Logicalis Divisional Report

"The group's strategic goal remains the maximisation of growth in profit and value by being a leading player in our chosen markets and offering strength in scale, efficiency and qaulity of execution."

Logicalis is an international provider of integrated information and communication technology (“ICT”) solutions, delivering secure, converged computing and communications infrastructure and services. The group provides the architecture, deployment, integration and management of networks and systems to deliver leading edge solutions that create value for customers by meeting their business needs now and into the future.

Headquartered in the UK, Logicalis group has annual revenues in excess of $550 million, with operations in the US, UK, Germany and South America. The group currently employs around 1 000 people world-wide, including highly-trained service specialists who design, specify, deploy and manage complex ICT infrastructures to meet the needs of over 5 000 corporate and public sector customers. To achieve this, Logicalis maintains strong partnerships with technology leaders such as IBM, HP and Cisco.

For the past two years, Logicalis group has implemented an acquisition growth strategy to complement its organic growth targets. The focus of this strategy has been on gaining scale in core geographies, technologies and service areas, and in strengthening and consolidating its US and UK businesses.

During the financial period under review, Logicalis undertook and completed five acquisitions: 

• On 1 March 2005, the group acquireNotability Solutions Limited (subsequently renamed Logicalis Computing Solutions Limited (“LCS”)), one of IBM’s leading business partners in the UK focusing on the IBM i-Series range. With annual revenues in excess of $40 million, the business is a Premier IBM hardware and software partner serving a broad range of industries but with particular emphasis on the financial services and distribution sectors. 

• On 17 March 2005, Logicalis acquired Eisco Technology, Inc. a $15 million-a-year revenue US IBM solution provider which focuses on high-end IBM z-Series mainframe solutions. The acquisition added IBM’s z-Series Partner accreditation enabling Logicalis to service the entire range of IBM customer requirements in the US.

• On 29 July 2005, Logicalis acquired Hawke Systems Limited, a $25 million-a-year revenue supplier of advanced computing infrastructure and one of HP’s leading Enterprise partners. The acquisition has enabled Logicalis to develop a strong storage practice in the UK and to secure a relationship with HP in the UK.

• On 16 September 2005, Logicalis acquired TBC Group Limited (“TBC”), a $50 million-a-year revenue IBM Premier partner, and supplier of advanced computing infrastructure and managed service solutions, based mainly around the IBM Unix server range, database applications and IBM middleware. TBC is highly complementary to the LCS business and the acquisition has positioned Logicalis as a top three IBM partner in the UK.

• On 9 January 2006, Logicalis acquired from Avnet, Inc. its end user HP business, a $100 million-a-year revenue HP premier partner business focused primarily on HP server and storage solutions. The acquisition has added scale and strengthened Logicalis’ relationship with HP in the US. The acquisition brings with it a 700 strong customer base and significant opportunities to leverage other Logicalis offerings such as IBM, Cisco and managed services. Coinciding with the acquisition, Logicalis negotiated an exclusive distribution partner relationship with Avnet from January 2006.

The three acquisitions in the UK have enabled Logicalis to form a focused servers and storage division trading under the Logicalis Computing Solutions brand name. From 1 March 2006, TBC and Hawke Systems have been integrated into the Logicalis Computing Solutions division.

These acquisitions, together with that of IBM partner Solution Technology, Inc. in September 2004, have significantly strengthened Logicalis’ vendor relationships with IBM and HP, in both the UK and US markets. As a result, the group now enjoys the following commanding market positions:

•  #1 HP Enterprise reseller and #3 IBM Business Partner in the US
• Top 5 Cisco Gold Partner in the UK 
• #3 IBM Business Partner in the UK
• #1 Cisco Gold Partner in Argentina.

STRATEGY

Logicalis’ solution-led and service-oriented go-to-market strategy is built around focused areas of expertise covering corporate networks, IP communications, security, enterprise infrastructure performance management, data management, application integration and enterprise computing. These areas of expertise are supported by consulting, lifecycle and managed services.

The group’s strategy is based on leadership in our chosen markets, excellence in advanced technologies, and the provision of high quality, innovative solutions and services to customers, combined with a strong customer base, a national presence and new 24x7 managed service centres in the US and UK markets.

The group’s strategic goal remains the maximisation of growth in profit and value by being a leading player in our chosen markets and offering strength in scale, efficiency and quality of execution. The group’s key strategic objectives include the following:

• Improve market recognition through clear, focused and complementary offerings

• Blend the responsive, personal service of smaller ICT partners with the financial strength and efficiency of large ICT partners to gain ground against both niche and larger competitors

• Continue to migrate its market offering from that of a technology provider to a customer-driven services and solutions provider

• Increase its presence in high demand growth technologies and align its positioning to its long-term ICT vision

• Improve the quality of customer engagement by growing the capabilities of its sales people, through the better use of CRM tools, better training and sales support, and enhanced sales management that maximises productivity

• Continue to improve and invest in internal processes and systems.

• Closely monitor the execution of plans and their measurement by operation and by business line.

In terms of technology, the group’s focus remains on higher demand advanced technologies that deliver secure, converged computing and communications infrastructures. These include wireless, IP communications, storage and data management, intelligent networking, data management and security. This strategy, combined with its established technical skills, has been recognised by key vendors during the year under review.

Logicalis has recently received two of Cisco’s most prestigious citations: Cisco World-wide Enterprise Partner of the Year 2005, presented to Logicalis Argentina; and Cisco European Services Partner of the Year 2005. These were awarded for consistently leading the way in providing customers and partners with innovative, market leading services, solutions and applications, gaining expertise in Cisco’s specialisations for advanced technology solutions, and achieving a consistent high level of customer satisfaction.

In the UK Logicalis received Cisco’s 2005 Gold Partner of the Year Award and its Services Partner of the Year Award. Other awards to the UK operations included an IBM i-Series Workload Recognition Award and a Vision Solutions Magna Cum Laude World-wide Award.

In the US, Logicalis gained HP Elite Status for HP Openview to complement its existing Elite Status for Servers and Storage. The company also received an IBM Beacon Award for being the Best IBM Business Partner delivering On Demand Business innovation to the marketplace on the IBM x-series platform. Logicalis South America also received Cisco South America Enterprise Partner of the Year 2005 and the Cisco South America Partner of the Year 2005 awards.

Logicalis management is focused on building strong businesses that provide the core information and communication technologies that underpin the ICT infrastructures of its customers. The acquisitions made since 2004 have been predominantly product based businesses and in accordance with its strategy. Moving forward, the group will seek to make further acquisitions that extend its services as well as its participation in other strategic geographic markets.

PEOPLE

In a customer-led and services-based business, success is driven by the quality of its employees. In Logicalis, the focus on advanced technologies requires a high level of technical expertise and management works closely with its vendors to ensure that employees are trained appropriately, taking full advantage of vendor-funded training schemes wherever possible. Management will maintain an intense focus in this area going forward.

MARKETS

The year under review saw an upturn in trading conditions with the group’s main vendor partners achieving growth of between 5% and 10%.

Year-on-year growth in demand for networking equipment was approximately 10% overall, however Cisco’s advanced convergence and security products enjoyed growth of around 20%. In the high-end enterprise storage and servers market, year-on-year growth was typically middle to high single digits, although some major product groups had very limited growth.

In South America the improving macro-economic conditions continued which helped drive investment in IT. For the second consecutive year, product sales, consisting mainly of Cisco equipment, more than doubled.

Revenues from other vendors also increased, with EMC sales climbing 76% year-on-year. This resulted in product revenues across the board growing by 14% year-on-year before the benefits from the acquisitions.

The rising revenues are a clear indication that expectations of a 3% to 6% increase in corporate IT budgets for the next few years are well founded, driven in no small way by the increasing number of opportunities presented by convergence.

Logicalis also increased professional and technical services revenues by 51% in the year. Growing annuity revenue remains a strategic focus, and growth of 8% was achieved in maintenance and managed services.

FINANCIAL PERFORMANCE

Group revenue amounted to $546 million during the year with $105 million of this arising from the acquisitions made during the year (2005 total revenue was $352 million). Excluding the impact of acquisitions, revenue increased 16% on a like-for-like basis.

Improved product sales generated additional demand for consulting and technical services, and revenues from project-based services rose by 44% over the corresponding previous period. The increased demand for these services resulted in a higher utilisation of staff and impacted favourably on the services gross margin, which increased from 23% in 2005 to 27% for the year under review.

The total gross margin for the year from continuing operations was 20%. This was down by 1,2% on the previous year, reflecting both an increase in the contribution from product-based business and an overall product margin decline.

Management maintained a tight rein on general and administrative operating costs and although total operating costs increased by 47% compared with the previous financial year, 31% was a result of the impact of acquisitions and the balance was primarily an increase in sales and marketing costs in line with the organic revenue growth. EBITDA for the year rose to $16,7 million compared with $9,6 million for the previous year. The 2006 EBITDA includes charges of $1,0 million for share-based payments under the requirements of IFRS 2 which has been applied for the first time. The acquisitions made during the year contributed $3,7 million of the total EBITDA. Operating profit after charges for depreciation and amortisation (“EBIT”) amounted to $11,5 million compared with $6,1 million for the previous year.

As stated in last year’s financial report, Logicalis sold its Australian and New Zealand businesses to IBM for $66 million in March 2004. The net proceeds substantially strengthened the Logicalis group balance sheet and provided funding for organic growth and the acquisitions in North America and the UK.

FUTURE PROSPECTS

The two main goals for the coming year are to successfully integrate the acquisitions made during the past financial year, in order to realise the expected strategic benefits and achieve sustainable growth in profitability. To achieve this, management will continue to focus on driving sales volumes, both by growing the customer base and by selling more to existing customers. In addition, costs will be tightly managed and core systems and processes will be upgraded, particularly in the US, to support the anticipated increase in scale.

Although there is some increased uncertainty, the macro-economic conditions are forecast to remain positive for the year ahead and expenditure on IT is expected to grow. However the market is expected to remain very competitive and customers are expected to continue to demand solutions that deliver a quality performance with clearly defined benefits.

In the face of these market expectations, the group’s business propositions are now much stronger and effective execution will continue to be the central objective for driving an improved and sustainable performance.