Datatec revenue increases as industry conditions remain depressed

* Revenue up 10% to $1,1-billion

* Tangible net asset value per share of $1,94

* Breakeven headline earnings

* Net cash of $100-million

* Adoption of US$ financial reporting

Datatec, the international IT networking and services group, today reported results for the six months to 31 August that showed revenue up 10% to $1,1-billion from the previous interim stage. The operating profit of $10-million was down from $18-million.

Chief executive Jens Montanana says while revenue increased in the six months, Datatec continued to feel the effect of continuing depressed conditions in its industry sector. "This decline is largely a result of lower margins in the industry as a consequence of difficult conditions in the sector, costs associated with consolidating operations, and foreign exchange losses from the appreciation of the Rand," he says.

Group revenue for the period was $1,1-billion compared to $1-billion for the first half of the previous financial year. Headline earnings a share came in at 0,04 US cents, compared to earnings of 1,13 US cents for the comparable period. In Rands, the headline earnings per share came in at 1c compared to 12c for the comparable period.

The group`s cash position remained strong with net cash of $100-million at end-August, compared to $69-million in the previous comparable period.

Datatec`s overall gross margin remained relatively stable, declining slightly from 12,63% to 12,59% for the six months to end-August.

"We`re still managing the group in line with conditions by keeping costs in line with revenue, focusing on generating and maintaining cash, and disposing of loss-making or non-core operations," says Montanana.

A key decision has been for the group to change its financial reporting currency from Rands to Dollars, beginning with the current financial year. However, parent company Datatec Limited will continue to report in Rands.

"The dollar is the currency in which most of the group`s trading is conducted. Over 95% of the group`s revenues are earned offshore in hard currencies.

Reducing the distorting effects of changes in exchange rates will simplify financial analysis and enhance the transparency of our financial reporting. This change will also make Datatec`s financials more meaningful to global investors and international benchmarking," he says.

Montanana says Datatec`s effective tax rate, which rose from 40% to 57% in the period, is disproportionate because some subsidiaries made losses for which no deferred tax assets will be raised, while others made taxable profits in countries with tax rates the same as or higher than in South Africa.

"We are continuing to take this very prudent approach to recognising deferred tax assets for tax losses that arise in the 2004 financial year," says Montanana.

Revenue at Westcon, the Datatec group`s channel provider of networking and related products, rose by 8% to $860-million from $795-million. The bulk of Westcon`s revenue growth came from the newly acquired Landis subsidiaries in Europe. Organic revenue growth was 2,3%.

Westcon`s gross margin for the period fell slightly from 9% to 8,9%. Montanana says this reflects continued pressure on global channel margins, particularly margins on sales of Cisco products which make up the largest proportion of Westcon`s vendor sales. Westcon reported EBITDA of $17,8-million, 9% down on the previous period.

Revenue at Datatec`s services and integration subsidiary, Logical, was up 14% from $165-million to $187-million on the previous comparable period. This performance was driven mainly by product sales and strong performances from Logical`s operations in the United States and Australasia.

Montanana says the concerted focus on selling, general and administration costs at Logical helped contain the increase in expenses to 2,5% compared to the 14% increase in revenue. Logical`s EBITDA for the six months came in at $2,6-million compared to $2,3-million the previous year.

While revenue at telecommunications consultancy Mason was relatively stable at $14-million, increased competition and lower consultancy rates put margins under pressure. Under these conditions, Mason`s EBITDA fell from $2-million to $1-million.

In South Africa, Datatec completed the sale of Affinity Logic to the UCS Group for R19,3-million, plus loan repayment of R44-million. Datanet and Westcon Cabinet Manufacturers, divisions of Westcon Africa Middle East (WAME), were sold for R18-million as part of a re-focusing of Westcon`s business in South Africa. WAME, which reported operating losses of $2-million, has undertaken substantial cost reductions and new management has been appointed.

Montanana says that, while the IT sector appears to have stabilised and the US seems finally on the way to a recovery, Datatec remains vigilant for any change of conditions.

"Margins remain tight and the pressure on operating margins intense. Visibility is still very much limited and we are unable to make a clear prediction for the second half," he says.