' Datatec | 2017 Integrated Report | Logicalis divisional report | OUR PERFORMANCE

Mark  Rogers
Logicalis CEO


Robert Bailkoski
Logicalis CFO


Logicalis divisional report


Corporate overview

Logicalis Group ("Logicalis") is an international multi-skilled solution provider offering digital enablement services to help customers harness digital technology to deliver powerful business outcomes.

Logicalis' customers cross industries and geographical regions and its focus is to engage in the dynamics of its customers' vertical markets including financial services, telecommunications, media and technology ("TMT"), education, healthcare, retail, government, manufacturing and professional service. Logicalis applies the skills of its 4 300 employees in modernising key digital pillars, data centre and cloud services, security and network infrastructure, workspace communications and collaboration, data and information strategies, and IT operation modernisation.

Logicalis is the advocate for its customers with some of the world's leading technology companies including Cisco, HPE, IBM, CA Technologies, NetApp, Microsoft, Oracle, VMware and ServiceNow.

Logicalis has revenues of over US$1.5 billion and operates in Europe, North America, Latin America and the Asia-Pacific region and recently expanded its services footprint to Africa.

Performance

Revenue maintained at US$1 510.3 million

Gross margins of 24.1% benefiting from the improved services mix

EBITDA remained broadly flat despite being impacted by a substantial reduction in UK profitability

Acquisition of Lantares in Spain in line with strategy


How Logicalis creates value

Logicalis' go-to-market strategy is built around engaging with its customers to deliver tangible business outcomes through implementation of data centre, networking, communications and collaboration solutions, mobility, data and information analytics, cloud services, and its Optimal Service portfolio: integration and professional services, lifecycle and managed services and cloud solutions, with a growing focus on embedding security across all the technology offerings.

Logicalis continues to evolve its market offering, and it is seeing growth in new markets, specifically in its Internet of Things ("IoT") practice in Brazil, its Independent Software Vendor ("ISV") practice in North America, and in its Security Operation Centres practices in Europe.

Furthermore, Logicalis works with both IT and line-of-business stakeholders to align business strategy with technology investments, driving strategic business objectives through the intelligent adoption and application of technology for competitive advantage. As a consequence, Logicalis has seen continued growth in the consulting and advisory services area of its business.

Logicalis demonstrates its value through its ability to service the changing demands of a more digitally literate customer, employee, student, or citizen, who now demand improved access to experiences, services and products, driven by increased use of mobility, social media, data analytics and cloud.

Logicalis' goal is to be a strategic partner of the CIO, enabling them to satisfy and operate all aspects of IT more effectively, accelerating the adoption of automation across its core platforms and applications, investing in the systems and processes that drive agility into IT service delivery, and improving the satisfaction of users by responding to the changing demands for technology-led business innovation across all areas of its organisation.

Logicalis has an independent and therefore flexible and objective approach to how customers own, operate and consume core IT services which enables it to achieve its core business goals. This drives Logicalis' revenue streams in systems integration, lifecycle and managed services, and a growing opportunity in provisioned cloud services. Logicalis seeks to help all stakeholders understand the value of technology investments, and choose the ownership, operational and consumption model that is right for their individual business circumstances.

Logicalis' strategy

Logicalis’ strategy is based on four key success factors:

  • Technical excellence in advancedand emerging technologies;
  • Industry and business know-how and intrinsic understanding of its customers' business challenges;
  • The ability to define, package and deliver solutions and services that meet the business or technology demands of its customers; and
  • The capability to support the changing operational and IT consumption demands of its customers.

The result of this strategy is a strong customer base across the Europe, North America, Latin America and Asia-Pacific regions.

Logicalis' goal remains the maximisation of growth in profit and value by gaining strength, capability and market share in its main markets and establishing Logicalis as the IT partner of choice for customers. Logicalis' key aims include the following:

  • Achieve above industry average EBITDA ratios and cash conversion;
  • Deliver balanced growth, organic and through acquisition;
  • Offer lifecycle IT solutions and services in all operating territories;
  • Maintain leadership in innovation for its solutions and service offerings;
  • Increase annuity (recurring services) sales;
  • Focus on customer business needs at both the CIO and line-of-business levels;
  • Invest in processes, people and systems that provide its customers with consistent industry best-inclass service;
  • Leverage knowledge and best practice processes in all territories; and
  • Attract and retain high-calibre employees.

To achieve these strategic objectives, Logicalis continues to:

  • Engage with customers at all levels and across stakeholder communities, building long-term relationships;
  • Focus on business outcomes and value;
  • Position itself as a trusted and capable partner for technology and service excellence; and
  • Expand its portfolio of Logicalis products, solutions and services through investment in resources, expertise, partnerships and acquisitions.

Logicalis' strategic positioning provides benefits and also carries business-specific risks, examples of which are discussed below.

The market transition to cloud is now happening at a more controlled pace.

Logicalis' customers are now strongly investing in cloud services, particularly around cloud on-premises and hosted infrastructure services (private cloud and managed private cloud). Logicalis has been able to capitalise on this move, especially in the private cloud market, but it is now seeing demand from its customers to access the public cloud as part of a hybrid cloud strategy. This is particularly evident in North America and Europe, where public cloud is gaining maturity and acceptance, creating requirements for new partnerships and skills availability in its business.

Logicalis generates a disproportionate percentage of its operating profits in Brazil and its market position there also presents possible business risk. A slowdown in the Brazilian economy, resulting in a slowdown in the service provider market, has continued to impact the business during FY17 and could impact its future growth potential and profitability. Logicalis is building a broader customer base in Brazil, in enterprise and the public sector markets, to manage the impact of this risk.


Progress against strategic objectives

FY17 objectives   FY17 execution of objectives   FY18 priorities
  • Continue to focus on improving the services and annuity revenue mix
 
  • Services and annuity revenue increased to 35% of revenue (FY16: 31%)
 
  • Continue to focus on improving the services and annuity revenue mix
  • Improve operational leverage by managing the cost base effectively such that operational costs reduce as a percentage of revenue
 
  • Renewed focus on optimising our cost base in FY17 by re-emphasising commitment to centres of excellence
 
  • Focus on cost reduction activities in legacy areas of the business
  • Increase offering of data analytics and security services
 
  • Acquisition of Lantares
  • Leveraging security operations centres across the group
 
  • Leverage group-wide capabilities in data, security and cloud-based knowledge
  • Seek further strategic acquisitions
  • Ensure successful integration of ATIG (USA) and Thomas Duryea (Australia)
 
  • Acquisition of Lantares
  • Both ATIG and Thomas Duryea were successfully integrated without business interruption
 
  • Seek further acquisitions to boost existing territories' market share and to leverage Logicalis' footprint in emerging technologies

Markets

The demand for IT infrastructure in the markets in which Logicalis operates was again mixed during the year. The market for networking technology products, servers and storage remained largely flat in the US but was down in Western Europe and was down substantially year-on-year in Latin America. Consequently, total Logicalis revenues remained flat during the year. In particular, demand from the telecommunications operators and service providers in Brazil was weaker due to the continued impact from the economic slowdown.

For IT infrastructure, the outlook for growth remains broadly flat. Analysts are predicting modest growth in IT investment in 2017 across the geographic markets in which Logicalis operates except for the UK, where changes in market dynamics and business appetite is causing a general deterioration in server end user spending in particular. However, certain key areas within Logicalis' portfolio are expected to grow rapidly over the course of 2017 and beyond. These include private cloud and computing, big data and analytics and security.

Logicalis is fully engaged with the acceleration of the move towards IoT, capitalising on the "smarter resources" opportunity (people, offices, streets, cities, factories and universities) in Latin America in particular, where it has developed a new IoT integration analytics platform.

Logicalis sees a continuing desire among its CIO and line-of-business stakeholders to build true multi-source multi-service environments, bringing a single portfolio for the business from both internal IT services and the growing mix of IT as a Service ("ITaaS") offerings.

According to Logicalis' fourth annual survey of over 700 CIOs worldwide, over 80% of CIOs globally report that line-of-business departments now employ their own IT staff and this is clearly the new norm for CIOs and their IT departments.

The phenomenon of Shadow IT, when line-of-business executives bypass the IT department and CIOs in making IT investments, is now a reality for the vast majority – almost two fifths of CIOs find themselves bypassed altogether in IT investments' decisionmaking. With CIOs gradually losing the battle to retain the balance of power in IT decision-making, the threat from line-of-business driven IT choices is forcing CIOs to realign their IT strategy to better serve the needs of their line-of-business colleagues, and transforming IT to become the first choice for all IT service provisions.

CIOs are just about maintaining overall control of IT spend, but with the democratisation of IT through technology consumerisation, ubiquitous mobility, growth in the cloud and business transformational technologies such as analytics, line-of-business colleagues' power in decision-making is only going to present increasingly tough challenges for the CIO and the wider business executive.

However, it seems that transformation is taking shape within IT departments. CIOs are freeing themselves from the day-to-day operational tasks, with 14% now spending at least 70% of their time on strategic activities. It seems clear that CIOs are seeking to regain control by establishing "internal service providers" capable of delivering the choice of services their organisation needs, whether those services are built and operated internally, sourced from managed service partners or are consumed from the cloud.

Given the need to align business demand and agile technology supply, Logicalis is helping its customers explore and invest in the next generation of internal IT platforms such as private cloud and emerging software-defined networks ("SDNs") and data centres ("SDDCs").

Alongside these technology transitions, the market continues to demand more project services such as consulting skills in digital transformation projects and automation, custom application development, best practice IT operations and processes, connecting technology platforms to day-to-day internal IT service delivery, and enabling organisations to blend services internally, from partners, and from the cloud into a coherent whole. Logicalis continues to invest in these skills across its business and expects growth in these areas beyond 2017.

As Logicalis' customers move to a model where they have a blend of internally and externally provided systems, solutions and services, Logicalis continues to invest in defining and bringing to market pre-packaged solutions and services, allowing customers to consume best practice and agile IT solutions directly from Logicalis managed services or from its cloud platforms (currently located in 11 locations, across Asia-Pacific, Europe, Latin America and North America).

Performance

Logicalis accounted for 25% of the Group's revenues (FY16: 24%) and 58% of its EBITDA (FY16: 47%).

Logicalis is an international IT solutions and managed services provider with expertise in IT infrastructure and networking solutions, communications and collaboration, data centre, cloud solutions and managed services.

Revenues were US$1.5 billion (FY16: US$1.5 billion), including US$2.2 million of revenue from acquisitions made during the period. Services revenues were up 9.3% with strong growth in both professional services and annuity revenue. Revenue decreases in Europe and North America were offset by increases in Latin America and Asia-Pacific.

In Europe, the UK results were impacted by the continuing restructuring of the UK operation. Latin America was adversely impacted by weak trading conditions in Brazil in the first half and the strong performance of the US Dollar which was mitigated by increased performance in Argentina following relaxation of exchange controls and the subsequent buoyant trading environment.

Revenues from product were down 6.2%, with decreases in Cisco, HPE and IBM, offset by strong growth in other vendor categories including Oracle, NetApp, VMware and ServiceNow.

Logicalis' gross margins were 24.1% (FY16: 23.1%), benefiting from the improved services mix.

Gross profit was up 2.8% to US$363.3 million (FY16: US$353.4 million).

Operating expenses in Logicalis increased by 4.3%, due in part to incremental integration costs of acquisitions incurred during the period.

EBITDA was US$79.0 million (FY16: US$80.9 million), with a corresponding EBITDA margin of 5.2% (FY16: 5.3%). EBITDA before restructuring charges was US$81.2 million. Operating profit was US$54.4 million (FY16: US$56.3 million).

Logicalis remained in a net cash position of US$18.1 million (FY16: US$77.6 million). The reduction in net cash reflected the unwinding of a large customer transaction in the UK during the year and by significant prepaid expenses in Latin America, relating to large customer transactions.

DSO for accounts receivable remained strong at 50 days at year-end, still lower than historical norms (FY16: 45 days). Logicalis' DPO for accounts payable improved to 88 days (FY15: 82 days).

Logicalis continues to have a contingent liability in respect of a possible tax liability at its PromonLogicalis subsidiary in Brazil.

The transition to cloud-based infrastructure solutions remains a dominant feature of the ICT market and Logicalis continues to adapt its go-to-market model and develop its services to address this change.

The global market for IT products and services remains stable and Logicalis is seeking to build on its position in higher growth segments such as analytics and security.

Partner and vendor relationships

Logicalis continues to build strong relationships and partnerships with key stakeholders, including employees, customers, vendors and service partners. Its strategy of building strong customer intimacy continues to enable Logicalis to grow its relationships and solution and service engagements with existing clients.

Logicalis has a historic strong relationship with Cisco and this was maintained during FY17. This was recognised with several awards during the year including Logicalis USA being given the Cisco Architectural Excellence Award in Security.

Beyond Cisco and in recognition of the significant development made in the growth and quality of its services practice and portfolio, Logicalis won over 40 industry awards including IBM Best Partner of the Year Award in Spain and Dell EMC's 2016 Solution Partner of the Year in Australia.

Logicalis also had notable recognition from several industry bodies including being named one of the top three most innovative technology companies in Brazil by the Tele. Sintese Year Book and one of the Top 100 Outsourcing companies in the world by the International Association of Outsourcing Professionals.

Outlook

Logicalis' operational priorities for the coming year are to continue to demonstrate the value of IT to its customers. Logicalis will continue to engage with clients through solutions and service-led sales engagements, and build out a common portfolio of solutions and services in geographies where it currently concentrates. Logicalis will maintain its focus on investing and innovating in its main areas of growth – data centre, networking, communications and collaboration, cloud solutions and managed services. Emerging trends such as private cloud, security services, mobility, business analytics, IT service management, big data, and cloud consumption are creating new opportunities to further differentiate Logicalis in the market and with customers.

General market conditions for IT products and services is forecast to improve but trading conditions, particularly for product sales, remain challenging. The strong growth in cloud-based solutions is disrupting the IT market at a dramatic pace. Logicalis will closely manage operating costs and maximise the opportunities provided by its multinational customer base. In addition, Logicalis expects to benefit from the changes in customers' consumption demands, and further benefit from the investments it has made in data centre and cloud-based services in order to grow its annuity-based managed services.

The two main financial goals for the coming year are the same as in prior years, namely to achieve a revenue growth rate in excess of the market and increase operating profits.