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EOH assesses impact of Microsoft contract cancellation

Admire Moyo
By Admire Moyo, ITWeb's news editor.
Johannesburg, 25 Mar 2019
EOH Group CEO Stephen van Coller.
EOH Group CEO Stephen van Coller.

IT services company EOH says it is "disappointed" in the way software giant Microsoft cancelled a partner agreement with EOH Muthombo, one of its subsidiaries.

Microsoft last month terminated the contract after an anonymous whistle-blower reportedly filed a complaint with the United States Securities and Exchange Commission (SEC) about alleged malfeasance to do with a R120 million contract with the SA Department of Defence.

Since the reports surfaced, the JSE-listed EOH's share price took a knock. EOH Group CEO Stephen van Coller has since proactively initiated an internal investigation, supported by ENSafrica, into EOH Mthombo's channel partner business unit.

In a statement issued this morning, the JSE-listed company says following expiry of the 30-day notice period relating to the termination of the Microsoft channel partner agreement with EOH Mthombo, as detailed in previous announcements, the termination has become effective and EOH is no longer a reseller of Microsoft software licences.

It notes that acceptable arrangements with a pre-existing Microsoft channel partner, independent of the group, have been secured.

Further to this, on 12 March 2019, a number of EOH group companies received a 30-day notice period of Microsoft Ireland's intention to terminate the Microsoft partner network agreement, without providing reasons for the termination, it says.

"While we understand the need for Microsoft to interrogate and finalise their own investigations, we are disappointed at the unilateral manner in which Microsoft has terminated the relationship prior to giving consideration to the impact on South African corporates."

Further meetings and correspondence between EOH senior executives and local Microsoft leadership are ongoing to discuss the impact of these terminations and seek a responsible solution that would limit the impact on all affected customers, the company says.

EOH says it has provided a number of suggestions to Microsoft for consideration.

"We await their feedback. During these engagements, Microsoft's local office advised EOH that they had initiated their own investigations into contracts involving Microsoft and government which may take six to 12 months to conclude.

"They advised they would not be able to enter into any discussions regarding re-instatement of the partnership until they had concluded their investigations."

According to EOH, while the immediate short-term impact can be managed, EOH is assessing and discussing various alternatives to ensure the long-term continuity of service to all customers and to maximise value for shareholders. EOH is confident this can be achieved, the company says.

It points out that as previously disclosed, the channel partner agreement (as software licence reseller division) is not material to EOH and reported a total profit before tax of approximately R10 million during the last financial year.

The impact of the latest notices is still being assessed, but early indications are that: "Our Microsoft-related bespoke application development, its largest business, will be predominantly unimpacted.

"Any long-term impact on the IP businesses, including the core IP that has been developed for re-sale utilising Microsoft technologies, can be mitigated through migration to other cloud providers. Our CRM (Dynamics 365) and productivity solutions business will be impacted in terms of access to partner support portals.

"Our Microsoft-related managed services business and clients will experience no impact as these services are provided on client infrastructure and platforms. Our cloud business and platform business and the re-sale of Azure cloud offerings will be impacted in the short-term and EOH is in discussions to find a solution to ensure continuity of service and revenue streams."

At the time of publishing, the EOH share was trading at R13.50. Over the past year, the company's stock has plummeted 71.9% and its market cap is now sitting at around R3 billion.

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