CEO's Report

Jens Montanana

Chief Executive officer

In our 20th year of existence we have achieved record revenues of $3 billion for the first time we have also continued to build upon the structural and management changes of the last few years and we are beggining to reap the benefits of our increasing scale, improved business focus and targeted geographical growth.

I am pleased to report that in this, the 20th year of our Group, we have achieved record revenues of $3 billion for the first time. We have also continued to build upon the structural and management changes of the last few years and we are beginning to reap the benefits of our increasing scale, improved business focus and targeted geographical growth.

We have achieved this in an improving IT networking and services market that appears to have entered a period of sustainable growth. This is supported by our principal technology suppliers, Cisco, IBM and HP, who have all reported robust market demand on the back of strong corporate growth and renewed IT investment.

There has also been a resurgence of consolidation activity as manufacturers, telecommunications operators and global services companies compete for a larger share of common IT budgets. We believe that this is healthy as it affords us the opportunity to engage with clients at various stages of the supply chain in our chosen focus areas, a strategy that we are well accustomed to.

Scale is becoming increasingly important as more and more organisations compete to provide a broader array of services. In this regard, innovation is increasing in areas such as security, IP telephony and converged “triple play” services which include broadband, fixed-line and mobile phone services, and “quad play” services which add video to this.

Intermediaries who can provide mixed vendor technologies and multiple services across industry leading platforms, which enable them to bring these technologies quickly to the market, will enjoy a distinct competitive advantage in this environment.

We believe we are well placed in this regard as the spread of our activities across distribution, integration services and consulting not only provides us with a defensive business model, as borne out during the previous market downturn, but also creates multiple points of entry and leverage for us in a growing market.

During the year under review, we made significant progress in strengthening our management at all levels. This has resulted in a broadening and deepening of the skills that help us to take advantage of new growth opportunities, and improve our ability to integrate acquisitions better.

This additional headroom in management has reduced our execution risks and provided additional capacity to scale our operations better. In addition, recent changes to incentive compensation and executive remuneration have helped to improve our competitiveness. These retentive and incentive schemes have promoted management stability, widened our succession planning and helped create a competitive working environment with advancement based solely on merit.

The re-scheduling of the Group’s financing facilities with HSBC during the year has provided $250 million of revolving credit and long-term loan facilities to the main trading divisions of Westcon and Logicalis. This, coupled with the Group’s strong balance sheet and history of prudent control of working capital, supports the Group’s longer-term stability and sustainability objectives.

Significant progress has been made across the Group in all areas of our business. We believe it is important to continue to have a strategy that is simple to understand and predictable in its execution. Shareholders increasingly expect well telegraphed trend changes and greater transparency, and we believe we deliver this in our business.

GROUP OPERATIONS – DISTRIBUTION

Westcon group forms the core of Datatec’s distribution operations with Westcon AME in SA and OnLine in Dubai providing distribution services across Africa and the Middle East. These activities accounted for almost 80% of Group revenues and contributed 60% of the consolidated gross profit.

Westcon group is a specialist distributor and support organisation for networking and security manufacturers that use reseller channels as their principal route to market.

Large vendors such as Cisco, Nortel, Avaya, Checkpoint and Nokia, which are the main technologies provided through Westcon, are using distribution companies such as Westcon to manage their supply chains and to develop their small and medium size reseller markets.

Revenues, margins and profits all grew significantly during the year under review, reflecting the improved focus and execution of management and the improved market conditions that prevailed in Europe. Management also continued to focus intensely on reducing general and administration operating costs whilst improving efficiencies through scale.

Westcon is the largest focused networking equipment and security products distributor in the world today.

GROUP OPERATIONS – INTEGRATED SOLUTIONS

The Logicalis group is a provider of IT integration solutions and networking services. This division operates businesses in North America, South America and Europe with a significant presence in the US and UK markets.

CHIEF EXECUTIVE OFFICER’S REPORT

Significant progress has been made across the group in all areas of our busines. We believe it is important to continue to have a strategy that is simple to understand and predictable in its execution.

During the year under review, Logicalis continued to make significant progress with the reshaping of its operations, the integration of recent acquisitions, the identification of new market opportunities, the growing of market share and the better balancing of the technology and vendor mix. Each of the major vendors Cisco, IBM and HP now accounts for a similar share of the overall technology supply mix. In addition, this division invested in growing its services contribution.

Logicalis has taken the lead in establishing new partnerships and commercial relationships in areas such as managed services with British Telecom, and technical contract consulting through the acquisition of Alliance Consulting in the US.

With 1 000 employees, over $500 million of revenues last year and rapidly growing profitability, this division is well positioned to continue to play a consolidating role in its major markets.

GROUP OPERATIONS – CONSULTING

Analysys Mason group comprises the previously merged businesses of the Mason group which was acquired in 1999, and Analysys Consulting and Research which was acquired in 2004.

The division’s activities include strategic telecommunications and networking consulting, research, project and change management and contact centre and customer relationship management technology consulting.

During the year, considerable progress was made in consolidating the operations, systems and administration of the division. Management focused on successfully deploying its combined resources to develop larger key account assignments.

STRATEGIC ISSUES

The Group is actively considering pursuing a secondary listing on the AIM market of the London Stock Exchange (“LSE”).

The Group feels that with its significant international operations raising capital in an internationally recognised exchange such as London will broaden its international shareholder base and help provide additional liquidity to fund contemplated and future acquisitions. The transaction will require the approval of a majority of shareholders.

FINANCIAL RESULTS

Group revenues rose a significant 18% year-on-year to a record $3 billion during the review period. EBITDA tripled to $85 million, while headline earnings per share jumped more than six-fold to 27 US cents.

This rapid rise in profitability did not come at the expense of working capital management. Year end cash reserves were a strong $172 million even after accounting for an outflow of $37 million in acquisitions during the year.

Operating profits doubled at Logicalis and Analysys Mason and quadrupled at Westcon.

Westcon’s exceptional performance was driven by a turnaround in the European operations and an improvement in gross margins across the board, which rose from 7,7% in the previous year to 8,5%. Similarly, consolidated gross margins rose from 10,4% to 11,4%.

EBITDA and operating profit margins continued to expand in all divisions, reflecting the benefits associated with scale and focus. Particularly pleasing was the strong sequential and comparative performance in underlying organic growth.

PROSPECTS

As anticipated in our previous report, the structural and management changes made in prior years have begun to yield what we believe to be sustainable performance improvements.

All of our divisions and major subsidiaries had a strong year. Especially encouraging has been the improving contribution from our distribution businesses in Western Europe and we expect these improvements to continue.

Business confidence in the US and UK may be curtailed somewhat in the year ahead in the wake of the successive interest rate increases over the past 18 months, while growth prospects in regions such as continental Europe and Asia may contrast as they still have to feel the effects of recently administered interest rate increases.

This may moderate economic growth in the markets we serve in the year ahead, however we remain encouraged by our own prospects and the development of the operations and management of our businesses. We believe that our improving execution will enable us to continue to grow revenues and improve margins in these economic conditions.

Jens Montanana

Chief Executive Officer