Our focusExecutive Directors' report

Our vision is to be the global leader in speciality high-value ICT solutions through distribution and integration services businesses, in collaboration with the best-in-class vendor technology partners. We have built an extensive global footprint through our entrepreneurial expansion and aim to continue to add technological agility and service excellence to deliver value to all stakeholders.

Market conditions

The macroeconomic environment in which the Group operates remained challenging for the period under review with global synchronised growth upset by gyrations in currencies, the strengthening of the US Dollar and the collapse in oil prices.

The recovery in the United States is becoming more sustained; however, growth in other parts of the world remains uneven. The interest rate environment remains favourable with general consensus pointing towards an increase in US interest rates in the short term. In Europe and emerging markets, the economic environment remains mixed. It seems likely that the launch of quantitative easing measures in Europe has begun to pave the way for gradual economic growth. Asia-Pacific continues to be impacted by the shifting patterns in the Chinese economy whilst economic growth in Australia remained subdued. Over the medium to longer term, any recovery in the United States and Europe as well as the effect of lower cost energy should boost many emerging economies by lifting exports and consumption.

The ICT industry is continuing its transition towards more applications being run on cloud-based infrastructure solutions. As a result, many of the areas in which the Group operates continue to benefit from the rapid proliferation of wireless and mobile broadband networks. Technology decisions are increasingly being made at a business and commercial level and are no longer just the remit of IT departments.

The Group’s scale and global diversity positions us well to take advantage of key markets and high-growth opportunities.

Financial review

Group revenues increased 13.3% to US$6.4 billion (FY14: US$5.7 billion) reflecting a 19.4% increase in Westcon revenues, partially offset by a 1.1% decline in Logicalis.

Gross margins were slightly lower at 14.5% (FY14: 14.8%) due to the increased contribution of Westcon to overall revenues. Gross profit increased by 10.9% to US$932.9 million (FY14: US$841.4 million) while operating costs grew by 9.1% to US$726.5 million (FY14: US$666.1 million).

EBITDA increased by 17.7% to US$206.4 million (FY14: US$175.3 million), which includes unrealised foreign exchange gains of US$1.0 million (FY14: US$3.4 million loss).

The Group’s EBITDA margin of 3.2% was up slightly (FY14: 3.1%) due to operating leverage and increased efficiency across all divisions.

Depreciation was US$26.3 million (FY14: US$26.4 million). Amortisation of acquired intangible assets and software was US$15.2 million (FY14: US$15.1 million) and amortisation of capitalised software development expenditure was US$7.2 million (FY14: US$6.3 million). Depreciation and amortisation includes a favourable impact arising from a revision of the amortisation period of the ERP system to terminate two years later than originally estimated.

Operating profit was up 29.2% to US$157.8 million (FY14: US$122.1 million).

The net interest charge decreased to US$17.6 million (FY14: US$21.6 million) mainly as a result of improved working capital management that led to reduced levels of average net debt during FY15.

Profit before tax was US$140.2 million (FY14: US$101.8 million).

The Group’s reported effective tax rate for FY15 is 36.8% (FY14: 36.8%). This is higher than the South African rate of 28% due to the profits arising in jurisdictions with higher tax rates, in particular North and Latin America.

Underlying* earnings per share (“UEPS”) were up 17.1% to 41.8 US cents (FY14: 35.7 US cents). Headline earnings per share (“HEPS”) were 37.0 US cents (FY14: 31.6 US cents).

*

Underlying earnings exclude impairment of goodwill and intangible assets, profit or loss on sale of investments and assets, amortisation of acquired intangible assets, unrealised foreign exchange movements, acquisition-related adjustments, fair value movements on acquisition-related financial instruments and the taxation effect on all of the aforementioned.

The Group generated US$186.2 million cash from operations during FY15 (FY14: US$32.2 million) and ended the year with net debt of US$87.1 million (FY14: net debt US$86.7 million), taking into account long-term debt of US$21.6 million and short-term debt of US$43.5 million, included in payables and provisions. The Group continues to enjoy comfortable headroom in its working capital facilities.

During FY15, the Group completed the following transactions:

Westcon

30 August 2014 – Westcon acquired the assets of Verecloud, for US$12.0 million (including US$1.0 million deferred purchase consideration). Verecloud enables Westcon to bring powerful channel-optimised cloud solutions and services distribution capabilities to the market. Over the past 18 months, they have co-developed a truly differentiated cloud go-to-market capability. They are well positioned to leverage the potential that cloud has for technology vendors, and for resellers to broaden their service solutions.

Logicalis

1 September 2014 – Logicalis acquired a 51% shareholding in Ituma for US$1.4 million. Wi-Fi-enabled services is an exciting segment of the growing global wireless data market. Our investment in Ituma provides Logicalis with access to a new complementary solution that has the potential to support increases in annuity, services and infrastructure revenues across multiple territories in which Logicalis operates.

2 January 2015 – Logicalis acquired a 100% shareholding in Inforsacom for US$17.3 million. The acquisition of Inforsacom creates a larger platform with broader ICT services capabilities to augment Logicalis’ existing German operations, in line with the strategy of growing our presence in Europe.

December 2014 and January 2015 – Logicalis increased its holding in PromonLogicalis Latin America Limited from 60% to 65%.

The fair value of companies acquired during the year was US$30.0 million. As a result of the acquisitions, goodwill and intangible assets increased by US$24.4 million and US$10.4 million respectively.

Datatec issued 6.5 million new shares during the year: 4.4 million shares as part of acquisition activities; 2.0 million shares for the FY15 interim scrip distribution; and 0.1 million shares to satisfy exercised share options.

The Group paid US$33.3 million to shareholders during the year: a final capital distribution in respect of FY14 of US$17.2 million in July 2014 and an interim scrip distribution with cash dividend alternative in respect of FY15 in December 2014.

The total value returned to shareholders in the FY15 interim distribution was US$16.1 million of which US$10.0 million (61.8%) was distributed to shareholders in the form of scrip (new shares) and US$6.1 million (38.2%) was settled in cash to those shareholders who had elected the cash dividend alternative.

A final scrip distribution with cash dividend alternative for FY15 has been declared as set out here under dividend.

Divisional performance

Westcon

Westcon’s operations are located in more than 60 countries and create unique distribution supply programmes which provide support to accelerate the business of its local, regional and global partners. Westcon’s portfolio of market-leading vendors includes among others: Cisco, Avaya, Polycom, Juniper, Check Point, F5, Palo Alto Networks and Blue Coat.

Revenues increased by 19.4% to US$4.9 billion (FY14: US$4.1 billion). Most notably, revenues improved in North America where sales increased 41.9% through a return to efficient execution following the resolution of post-ERP confronts in that region.

Westcon also continued its globalisation of core vendor relationships, most recently including Palo Alto Networks. The expanded partnership opens new markets for the industry’s fastest-growing enterprise security platform, permitting reseller channel partners to leverage highly integrated global distribution capabilities.

Westcon’s management remains focused on improving operational efficiency through the global roll out of its ERP system, with implementation in New Zealand, Singapore and Australia during FY15. The roll out is continuing in FY16, in conjunction with further operational efficiency measures.

Logicalis

Logicalis has operations in North America, throughout Latin America, Europe and across Asia-Pacific. Logicalis provides turnkey ICT integration services and solutions including the design, build and management of networks and data centres for mid-sized and large enterprise clients, across multiple geographies.

Revenue was US$1.5 billion (FY14: US$1.6 billion), including US$21.9 million from acquisitions made during the year. Organic revenue was down 3% due to lower product sales across the main vendor categories (Cisco, IBM and HP), which were only partially offset by increases in other vendor categories.

Revenues from total services were up 7.9%, with increases in both professional services and annuity service revenues. This change reflects customers’ increasing shift towards, and Logicalis’ response to, service-based solutions.

Sequentially revenues advanced 14.7% higher in the second half driven by higher professional services and product revenues.

Revenue growth for the year was mixed across the regions with marginal increases in North and Latin America offset by Asia-Pacific, which was adversely impacted by difficult trading conditions in Australia and a weakening in the macroeconomic environment.

Logicalis continues to adapt its go-to-market model and develop its services to address the change to cloud-based solutions. The dramatic weakening of the Brazilian Real against the US Dollar in particular will moderate growth expectations in the Latin America region. Logicalis UK is going through a reorganisation pursuant to the completion of a major seven-year contract.

Consulting Services

The Consulting Services division comprises the following three businesses:

• Analysys Mason, a provider of strategic, trusted advisory, business modelling and market intelligence services to the telecoms, digital media and technology (“TMT”) industries.
• Mason Advisory, an independent ICT consultancy providing related strategic, technical and operational advice to the public and private sectors.
• The Via Group (“Via”), a specialist professional services organisation providing unified communications and integrated voice solutions that encompass Microsoft technology.
• Intact Integrated Services (“Intact”) was transferred to Westcon in July 2014.

Divisional revenues were US$55.2 million (FY14: US$72.6 million). EBITDA improved to US$3.2 million (FY14: US$2.1 million) due to the transfer of Intact to Westcon, operating improvements at Via and cost-saving initiatives. The FY14 comparatives include Intact revenues of US$15.4 million and EBITDA loss of US$1.6 million. From FY15, Intact is included in the Westcon results.

Dividend

The Board has declared a total dividend for the year of 17 US cents, including an interim dividend of 8 US cents. The dividend policy for the Group remains a cover of three times underlying earnings per share.

Strategy

The Group’s strategy remains to support the development of its principal operating subsidiaries and also to look for sector-aligned acquisition opportunities both as incremental or standalone investments.

Westcon is seeking to improve its operating efficiencies through a combination of business transformation and scale. It plans to roll out its new ERP system in Europe after the implementation of a shared services initiative aimed at standardising the operating processes and procedures across the region. This is expected to deliver significant benefits to Europe in the first instance and to the broader EMEA region thereafter. In addition, Westcon is looking to increase the revenue scale in many of its developing markets by adding products from new vendors and additional customers.

Logicalis continues to adapt to a more service-led model as customers’ IT configurations evolve to take advantage of the transition to enterprise computing in the cloud and using Infrastructure as a Service (“IaaS”). This development towards enhanced services contributing to revenue through longer-term contracts with customers will continue to be a theme in FY16. Logicalis is well placed to consolidate its market positions in North America, Latin America and Asia-Pacific through the execution of targeted acquisitions in these regions.

The Consulting Services division has been transformed, through the transfer of Intact into Westcon and the separation of Mason Advisory from Analysys Mason. The current sales pipeline indicates that demand is expected to continue into FY16.

Prospects

The Group remains well positioned to support its vendors and customers through its scale and broad international coverage. Technology innovation remains high in the sectors in which the Group operates as IT infrastructure migrates to cloud-based delivery, often requiring managed services. This continues to create demand for networking, security, mobility and unified communications solutions.

The shift to cloud-based solutions is impacting the timing of product revenue recognition as infrastructure is delivered as a service. This is also changing competition in some market segments. Westcon and Logicalis are capitalising on these trends through continued vendor and customer alignment and innovation.

The Board has decided to discontinue specific forward guidance due to, inter alia, the size and diversification of the business today as well as the volatility of the multiple currencies in which the Group operates.

Based on market conditions, revenue growth will be driven by industry trends, market share expansion, exploiting new technology solutions and the continuing increase in services. Datatec expects earnings to be positively impacted by the growth momentum at Westcon offset by reorganisation in Logicalis UK and continued Dollar strength.

Appreciation

As always, we would like to thank the Board of Directors for their guidance, counsel and support during the past year. We are also grateful to all our vendors, customers, shareholders and other business partners and stakeholders for their continued support and contribution to the Group.

Finally, we wish to thank our employees for their dedicated service in driving solutions for our clients, to the continued distinction of the Group.

 

Jens Montanana
CEO
13 May 2015

Jurgens Myburgh
CFO
13 May 2015