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Massive pay cuts for EOH execs as revenue plummets

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Top executives at IT services firm EOH are set to take salary cuts of up to 25%, as the company battles to stay afloat amid the COVID-19 lockdown in SA.

This morning, the JSE-listed company announced its interim results for the six months ended 31 January.

In an interview with ITWeb this morning, Megan Pydigadu, EOH group financial director, said while the salary cuts are a temporary measure for the next two months, it’s not clear how long this will continue because of the uncertainties around the lockdown.

According to Pydigadu, the move was necessary in order to avoid retrenchments at EOH. She believes the salary cuts will save EOH roughly R40 million to R50 million per month.

“Our key businesses have delivered sound performances demonstrated by improved gross margins over the reporting period,” says Stephen van Coller, CEO of EOH. “We have made good progress on cost management projects and achieved both our disposal and closure targets, resulting in access to cash and a continued simplification of the business.

“Our focus remains on further reducing our debt burden and driving cost-efficiencies, notwithstanding the challenges brought by COVID-19.”

In a statement, the company says subsequent to the reporting date, the global outbreak of COVID-19 took place and the 21-day national lockdown kicked in, and these are expected to have a financial impact on the group going forward.

It notes the core ICT business is classified as an essential service and will continue operating during the lockdown period.

The group has a COVID-19 management team in place, consisting of all the representatives from the executive committee as well as key operational and support functions. The team monitors the situation on a daily basis and ensures adequate risk management and mitigation actions are taken, as well as appropriate communication and engagement with clients, staff and other stakeholders, says the company.

As a result, EOH says it has initiated a number of initiatives, including the CEO and executive committee taking a salary reduction of 25%.

The company also proposed a 20% reduction across the board in cash salaries, with the exception of those earning less than approximately R250 000 per annum (in consultation with clients and staff); negotiating rent holidays; a review of all fixed-term and consultant contracts; reassessing the retirement policy for those over 65 years of age; a review of variable pay elements including reimbursive travel and overtime; and a review of discretionary spend on travel, entertainment and events.

EOH CEO Stephen van Coller.
EOH CEO Stephen van Coller.

Revenue hit

In its results, EOH says total revenue decreased 21.8% (continuing 17.4%) to R6.4 billion (continuing R4.5 billion) when compared to the prior comparative period, mainly as a result of lower hardware and software sales, as well as legacy public sector enterprise resource planning implementation deals not repeated in the current period.

According to the company, the prior period comparative is also skewed by the inclusion of CCS and other businesses disposed of in discontinued revenue.

Encouragingly, it says, managed services among core clients remained relatively flat. The slowdown in the economy also contributed to the decline in revenue with EOH’s legacy issues only having a small impact, says the firm.

Total gross profit margin improved to 23.6% (continuing 23.5%) from 19.6% (continuing 15.8%) in the previous comparable period.

EOH says this is mainly due to a reduced contribution from hardware sales as well as improved efficiency in the iOCO businesses.

Total operating expenses decreased 31.5% to R2.3 billion (continuing R1.6 billion) from R3.3 billion (continuing R2.7 billion) in the prior period, largely driven by lower provisions and write-offs as well as cost-efficiencies, says the firm.

The group saw a significant decline in impairment losses from the continuing business from R1.3 billion in the prior year to R152 million in the current year. These had been necessary as part of the clean-up of the balance sheet in the prior year, it notes.

Total normalised earnings before interest, tax, depreciation and amortisation (EBITDA) for the period is R405 million (HY 2019: R675 million) and continuing EBITDA is R280 million (HY 2019: R435 million) as EBITDA losses from non-core business lines reduced to R270 million from R585 million in the prior comparative period largely as a result of improved management of the eight poorly contracted legacy public sector contracts, says EOH.

It adds the Nextec business normalised EBITDA was negative during the period.

Working capital management

Headline loss per share from continuing and discontinued operations was 395c (HY 2019: 827c) while headline loss per share from continuing operations alone was 381c (HY 2019: 840c).

EOH explains that historically there was a lack of focus on working capital management with large tranches of cash tied up in debtors.

During the prior year, it says more than R400 million was realised from the debtors book and balances at the half-year continued to be well managed, reducing to R2.9 billion from R4.1 billion at the prior comparative period and R3.1 billion at the full year.

Trade payables decreased by R447 million over the six-month period to R2.5 billion as the group did not actively stretch payables over the half-year.

Cash generated from operations after changes in working capital was R31 million (HY 2019: R82 million), but needs to be considered in light of the R227 million one-off payments over the reporting period, says EOH, adding that cash conversion of total normalised EBITDA, when removing these one-off costs and the impact of non-core businesses, is approximately 65%.

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