Westcon Divisional Report

Westcon Group, Inc. ("Westcon") is a leading distributor of networking technology from vendors such as Cisco, Nortel and Avaya to the security, convergence and mobility markets in North and South America, Europe and the Asia Pacific region. The group adds value to its distribution activities by providing resources such as technical expertise, training, sales support and services.

Westcon provides solutions that include the design and configuration of convergence networks, network extensions such as video conferencing, network storage and unified messaging and network security to over 7 900 customers world-wide. They include value-added and general resellers, systems integrators and service providers that resell networking products and solutions to small and medium sized businesses, large enterprises and governments.

STRUCTURE

Westcon operates via branded sales divisions under the Comstor, Voda One and Westcon brand names. It employs a highly trained team of over 500 sales and marketing professionals in 13 countries, supported by over 100 certified technical personnel.

The Comstor division distributes Cisco products in the US, Europe, Australia and Singapore, while offering a wide range of complementary products centred on convergence, security and IP devices. The US-based Voda One division distributes Avaya products for convergence, unified messaging, call centre applications, PBX and data networking solutions.

The Westcon division is a leading distributor of Nortel Networks solutions and also provides a wide range of complementary voice and data networking equipment and security products in the US, Europe, Canada, Australia and Brazil. Westcon is also a leading distributor of network security solutions from vendors such as Check Point, ISS, Crossbeam and many others.

WESTCON DIVISIONAL REPORT

Within the networking and communications industry, opportunities in the areas of convergence, security and  mobility continue to expand.

OVERVIEW

The year under review was very successful for the Westcon group. Revenue grew by 11% while EBITDA more than doubled and cash on hand improved substantially. The company’s operating structure was significantly improved and its North American and European management teams enhanced in key areas including legal counsel, finance and sales.

The company secured a new $150 million working capital facility and a $40 million second lien term loan to finance its operations in North America. The working capital facility will be used to finance Westcon’s North American operations and the second lien term loan to provide additional long-term capital to fund growth of the Westcon businesses.

The year also saw the completion of the group’s infrastructure for its world-wide ConvergencePoint, VoicePoint, SecurityPoint, OneVoice and OneDefense marketing programmes. Each of these serves as a single, comprehensive resource for resellers competing in these technology areas. The company also completed a powerful set of tools to help resellers achieve greater success in lead generation, presentation and marketing. These tools – LeadVision, SalesVision and MarketVision – are being made available to the entire Westcon customer base.

During the year, Westcon continued to build its Technology Solutions Group which integrates group strengths in technology solutions (convergence, security and mobility) with specific business methodologies and vertical market applications. By creating a standardised framework to define and deliver effective solutions for business requirements in its target markets, the company is able to draw more efficiently on its strategic manufacturer portfolio.

Westcon expanded its international solution portfolio of convergence and security technologies by announcing new or enhanced vendor partnerships with SONY, Braxtel, GN Netcom, Quintum Technologies, Trapeze Networks, SDC, Metropolis Technologies, Mediatrix and Meru Networks. The company continues to support its product and service offerings with branded customer focused training events.

MARKETS

Within the networking and communications industry, opportunities in the areas of convergence, security and mobility continue to expand as Cisco, Nortel and Avaya continue to report steady market demand. Convergence technology has been embraced by both enterprise and small and medium businesses (“SMB”) customers as a means of achieving increased productivity rather than simply cost savings. Continued well publicised reports of network threats and Internet viruses contribute to the ongoing demand for network security products and services.

FINANCIAL PERFORMANCE

Revenue during the review period increased 11,1% to $2,283 billion (2005: $2,055 billion), reflecting a strong demand across all geographic regions for Cisco products, coupled with moderate increases in the sales of Nortel and Avaya products.

Gross margins increased from 7,7% to 8,5% resulting in a 23% increase in gross profit from $158 million to $195 million. This was attributable to strong performance in the Americas and Asia-Pacific regions, coupled with an improved performance in Europe in the second six months.

Westcon's EBITDA increased by 166% from $25 million to $67 million, and its EBITDA margin from 1,2% to 2,9%. This was a result of the increased gross margins achieved across all regions together with a $5,1 million or 3,8% decrease in operating costs. Operating activities generated $37 million of cash, compared to $6 million in the previous year. Increased accounts receivables were partially offset by lower inventories, increased payables primarily in Europe and increased earnings.

For the year, Cisco products made up 59% of revenue followed by 10% for Nortel, 9% for Avaya, 7% for security and 15% for Development/Affinity vendors. From a geographic perspective, 55% of Westcon’s revenue was generated in the Americas followed by 37% in Europe and 8% in Asia-Pacific.

PEOPLE

Westcon's recruitment philosophy is to hire the most experienced and capable management team in each of the markets it serves, and to recruit the best local talent in each geographic area in which it operates. This includes certified engineers, product specialists and sales representatives. The group also invests heavily in training and career development programmes to build team spirit, heighten productivity and retain the best people.

FUTURE PROSPECTS

The group continues to refine its management organisation on a multi-national basis to drive market growth opportunities in its core areas of technology expertise, through geographic expansion and acquisition.

Specific goals for the coming year include continuing to develop new business opportunities in specific markets centering on convergence and security; continuing to hire strong people; continuing to expand geographically; and continuing to grow the company’s technological expertise to help its vendor partners access new markets.