Bytes maintains growth despite macro conditions

IT spend appears to be insulated from the wider macro-economic conditions. After Softcat (SCAT) posted a strong set of figures, Bytes Technology (BYIT) followed up with similarly impressive top line growth. The transition to hybrid working and cloud computing is creating tailwinds for both of these businesses.

Chief executive Neil Murphy said Bytes could be expected to grow future sales at least  in the double digits given the wider growth in cloud computing. Bytes has Microsoft Azure Expert status and in the first quarter of this year Azure grew its revenue by 42 per cent on a constant currency basis. Bytes’ gross invoiced income rose 23.2 per cent, so you would expect it to comfortably be able to maintain the expected rate of growth.

One concern is that cash conversion swung from 107.5 per cent last year to minus 2.8 per cent this year. As cash conversion is measured effectively as a snapshot at the end of the period it can be sensitive to just a few customer delaying payments. The way cloud revenue is billed also increased the debtor days. In the long-run, Bytes says it targets 100 per cent cash conversion and expects things to normalise in the second half of the year.

Softcat also posted a drop in cash conversion and pointed the finger at a change in the finance software delaying some of its billing. This may be a coincidence. However, with both companies reporting weakening cash conversion, it suggests a possibility that customers are delaying payments to conserve cash. It is an aspect worth reviewing as wider economic conditions deteriorate.  

House broker Numis doesn’t seem too concerned and has boosted its EPS forecast by around 5 per cent. The broker now has Bytes trading on a 2023 PE of 25.5. This is slightly more expensive than Softcat but this can be justified by Bytes' greater focus on software. The cloud exposure is appealing. Buy.  

Last IC View: Buy, 411p, 24 May 2022