Executive directors' report

This has been a landmark year for Datatec during which we generated exceptional value for shareholders through the successful sale of Westcon Americas and the disposal of Logicalis SMC. We remain focused on closing the valuation gap through strategic initiatives and other corporate actions.
Jens Montanana and Ivan Dittrich

"Logicalis delivered good growth during the year, supported by a much improved performance across our Latin America, Europe and Asia-Pacific businesses in the second half as well as the strategic acquisitions completed during the year. We expect Logicalis to deliver a strong financial performance in FY19.

"Westcon International's performance was disappointing, especially in the EMEA region where business disruptions relating to ERP and BPO processes continued. Our plans to return Westcon International to profitability and growth are progressing and the central cost base is being actively addressed."

Strategic overview

The Board and management are committed to staying focused on closing the valuation gap through strategic initiatives and other corporate actions.

Datatec's strategy remains to deliver long-term, sustainable and above-average returns to shareholders through portfolio management and the development of its principal subsidiaries providing technology solutions and services to targeted customers in identified markets around the world.

The Group completed two major disposals during FY18 which generated material shareholder value.

Effective 1 September 2017, the Group sold Westcon-Comstor's businesses in North America and Latin America ("Westcon Americas"), and a 10% interest in the remaining part of Westcon-Comstor ("Westcon International"), to SYNNEX Corporation for US$630 million in cash plus an earn-out (based on the gross profit of the Americas businesses). The amount of the earn-out achieved has not been agreed yet between the parties and a resolution process is currently under way, as provided for in the Sale and Purchase Agreement.

In October 2017, Logicalis also realised significant value from the sale of its non-core SMC consulting business to DXC Technology Company (NYSE: DXC) for US$42 million.

Following the disposal of Westcon Americas (the largest profit contributor of Westcon-Comstor), Westcon International, the remaining business, became directly managed by the Datatec management team. This business had a poorer performance in recent years as a result of the significant system and process changes.

The transition to Business Process Outsourcing ("BPO") in the last two years has been very disruptive and costly and has impacted Westcon's level of customer service and financial performance. We have therefore decided to bring back in-house the work currently outsourced to the BPO provider. This will improve customer experience.

Westcon International currently retains the legacy global central costs (approximately US$63 million in FY17) and has a transitional services agreement with SYNNEX whereby it provides certain Group services to Westcon Americas which expires at the end of August 2018. Westcon International is in the process of implementing cost-saving initiatives to reduce these central costs to approximately US$45 million in FY19 and US$33 million in FY20. The target is to get Westcon International central costs to below 1% of revenue.

Logicalis is the largest profit contributor to the Group. The Group intends to continue to develop and grow Logicalis through self-funded strategic acquisitions similar to those undertaken in the past few years to drive growth in specific markets such as Asia-Pacific and Latin America.

During the year, Datatec returned US$350 million to shareholders. A special dividend in January 2018 resulted in US$244.2 million cash being distributed to shareholders who did not elect the scrip distribution alternative. In total 43 770 095 shares were issued to shareholders who elected the scrip distribution alternative. Subsequently, a further US$34.6 million was returned via a general repurchase of 12 777 717 shares, representing just under 5% of the issued shares at the time.

The Company limited the repurchase to 5% of the issued share capital. It obtained legal advice that section 48(8) of the South African Companies Act ("Companies Act") would be applicable to a general repurchase of shares undertaken in accordance with the JSE Listings Requirements.

Section 48(8) of the Companies Act stipulates that any decision by the board of directors of a company that involves the repurchase of more than 5% of the company's issued securities of a particular class must be approved by a special resolution of the shareholders of the company compliant with sections 114 and 115 of the Companies Act, which require, inter alia, an independent expert report on the repurchase.

The Company therefore only intends to recommence share repurchases after its next Annual General Meeting and will undertake any share repurchases in a form and manner that is prudent for the Group, taking into account the Group's ongoing liquidity needs.

Westcon Americas and the Logicalis SMC business are classified as "discontinued operations" in accordance with IFRS 5. The Group's results for FY18 are reported in the form of the "continuing operations", excluding the discontinued operations and figures for the year ended 28 February 2017 ("the comparable period" or "FY17") are re-presented on the continuing operations basis for comparative purposes.

Given the Group's dividend policy and negative underlying* earnings in FY18, the Board is not declaring a final dividend.

Financial review

Group revenues for the year were comparable year on year at US$3.92 billion (FY17: US$3.86 billion).

Group gross margins in FY18 improved to 16.2% (FY17: 16.1%). Gross profit was US$636.0 million (FY17: US$622.3 million).

Overall operating costs were US$609.3 million (FY17: US$593.3 million). Included in the operating costs are total restructuring costs of US$16.9 million (FY17: US$13.1 million). EBITDA was US$26.7 million (FY17: US$29.0 million) and the EBITDA margin was 0.7% (FY17: 0.8%).

Depreciation and amortisation were lower at US$51.6 million (FY17: US$52.3 million), primarily as a result of the derecognition of capitalised development expenditure at the time of the SYNNEX transaction.

At year-end, a further US$55.1 million of capitalised development expenditure was impaired. This mainly comprised the Westcon ERP system. This resulted in an operating loss of US$81.0 million (FY17: US$23.3 million).

The net interest charge increased to US$18.4 million (FY17: US$13.8 million). The Logicalis net interest charge increased by US$7.3 million, partly as a result of higher working capital utilisation in Latin America on the large multi-year project. The Westcon International interest expense increased by US$2.5 million and interest income at the Datatec head office increased by US$5.2 million.

Loss before tax was US$99.4 million (FY17: US$31.8 million).

A tax charge has arisen on a loss before taxation in the continuing operations in both the current year and comparative numbers. This is largely as a result of tax losses arising in Westcon International's Asia, Africa, Middle East and UK operations for which no deferred tax asset has been recognised. In addition, the tax credit associated with certain management and IT costs of the continuing business have been treated as a credit arising for the disposal group.

As at February 2018, there are estimated tax loss carry forwards of US$185.4 million with an estimated future tax benefit of US$42.5 million, of which only US$13.2 million has been recognised as a deferred tax asset.

Cash

The Group generated US$17.6 million of cash from operations during FY18 (FY17: US$37.3 million cash utilised).

A cash consideration of US$672 million was received from two disposals in the year: Westcon Americas and 10% of Westcon International for US$630 million and Logicalis SMC for US$42 million. The special dividend in January 2018 resulted in US$244.2 million cash being distributed to shareholders who did not elect the scrip distribution alternative. Subsequently a further US$34.6 million was returned to shareholders via a general repurchase of shares.

A net outflow of US$10.8 million related to acquisitions in the year. Additions to property, plant and equipment resulted in a cash outflow of US$26.0 million and US$22.7 million was spent on capitalised development expenditure and software.

Datatec ended the year with a net debt of US$6.4 million (FY17: US$294.8 million from continuing operations). The net debt has been calculated as: cash of US$161.3 million (FY17: US$198.7 million net overdraft from continuing operations); short-term borrowings and current portion of long-term debt of US$106.0 million (FY17: US$64.7 million); and long-term debt of US$61.7 million (FY17: US$31.4 million).

The Group's balance sheet improved from the prior year with tangible net assets of US$452.0 million at 28 February 2018 (FY17: US$263.9 million).

* The new facility was formally approved on 5 June 2018.

Liquidity

The Group is anticipated to generate sufficient cash to settle liabilities as they fall due. Working capital remains well controlled. Trade receivables and inventory are of a sound quality and adequate provisions are held against both.

The US$375 million syndicated banking facility in Westcon Europe expires in July 2018. The Group is in an advanced stage of negotiation of a replacement facility of up to US$280 million, which is considered adequate for Westcon Europe's working capital needs. There is a high probability that the facility will be replaced*, as terms have been agreed with existing and new banks and credit approval for the facility has been received. In addition, the Group has sufficient cash at the centre, which it will use for working capital funding until the new facility is in place.

Acquisitions

Effective 1 June 2017, Analysys Mason acquired 100% of the share capital of Nexia Management Consulting AS, a telecoms management consultancy company registered in Norway. The consideration payable comprised an initial consideration of US$4.1 million paid as a combination of cash and shares, and deferred cash consideration of up to US$0.9 million. The acquisition of Nexia Management Consulting AS will enhance Analysys Mason's existing track record in the Nordics, where telecoms, media and technology markets are among the most advanced in the world and have been at the forefront of many new developments.

Effective 4 July 2017, Logicalis acquired 51% of the share capital in NubeliU Limited ("NubeliU"), a South American company specialising in cloud computing projects based on OpenStack. The 51% interest in NubeliU was acquired for a cash consideration of US$3.8 million. NubeliU's expertise in OpenStack will accelerate the global expansion of Logicalis' cloud computing and Software Defined everything ("SDx") practices, strengthening its position as a cloud integrator and ensuring its ability to meet its customers' requirements on their journey to digital transformation.

Effective 4 September 2017, Logicalis acquired 54% of the share capital in PT Packet Systems Indonesia, Inc. ("PSI"), a leading ICT systems integrator and services company. The 54% interest in PSI was acquired for a cash consideration of US$6.8 million. The acquisition has allowed Logicalis to strengthen its position within Indonesia and the Asia market.

After the FY18 year-end, on 14 May 2018, Logicalis signed an agreement to acquire 100% of the issued share capital of Coasin Chile S.A., a Chilean and Peruvian ICT services and solutions provider, for a maximum purchase consideration of US$20.2 million. The acquisition is subject to certain third-party consents as well as approval from the Chilean Competition Authorities.

Divisional reviews

Logicalis

Logicalis accounted for 40% of the Group's continuing revenues (FY17: 38%).

Revenues from continuing operations were US$1.6 billion (FY17: US$1.5 billion), including US$39.1 million of revenue from acquisitions made during the period.

Services revenues were up 12.1% with strong growth in both professional services and annuity revenue.

Revenue increased in absolute terms in Latin America, Europe and Asia-Pacific. These increases were partially offset by a decrease in North America.

In Europe, the UK results improved significantly and Germany had a strong year. In addition, the UK benefited from a large supplier credit. Latin America showed improvements, notably in Brazil, Argentina and a recently set up operation in Puerto Rico. North America was adversely impacted by weak product sales. Asia-Pacific benefited from the contribution of the PSI acquisition.

In September 2017, Logicalis won a large multi-year project with a large service provider covering multiple territories within Latin America which will contribute significantly to the business. FY18 includes revenues of US$88.8 million from this project and there is initially an adverse working capital impact which will unwind as the project evolves. This project resulted in an increase to FY18 accounts receivable of US$114.2 million and an increase to FY18 liabilities of US$86.9 million of which US$71.4 million is interest-bearing.

Revenues from product were up 3.5%, with an increase in Cisco solution sales partially offset by decreases in IBM and HPE.

Logicalis' gross margins from continuing operations were 25.0% (FY17: 24.1%), benefiting from the improved services mix and a large supplier credit.

Gross profit from continuing operations was up 10.6% to US$391.7 million (FY17: US$354.1 million).

Operating expenses in Logicalis increased by 10.0% due in part to restructuring costs associated with the UK business incurred during the year and incremental overheads associated with acquisitions.

EBITDA from continuing operations was US$86.2 million (FY17: US$76.3 million), with a corresponding EBITDA margin of 5.5% (FY17: 5.2%). Operating profit from continuing operations was US$59.5 million (FY17: US$52.0 million). Logicalis incurred US$5.2 million expenditure in FY18 restructuring its UK operations. EBITDA from continuing operations before restructuring charges was US$91.4 million with an EBITDA margin of 5.8%. Operating profit from continuing operations before these restructuring charges was US$64.7 million.

At 28 February 2018, Logicalis had a net debt balance of US$139.5 million (FY17: US$20.4 million). This consisted of: cash of US$7.1 million (FY17: US$16.7 million from continuing operations); short-term borrowings and current portion of long-term debt of US$102.4 million (FY17: US$22.9 million); and long-term debt of US$44.2 million (FY17: US$14.1 million). The increase in net debt was caused primarily by the significantly higher working capital requirements of the large multi-year project in Latin America referred to above. The sale of the SMC business in October 2017 brought US$42 million of cash into the business in H2 FY18 which was used primarily to support deleveraging.

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

Digital innovation is accelerating and business technology is continuing to undergo a major shift. Logicalis is transitioning itself into a Digital Enabler for its customers, driven by the explosion of data, the rise of mobile and the cloud. Many opportunities exist to tap into themes such as security to augment its strong networking heritage.

Logicalis is also investing in areas such as business intelligence and data analytics to grow its data centre infrastructure offerings for customers. Cloud continues to be a key feature in the business and IT strategies of customers and Logicalis is well positioned to support customers regardless of their cloud strategy.

Logicalis remains confident about the prospects for the industry and its positioning and expects to build on the solid progress made in the past year to deliver a strong financial performance in FY19.

Westcon International

Westcon International accounted for 59% of the Group's continuing revenues (FY17: 61%).

Westcon International is the part of Westcon-Comstor organisation which remains in the Group's ownership (90%) following the sale of Westcon Americas to SYNNEX during the year. SYNNEX holds a 10% interest in Westcon International. The business comprises the Westcon-Comstor businesses in Europe, Middle East, Africa and Asia-Pacific and it retains the entire central cost base of the former Westcon-Comstor group. As noted above the reduction of these central costs and reshaping of the Westcon International business are key strategic goals for Datatec Group.

Westcon International's revenues from continuing operations decreased by 1.5% to US$2.32 billion (FY17: US$2.35 billion) as lower revenue in Europe and MEA were offset by 2% growth in Asia-Pacific.

Westcon International's gross margins from continuing operations were 9.8% (FY17: 10.8%) with the decrease primarily attributable to lower margins in Europe partially offset by improved margins in Asia-Pacific. Westcon International's gross profit decreased by 10.6% to US$227.4 million (FY17: US$254.4 million).

There was a decline in the financial performance of the EMEA region, driven by continued business disruption as the BPO challenges were compounded by the complex conversion to the ERP system. Trading conditions in South Africa were weak.

Westcon International's revenue by technology category reflected continuing growth in the security sector offset by decreased unified communications revenue (Avaya and Juniper).

Operating expenses from continuing operations decreased to US$275.5 million (FY17: US$288.1 million). Operating expenses benefited from US$15 million of central costs which were reclassified and allocated against the profit on disposal of Westcon Americas to SYNNEX, as these costs are being incurred in providing transitional services to SYNNEX. This was offset by increased operating expenses in Europe. A further US$15 million has been accrued against the profit on sale of Westcon Americas for transitional services obligations in H1 FY19, which will reduce central costs in FY19.

Restructuring costs of US$11.5 million were incurred, mainly relating to central cost reductions and BPO unwind.

EBITDA loss from continuing operations was US$48.1 million (FY17: US$33.7 million) due to a significant decrease in Europe's profitability. This was offset somewhat by lower costs in the centre and improved results in Asia-Pacific and MEA.

Depreciation and amortisation was US$23.7 million (FY17: US$27.4 million), declining 13.5% due to the impact of FY18 derecognition of capitalised development expenditure at the start of the second half. At the end of FY18, Westcon further impaired capitalised development expenditure by US$55.1 million in accordance with IAS 36. This will result in reduced amortisation expenditure in future years. Operating losses from continuing operations were US$127.9 million (FY17: US$61.1 million).

Westcon International's net working capital days decreased to 35 days compared to FY17 (48 days) primarily due to improved inventory turns in EMEA and Asia-Pacific. The improvement in net working capital days and cash injections from Datatec following the SYNNEX transaction was partially offset by lower cash earnings, US$23 million of capital expenditures and the further purchase of US$2.6 million Angola government bonds which resulted in a decrease of US$168.4 million in net debt to US$131.8 million (FY17: US$300.2 million) from continuing operations. The net debt consisted of: net overdrafts of US$113.8 million (FY17: US$256.4 million); short-term borrowing and current portion of long-term debt of US$0.9 million (FY17: US$28.4 million); and long-term debt of US$17.1 million (FY17: US$15.4 million).

Management has made good progress with reducing the circa US$63 million central cost base towards the target of US$45 million for FY19 and US$33 million for FY20. The aim being to reduce Westcon International's central costs to below 1% of revenue.

Westcon International decided to bring back in-house the work currently being outsourced to the BPO provider to improve customer experience. Westcon has decided to build internal shared services capabilities in South Africa and the Philippines to service the EMEA and Asia-Pacific regions. Management has taken actions to streamline the business and expects the turnaround in Westcon International to take approximately 24 months. With a common business foundation in place, Westcon International is poised to drive top-line growth, improve market share and relevancy in its chosen markets.

Corporate, Consulting and Financial Services

This segment accounted for 1% of the Group's continuing revenues (FY17: 1%).

The Consulting unit comprised Analysys Mason, a provider of strategic, trusted advisory, modelling and market intelligence services to the TMT industries.

Consulting revenues were US$42.0 million (FY17: US$39.1 million) and EBITDA was US$2.5 million (FY17: US$2.3 million). The FY17 Consulting revenues and EBITDA include Mason Advisory for the first half but in FY18, the Group's share of Mason Advisory's profit is included in "share of equity-accounted investment earnings". Both Analysys Mason and Mason Advisory achieved improved results for FY18 compared to FY17.

Datatec Financial Services is in a development phase of its business providing financing/leasing solutions for ICT customers. The business recorded revenues of US$1.4 million in FY18 (FY17: US$1.9 million) and an EBITDA loss of US$1.4 million (FY17: US$1.4 million).

Corporate includes the net operating costs of the Datatec head office entities which were US$13.5 million (FY17: US$11.2 million). These costs include the remuneration of the Board and head office staff, consulting and audit fees. In FY18, foreign exchange gains were US$1.0 million (FY17: US$3.3 million foreign exchange loss). As at 28 February 2018, Datatec head office entities held cash of US$259.0 million (FY17: US$36.1 million).

Current trading and outlook

Logicalis is expected to deliver another strong financial performance in FY19, supported by anticipated growth in all regions, the contribution of PSI and the large multi-year project in Latin America.

Logicalis will also continue with organic and acquisitive initiatives in line with its strategy. Any acquisitions will be funded by Logicalis cash and debt resources.

The restructuring of Westcon International is under way with committed plans to cut costs and streamline its operations to return the business to profitability and resume growth.

The Board expects that the financial performance of Logicalis and the successful restructuring of Westcon International will enhance the value of the Group going forward.

Jens Montanana
CEO

Ivan Dittrich
CFO

17 May 2018

* Excluding impairments of goodwill and intangible assets, profit or loss on sale of investments and assets, amortisation for acquired intangible assets, unrealised foreign exchange movements, acquisition-related financial instruments, restructuring costs relating to fundamental reorganisation, SYNNEX deal-related expenses and the taxation effect on all of the aforementioned.