Datatec Limited ("Datatec" or the "group", JSE and LSE: DTC), the international ICT group, has today published its unaudited results for the six months ended 31 August 2008.
Unaudited results for the six months ended 31 August 2008.
Financial highlights:
* Revenue: $2.3 billion up 18% (2007: $1.9 billion)
* Underlying* EBITDA: $76 million up 25% (2007: $61 million)
* Operating profit: $54.3 million up 12% (2007: $48.5 million)
* Underlying* earnings per share: 22.5 US cents up 19% (2007: 18.9 US cents)
* Significant increase in cash generation from operations: $66 million (2007: $3 million)
* Excluding goodwill impairment, amortisation of acquired intangible assets, profit or loss on sale of assets and businesses, fair value movements on put/call arrangements and unrealised foreign exchange movements.
Operational highlights:
* Diversity of group and significant international scale has helped deliver continued growth
* Over 40% of EBITDA now derived from integration, services and consulting business streams
* Promon acquisition in Brazil improves group's geographic mix
* Very strong performance from Logicalis in all regions
* National presence established in India
Commentary
Jens Montanana, Chief Executive of Datatec, commented: “Despite deteriorating macro-economic conditions, the group has delivered a strong first half performance with further improvements in revenue, profitability and cash flow.
“Our geographic diversity, global presence and improving mix of business are helping to mitigate the impact of the current economic climate. In all areas of our business and in each of our divisions we have been able to mitigate slower growth in some markets with faster growth in others. Emerging and developing markets have proved resilient with higher contributions from South America, the Middle East and Asia-Pac.
“We are particularly pleased with the financial performance of Logicalis, where all regions contributed with increases in profit and margins. The strategically important acquisition of Promon in South America earlier this year, and the pre-emptive action taken last year to restructure the US operations, have been major factors in Logicalis' notable performance over this period.
“The group has become more weighted to the cash generative businesses of integration services and consulting activities, which now account for over 40% of the group EBITDA. This change, together with tight cash management across the group, has resulted in a substantial improvement in operational cash flow during the first half of the year.
“The board currently expects that the second half earnings per share, headline earnings per share and underlying earnings per share will be similar to or exceed that of the first half.”
Profile, group structure
Datatec Group is an international ICT networking and related services business, with operations in many of the world's leading economies. The group's main lines of business comprise: the global distribution of advanced networking and communications convergence products (Westcon); ICT infrastructure solutions and services (Logicalis); and telecommunications strategy consulting (Analysys Mason). Other Holdings encompasses the group's distribution and ICT services businesses in the Middle East and Africa as well as the head office.
Overview
Datatec has reported a continued strong overall performance in a challenging environment, with good progress made on the execution of key operating objectives. The group's geographic diversity, global presence and improving mix of business are helping to mitigate the impact of the current economic climate.
Organic revenue growth was 9%, gross margins expanded to 13.4% with underlying* operating profit up 19% and underlying* earnings per share up 19%. Notably, a combination of the strong overall performance, improved business mix and enhanced operational execution across all parts of the business resulted in a substantial improvement in operating cash flow, with the group generating $66 million (2007: $3 million).
The initiatives taken to improve the group's balance of revenue and profit streams has resulted in integration solutions, services and consulting activities now accounting for 46% of the gross margin and 43% of EBITDA. In all of the group's divisions, slower growth in some markets was mitigated by faster growth in others.
Despite Westcon revenues increasing, operating margins were down as a result of an investment in building the footprint of value added distribution businesses in Europe following the acquisitions of Crane and NOXS during the previous financial year. Trading conditions in the US and Europe remain challenging. As a result further reductions to the operating cost base are being made so that the business is sized appropriately for market conditions and to protect profitability.
There was a significant improvement in the financial performance of Logicalis, where all regions contributed increases in profit and margins. The pre-emptive steps taken last year to restructure the US operation is one of the key reasons the business has continued to perform so strongly this year.
Emerging and developing markets have proved resilient. In particular Brazil, Turkey, the Middle East and India are expected to continue to show strong growth in the second half.
Strategy
The group continues to make good progress with its strategy to deliver long-term, sustainable, above-average returns to shareholders by focusing on a combination of organic growth in the faster growing sectors of the ICT market, geographical expansion and earnings enhancing acquisitions.
The group has successfully reduced its dependency on any key market, territory or technology sector as well as improving supplier and customer diversification as a consequence of its scale and increasing globalisation.
The group completed the strategically significant acquisition of Promon Tecnologia (Promon), a leading Brazilian network integration business, during the first six months of the year. On 11 September 2008, Datatec acquired a 50.01% stake in Inflow Technologies Private Limited (Inflow), an Indian ICT distribution business. Datatec will continue to look for acquisitions that can deliver enhanced margins over the longer term and other initiatives to improve the group's returns and facilitate consolidation in proven markets. The board believes that with the difficult market conditions, further opportunities may present themselves, as Datatec will be able to exploit its resilient performance, strong cash flow and balance sheet strength.
A common theme of Datatec's acquisitions is the active ongoing participation of the local management of the acquired companies, through empowering these individuals and ensuring that their interests are aligned to the group's. This allows Datatec to scale its businesses rapidly without adding substantially to head office costs.
The group's increasing scale and international reach is attracting significant vendor and customer interest as Datatec continues to broaden its solutions and services offerings, as well as offering a greater exposure to key higher growth emerging markets and developing economies.
Datatec will continue to target faster growth emerging markets and developing countries, which offer superior growth characteristics and often lower cost of entry compared to more mature markets.
Financial results
Group revenue increased by 18% (9% organic) to $2.3 billion (2007: $1.9 billion), while gross margin increased from 12.9% to 13.4%.
Of the group's $2.3 billion revenue, 35% was generated from North America, 42% from Europe, 6% from Asia Pacific, 9% from South America and 8% from Middle East and Africa.
Gross profit increased by 22% from $247.8 million to $303.4 million, while operating costs increased 22% from $186.8 million to $227.2 million, mainly as a result of the Promon acquisition.
Underlying* EBITDA, which excludes goodwill impairment, amortisation of acquired intangible assets, profit or loss on sale of assets and businesses, fair value movements on put/call arrangements and unrealised foreign exchange movements increased 25% to $76.2 million (2007: $61 million). Reported EBITDA increased 18% to $71.4 million (2007: $60.5 million). The group had unrealised foreign exchange losses of $4.8 million (2007: $0.5 million) and realised foreign exchange gains during the period of $5.2 million (2007: $1.2 million).
Underlying* operating profit increased by 27% to $67.9 million (2007: $53.5 million). Reported operating profit increased by 12% to $54.3 million (2007: $48.5 million). The net interest charge in the period was $7.4 million (2007: $8.0 million), down slightly from the same period last year.
Underlying* profit before tax increased by 34% to $60.8 million (2007: $45.5 million). Reported profit before tax was up 17% to $47.2 million (2007: $40.5 million).
The group's effective tax rate increased to 32% from 30% in 2007, due to profits arising in higher taxing jurisdictions.
Underlying* earnings per share rose 19% to 22.5 US cents (2007: 18.9 US cents), while Headline Earnings per Share (HEPS) increased by 5% to 17.6 US cents (2007: 16.8 US cents).
The group issued 6.8 million new shares during the period. 6.7 million shares were issued in May 2008 as part of the Promon acquisition, and 0.1 million shares were issued for exercised share options. In the six months to August 2008 the group continued with its share buy-back initiative and repurchased 1.2 million shares at a cost of $4 million.
Working capital remained tightly controlled. Receivables increased 20% over the year, inventory increased by 38% and payables and provisions increased by 33%.
Outstanding liabilities to vendors of businesses acquired have increased since last year-end from $2 million to a total of $78.9 million, of which $62.2 million is included under long-term liabilities. The largest portion of the increase relates to two elements of the Promon acquisition - potential further cash payments ($28.2 million) to the sellers based on future profitability and the performance of the Datatec share price, as well as a liability of $44.6 million recognised against equity in accordance with IAS 32 Financial Instruments: Presentation, for a put option held by minority shareholders.
Cash generated from operating activities (after working capital changes) improved significantly to $66.3 million (2007: $2.7 million).
The group paid $20.5 million (2007: $16.8 million) to shareholders as a capital distribution in July 2008. The group ended the period with net debt of $47.7 million, including long and short-term debt (29 February 2008: $31.9 million).
The group spent approximately $49.5 million on acquisitions (net of cash acquired) - predominantly Promon - which has improved the group's geographical reach, market position and product mix particularly in Latin America
Divisional reviews
Westcon
Westcon accounted for 67% of the group's revenue and 55% of EBITDA (2007: 72% and 78% respectively).
Westcon is the world's leading specialty distributor in networking, security, mobility and convergence for leading technology vendors, including Cisco, Nortel, Avaya, Juniper and Polycom. Westcon's revenue increased 9% from $1.4 billion to $1.5 billion, with increases in Europe and Asia Pacific contrasting with a decrease in the Americas, as a result of the slowdown in US sales.
Gross margins increased from 9.8% to 10.1% with gross profit increasing 11% from $136.4 million to $151.9 million. The increase is attributable to increased gross margins in the Americas and Asia Pacific. The growth of Cisco business in the higher margin Brazil market offset competitive pricing pressures, which have reduced margins in the US. European margins were consistent with the prior comparable period as it also faces competitive pricing pressures.
Operating expenses in Europe increased as a result of the acquisitions in the prior year period. Freight costs also increased which have been impacted by surcharges due to the rise in oil prices.
EBITDA decreased 7% from $47.7 million to $44.1 million with decreases in the Americas and Europe contrasted with growth in Asia Pacific. Overall EBITDA margins decreased 50 basis points to 2.9% as lower margins in the US and Europe offset improved margins in Asia Pacific.
During the first half, Westcon generated cash flow from operations (after working capital changes) of $11 million. It used $5.2 million for investing activities, primarily capital expenditures while $15 million was used to repay credit lines and debt.
Operating profit was $36.9 million (2007: $41.2 million).
Cisco products made up 55% (2007: 57%) of Westcon's revenue, 10% Nortel (2007: 11%), 10% Avaya (2007: 10%), 15% security solutions (2007: 12%) and 10% other developing vendors (2007: 10%). 49% of Westcon's revenue was generated in Europe followed by 41% in the Americas and 10% in Asia-Pacific.
Companies are seeking efficiency in their networks as well as productivity-enhancing applications. Need for effective IT security remains paramount as companies begin to rely increasingly on mobile applications. This continues to underpin demand for communications technologies and VOIP and networked security products in particular.
Logicalis
Logicalis accounted for 24% of the group's revenue and 40% of EBITDA (2007: 20% and 13% respectively).
Logicalis is an international provider of integrated ICT solutions, delivering secure, converged computing and communications infrastructure and services. Specialising in the areas of advanced technologies, the group's integrated services portfolio comprises the architecture, deployment, integration and management of customers' networks and systems to deliver optimum solutions that meet their business needs now and into the future.
Revenue increased by 39% to $550.7 million (2007: $395.5 million), including $106 million contribution from acquisitions. Excluding the impact of acquisitions made in 2007 and 2008, organic revenue increased by 11%.
On 2 May 2008 Logicalis completed the acquisition of 70% of Promon for a maximum consideration of $77.2 million in cash and new Datatec shares, plus 30% of Logicalis' existing operations in Latin America. Goodwill and intangible assets recognised were $71.8 million and $37.6 million respectively.
In the first six months of the financial year, the performance in the US, Europe and Latin America has been strong. The US business continued its recovery from a difficult first half last year, the UK delivered solid growth and the acquisition in Brazil generated significant revenue and EBITDA in the first four months of ownership.
Revenue from product sales was up 42% year on year (10% excluding the benefit of the Brazil acquisition) with growth mainly in Cisco products. Sales of HP and IBM products were similar to the prior period. The focus on growing annuity revenue yielded excellent results with maintenance and managed services growing 36%.
The gross margin percentage for the six-month period was 22% (2007: 21.6%) with improved product and services margins. The gross profit increased 42% on the prior year to $121.3 million (2007: $85.3 million).
Operating expenses increased by 16%, significantly lower than the 39% growth in revenues with the effective management of operating costs. EBITDA rose to $32 million (2007: $8.1 million), an increase of 295%.
Operating profit was $23.2 million (2007: $3.3 million).
Analysys Mason
Analysys Mason accounted for 1% of the group's revenue and 3% of EBITDA (2007: 2% and 5% respectively).
Analysys Mason provides strategic and technical consulting to many of the industry's leading service providers, regulators and government bodies. Convergence in telecommunications, broadcasting, television and online media content is being fuelled by widespread deployment of faster broadband Internet infrastructure. Analysys Mason is particularly well positioned to exploit demand for advisory and consulting services in this market around the world.
On a local currency basis, revenue fell by 2%, but the strengthening of the US dollar accentuated this fall, resulting in revenue of $30.4 million (2007: $31.4 million).
Analysys Mason has felt the impact of the general economic uncertainty as discretionary spending with large enterprises has tightened. Steps have been taken to reduce the fixed cost base in the business to mitigate the risk of this uncertainty. As a result of lower than expected levels of consulting utilisation, gross margin fell to 36.8% (2007: 39.2%) resulting in EBITDA of $2.4 million (2007: $3 million) at a margin of 7.9% (2007: 9.6%) and operating profit to $1.9 million (2007: $2.7 million).
On 26 June 2008, Analysys Mason completed the acquisition of OSS Observer. This acquisition, based in the US, will strengthen the research business, increasing the breadth of service that Analysys Mason delivers to its global client base. The business will be fully integrated into the Analysys Mason research business.
Africa and Middle East (included in “Other Holdings”)
Datatec's Africa and Middle East operations made up 8% of the Group's revenue and 2% of EBITDA.
Included in Other Holdings are the operating costs of the Datatec head office entities, which also include unrealised and realised foreign exchange losses of $1.4 million and $1.4 million respectively, (2007: unrealised loss of $0.5 million and realised gain of $1.5 million).
Westcon Africa Middle East (Pty) Ltd (WAME) is the distribution holding company for Datatec's 55% stake in Westcon SA and its 51% stake in Westcon Africa. These combined operations span 12 sub-saharan African countries. Westcon SA revenue improved to $42.5 million (2007: $38.6 million), with EBITDA increasing to $1.6 million (2007: 1.5 million), and the EBITDA margin increased from 3.5% to 4%. Westcon Africa's performance is reported for an eight-month period due to a change in year-end to align with the group. Revenue was $62.4 million. Westcon Africa posted an EBITDA loss of $3.1 million due mainly to tougher than expected trading conditions in Kenya as a consequence of the political uncertainty that existed after elections earlier in the year as well as investments in organic start up initiatives and provisions made following the acquisitions of Sparnoon Dynatech and Jet Distribution.
Westcon Middle East group, Datatec's value-added distributor for data networking products and services, covering the Middle East, Western Asia and North Africa, revenues increased by 27% to $33.8 million (2007: $26.7 million) while EBITDA increased by 6% to $1.5 million. Comstor Middle East (“Comstor”), Westcon's Cisco business in the Middle East, started operations in February 2007. Comstor revenues increased by 180% to $12 million, and it achieved EBITDA of $0.3 million (2007: Loss of $0.3 million).
African Legend Indigo is Datatec's 55% owned South African operation formed in partnership with African Legend Technologies as part of South Africa's Black Economic Empowerment programme. This business generated revenue of $25 million (2007: $27.1 million) and EBITDA of $0.7 million (2007: loss of $0.2 million).
The distribution businesses currently included in the Africa and Middle East sub grouping operate in some of the most dynamic and fast growing markets in the world today. In addition, the acquisition of Inflow in India will also form part of this sub group. The scale and diversity of these operations requires a more focused and structured management approach in order to maximise the underlying benefits and cross-group opportunities. As a result, these operations are being consolidated under a new 'Westcon Emerging Markets' umbrella, which will ensure a more regional approach towards management and reporting, with a strong focus on existing business development and cross-group operational efficiencies. The new structure and reporting will be effective by the end of the financial year.
Reporting
This report complies with International Accounting Standard 34 - Interim Financial Reporting as well as with Schedule 4 of the South African Companies Act, the AIM Rules and the disclosure requirements of the JSE Limited's Listings Requirements.
The accounting policies comply with International Financial Reporting Standards (IFRS) of the International Accounting Standards Board and are consistent with those applied in the prior year financial statements. This report has not been audited and the forecast within the current trading and prospects section below has not been reviewed and reported on by Datatec's auditors.
Subsequent events
On 11 September 2008, Datatec acquired a 50.01% stake in Inflow. The remaining 49.99% will continue to be held by management and other existing shareholders. The acquisition of a 50.01% stake in Inflow, with its presence in nine key Indian cities, provides Datatec with an excellent entry point and initial footprint in India. Inflow also has operations in Sri Lanka and Singapore.
Current trading and prospects
Market conditions remain challenging and the outlook uncertain. The deterioration of the international trading environment and the global financial crisis is having an impact on many economies in which Datatec operates. At this stage it is unclear how much this may affect the IT and telecommunications markets around the world as communications technologies are often leveraged in periods of slower economic growth as a means of improving productivity and operating efficiencies.
As a key international intermediary for these technologies, the group remains well positioned. However, in the current market environment management remains focused on controlling operating expenses, improving its cash position and diversifying its operations globally, particularly in the faster developing economies.
The board currently expects that the second half earnings per share, HEPS and underlying earnings per share will be similar to or exceed that of the first half.
Please click here to see the financial tables in this Datatec press release
On behalf of the board
S J Davidson
Chairman
J P Montanana
Chief Executive Officer
I P Dittrich
Chief Financial Officer
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