Executive directors' report

Good demand
for solutions and
services

“The Group delivered strong results in the past year, supported by good operational execution in all divisions in the face of growing global economic uncertainty.

“Westcon International returned to profitability and Logicalis Latin America produced an exceptional performance, as did Analysys Mason, our Management Consulting division, which continued to benefit from demand for 5G expertise.

“The Group generated significantly improved cash flows while we returned US$60 million to shareholders through a special dividend and ongoing share repurchases during the year.

Ivan Dittrich
CFO

Jens Montanana
CEO

“Since the start of the new financial year, the COVID-19 pandemic has taken its toll on economies, communities and business everywhere. We were able to adjust and move rapidly to a remote working environment across the Group and all divisions. We have seen increased demand for technologies and services required to enhance remote working in areas such as security and network access solutions, cloud migration and infrastructure virtualisation, as well as unified communications.

“I would like to thank all of our employees, customers and suppliers for their continued support during these unprecedented times.

“Datatec is well positioned to navigate the current environment in spite of the extremely uncertain macroeconomic outlook. Good demand for our solutions and services is expected to continue, while we focus on costs, balance sheet and liquidity management.”

Jens Montanana, CEO

Strategic overview

Datatec’s strategy is to improve shareholder returns over the medium term through a combination of corporate and business development actions aimed at enhancing the competitiveness and profitability of its subsidiaries and operating divisions.

Logicalis is the largest profit contributor to the Group. The division also has the widest geographical exposure and Datatec intends to continue to develop and grow Logicalis globally, both organically and through acquisitions.

Datatec issued a cautionary announcement on 2 March 2020, informing shareholders that it is exploring the possibility of a listing (the “Potential Listing”) of Logicalis’ Latin American business (the “Latin American business”) on the B3 S.A. – Brasil, Bolsa, Balcão (www.b3.com.br – Brazilian stock exchange). This would result in the Latin American business and its shareholders potentially carrying out a primary and secondary offering of the shares of the Latin American business, subject to satisfactory market conditions. A further cautionary announcement in this regard was issued on 15 April 2020.

While the Potential Listing remains of high interest, current market conditions are making the timing of the Potential Listing increasingly undeterminable. As a result, the Board has decided to withdraw the cautionary announcement.

Westcon International is 90% owned by Datatec following the sale of Westcon Americas to SYNNEX Corporation (“SYNNEX”) together with 10% of Westcon International in FY18. The Group’s strategy is to reshape the Westcon International business in order to improve profitability and reduce the central cost base which was retained after the SYNNEX transaction.

Westcon International returned to profitability in FY20 supported by excellent costs containment with the previously published target reduction in central costs for FY20 successfully exceeded. Following multiple years of restructuring, as well as system and process changes in Westcon International, no restructuring charges were incurred in FY20.

Following an arbitration process by an independent accountant, the earn-out payment relating to the disposal of Westcon Americas to SYNNEX was determined to be US$14 million on 29 May 2019.

This was returned to shareholders by way of a special dividend of R1.00 per share on 29 July 2019, which totalled US$15.4 million.

During FY20, the Company undertook general share repurchases under three separate shareholder mandates provided at general meetings on 15 January 2019 and 26 June 2019 and at the AGM on 29 August 2019. These repurchases amounted to US$44.3 million and totalled 19.0 million shares which have been cancelled, reducing the Company’s shares in issue to 201.45 million at 29 February 2020.

Group results

         
US$'000  February 2020    February 2019   
Revenue 
4 304 845   4 332 381  
Gross profit 
741 578   687 744  
Gross margin % 17.2%   15.9%  
Operating costs 
(582 921)   (600 983)  
Operating profit before interest, tax, depreciation and amortisation (“EBITDA”) 
158 657   86 761  
EBITDA margin %  3.7%   2.0%  
Operating profit 
82 537   48 423  
Net finance costs 
(25 874)   (22 577)  
Profit before taxation 
58 488   24 215  
Taxation 
(31 809)   (20 959)  
Profit for the year from continuing operations 26 679   3 256  
Underlying earnings/(losses) per share (US cents) 
9.9   6.6  
Net debt 
139 867   100 753  

IFRS 16 adoption

IFRS 16 Leases has been adopted for FY20 which has had a significant effect on the Group’s financial reporting in several areas. Operating expenses have reduced as the majority of rental costs of leased assets are no longer included and depreciation and interest expense have both increased by an approximately commensurate amount. On the statement of financial position, fixed assets have increased with the inclusion of right-of-use assets and borrowings have increased with the equivalent lease liabilities affecting the net debt metric. The detail of this accounting change is set out in the Group consolidated annual financial statements.

*   Excluding impairments 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, restructuring costs relating to fundamental reorganisations and the taxation effect on all of the
aforementioned.
**   Certain information presented in these results constitutes pro forma financial information. The responsibility for preparing and presenting the pro forma financial information and for the completeness and accuracy of the pro forma financial information is that of the Datatec directors. This is presented for illustrative purposes only. Because of its nature, the pro forma financial information may not fairly present the Group’s financial position, changes in equity, and results of operations or cash flows. The Group has included pro forma IFRS 16 Leases, financial information that represents the results and statement of financial position showing the impact on FY20 as if IFRS 16 had not been applied.
***   Pro forma financial information is included for the Group’s revenue for the current reporting period, had it been translated at the average foreign currency exchange rates of the prior reporting period (“constant currency financial information”). The pro forma IFRS 16 and constant currency financial information contained in this Integrated Report has been reported on by the Group’s external auditors. The Group’s auditors Deloitte & Touche, have issued two unmodified reasonable assurance reports (in terms of ISAE 3420: Assurance Engagements to Report on the Compilation of Pro Forma Financial Information included in the Prospectus), a copy of which is available for inspection at the Company’s registered office.

Acquisitions

On 1 March 2019, Analysys Mason Limited acquired 100% of the issued share capital of Stelacon, a Swedish consulting company, for US$2.6 million (including a deferred purchase consideration of US$1.2 million). This was an important further step in building a pan-Scandinavian presence, after Analysys Mason’s successful expansion into Norway. Stelacon brings experience in areas including smart cities, regional development, digital services, policy and regulation, and telecoms and digital communications.

Effective 30 June 2019, Logicalis SA (Pty) Ltd, acquired 100% of the issued share capital of Mars Technologies, a South African IT services business, with offices in Cape Town, Johannesburg, Port Elizabeth, Durban and East London for US$0.4 million (including a deferred purchase consideration of US$0.1 million). Mars Technologies offers managed IT services ranging from the remote monitoring of networks and servers, managed desktop, anti-virus, cloud backup, and printers, to full outsourcing, with a strong offering to small and mid-market enterprises. This acquisition strengthens and expands Logicalis’ South African managed services offering.

Logicalis Group purchased a 70% interest in Cilnet on 2 September 2019. Cilnet is a Cisco systems integrator and managed services business in Portugal. The purchase consideration was US$8.8 million (including a deferred purchase consideration of US$2.3 million and US$0.7 million non-controlling interest that was raised at acquisition). The acquisition increases Logicalis’ Cisco technical expertise in the Iberian region and complements the existing Spanish operation with data centre, collaboration, networking, infrastructure and managed services capabilities, expanding the offering to the region.

Logicalis Group also acquired 100% of Orange Networks on 2 September 2019. Orange Networks is a Microsoft services business focused on Microsoft cloud and managed services, with Germany-wide presence, including Hamburg, Munich, Offenbach and Düsseldorf. The purchase price was US$2.9 million (including a deferred purchase consideration of US$0.6 million). This acquisition advances Logicalis Germany to Microsoft Gold-Certified Partner status and enhances its hybrid cloud offering.

As a result of these acquisitions, goodwill and other intangible assets increased by US$13.0 million and US$3.9 million respectively. None of the goodwill recognised is expected to be deductible for income tax purposes. The revenue and EBITDA included from the acquisitions in FY20 are US$23.3 million and US$2.6 million respectively; profit after tax included from these acquisitions was US$1.7 million. Had the acquisition dates been 1 March 2019, revenue and EBITDA attributable to these acquisitions would have been approximately US$42.8 million and US$4.9 million respectively.

It is not practical to establish profit after tax that would have been contributed to the Group if they had been included for the entire year. All trade receivables are measured at amortised cost. The carrying value of trade receivables balances approximates their fair value. All identifiable intangible assets have been recognised and accounted for at fair value.

Acquisition-related costs of the above acquisitions of US$0.3 million are included in operating costs in the consolidated statement of comprehensive income.

Liquidity and borrowing facilities

In light of the COVID-19 crisis, particular attention has been given to assessing the outlook for liquidity across the Group and ensuring that sufficient cash will continue to be generated to settle liabilities as they fall due. Each division has carried out scenario planning and stress testing for the 12 months following the date of this report and has contingency plans in place to adapt to the more severe scenarios.

In January 2020, Logicalis completed a new three-year US$155 million banking facility for its subsidiaries. This new senior facility covers Logicalis’ operations throughout the world, excluding Latin America, which has its own separate credit facilities. The facility is used to fund working capital requirements and also includes a new acquisition credit line. In addition, the Latin American credit facilities are considered adequate in the current environment.

On 14 May 2020, Westcon International extended its expiring European Invoice Financing facility of US$280 million for a further 12 months until 4 June 2021. The facility has been reduced with effect from 4 June 2020 to US$224 million with an accordion provision to increase the facility to US$280 million during the period from November 2020 to February 2021 when working capital utilisation is typically at its highest. This extended facility is considered adequate for Westcon International’s working capital requirements, based on historical utilisation as well as projected headroom requirements as per the scenario modelling and stress testing.

The Group performed covenant projections for the next 12 months to confirm that banking covenants will continue to be met.

The Group’s liquidity is dependent upon customers continuing to pay their invoices on a timely basis. To date in FY21, customers have continued to pay largely in line with historic norms. Suppliers have also provided extended payment terms where required.

Working capital was very well controlled across the Group in FY20 and net working capital days continued to improve in Westcon International as detailed in the Westcon International divisional review. Trade receivables and inventory are of a sound quality and adequate provisions are held against both.

Shareholder distributions: dividend policy and share repurchases

The Group’s policy is to maintain a fixed three times cover relative to underlying* earnings when declaring dividends. However, as a result of the current COVID-19 pandemic and stated focus on preserving cash, the Board has decided not to declare a dividend for FY20.

Following an arbitration process by an independent accountant, the earn-out payment relating to the disposal of Westcon Americas to SYNNEX was determined to be US$14 million and was returned to shareholders by way of a cash dividend of R1.00 per share with scrip distribution alternative on 29 July 2019, which totalled US$15.4 million. The special dividend resulted in US$12.2 million of cash being distributed to shareholders who did not elect the scrip distribution alternative and 1.25 million shares were issued to shareholders who elected the scrip distribution alternative.

The Board had previously instituted a structured programme of general share repurchases in order to return cash to shareholders. During FY20, the Company undertook general share repurchases under three separate shareholder mandates:

  • General meeting on 15 January 2019 – 4.40 million shares
  • General meeting on 26 June 2019 – 4.05 million shares
  • AGM on 29 August 2019 – 10.55 million shares

These repurchases amounted to US$44.3 million and totalled 19.0 million shares which have been cancelled, reducing the Company’s shares in issue to 201.45 million at 29 February 2020.

The Company has undertaken all its share repurchases in accordance with the JSE Listings Requirements.

Datatec has completed its share repurchase programme.

Divisional reviews

Logicalis
A review of Logicalis’ financial performance can be found in the Logicalis divisional review.

Logicalis continues to seek enhancements in its long-term capabilities within cloud, IoT, software, security, data management and intelligent networks to promote long-term value and insight-led transformation to its customers.

While it is certain that technology will be even more firmly embedded in customers’ operations following this pandemic, the exact impact of COVID-19 on Logicalis’ short to medium-term trading is difficult to establish at this stage.

Regional leadership teams within Logicalis have prepared action plans to respond to different scenarios that they may encounter. At the same time, each region has put together compelling offers to customers and markets, including rapid remote deployment of essential solutions and services. These are designed to support customers in the areas that are most relevant to them right now, including secure remote working solutions, collaboration packages and improvements to IT resilience.

Logicalis remains confident about the long-term prospects for the industry and its positioning within it. Emerging markets currencies are expected to remain volatile over the short term.

Westcon International
A review of Westcon International's financial performance can be found in the Westcon International divisional review.

In September 2019, the Group announced a change in the black economic empowerment (“BEE”) partner of its subsidiary Westcon Southern Africa Holdings (Pty) Ltd (“Westcon SA”). This followed the disposal by MIC Investment Holdings (Pty) Ltd of its 40% equity interest in Westcon SA to Ascension Capital Partners (Pty) Ltd, a South African private equity investor. Westcon SA has maintained its Level 1 BEE rating pursuant to this transaction.

Westcon International continues to monitor and respond to the COVID-19 pandemic with its priority on maintaining the health and welfare of its staff in compliance with relevant government directives, while limiting business impacts for channel and vendor partners.

Westcon International’s key logistics centres in the UK, Netherlands, Middle East, South Africa and Asia-Pacific remain open and are being managed under strict measures to assure the wellbeing of logistics and warehousing teams while maintaining service levels. This has enabled the division to take an active role in servicing the needs of critical business sectors alongside partners during the pandemic.

The multi-year investments in Westcon International’s advanced systems and business automation enabled business continuity plans to be deployed seamlessly, with almost the entire workforce switching to remote working.

The reshaping of Westcon International is proceeding according to plan and the business is now operating profitably. While the near term remains very uncertain, current conditions are driving demand for technologies that support remote access computing, cloud computing, virtualisation, security and unified communications.

Corporate, Management Consulting and Financial Services

This segment accounted for 1% of the Group’s revenues (FY19: 1%).

The Management Consulting unit comprises Analysys Mason, a provider of strategic, trusted advisory, modelling and market intelligence services to the telecoms, media and technology industries.

Analysys Mason delivered an excellent performance in FY20. Management Consulting revenues were US$58.7 million (FY19: US$45.7 million) and EBITDA was US$9.4 million (FY19: US$2.8 million). This strong performance was reflected across all 16 offices worldwide and across the main propositions of Strategy, Transaction Support, Regulatory Advice and Research. In particular, areas such as 5G and fibre, where Analysys Mason has unrivalled deep domain expertise, were significant drivers of revenue growth.

Effective 1 March 2019, Analysys Mason acquired Stelacon in Sweden as the next step in building a pan-Scandinavian team, following the earlier acquisition of Nexia Management Consulting in Norway.

On 1 April 2020, Analysys Mason acquired Allolio&Konrad, a consultancy based in Bonn, Germany, with an extensive track record in the telecommunications industry and long-term client relationships with Europe’s leading telecom operators.

The acquisition of Allolio&Konrad builds logically on other recent acquisitions, strengthening Analysys Mason’s position in the strategic, digital transformation, IT transformation, and performance consulting market, and broadening its skills base to support the accelerating demand for 5G expertise.

The Datatec Financial Services business provides financing/ leasing solutions for ICT customers. The business recorded revenues of US$1.0 million in FY20 (FY19: US$0.9 million) and an EBITDA loss of US$1.2 million (FY19: US$1.7 million).

The Corporate reporting segment includes the net operating costs of the Datatec head office entities, which were US$15.3 million (FY19: US$16.8 million). These costs include the remuneration of the Board and head office staff, consulting and audit fees. In FY20, foreign exchange gains were US$1.9 million (FY19: US$3.5 million).

As at 29 February 2020, Datatec head office entities held cash of US$67.5 million of which US$14.5 million (the equivalent of ZAR226.8 million) is held in South Africa and subject to the South African Reserve Bank regulations.

Current trading and outlook

The declaration of COVID-19 as a pandemic by the WHO on 11 March 2020, at the start of the Group’s new financial year, heralded an unprecedented global economic and humanitarian crisis.

The Group’s immediate response was to keep employees safe in accordance with government guidelines in all geographies of operation which typically involved maximising working from home, social distancing and all advised measures to limit the spread of COVID-19.

The multi-year investments in Westcon International’s advanced systems and business automation enabled business continuity plans to be deployed effectively with almost the entire workforce switching to remote working. Most of Logicalis’ global workforce is also working from home, limiting operational disruptions during lockdown periods.

Trading has remained steady since the beginning of the 2021 financial year, although some delays and supply disruptions were experienced especially in countries with highly restrictive lockdowns. Initial indications are that Westcon International’s revenues and order intake for the first quarter of FY21 (“Q1 FY21”) are similar to the same period last year. For Logicalis, order intake for Q1 FY21 is similar to the corresponding period last year, with revenues for Q1 FY21 slightly lower than Q1 FY20.

The foreign currency exchange effects have been exacerbated so far in Q1 FY21 with the Rand and the Brazilian Real in particular depreciating dramatically against the US Dollar. Sustained emerging markets’ currency weakness is expected for the near term.

Collections from customers during the first few months of FY21 have remained in line with historic norms. As intermediaries in the supply chain, both Logicalis and Westcon International are working with vendors to provide support to customers experiencing adverse effects from the pandemic.

Increased demand for the Group’s technology solutions is being experienced to support remote working during the lockdowns enforced throughout the world. In particular, demand for cloud computing, remote access solutions, virtualisation, security and unified communications remains strong. The positioning of the Group’s divisions remains strategically sound with good demand for their solutions and services expected to continue as the world emerges from the current crisis and investments towards digital transformation accelerate.

The COVID-19 pandemic has created a lot of uncertainty over the macroeconomic outlook, both in the short and medium term. As a result, the Group will not be issuing any forward-looking guidance.

Our focus will remain on optimising our business for the current environment which will include cost and liquidity management.

Jens Montanana

CEO

Ivan Dittrich

CFO

27 May 2020