Logicalis divisional report

Performance

  • Revenue from continuing operations grew by 6.5% to US$1.6 billion (FY17: US$1.5 billion)
  • Gross margins from continuing operations of 25.0% benefiting from an improved services mix (FY17: 24.1%)
  • EBITDA from continuing operations increased by 12.9% to US$86.2 million despite being impacted by a substantial reduction in US profitability (FY17: US$76.3 million)
  • Acquisition of PSI in Indonesia, NubeliU in Argentina and Brazil during FY18 and Coasin in Chile and Peru (scheduled to complete in Q3 FY19) in line with strategy
Mark Rogers and Robert Bailkoski


Corporate overview

Logicalis is an international multi-skilled solution provider offering digital enablement services to its customers to help them harness the power of digital technology in delivering beneficial business outcomes.

Logicalis' customers span industries and geographical regions. The Group engages in the dynamics of its customers' vertical markets including financial services, telecommunications, media and technology, education, healthcare, retail, government, manufacturing and professional services. Logicalis applies the skills of its more than 4 700 employees to modernise its customers' data centre and cloud services, security and network infrastructure, workspace communications and collaboration capability, data and information strategies, and IT operations.

Logicalis acts as a customer advocate with some of the world's leading technology companies including Cisco, IBM, Microsoft, Oracle, HPE, CA Technologies, NetApp, VMware and ServiceNow.

Logicalis has revenues of approximately US$1.6 billion and operates in Europe, North America, Latin America, the Asia-Pacific region and Africa.

Logicalis product revenue % by vendor

Logicalis product revenue % by vendor
 

Logicalis revenue % by segment

Logicalis revenue % by segment

How Logicalis creates value

Logicalis' go-to-market strategy is built around engaging with its customers to deliver tangible business outcomes through the implementation of a variety of technology solutions and services. These include data centre, networking, communications and collaboration solutions, mobility, data and information analytics and cloud services. A key element of the Logicalis value proposition is its optimal service portfolio, which offers a broad range of services including product integration and associated professional services, lifecycle and managed services and cloud solutions, with a growing focus on embedding security across all the technology offerings.

Logicalis is able to deliver consistent, common global services delivered from shared, best practice platforms known as its Common Services Platform ("CSP").

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.

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 better experiences, services and products, driven by increased use of mobility, social media, data analytics and cloud technologies.

Logicalis' goal is to be a strategic partner to the CIO, enabling them to satisfy and operate all aspects of IT more effectively. This includes accelerating the adoption of automation across a customers' 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, flexible and objective approach to how customers own, operate and consume core IT services. 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 advanced and 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's outcome 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:

  • Focus on customer business needs at both the CIO and line-of-business levels to deliver business improvement outcomes;
  • Invest in processes, people and systems that provide its customers with consistent industry best-in-class service;
  • Leverage knowledge and best practice processes across all territories;
  • Attract and retain high-calibre employees;
  • Deliver revenue growth which is balanced between organic and acquired growth;
  • Maintain leadership in innovation for its solutions and service offerings;
  • Offer lifecycle IT solutions and services in all operating territories; and
  • Increase annuity (recurring services) sales.

To achieve these strategic objectives, Logicalis continues to:

  • Focus on business improvement outcomes and the value delivered to customers;
  • Engage with customers at all levels and across stakeholder communities, building long-term relationships;
  • Renew its focus on key vendor relationships;
  • Position itself as a trusted and capable partner for technology and service excellence; and
  • Expand its portfolio of 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 large percentage of its operating profits in Brazil and its market position there also presents possible business risk. A slowdown in the Brazilian economy could impact Logicalis' future growth potential and profitability.

Progress against strategic objectives

  FY18 objectives   FY18 execution of objectives   FY19 priorities  
 
  • Continue to focus on improving the services and annuity revenue mix
 
  • Services and annuity revenue increased to 37% of revenue (FY17: 35%)
 
  • Continue to focus on improving the services and annuity revenue mix
 
 
  • Focus on cost reduction activities in legacy areas of the business
 
  • Renewed focus on optimising our cost base in FY18 by re-emphasising commitment to centres of excellence and the transition of UK managed services to our in-house services provider in South Africa
 
  • Focus on cost reduction activities in legacy areas of the business
 
 
  • Leverage group-wide capabilities in data, security and cloud-based knowledge
 
  • Acquisition of NubeliU further enhances our cloud services capability. Logicalis' common services platform was rolled out to several new countries
 
  • Continue the roll out of the common services platform to new countries as an enabler for further efficiencies
 
 
  • Seek further acquisitions to boost existing territories' market share and to leverage Logicalis' footprint in emerging technologies
 
  • The acquisition of a majority stake in PSI substantially boosted our local market share
  • The acquisition of NubeliU in Argentina and Brazil increased Logicalis' capabilities in Openstack technology
 
  • Seek further acquisitions to boost existing territories' market share and to leverage Logicalis' footprint in emerging technologies
 

Markets

Total worldwide IT spending is expected to grow steadily from US$2.3 trillion in 2016 to US$2.7 trillion in 2021, a CAGR of 3.4% (source: EITO, IDC, Gartner, Analysys Mason). While the demand for IT infrastructure in the markets in which Logicalis operates was again mixed during the year, digital transformation will drive growth across all Logicalis markets.

According to Logicalis' fifth annual survey of almost 900 CIOs worldwide, there is a clear view that legacy and/or complex infrastructure, organisational culture and security, plus issues like cost and skills, are the main barriers to digital transformation.

However, the benefits of digital transformation are clear to the majority of CIOs. They understand that "digital" opens up a wealth of possibilities, from new customer interfaces and experiences to greater operational efficiency. CIOs took note that those able to derive actionable insight from analytics that seamlessly harness market, customer, operational and financial data will be first to market with new products and services, enhanced customer experience and even new business models.

Despite a long-stated desire to take on more strategic roles, as our past surveys have shown, the majority of CIOs still spend between 60% and 80% of their time on day-to-day IT management, leaving little time for strategy. If CIOs are to deliver digital transformation they must be change makers, not change managers. According to this year's survey, 51% of CIOs are planning to replace and/or adapt existing infrastructure, as well as change the relationship between business and IT, engaging with line of business colleagues and acting as ambassadors for digital transformation.

Progress towards full digital enablement may be slow, but CIOs are delivering new digital services and capabilities, albeit in reactive mode as they respond to business demand and market dynamics.

They understand the scale of the digital transformation challenge and they are prepared to look outside for help. Trusted partners such as Logicalis are able to take on the heavy lifting of day-to-day IT and to simplify technology by creating environments in which digital enablement can flourish.

At Logicalis we see ourselves as "architects of change". Logicalis clearly differentiates through its depth of expertise and experience of managing end-to-end delivery of projects from initial concept, through to delivery of desired business outcomes. This requires some degree of digital modernisation of the core network assets. Logicalis has been working with customers to ensure data platforms become highly automated self-service platforms, data and information capabilities create new value and business optimisation from existing data, the network connects more things securely, supporting mobility, new applications and communication tools, and IP operations are modernised to interconnect and automate everything. Logicalis has the tools and methodologies to help customers realise this transformation in a manageable and secure manner.

Performance1

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 improvement 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 the incremental overhead 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); 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.

1 The prior year has been re-presented to show comparative results from continuing and discontinued operations in accordance with IFRS 5.

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 further enhanced during FY18 when Logicalis was awarded Cisco Global Gold status.

During the year, we were recognised with several partner awards. Highlights include:

  • Logicalis' Latin American businesses collected a total of 16 awards at the Cisco Partner Summit in November 2017
  • Logicalis Australia was recognised with the 2017 CRN Fast50 Icon Award and was awarded 2017 Citrix Partner of the Year for ANZ
  • Logicalis Spain was acclaimed IBM's Most Relevant Partner in SaaS in 2017
  • Logicalis USA was announced as Impact Partner of the Year by Veeam

Outlook

Logicalis' operational priorities for the coming year are to continue to demonstrate the value of IT to its customers by focusing on the impact it can have on positive business outcomes.

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 operates. 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 main financial goal for the coming year is to increase the value of the Logicalis Group to Datatec shareholders by delivering a revenue growth rate in excess of the market and increasing EBITDA and cash generation.