The worst Services margins in Europe?
SWON's story is; "Software & Cloud Services sector is profitable"
This is not a small area to understand. S&C Services is 46 % of revenue in the last twelve months. They have invested 267MCHF in the last 5 years (all M&A's except one are mainly services). It is thousands of employees in the services sector and the Intangible assets in the balance sheet is sized hundreds of millions CHF.
When we met the Chairman, CEO, CFO and others in Zürich they all verbally, and in writing, stating that "Our S&C Services sector is profitable" and "it's improving". When they were challenged with Hvaler Invest estimates they did not really know how to respond.
Take a look at the first line in the table below. Do you agree "it looks profitable" and "it's improving"?
What you must do is allocating the relevant part of corporate HQ costs and depreciations. Additionally, you should allocate "Adjustments" that constantly are very high in SoftwareOne. Then you end up with a IFRS Reported Ebit figure which in our opinion explains "profitability" better. Optionally you could also allocate "activated internal IT development cost less depreciations" (we have not).
Our cost distribution to the 2 divisions is based on revenue size. We would of course prefer a more transparent segment reporting, but SoftwareOne are poor on profitability reporting. You could argue for a different cost distribution but let's keep it simple until they disclose better.
Conclusions are;
LTM Reported EBIT margin is -15%, you probably have "the worst profitability in Europe"
Margins are pretty stable on an extremely low level
What is the ROI on your 267MCHF invested? A goodwill "write off" may happen in the next 2-3 years. The sooner the better in my world.
Accumulated Reported Ebit last 3 years is worse than -200MCHF
We do understand that S&C Services sometimes stimulate VAR business (called S&G Marketplace in SoftwareOne) but "you have a headache," and it won't go away before you say, "this is very unprofitable today". Then you can either "turn around" or "sell out non-core" elements of services.
Stay tuned - next letter is about margins in S&G Marketplace where we again have deep dived into their reports, asked questions, and checked out peers.
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
24.01.25