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Bytes Technology profits from IT spending

The IT service provider is seeing growing demand from its customers
Bytes Technology profits from IT spending
  • Cash conversion remains above 100 per cent
  • Pays a special dividend

IT investment seems to be “recession proof”, according to Bytes Technology (BYIT) chief executive Neil Murphy. This may be a bullish comment but the evidence from Bytes full-year results suggests there is some proof in the pudding. For the last full year, gross invoiced income increased 26 per cent and Murphy said he hasn’t seen any softening in demand in the last few months.

Bytes is a software, security and cloud services business that helps clients keep their digital capabilities up to date. Software makes up the majority of the business, with 94 per cent of last year’s gross invoiced income. The software focus is on cloud and security products, underpinned by Bytes’ Microsoft Azure Expert status.

A promising feature of the business is that 93 per cent of gross profit comes from existing customers. Last year, gross profit per customer rose 16 per cent to £20,100, which implies that not only are customers happy to spend more on software, but it could imply that they are also happy with the quality of service provided by Bytes.   

While Bytes has been selling more to its existing customers it only added a net of 4 per cent in new customers. This was partly due to a “slight lag” in expanding sales capacity. Murphy said last year the focus was on hiring technical staff, but the company has now launched a graduate sales program to help accelerate new customer acquisition.

The market is alreadyaware of Bytes’ strong growth prospects, hence its expensive forward PE ratio of 27, according to FactSet consensus. Broker Numis is optimistic after these results and has upgraded its FY 2023 operating profit forecast by 6-7 per cent.

This will depend on whether IT spend really does prove to be “recession proof”. We are optimistic. But IT is now essential for any business and will surely be one of the last expenses to be cut. Plus, with just a single-digit market share, there is room for Bytes to grow. Buy.

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BYTES TECHNOLOGY (BYIT)  
ORD PRICE:447pMARKET VALUE:£1.1bn
TOUCH:447-447.6p12-MONTH HIGH:589pLOW: 387p
DIVIDEND YIELD:0.9%PE RATIO:33
NET ASSET VALUE:20p*NET CASH:£66mn
Year to 28 FebTurnover (£mn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
202037329.910.4nil
202139426.78.52nil
202244841.613.74.2
% change+14+56+61
Ex-div:28 Jul   
Payment:12 Aug   
*Includes intangible assets of £43mn, or 18p a share. NB: Full-year dividend doesn't include special dividend of 6.2p per share.