For investors in Bytes Technology Group, the past few weeks have felt like whiplash. As recently as mid-May, the company was riding high on strong full-year results. But a far more cautious outlook shared in its AGM statement on July 2 for the new financial year — forecasting a marginally lower operating profit for the first half — wiped nearly 30% off the share price, a stark reminder of how quickly sentiment can shift.
Bytes is a value-added software reseller spun out of JSE-listed Altron in 2020. Dual-listed in London and Joburg, it is one of Microsoft’s biggest resellers in the UK. Microsoft-linked sales contribute about half of Bytes’ gross profit. That relationship brings significant advantages in scale and partner access — but also leaves Bytes exposed to changes in Microsoft’s partner incentives.
A key element is Microsoft’s enterprise agreements (EAs), multiyear software licensing deals for medium to large organisations covering products such as Windows, Office, Teams and Azure. Historically, EA renewals have been a lucrative source of rebates for resellers. Yet Microsoft frequently tweaks these incentives to shift partners from one-off licensing to additional services and add-ons.
Fortunately, Bytes is weighted more towards the SME market, where customers typically purchase through Microsoft’s Cloud Solution Provider (CSP) programme instead of EAs. CSP incentives differ: they’re lower in percentage terms but recurring — designed to reward partners who drive steady monthly cloud spending. For Bytes, this dual focus presents both opportunities and challenges — managing declining EA margins while expanding recurring revenue from SMEs, where margins are thinner but the customer base is broader.
Despite market worries, Bytes maintains that the latest Microsoft incentive changes haven’t dealt a major blow to the company. CEO Sam Mudd told investors during the FY2025 webcast: “You’ll remember that at our half-year results we stated that the Microsoft incentive changes, including reduced enterprise agreement rebates, were not expected to have a material impact on our business. And this has proven to be the case since that update.”
The company noted that rebate cuts in the public sector were partially reversed, easing pressure, and that “adjusting to incentive changes is part and parcel of our business”. Still, these shifts have accelerated Bytes’ pivot to CSP. “The key adjustment is transitioning more corporate customers to CSP and providing more services, which has long been a part of our strategy,” Mudd added.
Azure, Microsoft’s vast cloud platform, covers everything from virtual machines and databases to AI, security and analytics. Unlike revenue from fixed licences, Azure earnings are consumption-based. One quarter might see customers ramp up AI spending; the next, cost-cutting, volatility that Bytes must navigate.
Bytes splits its business between public sector clients, where demand has remained relatively resilient, and corporate customers, which have become noticeably more cautious. Microsoft’s changes to EA partner incentives in January 2025 weighed on the first half of Bytes’ 2026 financial year due to the timing of contract renewals, while macroeconomic challenges — from tariff risks and high interest rates to geopolitical tensions — delayed IT spending.
Security represents 25% of our gross profit, and it’s a crucial part of our portfolio
— Sam Mudd
Even amid macroeconomic headwinds, investments in IT are increasingly essential rather than optional. Businesses can’t afford to fall behind in adopting AI-powered tools, modern collaboration platforms such as Teams, or cybersecurity defences. “There is substantial growth in Azure, and we see opportunities across all segments, as 83% of data is still on-premises,” CFO Andrew Holden noted, highlighting the cloud migration potential.
Another growth engine for Bytes is its value-added services. Beyond reselling software, Bytes provides advisory services, cloud architecture design, cybersecurity solutions, managed services for Azure and Microsoft Sentinel, and technical support. These services deepen customer relationships and generate recurring revenues that help offset shrinking licence rebates. “Security represents 25% of our gross profit, and it’s a crucial part of our portfolio,” said Mudd, highlighting the role of managed services in Bytes’ growth plans.
Bytes has acknowledged that shifting from a generalist corporate sales team to more specialised, customer-focused teams is taking longer than expected. Yet the company remains confident these changes will pay off in the second half. “While this has affected trading, our value proposition remains strong,” Mudd reassured investors. “We’re seeing continued engagement, we have a healthy pipeline and remain confident that as these sales team changes bed in, we will be a stronger business — better aligned to meeting our customer needs and to driving sustainable growth.”
There’s always a risk that Microsoft could implement further changes to partner incentives. However, as one of Microsoft’s largest UK partners, Bytes enjoys advantages smaller rivals cannot match, from preferential rebates to enhanced technical support and executive access. As Mudd summed up: “Our scale and operational efficiency give us an advantage, and we expect to gain market share as smaller partners struggle with CSP changes.”
After the sharp drop in its share price, Bytes now trades at an earnings multiple of about 15 — a modest valuation for a cash-generative, asset-light business well positioned to benefit from growing cloud adoption. Whether the market rewards the stock with a higher rating will hinge on Bytes delivering the second-half recovery it has promised.
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