SoftwareOne shares collapse after another forecast correction and CEO change – analysis

Some Swiss investors considered SoftwareOne’s investment case to be at least fragile at the time of its IPO in 2020. SoftwareOne resells third-party software products and offers related consulting services. In order for this model to be profitable for so-called IT resellers like SoftwareOne, they receive “incentive” payments, funds from the large software companies when certain (sales) goals are achieved. This also makes the IT resellers dependent on these software companies to a certain extent was considered a not insignificant risk factor.

At SoftwareOne, this dependency primarily affected Microsoft, the most important individual supplier of software. In other words: Microsoft controls SoftwareOne’s operating figures. And this year the US company from Redmond is likely to have tightened the screws significantly again. SoftwareOne therefore had to publish a harsh forecast correction on Thursday and at the same time announced the departure of CEO Brian Duffy, who had only arrived a year ago.

Harsh forecast correction

“Unlike in the first half of the year, the reduction in Microsoft incentives was no longer compensated for,” said CFO Rodolfo Savitzky dryly at a spontaneously called analyst conference.

This was noticeable in the third quarter figures published in advance on Thursday. In the quarter under review, sales rose only 1.4% to CHF 236.7 million and thus remained well below expectations. The operating margin, SoftwareOne’s key indicator, fell to 16.6% in the quarter, compared to 20.5% last year – not even including special costs.

The forecast adjustment for the year as a whole is correspondingly severe. For 2024, the forecast Ebitda margin was reduced to 21 to 23% (from 24.5 to 25%) and for sales growth to 2 to 5% (previously: 7 to 9%). The medium-term goals have also been shortened: in 2026, only “double-digit” sales growth and an Ebitda margin of 27% are expected. However, it is questionable to what extent even this is even feasible, as the newly appointed CEO, Raphael Erb, a long-time SoftwareOne veteran, made it clear that “further headwinds will be felt due to the incentive changes” in 2025.

The optics couldn’t be more disastrous and the company loses any remaining credibility. Because SoftwareOne has already disappointed several times with its margin – especially prominently in 2022 with an event that led to the resignation of the then CEO Dieter Schlosser had led.

The operational situation at SoftwareOne cannot be attributed to the unfavorable incentives alone. FuW had previously warned that the growth would be the result of numerous acquisitions brought with it structural weaknesses and high integration challenges. They may also be one reason why sales fell in important regions such as North and South America in the third quarter.

Takeover fantasy has fizzled out

Nobody is looking good after this renewed disappointment – neither Brian Duffy and the voted out board under ex-VRP Adam Warby, under whose aegis the “old” forecast was still issued, nor the new board under VRP Stockar, which the change of power in VR with the hope of a takeover by private equity. The possibility of a takeover that would be lucrative from a shareholder perspective has been on the back burner for months due to mixed operational performance, which has also caused the share price to collapse more and more. On Thursday, the share lost another third of its value in early trading.

The communication to shareholders mentions ongoing discussions regarding going private. But of course the conditions are crucial. They have now deteriorated to the point that even institutional investors who initiated the recent board change have reduced their stock position in SoftwareOne. If a takeover were to occur, a financier could dictate the terms given the precarious operational situation.

Meanwhile, the strategic options of the new management remain limited: There has been silence about own software products with added value for a long time. As before, SoftwareOne has to try to compensate for the poorer incentives with higher economies of scale. That might also be the reason why in the background a merger with the Norwegian Crayon – the second major European IT reseller – is reportedly being discussed further. As before, FuW advises reducing or completely eliminating the position.

Siegmund Scalar writes for the corporate department about the Swiss technology, media and telecom sectors. More info

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