Bytes Tech Regulatory News (BYIT)

25 October 2023

BYTES TECHNOLOGY GROUP plc

('BTG', 'the Group')

Results for the six months ended 31 August 2023

Strong first half extending our track record of double-digit growth

BTG (LSE: BYIT, JSE: BYI), one of the UK and Ireland's leading software, security, AI, and cloud services specialists, today announces its half year results for the 6 months ended 31 August 2023 ('H1 FY24').

Neil Murphy, Chief Executive Officer, said:

"I am delighted that we have delivered another strong financial performance over the first half of the year. Our success in the period was driven by the combination of our skilled workforce and strong vendor relationships, which have once again enabled us to support our customers and grow our business. We are pleased that our customer and staff satisfaction levels continue to be amongst the best in our industry.

"While the economic backdrop remains mixed, we have continued to see strong demand from our corporate and public sector customers for security, cloud adoption, digital transformation, hybrid datacentres and remote working solutions. This has allowed us to invest in our business, growing our headcount to more than 1,000 for the first time while equipping our people with the skills to advise customers on the latest software, services, and hardware offerings.

"A shift to Artificial Intelligence (AI) products will be one of the defining trends in the IT Services sector in the coming years, and we are well-placed to capitalise on that opportunity. We stand to benefit from our long-standing relationship with Microsoft, whose Copilot product we are already trialling and will be available more widely in the near future. We are also looking forward to working with our other vendor partners that are developing AI software tools.

"Looking ahead, we have made a good start to the second half of the year and are well-placed for the remainder of the financial year."

Financial performance

Financial highlights

International Financial Reporting Standard measures (IFRS):

- Revenue increased 16.3% to £108.7 million (H1 FY23: £93.5 million).

- GP growth of 15.0% to £75.3 million (H1 FY23: £65.5 million) was driven by higher GII and increased GP per customer of £16,300 (H1 FY23: £14,800).

- Gross margin was broadly stable at 69.3% (H1 FY23: 70.1%).

- Operating profit increased by 12.1% to £30.6 million (H1 FY23: £27.3 million).

Alternative performance measures (non-IFRS):

- GII increased by 37.6% to £1,081.6 million (H1 FY23: £786.2 million), exceeding £1 billion in H1 for the first time. The exceptional level of growth was underpinned by some large, strategically important, contract wins in the public sector (most notably with the NHS and HMRC) and by continued demand from corporate customers.

- The reduction in GP/GII% to 7.0% (H1 FY23: 8.3%) reflects the impact of these large contracts transacting at a reduced margin in the initial year of the agreements.

- AOP increased by 13.8% to £33.9 million (H1 FY23: £29.8 million); AOP as a percentage of GP has remained in line with the previous year at 45.0% as we continue to invest in the business.

- Adjusted earnings per share increased 15.8% to 11.71 pence (H1 FY23: 10.11 pence).

- Half year cash conversion of 48.7% (H1 FY23: (2.8%)) is in line with our expectations, reflecting the seasonal timing of cash flows and weighting to the second half of the financial year. Our rolling cash conversion for the year ended 31 August 2023 stood at 107.2%, meeting our sustainable annual target of 100%.

Interim dividend

- Interim dividend of 2.7 pence per share, a 12.5% increase on last year's interim dividend (H1 FY23: 2.4p).

Operational highlights

- Strong levels of demand for security, cloud adoption, digital transformation, hybrid datacentres and remote working solutions have underpinned the Group's continued growth in H1 FY24.

- 98% of GP came from customers that traded with BTG last year (H1 FY23: 97%), at a renewal rate of 113%.

- Increased headcount by 10% since the FY23 year end to service high levels of customer demand, with over 1,000 staff at the half year.

- The Group enrolled in Microsoft's early access programme for Copilot, an AI assistant feature for Microsoft 365 applications, to improve productivity internally and in preparation to support our customers.

- Both Bytes Software Services and Phoenix Software named among the UK's Best Workplaces in Tech in Great Place to Work's Large and Super Large Category.

- Phoenix Software named Microsoft's Global Modern Endpoint Management Partner of the Year 2023.

- In April 2023, the Group acquired a 25.1% interest in Amazon Web Services (AWS) partner, Cloud Bridge Technologies, to bolster our multi-cloud strategy in the years to come.

Current trading and outlook

We reported another strong performance in H1 FY24, extending our track record of delivering robust double-digit growth across our key financial metrics.

The business has started the second half of the year well, continuing the momentum delivered in H1 FY24. Whilst we remain mindful of the challenging macroeconomic environment and geopolitical uncertainty in Ukraine and the Middle East, we are confident in our ability to capitalise on the growth opportunities we see ahead. The Group's proven strategy of acquiring new customers and then growing our share of wallet, building on our strong vendor relationships and the technical and commercial skills of our people, ensures we are well placed to continue our progress over the remainder of FY24.

Analyst and investor presentation

A presentation for analysts and investors will be held today via webcast at 9:30am (BST). Please find below access details for the webcast:

Webcast link:

https://stream.brrmedia.co.uk/broadcast/651d406c8fb8fe0aea8cc7f6

A recording of the webcast will be available after the event at www.bytesplc.com.

The announcement and presentation will be available at www.bytesplc.com from 7.00am and 9.00am (BST), respectively.

Enquiries

Forward-looking statements

This announcement includes statements that are, or may be deemed to be, 'forward-looking statements'. By their nature, forward-looking statements involve risk and uncertainty since they relate to future events and circumstances. Actual results may, and often do, differ materially from forward-looking statements.

Any forward-looking statements in this announcement reflect the Group's view with respect to future events as at the date of this announcement. Save as required by law or by the Listing Rules of the UK Listing Authority, the Group undertakes no obligation to publicly revise any forward-looking statements in this announcement following any change in its expectations or to reflect events or circumstances after the date of this announcement.

About Bytes Technology Group plc

BTG is one of the UK's leading providers of IT software offerings and solutions, with a focus on cloud and security products. The Group enables effective and cost-efficient technology sourcing, adoption, and management across software services, including in the areas of security, cloud and AI solutions. It aims to deliver the latest technology to a diverse range of customers across corporate and public sectors and has a long track record of delivering strong financial performance.

The Group has a primary listing on the Main Market of the London Stock Exchange and a secondary listing on the Johannesburg Stock Exchange.

1 'Gross invoiced income' ('GII') is a non-International Financial Reporting Standard (IFRS) alternative performance measure that reflects gross income billed to customers adjusted for deferred and accrued revenue items. The effect of these adjustments for the year ended 28 February 2023 is included on p146 of the annual report and accounts for that period. GII has a direct influence on our movements in working capital, reflects our risks and shows the performance of our sales teams.

2 'Revenue' is reported in accordance with IFRS 15, Revenue from Contracts with Customers. Under this standard the Group is required to exercise judgment to determine whether the Group is acting as principal or agent in performing its contractual obligations. Revenue in respect of contracts for which the Group is determined to be acting as an agent is recognised on a 'net' basis (the gross profit achieved on the contract and not the gross income billed to the customer). Our key financial metrics of gross invoiced income, gross profit, adjusted operating profit and cash conversion are unaffected by this judgement.

3 'Adjusted operating profit' is a non-IFRS alternative performance measure that excludes from operating profit the effects of significant items of expenditure which are non-recurring events or do not reflect our underlying operations. Amortisation of acquired intangible assets and share-based payment charges are both excluded. The reconciliation of adjusted operating profit to operating profit is set out in the Chief Financial Officer's review below.

4 'Cash conversion' is a non-IFRS alternative performance measure that divides cash generated from operations less capital expenditure (together, 'free cash flow') by adjusted operating profit. It is calculated over both the current reporting period and over a rolling 12 months, the latter taking the previous 12 months free cash flow divided by the previous 12 months adjusted operating profit, in over to reflect any seasonal variations during the full year up to the reporting date.

5 'Adjusted earnings per share' is a non-IFRS alternative performance measure that the Group calculates by dividing the profit after tax attributable to owners of the company, adjusted for the effects of significant items of expenditure which are non-recurring events or do not reflect our underlying operations ('Adjusted earnings'), by the weighted average number of ordinary shares in issue during the year. Amortisation of acquired intangible assets and share-based payment charges are excluded in arriving at Adjusted earnings. The calculation is set out in note 16 of the interim condensed consolidated financial statements.

_________________________________________________________________________________________

Chief Executive Officer's Review

A strong half year performance delivering on our strategy.

We are delighted with the strong performance in H1 FY24, which saw the Group deliver growth in adjusted operating profit ('AOP') of 13.8% and gross profit ('GP') of 15.0%, driven by a 37.6% increase in gross invoiced income ('GII').

We have maintained our track record of strong double-digit year-on-year growth despite the ongoing uncertainty caused by the challenging macroeconomic conditions. Our business continues to benefit from the wide-ranging product offering that we have developed, with a substantial suite of software, IT services and hardware solutions from the world's leading vendors and software publishers.

The exceptionally strong growth in GII primarily reflects the success of the business in winning large public sector Microsoft contracts, demonstrating our strength and credibility when bidding for substantial government software opportunities under the Crown Commercial Services framework agreements. The Group's success in winning these new contracts resulted in our public sector GII increasing by 44.4%. Due to the competitive tendering process involved, these sales are typically won at reduced initial margins. However, over the course of the contracts, typically 3 to 5 years, we have a strategy and track record of growing the profitability of those contracts and opening up other software, hardware, or services opportunities within those accounts. Additionally, we have seen continued success in the corporate sectors, growing GII by 25.7% across these customers.

The growth above is reflected in our 39.1% increase in software GII, supported by a 15.7% rise in our internal services GII and hardware growth of 15.3%. The double-digit growth across both our key sectors and our three primary products and services areas reflects the continued demand from our customers to invest in resilient and efficient IT applications and services.

Our customers' ongoing appetite for security, cloud adoption, digital transformation, hybrid datacentres and remote working solutions underpinned the strong growth reported in H1 FY24. These investments increasingly take the form of contracts of an annuity type and therefore we remain confident in the Group's growth prospects going forward. This reinforces the potential for future up-selling and cross-selling opportunities with existing clients. The double-digit growth in GII and GP reflects the buoyant and robust nature of IT spend across the UK and Ireland.

We continue to expand our IT services capability, underpinned by the renewal of our Microsoft Azure Expert status for the provision of managed services, along with many other key vendor accreditations, augmented with our own IP in the form of Quantum and Licence Dashboard. Our broad suite of services enables us to expand our relevance to new and existing clients who need support and assurance as they seek to strengthen their IT resilience and security.

We expect to see a strong customer response to Microsoft's AI products, including Copilot. We are preparing for this to gain increasing momentum into 2024 and beyond, and to open up associated services opportunities to support customer readiness and adoption. Our broad roster of vendors also have a strong pipeline of AI-supported software solutions that we look forward to rolling out to our customers.

We remain proud of the energy, enthusiasm and professionalism demonstrated by our people. Our current and future growth is being supported by increasing headcount, training, and development in all areas from front-end sales and delivery teams and across all supporting areas. As a management team, we are extremely pleased with the way our people continue to embrace our collaborative, team-based culture. Our flexible working regime continues to deliver positive results for our business, while also meeting our people's aspirations for a healthy work/life balance. In June 2023, we launched our third Share Save Plan, which has again been well received by our workforce, with over 50% of employees participating in one or more of these plans.

To support the growth in sales and people, we continue to invest in, and evolve, our internal systems both to improve user experiences and to drive efficiencies. Notwithstanding this investment, our AOP as a percentage of GP has remained in line with the previous year at 45%, and therefore achieving our target to exceed 40%.

Our relationships with key partners continue to go from strength to strength and we are especially pleased to have been recognised by leading industry vendors. Following Phoenix Software being awarded the Microsoft Partner of the Year for the UK for 2021 and Bytes Software Services being named Microsoft Partner of the Year for Operational Excellence in 2022, Phoenix has followed this up by being named 2023 Microsoft Modern Endpoint Management Global Partner of the Year and Sophos Public Sector Partner of the Year. These awards reflect the status and high esteem that the Group has with global technology leaders and is testament to the expertise of our staff and the customer success stories that we deliver.

We remain committed to executing our strategy in a responsible manner, with sustainability rooted in everything we do. Our sustainability framework aims to deliver positive impacts for our stakeholders across key themes which we have identified as most relevant for the environment in which we operate. Within each theme - financial sustainability, corporate responsibility, stakeholder engagement and good governance - we set ourselves focus areas that drive our activities. Through our staff-led working groups, we allocate time and resources to various environmental initiatives, and to corporate social responsibility activities. We remain committed to supporting diversity throughout our business and are proud of the balance represented across our people. We continue our efforts to align with broader diversity targets to reflect the society in which we, and our stakeholders, operate. Further details in respect of our sustainability initiatives are set out below.

Our dividend policy is to distribute 40% of the Group's post-tax pre-exceptional earnings to shareholders by way of normal dividends. Accordingly, we are pleased to confirm that the Board has declared an interim dividend of 2.7 pence per share which will be paid on 1 December 2023 to shareholders on the register at 15 November 2023.

I wish to extend my gratitude to all my colleagues for their hard work and dedication to the business during FY24 to date. Finally, I would like to thank our clients for their support and entrusting their business with us; together, our staff and customers are our lifeblood and will always be our top priority.

Continued focus on Environment, Social and Governance (ESG)

Our approach to responsible business and ESG is aimed at helping to build a sustainable future and create long-term value for the Group and its stakeholders. Our strategy is underpinned by our purpose and values, which fosters an aligned culture across the organisation. During the period, we further progressed our ESG initiatives in the following ways.

Increasing our carbon reporting

In H1 FY24 we have disclosed our reported emissions for FY23 and future targets to Carbon Disclosure Project (CDP). This is the first year in which our disclosure will be independently scored by CDP, with the results expected in our Q4 FY24. In July 2023, we made a Group commitment to submit our targets to the Science Based Targets initiative (SBTi) for validation against the Paris Agreement's aim for less than a 1.5 degree global temperature increase. We expect to have our targets validated during 2024.

As part of our ongoing reporting, our Taskforce for Climate-Related Financial Disclosures (TCFD) will be incorporated into the S1 and S2 requirements under IFRS, once endorsed by the UK. We will monitor progress towards this and report in our annual report and accounts following adoption.

Within our businesses, we are supporting the transition to greener transport to reduce business travel and commuting emissions. The Group has successfully deployed an Electric Vehicle company car scheme during the period.

Positively impacting our society

Employee support and wellbeing remain key focus areas for the Group, particularly in light of the continuing cost-of-living crisis, with wellbeing days an important part in driving a healthier and happier workforce. In addition to this, employees have been engaged in, and managers trained in, the impact of menopause and in neurodiversity as part of a wider 'Breaking Taboos' programme.

Our strong culture remains a driving force behind our successful growth. We continue to support this through staff events and the development of our people with continued learning and training opportunities and social groups for more remote workers to connect. Staff are also listened to through various channels and improvements are made based on their ideas and initiatives.

During H1, we supported our communities through donations, fundraising events, and volunteer days, such as with the London Wetland Centre. Charity sport days have continued over the summer months, engaging with vendors to widen the impact.

Changes in directorate since the year end

Sam Mudd was appointed as an Executive Director at the Annual General Meeting held on 12 July 2023. Sam continues in her role as the Managing Director of Phoenix Software Limited, a wholly owned subsidiary of the Group, following her appointment to the Board.

Also, after 23 years with the Group, David Maw stepped down as a non-executive director at the 2023 AGM. Following David's retirement, Dr. Erika Schraner assumed the role of Designated Non-Executive for employee engagement, building on the constructive work carried out by David in this role.

Having served on the Board since 6 November 2020, Dr. Alison Vincent has indicated that she wishes to retire from her role as independent non-executive director at the conclusion of her three-year term, with effect from 1 November 2023. A process to recruit an additional independent non-executive director with relevant experience is underway and a further announcement will be made in due course and, as previously announced, Dr Erika Schraner will be Chair of the Remuneration Committee with effect from 1 November 2023.

Chief Financial Officer's review

1 Provision of services to customers using the Group's own internal resources

2 Provision of services to customers using third party contractors

3 Cloud Bridge Technologies 25.1% share of profits since April 2023

Overview of H1 FY24 results

H1 FY24 has seen continued double-digit growth across all our key performance measures. With hybrid working widespread across our whole customer base, and heightened requirements around cybersecurity, customers have continued to engage with us to support their move into the cloud, or extending their presence in it, with more sophisticated and resilient security, support, and managed service solutions. This has resulted in operating profit increasing by 12.1% to £30.6 million (H1 FY23: £27.3 million) and AOP growing by a slightly higher 13.8% year on year from £29.8 million to £33.9 million. The adjusted operating profit excludes the impact of amortisation of acquired intangible assets and share-based payment charges which do not reflect the underlying day-to-day performance of the Group.

Gross invoiced income (GII)

GII reflects gross income billed to our customers, with some small adjustments for deferred and accrued items (mainly relating to managed service contracts where the income is recognised over time). We believe that GII is the most useful measure to evaluate our sales performance, volume of transactions and rate of growth. GII has a direct influence on our movements in working capital, reflects our risks and demonstrates the performance of our sales teams. Therefore, it is the income measure which is most recognisable amongst our staff, and we believe most relevant to our customers, suppliers, investors, and shareholders for them to understand our business.

GII has increased by 37.6% year on year, with growth spread across all the business's income streams, but most significant for software which remains the core focus, contributing 95% of the total GII for the six months (H1 FY23: 94%). The Group's already substantial presence in the public sector, has been bolstered by a number of key strategic and substantial wins relating to government Microsoft Enterprise Agreements where the Group bids under highly competitive tenders, either for single contracts or for several public body contracts in aggregate, the latter enabling the Group to gain multiple new clients from a single bid process.

This continual high level of government investment in IT technologies, and the Group's success in winning new contracts, has resulted in our public sector GII increasing by £221.9 million, up 44.4%, to £721.7 million (H1 FY23: £499.8 million). Our corporate GII increased by £73.5 million to £359.9 million (H1 FY23: £286.4 million), representing a very pleasing rise of 25.7%.

This means that our overall GII mix has moved slightly compared to last year with 67% in public sector (H1 FY23: 64%) against corporate of 33% (H1 FY23: 36%)

Revenue

Revenue is reported in accordance with IFRS 15 Revenue from Contracts with Customers. Under this reporting standard, we are required to exercise judgment to determine whether the Group is acting as principal or agent in performing its contractual obligations. Revenue in respect of contracts for which the Group is determined to be acting as an agent is recognised on a 'net' basis, that is, the gross profit achieved on the contract and not the gross income billed to the customer.

Our judgements around this area are set out in notes 1.4 and 1.11 of the full year financial statements for the year ended 28 February 2023. In summary, software and external services revenue is treated on an agency basis whilst hardware and internal services revenue is treated as principal.

It should be noted that GII, gross profit, operating profit, and profit before and after taxes are not affected by these judgements, neither are the consolidated statements of financial position, cashflows and changes in equity.

With the significant increase in software GII, as noted above, and its treatment on a net, or agency, basis, the 16.3% increase in revenue in the six months is lower than the rise in GII.

Gross profit (GP) and gross profit/GII (GP/GII%)

Gross profit increased by 15.0% to £75.3 million (H1 FY23: £65.5 million).

This growth is less than that for GII due to the high level of new or renewed GII derived from the public sector and the highly competitive nature of the tendering process, governed under the Crown Commercial Services framework agreements. This has meant that large software contracts, most notably with Microsoft, have been won or renewed at reduced margins. This tends to be particularly prevalent in the first year of new agreements with public sector entities, and as a result we have seen a reduction on our GP/GII% in the first 6 months to 7.0% (H1 FY23: 8.3%). That said, if the impact of the two largest new contracts is removed from the calculation, the percentage reverts to 8.3%, therefore equivalent to last year and demonstrating the overall strong performance of the business in maintaining its margins.

Deals such as these are consistent with the Group's strategy of winning new customers and then expanding share of wallet. Our objective is to ensure we build our profitability within each contract over its term, typically 3 to 5 years, by adding additional higher margin products into the original agreement as the customers' requirements grow and become more advanced. This is further enhanced by focusing on selling our wide range of solutions offerings and higher margin security products, whilst maximising our vendor incentives through achievement of technical certifications. We track these customers individually to ensure that the strategy delivers value for the business, and our other stakeholders over the duration of the contracts.

Our long standing relationships with our customers and high levels of repeat business is again demonstrated in H1 FY24 with 98% of our GP coming from customers that we also traded with last year (H1 FY23: 97%), at a renewal rate of 113% (which measures the GP from existing customers this period compared to total GP in the prior period), which also demonstrates our ability to increase our share of wallet with our customers.

Administrative expenses

This includes employee costs and other administrative expenses as set out below.

Employee costs

Our success in growing GII and GP continues to be as a direct result of the investments we have made over the years in our front-line sales teams, vendor and technology specialists, service delivery staff and technical support personnel, backed up by our marketing, operations, and finance teams. It has been, and will remain, a carefully managed aspect of our business.

In addition to continuing to hire in line with growth, our commitment to develop, promote and expand from within the existing employee base, giving our people careers rather than just employment, is at the heart of our progress as a business. This has contributed to long tenure from our employees which in turn supports the long relationships we have established with our customers, vendors, and partners. This is at the very heart of our low employee churn rate, the growth in gross profit per customer and our high customer retention rate.

During the period we have seen total staff numbers rise above 1,000 for the first time, to 1,026 on our August 2023 payroll, up by 10% from the year-end position of 930 on 28 February 2023. Employee costs included in administrative expenses rose by 20.2% to £35.7 million (H1 FY23: £29.7 million) but excluding share-based payments of £2.9 million (H1 FY23: £1.7 million), the rise was lower at 17.1%.

Other administrative expenses

Other administrative expenses increased by 5.9% to £9.0 million (H1 FY23: £8.5 million). This increase included additional spend on internal systems, professional fees, staff welfare and travel costs. This reflects the costs of running, and investing in, a growing organisation and in operating a listed Group, including evolving our governance structure, controls, and processes with the support of our professional advisors.

Adjusted operating profit and operating profit

Adjusted operating profit excludes, from operating profit, the effects of:

- Share based payment charges as, whilst new employee share schemes are being launched, the charge to the income statement will increase each year. Accordingly, the charge for the current year has risen to £2.9 million, compared to £1.7 million last year.

- Amortisation of acquired intangibles as this cost only appears as a consolidation item and does not arise from ordinary operating activities.

We believe that adjusted operating profit is a meaningful measure which the Board can use to effectively evaluate our profitability, performance, and ongoing quality of earnings. Adjusted operating profit in H1 FY24 increased to £33.9 million (H1 FY23: £29.8 million), representing growth of 13.8%. Our operating profit increased from £27.3 million to £30.6 million equating to an increase of 12.1%.

Adjusted operating profit as a percentage of GP is one of the Group's key alternative performance indicators, being a measure of the Group's operational effectiveness in running day-to-day operations. We set a target of no less than 40% and we have again achieved this, with a ratio of 45.0% (H1 FY23: 45.5%).

Interest receivable and finance costs

This period has seen significant interest being earned from money market deposits, totalling £2.9 million in the 6 months (H1 FY23: nil), as interest rates have risen steeply. This has resulted in our profit before tax growing by 23.3% to £33.3 million (H1 FY23: £27.0 million).

Our finance costs largely comprise arrangement and commitment fees associated to our revolving credit facility (RCF), noting that to date the Group has not drawn down any amount. This balance also includes a small amount of finance lease interest on our right-of-use assets, increasing slightly in the current period due to the introduction of a staff electric vehicle (EV) scheme.

Share of profit in associate

Following the acquisition of a 25.1% interest in Cloud Bridge Technologies in April 2023, in accordance with IAS 28 Investments in Associates, we have accounted for the Group's share of its profits since the date of our investment, £0.1 million for the 5-month period.

Income tax expense

The 49.1% rise in our income tax expense to £7.9 million (H1 FY23: £5.3 million) reflects the growth in profits and the increase in the UK corporate tax rate from 19% to 25% effective from 1 April 2023.

Profit after tax increased by 17.1% to £25.4 million (H1 FY23: £21.7 million), underlining our growth in operating profits and with the impact of higher tax rates largely offset by the increase in interest income.

Balance sheet and cashflow

Closing net assets stood at £60.0 million (31 August 22: £46.1 million) including the Group's £3.1 million interest (25.1%) in Cloud Bridge Technologies, acquired in April 2023. Closing net current assets were £5.2 million (31 August 22: (£1.6) million).

Cash at the end of the period was £51.7 million (31 August 22: £35.8 million) which is after the payment of dividends totalling £30.2 million during the 6 months, being the final and special dividends for FY23.

Cash flow from operations after payments for fixed assets (free cash flow) was strong during the reporting period, generating a positive net inflow of £16.5 million (H1 FY23: (£0.8) million). Consequently, the Group's cash conversion ratio for the period (free cash flow divided by AOP) was 48.7% (H1 FY23: (2.8)%).

The difference to the prior half year illustrates the sensitivity of this ratio to even small delays in payments from customers, particularly when measured over a fixed period rather than on a rolling 12 month basis. This makes it susceptible to short-term, but potentially high value, timing of customer receipts.

Our rolling cash conversion for the year ended 31 August 2023 stood at 107.2%, (year ended 31 August 2022: 65.3%) and the Group has now delivered a cumulative cash conversion ratio above 100% since 1 March 2017 which is in line with our sustainable annual cash conversion target.

Over our half year fixed periods, we expect H1 cash conversion to be lower than H2 due to the timing of receipts and payments in relation to some our largest Microsoft software enterprise agreements. For our public sector customers in particular, many of the agreement anniversaries fall on 1 April, aligned to the public sector year end. With these orders needing to be placed at least 30 days ahead of anniversary we often see the customers pay us prior to the end of our financial year (in H2), whilst the corresponding payments to Microsoft do not fall due until the first quarter of the following year (in H1)..

If required, the group has access to a committed revolving credit facility (RCF) of £30 million with HSBC. The facility commenced on 17 May 2023, replacing the Group's previous facility for the same amount and runs for three years, until 17 May 2026. To date, the Group has not utilised the facility.

Interim dividend

As stated above, the Group's dividend policy is to distribute 40% of post-tax pre-exceptional earnings to shareholders. Accordingly, the Board is pleased to declare a gross interim dividend of 2.7 pence per share. The aggregate amount of the interim dividend expected to be paid out of retained earnings at 31 August 2023, but not recognised as a liability at the end of the half year, is £6.5 million.

The salient dates applicable to the dividend are as follows:

Additional information required by the Johannesburg Stock Exchange:

 The GBP:ZAR currency conversion will be determined and published on SENS on Monday, 13 November 2023

1. A dividend withholding tax of 20% will be applicable to all shareholders on the South African register unless a shareholder qualifies for exemption not to pay such dividend withholding tax.

2. The dividend payment will be made from a foreign source (UK).

3. At 25 October 2023, being the declaration announcement date of the dividend, the Company had a total of 239,482,333 shares in issue (with no treasury shares).

4. No transfers of shareholdings to and from South Africa will be permitted between Tuesday, 14 November 2023 and Friday, 17 November 2023 (both dates inclusive). No dematerialisation or rematerialisation orders will be permitted between Wednesday, 15 November 2023 and Friday, 17 November 2023 (both dates inclusive).

Principal risks

The Group Board has overall responsibility for risk. This includes establishing and maintaining our risk management framework and internal control systems and setting our risk appetite. In doing this it receives support from our Audit Committee, our internal audit partner, and our executive management teams. However, through their skills and diligence, everyone in the Group plays a part in protecting our business from risk and making the most of our opportunities.

We have identified principal risks and uncertainties that could have a significant impact on the Group's operations, which we assign to four categories: financial, strategic, process and systems, and operational. BTG's management review each principal risk looking at its level of severity, where it overlaps with other risks, the speed at which it is changing, and its relevance to the Group. We consider the principal risks both individually and collectively, so that we can appreciate the interplay between them and understand the entire risk landscape. 

We continue to closely monitor new and emerging risks, including the ongoing global risk of climate change and sustainability. We also determined that social change may represent a future risk. Changes to people's needs and perspectives, as happened when priorities shifted during the pandemic, and more generally with younger generations, may affect our ability to attract and retain talent. Like many risks, these could provide opportunities as well as downsides. For example, inflation might encourage customers to spend more on automation with us or, on the other hand, to cut investment in IT. We have mitigating plans to cover these different outcomes, such as broadening our portfolio of vendors and the solutions we can offer.

The invasion of Ukraine continues to affect the global economy, contributing to higher energy prices and inflation over the past year. We recognise the impact of this increased cost of living on our employees' welfare. These conditions are expected to continue into the next financial year, and we have maintained this as a principal risk.

Cybersecurity continues to be a risk, heightened by the current geopolitical uncertainties in the Ukraine and Middle East. Our chief information security officer function and technology solutions reduce our risk, but the residual is covered by cyber insurance. This insurance has been renewed, at a greater cost than in the previous year, due to the increased threat level.

Although we performed strongly and managed risks well in the FY23 and continuing into H1 FY24, we have made some amendments to our principal and emerging risks to account for changes in the market, society and with our vendors.

These changes comprise:

New principal risks:

· 'Climate change and sustainability' moved from an emerging risk to a principal risk re-named 'Sustainability / ESG'. Whilst the physical threats from climate change will remain as emerging, the elevated principal risk relates to regulatory requirement changes as well as keeping ahead of expectations from investors, employees, customers, and other stakeholders.

· New principal risk in 'Supply chain management'. Risk is based on the time and effort to manage the supply chain with increasing focus on compliance, audits, sustainability, and reporting.

New emerging risk:

· New emerging risk added for the 'Impacts of AI and Machine Learning' due to the potential of this technology to change the IT and working landscape and the associated risks from moral, legal, and ethical standpoints.

Existing principal risks with updated focus:

· 'Economic disruption' risk expanded to focus on economic impacts affecting our customers, in addition to the existing risk to ourselves.

· 'Inflation' risk expanded to focus on the internal impact to our workforce, in addition to the existing risk to the business.

· 'Increasing debtor risk' re-defined as 'Working Capital' risk, to include risk of vendors changing their payment terms, in addition to the existing risk of an increased age debt profile.

· 'Competition' risk definition expanded to include the evolution of the competitor landscape, such as through AI and direct purchasing platforms and marketplaces.

· 'Relevance and emerging technologies' risk expanded to include the need to use new technologies internally to remain agile and productive, in addition to the existing need to offer cutting edge products and relevant services to our customers.

· 'Business continuity failure' risk expanded to include risk to and from people, such as insider threats, in addition to the existing risk of failure to our internal systems or IT infrastructure.

· 'Attract and retain staff whilst keeping our culture' risk amended to replace the general existing "skills shortage in the IT sector" with a more specific skills shortage in emerging areas, such as AI, where expertise is in high demand.

Full details of the updated principal risks and uncertainties that the Board believes could have a significant effect on the Group's financial performance are:

Going concern disclosure

The Group performed a full going concern assessment for the 6 months ended 31 August 2023 undertaking the review and process set out in note 1.2. As outlined in the Chief Financial Officer's review above, trading during the period demonstrated the Group's strong performance and our resilient operating model. The Group has a healthy liquidity position with £51.7 million of cash and cash equivalents available at 31 August 2023. The Group also has access to a committed revolving credit facility that covers the going concern period to 28 February 2025 and which remains undrawn.

The directors have reviewed trading and liquidity forecasts for the Group, as well as continuing to monitor the effects of macro-economic, geopolitical and climate related risks on the business. The directors have also considered a number of key dependencies which are set out in the Group's principal risks report, and including BTG's exposure to inflation pressures, credit risk, liquidity risk, currency risk and foreign exchange risk. The Group continues to model its base case, severe but plausible and stressed scenarios, including mitigations, consistently with those disclosed in the annual financial statements for the year ended 28 February 2023, with the key assumptions summarised within the interim condensed financial statements below. Under all scenarios assessed, the Group would remain cash positive throughout the whole of the going concern period without needing to utilise the revolving credit facility.

Going concern conclusion

Based on the analysis described above, the Group has sufficient liquidity headroom through the forecast period. The directors therefore have reasonable expectation that the Group has the financial resources to enable it to continue in operational existence for the period up to 28 February 2025. Accordingly, the directors conclude it to be appropriate that the interim condensed consolidated financial statements be prepared on a going concern basis.

Responsibility statement pursuant to the Financial Services Authority's Disclosure and Transparency Rule 4 (DTR 4)

Each director of the company confirms that (solely for the purpose of DTR 4) to the best of his/her knowledge:

· The financial information in this document, prepared in accordance with the applicable UK law and applicable accounting standards, gives a true and fair view of the assets, liabilities, financial position, and result of the Group taken as a whole.

· The Chief Executive Officer's and Chief Financial Officer's reviews include a fair review of the development and performance of the business and the position of the Group taken as a whole, together with a description of the principal risks and uncertainties that they face.

On behalf of the Board

Neil Murphy Andrew Holden

Chief Executive Officer Chief Financial Officer

25 October 2023

Interim condensed consolidated statement of profit or loss

The consolidated statement of profit or loss has been prepared on the basis that all operations are continuing operations.

There are no items to be recognised in other comprehensive income and hence, the Group has not presented a statement of other comprehensive income.

1. Accounting policies

1.1 General information

The interim condensed consolidated financial statements of Bytes Technology Group plc, together with its subsidiaries ("the Group" or "the Bytes business") for the six months ended 31 August 2023 were authorised for issue in accordance with a resolution of the directors on 24 October 2023.

The Company is a public limited company, incorporated and domiciled in the UK. Its registered address is Bytes House, Randalls Way, Leatherhead, Surrey, KT22 7TW.

The Group is one of the UK's leading providers of IT software offerings and solutions, with a focus on cloud and security products. The Group enables effective and cost-efficient technology sourcing, adoption and management across software services, including in the areas of security and cloud. The Group aims to deliver the latest technology to a diverse and embedded non-consumer customer base and has a long track record of delivering strong financial performance. The Group has a primary listing on the Main Market of the London Stock Exchange (LSE) and a secondary listing on the Johannesburg Stock Exchange (JSE).

1.2 Basis of preparation

The annual consolidated financial statements of the Group will be prepared in accordance with UK-adopted International Accounting Standards ("UK-adopted IFRSs").

The interim condensed consolidated financial statements for the six months ended 31 August 2023 have been prepared in accordance with UK-adopted International Accounting Standard ("IAS") 34 Interim Financial Reporting.

The interim condensed consolidated financial statements have been reviewed, but not audited, by Ernst & Young LLP and were approved by the Board of Directors on 24 October 2023. The financial information contained in this report does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The interim condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements for the year ended 28 February 2023, which were prepared in accordance with UK-International Accounting Standards in conformity with the requirements of the Companies Act 2006. The annual financial statements for the year ended 28 February 2023 were approved by the Board of Directors on 22 May 2023 and have been delivered to the registrar. The auditor's report on those financial statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498(2) or (3) of the Companies Act 2006.

The Group's interim condensed consolidated financial statements comprise the interim condensed consolidated statement of profit or loss, interim condensed consolidated statement of financial position, interim condensed consolidated statement of changes in equity and interim condensed consolidated statement of cash flows and a summary of significant accounting policies and the notes thereto.

All amounts disclosed in the Group's interim condensed consolidated financial statements and notes have been rounded off to the nearest thousand, unless otherwise stated.

Going concern

The Group has performed a full going concern assessment for the 6-month period ended 28 February 2023. As outlined in the Chief Financial Officer's review above, trading during the period demonstrated the Group's continued strong performance and resilient operating model with double digit growth in gross invoiced income, gross profit, and operating profit against the prior year.

The Group has a healthy liquidity position at 31 August 2023 with £51.7 million of cash and cash equivalents available, and net current assets of £5.2 million, after having paid final and special dividends in relation to the year ended 28 February 2023 totalling £30.2 million during the period. The Group has also seen an increase in its cash conversion during the six months, compared to the equivalent prior period, and targets a sustainable cash conversion ratio of 100% on a rolling 12-month basis. The Group has access to a £30 million committed revolving credit facility (RCF) that covers all its reasonably expected cash requirements up until the end of the going concern review period and extends further beyond that date to May 2026. The facility has never been used and we do not forecast its use over the going concern assessment period.

In continuing to adopt a going concern basis for preparing the interim condensed financial statements for the period ended 31 August 2023, the directors have reviewed trading and cash forecasts prepared for the Group up to 28 February 2025. This included considering the availability of liquidity headroom on the revolving credit facility, and a number of uncertainties which are set out in the Group's principal risks above, as well as the Group's exposure to credit risk, liquidity risk, currency risk and foreign exchange risk as described in note 12 of the interim condensed financial statements and considered further below.

The Directors have also considered impacts on future trading and liquidity in the context of the current operational performance and the macro-economic and geopolitical environments.

Operational performance and operating model

The Group is now in its fourth year of trading since it listed in December 2020, following the previous three years of strong growth. In the current period of reporting the Group has again achieved double-digit growth in gross invoiced income, revenue, gross profit, and operating profit.

Resilience is built into the Group's operating model from its wide customer base, high levels of repeat business, strong vendor relationships, and increased demand driven by heightened IT security risks, migrations into the cloud, and hybrid working. The key elements of the model are explained in further detail on pages 132-133 in the annual financial statements for the year ended 28 February 2023 to which we are already seeing emerging requirements for AI functionality within IT applications. This will further bolster our resilience and create new opportunities in the coming months and years.

As a result, the directors believe that the Group continues to operate in a resilient industry, which will enable it to continue its profitable growth trajectory but are also very aware of the risks which exist in the wider economy. Over the past 18 months, other risks have become more prominent around energy, wage, and commodities inflation; supply problems caused by the conflict in Ukraine; product shortages; and climate change. These risks align to those identified in our principal risks statement, notably economic disruption, inflation, and attraction and retention of staff. The Board monitor these macroeconomic and geopolitical risks on an ongoing basis. They are considered further below.

Macroeconomic risks

? Energy cost inflation - Our businesses are not naturally heavy consumers of energy, and hence this element of our overall cost base is a very small part of the total group administrative expenses. Even a substantial percentage rise would not have a significant impact on our operating profit.

? Cost of sale inflation and competition leading to margin pressure - Whilst pricing from our suppliers may be at risk of increasing, as they too face the same macroeconomic pressures as ourselves, our commercial model is based on passing on supplier price increases to our customers. We also see pressure from our customers, notably in the public sector space where new business must often be won under highly competitive tendering processes. Hence, whilst there has been a reduction in our gross profit/gross invoiced income (GP/GII%) in the period, this is almost entirely attributable to two exceptionally large new public sector contracts which were secured at reduced margins, for strategic reasons, in order to monetize those accounts over the longer contract terms. Excluding those deals, we have maintained our GP/GII% compared to the prior period and this remains one of the biggest focus areas in our business.

? Wage inflation - the business has been facing pressure from wage inflation over the past two years. Where strategically required we have increased salaries to retain key staff in the light of approaches from competitors, especially where staff have specialist or technical skills. We monitor our staff attrition rate and have maintained a level below 15% which is consistent with last year. We do not believe there has been any significant outflow of staff due to being uncompetitive with salaries. We have a strong, collaborative, and supportive culture and offer our staff employment in a business which is robust and which they are proud of, and this is a key part of our attraction and retention strategy.

Moreover, when we look at our key operational efficiency ratio of adjusted operating profit/gross profit (AOP/GP) we have achieved 45% which is in line with last year, hence demonstrating the control over rising staff costs in response to the growth of the business. Whilst we have already aligned staff salaries to market rates, further expected rises have been factored into the financial forecasts in line with those awarded in the past year.

? Interest rates - interest rates rising rapidly in the UK and internationally have had a negative financial impact on many organisations and households. The Group however does not have any debt, and hence currently no exposure, nor has it ever needed to call upon its revolving credit facility. We have taken advantage of the recent higher interest rates to generate a significant £2.9 million of interest income in the 6-month period, due to the timing difference we see in our cashflow model between customer receipts and supplier payments, and by placing cash on the money markets through our monthly cash cycle.

? Foreign currency rate changes - fluctuations in the value of the pound can have both positive and negative impacts but we have the ability to self-hedge as we make both sales and purchases in the primary currencies of USD and Euro. Risk is further diminished as our foreign currency transactions are only a small part of our business.

? Inflation and rising interest rates impacting on customer spending - whilst customers may consider reducing spending on IT goods and services, if it is seen as non-essential, we have seen increased spending by our customers as IT may in fact be a means to efficiency and savings elsewhere. As our customers undergo IT transformation, trending to the cloud, automation, and managed service and with growing cybersecurity concerns also heightening the requirements for IT security, we are seeing no let-up in demand, as illustrated by our reported trading performance. This is supported by our very robust operating model, with business spread over many customers in repeat subscription programs and service contracts, and high renewal rates.

? Inflation and rising interest rates impacting on customer payments - across the period we have seen a small reduction in our debtor days compared to prior year and with no evidence that customers ultimately do not pay. As in previous years, the majority of our GII came from the public sector, traditionally very safe and with low credit risk, whilst our corporate customer base includes a wide range of blue-chip organisations and with no material reliance on any single customer.

Geopolitical risks

The current geopolitical environment, most notably the conflict in Ukraine, has created potential supply problems, product shortages and general price rises particularly in relation to fuel, gas, and electricity.

? As noted above, increasing energy prices are not having a noticeable impact on our profitability.

? In terms of supply chain, we are not significantly or materially dependent on the movement of goods and hence physical trade obstacles are not likely to affect us directly with hardware only making up 2% of our gross invoiced income during the period. Nevertheless, we have ensured that we have a number of suppliers with substitute, or alternative, technologies which we can rely on if one supplier cannot meet our requirements or time scales; this indicates that we have managed the supply chain well.

? Software sales though continue to be the dominant element of our overall gross invoiced income and hence is not inherently affected by cross-border issues.

Climate change risks

The Group does not believe that the effects of climate change will have a material impact on its operations and performance over the going concern review period considering:

? The small number of UK locations it operates from.

? A customer base substantially located within the UK.

? A supply chain which is not reliant on international trade and does not source products and services from parts of the world which may be impacted more severely by climate change.

? It sells predominantly electronic software licences and so has no manufacturing or storage requirements.

? Its workforce can work seamlessly from home should any of their normal work locations be impacted by a climatic event, although in the UK these tend to be thankfully infrequent and not extreme.

Climate risks are considered fully in the Task Force on Climate-related Financial Disclosures (TCFD) included in the Annual Report for the year ended 28 February 2023.

Going concern assessment

The Group continues to forecast cashflows under a base case scenario modelled on continued growth, and then two downside scenarios, severe but plausible and stressed, both of which include certain appropriate mitigations. This approach to stress testing is consistent with the disclosure on page 135 in the annual financial statements for the year ended 28 February 2023.

In its assessment, the Board has considered the potential impact of the current economic conditions and geopolitical environment as described above, most notably general inflation, wage inflation, the conflict in Ukraine and, climate change. Whilst there is resilience against such pressures, as noted above, if any of these factors leads to a reduction in spending by the Group's customers, there may be an adverse effect on the Group's future gross invoiced income, gross profit, operating profit, and debtor collection periods.

In the most stressed scenario, we have forecast both gross invoiced income and gross profit falling by 30% year on year, and by 39% compared to the base case, commencing in December 2023, and debtor days increasing by 10 at that same point in time. The directors consider that such deteriorations remain appropriate to reflect the potential collective impact of all the macro-economic and geopolitical matters considered above, albeit highly unlikely.

Under such downsides the Board have factored in the extent to which they might be partially offset by freezes in recruitment, pay rises and general costs (including a natural reduction in commissions and bonuses if gross profit falls) and with further mitigation measures including reductions in headcount (through natural attrition by not replacing leavers). These mitigations are within the control of the Group to implement quickly in response to any downward trends should they be necessary.

Under all scenarios assessed, the Group would remain cash positive throughout the whole of the going concern period, with no requirement to call upon the revolving credit facility and remaining compliant with the facility covenants.

Going concern conclusion

Based on the analysis described above, the Group has sufficient liquidity headroom through the forecast period. The directors therefore have reasonable expectation that the Group has the financial resources to enable it to continue in operational existence for the period up to 28 February 2025. Accordingly, the directors conclude it to be appropriate that the interim condensed financial statements be prepared on a going concern basis.

1.3 Critical accounting estimates and judgements

The preparation of the interim condensed consolidated financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying the Group's accounting policies.

The accounting estimates and judgements adopted for these interim condensed consolidated financial statements are consistent with those of the previous financial year as disclosed in the Group's annual report and accounts for the year ended 28 February 2023.

1.4 New standards, interpretations and amendments adopted by the Group

There were no new standards, interpretations and amendments adopted by the Group during the period to 31 August 2023 that have a material impact on the interim condensed consolidated financial statements of the Group.

1.5 Changes in accounting policies and disclosures

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are the same as those set out in the Group's annual consolidated financial statements for the year ended 28 February 2023, except for the new accounting policy in note 1.6 below.

1.6 Investment in associates

An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The Group's investment in its associate is accounted for using the equity method.

Under the equity method, the investment in an associate is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group's share of net assets of the associate since the acquisition date. The statement of profit or loss reflects the Group's share of profit of the associate. Where there is objective evidence that the investment in associate is impaired, the amount of the impairment is recognised within 'Share of profit of associate' in the statement of profit or loss.

1.7 Finance income and costs

Finance income comprises interest income on funds invested. Interest income is recognised as it accrues in profit or loss, using the effective interest method.

Finance costs comprises interest expense on borrowings and the unwinding of the discount on lease liabilities, that are recognised in profit or loss as it accrues using the effective interest method.

2. Segmental information

2(a) Description of segment

The information reported to the Group's Chief Executive Officer, who is considered to be the chief operating decision maker for the purposes of resource allocation and assessment of performance, is based wholly on the overall activities of the Group. The Group has therefore determined that it has only one reportable segment under IFRS 8, which is that of 'IT solutions provider'. The Group's revenue, results, assets and liabilities for this one reportable segment can be determined by reference to the interim condensed consolidated statement of profit or loss and the interim condensed consolidated statement of financial position. An analysis of revenues by product lines and geographical regions, which form one reportable segment, is set out in note 3.

2(b) Adjusted operating profit

Adjusted operating profit is an alternative performance measure which excludes the effects of amortisation of acquired intangible assets and share-based payment charges.

Adjusted operating profit reconciles to operating profit as follows:

3. Revenue from contracts with customers

3(a) Disaggregation of revenue from contracts with customers:

The Group derives revenue from the transfer of goods and services in the following major product lines and geographical regions:

Software

The Group's software revenue comprises the sale of various types of software licences (including both cloud-based and non-cloud-based licences), subscriptions and software assurance products.

Hardware

The Group's hardware revenue comprises the sale of items such as servers, laptops and other devices.

Services internal

The Group's internal services revenue comprises internally provided consulting services through its own internal resources.

Services external

The Group's external services revenue comprises the sale of externally provided training and consulting services through third-party contractors.

Gross invoiced income reflects gross income billed to customers adjusted for deferred and accrued revenue items. The Group reports gross invoiced income as an alternative financial KPI as management believes this measure allows further understanding of business performance and position particularly in respect of working capital and cash flow.

4. Finance income and costs

5. Income tax expense

Income tax expense is recognised based on management's estimate of the weighted average effective annual income tax rate expected for the full financial year. The estimated average annual rate used for the period to 31 August 2023 is 23.9%, compared to 19.7% for the period to 31 August 2022. The tax rate is higher in the current period, due primarily to the increase in the UK corporate tax rate from 19% to 25% effective from 1 April 2023.

The major components of the Group's income tax expense for all periods are:

Amounts recognised directly in equity