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 Jens Montanana, Chief Executive Officer
2008 represented our fifth successive year of improvement in revenues and earnings across the Group. We continue to benefit from our scale and geographic diversity. The Group exceeded its revenue target of US$4 billion, with the non-US operations now accounting for 58% of total revenues (2007: 52%). The Group's operations in Asia-Pacific, Africa and the Middle East and South America continued to grow and now account for 15% of the Group's revenues (2007: 14%). The Group successfully expanded its gross margins to 13,7% and increased operating profit before finance costs, depreciation and amortisation ("EBITDA") by 26%. Operating profits rose 25% to US$123,6 million from US$99,1 million, and headline earnings per share ("HEPS") grew 12% to 45,6 US cents (2007: 40,8 US cents). Underlying earnings per share grew by 21% from 39,2 US cents to 47,3 US cents. Despite a slowdown in the US, tight operating cost controls and improving productivity have underpinned solid progress for the year as a whole and in the second half of the year in particular. Each of our principal business divisions, Westcon, Logicalis and Analysys Mason, had strong years and are described further below and in more detail in their own divisional report. In addition to providing the normal divisional breakdown for the Group, this year we have also provided an analysis of revenue streams across the Group's principal business activities, namely Distribution, ICT Solutions and Consultancy & Services in order to more clearly illustrate how both revenues and profits are derived. Of the US$4 billion revenues generated during 2008, some 76% came from product distribution, principally through Westcon Group, but also from our other operations in Africa and the Middle East (eg. Westcon SA and Online Distribution) and 18% from ICT Solutions derived principally from Logicalis but also includes our investment in African Legend Indigo. The balance of 6% is attributable to revenues derived from consulting and services generated across our operating units, which comprise consulting revenues of Analysys Mason and attached services from both the ICT Solutions and Distribution operations, including: design; configuration; maintenance; support; managed services and other professional services. These activities generated revenues of US$258 million; significantly, they contributed more than 17% of the Group's gross profit. The spread of activities across these three business streams provides the Group not only with multiple points of leverage in the ICT market, but also a defensive business model with no particular vendor, technology, geography or industry dependency. MARKET The weak US Dollar has helped to underpin the broad-based global demand for technology products (which are mostly priced in US dollars) and overall ITspending remains buoyant. The global ICT industry is still experiencing a sustained period of growth, led by demand for IT infrastructure replacement and strong cycles of innovation driven by the convergence of ubiquitous broadband and widely available high-speed mobile data networks. This has led to an explosion in personal online communications use, unleashing a whole new generation of data-intensive and network-hungry applications and new content services. Significantly, unlike the setback following the dot.com collapse in 2001, this time there has been no excessive overinvestment linked to ICT. The main vendors in the ICT industry, including our principal partners such as IBM, Cisco and HP, continue to exhibit strong global growth, even as the US economy falters. In particular, these vendors have increasingly shifted their business models away from direct selling in favour of growing third-party channels such as through resellers and distributors to improve market access. This continuing trend clearly supports the positioning of Datatec and its divisions in distribution channels, solutions integration and professional services. STRATEGIC FOCUS During the year, the Group completed a number of acquisitions which have improved its competitive position, geographic reach and vendor mix as well as enhanced its overall scale and global presence. These acquisitions are described in the summary divisional overviews below and in more detail in the relevant divisional reports. In the coming year, we will continue to look for opportunities to consolidate where we can improve the Group's market share and financial returns or facilitate the entry into or extension of a fast-growing territory. A common theme of Datatec's acquisitions is the active ongoing participation of the local management of the acquired companies. Through empowering these individuals and ensuring that their interests are aligned to the Group's, Datatec benefits substantially from their local knowledge and contacts and allows the Group to scale rapidly without adding substantially to Head Office costs. Specifically, we will continue to target faster growth emerging markets and developing countries, as demonstrated by our recent transactions in Brazil, Turkey and Africa. These markets are attractive because of their superior growth characteristics and lower cost of entry when compared to more mature markets. Further expansion in Latin America is expected as the Group believes incremental opportunities will exist for Datatec to leverage its scale. Expansion into new markets such as India and other parts of Asia is also being evaluated. WESTCON Westcon is the world's leading speciality distributor in networking, security, mobility and convergence for leading technology vendors, including Cisco, Nortel, Avaya, Juniper and Polycom. Despite the softening of the US market, Westcon delivered another strong performance. Overall revenue increased 26% from US$2,3 billion to US$2,9 billion, with increases in regions. Acquisitions contributed US$319 million in revenue, in addition to an organic revenue increase of 12%. Gross margins increased from 9,5% to 10,4% with gross profit increasing 37% from US$216,2 million to US$296,7 million. The increase is attributable to contributions from acquisitions coupled with increased gross margins in Europe and Asia-Pacific. EBITDA profits tracked revenue growth, rising 23% from US$82,7 million to US$102 million, while overall EBITDA margins remained steady at 3,6% as improving EBITDA margins in Europe and Asia-Pacific were offset by slightly lower EBITDA margins in the Americas. Across all regions Westcon continued to gain market share by opening up new channels for complex vendor solutions in higher growth SMB/SME sectors, and through providing outsourced logistics and procurement services to a growing number of international service providers and global system integrators. During the year, Westcon invested heavily in developing its convergence and information security portfolio which has led to a more balanced vendor portfolio. Cisco products made up 55% (2007: 60%) of Westcon's revenue, 11% Nortel (2007: 13%), 11% Avaya (2007: 9%), 13% security (2007: 4%) and 10% other developing vendors (2007: 14%). Forty-six percent of Westcon's revenue was generated in Europe, followed by 45% in the Americas and 9% in Asia-Pacific. During the year the Group completed a number of acquisitions that have helped to consolidate Westcon's market position, broaden its portfolio and strengthen its vendor relationships. In April and May 2007, Westcon completed the acquisitions of NOXS and Crane Telecommunications, respectively. These acquisitions helped to propel Westcon into a market-leading position in Europe in not just data networking, but also in the high-growth markets of security and VoIP convergence technologies. The integration of these assets has progressed well and they have made a strong contribution to the improved performance of Europe in the year under review. In July 2007, the acquisition of ReView Video LLC, a leading US distributor of IP networked audio and videoconferencing solutions, added voice and videoconferencing expertise to the Westcon portfolio. In line with the Group strategy of increasing its exposure to high-growth markets, Westcon also made a number of strategic investments in Eastern Europe and South America. In July 2007, Westcon announced a joint venture in Turkey with Index Group, a listed Istanbul-based distributor of IT equipment, whereby Westcon acquired a 50% stake in wholly owned subsidiary Neteks, a networking and security distributor whose vendor relationships include Cisco, Nortel, HP, 3Com, and Check Point. Neteks generated revenues of approximately US$50 million in the last financial year. As a result of the joint venture, Westcon Group became the leading networking and security distributor in that region. With a GDP of US$358,5 billion and population of over 71 million, Turkey is an important emerging market where IT networking will play an increasingly important role. In October 2007, Westcon acquired the assets of Cernet of America, Inc. and its related Mexican company, Cernet Tecnologia en Telecomunicaciones, S.A. In December 2007, Westcon added a full-service capability to distribute and support Cisco products and services from its established Westcon operations in Brazil. This new organic initiative has the potential to grow very rapidly and is expected to add revenues of over US$100 million over the next two years. These acquisitions were important and complementary steps in the Group's strategy to leverage Weston's scale and financial strength by expanding its operations geographically to mirror the growth objectives of its leading vendor partners. LOGICALIS Logicalis is an international provider of integrated ICT solutions, delivering secure, converged computing and communications infrastructure and services. Specialising in the areas of advanced technologies, the Group's integrated services portfolio comprises the architecture, deployment, integration and management of customers' networks and systems to deliver optimum solutions that meet their business needs now and into the future. During the year the UK and South America have performed strongly. Tougher market conditions in the US accelerated a strategic assessment of the US business model during the first half and a restructuring which resulted in multiple service delivery activities being unified under a focused management team and a streamlining of the cost base. Revenue for the year increased by 22% to US$845,1 million (2007: US$693,1 million) including a US$14,4 million contribution from acquisitions. Excluding the impact of acquisitions made in 2007 and 2008 organic revenue increased by 10%. Product and solutions sales growth of 19% year-onyear generated additional demand for consulting and technical services which increased by 27%. Managed services and annuity revenues grew 33% year-on-year. Gross margin percentage for the year was 22,9% (2007: 22,3%) with services and annuity margins off-setting slightly weaker product margins. The gross profit increased 25% on the prior year to US$193,8 million (2007: US$155 million). On 31 May 2007, Logicalis completed the acquisition of Carotek's Information Technology Division, in Northern Carolina, USA. This increased Logicalis' presence in the Carolinas, Georgia, Alabama, Tennessee and Florida, whilst broadening and deepening its relationship with HP. The Group also purchased the outstanding 20% minority interest in its South American operations and increased its stake in its Germany-based services business to 75%. Across the business, the Logicalis management has increased the focus on client-specific solutions that leverage the full Logicalis portfolio. Each region has developed single solutions sales and consulting services units. This approach improves the value added and further strengthens client relationships. A significant number of major long-term customer contracts have recently been secured. Most notable was the awarding of a US$150 million seven-year contract with the Welsh Assembly Government for the provisioning and support of a new national broadband network. The Group plans to achieve revenue growth in excess of the market rate by offering a customer-driven portfolio of solutions that address business efficiencies through ICT implementations in areas such as virtualisation and convergence; to improve operating margins by increasing the services and annuity revenue mix; and to expand its geographical reach into selected fastergrowing economies. The merger of Logicalis' existing South American operations with those of Promon Tecnologia ("PT"), the leading Brazilian network integration businesses, completed in May 2008, is significant. The combination of Logicalis' South American businesses in Argentina, Uruguay, Chile, Peru and Paraguay with PT in Brazil Datatec Annual Report 2008 has transformed Logicalis into the largest network integrator in South America, with over 500 employees and annualised revenues in excess of US$300 million. The merger also provides a solid foundation for further growth in the Latin American market and increases Logicalis' capability to service major multinational clients across the region. We anticipate a growing proportion of profits to be derived from this region and in FY2009 we anticipate that profits will be derived evenly from our operations in the US, Europe and South America. ANALYSYS MASON Analysys Mason provides strategic and technical consulting to many of the industry's leading service providers, regulators and government bodies. Convergence in telecommunications, broadcasting, television and online media content is being fuelled by widespread deployment of faster broadband internet infrastructure. The Group is particularly well positioned to exploit demand for advisory and consulting services in this market around the world. Revenues grew to US$63,5 million (2007: US$61,4 million). Telecoms strategy consulting revenues have continued to enjoy strong growth in recent months with a compound annual growth of 12% over the last three years. Analysys Mason has also seen further globalisation of its client base with non-UK or international revenues now representing 60% total revenue (2007: 55%). Much of this growth has come from the Middle East and North Africa ("MENA") region where a Dubai office was recently established to capitalise on the opportunity in that area. Gross margin improved to 40% (2007: 36,3%), resulting in improved EBITDA of US$6,9 million (2007: US$6,2 million) at a margin of 10,9% (2007: 10,1%) and operating profit of US$6,2 million (2007: US$5,8 million). On 19 February 2008 Analysys Mason completed the acquisition of Redbox Consulting Services. This acquisition will further enhance the range of services that can be offered to clients. The business will be fully integrated into the Analysys Mason consulting model and is expected to bring approximately US$3 million of additional revenue in 2009. Analysys Mason has increasingly worked to deliver projects that span the full business development cycle of its clients, including research, strategy, planning and implementation. In line with its approach of continually enhancing the value it delivers to customers, and in response to clients who are currently engaging with other parts of the Group, it has consolidated its portfolio of offerings under the integrated Analysys Mason brand. EMERGING MARKET HOLDINGS Westcon Africa Middle East (Pty) Ltd ("WAME") is the holding company for Datatec's 55% stake in Westcon SA (Pty) Ltd ("Westcon SA"). Westcon SA revenue was up 23% to US$85 million (2007: US$69,2 million) and EBITDA was US$3,5 million (2007: US$0,9 million). During the year WAME acquired 51% of International Technology Distributors FZCo which has since been renamed Westcon Africa FZCo ("Westcon Africa") and 100% of Jet Distribution Ltd and Resolv Computers Ltd (collectively: "other WAME operations"). Other WAME operations are principally African-focused businesses which distribute products similar to the rest of Westcon. Datatec Annual Report 2008 The other WAME operation's revenues were US$50,8 million and EBITDA was US$0,1 million in its first reporting period as part of the Group. The gross margin of 9,6% is in line with expectations and a slow upward trend on gross margin is expected. This will be achieved by better procurement capability and the gradual extension of the Westcon value-add distribution model. African Legend Indigo is Datatec's 55% owned South African operation formed in partnership with African Legend Technologies as part of South Africa's Black Economic Empowerment programme. This business generated revenue of US$51,1 million (2007: US$28,3 million) and EBITDA of US$1,7 million (2007: loss of US$0,2 million). Online Distribution ("Online"), Datatec's value-added distributor for data networking products and services, covering the Middle East, Western Asia and North Africa, revenue increased by 24% to US$55,6 million (2007: US$44,7 million) while EBITDA increased marginally by 7% to US$2,9 million. Comstor Middle East ("Comstor"), Westcon's Cisco business in the Middle East, started operations in February 2007. Comstor revenue was US$13,1 million. However, being the start-up year, Comstor made a marginal loss. Comstor expects to generate increased revenue growth and profitability during the next 12 months due to the growing market in the Middle East. The growth outlook for Westcon SA remains strong, whereas it is expected that other Africa operations will take a further 12 months before starting to realise the higher growth opportunities and deliver margins in line with the rest of the Group. The growth in the Middle East market has been sustained this year and is expected to remain buoyant during the next 12 months with investments expected in the finance, health and hospitality sectors. PROSPECTS Whilst Datatec is not immune to any slowdown in the global economy, we remain confident that our global reach, multi-sector exposure, geographic diversity and leading vendor portfolio will help to insulate the Group against any adverse market conditions We believe that the defensive nature of our business model will continue to generate superior financial performance over any cycle. We are aiming to double the proportion of our revenues and profits derived from emerging markets in the next two years. In particular, we are optimistic that our most recent investments in South America will contribute strongly to both revenues and profits in FY2009. As a result, in the year to 28 February 2009, we expect to grow revenues in excess of 20%. We see the majority of our growth coming from organic operations, with acquisitions being used to complement growth. Importantly, we think that the quality of our business will continue to improve in the year ahead, driven by a better business mix and a growing contribution from value-added services streams across the Group. The Group is targeting consolidated EBITDA margins of 4% in the medium term. For the year ahead, we have set a number of core objectives for the business:
We will report on progress against these objectives in next year's annual report.
Jens Montanana |
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