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Logicalis divisional report

A leading provider of global IT solutions and managed services

Corporate overview

Logicalis is an international multi-skilled IT provider that designs, plans and supports impactful digital transformation solutions. With sector-leading experience and insight, its unique approach enables progress at pace and with purpose.

Logicalis' customers span industries and geographical regions. It operates in several markets including financial services, telecommunications, education, healthcare, retail, government, manufacturing and professional services.

Logicalis applies the skills of its more than 6 000 employees to create, transform, deploy and operate companies' IT infrastructure through on-premise, cloud or hybrid solutions. Logicalis modernises its customers' data centres, offers security and network infrastructure expertise, workspace communications and collaboration capability, and designs and implements data and Internet of Things ("IoT") projects.

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

Logicalis has revenues of over US$1.7 billion and operates in Europe, North America, Latin America, Asia-Pacific and Africa.

Executive team

How Logicalis creates value

Logicalis' go-to-market strategy is based on delivering the business objectives of its customers through the implementation of a variety of technology solutions and services. These include cloud, data centre, networking, communications and collaboration solutions, IoT, mobility, and data and information analytics. A key element of the Logicalis value proposition is its extensive service portfolio, which offers a number of services including product integration and associated professional services, lifecycle and managed services and cloud solutions, with a focus on embedding security across all the technology offerings.

Logicalis delivers consistent, common global services delivered from shared, best practice platforms. Logicalis works with both IT and line-of-business stakeholders to align technology investments with business strategy, driving critical business objectives through the adoption and application of technology for competitive advantage.

Logicalis demonstrates value through its ability to address the changing technology demands of a more digitally literate customer, employee, student, or citizen. Each of these stakeholders now demands 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 customer's 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 increasingly 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.

Strategic overview

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' required outcome or technology demands of its customers
• 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 European, North American, Latin American and Asia-Pacific regions.

Logicalis remains committed to the maximisation of growth in profit and value by gaining scale, 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 success 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 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
• Increase recurring services sales.

To achieve these key aims, 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. For example, the market transition to cloud is now happening at a more controlled pace. Logicalis' customers are investing in cloud services, particularly private cloud and managed-private cloud. Logicalis has adapted well to this change, especially in the private cloud market, but 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 capability.

Logicalis continues to generate a large percentage of its operating profits in Brazil but 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							ACHIEVED IN PROGRESS
	FY19 OBJECTIVES		FY19 EXECUTION OF OBJECTIVES				FY20 PRIORITIES
	Continue to focus on improving the services and annuity revenue mix		Services and annuity revenue increased to 38% of revenue (FY18: 37%)				Continue to focus on improving the services and annuity revenue mix
	Focus on cost reduction activities in legacy areas of the business		Further cost optimisation activities completed mainly in parts of Europe and the USA				Focus on cost reduction activities in legacy areas of the business and increasing order intake
	Continue the roll out of the common services platform to new countries as an enabler for further efficiencies		Logicalis' common services platform was rolled out to several new countries. Acquisition of CNI enhances Logicalis' cloud services capability				Seek to add to the capabilities of the common platform to ensure it remains a business enabler
	Seek further acquisitions to boost existing territories' market share and to leverage Logicalis' footprint in emerging technologies		The acquisition of Coasin substantially boosted Logicalis' local market share in Chile and Peru; Clarotech was acquired in South Africa, improving market share; and the acquisition of CNI in Australia increased Logicalis' capabilities in Microsoft Azure 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 to US$2.7 trillion in 2021 (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.

The sixth annual Logicalis Global CIO Report, of almost 850 CIOs, has identified significant changes in the role of CIOs across Europe, the Americas, the Far East and Australia. Today, 94% of these IT leaders spend between 10% and 50% of their time on innovation and other strategic activities. This more strategic focus appears to have been at least partly enabled by an increasing willingness to rely on third parties to manage day-to-day IT. Working with trusted third parties to deliver and manage IT outside of the core makes day-to-day management more efficient while maintaining service agility.

Half of CIOs now see their performance measured according to their ability to deliver service innovation and more than a third (35%) are expected to make a direct contribution to revenue growth – perhaps through digital transformation and by enabling product and service innovation through digital technology. Furthermore, CIOs' success in taking on a more strategic role appears to be enabling new, more agile and adaptable approaches to organisational innovation.

The way organisations think about innovation is changing, with strategies for innovation now most commonly about enabling small scale, everyday experimentation. In this year's CIO Survey, over a third (34%) of organisations now take that approach, with the large-scale projects that once dominated now accounting for less than a quarter (23%).

These findings complement a number of key takeaways in a recent survey of CIOs by Gartner (source: 2019 CIO Agenda: Secure the Foundation for Digital Business). It reports that digital progress has reached a tipping point where half of respondents say their organisation's business model has already changed or is changing. In total, 95% of the Gartner respondents believe security threats will increase and calls for CIOs to "build relationships with the business and other stakeholders while communicating the value of IT for digital business", something the Logicalis survey shows they are doing as "agents of innovation".

Logicalis sees itself as an "architect of change" and differentiates itself through its expertise and experience in managing projects from initial concept, through to successful delivery of desired business outcomes. This requires a degree of digital modernisation of the core network assets. Logicalis has been working with customers to ensure their data platforms become highly automated self-service platforms and that data and information capabilities create new value and business optimisation from existing data.

Customers' networks need the ability to connect to more devices securely, supporting business optimisation through the utilisation of data generated by those devices. Understanding how to modernise applications, communication and mobility tools and IT operations is critical to customer success. Logicalis has the tools and methodologies to help customers realise this transformation in a manageable and secure manner.

In September 2018, Logicalis completed the acquisition of Coasin Group, a Chilean ICT system integrator offering technological solutions to industries such as mining, financial services, telecommunications and retail, with operations both in Chile and Peru. Logicalis also acquired Clarotech, a South African open source IPT cloud and managed services business. In October 2018, Logicalis' Australian operation, Thomas Duryea Logicalis acquired CNI, a Microsoft-certified gold partner.

Outlook

Logicalis' performance is expected to strengthen over the next financial year with its results potentially impacted by currency movements, especially in Latin America.

Performance

Logicalis accounted for 40% of the Group's revenue (FY18: 40%).

US$'million	February  2019	February  2018	%  movement
Revenue Revenue from operations increased by 11.3% to US$1.7 billion (FY18: US$1.6 billion). Services revenue was up 15% with growth in both professional services and annuity revenue. Revenue increased across all regions in absolute terms with growth in Europe driven mainly by Germany and Spain. Latin America showed improvements notably in Brazil which benefited from a large multi-year deal despite currency headwinds. Asia-Pacific also improved largely because of the contribution of the Packet Systems Indonesia acquisition for the full year, as well as a number of territories in the region which experienced high growth. Revenues from product sales were up 9% driven by Latin America, with increases in Cisco, partially offset by decreases in HPE. Revenue	1 741.1	1 563.7	11.3
Gross profit Gross profit was up 4.7% to US$410.1 million (FY18: US$391.7 million). Logicalis’ gross margins were 23.6% (FY18: 25.0%). This reduction was partly due to the large multi-year Latin-American contract which included a large product component as well as a disappointing performance in the UK. Gross profit	410.1	391.7	4.7
Gross margin (%)	23.6	25.0
Operating costs	(316.7)	(305.5)	3.7
EBITDA EBITDA was US$93.4 million (FY18: US$86.2 million), with a corresponding EBITDA margin of 5.4% (FY18: 5.5%). Operating profit before interest, tax, depreciation and amortisation ("EBITDA")	93.4	86.2	8.4
EBITDA margin (%)	5.4	5.5
Operating profit Operating profit was US$65.9 million (FY18: US$59.5 million). Operating profit/(loss)	65.9	59.5	10.8
Net finance costs The net interest charge increased by US$4.0 million, largely as a result of higher working capital utilisation in Latin America on the large multi-year project. Net finance costs	(16.8)	(12.8)	31.3
Profit/(loss) before taxation	49.6	46.7	6.2
Net debt Net debt of US$109.2 million (FY18: US$139.5 million) consisted of: net cash of US$16.4 million (FY18: US$7.1 million); short-term borrowing and current portion of long-term debt of US$94.4 million (FY18: US$102.4 million); and long-term debt of US$31.2 million (FY18: US$44.2 million). The decrease in net debt compared to FY18 was driven by seasonal outflows associated with the Americas and the reduction in working capital requirements associated with the large multi-year Latin-American contract. The working capital requirements linked to this contract are expected to unwind as the project advances. Net debt	(109.2)	(139.5)	(21.7)

Logicalis has operations in Argentina. During the year, Argentina entered into a period of hyperinflation. The impact on the FY19 financial statements was not material.

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