Westcon International divisional report

Performance

  • Revenue of US$2.3 billion
    (FY17: US$2.4 billion)
  • Gross margins of 9.8%
    (FY17: 10.8%)
  • Internal adoption issues from systems and BPO transformation negatively impact results in EMEA, partially offset by a good contribution from Asia-Pacific
  • SAP roll-out is complete and stability is improving
  • Business process to be returned in-house to shared services centres in South Africa and the Philippines learning lessons from the BPO exercise to improve customer service and transaction execution
Jens Montanana and Ivan Dittrich


Corporate overview

Westcon International is a value-added speciality distributor of industry leading cyber security and network infrastructure, unified communications products, data centre solutions and channel services with a global network of service providers, systems integrators and speciality resellers. Westcon International has operations in more than 50 countries. The company goes to market under the Westcon and Comstor brands. Westcon International's portfolio of market leading vendors includes: Cisco, Avaya, Juniper, Check Point, F5, Palo Alto and Symantec.

With effect from 1 September 2017, Westcon Americas (North America and Latin America) was sold to SYNNEX and the EMEA and Asia-Pacific businesses of Westcon-Comstor (Westcon International) continue under Datatec ownership with a 10% interest held by SYNNEX. This divisional report covers the continuing operations within the Datatec Group.

Westcon International revenue %
by technology category

Westcon International revenue % by technology category

Westcon International revenue %
by customer

Westcon International revenue % by customer

Westcon International revenue %
by business unit

Westcon International revenue % by business unit


Westcon

Operating in Asia-Pacific, Europe, Middle East and Africa, Westcon provides solutions from a broad portfolio of premier vendors. Westcon has deep expertise with vendors in the following technologies:

  • Cyber and network security: Arbor Networks, Beyond Trust, Check Point, F5 Networks, Infoblox, Palo Alto Networks, PulseSecure, Riverbed, Splunk, Symantec, Tennable, TrendMicro;
  • Networking infrastructure: APC, Ciena, Extreme Networks, Juniper, Nokia Nuage, Riverbed, Ruckus, Silver Peak, Solar Winds, VeloCloud;
  • Collaboration and mobility: Avaya, Jabra, Microsoft, Mitel, Plantronics, Polycom, Zebra Audiocodes;
  • Data centre: NetApp, Panduit, VMware; and
  • Business productivity: AWS, Microsoft.

Comstor

Comstor is the Cisco-centred business unit of Westcon International, shipping to more than 100 countries. The business distributes the full line of Cisco solutions:

  • Cisco security: providing highly secure firewall, web and email threat detection and management services for network and mobile device protection;
  • Cisco collaboration: empowering people to engage and innovate through multiple endpoints and truly collaborative software; anywhere, any time, on any device;
  • Cisco software: flexible software licensing across the hardware estate combined with profitable annuity revenue;
  • Cisco data centre: allowing data to be analysed, simplified, automated and protected ("ASAP") for operational efficiency through storage of digital information on mission-critical applications;
  • Cisco enterprise networking: covering SMB and enterprise solutions across core switching, wireless and routing technologies – without the enterprise costs; and
  • Cisco services: providing customer support on Cisco solutions through its global support and solutions team of experts, serving over 180 countries and responding in 17 languages.

Westcon International

Westcon International also has capability practices, or specialities, that it offers globally under its Westcon-Comstor brand:

  • Cloud: Amazon Web Services and Microsoft Azure and Office 365;
  • Services: supply chain, financial, education, technical support and professional; and
  • Global deployment solutions: logistics, staging, strategic stocking, configuration, project coordination, VAT recoverability; and global contracting, credit applications, and terms and conditions.

Through a difficult year in most markets, Westcon International continued to invest in its partner technology and digital distribution platforms to drive processes automation in its business with the goal of creating exceptional customer experiences, driving operational excellence, reducing transactional costs and expanding its capabilities around services, software and cloud. This included the final roll out of its SAP ERP software and specialist modules as well as determination of its retained organisation and BPO strategy.

Westcon International is at the end of a multi-year business transformation aimed at delivering a unified operating platform to accelerate future growth. The company, its customers and vendors are now beginning to see the benefits of the common platform and its investments in new productivity tools, partner integration in its software and cloud solutions and services. The impacts of outsourcing have been challenging, particularly in EMEA, affecting consistent quality and timely support. The executive team is fully aware of the impacts and has decided to bring the BPO functions back in-house by building internal shared services capabilities in South Africa and the Philippines to serve the European Asia-Pacific regions. The intention is to improve customer experience and vendor satisfaction.

Westcon International's strategy

For over 30 years, Westcon has evolved its business model with one clear principle in mind: enabling partners and improving profitability through focus and value-added capabilities. Following the sale of Westcon Americas, the Westcon International team studied several inputs and recent changing dynamics including distribution and technology market trends, competitor analysis, and recent sales performance trends to create a strategic framework of increasing mid-term stakeholder value.

A key objective for Westcon International is improving profitability through its strategic priority actions, including: business restoration customer success; solutions and services; creating a winning team; execution excellence; and digital enablement. The company is driving its mix to services and other higher margin offerings, managing its operating costs and driving efficiencies. Examples include establishing "lines of business" focused on specific vendors and customer groups to improve sales growth and profitability; focusing on core customer activities executed within the business; consolidating businesses, management, processes and locations; creating and deploying better tools for automation; and investing overall in IT.

Markets

Westcon International experienced growth in its Asia-Pacific market due to sales expansion in China, growth throughout Asia and Cisco exclusivity being awarded in New Zealand. Westcon International experienced sales slowdown in its Australian market due to challenges in its Westcon division as well as in its European market at the start of the year due to challenges associated with adoption following the ERP and BPO business transformation roll outs. This was compounded by continued macroeconomic pressures that resulted in declines in its Middle East and Africa markets. The company has taken necessary steps to normalise operations in Europe and manage costs in challenged markets while improving the sales motion across all regions.

Progress against strategic objectives

FY18 objectives   FY18 execution of objectives   FY19 priorities
       

Business restoration

  • Focus on revenue growth, margin improvement and profitability
  • Working capital normalisation and improving cash flow
  • Africa transformation from loss to profit
  • Reduce ongoing central costs to below 1% of revenue
  • Continue roll out of 1View Quote and order productivity automation
  • .com and ecommerce roll out
  • Focus on renewals data
  • Continue to evolve BlueSky cloud platform
  • Accelerate and simplify vendor integrations
  • Rectify the outstanding issues with SAP and BPO
 
  • 1View Quote roll out complete, .com and ecommerce roll out continues
  • Single point-of-contact owning the customers' business case
  • Developed renewals excellence centres for security, UCC and Cisco solutions
  • Continued stabilisation of SAP in Europe
  • Decision reached to exit BPO and repatriate outsourced activities
 

Customer success

  • Alignment of vendor and partner objectives to ensure profitable and maximised growth through line-of-business structure
  • Development of clear customer segmented support models
  • Deployment of customer technology solutions and digital distribution platforms to ensure fast and accurate engagement, quoting, transacting and support models
  • Continued investment in marketing and sales initiatives which focus on partner growth opportunities
  • Consolidation of market leading position with the global eight vendors in terms of growth, share and objectives alignment
  • Review of portfolio to ensure alignment to growth objectives and medium-term market opportunities
  • Selective new portfolio additions
 
  • Successfully solidified relationships with core vendors post-acquisition
  • Focus on understanding vendor and reseller needs
  • Focused on development of SD-WAN portfolio and on-boarded strategic providers
  • Introduced a new GTM sales model, providing alignment of vendor and customer objectives
  • Enhanced and expanded global Comstor security initiative (EMEA Boost programme)
  • Executed successful launch of Cisco's distribution sales visibility ("DSV") programme
 

Solutions and service

  • Continued focus on Comstor-Cisco differentiation
  • Expand security portfolio in emerging technologies
  • Maximise existing distribution sales while continuing to build digital distribution capabilities (renewals, services and cloud)
  • Add strategic software and cloud partnerships
  • Portfolio expansion in fast growing technology areas, for example SD-WAN, with associated services and ECO system offers
  • Continue roll out of Cisco SaaS offers into remaining countries, add new Cisco SaaS offers and drive revenue through software and cloud platform
  • Digital enablement of customers' technology tools to drive satisfaction, operational excellence and enhance "ease of doing business"
  • Deliver an expanded portfolio of resources to enable customers to grow profitability
  • Adapt go-to-market engagement to cover SMB as well as SP/SI regional and channels
 
  • Introduction of CRM tool, SalesView, into the lines of business
  • Tools enablement and adoption for 1View, CRM and ecommerce
 

Winning team

  • Continue to develop best talent in all areas while promoting from within wherever possible
  • Recruit, develop and retain the best talent in every role
  • Maintain an environment where everyone is motivated to do their best to support customers and contribute to company and individual success
  • Investment in training and development of all functions and roles
  • Invest in offer and delivery capability for service providers, XaaS and supply chain
  • Improve solution offerings, develop sales and marketing motion
  • Drive operational quality and efficiency
  • Focus on global vendors and Accelerate vendors
 
  • Expanded service offerings to include managed services and technology-as-a-service offerings
  • Large-scale global launch of new Company values
  • All staff trained on energy programme
  • New staff induction training programme formalised and executed
 

Execution excellence

  • Shared services centres in South Africa and Philippines for EMEA and Asia-Pacific
  • Reverse BPO to improve customer service and transaction execution
  • Consistent, timely and accurate reporting and management information
  • Provide customers the ability to integrate with cloud vendors to replenish and manage orders at the customer level
  • Offer powerful cloud market-place and reseller white-label services
  • Continue to bolster cloud data acquisition, aggregation and billion capabilities; and value-added service offerings
 
  • Piloting Comstor customer success centre in UK to support Cisco's software adoption initiative
  • Rolled out of Cisco SaaS offers on BlueSky platform
  • Continued development of BlueSky platform features and capabilities
 

Digital enablement

  • Deployment of digital distribution technology – Cloud/aaS enabled ERP
  • Leverage technology automation around SAP and customer supplier tools
  • Complete SAP last mile items critical for the optimisation of the platform

Performance

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

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.

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.

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 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) from continuing operations; short-term borrowing and current portion of long-term debt of US$0.9 million (FY17: US$28.4 million) from continuing operations; and long-term debt of US$17.1 million (FY17: US$15.4 million) from continuing operations.

Partners: customer and vendor relationships

Westcon International's partners include technology vendors, and customers such as value-added resellers, systems integrators and service providers offering technology solutions for small and medium-sized businesses, enterprise organisations, governments and other vertical markets around the world. Solutions include the design, configuration and implementation of cyber and network security, network infrastructure, unified communications and collaboration, mobility and data centre networks, as well as network storage. Westcon International also provides a range of comprehensive services to complement these solutions, such as Westcon-Comstor EDGE, its unique partner enablement programme.

Partner engagement programmes and an ongoing focus on vendor relationships continue to create new market opportunities. Westcon International's relationships with the company's "global eight" vendors remain the fundamental platform for driving revenue growth, opportunity for services penetration and influence for software and cloud solutions. Examples include the launch of the "Comstor security initiative", to align with Cisco's ambitions to become the global leader in infrastructure security; the investments in PAN across all regions; and growth with Checkpoint and global deployments with Symantec confirm the company's position as a global leader in cyber security distribution. The expansion with Microsoft for its portfolio and advances of the Accelerate Programme to grow emerging technology vendors, underscores the deep-rooted focus on technology evolution combined with commercial opportunity.

Awards and recognition

Westcon International's leadership, vision, programmes and performance continue to draw the attention of the technology market it serves. Westcon International's relentless commitment to excellence transcends all facets of the organisation. Most recent accolades include:

Comstor Australia Best Adoption of Cisco Start Portfolio

Comstor Asia Pacific Japan Cisco Security Value Distributor of the Year 2017

Comstor EMEA – Cisco, EMEAR Digital Marketing Distributor of the Year

Westcon ANZ Juniper distributor of the Year

Westcon Middle East SonicWall, Network Security Excellence Award for Best Value-Added Support

Westcon Security Netherlands Pulse Secure, Distributor of the Year 2016

Westcon Singapore Gigamon Outstanding PM award

Westcon Singapore Juniper Value-added Distributor of the Year 2017

Westcon Thailand Avaya Best Distributor of the Year 2017

Westcon Thailand Avaya Libero Award for 2017

Westcon China Micro Focus Premier Partner 2017/18 Distributor

Westcon Thailand Splunk Distributor South Asia 2017

Westcon New Zealand – Reseller News Best cloud distributor 2017

Comstor Austria Cisco, Distributor of the Year 2016

Comstor Singapore Cisco Top overall distributor 2017

Comstor Philippines Cisco Top Distributor Engineer for Data centre

Comstor Philippines Top Distributor Engineer for Security

Comstor Philippines Excellence in Marketing Award

Westcon New Zealand Reseller News Highly commended, Best distributor Initiative 2017

Westcon New Zealand NZ distributor of the Year for APC, 2017

Westcon ANZ Pulse Security distributor of the Year

Westcon China Palo Alto Networks 2017 Top Performance in Renew Business

Westcon China Palo Alto Networks 2017 Top Performance in Total Business Growth

Westcon Philippines Solarwinds Top Distributor Award

Westcon UCC Germany Plantronics, Distribution Award 2017 for Biggest B2B revenue growth

Westcon Middle East APC – Best Value-Added Distributor 2016

Westcon EMEA F5 Networks, Best Regional ATC 2017

Westcon Middle East F5 Networks, Best Performing Security ATC 2017

Westcon International's executives are active members of the Global Technology Distribution Council ("GTDC"), a consortium of the world's leading technology distributors. GTDC members represent more than US$150 billion in annual revenue.

Outlook

Westcon International has decided to bring back in-house the work currently being outsourced to the BPO provider to improve customer experience. Shared services capabilities are being built in South Africa and the Philippines to service the EMEA and Asia-Pacific regions to optimise business processes internally. 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.