Half year results
|Datatec Limited (“Datatec” or the “Group”, JSE and LSE: DTC), the international Information and Communications Technology (ICT) group, is today publishing its unaudited half year results for the six months ended 31 August 2013 (“the Period”).|
|Current trading and prospects|
|Jens Montanana, Chief Executive of Datatec, commented:|
|“Performance in parts of Westcon’s North American business, where the new ERP system has been implemented, has been disappointing. The volume shortfall in that region has been the main reason for the Group’s underperformance in the Period.
“Logicalis continues to execute strongly and in line with our expectations; Analysys Mason Advisoryhas also performed well.
“We are experiencing varying trading conditions in many parts of the world with Europe recently showing signs of improvement, while developing markets have been impacted by currency volatility.
“Our confidence in our long term strategy has enabled us to maintain the interim dividend (capital distribution).”
|Datatec Group is a global provider of ICT products, solutions and services, with more than 6,500 people worldwide and with operations in over 50 countries.
The Group’s main lines of business comprise:
|“Corporate” encompasses the costs of the Group’s head office entities.|
|Datatec achieved modest revenue growth with expanding gross margins in the six months ended 31 August 2013. Across the Group the US market did not grow as much as anticipated.
Westcon’s performance in the Period was disappointing, impacted adversely by the ERP system roll out in North America which had a big effect on transaction volumes.
Logicalis performed very well, in line with management’s expectations and benefitted from the acquisition of the European operations of 2e2 in March 2013.
Latin America continues to be the Group’s strongest performing region. There have been signs of nascent economic recovery in Europe, however, the market there remains weak. In many other markets currency fluctuations contributed to a mixed performance.
The rest of the world outside North America and Europe now generates 39% of Datatec’s revenues and 44% of the Group’s gross profits, compared with 35% of revenue and 41% of gross profits in the Comparative Period.
Group revenues increased 6% to $2,77 billion (H1 FY13: $2,62 billion), of which some 71% came from Westcon; 28% from Logicalis and 1% from Consulting Services.
Overall Group gross margins expanded to 15,0% (H1 FY13: 14,4%). EBITDA was $89,2 million (H1 FY13: $91,9 million) while underlying* earnings per share are 19,2 US cents (H1 FY13: 23,5 US cents).
|STRATEGY AND ACQUISITIONS|
|Datatec has a strong market position with no particular dependency on any single market, territory or technology sector. The Group continues to pursue its long-term strategy to deliver sustainable above average returns to shareholders by focusing on a combination of organic growth in the faster-growing sectors of the ICT market, geographic expansion and earnings-enhancing acquisitions.
During the first half of FY14 the Group made two acquisitions.
On 4 March 2013, Logicalis acquired the European operations of 2e2 in Spain, Ireland, Channel Islands and Netherlands for $31 million.
On 31 May 2013, Datatec completed the acquisition of Comztek, a South Africa based ICT distribution group with operations in a range of African countries. The integration of Comztek into the Westcon South Africa business, which Datatec owns jointly with its BEE partner MIC, is now in progress.
On 31 August 2013, Westcon completed the sale of its 54% holding in Inflow Technologies following Datatec’s decision to exit the distribution market in India in May.
The Group will continue to seek to improve its competitive position. It believes that the prevailing economic climate continues to provide attractive opportunities to enhance margins, to facilitate consolidation in proven markets and to extend the Group’s geographical reach.
|Group revenues increased by 6% to $2,77 billion (H1 FY13: $2,62 billion) with 27% of Group revenue generated from North America (H1 FY13: 34%), 34% from Europe (H1 FY13: 31%), 18% from Latin America (H1 FY13: 14%), 11% from Asia Pacific (H1 FY13: 13%) and 10% from Africa, India and Middle East (“AME”) (H1 FY13: 8%).
Gross margins improved to 15,0% (H1 FY13: 14,4%). Gross profit increased by 10% to $413,5 million (H1 FY13: $377,0 million), while operating costs increased at a higher rate of 14,0% to $324,3 million (H1 FY13: $285,1 million).
EBITDA was $89,2 million (H1 FY13: $91,9 million), which includes net unrealised foreign exchange gains of $0,2 million (H1 FY13: losses of $0,5 million). Depreciation was $15,3 million (H1 FY13: $13,7 million). Amortisation of intangible fixed assets arising from acquisitions was $6,9 million (H1 FY13: $7,2 million).
The fair value of companies acquired during the year was $40,1 million. As a result, goodwill and intangible assets increased by $11,8 million and $9,5 million respectively. The revenue and EBITDA included from these acquisitions in H1 FY14 was $90,4 million and $2,3 million respectively; with an after tax loss of $0,4 million. Had the acquisition dates been 1 March 2013, revenue in H1 FY14 attributable to these acquisitions would have been approximately $113,6 million. It is not practical to establish the EBITDA that would have been contributed by the acquisitions in H1 FY14 if they had been included for the entire period.
Operating profit was $67,0 million (H1 FY13: $71,0 million). The net interest charge decreased to $10,4 million (H1 FY13: $11,4 million) as a result of improved funding levels for working capital in Logicalis’ Brazilian business and the cessation of prompt pay arrangements in parts of the Westcon business.
Profit before tax was $57,7 million (H1 FY13: $60,4 million).
The Group’s reported effective tax rate for H1 FY14 is 31,2% (H1 FY13: 31,6%). The Group’s effective tax rate is higher than the South African rate of 28% due to the profits arising in jurisdictions with higher tax rates, in particular North and Latin America.
The decrease in the effective tax rate in the current half year is due mainly to lower effective rates in North and Latin America and a reduced statutory rate in the UK. The effective tax rate for the financial year ending 28 February 2014 is expected to be 34,0% (FY13: 34,9%).
Underlying* earnings per share were 19,2 US cents (H1 FY13: 23,5 US cents). Headline earnings per share (“HEPS”) were 18,2 US cents (H1 FY13: 20,7 US cents).
The Group’s operations utilised $19,1 million cash during the Period (H1 FY13: $57,8 million cash generated from operations).
The Group ended the Period with net debt of $56,7 million (H1 FY13: $135,5 million), after deducting long-term debt of $20,2 million and short-term debt of $19,2 million, included in the payables and provisions line on the statement of financial position. The Group continues to enjoy comfortable headroom in terms of its working capital lines.
The Group issued 4,1 million new shares. Of this 3,4 million shares were issued as part of consideration for acquisitions, while a further 0,7 million shares were issued to settle commitments under the terms of Datatec’s equity-settled share-based remuneration schemes.
The Group paid $16,2 million to shareholders during H1 FY14 as a final capital distribution relating to FY13, bringing the total capital distribution for FY13 to $31,4 million.
|Westcon accounted for 71% of the Group’s revenues (H1 FY13: 73%) and 50% of its EBITDA (H1 FY13: 63%).
Westcon is the world’s leading specialty distributor in networking, security, mobility and convergence for leading technology vendors, including Cisco, Avaya, Check Point, Brocade, Polycom and other complementary manufacturers. Through its Comstor Cisco-dedicated business unit and Westcon Convergence and Westcon Security divisions, Westcon sells products and services to resellers, systems integrators and service providers.
Westcon has expertise in the convergence of voice, data and video applications and technologies, security for networking and communications systems, data centre technologies, videoconferencing and wireless connectivity.
Westcon had a challenging first half of FY14 as a result of the impact of the ERP implementation on its North American business and mixed trading conditions across its geographic markets. Overall revenues increased 3% to $1,96 billion (H1 FY13: $1,90 billion) with increases in Latin America, Europe and AME offset by lower sales in Asia Pacific and a significant decrease in North America.
Westcon acquisitions contributed $32,0 million in revenue.
Of Westcon’s revenue, 35% was generated in Europe (H1 FY13: 33%), 28% in North America (H1 FY13: 34%), 12% in Asia Pacific (H1 FY13: 14%), 14% in AME (H1 FY13: 11%) and 11% in Latin America (H1 FY13: 8%).
Gross margin of 11,3% was consistent with H1 FY13 as margin pressures in Latin America, AME and Europe were offset by margin expansion in North America and Asia Pacific. A decrease in early payment discount for Cisco product in Europe was offset by a favourable product mix.
The share of lower–margin Cisco products decreased to 48% of Westcon’s revenue (H1 FY13: 51%) followed by 12% for Avaya/Nortel (H1 FY13: 13%), 26% for security (H1 FY13: 20%) and 14% for Affinity/other development vendors (H1 FY13: 16%). Gross profit increased 4% to $222,2 million (H1 FY13: $214,0 million).
Westcon’s EBITDA decreased to $45,7 million (H1 FY13: $62,1 million) while EBITDA margin was 2,3% (H1 FY13: 3,3%). Operating profit was $35,0 million (H1 FY13: $53,4 million).
Westcon’s net working capital days improved eleven days on the strength of increased payables compared with 31 August 2012 and over the same period net debt improved by $60 million.
Westcon is in the process of transitioning its existing global ERP system to a new platform. The upgrade is part of a multi-year programme to improve and optimise Westcon’s systems and infrastructure capabilities. To date it has been only implemented in North America. All other regions are operating on legacy systems.
The transition in North America has caused operating disruptions which have adversely impacted revenues, particularly in the high volume transaction business. The roll-out schedule has been adjusted and the amount of disruption is expected to decline.
Market conditions are expected to remain challenging in the second half of the year in the mature markets of Europe and particularly North America. Despite the difficult trading environment, Westcon management expects to leverage certain vendor relationships to deliver an improved performance in the second half of FY14.
|Logicalis accounted for 28% of the Group’s revenues (H1 FY13: 26%) and 48% of its EBITDA (H1 FY13: 35%).
Logicalis is an international IT solutions and managed services provider with a breadth of knowledge and expertise in communications and collaboration, data centre and cloud services, and managed services.
Overall revenues and profits in the first half were significantly better than the first half of the previous year. The Latin America region was particularly strong and the performances of the other regions were in line with expectations.
Revenue increased by 12% to $767,3 million (H1 FY13: $682,3 million), including $58,4 million of revenue from the 2e2 acquisition. Organic revenue growth was 4%.
Latin America remained the largest revenue contributor at 37% of total revenue (H1 FY13: 33%) despite a further depreciation in the Brazilian currency relative to the US dollar. The Europe region grew from 26% to 29% of total revenue whilst North America’s share of revenues fell from 32% to 26%.
Revenues from product sales were up 6%, with robust increases in the Cisco and Other vendor categories. Revenues from total services were up 29%, with strong growth in both professional and annuity service revenues.
With the strong growth in professional and annuity service revenues, the gross margin improved to 23,1% (H1 FY13: 21,8%). The gross profit was up 19% to $176,9 million (H1 FY13: $149,0 million) and EBITDA increased by 28% to $43,7 million (H1 FY13: $34,2 million) resulting in an EBITDA margin of 5,7% (H1 FY13: 5,0%).
Operating profit was up 45% to $32,7 million (H1 FY13: $22,6 million) after charges for depreciation and amortisation of intangible assets.
Logicalis continues to have a contingent liability in respect of a possible tax liability at its Promon-Logicalis subsidiary in Brazil.
Despite generally more positive macroeconomic news flow, trading conditions continue to remain challenging but stable, particularly in the European and North American markets. The outlook in the Latin America region remains positive with the exception of Argentina where government-imposed import restrictions are disrupting normal business activities. Logicalis continues to concentrate on demonstrating the value of ICT to customers by focusing on business benefits while managing cost. Logicalis expects the second half results to be seasonally better than the first half.
|The Consulting Services division accounted for 1% of Group revenues (H1 FY13: 1%) and 2% of EBITDA (H1 FY13: 2%).
The division comprises: Analysys Mason, a provider of management consulting, advisory, modelling and market intelligence services to the telecoms, IT and digital media industries; Intact, a services and support consultancy delivering high-end professional services in networking, unified communications, and related security, wireless and data centre connectivity focusing on Cisco technologies; and The Via Group (‘Via’), a specialist professional services organisation providing unified communications and integrated voice solutions that encompass Microsoft technology.
Revenues contracted slightly to $37,1 million (H1 FY13: $38,3 million). An exceptional performance from Analysys Mason Advisory and revenue expansion at Via was offset by lower revenues at Intact. Analysys Mason’s strong performance contributed to growth in divisional gross profit to $14,4 million (H1 FY13: $13,9 million), expanding gross margins to 38,8% (H1 FY13: 36,3%).
The strong demand experienced by Analysys Mason Advisoryfor transaction support services in particular, has resulted in a continuation of enhanced operational leverage which is driving improved profitability. With the inclusion of Via and despite a tougher trading period at Intact, overall EBITDA improved by 42% to $2,2 million (H1 FY13: $1,6 million).
The division has seen growing demand for core propositions with an emphasis on projects in Emerging markets. While the division continues to trade well in a few European jurisdictions, the management’s sentiment is that Europe generally, still remains weak. This has been compensated by stronger sales in the Middle East, Asia and Africa. These trends are expected to continue into the second half.
|Corporate encompasses the net operating costs of the Datatec head office entities of $5,5 million (H1 FY13: $6,4 million) and unrealised exchange gains of $2,2 million and realised exchange gains of $0,9 million (H1 FY13: $0,3 million unrealised exchange gains and immaterial realised exchange losses). Head office costs are slightly lower than in the Comparative Period due to lower acquisition and other project costs and the weakening of the Rand against the Dollar.|
|Accounting for acquisitions|
|The following table sets out the provisional assessment of the fair value of assets acquired across all acquisitions made by the Group. 2e2 is the largest component of this. The receivables, inventory and taxation fair value assessments and the amounts recognised in the financial statements in respect of the 2e2 and Comztek acquisitions have only been determined provisionally due to the timing and number of legal entities acquired and this may impact goodwill (•).|
|On 14 October 2013, Logicalis acquired iConsult, a Channel Islands based integrator.|
|CURRENT TRADING AND PROSPECTS|
|The Group remains very well positioned to support its vendors and customers through its investments to drive scale and create broad international coverage. Technology innovation remains high in the sectors in which the Group operates as IT infrastructure migrates to cloud based services, which is fuelling demand for networking, security, mobility and unified communications solutions.
In light of Weston’s underperformance and the effect of continued disruption caused by the system transition, the forecast for the financial year ending 28 February 2014 has been revised down from that originally presented on 15 May 2013. The revised forecast for the 2014 financial year is as follows:
|The financial information on which this forecast is based has not been reviewed or reported on by Datatec’s external auditors.|
|INTERIM CASH DISTRIBUTION BY WAY OF CAPITAL REDUCTION|
|The Group will distribute to shareholders an interim capital reduction out of contributed tax capital in lieu of a dividend, of 80 RSA cents per share (approximately 8 US cents per share) for the six months ended 31 August 2013. The issued share capital at the declaration date is 196,534,384 ordinary shares of ZAR0.01 each.|
|The salient dates will be as follows:|
|Share certificates may not be dematerialised or rematerialised between Monday, 25 November 2013 and Friday, 29 November 2013, both days inclusive.
The capital distribution will be paid to shareholders on the Jersey branch register in pounds sterling translated at the closing exchange rate on Wednesday, 27 November 2013.
|This interim report complies with International Accounting Standard 34 – Interim Financial Reporting, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council, the requirements of the Companies Act of South Africa, the AIM Rules for Companies and the disclosure requirements of the JSE Limited’s Listings Requirements. The accounting policies comply with International Financial Reporting Standards (“IFRS”) of the International Accounting Standards Board and are consistent with those applied in the prior year financial statements. The preparation of the Group’s consolidated interim results for the six months ended 31 August 2013 was supervised by the Chief Financial Officer, Mr RP Evans. The financial information has not been audited or reviewed by Deloitte & Touche.|
|On behalf of the Board:|
|16 October 2013|
|Condensed Group statement of comprehensive income|
|Condensed Group statement of financial position|
|Condensed Group statement of cash flows|
|Condensed Group statement of changes in total equity|
|Determination of headline and underlying earnings|
|SJ Davidson°• (Chairman), JP Montanana• (CEO), RP Evans• (CFO), O Ighodaro°‡, JF McCartney°†, LW Nkuhlu°, CS Seabrooke°, NJ Temple°•
°Non-executive •British †American ‡Nigerian