Sound performance drives strong cash generation

Datatec Limited ("Datatec" or the "Group", JSE and LSE: DTC), the international Information and Communications Technology (ICT) group, is today publishing its unaudited interim results for the six months ended 31 August 2009 ("H1 FY10").

Financial highlights

• Revenue $1,8 billion (H1 FY09: $2,3 billion and H2 FY09: $1,9 billion)
• EBITDA $44,6 million (H1 FY09: $71,4 million and H2 FY09: $54,2 million)
• Underlying* earnings per share 11,5 US cents (H1 FY09: 22,5 US cents and H2 FY09: 10,6 US cents)
• Cash generated from operations: $184 million (H1 FY09: $66 million and H2 FY09: $129 million)

*Excluding goodwill and intangibles impairment, amortisation of acquired intangible assets, profit or loss on sale of assets and businesses, fair value movements on put/call arrangements and unrealised foreign exchange movements.

 Operational highlights

• Group's scale and diversity continues to be a strong asset - providing resilience in a difficult environment
• South America, Middle East and Asia remain robust
• Signs of improvement in US and Europe in recent months

Jens Montanana, Chief Executive of Datatec, commented:

"We have delivered another sound performance with stable gross margins and further improvements in working capital management driving strong cash generation. Our underlying earnings per share for the first half of the current financial year have improved over the second half of the previous financial year.  

"Whilst trading conditions remain challenging, they are becoming more predictable and we are confident of a return to overall revenue growth in our traditionally stronger second half, compared to the first half of this financial year and the second half of the previous financial year.  We expect our overall financial performance to improve, as we benefit from high operational gearing as a result of the significantly reduced cost base.

"Our divisional structure, with multiple lines of business and geographic diversification, continues to be a strength.  We remain committed to widening our global reach and are now well positioned to embark upon the next stage of our international expansion. 

 "In keeping with our recent successful advances in Brazil and India, we are now actively reviewing a number of potentially strategically significant initiatives in China and parts of Asia, which we see as key strategic market opportunities."

PROFILE AND GROUP STRUCTURE

Datatec Group is an international Information Communications Technology ("ICT") networking and related services business with operations in many of the world's leading economies. The Group's main lines of business comprise: the global distribution of advanced networking and communications convergence products ("Westcon" and "Westcon Emerging Markets"); ICT infrastructure solutions and services ("Logicalis"); and Consulting Services ("Analysys Mason" and "Intact"). "Corporate and Other" encompass the operating costs of the Group's head office entities and two months' trading of African Legend Indigo ("ALI").

OVERVIEW 

Despite continued challenging market conditions in the first half of the financial year, the Group has delivered a sound financial and operational performance with further improvements in operating cash flow. Datatec's geographic diversity, global presence and improving mix of business continue to mitigate the impacts of the global economic downturn. While all markets have been affected by credit contraction and lower economic growth, South America, the Middle East and Asia continue to remain robust which has helped to compensate for softer business conditions in the USA and Europe.

The challenging conditions of the second half of the 2009 financial year ("H2 FY09") continued into the first quarter of the current financial year. However, trading conditions started to improve in the second quarter and the Group is confident of a return to sequential growth in the second half of the year.

Westcon's performance in particular exceeded the Board's expectations, continuing the sequential improvement in operating performance reported at the Interim Management Statement in July 2009, with stable gross margins, EBITDA margin expansion and improved profitability.

The performance of Logicalis was impacted by challenging conditions in the US and the UK.  Trading and profitability in South America remained robust and in line with our expectations.  An overall better financial performance is expected in the second half of the financial year at Logicalis as a result of the traditionally stronger trading period in the second half of the year.

Consulting Services, as expected, had a difficult start to the year as a result of deterioration in demand for discretionary and strategic consulting services. Additional cost reductions have been made to improve profitability, with an improved financial performance expected in the second half.

In the six months to 31 August 2009 ("H1 FY10"), Datatec achieved revenues of $1,8 billion compared to $2,3 billion in the first half of the 2009 financial year ("H1 FY09") and $1,9 billion in H2 FY09. Gross margins held above 13% at 13,1% (H1 FY09:13,4%).

Reported EDITDA was $44,6 million compared to $71,4 million in H1 FY09 (H2 FY09: $54,2 million), and EBITDA margins reduced to 2,5% from 3,2% in H1 FY09 (2,9% in H2 FY09 ). Profit after tax was $8,7 million (H1 FY09: $32,1 million and H2 FY09: $27,9 million).

Underlying earnings was 11,5 cents per share, compared to 22,5 cents in H1 FY09 (10,6 cents in H2 FY09).

Of the $1,8 billion revenues generated during H1 FY10, some 76% came from Distribution; 17% from ICT Solutions and 7% from Consulting and Services.

The Group achieved strong operating cash generation during H1 FY10 as a result of continued effective working capital management.  Datatec ended the period with a net cash position of $172 million (H1 FY09: Net debt of $47,7 million). Westcon, in particular continued to be strongly cash generative, as reported in the second half of the previous financial year.  

STRATEGY

Despite the economic downturn, Datatec has maintained its focus on its long term strategy: to deliver sustainable above average returns to shareholders by focussing on a combination of organic growth in the faster growing sectors of the ICT market, geographic expansion and earnings enhancing acquisitions.

The successful reduction in the Group's dependency on any single market, territory or technology sector, as well as improving supplier and customer diversification and increasing internationalisation, has resulted in Datatec being in a strong market position in the current climate. 

Datatec is creating shareholder value through actively managing its complementary but standalone businesses. In addition to the allocation of capital and financing resources for each activity, the central team supports each division's growth strategies, providing corporate opportunities, market and sector intelligence plus geographical and industry expertise.

The Group's increasing scale and international reach continues to attract significant vendor and customer interest, with Westcon's appointment as Cisco's first global distributor in April 2009, a good example.  This agreement enables both companies to conduct international and multi-regional transactions more efficiently in any country, while at the same time increasing both organisations' ability to access emerging market opportunities.

The Group continued its focus during H1 FY10 on improving operational performance and cash generation and completed one small acquisition in Germany during the period.  However, the Board is now looking at organic initiatives and acquisitions that can deliver enhanced margins over the longer term, facilitate consolidation in proven markets and extend geographical reach. Having successfully expanded in Brazil and India, the Board is now actively evaluating new opportunities in other markets especially China and parts of Asia.

FINANCIAL RESULTS

In line with expectations, Group revenue in H1 FY10 were $1,8 billion (H1 FY09: $2,3 billion), while gross margin remained stable at 13,1% (H1 FY09:13,4%). Revenues decreased mainly as a result of tougher trading conditions during H1 FY10, compared to H1 FY09.

Of the Group's $1,8 billion revenue in H1 FY10, 39% was generated from North America (H1 FY09: 35%), 38% from Europe (H1 FY09: 42%), 8% from Asia Pacific (H1 FY09: 6%), 8% from South America (H1 FY09: 9%) and 7% from Middle East and Africa (H1 FY09: 8%).

Gross profit was $235,4 million (H1 FY09: $303,4 million), while operating costs were 17% lower at $190,3 million (H1 FY09: $227,2 million) as a result of significant cost reduction activities across the Group.

EBITDA was $44,6 million (H1 FY09: $71,4 million), which includes unrealised foreign exchange losses of $0,6 million (H1 FY09: $4,8 million) and realised foreign exchange losses of $5,0 million (H1 FY09: gains of $5,2 million).  Amortisation of intangible fixed assets arising from acquisitions was $7,6 million (H1 FY09: $8,8 million).

Operating profit was $28,8 million  (H1 FY09: $54,3 million).  The net financing costs were $5,6 million (H1 FY09: $7,4 million). Net financing costs reduced as a result of working capital leverage, cash flow generation, decreased debt levels and lower interest rates.

Profit before tax was $16,5 million (H1 FY09: $47,2 million). 

The Group's effective tax rate increased to 47% from 32% in H1 FY09, primarily due to profit reduction as a result of fair value movements on put option liabilities. If the charges arising from the fair value movements on put option liabilities are excluded from profit before tax, the effective tax rate would have been 34%. This increase is attributable to profits being realised for a number of business units in jurisdictions with higher effective tax rates, most notably North and South America.

Gains of $76,7 million (H1 FY09: losses of $109,3 million) arising on the translation of non USD denominated subsidiaries are included in comprehensive income of $76,8 million (H1 FY09 losses of $88,1 million). Under previous accounting standards these figures were included in the statement of changes in equity.

Underlying earnings per share were 11,5 US cents compared to 22,5 US cents in H1 FY09 (10,6 US cents in H2 FY09). Headline earnings per share ("HEPS") were 4,9 US cents (H1 FY09: 17,6 US cents). This includes the effects of the fair value adjustments of the put option liabilities detailed below. If the effect of these put option fair value adjustments were to be excluded, HEPS would be 8,5 US cents (H1 FY09: 17,6 US cents).

Working capital remained tightly controlled and $133 million operating cash was generated as a result of working capital changes (H1 FY09: $0,6 million cash outflow from working capital changes).  The Group enjoys comfortable headroom in terms of its working capital needs.

Outstanding liabilities to vendors of businesses acquired have decreased since last year-end from $51 million to $48 million, of which $33,7 million is included under long term liabilities. Liabilities owing to vendors comprise potential future cash payments to the sellers of businesses acquired based on future profitability and performance of the Datatec share price, as well as liabilities initially raised against equity in accordance with IFRS. Companies are required to re-measure such liabilities at each reporting date, with changes in the fair values booked in the income statement. An increase in put option liabilities has resulted in a non-operating charge of $6,4 million being recognised (H2 FY09: gain of $16,8 million).

Operating cash flows have continued to improve as the Group de-leveraged on the back of lower revenues, better payment terms from major creditors and other improvements in working capital. Cash generated from operating activities (after working capital changes) amounted to $183,8 million which represents an increase of 180% over H1 FY09 during which the Group had generated cash of $66,3 million.

The Group paid $22 million to shareholders as a capital distribution in July 2009.

The Group had net cash of $172 million on 31 August 2009, including long-term debt of $21,3 million and short term debt of $39 million included in the payables and provisions line on the balance sheet (H1 FY09: net debt of $47,7 million and H2 FY09: net cash of $36,2 million).

The Group spent approximately $2,6 million (net of cash acquired) on the Minters acquisition in Germany. As a result, goodwill and intangible assets increased by $2,4 million and $0,4 million, respectively. The balance of the increase in goodwill over the prior financial year is a consequence of foreign exchange variances, where non Dollar denominated goodwill is converted to Dollars at period end.

The revenue included from the acquisition in H1 FY10 was $5,9 million. Had the acquisition date been 1 March 2009, the pro-forma revenue would have been approximately $7 million. Since this acquisition is fully integrated into existing operations, it is not practical to establish the profit after tax contributed by the acquisition in H1 FY10, or the profit after tax which the acquisition would have contributed to the Group if it had been included for the entire first half.

DIVISIONAL REVIEWS

Westcon

Westcon accounted for 69% of the Group's revenues (H1 FY09: 67%) and 66% of EBITDA (H1 FY09: 55%).

Westcon is the world's leading specialty distributor in networking, security, mobility and convergence for major technology vendors, including Cisco, Nortel, Avaya, Juniper and Polycom. Westcon's revenue was $1,2 billion (H1 FY09: $1,5 billion and H2 FY09: $1,3 billion)  with softening experienced across all three operating regions.

Trading in the Americas improved modestly from H2 FY09, with conditions in Europe remaining stable and performance of the Asia Pacific region still strong. Strong working capital and operating cash flow management has continued.

Gross margins increased from 10,1% in H1 FY09 to 10,2% in H1 FY10 with gross profit of $126 million achieved (H1 FY09: $152 million). The increase in gross margins is attributable to higher margins in Europe and Asia Pacific offset by lower gross margins in the Americas.

Restructuring and cost control initiatives which commenced in FY09, resulted in operating expenses decreasing 17% from $108 million to $90 million, mainly due to a reduction in headcount, lower outbound freight costs, reduced professional fees and lower travel expenses.

Westcon's EBITDA was $36 million compared to $44 million in H1 FY09 ($24 million in H2 FY09). Overall EBITDA margins improved to 2,9%, having been 1,9% in H2 FY09, with higher margins in Europe and Asia Pacific offset by lower margins in the Americas.

After charges for depreciation and amortisation of intangible assets, operating profit was $30 million (H1 FY09:  $37 million).

Westcon generated $127 million of cash from operations, compared to cash usage of $0,1 million in H1 FY09, driven by effective working capital management and better payment terms from suppliers. 

In terms of revenue split by vendor, Cisco products made up 57% (H1 FY09: 55%) with 10% for Avaya (H1 FY09: 10%), 8% for Nortel (H1 FY09: 10%), 17% for security (H1 FY09: 15%) and 8% other developing vendors (H1 FY09: 10%). 46% of Westcon's revenue was generated in the Americas followed by 43% in Europe and 11% in Asia-Pacific.

Over the course of FY09, and particularly at the onset of the global economic downturn, Westcon took significant measures to ensure it could weather the difficult market conditions and emerge as a stronger company. These measures included significantly increasing its overall cash position and utilising better payment terms from certain suppliers. As a result, Westcon has been able to continue operating successfully within the current economic climate and is very well positioned to maintain its margins even with reduced revenues.

In April 2009, Westcon announced that it had become Cisco's first global distributor, signing a partnership that effectively increased both organisations' ability to access emerging market opportunities in many parts of Africa and the Middle East, South America and across Asia.  As a result of this agreement, Westcon opened new offices in the Philippines, Thailand and Vietnam in Asia, and the Czech Republic in Europe. 

To consolidate the early success of this partnership, Westcon announced in September 2009 the creation of Comstor Worldwide, a new global business unit focused on its Cisco solutions offerings in order to better manage growth and investments in its Cisco-oriented business. This new business unit accounts for over 50% of Westcon's revenue.

Although trading in Europe so far this year has been flat, a modest improvement is being seen in the US, with Brazil and Asia Pacific performing strongly. The Group expects Westcon's profitability to continue to improve for the remainder of this financial year, particularly as this business continues to benefit strongly from the high operational gearing that now exists as a result of the significantly reduced cost base and improved operational efficiencies.

Westcon Emerging Markets ("WEM")

WEM operations made up 7% of the Group's revenue (H1 FY09: 7%) and 4% of EBITDA (H1 FY09: 1%).

WEM is Datatec's distribution division operating in Africa, the Middle East and India. These subsidiaries previously formed part of the Group's "Other Holdings". Consolidation of these operations under the WEM umbrella has ensured a more regional approach towards management and reporting, with a strong focus on existing business development and cross-group operational efficiencies.

WEM revenues were $128,7 million (H1 FY09: $150,3 million), with the decrease mainly attributable to softening in Africa and South African revenues as a result of the global economic downturn.

EBITDA doubled from $1 million in H1 FY09 to $2 million as a result of a strong performance in the Middle East and the African region having turned to profitability with continued EBITDA pressures in South Africa.

WEM has emerged in a stronger position following an extensive restructuring programme in Africa and South Africa despite trading conditions remaining difficult in South Africa. The Group expects WEM's financial performance to continue to improve for the remainder of this financial year.

Logicalis

Logicalis accounted for 22% of the Group's revenues (H1 FY09: 24%) and 30% of EBITDA (H1 FY09: 40%).

Logicalis is an international provider of integrated information and communication technology solutions, delivering secure, converged computing and communications infrastructure and services. Specialising in the areas of advanced technologies, Logicalis focuses on three main areas of integration - data centre solutions, unified communications and professional and managed services.

Revenue was $394,0 million (H1 FY09: $542,3 million), including a $5,9 million contribution from an acquisition, reflecting the difficult global macroeconomic environment (down 17% on a constant currency basis). Last year the first half performance in South America was boosted by a large project with a telecommunications company. 

The decline in activity was largely anticipated and close attention to the cost base resulted in an EBITDA margin of 4,2% (H1 FY09: 5,8%). Excluding the impact of acquisitions made in FY09 and FY10, organic revenue decreased by 23% on a constant currency basis.

Revenue from product sales was down 33% year on year with declines across all main vendor categories, namely Cisco, HP and IBM. However, revenues from services were more resilient, down only 2% year on year, with particularly encouraging growth in maintenance revenues of 16% as customers in downturns often increase their reliance on services associated with their install base.

The gross margin was 21,6% (H1 FY09: 21,7%). Product margins were under pressure, particularly in the US and UK, but services margins were maintained and an improved services mix kept the overall margin similar to last year. The gross profit was $85,3 million (H1 FY09: $117,8 million).

Operating expenses were cut by 20%, reflecting the reduction in cost base by management in anticipation of lower revenues. EBITDA was $16,5 million (H1 FY09: $31,4 million). After charges for depreciation and amortisation of intangible assets, operating profit was $8,3 million (H1 FY09: $22,6 million).

On 5 May 2009 Logicalis acquired Minters GmbH ("Minters"), a German Cisco Systems Silver Partner. The enlarged Logicalis German operation is a mid-market focused ICT integrator and provides a platform for further growth in Germany. On 28 February 2009 Logicalis transferred its Intact services business into the Consulting Services Division. The results of Intact for the six months ended 31 August 2008 are excluded from Logicalis' comparative results on a pro forma basis.

Management expect an improved performance from Logicalis in the second half of the current financial year. Traditionally activity levels are higher for Logicalis in the second half, and the business is expected to benefit from higher operational leverage as a result of the reduced cost base.

Consulting Services

The Group's Consulting Services division consists of Analysys Mason and Intact.

Analysys Mason provides management consulting advice and market intelligence services to the telecoms, IT and digital media industries. It advises clients across the full business development cycle, from corporate strategy, financial transactions, and policy issues to product development, marketing, and network operations. Its clients include telecoms operators, media organisations, financial institutions, regulators, and other public sector bodies.

As expected, Analysys Mason experienced a difficult start to the year particularly in the area of strategy consulting where operators and service providers have continued to reduce discretionary spend. On a local currency (Sterling) basis, year on year revenue fell by 8%, but the strengthening of the US$ resulted in revenue of $22,4 million (H1 FY09: $30,4 million).

As a result of lower consulting utilisation, the gross margins were 27,4% (H1 FY09: 36,8%), resulting in an EBITDA loss of $0,2 million (H1 FY09: profit $2,3 million). Additional cost reductions have been made and in recent months order intake has started to improve. Consequently, management expect a return to growth and improvement in operating profit in the second half.

Intact is a networking services and support consultancy business focussed on providing high end professional services to its customers. Intact's services are offered exclusively through its partner network, which include Value Added Resellers, Systems Integrators, Network Integrators and Service Providers. Intact generated revenues of $8,9 million (H1 FY09: $8,3 million) and generated EBITDA of $0,4 million (H1 FY09: 0,7 million).

Corporate and Other

Included in Corporate and Other are the operating costs of the Datatec head office entities which also include unrealised and realised foreign exchange losses of $1,5 million and $3,0 million respectively (H1 FY09: $1,4 million and $1,4 million).

This segment also includes two months' trading for the Group's 55% holding in the South African ICT business, ALI, which was sold effective 30 April 2009. During the two months ended 30 April 2009, ALI generated revenues of $7,4 million  (H1 FY09: $25,0 million) and an EBITDA loss of $0,9 million (H1 FY09: profit of $0,7 million).

REPORTING

This report complies with International Accounting Standard 34 - Interim Financial Reporting as well as with Schedule 4 of the South African Companies Act (Act 61 of 1973, as amended), the AIM Rules for Companies and the disclosure requirements of the JSE Limited's Listings Requirements. The accounting policies comply with International Financial Reporting Standards ("IFRS") of the International Accounting Standards Board and are consistent with those applied in the prior year financial statements, except for the adoption by the Group of the amendments to IAS 1 - Presentation of Financial Statements. This standard affects the presentation of owner changes in equity and comprehensive income and does not impact on recognition, measurement and disclosure of specific transactions as required by any other IFRS standard. The Group has presented a ‘statement of comprehensive income' which replaces the income statement and also includes all non-owner changes in equity. All changes in equity resulting from transactions with owners in their capacity as owners are presented in the ‘statement of changes in equity'.

SUBSEQUENT EVENTS

On 1 October 2009 Westcon acquired Datastor (NZ), a New Zealand ICT distribution business for cash. The acquisition provides Westcon with the opportunity to add an additional operation in New Zealand to help consolidate its existing business and create a market leading position that is complementary to Westcon's Asia Pacific distribution business. 

CURRENT TRADING AND PROSPECTS

Trading in the first half of FY10 has been largely in line with the latter part of FY09.

Encouragingly, the Group has seen some early signs of improvement in the macro-economic conditions in most regions in which it operates. A recovery is now anticipated in the US and Europe whilst South America, Middle East and Asia have remained robust. Business conditions have become more predictable, particularly since the second quarter.  As a result, the Board is confident of a return to revenue growth in all divisions in the second half of the year.

The Group is evaluating a number of potential strategic corporate developments in China and parts of Asia. In keeping with the Group's recent successful advances in Brazil and India, Datatec believes that there are opportunities to grow further in developing markets, especially China and parts of Asia, representing key strategic markets for its operations.

On 14 May 2009 the Group published a forecast for FY10 of revenues of between $3,7 billion and $4 billion, profit after tax of approximately $44 million, underlying earnings per share of approximately 29 US cents and earnings and headline earnings per share of approximately 23 US cents. Based on current trading conditions, these forecasts remain unchanged.

This report has not been audited and the forecast within this current trading and prospects section has not been reviewed and reported on by Datatec's auditors.

On behalf of the Board:

Enquiries: