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Datatec Limited - Unaudited Interim Results For The Six Months Ended 30
Release Date: 20/11/2002 17:00:40 Code(s): DTC
Datatec Limited - Unaudited Interim Results For The Six Months Ended 30
September 2002
DATATEC LIMITED
Registration number 1994/005004/06
Share code: DTC ISIN: ZAE000017745
("Datatec")
Unaudited interim results for the six months ended 30 September 2002
* Cash generated from operations of R905 million
* Tangible net asset value of R21,14
Consolidated income statements
Unaudited Unaudited Audited
six months six months year
to to ended
30 Sept % 30 Sept 31 March
(R million) 2002 Change 2001 2002
Revenue 10 716 9 745 20 677
Continuing operations 10 435 9 584 20 316
Acquisitions 269 52 202
Revenue from ongoing operations 10 704 11% 9 636 20 518
Discontinued operations 12 109 159
Cost of sales (9 367) (8 293) (17 759)
Gross margin 1 349 1 452 2 918
Operating costs (1 176) (1 018) (2 072)
Operating profit before financing costs,
depreciation and amortisation
("EBITDA") 173 434 846
Ongoing operations 188 (59%) 463 896
Discontinued operations (15) (29) (50)
Depreciation (124) (78) (200)
Operating profit 49 (86%) 356 646
Income from investments 41 48 76
Financing costs (53) (98) (172)
Share of associate company losses - - (3)
Profit before exceptional items and goodwill 37 306 547
Goodwill amortisation (38) (70) (133)
Goodwill impairment - - (397)
Exceptional items (28) (5) (164)
(Loss)/profit before taxation (29) 231 (147)
Taxation (10) (104) (178)
(Loss)/profit after taxation (39) 127 (325)
Profit attributable to outside shareholders (5) (21) (11)
Attributable (loss)/earnings (44) 106 (336)
Headline earnings 17 (91%) 182 346
Key ratios:
Gross margin % 12,6% 14,9% 14,1%
EBITDA% on ongoing operations 1,8% 4,8% 4,4%
Normal tax rate before exceptional items
and goodwill 40,3% 34,1% 30,6%
Exchange rates
Average Rand/$ exchange rate 10,3:1 8,3:1 9,6:1
Closing Rand/$ exchange rate 10,5:1 8,9:1 11,4:1
Salient financial features
Number of shares (millions)
Issued 138 129 137
Weighted average 138 129 131
Diluted weighted average 138 129 133
Earnings per share (cents)
Headline 12 (91%) 142 265
Basic (32) 82 (257)
Diluted (32) 82 (253)
Diluted headline 12 141 260
Net asset value per share (cents) 2 562 (6%) 2 732 2 720
Net tangible asset value per share (cents) 2 114 5% 2 008 2 318
Consolidated balance sheets
Unaudited Unaudited Audited
30 Sept 30 Sept 31 March
(R million) 2002 2001 2002
ASSETS
Non-current assets 1 253 1 646 1 275
Property, plant and equipment 457 483 513
Capitalised development expenditure 121 91 131
Goodwill 495 843 419
Associated companies and investments 23 46 30
Net deferred taxation 157 183 182
Current assets 8 021 7 010 8 420
Inventories 2 237 2 377 2 397
Receivables 4 045 3 495 4 147
Cash resources 1 739 1 138 1 876
Total assets 9 274 8 656 9 695
EQUITY AND LIABILITIES
Ordinary shareholders` funds 3 529 3 524 3 726
Outside shareholders` interest 206 144 199
Total equity 3 735 3 668 3 925
Long-term liabilities 66 86 58
Current liabilities 5 473 4 902 5 712
Payables 4 395 2 974 3 771
Amounts owing to vendors 40 112 90
Taxation 22 72 143
Bank overdrafts and trade finance advances 1 016 1 744 1 708
Total equity and liabilities 9 274 8 656 9 695
Capital expenditure incurred in current period 99 139 136
Capital commitments at end of period 20 81 64
Lease commitments at end of period 1 012 961 1 046
Payable within one year 148 127 196
Payable after one year 864 834 850
Abridged consolidated cash flow statements
Unaudited Unaudited Audited
six months six months year
to to ended
30 Sept 30 Sept 31 March
(R million) 2002 2001 2002
EBITDA 173 434 846
Loss on disposal of plant and equipment 1 1 1
Non cash items - unrealised foreign
exchange losses/(gains) 22 - (95)
Operating profit before working capital changes 196 435 752
Working capital changes 709 135 1 299
(Increase)/decrease in inventories (33) 783 1 611
(Increase)/decrease in receivables (226) 217 754
Increase/(decrease) in payables 968 (865) (1 066)
Cash generated from operations 905 570 2 051
Net financing costs paid (12) (50) (96)
Taxation paid (128) (163) (268)
Net cash inflow from operating activities 765 357 1 687
Net cash outflow from investing activities (194) (228) (520)
Net cash (outflow)/inflow from disposal
of operations and investments (20) 2 -
Net cash outflow from financing activities (21) (465) (100)
Increase/(decrease) in cash and cash equivalents 530 (334) 1 067
Translation difference on opening cash position 25 (10) (637)
Cash and cash equivalents at beginning of period 168 (262) (262)
Cash and cash equivalents at end of period (*) 723 (606) 168
(*) comprises cash resources net of bank overdrafts and trade finance advances
Segmental analysis
Unaudited Unaudited Audited
six months six months year
to to ended
30 Sept 30 Sept 31 March
(R million) 2002 2001 2002
Revenue
Westcon 8 338 7 469 15 595
Logical 1 729 1 646 3 755
Mason 137 139 282
Other Holdings 500 382 886
Revenue from ongoing operations 10 704 9 636 20 518
Discontinued Operations 12 109 159
10 716 9 745 20 677
EBITDA
Westcon 205 370 685
Logical 17 32 75
Mason 16 24 13
Other Holdings (21) (6) (13)
Group foreign exchange (losses)/gains (29) 43 136
EBITDA from ongoing operations 188 463 896
Discontinued operations (15) (29) (50)
173 434 846
Operating profit
Westcon 138 335 586
Logical (20) 6 12
Mason 12 21 6
Other Holdings (34) (18) (38)
Group foreign exchange (losses)/gains (29) 43 136
Operating profit from ongoing operations 67 387 702
Discontinued operations (18) (31) (56)
49 356 646
DETERMINATION OF HEADLINE EARNINGS
Attributable (loss)/earnings per the consolidated
income statements (44) 106 (336)
Headline earnings adjustments (net of taxation and
outside shareholders):
Goodwill amortisation 38 70 133
Loss on disposal of plant and equipment 1 1 1
Exceptional items:
Write-down of carrying value of investments 3 - 58
Loss-on disposal and closure of
discontinued operations 19 5 64
Proposed listing costs - - 27
Impairment of goodwill - - 397
Other - - 2
Headline earnings 17 182 346
Statement of changes in ordinary shareholders` funds
Balance at beginning of period 3 726 3 205 3 205
Attributable (loss)/earnings (44) 106 (336)
Shares issued 6 - 164
Translation of foreign subsidiaries (159) 128 622
Recoupment of goodwill and trademarks - 85 71
Balance at end of period 3 529 3 524 3 726
1. PROFILE AND GROUP STRUCTURE
Datatec ("the Group") is an international IT networking and services group
with operations in many of the world`s leading economies. The Group`s main lines
of business comprise the global distribution of advanced networking and
communication products ("Westcon"), professional services and IT network
integration ("Logical") and strategic telecommunications consulting ("Mason").
The Group also has a number of other interests in South Africa ("SA"), which are
included with the group head office under Other Holdings. These interests
include Westcon AME (operating in Africa and the Middle East), a 47,5% interest
in Affinity Logic and a 83,65% interest in RangeGate (operating in SA and the
United Kingdom ("UK")).
During the period ended 30 September 2002 the Group combined certain of the
head office functions of Logical with those of its Datatec head office functions
in order to shorten reporting lines, streamline operations and further reduce
costs. Stephen Lawrence has resigned from the Group and Logical boards of
directors, and Nick Temple was appointed as a non-executive director from 1
October 2002.
2. COMMENTARY ON RESULTS
The Group`s financial results for the period ended 30 September 2002
reflected revenues from ongoing operations of R10,7 billion compared with
revenues in the previous comparable period for 2001 of R9,6 billion. Operating
profit before financing costs, depreciation and amortisation ("EBITDA") from
ongoing operations amounted to R188 million compared with EBITDA in the previous
period for 2001 of R463 million. This decline is largely as a result of the
difficult economic trading conditions, the lower margins in the industry, the
initial trading losses associated with the recently acquired Landis Business
Partners operations ("Landis") in Europe and the foreign exchange losses of R29
million (2001: profit of R43 million) from the appreciation of the Rand in the
first half of the year. Headline earnings per share for 2002 amounted to 12
cents compared to 142 cents for the period to September 2001, a decline of 91%.
Gross margins decreased from 14,9% in 2001 to 12,6% for 2002. This decline is
due mainly to the reduction in margins associated with the sales of Cisco
products, the highly competitive nature of a contracting market and a decline in
professional service revenue.
Financing costs decreased during the period due to the reduction in interest
rates in the United States of America ("USA") and the operating cash flows
generated in Westcon and Logical that lowered the levels of working capital.
Exceptional items of R28 million were incurred during the period, which
predominantly related to the net loss realised on the closure of Logical e-
Business Solutions Limited and Logical Strategy Limited.
Cash generated from operations was R905 million and at the end of the period
under review the Group`s balance sheet showed a net cash positive position of
R723 million.
Amounts owing to vendors in the balance sheet represent purchase
considerations still outstanding in respect of acquisitions. During the period
the Group settled R32 million ($3 million) of the amounts owing to vendors.
These amounts were settled out of internal cash resources. At the end of the
period, the Group reflected an amount of R40 million as owing to vendors, with a
further estimated contingent liability of R114 million (2001: R86 million)
relating to possible future earnout obligations.
Capitalised development costs in the balance sheet have decreased in the
period by R10 million, with amortisation amounting to R21 million. Costs
capitalised during the period arose largely in Westcon, where an additional R14
million in respect of Westcon`s internally developed enterprise resource
planning system known as Compass was capitalised.
Ordinary shareholders` funds at the reporting date were R3,5 billion, which
represents a net tangible asset value per share of R21,14.
The effective rate of taxation on profit before exceptional items and
goodwill increased from 34,1% for the corresponding period in 2001 to 40,3% in
2002. This is consistent with the estimated average effective tax rate for the
full period. Losses have arisen in Westcon`s new Landis subsidiaries, as well as
some Logical subsidiaries. Based on management`s prudent approach, only R20,9
million ($2,0 million) of the Landis loss has been recognised as a deferred tax
asset. This situation will be reviewed at year-end to estimate whether these
losses will be utilised in the foreseeable future.
3. DIVISIONAL REVIEWS
3.1 Westcon
Westcon achieved revenues of R8,3 billion ($795 million) for the period
under review compared to revenues of R7,5 billion ($922 million) in 2001, a
decline of 14% in dollars, reflecting the weak economic trading conditions.
Gross margins decreased from 11,1% in 2001 to 8,8% for 2002, a decline of 21%.
This decline is due mainly to the reduction in global channel margins associated
with the sales of Cisco products, the reduction or elimination of margin-
enhancing programmes previously offered by many significant vendors, and the
highly competitive nature of a contracting market. Consolidated EBITDA margins
reduced from 5,0% in 2001 to 2,5% in 2002, due primarily to a reduction in gross
margins in Westcon`s Comstor Division, which derives a material portion of its
revenue from sales of Cisco products and $4,5 million losses incurred during the
start up phase of the new businesses acquired from Landis. The reduction in
gross margins was partially offset by a decline in selling, general and
administrative ("SG&A") expenses incurred by Westcon`s existing businesses in
comparison to the prior year period. Excluding the impact of the new businesses,
SG&A expenses declined from 6,2% of revenue in 2001 to 5,9% of revenue in 2002,
as Westcon management continues to streamline its businesses in response to the
current trading environment. Excluding the impact of losses incurred by Landis,
EBITDA margins would have been 3,0% for the most recent six-month period. It
should also be noted that when comparing the sequential six-month periods,
Westcon revenues excluding Landis grew in dollar terms to $770 million from $748
million. Operating profits amounted to $13,2 million (2001: $41,4 million).
The Landis transaction was completed on 15 May 2002 with the purchase
consideration amounting to approximately $7 million. The transaction involved
the absorption of the employees and the fixed assets of the former Landis
organisation operating in nine European countries: Austria, Belgium, Denmark,
France, Germany, Norway, Spain, Sweden and The Netherlands. As part of the
integration process, Westcon is actively "right-sizing" the former Landis
operations. To date, these initiatives have included staff reductions to
appropriate levels based on the Westcon operating model and current economic
trends in the respective geographies.
Landis achieved revenue of $25,7 million and incurred losses of $4,5 million
in the three and a half month period. $10,9 million additional direct costs have
been capitalised to the investment, which includes legal and redundancy costs.
Current integration plans call for the new business operations to turn
profitable in the next financial year.
Despite the cash flow demands created by the start-up of the new businesses
and their related working capital requirements, substantial operating cash flows
totaling $86 million were generated during the period. These cash flows were the
result of improvements in working capital achieved by the company`s businesses.
As noted in the Group`s 2002 Annual Report, Westcon has provided an amount
of $13 million against its remaining Lucent inventory of $16 million. Westcon
management believe that Westcon has a meritorious case against Lucent and is
continuing with the litigation. Accordingly a further review of these provisions
will be made at year-end.
Cisco products contributed 53% (2001: 60%), Nortel`s products contributed
12% (2001: 11%), Avaya`s products contributed 12% (2001: 11%) and the value
products contributed 23% (2001: 18%) to Westcon`s revenue. North America
amounted to 62% (2001: 64%) and the UK and Europe amounted to 31% (2001: 28%) of
Westcon`s revenue.
3.2 Logical
Logical achieved revenues from continuing operations of R1,7 billion ($167,3
million) for the period under review compared to revenues of R1,6 billion
($199,4 million) in 2001, a decline of 16% in dollar terms. This decline is
primarily a result of both the weak economic conditions in the USA and
uncertainty in the market following the HP/Compaq merger. The impact of the Peso
devaluation in Argentina contributed 3,6% of the overall 16% revenue decline.
Gross margins from continuing operations decreased from 25,4% in 2001 to 24,3%
in 2002 principally a result of a decline in professional service utilisation
and pressure on product margins. During the period Logical closed two UK
subsidiaries, Logical e-Business Solutions Limited and Logical Strategy Limited.
These disposals removed the largest source of losses for Europe (losses before
tax of $1,9 million were incurred for the period).
EBITDA from ongoing operations amounted to R17 million ($1,6 million) for
the period when compared to R32 million ($3,9 million) for 2001 and operating
losses amounted to $1,9 million (2001: profit of $0,8 million). The effects of
Logical`s cost cutting, restructuring and reorganisation that was announced in
the press on 25 September 2002 were reflected in total EBITDA and amounted to
R20 million ($2,0 million). Significant emphasis remained on the management of
working capital. Management is working to increase revenues while continuing to
focus on reducing operating expenses in order to improve profitability in the
prevailing difficult economic environment.
Logical`s net cash position was $16,9 million at 30 September 2002.
3.3 Mason
Mason achieved revenues of R137,2 million (GBP8,7 million) during the period
under review compared to R139,5 million (GBP11,7 million) in 2001. EBITDA
declined substantially from R24,1 million (GBP2,04 million) in 2001 to R15,7
million (GBP0,9 million) for the current period and operating profit amounted to
GBP0,7 million (2001: GBP1,8 million).
The steps Mason management took last year to reduce its staff and save costs
have achieved the desired effect and Mason has been profitable since April 2002.
Revenues for the period were similar to the half year to 31 March 2002. Although
the market remains fairly flat, the decline in revenues from the telco sector
appears to have stabilised, the enterprise sector remains constant and there is
some growth in the government and contact centre sectors. The forward pipeline
has remained relatively constant and modest growth in Pounds Sterling is
expected in the second half of the year.
Market conditions remain difficult with increased competition and reduced
consultancy rates. However, Mason has been successful in developing services
that enable clients to save money and work their assets harder. This has ensured
the maintenance of revenue and places the company in a strong position to take
advantage when the market recovers.
3.4 Other Holdings
Westcon Africa Middle East ("Westcon AME")
Westcon AME is a value added networking distributor whose operations mirror
those of the Westcon group. Revenues for the period grew 39,5% to R418,2 million
(2001: R299,8 million), mainly as a result of the acquisition of Dubai-based
OnLine Distribution. Operating profits however reduced by 1,0% to R9,9 million
(2001: R10,0 million), due to margin pressure from the appreciation of the Rand.
Affinity Logic
Affinity Logic`s core business is the provision of consulting and outsource
services for the delivery of computing infrastructure and application solutions
to the retail and consumer goods sector.
As set out in the Group`s 2002 Annual Report, restructuring of outsource
contracts and significant investment in development of its service portfolio
were expected to have a negative impact on profitability in the short term.
There are, however, early indicators of positive market reaction to the
company`s service offering reflecting an improved financial performance. The
company reported an operating loss of R5,8 million (2001: R5,4 million) which
includes a R3,3 million additional debtors` provision due to the uncertain
recoverability of monies owing from a client placed in liquidation. The company
continues to generate positive cashflows from operations.
In June 2002, Wooltru`s stake in Affinity Logic was bought out by management
and Datatec, increasing the Group`s shareholding from 47,5% to 55,2%, subject to
Competition Commission approval, which is expected later this year.
RangeGate
RangeGate, located in SA and the UK, represents the Group`s mobile
technology systems integration business, and provides mobile solutions into
specific market sectors such as retail, industrial, manufacturing and transport
and logistics.
Revenues for the period amounted to R34,8 million (2001: R41,7 million) and
operating losses amounted to R13,1 million (2001: R8,2 million). Accordingly,
substantial reductions in costs have been, and are being, implemented.
Management have restructured the SA operations to duplicate the UK model which
is based on a software solutions entity and is less dependent on hardware vendor
sales.
4. PROSPECTS
The networking and telecommunications sector remains subdued as a result of
the over investment that has occurred during recent years. However, the Group
feels that there will be no recovery in this sector in the current financial
year. Steps have been taken to improve profitability over the next six months
through lower operating costs and reductions in personnel. Overall revenues and
gross margins appear to have stabilised, however concern remains around future
margin retention on Cisco related product sales
The Group has decided to change its year end from March to that of February
in order to align itself with its major subsidiary, Westcon. Accordingly the
audited results for the period to February 2003 will be for the twelve months
then ended for Westcon and an eleven month period for the rest of the Group.
Although the second half is expected to show an improvement over the first half,
the financial year`s earnings will be substantially below that of the prior
year.
5. REPORTING
This report has been prepared in accordance with the Group`s published
accounting policies which comply with South African Statements of Generally
Accepted Accounting Practice and with International Accounting Standards (other
than goodwill which has previously been written off against share premium),
which have been consistently applied with the previous financial period.
6. DIVIDENDS
Under current international market and business conditions, it is not
considered prudent to declare a dividend at the present time.
On behalf of the Board:
L Boyd J P Montanana D B Pfaff
Chairman Chief Executive Officer Group Finance Director
20 November 2002
A copy of this announcement and the results presentation is available on the
website.
Directors: L Boyd* (Chairman), J P Montanana# (CEO), C B Brayshaw*, M Karpul*,
J F McCartney*+, D B Pfaff, R S Rindel, C M L Savage*,
C S Seabrooke*, A M Smith+, N J Temple*#
#British +American *Non-executive,
DATATEC LIMITED ("Datatec")
Registration number 1994/005004/06
Share code: DTC ISIN: ZAE000017745 www.datatec.co.za
Date: 20/11/2002 05:00:00 PM Produced by the JSE SENS Department
