Shares in Data#3 Ltd (ASX: DTL) are down 6% on Monday morning (at the time of writing) after the IT services group delivered modest profit growth for the first half of FY26, with softer margins in its Software Solutions business tempering investor enthusiasm.
While gross sales reached record levels, the market appeared focused on margin pressure and ongoing headwinds in parts of the Services segment.
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What did Data#3 report?
Data#3 reported gross sales of $1.54 billion for the half year to 31 December 2025, up 9% on the prior corresponding period.
Statutory revenue increased 8% to $423 million, while gross profit edged up 0.3% to $144 million.
Net profit before tax rose 4.5% to $33.5 million, and net profit after tax increased 3.7% to $23 million. Basic earnings per share lifted 3.6% to 14.95 cents.
The board declared a fully-franked interim dividend of 13.50 cents per share, up 3%, representing a payout ratio of 90.3%.
What else do investors need to know?
The key issue this half was margin pressure in Software Solutions.
Gross margin on sales declined to 9%, down from 10% in the prior period, primarily due to Microsoft incentive program changes that took effect from 1 January 2025.
While Software gross sales rose 8.9% to $1.1 billion, gross profit from that segment fell 4.6%, and profit declined 9.4%.
In contrast, Infrastructure Solutions delivered strong growth. Gross sales increased 17.6% to $275.2 million, with management profit more than doubling as operating leverage improved.
Services delivered mixed results, with Managed Services and Consulting growing, but Project Services and recruitment remaining challenged amid softer economic conditions.
The balance sheet remains strong, with no borrowings and closing cash of $125.4 million.
What did management say?
Managing Director Brad Colledge said the first-half performance was in line with expectations and highlighted ongoing cost discipline and automation initiatives.
He noted that the Microsoft incentive changes were most impactful in the first half, but mitigation strategies are in place, and Software's gross profit is expected to return to growth in the second half.
What's next for Data#3?
The company did not provide specific FY26 guidance but reiterated that earnings are typically skewed toward the second half, with sales peaking in May and June.
Management expects Infrastructure Solutions to remain strong, driven by Windows 11 device refresh cycles and AI-related demand, while Software gross profit is forecast to be consistent with FY25 for the full year.
Share price snapshot
Despite steady profit growth and a rising dividend, the 6% share price fall suggests investors were hoping for stronger margin expansion.
For now, the market appears to be weighing short-term Software margin pressure against the company's longer-term positioning in AI, cloud, and infrastructure growth themes.
Data #3 shares are up 8% over the last 12 months.
