DIVISIONAL REVIEWS
Westcon
Westcon accounted for 69% of the Group’s revenues and 60% of EBITDA.
Westcon is the world’s leading speciality distributor in networking, security, mobility and convergence products for leading technology vendors, including Cisco, Avaya/Nortel, Juniper, Checkpoint and Polycom.
Westcon’s revenue was $2,6 billion (2009: $2,8 billion) with decreases in the Americas and Europe offset by an increase in Asia Pacific. Cisco products made up 56% of Westcon’s revenue (2009: 54%), 17% for Avaya / Nortel (2009: 20%), 17% for security (2009: 16%) and 10% for Development/Affinity vendors (2009: 10%). 46% of Westcon’s revenue was generated in the Americas (2009: 43%), 43% in Europe (2009: 48%) and 11% in Asia Pacific (2009: 9%).
Gross margins increased from 10.1% in 2009 to 10.2% in 2010 due to increased margins in Europe and Asia Pacific offset by lower margins in the Americas. Gross profit was $263 million (2009: $281 million).
Cost reduction initiatives, including reduction in headcount, reduced professional fees and lower travel expenses, begun in the second half of 2009, helped to drive a $24,9 million or 12% reduction in operating expenses in 2010. As a result, Westcon’s EBITDA increased 10% from $67,8 million to $74,7 million while EBITDA margins increased from 2.4% in 2009 to 2.9% in 2010 with increased margins in all operating regions.After charges for depreciation and amortisation of intangible assets, operating profit increased by 14% to $62,0 million (2009: $54 million).
Westcon’s operating activities generated $125 million of cash (2009: $126 million) as effective working capital management resulted in favourable changes in inventory and accounts payable balances.
In April 2009, Westcon become Cisco’s first global distributor, signing a partnership that effectively increased both organisations’ ability to access emerging market opportunities in many parts of Africa and the Middle East, South America and across Asia. As part of it's expansion, Westcon is opening new offices in the Philippines, Thailand and Vietnam in Asia, and the Czech Republic in Europe.
To consolidate the early success of this partnership, in September 2009 Westcon created Comstor Worldwide, a new global business unit focused on its Cisco solutions offerings in order to better manage growth and investments in its Cisco-oriented business. This new business unit accounts for over 50% of Westcon’s revenue.
On 1 October 2009 Westcon acquired Datastor (NZ), a New Zealand ICT distribution business for cash. The acquisition provides Westcon with the opportunity to add an additional operation in New Zealand to help consolidate its existing business and create a market leading position that is complementary to Westcon’s Asia Pacific distribution business.
Westcon Emerging Markets (“WEM”)
Datatec’s WEM operations made up 7% of the Group’s revenue and 4% of EBITDA.
WEM represents Datatec’s distribution subsidiaries operating in 12 countries across Africa, the Middle East and the Indian subcontinent. Consolidation of these operations under the WEM umbrella has created a more regional approach towards management and reporting, with a strong focus on existing business development and cross-group operational efficiencies.
WEM started the year in a stronger position following an extensive restructuring programme in Africa and South Africa. Trading conditions were difficult in South Africa for much of the year. The Middle East region continued to perform strongly.
WEM’s financial performance improved throughout the year, achieving revenues of $245,7 million (2009: $283,3 million) and EBITDA jumping to $5,4 million from $0,6 million in 2009, following the restructuring initiatives of the prior year.
On 24 April 2009 Datatec increased its shareholding in Westcon SA from 55% to 74,9% through the disposal of its 55% stake in African Legend Indigo and the issue of 275 578 Datatec shares.
WEM is expected to be fully integrated into Westcon Group during the second half of the 2011 financial year.
Logicalis
Logicalis accounted for 22% of the Group’s revenues and 34% of EBITDA.
Logicalis is an international provider of integrated ICT solutions and services with a breadth of knowledge and expertise in IT infrastructure and networking solutions, communications and collaboration, data centre and professional and managed services.
Trading was very difficult with the global economic slowdown and recessionary conditions prevailing in most of the markets in which Logicalis operates. Demand for technology products contracted, and Logicalis’ main vendor partners, Cisco, HP and IBM, experienced double-digit declines in product revenues. In addition, telecommunication operators and services providers in South America, an important customer segment for Logicalis in this region, cut capital expenditure significantly.
Revenue from product sales was down 21% with declines across all main vendor categories, IBM product sales were down the least at 7%. However, revenues from services were more resilient and were flat year on year. There was particularly encouraging growth in annuity revenues of 17%.
Despite this economic backdrop, the UK had a good performance and the contribution from the South America region was strong. Lower than expected customer demand in the US was partially offset by effective cost management, although activity did increase towards the end of the year. Revenue was $838,5 million (2009: $1005,4 million), including a $19,0 million contribution from two acquisitions. Excluding the impact of acquisitions made in 2009 and 2010, revenue decreased by 17% on a constant currency basis. However, the 2009 performance was boosted by an exceptionally large project with a telecommunications operator in South America.
The gross margin slightly improved to 22,2% (2009: 22,1%). Product margins were under pressure, particularly in the US for both HP and IBM products, but services margins were maintained and an improved services mix kept the overall margin similar to last year. The gross profit was $186,4 million (2009: $221,7 million).
The decline in activity was largely anticipated and the reduction in the cost base resulted in operating expenses being 13% lower. EBITDA was $42,4 million (2009: $57,0 million) and the EBITDA margin 5,1% (2009: 5,7%).
After charges for depreciation and amortisation of intangible assets, operating profit was $25,2 million (2009: $39,3 million).
In May 2009 Logicalis acquired Minters GmbH, a German Cisco Systems Partner. The enlarged Logicalis German operation is a mid-market focused ICT integrator and provides a platform for further growth in Germany.
On 15 January 2010 the acquisition of NetStar completed. NetStar is a leading IP network infrastructure solutions and services provider in the Asia Pacific region with capabilities and expertise across data, voice and security infrastructure and a strong focus on Cisco network integration and data centre solutions. NetStar has operating units in Australia, Singapore, Malaysia, Taiwan, Hong Kong and China. It has over 300 employees and marked an important strategic development for Logicalis as NetStar, with its regional footprint and a Network Operations Centre in Malaysia, provides the capabilities to support the needs of multi-national corporations.
Consulting Services
The Group’s Consulting Services division, consisting of Analysys Mason and Intact, accounted for 2% of Group revenues and 2% of EBITDA.
Consulting Services had a difficult start to the year but improved in the second 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 discretionary spend significantly throughout much of 2009, resulting in lower strategy consulting revenues.
Analysys Mason provides management consulting advice and market intelligence services to the telecoms, IT and digital media industries. Analysys Mason reported revenues of $44,4 million (2009: $55,8 million) and EBITDA of $0,9 million (2009: $4,6 million).
Intact is a networking services and project management support consultancy business focused on providing high end professional services to its customers. Intact reported revenues of $19,5 million (2009: $17,1 million) and EBITDA of $1,0 million (2009: $2,0 million).
Corporate and OtherCorporate and Other encompasses the operating costs of the Datatec head office entities of $10,4 million (2009: $10,2 million) and unrealised and realised foreign exchange losses of $3,6 million and $0,9 million respectively (2009: gains of $1,3 million and $0,8 million) incurred by the Datatec head office entities.
This segment also includes two months’ trading for the Group’s 55% holding in the South African ICT business, ALI, which was sold effective 24 April 2009. During the two months ALI generated revenues of $7,4 million (2009: $50,7 million) and an EBITDA loss of $0,9 million (2009: profit of $1,8 million).
REPORTING
This report complies with International Accounting Standard 34 – Interim Financial Reporting as well as with Schedule 4 of the South African Companies Act (Act 61 of 1973, as amended), the AIM Rules for Companies 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, except for the adoption by the Group of the amendments to IAS 1 – Presentation of Financial Statements. This standard affects the presentation of owner changes in equity and comprehensive income and does not impact on recognition, measurement and disclosure of specific transactions as required by any other IFRS standard. The Group has presented a ‘statement of comprehensive income’ which replaces the income statement and also includes all non-owner changes in equity. All changes in equity resulting from transactions with owners in their capacity as owners are presented in the ‘statement of changes in equity’. The financial information has been audited by Deloitte & Touche whose unmodified audit report is available for inspection at the Group’s registered office.
SUBSEQUENT EVENTS
On 9 April 2010 Analysys Mason acquired BDA Connect (Pvt) Limited (“BDA India”), a small management consultancy business with 15 employees, based in New Delhi, which provides Analysys Mason with a platform to develop its consulting business in India and to support its existing operations in Singapore and Dubai. Furthermore, BDA India’s research capabilities will enable Analysys Mason to deliver global research coverage to its clients.
CURRENT TRADING AND PROSPECTS
The Board’s focus during the last financial year was to ensure that the Group’s performance was sound and predictable with management taking a very prudent approach. This also resulted in significant cash generation.
Although the Group remains cautious about trading conditions for the current financial year, the Board expects profitability across all divisions to improve, as the business continues to benefit from improved operational gearing.
The main divisions are well positioned to take advantage of advances in ICT in sectors adjacent to networking, such as data centre virtualisation and shared computer infrastructure (often referred to as cloud computing), fourth generation (LTM) wireless networking and increased networking security.
The Group also expects to continue making further investments to support its business structure and management to respond to any acceleration in growth, it also believes the current environment presents a good opportunity to recruit excellent people and ensure all the Group’s businesses have the best foundations for future scalability.
Based on current trading conditions and prevailing exchange rates, the Board expects revenues for the 2011 financial year to be between
$4,1 and $4,4 billion, with some margin expansion. The Board expects underlying earnings per share to be approximately 35 US cents and both earnings per share** and headline earnings per share** to be approximately 30 US cents. Profit after tax** is expected to be approximately
$58 million. The financial information on which this forecast is based has not been reviewed and reported on by Datatec’s auditors.
DIVIDEND/CAPITAL DISTRIBUTION POLICY
The Group’s dividend/capital distribution policy of paying an annual dividend/capital distribution, which will provide cover of at least three times relative to underlying* earnings, remains unchanged.
CASH DISTRIBUTION BY WAY OF CAPITAL REDUCTION
Following the increased cash generation for the year, the Group will distribute to shareholders a capital reduction out of share premium, in lieu of a dividend, 90 RSA cents per share (approximately 12 US cents per share) for the year ended 28 February 2010, in terms of the general authority granted to directors at the Annual General Meeting held on 12 August 2009. The capital distribution will be paid to shareholders on the Jersey branch register in GBP translated at the closing exchange rate on Wednesday, 7 July 2010.
The salient dates will be as follows:
Last day to trade |
Friday, 2 July 2010 |
Share certificates may not be dematerialised or rematerialised between Monday, 5 July 2010 and Friday, 9 July 2010, both days inclusive.On behalf of the Board:
SJ Davidson |
JP Montanana |
IP Dittrich |
13 May 2010
**Forecasts for profit after tax, earnings per share and headline earnings per share do not take into account any fair value gains or losses on
acquisition related financial instruments, which are required under IFRS.