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.

The Group achieved a solid operational performance in the year ended 28 February 2021 with all divisions showing resilient trading with strong operating cash flows and significantly enhanced liquidity. This was achieved despite the challenging socioeconomic environment resulting from the declaration of Covid-19 as a pandemic by the WHO on 11 March 2020, at the start of FY21.

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 was also able to work remotely, limiting operational disruptions during lockdown periods.

Although some delays and supply disruptions were experienced, especially in countries with highly restrictive lockdowns, the business operations coped very well and performed ahead of the expectations set at the start of the year.

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

In June 2020, Datatec strengthened Westcon International's standalone statement of financial position by converting US$80 million of intercompany loans to equity in order to enable the division to obtain improved commercial terms. Prior to this capitalisation, Westcon International was 90% owned by Datatec following the sale of Westcon Americas to SYNNEX Corporation ("SYNNEX"), which held the other 10% of Westcon International. After the capitalisation, Datatec (via Datatec PLC, an intermediate holding company) increased its shareholding in Westcon International to 92.1% and the minority interest of SYNNEX decreased to 7.9%.

Westcon International completed two significant refinancing arrangements during FY21:

• A two-year US$80 million new receivables securitisation facility for its Asia-Pacific subsidiaries ("Westcon APAC").
• A three-year €275 million new invoice assignment facility for its European subsidiaries ("Westcon Europe").

These new facilities considerably enhance Westcon International's liquidity.

Group results

All divisions delivered solid performances as falling operating costs offset the effect of lower gross profits due to a change in revenue mix that saw an increased contribution from the distribution segment, which has lower margins. Overall revenue was broadly flat with good growth in Westcon International balancing a decline in Logicalis.

Emerging markets such as Brazil, Argentina, Chile, Mexico, Indonesia and South Africa were impacted by local currency weakness in FY21 which reduced their dollar-reported contribution to the results.

 

^FY20 revenue restatement

The amount of the restatement for FY20 is shown in the table below.

During the year, the volumes of software, software services and cloud computing solutions, which include Infrastructure as a Service ("IaaS") and Software as a Service ("SaaS") sold by Datatec, have grown in significance. As a result, the Group revisited the revenue recognition for these arrangements leading to the decision to restate its consolidated statement of comprehensive income, reflecting a decrease in revenue and a corresponding decrease in cost of goods sold in the previous financial year. There was no impact on gross profit or items below gross profit and hence, there was no impact on earnings or earnings per share. Refer to Note 1 of the Group consolidated annual financial statements in the Annual Report for further details of the impact of the restatement.

FY20		Before  restatement	After  restatement	Total  restatement
Revenue (US$ million)		4 304.8	4 214.4	(90.4)
Cost of sales (US$ million)		(3 563.2)	(3 472.8)	90.4
Gross profit (US$ million)		741.6	741.6	–
Gross margin (%)		17.2	17.6	0.4

The impact of the revenue restatement on the first half of FY21 ("H1 FY21") was as follows:

H1 FY21		Before  restatement	After  restatement	Total  restatement
Revenue (US$ million)		2 031.2	1 962.9	(68.3)
Cost of sales (US$ million)		(1 707.0)	(1 638.7)	68.3
Gross profit (US$ million)		324.2	324.2	–
Gross margin (%)		16.0	16.5	0.5

Of the US$68.3 million H1 FY21 restatement, US$61.2 million related to Westcon International and US$7.1 million to Logicalis.

*	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.
**	Adjusted EBITDA excludes restructuring costs.
***	The pro forma constant currency and adjusted EBITDA information, which is the responsibility of the Datatec directors, presents 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 as well as EBITDA had restructuring costs not been incurred. This information is for illustrative purposes only and because of its nature, may not fairly present the Group’s results. The pro forma supplementary information has been reported on by the Group’s external auditor. The Group’s auditor, PwC, has issued a limited assurance report (in terms of ISAE 3420: Assurance Engagements to Report on the Compilation of pro forma Financial Information Included in a Prospectus) on the pro forma financial information presented.

 

Liquidity and borrowing facilities

The Group continues to actively assess the outlook for liquidity in its divisions to ensure that sufficient cash will continue to be generated to settle liabilities as they fall due.

In February 2020, Logicalis completed a new three-year US$155 million banking facility for its subsidiaries. This senior facility covers Logicalis' operations throughout the world, excluding Latin America, which has its own separate uncommitted 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.

In August 2020, Westcon Europe entered into a €275 million new invoice assignment facility with a European banking syndicate, led by Crédit Agricole Leasing & Factoring ("CAL&F"). This invoice assignment facility replaced Westcon Europe's previous invoice financing facility of US$224 million with effect from 1 October 2020. The new committed facility is for an initial period of three years. It will be used to fund Westcon Europe's working capital requirements and will bear interest at a much reduced rate compared to the previous facility. The CAL&F facility replaced the previous syndicated invoice finance facility led by HSBC ("HIF facility"). The HIF facility was disclosed under bank overdrafts in the statement of financial position.

Due to the different nature of the CAL&F facility, it is disclosed under short-term interest-bearing liabilities in the statement of financial position. Both facilities form part of the net cash/debt of the business.

Westcon APAC also entered into a two-year US$80 million new receivables securitisation facility with Westpac Banking Corporation, replacing Westcon APAC's previous financing facilities in Australia, New Zealand and Singapore. This provides an incremental US$25 million working capital facility at improved interest rates for Westcon APAC, compared to its previous uncommitted facilities. This became effective on 25 September 2020.

The Group has performed covenant projections for the next 12 months to confirm that banking covenants are likely to be met.

The new financing facilities, as well as the very strong operating cash flow generated during FY21, have significantly improved the Group's liquidity position, despite the
Covid-19 pandemic.

Cash dividend with scrip distribution alternative

The Group's policy is to maintain a fixed three times cover relative to underlying* earnings when declaring ordinary dividends.

The Board declared a cash dividend with a scrip alternative of 100 South African cents per share (approximately 7.1 US cents per share), which is in excess of the amount determined under the policy. This decision was informed by the strength of the balance sheet and enhanced liquidity in the Group, positive operating profitability across all divisions of the Group and the cautiously optimistic trading outlook for the Group.

Divisional reviews

Logicalis

Logicalis accounted for 35% of the Group's revenue (FY20: 40%).

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

On 31 July 2020, Logicalis acquired a minority stake in Brazil-based Cirrus Participações S.A., which trades under the Kumulus brand. Kumulus is focused on delivering high-value, impactful services and solutions to its customers' businesses, through cloud and data solutions. Logicalis exercised a call option to purchase a further minority stake 
in March 2021. 

The increased investment in NubeliU from 51% to 100%, will allow for the integration of NubeliU as a 100% subsidiary of PLLAL.

Logicalis Group purchased a 65% interest in iZeno Group in November 2020, a company specialising in digital transformation, application modernisation, DevOps, customer experience and hybrid cloud solutions. Headquartered in Singapore with additional operations in Malaysia, Indonesia and Thailand, iZeno holds a leading presence in the region. With this investment, Logicalis strengthens its ability to offer differentiated, high-impact solutions and accelerates its vision to be the preferred digital transformation enabler for its customers.

After the balance sheet date, Logicalis acquired a 70% stake in Áudea on 31 March 2021, a Spanish company that specialises in cyber security and regulatory compliance. This investment reinforces Logicalis' ability to offer a comprehensive service to customers looking to secure their critical data.

Refer to the Logicalis divisional review for more information and a review of Logicalis’ financial performance.

*

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.

Westcon International

Westcon International accounted for 63% of the Group’s revenue (FY20: 59%).

During the year, and despite the pandemic, Westcon International secured new working facilities in its key markets for Europe and Asia-Pacific. A three-year €275 million (approximately US$330 million) new invoice assignment facility led by CAL&F was concluded in Europe. A two-year US$80 million new receivables securitisation facility led by Westpac Banking Corporation was concluded in Asia-Pacific. The new committed facilities provide enhanced liquidity at reduced costs and are used to fund the Company’s working capital requirements.

Refer to the Westcon International divisional review for more information and a review of Westcon International’s financial performance.

Corporate, Management Consulting and Financial Services

This segment accounted for 2% of the Group's revenue (FY20: 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.

The Management Consulting unit delivered an excellent performance in FY21. Revenue was US$73.2 million (FY20: US$58.7 million). Gross profit increased to US$31.0 million from US$23.8 million in FY20. EBITDA increased to US$10.2 million (FY20: US$9.4 million) and EBITDA margins decreased to 13.9% compared to 16.0% in FY20. 

Effective 1 April 2020, Analysys Mason acquired 100% of the shares in 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 contributed significantly to the division's results
for FY21. 

Analysys Mason has a strategy focused on specialisation in the technology, media and telecommunications sector where increasingly the industries of telecommunications and IT are converging and driving rapid digitisation across many industries often brought about by the move to cloud computing.

Datatec Financial Services provides financing/leasing solutions for ICT customers. The business recorded revenue of US$1.1 million in FY21 (FY20: US$1.0 million) and an EBITDA loss of US$1.1 million (FY20: US$1.2 million loss) and adjusted EBITDA loss of US$0.6 million. The business will be moved into Westcon International during FY22 in order to leverage the capabilities and scale of both businesses.

Corporate includes the net operating costs of the Datatec head office entities which were US$17.2 million (FY20: US$15.3 million). These costs include the remuneration of the Board and head office staff, consulting and audit fees. In FY21, foreign exchange losses were US$0.4 million (FY20: foreign exchange gains of US$1.9 million).

As at 28 February 2021, Datatec head office entities held cash of US$74.2 million, of which US$18.3 million (including R99.2 million held in ZAR) is held in South Africa and subject to the SA Reserve Bank regulations. These cash balances increased by US$6.7 million from the year ended 29 February 2021 mainly as a result of net settlement of intercompany loans from subsidiaries.

Current trading and outlook

While the Covid-19 pandemic continues to cause unpredictable business disruptions, economic uncertainty and currency volatility, the Group's divisions are in a strong position with a solid order book related to remote working, cloud access and fixed or mobile secured networking.

The trend towards digitisation is set to continue and the structural shift away from many forms of traditional hardware to increasing software and services with growing annuity revenue is already benefiting our divisions as they provide many of the products and services required to support a remote IT networked-based way of doing business. The trends experienced during FY21 have continued into FY22.

Operationally, the Group continues to reap the benefits of the investments in business automation and the technology systems rolled out over the past few years.

The improved liquidity following the refinancing of the major subsidiaries of Westcon International on more favourable terms during FY21 will provide greater flexibility and reduce interest expense going forward.

The global semiconductor shortage due to Covid-19-related constraints is impacting all technology participants across the entire value chain and Datatec continues to monitor and mitigate the impact on availability and costs where possible.

25 May 2021