Softcat CEO on growth hotspots, the search for acquisition targets, and taking a crack at Ireland

Martin Hellawell says record £14m software deal and rebound in PC sales drove unexpected 29 per cent sales rise in the reseller's fiscal first half as he talks through his plans for 2017

London-listed reseller Softcat this morning took the market by surprise by posting 29 per cent year-on-year growth for its fiscal first-half ending 31 January.

CRN met its CEO Martin Hellawell (pictured) to talk investment priorities, shifting vendor allegiances, potential acquisitions and whether at some point the Marlow-based outfit will build an overseas presence.

Softcat's sales grew 29 per cent year on year to £378.5m in your fiscal half. Did that growth surprise you, and what's driving it?

We probably weren't expecting such high revenue growth. There were a couple of things that put it up more than we expected. First of all, we had one very large software deal - 80,000 seats with a central government department. That was about £14m in the period so it added a big chunk to the growth. We also saw a big bounceback in PCs. Underlying trading was solid anyway, so those two areas were the icing on the cake. The Microsoft licensing world was really strong too.

What's driving that PC rebound?

The previous year was very low. PC sales died, and that was largely due to the fact there had been an upgrade cycle a year or two before that, so people weren't refreshing so readily. The time has come around to refresh again. It's against a very low compare from the previous year, and we are probably back to where we were two years ago.

Your operating margin stood at 5.5 per cent in your first half [operating profit rose from £15.3m to £20.9m year on year), which is fairly high for the industry in which you operate. What's the secret to keeping margins up in that traditional VAR model and are those kinds of margins sustainable?

The way we sustain those kind of margins is, firstly, by selling primarily into the mid-market, which we think is a more profitable area than large enterprise or public sector. [Mid-market] customers need a lot more help, advice and guidance, and are willing to pay for a high-quality service.

Secondly, we've always approached the market from a higher-end technology point of view in terms of datacentre, networking, software and services; much more so than the volume, logistical-type play. The higher the quality of the sales mix we are selling to customers, the higher the margins. And then we keep a very no-nonsense cost base. We keep things very lean and mean, and keep hierarchy to a minimum. We don't spend money on things we don't need. These are the things that drive our higher margins, and they are sustainable as long we keep focused on doing those things.

In the last half, we spoke to I would say eight, maybe getting on to 10 businesses. I don't think we've got to a second meeting with any, so it's not too serious. We are having a look and educating ourselves.

In your results commentary, you've said more office openings are unlikely this year. What new growth initiatives do you have planned?

None specifically. I'm always disappointed in myself at this point in the call in that it's always more of the boring same with Softcat. We keep evolving everything we're doing, because it seems to be working; we don't go off on any new tangents. For our offices, recruitment is very strong right now. We've never had it so good in terms of the number of people applying, so we don't feel a compelling need [to open another office] in this financial year.

We will keep focusing on the opportunities the market is giving us, and they are plenty. There are still lots of hybrid computing conversations going on with our customers, and most customers are at an early stage of working out whether to go for public or private cloud, or a mixture of those things, and how to manage that, so that's a great opportunity for us. Security is still the number-one priority for all our customers and the whole GDPR debate will fuel that further. We think IoT is very real, and that is going to give our networking business a boost as people gear up for much stronger networks. The stuff we are doing for customers is getting more complex, particularly as you move into that hybrid world, which gives us a great opportunity on the services side. So we keep building up that services arm, and that was one of the star performers in the first half, growing 33 per cent in the first half. The market is just handing us on a plate so many different opportunities that we don't need to get clever and invent any new ones.

Softcat has never made an acquisition, but in your results commentary, you say you are 'remaining vigilant' on potential acquisition opportunities. How many targets have you spoken to, and how serious have discussions been?

In the last half, we spoke to I would say eight, maybe getting on to 10 businesses. I don't think we've got to a second meeting with any, so it's not too serious. We are having a look and educating ourselves. We continue to look out for that gem, but we don't need that gem, so we're not putting a big pressure on ourselves to acquire something for the sake of it. We may well be having this conversation in three years' time and saying we've done nothing at all, and I won't be disappointed by that. We'll only move if we find absolutely the right opportunity.

With various vendors splitting in two and Dell and EMC combining, have your vendor allegiances shifted?

Our strongest performer in the first half was Microsoft, which has been our strongest allegiance for 24 years, so that's been reinforced. The HP [and HPE] relationship has always been extremely strong and it was good to see them buying Simplivity and Nimble, which will only reinforce that relationship. The Dell relationship we had was stronger than the EMC relationship, and I certainly hope to use the relationship we have with Dell to leverage the EMC relationship going forward. And then there are many more specialist players we love working with - the Mimecasts and Sophoses of this world, plus some new people breaking into the business such as Pure Storage, Tintri and Nutanix.

Do you have any plans to expand outside the UK?

We have no plans but the one I'm quite open about - probably too open about - is that I'd love to have a crack at Ireland. We need to understand a bit more about that market and look into it in a deeper way. More importantly, I need to have a team of people from Softcat who are ready and the right people to go and set up an Irish office, which I don't have today. So that would be a baby step towards the international front. We keep doing more international business with our international partners, and that's going really well. And out of the eight [acquisition targets] we have spoken to, one was an overseas organisation and one was a UK organisation with overseas operations. It's something we are in the early stages of looking at, but there is no plan.

Who are your international partners?

We use two or three different ones, but the one we are probably having the most fun with is Forsythe.

What are the major themes of 2017?

Security, IoT, hybrid computing and mobility. Those are all incredibly hot topics at the moment for an organisation like Softcat. And for Softcat more specifically, we are getting a good handle on managed print and we are getting really good at vendor contractual support services.

Your share price has been climbing in recent months. How has being a public company changed Softcat's culture, if at all?

I don't think it has. I really hope it hasn't. My number-one priority last year was to make sure it didn't change in any significant form. It's always a struggle as it's now an organisation with nearly 1,100 people and maintaining that culture with 1,100 people is different to when you are 200 people in one office, but I think we do a good job of it, and hopefully the employee engagement awards we keep winning are a testament to that. These challenges are linked more to the scale of the organisation than being a public company. The only tangible thing that has culturally changed due to our being a public company is that we can't talk so openly about our numbers now. That's a shame as we enjoyed doing that.