balance sheet and liquidity, unused credit lines and strong cash flow, SoftwareONE is well prepared to weather a potentially longer-term downturn and to continue to invest in its business.
Alternative Performance Measures:
Please see the 2019 Annual Report for a definition of Alternative Performance Measures used in this press release (page 33 of the PDF version).