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Westcon International divisional report

Corporate overview

Westcon International is a value-added speciality distributor of industry leading cyber security, 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. It goes to market under the Westcon and Comstor brands. Westcon International's portfolio of market leading vendors includes Cisco, Extreme, Juniper, Check Point, F5, Palo Alto Networks, Infoblox, Avaya, and Broadcom.

Westcon

Operating in Asia-Pacific, Europe, Middle East and Africa ("MEA"), Westcon provides solutions from a broad portfolio of premier vendors. Westcon has 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, Tenable and TrendMicro
• Networking infrastructure: APC, Ciena, Extreme Networks, Juniper, Nokia Nuage, Ruckus, Silver Peak, Solar Winds and VeloCloud
• Collaboration and mobility: Avaya, Jabra, Microsoft, Mitel, Poly, Zebra, Audiocodes
• Data centre: NetApp and VMware
• Business productivity: Amazon Web Services and Microsoft

Comstor

Comstor is the Cisco-centred business unit of Westcon International, shipping to more than 100 countries. Comstor 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 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
• 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 and specialities, that it offers globally under its Westcon-Comstor brand:

• Cloud: Amazon Web Services, Microsoft Azure and Microsoft Office 365
• Services: supply chain, financial, education, technical support and professional
• Global supply chain services: logistics, staging, strategic stocking, configuration, project co-ordination, VAT recoverability; global contracting and global credit management

How Westcon International creates value

Westcon International's people are dedicated to delivering outstanding performance and customer satisfaction. Westcon International has a wealth of industry insight, market leading digital platforms to support solution design and procurement, innovative marketing and business generation tools, technical expertise and decades of distribution experience.

Westcon International has long established strategic vendor engagements and leverages these relationships to ensure its partners can access established and emerging technology solutions. With over 30 years' distribution success as a strategic partner to the world's leading IT brands Westcon International combines global reach, digital capability and scale with a personalised, local footprint to provide capabilities and services that outshine the traditional distribution experience.

Westcon International offers employees rewarding and challenging work in an inspiring, fast moving environment. It has established a culture where people are valued and respected and where everyone can contribute, collaborate and reach their potential.

WESTCON INTERNATIONAL’S VALUE CREATION BUSINESS MODEL

Performance

US$ million	February  2020		February  2019	%  movement
Revenue Westcon International’s revenues for FY20 were flat at US$2.54 billion (FY19: US$2.54 billion) as higher sales in Asia-Pacific and MEA were offset by lower sales in Europe. In constant currency*** terms, Westcon International’s revenues increased by 2.7% and revenues in all regions except Europe, were up year-on-year. Revenue	2 544.6		2 544.8	0
Gross profit Westcon International’s gross profit increased by 5.9% to US$275.7 million (FY19: US$260.4 million) with increases across all regions. Gross margins increased to 10.8% (FY19: 10.2%) with higher margins in Europe and Asia-Pacific. Gross profit	275.7		260.4	6
Gross margin %	10.8%		10.2%
Operating costs Operating costs decreased 7.5% to US$235.7 million (FY19: US$254.8 million). Operating costs in FY19 benefitted from a US$15.0 million SYNNEX transitional costs credit in the first half. Part of the decrease in FY20 operating costs has resulted from the adoption of IFRS 16. Following several years of transformation, systems and process investments, no restructuring costs were incurred in FY20. Central costs of US$29 million were incurred in FY20, coming in significantly below the published target of US$33 million. Operating costs	(235.7)		(254.8)	(7)
EBITDA EBITDA was US$40.0 million (FY19: US$5.6 million), benefitting by US$13.0 million from the adoption of IFRS 16**. Operating profit before interest, tax, depreciation and amortisation ("EBITDA")	40.0		5.6	614
EBITDA margin %	1.6%		0.2%
Operating profit/(loss)	19.0		(4.2)	552
Net finance costs	(13.6)		(12.2)	11
Profit/(loss) before taxation	6.3		(18.9)	133
Working capital and net debt Net working capital days decreased to 22 days (FY19: 28 days) primarily due to lower days sales outstanding (“DSO”) and increased inventory turns. Net debt was US$48.7 million (FY19: US$109.5 million) reflecting the adoption of IFRS 16 in FY20 which increased debt by US$31.3 million. Excluding the effect of IFRS 16**, net debt decreased to US$17.4 million. The net debt consisted of: net overdrafts of US$4.5 million (FY19: US$94.4 million); short-term borrowings and current portion of long-term debt of US$6.6 million (FY19: US$15.0 million); and long-term debt of US$37.6 million (FY19: US$0.1 million). Net debt	(48.7)		(109.5)	(56)

***

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.

Strategic overview

Westcon International has developed its strategy according to its core values, enabling its partners and improving their business potential and performance. Westcon International's strategic framework aims to create value for all stakeholders via seven strategic pillars that define its priorities, namely customer-oriented; vendor-aligned; solutions portfolio; execution excellence; data-driven; digital first and people.

Westcon International will continue the model of specialisation for vendor solutions and will enhance the customer and market segment orientation with appropriately tailored propositions. It remains focused on process stability, automation and back office efficiency with an emphasis on accuracy, quality and urgency in all functions.

Progress against strategic objectives

FY20 strategic objectives			FY20 execution of objectives					FY21 strategic priorities
Business restoration
Focus on revenue growth and overall profitability			Revenue growth is 0% in US$, 2.7% growth in constant currency*** Gross profit growth of 5.9% (1% due to IFRS 16) Gross margin improved to 10.8% from 10.2% Operating profit increased to US$19.0 million from a US$4.2 million operating loss in FY19					Ensure that Westcon International successfully navigates the COVID-19 pandemic
Working capital improvement and operating cash flow generation			Net working capital improved by US$92 million or six days Positive cash flow from operations in FY20 (FY19: cash outflow)					Focus on working capital and liquidity
Reduce ongoing central costs to below 1% of gross revenue (central costs target of US$33 million in FY20)			Central costs of US$29 million, 33% lower than FY19 and 12% below targeted levels 0.9% of gross revenue of US$3.4 billion					Further central cost optimisation
								Grow revenue contribution from next generation technology providers
Customer engagement
Continue to build strong line-of- business model providing vendors with focus and alignment to their objectives			Piloted a vendor key performance indicator ("KPI") alignment and reporting solution with two strategic vendors (Cisco and Palo Alto Networks) with support and endorsement of their global channel leadership					Successful deployment of KPI solution with additional four strategic global vendor partners
Define/refine customer segmentation and develop go-to-market models, support and organisational capability to maximise success in each segment (including Velocity)			Undertaken a thorough review and re-definition of customer segmentation model which is now being deployed in data architecture, sales automation systems and business intelligence systems					Successful adoption of a sales commission system that enables the alignment of sales rewards and incentives directly with the achievement of specific vendor objectives
Drive PartnerView (reseller online portal) adoption with enhanced e-commerce capability			Steady growth in the adoption of PartnerView across all customer segments and technology types, complemented by rapid growth in the adoption of the BlueSky cloud billing and subscription platform for relevant solutions from Microsoft Azure and Amazon Web Services					Continue to evolve value propositions, go-to-market models, capabilities and platforms to reflect the needs of these customer segments and drive improved growth, profitability and customer satisfaction
Solutions and services
Invest in Global Deployment Services ("GDS") capability and ensure retained leadership position			The GDS underwent a thorough assessment against customer requirements and benchmarks, with some consequent process redesign and retraining of delivery and sales teams					Successful rebranding of global services under the ORBIT programme which integrates a number of value propositions and delivery models in a compelling and customer-centric solution set
Complete integration and alignment of services organisation and technology solutions operations, and develop compelling offers			The process of integrating the services organisation into the geographic business units and aligning capabilities more closely with largest customer needs has begun					Further integration and evolution of services capabilities to drive deeper customer relationships
Develop core solutions to provide differentiated offers			The effective combination of solutions from multiple vendors to solve recognised business problems in a single commercial offer remains a key focus					Roll out of intelligent demand programme in FY21 – increased use of big data and analytics to identify opportunities for integrated solutions in key technology, customer and industry segments
Winning team
Continue to develop best talent in all areas while promoting from within wherever possible			The use of recognised talent identification and development techniques complemented by leadership mentoring has proved effective in retaining talent and ensuring continuity and longevity in key customer and vendor relationships					Continue to nurture internal talent while developing a positive external employer brand through advocacy of performance and values
Create career path framework to enable the retention of the best talent			Begun to define and formalise career development and recognition paths for all functions in the business					Continue to develop people and their potential for successful careers through a combination of formal training and development and a collaborative cross-functional ethos based on our core values
Launch executive leadership training programme for senior leaders			Engaged on a leadership training and development programme for senior executive team and their direct reports – this has been positively received					Ensure further delivery of the leadership training and development programme
Execution excellence
Process optimisation project initiated – driving end-to-end improvements to develop "frictionless transactional capability" with emphasis on balancing "front office versus back office" ratios			Overall operating costs decreased by 7%. Improvements in end-to-end processes have been made as demonstrated by cost reduction performance and productivity gains in the operations functions					Continued focus on process automation through the increasing capabilities of digital technologies productivity
Ensure accuracy, quality and urgency in all activities			Results this year demonstrate stability in platforms and processes.
Drive adoption and utilisation of digital distribution platform tools			See PartnerView comments above
Digital enablement
Continued development of digital distribution platform suite in line with customer and market requirements			Delivered on a roadmap of improvements to the core capabilities in digital distribution platforms enabling the addition of new vendor solutions and the addition of effective cloud and subscription billing capabilities					Continue to innovate in digital distribution platforms to enhance customer experience and vendor ecosystem
Partner Digital Transformation – deliver phase 1 integrations (foundational and enhanced) utilising application programming interface ("API") gateway software development kit			Initial customer integrations using APIs and API manager have been successfully delivered for two of Westcon International's largest global customers					Undertake further targeted sales and marketing activity with named global and enterprise customers to drive further integration and adoption of the API toolset
Accelerate best-in-class enhancement for sales tools			Continued to develop the SalesView CRM platform in line with the requirements of sales teams, driving global adoption and improved data integrity					Integration of SalesView with the Pardot Marketing Automation platform to enable a seamless lead management, allocation and tracking solution that is designed to improve opportunity identification and conversion for sales and marketing teams

 

Markets

Westcon International's revenues for FY20 were flat at US$2.54 billion (FY19: US$2.54 billion) as higher sales in Asia-Pacific and MEA were offset by lower sales in Europe. In constant currency*** terms, Westcon International's revenues increased by 2.7% and revenues in all regions except Europe, were up year-on-year.

While on a consolidated basis Westcon International's revenues were flat year-on-year, the organisation experienced growth during FY20 in the Middle East, sub-Saharan Africa and parts of Asia. In Europe, the impacts of Brexit, associated economic uncertainty and some vendor consolidation resulted in revenue headwinds with overall lower results in the UK, Germany, Spain and Sweden which were offset by growth in the Netherlands. However, the Comstor division recorded strong market share gains in most major countries and the Westcon division showed good growth in cyber security and networking technologies.

MEA saw double digit growth. Asia-Pacific revenue increased 1% as higher results in Asia offset lower revenue in Australia. The Asia-Pacific, Middle East and sub-Saharan African regions all made strong profit contributions.

The improving financial performance, improvement in net working capital, market share gains across all markets and vendor recognition all demonstrate that Westcon International is providing excellent customer experiences through traditional and digital transaction execution. These capabilities have been invaluable and pivotal to the turnaround.

Outlook

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.

Initial indications are that Westcon International revenues and order intake for the first quarter of FY21 are similar to the same period last year.

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.

AWARDS AND RECOGNITION