Jens Montanana, Chief Executive of Datatec, commented:
“This is a very solid financial performance, particularly by Westcon, despite the continued difficult trading conditions in many countries. It is a testament to our strategy of international and business diversification and to our overall operational capabilities.
The sound results delivered in the first half continued into the second half of the financial year. All of the Group’s operating divisions now appear to have passed their inflexion points and returned to revenue growth. The Group’s performance improved in the traditionally stronger second half of the year; second half revenues and profits improved sequentially over the first half of the year and comparatively over the second half of the previous financial year.
Our rapid reaction to the recent global crisis resulted in significant cost reductions being initiated over a year ago. This enabled us to lower our cost base and consequently maintain margins even as our revenues fell. Our cash generation remains very strong and margins remain stable.
Following on from our successful advances in Brazil and India, we completed the acquisition of NetStar Asia which provides Logicalis with a pan Asian platform and a presence in mainland China.
We are actively reviewing a number of strategic initiatives in Asia and Latin America, and in particular China and Brazil, which we see as key market opportunities for the Group.
Having very tightly managed the Group’s business whilst expanding the geographic footprint over the last few years, we are well positioned to take advantage of improving market conditions and the recovery that we have seen in our major geographies.”
PROFILE AND GROUP STRUCTURE
Datatec Group is an international Information Communications Technology (“ICT”) networking and related services business with operations in many of the world’s leading and emerging economies. The Group’s main lines of business comprise: the global distribution of advanced networking and communications convergence products (“Westcon” and “Westcon Emerging Markets”); ICT infrastructure solutions and services (“Logicalis”); and Consulting Services (“Analysys Mason” and “Intact”). “Corporate and Other” encompass the net operating costs of the Group’s head office entities and two months’ trading of African Legend Indigo (“ALI”) prior to its disposal effective 24 April 2009.
OVERVIEW
Datatec delivered a sound financial and operational performance, particularly by Westcon. The year was marked by very strong operational cash generation and steady margins, despite tough trading conditions, which impacted revenues particularly in the first half of the year.
The second half of the financial year was both sequentially and comparatively better than the first half of the financial year and the second half of the prior financial year. The Group benefited from the twin effects of an improvement in trading conditions and high operational gearing, as a result of the significantly reduced cost base reflecting actions taken by the management team. The Group has now returned to revenue growth in all its divisions.
Datatec’s geographic diversity, global presence and improving mix of business continue to be a key benefit, helping to mitigate the impact of the global economic downturn. Trading in South America, the Middle East and Asia Pacific has remained robust, helping to compensate for softer business conditions in the USA and Europe.
Datatec revenues were $3,74 billion (2009: $4,19 billion), with second half revenues of $1,94 billion compared to $1,92 billion in the second half of the previous financial year. Overall gross margins remained stable at 13,3% (2009: 13,5%).
EDITDA was $108,5 million (2009: $125,6 million), and EBITDA margins were 2,9% (2009: 3,0%). The Group achieved EBITDA of $63,9 million in the second half, compared to $54,2 million in the second half of the previous financial year. Profit after tax was $31,6 million (2009: $60,0 million). Underlying earnings were 30,3 cents per share (2009: 33,1 cents), with 18,8 cents per share in the second half, an improvement of 77,4% over the 10,6 cents per share in the second half of the previous financial year.
The Group achieved very strong operating cash generation as a result of continued effective working capital management and extended credit terms received from major suppliers. Datatec ended the year with a net cash position of $186 million (2009: $36,2 million).
In our industry we see the highest growth technology segments being those associated with connecting data, voice and video over IP networks (unified communications) and growing demand in data centres for security, storage and virtualisation.
Westcon performed particularly well, with gross and EBITDA margin improvement and improved profitability. Westcon benefited strongly from the high operational gearing that exists as a result of its significantly reduced cost base, continuing improving working capital and improved operational efficiencies. Trading in the Americas, particularly in the US, improved throughout the financial year, with conditions in Europe remaining stable and the Asia Pacific region performing strongly.
Westcon Emerging Markets (Africa, Middle East and India) continued to trade well with an improved financial performance over the prior year. This business will be folded into Westcon during the second half of the current financial year. Its financial performance will be included with Westcon’s figures from the second half of the current financial year.
As we have stated previously, Logicalis is a business that typically improves later in the economic cycle, in part due to the longer term and contractual nature of its customer relationships. As anticipated, its recovery has lagged that of Westcon by five to six months, but appears to be now well underway. The first half was impacted by challenging conditions in the US and the UK, but the performance improved markedly in the second half, with UK operations enjoying a very strong year-end and the US passing its inflexion point. Trading and profitability in South America remained robust throughout the year in line with the Group’s expectations. Logicalis gained an Asia Pacific presence with the acquisition of NetStar Group Holding Ltd (“NetStar”) in January 2010.
Consulting Services improved in the second half after a difficult first half, as a result of additional cost reductions being made to improve profitability. Overall performance has been significantly impacted by telecommunications operators and service providers reducing spend resulting in lower strategy consulting revenues.
Of the $3,74 billion revenues generated during 2010, some 76% came from Distribution; 17% from ICT Solutions and 7% is attributable to revenues derived from Services. The spread of activities across these three business activities not only provides the Group with multiple points of leverage in the ICT market, but also with industry diversification with no particular vendor, technology, geography or industry sector dependency.
ANALYSIS BY BUSINESS STREAM
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STRATEGY
Despite the economic downturn, Datatec continues to pursue its long term strategy to deliver sustainable above average returns to shareholders by focusing on a combination of organic growth in the faster growing sectors of the ICT market, geographic expansion and earnings enhancing acquisitions.
Datatec is now in a much stronger market position following the successful strategy over the last few years to reduce the Group’s dependency on any single market, territory or technology sector, as well as improving supplier and customer diversification.
Datatec Group is creating shareholder value through actively managing its complementary but standalone businesses. In addition to the allocation of capital and financing resources for each activity, the central team supports each division’s growth strategies, providing corporate and business development opportunities, market and sector intelligence plus geographical and industry expertise.
During the year the Group has primarily focused on improving operational performance and cash generation, whilst at the same time, reviewing a number of acquisition opportunities to enhance margins, facilitate consolidation in proven markets and extend the Group’s geographical reach.
The Group is actively pursuing a number of acquisition opportunities and completed the NetStar acquisition for $19,8 million in January 2010. In one transaction the acquisition of NetStar established a sizeable presence for Logicalis across South East Asia and Australia and significantly includes an operation in mainland China, one of the most important developing markets. Other opportunities in Asia and Latin America are also being reviewed, and in particular China and Brazil, which the Board sees as key market opportunities for the Group.
FINANCIAL RESULTS
Group revenues were $3,74 billion (2009: $4,19 billion). In the second half, revenues were $1,94 billion compared to $1,92 billion in the second half of the previous year.
38% of Group revenue was generated from North America (2009: 35%), 39% from Europe (2009: 41%), 9% from Asia Pacific (2009: 7%), 8% from South America (2009: 9%) and 6% from Middle East and Africa (2009: 8%).
Gross margins remained stable at 13,3% (2009:13,5%). Gross profit was $498,4 million (2009: $563,8 million), while operating costs reduced by 11% to $389,8 million (2009: $438,2 million) as a result of significant cost reduction across the Group.
EBITDA was $108,5 million (2009: $125,6 million), which includes net unrealised foreign exchange losses of $2,1 million (2009: gains of $0,4 million). The Group achieved $63,9 million EBITDA in the second half of the financial year, compared to $54,2 million in the second half of the prior financial year. Amortisation of intangible fixed assets arising from acquisitions was $15,4 million (2009: $17,7 million) as a result of intangible assets recognised on the acquisitions made during the past and prior years.
Operating profit was $76,0 million (2009: $84,8 million). The net interest charge in the period was $9,6 million (2009:
$16,6 million). The net interest charge was significantly reduced as a result of working capital leverage, strong cash flow generation and decreased debt levels.
Profit before tax was $54,1 million (2009: $85,5 million), after fair value movements on put option liabilities referred to below.
The Group’s reported effective tax rate increased to 42% from 30% in 2009. If the fair value movements on put option liabilities are excluded from profit before tax, the effective tax rate would have been 34% (2009: 37%). The Group’s effective tax rate is higher than the South African statutory tax rate of 28%, primarily due to profits being realised for a number of business units in jurisdictions with higher effective tax rates, most notably North and South America. The effective tax rate for the financial year ended 28 February 2011 is again expected to be approximately 34%.
Underlying earnings per share were 30,3 US cents (2009: 33,1 US cents), with 18,8 US cents in the second half of the financial year, compared to 10,6 US cents in the second half of the prior financial year, a 77,4% increase.
Headline earnings per share (“HEPS”) were 17,0 US cents (2009: 36,3 US cents). This includes the effect of the fair value adjustments of the put option liabilities detailed below. HEPS, excluding the effect of these put option fair value adjustments, is 23,8 US cents (2009: 26,6 US cents).
The Group issued 6,7 million new shares during the year, with 6,2 million shares were issued as part of acquisitions completed, while 0,5 million shares were issued for exercised share options.
Following the increased cash generation for the year and the overall strength of the Group, the Board plans to maintain its cash distribution in lieu of a dividend of 12 US cents per share (2009: 12 US cents per share) out of share premium.
Working capital remained tightly controlled, resulting in $225 million cash being generated from operations (2009: $195 million). The Group continues to enjoy comfortable head room in terms of its working capital lines.
Operating cash flows have continued to improve as the Group de-leveraged on the back of lower than expected revenues and better payment terms from major creditors. Cash generated from operating activities (after working capital changes) amounted to $196 million which represents an increase of 29% over 2009 which had cash generated of $151,7 million.
The Group paid $22 million to shareholders as a capital distribution in July 2009.
The Group ended the year with net cash of $186 million (2009: $36,2 million), including long-term debt of $17,7 million and short-term debt of $36,2 million included in the payables and provisions line on the balance sheet.
Outstanding liabilities to vendors of businesses acquired have increased slightly since last year-end from $51 million to a total of $52,8 million, of which $32,9 million is included under short term liabilities. The largest portion of the total balance relates to two elements of the Promon acquisition – potential further cash payments of $14,2 million to the sellers, based on future profitability and the performance of the Datatec share price, as well as a liability of $32,6 million initially recognised against equity in accordance with IAS 32 Financial Instruments: Presentation, for a put option held by minority shareholders. Under IAS 39 Financial Instruments: Recognition and Measurement, companies are required to re-measure such liabilities at each reporting date, with changes in the fair values booked in the income statement. An increase in put option liabilities has resulted in a non-operating non-cash charge of $12,0 million being recognised in the period (2009: gain of $16,8 million).
The Group spent approximately $29,7 million on acquisitions, net of cash acquired. As a result, goodwill and intangible assets increased by $16,3 million and $6,1 million, respectively. The revenue and EBITDA included from these acquisitions in 2010 was $39,9 million and $2,2 million respectively. Had the acquisition date been 1 March 2009, the pro-forma revenue would have been approximately $126 million. It is not practical to establish the EBITDA that would have been contributed by the acquisitions in 2010 if they had been included for the entire year.
Gains of $77,5 million (2009: losses of $109,3 million) arising on translation of non USD denominated subsidiaries are included in comprehensive income of $100,4 million (2009: losses of 88,1 million). Under previous accounting standards these figures were included in the statement of changes to equity.