Bytes Technology downgraded by UBS due to twin threat from Microsoft cuts

Bytes Technology Group PLC (LSE:BYIT, FRA:9NY, JSE:BYI) faces growing pressure from changes to Microsoft’s reseller incentives and the likelihood that generative AI is unlikely to provide a meaningful near-term boost, according to UBS.

The bank has slapped a 'sell' rating on the FTSE 250 group's shares, downgraded from 'neutral' on the view that investors have underestimated the risk to a business that derives about half its gross profit from Microsoft incentives and product mark-ups.

From October, Microsoft will cut base incentives on selected Office 365, Exchange, OneDrive and SharePoint products by five percentage points to 15%. Incentives for additional Azure consumption will fall by 0.5 percentage points to 7%. UBS estimated that Microsoft incentives generate 20%-25% of Bytes’ gross profit. Including product mark-ups, Microsoft contributes about half.

Microsoft is doubling the base margin on Copilot to 20%, but future rewards will be more closely tied to winning customers, adding users and selling higher-value products. UBS believes the overall effect will be negative for Bytes.

The Swiss bank expects the impact to become more pronounced in the 2028 financial year as Microsoft seeks to control costs while increasing capital expenditure. UBS analysts expect Microsoft to indicate a 61% rise in spending for the 2027 financial year when it reports this week.

UBS cut its Bytes operating profit forecasts for the 2028 and 2029 financial years by 3% and 4% respectively.