S&C Marketplace - the jewel in the company
A jewel with a margin challenge
WON is operating in a fast-growing market with critical deliveries to 65.000 clients. The market outlook (for Microsoft products and others) is very strong. SWON is a worldwide player in this market. In previous letters we have discussed why the share price today is 75% lower than 5 years ago. Let's leave that aside for now (we'll be back with a summary) and take a look at the jewel in the company.
S&C Marketplace - the jewel in the company
SoftwareOne has a very strong foothold in this market, first of all in the enterprise market (very large clients). They have low client churn and a well-developed IT system including a supplier catalog sized 7.500 names (a lot bigger than Crayon). IT systems are, as far as we understand, often integrated with client systems, which again leads to lock-in effects.
Growth and profitability
What we can see is;
A very profitable segment with good margins
Also, on Reported Ebit less adjustments and allocated overhead
Close to 0 growth (somewhat higher in local currency but they lose market share)
Profitability should improve when 50MCHF cost cut program is implemented and if adjustments "disappears or goes down to industry standards"
Better response to Microsoft migration (Cloud, AI, Security etc) is an upside
There is however a big uncertainty that SoftwareOne pointed at in their last profit warning and in their Q3 presentation. It's about changed incentives/margins in Microsoft business. Remember, these margins/incentives are fundamental to their business and profitability. Let's have a look and discuss.
Are SWON (and CRAYN) VAR margins up or down? Where do they go?
We are not experts here* but let's try to add some value and simplify so that even investors can understand 🙂. Let's divide Incentives from vendors like Microsoft and others into 2 elements, commissions and other incentives and then discuss them separately.
"Other incentives" could be of some size, and they could be linked to "next generation products", "strategic goals", "improved processes ", "certain segments in the market" or "extraordinary situations" to support important partners. Other incentives could arrive in different ways, they are booked differently and are almost always "discretionary", i.e you cannot (and should not) be too transparent about the size of incentives. It's ok, in the longer run you get what you deserve from Microsoft and others.
Commissions are "the big and important" part of your economy. It has been challenged whether Microsoft and others need a Value-Add Reseller in more than 30 years and guess what - the answer is still yes. It will probably continue for the next decades. That's why CRAYN is our biggest investment.
After Q3 SWON issued a profit warning for 2024 and also stated that Microsoft commissions/incentives will change in 2025. They said it will "reduce volume" with 2-3%. They should have said "reduce volume and profitability" with 2-3% points meaning 20-30MCHF. This is not at all dramatic and these changes were announced a long time ago but the problem for SWON is "a slow internal response" to these changes. The question is whether this "slow internal response" is an ongoing problem. Let's look at some facts, but let's first discuss Crayons response to the same Microsoft (long announced) changes.
After Q3 CRAYN said that "this has been announced a (very) long time ago", "we have prepared and implemented actions in due time", "this is normal" and "we will not lose neither volume nor profitability in 2025". It might even be slightly positive if I remember Melissas (CEO CRAYN) dialogue with us investors properly. What Melissa could have said is; "My last job was in Microsoft; I know what I'm talking about and our partnership with Microsoft have probably never been better" - but she did not 🙂
Let's look at the Facts from last 4 years including Hvaler Invest 2024e. These figures are not easily available in SWON, but when asking IR in SWON we got fast and good response on questions around gross billings meaning you are able to calculate software margins. In CRAYN it's pretty easy to access relevant figures on a quarterly basis (cred to CRAYN on transparency again).
What you can see is an ongoing downward trend in SWON i.e you probably have an ongoing problem, and our estimated gross margin moves to 4,8% in 2025. It will probably take time to turn the ship towards "higher contribution sectors/products" but AI and Copilot is a potential upside to our estimates. It's not at all any drama around these figures in SWON, they should be well positioned to turn around but it will probably take time.
In CRAYN you have a stable trend which again build credibility in CRAYNs previous investor communication. Certainly, CRAYN has been through challenges in the last years, but company communication is of high quality. We should trust their statement on margins (they have been "spot on" on guiding last 5 years).
SWON conclusion on margins, you are on a downward trend on margins (and have very low growth at the same time), you have not adapted in due time, you will probably continue down in 2025, but you can turn and improve🤔
CRAYN conclusion on margins, you are stable on margins (and have high double-digit growth), you have adapted in due time, you will probably be stable in 2025 or even improve slightly💪🏻
SoftwareOne, S&C Marketplace, the jewel in the company, is a profitable business with a very good presence in the Enterprise market. There are however important questions regarding margin development, market share development, execution on changed Go to Market model and execution on implementation of 50MCHF cost cut program. Timing for a marriage is not at all good, you could actually argue it's pretty bad😬
*We have however been in this business long time ago and met top figures and local representatives to discuss commissions and incentives.
Stay tuned.
Disclaimer:
Hvaler Invest is a significant shareholder so you cannot trust us (or perhaps you can?)
All the best,
Sverre and David
Hvaler Invest AS
Lillestrøm, Norway
29.01.25