Westcon divisional report

 


Tom Dolan
Chief Executive Officer                                                                            


John O' Malley
Chief Financial Officer

 

Westcon Group, Inc.TM is the world's leading speciality distributor of networking, security, mobility and convergence products for leading technology vendors with particular expertise in the convergence of voice, data and video applications and technologies, including Voice-over Internet Protocol (VoIP) security for networking and communications systems, videoconferencing and wireless connectivity. The company's customers consist of value-added resellers, systems integrators and service providers that resell networking products and solutions to small- and medium-sized businesses, enterprise organisations and governments around the world.

Westcon's primary vendor partners are Cisco, Nortel, Avaya, Juniper and Polycom, in addition to a host of other complementary vendors. Westcon adds value to its distribution activities by providing resources such as dedicated solutions programmes, technical expertise, sales and product training, engineering support and professional services. Among the solutions Westcon Group provides is the design and configuration of convergence and mobility networks, network extensions such as videoconferencing, network storage, unified messaging and network security.

STRUCTURE
Westcon Group operates its multinational distribution business through its branded sales practices: Westcon, Comstor and Voda One. The Company delivers value to its vendor partners and customers through its world-class logistics capabilities, powerful solutions programme infrastructure, innovative financing alternatives and through its highly skilled sales, marketing, technical and operational staff.

  • The Comstor practice is focused on delivering Ciscooriented advanced technology solutions and operates in North and South America, Europe, Australia, Asia and the Middle East. Comstor's targeted programme offerings, which are centred on convergence, security and mobility, include OneDefense, OneVoice, OneNetwork and OneWave.
  • The Westcon practice, which operates in North and South America, Central and Latin America and Europe, is focused on delivering solutions from vendors like Nortel and Avaya, while providing a wide range of complementary voice and data networking equipment. The Westcon practice also offers security solution from vendors like Blue Coat, Check Point, RSA, F5, Secure Computing, Nokia and many others. Westcon programmes include ConvergencePoint, VoicePoint, SecurityPoint, MobilityPoint and CollaborationPoint.
  • The Voda One practice, which operates in North America, is focused on delivering convergence and unified communications solutions from Avaya while providing a broad range of complementary VoIP hardware and applications.

2008 OPERATIONAL HIGHLIGHTS

  • Organic growth of 12%
  • Gross margins improve to 10,4%
  • NOXS and Crane acquisitions create leadership position in Security and
    Convergence
  • Significant improvement in product mix
  • Completed acquisition of Review Video (US), a specialist distributor of networked videoconferencing and collaboration solutions
  • Acquired Cernet (Americas), providing entry into Mexico and Central American markets
  • Entered into a strategic joint venture in Turkey

2008 SUMMARY
Westcon Group experienced strong growth during FY2008, increasing its revenues and EBITDA by 26% and 23%, respectively, over tprior year. The company achieved this growth through a combination of strong organic growth and strategic acquisitions. During the year, Westcon Group completed several acquisitions, including NOXS and Crane Telecommunications - which together significantly increased its European reach in security and telecommunications. In July 2007, Westcon completed the acquisition of US-based Review Video, a specialist distributor of videoconferencing and collaboration solutions. In October 2007, Westcon acquired Cernet, based in Mexico, providing its first entry into the CALA region.

These acquisitions, combined with a strategic joint venture in Turkey and the impact of acquisitions from the previous fiscal year, helped Westcon to extend its customer base on a multinational basis, while broadening its technological expertise in emerging technologies. In addition, these acquisitions also helped to strengthen relationships with vendor partners such as Avaya and Polycom.

Westcon's advanced technology focus is a key factor supporting the higher-than-average gross margin that the company achieves. Enabling and supporting this success is a set of marketing strategies which is geared to leverage the internal intellectual capital of any sales and marketing team against the customer base of the whole company. These marketing strategies are embodied in Westcon Group's branded programmes, which are now available to customers all over the world.

OneVoice and OneDefense were launched in Singapore and Turkey, OneWave and OneNetwork were launched across Europe, and ConvergencePoint and SecurityPoint were launched in Brazil. Westcon's technology-focused solutions programmes continue to provide a very attractive touch point for the company's new and existing customers.

Westcon Group continued to perform ahead of budget in both Europe and East Asia during FY2008, while it firmly held its ground in other regions. The company forged important vendor relationships around the globe, signing a distribution agreement with Juniper to include Western Europe and Canada. Additionally, Westcon extended agreements with many vendors - most notably Cisco which added territories in Canada and Brazil; Polycom, which added territories in the US, UK and Canada; and Avaya, where it now distributes all across Europe.

In addition to strengthening its vendor relationships and enhancing its programme-offering worldwide, Westcon also offered many other added-value customer services such as flexible financing programmes in the United States, targeted network and managed services in Europe, and an enhanced eCommerce offering to its customers around the world.

During the year, Westcon Group received several industry accolades from its peers and the media. For example, the company received many accolades from Cisco, its largest vendor partner, including "Multi-Theater Partner of the Year" (a unique distinction for a distributor), "Distributor of the Year" both worldwide and in the following regions: Spain, France, Northern Europe, UK and Ireland, Austria and Germany - which has picked up the award for the last five consecutive years.

In the media, CRN, an important channel publication in the United States, awarded Westcon Group with no less than 13 awards in its annual sourcing study. Among the awards Westcon picked up were number one Distribution Programmes, number one Emerging Market/Emerging Technology Expertise and number one Financing and available credit. Two notable channel publications in Europe, Microscope and CommsBusiness, also awarded Westcon "Distributor of the Year".

PEOPLE
The key to Westcon Group's success around the world is its diverse and talented employees. Westcon continues to recruit the most experienced and capable employees in each of the markets in which it operates, and continually invests in its employees through internal training and career-development programmes. Westcon employs over 1 600 employees around the world andprides itself on its strong and stable workforce. The retention rate for employees with five years seniority is strong at 37%. During the year, Westcon launched Westcon University, an internal training and career development programme for employees, and also enhanced its orientation programme for new hires.

This year, Westcon once again initiated a company survey to its global employee base to gain insight into company morale, alignment with strategic direction and overall satisfaction. This was the third year Westcon captured this information as a benchmark, and the survey continues to yield very positive results, as well as helping management gauge employee productivity issues.

CONTINUED FOCUS ON ADVANCED TECHNOLOGIES
The company views its focus on advanced technologies as the key differentiator between Westcon and its broad-line multinational competitors. Management believes that core-vendor partners, Cisco, Nortel, Avaya, Polycom and Juniper, will continue to develop new technology categories for which Westcon can offer valued-added solutions developed specifically to help its reseller customers compete effectively in the market. Additionally, by continually developing its portfolio of new complementary vendors, and through offering new open-source based IP-PBX products, Westcon will continue to deliver flexible and profitable networking alternatives for its customers.

MARKETS
While the financial markets in the US and other regions continue to tighten, opportunities in networking - particularly convergence, security and mobility - continue to expand despite this broader market contraction. As end-user companies face pressure to be more efficient, it is becoming more important for their networks to be able to support productivityenhancing applications. Demand for effective IT security remains paramount as companies begin to rely increasingly on mobile hardware and applications - this has created significant demand for VoIP security products that protect mobile networks and devices.

FINANCIAL PERFORMANCE
During the year, Westcon's revenue increased 26% to US$2,9 billion (2007: US$2,3 billion). Westcon Group's acquisitions contributed US$319 million in revenue, resulting in an increase in organic revenue of 12%. This reflects an increase across all geographic regions due to strong demand for Cisco products in particular.

Gross margins increased from 9,5% in 2007 to 10,4% in 2008 with gross profit increasing 37% from US$216 million to US$297 million. The increase is attributable to contributions from FY2008 acquisitions, coupled with increased gross margins in Europe and Asia-Pacific, offset by lower gross margins in the Americas.

Westcon's EBITDA increased 23% from US$83 million to US$102 million while EBITDA margins remained steady at 3,6% as improving EBITDA margins in Europe and Asia-Pacific were offset by the twin effects of lower EBITDA margins in the Americas and US$4 million of European acquisition integration costs.

Westcon used US$156 million for investing activities. Of this amount, US$145 million was used for business acquisitions. Financing activities generated US$163 million of cash, which was used to fund the acquisitions and for working capital needs.

For the year Cisco products made up 55% of Westcon's revenue followed by 11% for Nortel, 11% for Avaya, 13% for security and 10% for other developing vendors. From a geographic perspective, 46% of Westcon's revenue was generated in Europe followed by 45% in the Americas and 9% in Asia-Pacific.

FURTHER PROSPECTS
Whilst the US market remains soft and the outlook remains uncertain, management remains confident that Westcon's multiyear growth trajectory will remain intact over the coming year. Westcon will continue to seek to leverage its international reach and global scale for its vendor partners which are increasingly turning to Westcon to help them to develop their global channels to market, especially for more complex technologies.

There are significant opportunities to further consolidate and invest in new markets to parallel the objectives of our major partners. Geographically we see the biggest growth opportunities to be in Asia-Pacific and Latin America, whilst further margin expansion is expected in Europe by virtue of our increased scale and operating efficiencies.

Westcon's strengths are its geographic diversity and synergistic technology, coupled with a sector specialism that has positioned us at the forefront of the global ICT industry. We believe we have the right business ingredients and depth of management to continue to expand this successful formula and look forward to further growth in the year ahead.