IT services firm EOH is re-engaging Microsoft in a bid to renew a contract the US-based software giant cancelled earlier this year.
So said Megan Pydigadu, EOH group finance director, in an interview with ITWeb this morning, following the announcement of financial results for the year ended 31 July.
“We are currently re-engaged with Microsoft. We are starting to have discussions with them to see if we can get to a place where we can renew the partnership at some point in time,” said Pydigadu.
EOH’s problems surfaced after Microsoft in February terminated its contract with the IT services company after an anonymous whistle-blower filed a complaint with the United States Securities and Exchange Commission about alleged malfeasance to do with a R120 million contract with the SA Department of Defence.
However, Pydigadu noted the contract cancellation has not had any significant financial impact on EOH except reputational damage.
“With the Microsoft contract, it was mostly about the selling of licences. So the licensing has not had a direct impact on us but it was more of a reputational issue,” she said.
Last week, Microsoft named JSE-listed technology company Altron as a licensing solution provider in SA.
Microsoft could not be reached for comment on its re-engagement with EOH at the time of writing.
Debt servicing
Pydigadu also told ITWeb how the troubled IT services company is looking to service its multibillion-rand debt.
In its results, EOH indicated it reduced gross debt by approximately R500 million to R3.1 billion.
Pydigadu believes the company will be able to cut this debt by half by 2021 and then return to profitability.
“For us, the previous year was mostly about cleaning up the balance sheet. We have made a number of significant write-offs on the balance sheet. The other critical point for us has been around governance, trying to ensure we complete EOH’s [corruption] investigation.”
On the debt, she explained that one of the biggest issues is in 2017, EOH took a debt of R3.4 billion and “for a services company, EOH was never going to service that amount of debt.
“Of that R3.4 billion, R900 million was invested in Zimbabwe, which we wrote-off to zero this year. We then spent about R750 million on non-generating assets. We also had inefficient management of contracts that we have written off. It was R750 million on these projects. We then invested a further R400 million with a business that had a single customer. With all the lack of governance, we also lost R935 million that was discovered in the investigation.”
All this was under the old management team’s watch, said Pydigadu. “What we have been doing since then is reaching agreements with the banks on how to service the debt.
“We want to take the debt from R3 billion to about R1.5 billion by 2021. The first thing we will do is look at our working capital management. We are also looking at selling our non-core assets and look for strategic partners.”
The company recently sold 70% of its Construction Computer Software (CCS) business to RIB Software for R444 million as part of a strategic partnership agreement with the German buyer.
In August, EOH said it was selling off its stake in Twenty Third Century Systems and its subsidiaries for R122 million.
“We have three other IP businesses that are similar to CCS that the company is also looking to dispose of. From these, we are looking to realise over R2 billion,” Pydigadu noted.
Consolidation phase
On future acquisitions, Pydigadu said: “At this time, we are looking to consolidate. We are at a disposal phase at this point in time, and once we get a tighter and smaller business, we will then relook at how we can drive our strategy. We first need to get to a place where the debt isn’t a burden for the business and make sure we have cleaned out a lot of non-core businesses.
“If you look at our stable, you will see there were a lot of businesses that were bought that are not core to us. They are great businesses but they do not fit into our ICT fold. For example, we have got businesses that are sitting there that require heavy balance sheets, guarantees and bonds. However, we don’t have those kinds of balance sheets that can support those kinds of businesses and scale them.”
She pointed out EOH’s core focus will be around its ICT business which it recently rebranded to iOCO.
“I think the next financial year is still going to be a year of consolidation. We still have a lot of non-core businesses that we need to either turn around or dispose of. We are also looking to restructure the company during the next financial year. I think by the time we get to FY2021, we should be in a good place where EOH is profitable and has a sustainable and core business.
“Unfortunately, for us, people losing jobs in this type of economy is probably the last thing that we would want to do. We need to look at all our costs in the business as there are some opportunities to save costs so we don’t have to affect people,” she concluded.
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