| Thu 21 Nov 2002, 11:13 | | Dimension Data Holdings Plc - Preliminary Results |
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Dimension Data Holdings Plc - Preliminary Results
Release Date: 21/11/2002 09:00:08 Code(s): DDT
Dimension Data Holdings plc - Preliminary Results
Dimension Data Holdings plc
Preliminary Results
Year ended 30 September 2002
Dimension Data Holdings plc ("Dimension Data" or the "Group"), a leading global
technology services Group, announces its preliminary results for the year ended
30 September 2002.
Financial Results
* Total turnover of $2,187.3 million (2001: $2,460.3 million)
* Total operating profit before goodwill amortisation and exceptional items
of $45.4 million (2001: $180.9 million)
* Profit on ordinary activities before goodwill amortisation and exceptional
items of $30.1 million (2001: $163.8 million)
* Basic earnings per share before goodwill amortisation and exceptional
items of 2.3 cents (2001: 13.0 cents)
* Cash on hand of $372.6 million (2001: $894.0 million)
Abridged profit and loss analysis
(Before goodwill amortisation, impairment and exceptional items)
Restated
Year ended Year ended
30 Sept 2002 30 Sept 2001
$`000 $`000
Turnover
Group turnover 2,120,562 2,401,503
Associates 66,769 58,755
Total turnover 2,187,331 2,460,258
Operating profit before goodwill amortisation,
impairment and exceptional items 40,962 175,970
Share of operating profit in associates 4,464 4,889
Total operating profit 45,426 180,859
Investment income 1,340 3,603
Net interest receivable 2,604 52,266
Profit before taxation 49,370 236,728
Taxation (13,461) (49,122)
Profit after taxation 35,909 187,606
Equity minority interests (5,809) (23,802)
Profit for the year before goodwill amortisation,
impairment and exceptional items 30,100 163,804
Basic earnings per ordinary share before goodwill
amortisation and exceptional items (US cents) 2.3 13.0
Restated
Year ended Year ended
30 Sept 2002 30 Sept 2001
$`000 $`000
Reconciliation to consolidated profit
and loss account
Profit for the year before goodwill amortisation,
impairment and exceptional items 30,100 163,804
Goodwill amortisation (724,280) (611,795)
Net exceptional items (1,889,710) (1,275,668)
Loss for the year as presented in the
consolidated profit and loss account (2,583,890) (1,723,659)
Geographical analysis
$`000 2002 2001
Turnover
Africa 292,866 426,790
Asia 404,908 546,195
Australia 364,609 406,857
Continental Europe 360,774 360,339
United Kingdom 193,652 243,575
United States 503,753 407,893
Other* - 9,854
Group 2,120,562 2,401,503
Associates 66,769 58,755
Total 2,187,331 2,460,258
Operating profit**
Africa 20,027 65,630
Asia 16,961 47,221
Australia 10,188 16,596
Continental Europe 18,691 24,957
United Kingdom 8,644 26,248
United States (9,021) 12,187
Other* (24,528) (16,869)
Group 40,962 175,970
Associates 4,464 4,889
Total 45,426 180,859
Operating margin
Africa 6.8% 15.4%
Asia 4.2% 8.6%
Australia 2.8% 4.1%
Continental Europe 5.2% 6.9%
United Kingdom 4.5% 10.8%
United States (1.8%) 3.0%
* comprises Investment holding and management and Protocol
** before goodwill amortisation, impairment and exceptional items
Turnover analysis by lines of business (unaudited)
Year ended United United
30 Sept 2002 Africa Asia Australia Europe Kingdom States Total
$`000 $`000 $`000 $`000 $`000 $`000 $`000
CIS 24,043 - 9,962 8,496 30,632 17,593 90,726
SPS 15,167 133,620 - 8,277 36,302 - 193,366
Network
Solutions * 104,477 271,288 163,605 297,091 114,823 426,351 1,377,635
IPC 26,200 - - 6,670 301 - 33,171
Security - - - 27,998 3,646 - 31,644
Applications 55,330 - - 4,376 3,531 55,564 118,801
Express Data - - 180,711 - - - 180,711
Other 67,649 - 10,331 7,866 4,417 4,245 94,508
Group 292,866 404,908 364,609 360,774 193,652 503,753 2,120,562
Year ended
30 Sept 2001
CIS 20,041 - 8,224 1,488 54,087 13,150 96,990
SPS 25,529 189,497 - 6,344 16,329 - 237,699
Network
Solutions * 261,834 329,207 140,957 328,705 167,022 345,503 1,573,228
Security 9,869 672 - 12,210 447 129 23,327
Applications 58,645 14,617 24,229 2,160 5,357 46,794 151,802
Express Data - - 217,548 - - - 217,548
Other 50,872 12,202 15,899 9,432 333 2,317 91,055
Group 426,790 546,195 406,857 360,339 243,575 407,893
2,391,649**
* Includes operational services
** Excludes Investment holding and management and Protocol of $9.9 million.
No operating profit has been disclosed on lines of business as the
operations are managed regionally.
Currency
The following table reflects the average and period end exchange rates
against the US dollar of SA Rand, Australian Dollar, Sterling and Euro:
Year ended Year ended
30 Sept 2002 30 Sept 2001
Currency Average Period end Average Period end
South African Rand 10.606 10.560 8.226 8.995
Australian Dollar 1.850 1.841 1.949 2.023
Sterling 0.664 0.641 0.692 0.681
Euro 1.059 1.019 1.122 1.094
Key points
* Revenue reflected ongoing difficult global demand conditions, but
stabilised in the second half of the year.
* Intense pressure on pricing in highly competitive markets intensified in H2
2002, resulting in continued gross margin pressure.
* Rand depreciation of 22% substantially impaired the contribution from
South Africa.
* Significant cost reductions of 11% largely through 19% reduction in
headcount.
* Fixed overheads reduced from $530 million (annualised) in 2001 to $416
million in 2002.
* Growth in contribution from value-added services and annuity-based income.
* Global Sales focus resulted in a further improvement in the quality of the
customer base and a number of high-profile customer wins.
* Successful launch and global rollout of the `DD Way`, a performance-based
realignment and transformation programme focused on improving the Group`s
competitive positioning and financial performance.
* Substantial investment was made in Dimension Data`s IP to enhance the
Group`s competitive position, through a focus on four "go-to-market"
global focus areas:
- Security
- IP Convergence
- Service Provider Solutions
- Customer Interactive Solutions.
* Structural changes were made to drive Application Network strategy,
including:
- Formation of Executive Committee
- Appointment of new Group COO, Sales Director and Services CEO
- Dedicated senior appointments to focus on solutions and services
- Broadening of talent with new skills to balance existing senior
management
- Regional CEOs appointed to Executive Committee.
* Implementation of corporate governance best practice, demonstrated by a
reduction in the number of executives on the Board.
* Subject to shareholder approval at an Extraordinary General Meeting to be
held on 13 December 2002 the issue to VenFin Ltd (or its nominee) of a
$100 million convertible bond.
Chairman`s Statement
Over the past year, Dimension Data has concentrated on a careful,
comprehensive evaluation of our operations and the manner in which we deliver to
all our stakeholders.
The market has changed substantially and it has become crucial to align and
invigorate our business to succeed in difficult conditions. Our evaluation has
translated into a programme of tangible change, designed to have a direct impact
on our delivery.
Despite the challenges, we have increased our global client base due to our
broad, integrated offering and increased brand recognition. We have also managed
to grow our annuity-based income through increased interest in and take-up of
our GSOA (`Global Services Operating Architecture`) operational services. The
stronger uptake resulted from a better customer understanding of our offering,
greater awareness of the benefits, the trend towards outsourcing this type of
service, and a sales force that is better equipped to sell these services.
For information on the financial performance of the Group, refer to the
Financial Review.
Structuring for delivery
Dimension Data has spent the last few years building a global business. We
are now focused on integrating our businesses across different regions to ensure
we can offer a world-class service in all our regions.
To become world leaders in the provision and management of Application
Network solutions, we must assist our clients to unlock value by enabling them
to interact and communicate seamlessly and flexibly. Our operational focus
therefore is to provide integrated solutions and services that exploit our
unique capability in designing, integrating and operating Application Networks.
At our year-end, we announced significant changes to our Board of Directors
and management team to ensure that we have the right structure to sustain the
execution of our strategy. Our Board has been reduced to four executive and
six non-executive directors.
In addition, we have created an Executive Committee comprising existing
senior management and new senior managers with international experience. The
Executive Committee is responsible for running operations and the formulation
and execution of Group strategy.
We have also made senior appointments to focus specifically on the provision
of integrated solutions and services to our clients. Furthermore, we have
significantly broadened our base of international expertise to supplement that
of our existing senior management. I believe this new management team has the
depth and breadth to meet the global challenge in a proactive way. Overall, our
current talent base is the strongest in our history and we will continue to
promote from within wherever possible.
Driving change throughout our business has not only been about putting the
right people in the right positions. We are also transforming the way we conduct
our business. After extensive independent and internal research, we have put a
global performance-based transformation programme into action, which we have
called the DD Way. It is an all-embracing initiative driven from Board level by
dedicated staff.
The DD Way focuses on boosting Group turnover and margins and enhancing the
value of our proprietary technology and brands. At its heart is a stringent
focus on improving people management and strengthening our client relationships.
In all cases, these changes are guided by global best practice.
The DD Way has now been implemented throughout the Group. We have rolled it
out through a process of working sessions with all employees. We have
strengthened our human resources processes to ensure this programme is closely
linked to the incentivisation and measurement of our people. All staff are
accountable to ensure these substantive changes translate into sustainable
financial deliverables.
Focused for the future
We have established a Group with a global reach that spans more than 30
countries on five continents. We have experienced teams across this footprint
and can cross-utilise skills from different regions to offer the most efficient
and cost-effective solutions to our clients.
By reconfiguring our management structure, and with the focused approach that
is brought to bear by the DD Way, we now have the dedicated resources to
accelerate the rollout of proprietary solutions and services to our global
client base.
These solutions centre on addressing those areas in a client`s IT
infrastructure where there is greatest duplication and inefficiency, thereby
creating the opportunity for significant and immediate return on investment. Our
`go-to-market` focus areas include security, IP convergence, customer
interactive solutions (CIS), and service provider solutions (SPS). Research
indicates that solutions in these areas are in high demand and represent above-
average growth opportunities over the medium term. Offering value-added
solutions in these areas should generate significant annuity income.
Multi-sourcing is a means for us to capitalise on world-class teams and
solutions IP in low-cost geographies to win and deliver business in regions
where we either lack delivery capability or can benefit from the cost
differential. Initially we will be focusing on leveraging experience from South
Africa, Australia and India where we have a proven track record in delivering
complex Application Network Solutions into other regions.
With the growing convergence between devices, software applications and
protocols, it is essential to have a broad knowledge and skills base. This
flexibility and focus on multi-sourcing solutions has positioned us strongly.
In the period under review, we managed to secure several high-profile
contracts. The growth in our international client base supports an increasing
realisation amongst our customers that an IT partner offering global solutions
provides the opportunity for maximum return on investment.
It was announced on 5 November 2002 that, subject to shareholder approval at
an EGM on 13 December 2002, the Group would issue a $100 million convertible
bond to VenFin Ltd (or its nominee). This will allow greater flexibility in the
management of cash resources post the redemption of the existing convertible
debenture.
We continue to be challenged by difficult market conditions, but we believe
the management changes, cost containments and the focus on delivery through the
DD Way have placed us in the strongest possible position to meet these
challenges.
Thank you
I would like to thank the management of Dimension Data for their contribution
to the restructuring of this business for the future. A special thank you to
Dirk Ackerman who has resigned as an executive director of the Board to pursue
an alternative career. Dirk will continue to consult to the Group and remains as
non-executive chairman of The Merchants Group.
Richard Came, Ronald Cattell, Peter Hird, Ettienne Reinecke, Donovan Smyth,
Robert Taylor and Bruce Watson have also resigned from the Board to join the
newly formed Executive Committee. We thank them for their contribution as Board
members and I look forward to their continued input. I welcome all the new team
members who will work with our new Chief Operating Officer, Brett Dawson, and
the Executive Committee to execute Group strategy. A special welcome to Adam
Craker who will work closely with Brett as the Group Sales director and Denis
Hocking, the CEO Global Services, who will focus on growing and delivering world
class services for the Group.
Raul Fernandez and Peter Harrison have also resigned from the Board but will
remain on the US and European regional boards, respectively.
I am very pleased to welcome Moss Ngoasheng as a new non-executive director
to our Board. Moss will no doubt add tremendous value and play an important role
in advising on our black empowerment initiatives, which we see as crucial to our
future success.
Gordon Waddell has been appointed as senior non-executive director. Gordon
has been invaluable to us in the past and we look forward to continuing to tap
his extensive knowledge.
To our clients, thank you for your continued support.
And lastly, to the entire Dimension Data team, it has not been an easy time
and I want to thank each and every person for their contribution. The
substantial change completed this year could not have been successfully effected
without the dedication and passion of all.
Jeremy Ord
Executive Chairman
Enquiries:
Dimension Data Holdings plc
Jeremy Ord, Executive Chairman
Malcolm Rutherford, Group Chief Financial Officer
Karen Cramer, Investor Relations
On the day: +(44) 793 2020 296
Thereafter: +(44) 20 7651 7000
karen.cramer@uk.didata.com
Bronwyn Goeller, Investor Relations (SA)
On the day: +27 83 296 6910
Thereafter: +27 11 709 1000
Bronwyn.Goeller@za.didata.com
Internet address: www.didata.com
Brunswick Group
Tom Buchanan
+(44) 20 7404 5959
Interviews with Jeremy Ord, Executive Chairman, and Malcolm Rutherford, Group
Chief Financial Officer, are now available in video, audio and text on
www.didata.com and www.cantos.com.
Note:
All references to $ are to US$
REGIONAL REVIEW
Overview of trading conditions
In a period of deteriorating global economic conditions and increasing
uncertainties, trading in all Dimension Data`s regions remained extremely
challenging. Constrained IT budgets, declining volumes, smaller deal sizes,
lengthening lead times and postponement of significant spending decisions were
all features of the period. Across the board, customers were cautious about
committing to new IT infrastructure spend. They remained focused on extracting
returns on their IT investments, reducing the operational costs of existing
infrastructure and were more inclined to invest in services and solutions.
Group revenue declined by 12% over the period, but some stabilisation
returned in the second half of the year when revenues were only marginally down
on the first half. Gross margins came under severe pressure over the year.
Lower volumes, fewer large opportunities and the fiercely competitive trading
environment resulted in pressure on technology pricing and billing rates,
particularly in the second half of the year. This was exacerbated by low
utilisation levels and excess overheads relative to the reduced level of
activity. The Group-wide rationalisations largely in the second half of the year
in response to the deteriorating market conditions were costly and further
disrupted trading in some regions.
Africa
Dimension Data remained the overall leader in the South African IT services
market, maintaining market share in the Network Infrastructure and Integration
business. Over the year the Rand declined by 22% against the US dollar, which
contributed to the 31% decline in reported dollar revenues compared to a Rand
revenue decline of only 12%.
Management changes, cost reductions and rationalisations were implemented,
largely in the second half of the year. Costs came down by 23% relative to
budgeted costs at the beginning of the year, following retrenchments, cost cuts
and a major rationalisation and consolidation of our lease exposures. Headcount
was reduced by 17%.
Gross margins have declined over the second half of the year due to increased
capacity in Internet Solutions, which accounted for a 2% drop in operating
margin. As capacity is utilised in 2003 margins will again improve.
The African business is entering 2003 with a more focused and streamlined
operation, a more efficient cost structure and upgraded management systems. The
lines of business have been reduced from thirteen to eight. Employee incentive
structures have been realigned to ensure greater cross-pollination and a single
services organisation has been established to drive improved service and
utilisation levels. Sales force effectiveness, key account management and bid
management are other areas that received additional investment and focus.
Black economic empowerment is becoming increasingly important when competing
for new customers. Management has been proactive in implementing a black
empowerment charter and setting targets to ensure that it is realised. These
include new appointments, partnerships, supplier relationships, internal
training and leadership initiatives aimed at creating representation across all
staffing levels.
The top customer wins during the year included:
- MTN, a three year, $9.5 million, core network upgrade to enable
convergence of voice and data. The project will offer a Primer service.
MTN is an existing customer.
- Parmalat SA, a five year, $5.7 million, upgrade and outsource contract.
Parmalat is an existing customer.
- Santam, a three year, $4.7 million, network management contract. Santam
is an existing customer.
- University of Pretoria, a two year, $2.0 million, network infrastructure,
Primer and Uptime contract. University of Pretoria is a new customer.
- SA Petroleum Refineries (SAPREF - jointly owned by Shell and BP), a $1.0
million, contract streamlining their business processes and accelerating
productivity. SAPREF is an existing customer.
Asia
Datacraft changed its year end from 30 June to 30 September to bring it in
line with Dimension Data`s year end. Datacraft`s reported numbers (reported
under a separate announcement) reflect the 15 month period to 30 September 2002
whilst the commentary below and all numbers in this document refer to the 12
months to 30 September 2002.
Although revenue in the Asian region declined by 26% year on year, some
stability returned in the second half when the sequential decrease on the first
half was only 8%. Declining IT spend from Enterprise and Telco customers was
buffered by pockets of good demand for IP infrastructure and iBOSS solutions and
demand for services held up better than infrastructure demand. Whilst
performances differed widely across regions, Datacraft maintained or grew market
share in all areas with the exception of China, where revenues declined by 53%.
In response to the turbulent market conditions and a reduction in business
volumes, the company reduced fixed overheads by implementing a company-wide
restructuring programme. Restructurings undertaken during the year reduced
overheads by 19% and headcount was cut by 21%.
Datacraft continued to focus on streamlining its operations, its balance
sheet and cash flows. Following a $17.9 million increase in the provision for
bad debts mainly in China, financial controls have been strengthened and new
financial management appointments have been made.
A number of operations have been merged to improve efficiencies, including
Datacraft New Zealand and NCS, Datacraft Korea and Dasan, Datacraft Singapore
and Multisoft, and Datacraft China and DNI.
Datacraft has strengthened its focus on services by appointing separate heads
for professional and operational services. The business will also be targeting
more global and multinational accounts and has introduced new business lines and
solutions sets in the areas of enterprise storage, call centre integration, IP
convergence and managed security. A key focus in 2003 will be on strengthening
cash flows and the balance sheet, improving profitability ratios and returning
China to profitability.
The top customer wins during the year included:
- State Bank of India, a one year, $18 million, project to build and manage
India`s largest banking backbone network including a three year Uptime
and Insite contract. State Bank of India is a new customer.
- PT Telkom Indonesia, a seven month, $12 million project to build
Indonesia`s largest high speed IP backbone. PT Telkom is an existing
customer.
- TA Orange Thailand, a one year, $5.6 million contract to set up and
manage a countrywide network that interconnects more than 120 sites
throughout Thailand. TA Orange is an existing customer.
- Hanoi Post and Telecommunications (HNPT), a six month, $2.6 million
contract to provide Vietnam`s second largest telecommunications carrier
with the infrastructure to transform itself from a local loop operator
into a full-spectrum fixed-network service provider offering the latest
IP-based services. HNPT is a new customer.
- Hanaro Telecom, a three year, $2.3 million outsourcing contract which
will see Datacraft Asia provide Uptime support and maintenance for the
company`s networks in Korea. Hanaro Telecom is an existing customer.
Australia
Depressed demand resulted in revenues in the Australian business declining by
10% on 2001. However, following a sharp decline in the first half of the year,
revenues rebounded strongly in the second half, increasing sequentially by 33%.
Demand for services that optimise existing IT investment drove increased
customer interest in operational services and growth in areas such as customer
interactive solutions and service provider solutions (iBOSS). The distribution
business, Express Data gained market share in major product lines and the
network infrastructure and integration business maintained its market leadership
position.
Profitability was impacted by a relatively higher contribution from Express
Data, which is a lower margin business. In reaction to lower utilisation levels
and margin pressures, headcount was cut by 18% over the year, unprofitable
businesses were exited and lease overheads significantly reduced. This resulted
in cost reductions of 12% relative to budgeted costs at the beginning of 2002.
The DD Way framework and the Group`s refined Application Network strategy
have given the Australian business a clearer focus and increased emphasis on
selling Dimension Data packaged solutions and services. New initiatives during
the year include the formation of a solutions sales team, the launch of new
customer interactive (voice) and storage solutions as well as new operational
services, such as Uptime for applications and new Surveyor offerings. Stricter
margin governance processes, improvement of services margins through better
utilisation and recovery rates and the outsourcing of logistics to Express Data
are key objectives aimed at improving profitability in the new financial year.
The top customer wins during the year included:
- Victorian Department of Natural Resources and Energy, a three year, $6.0
million project lead in two major contracts, one is to provide directory
and authentication services and the second contract is to build and
maintain a new converged network to support voice, video and data. They
are an existing customer.
- A leading Tier-One Telecommunications and Services Operator in the Asia-
Pacific region, a nine month, $4.9 million project to implement an iBOSS
solution. They are an existing customer.
- A Leading Financial Institution, a one year, $4.1 million, preferred
supplier agreement for infrastructure technology supply and Insite,
Uptime and operational services contract. They are an existing customer.
- Boral Limited, a three year, $1.8 million, renewal and upgrade to pre-
existing Uptime and Insite contracts. Boral is an existing customer.
- Australian Centre for the Moving Image (ACMI), a three year, $0.8 million
contract to design, supply and develop a new network server and storage
architecture. ACMI is a new customer.
Continental Europe
After a strong revenue growth and profit performance in the first half of the
year, a general deterioration in economic conditions led to a slowing in revenue
growth in the second half. Revenues were flat on 2001 but in the second half,
revenues declined sequentially by 9%. In response to the difficult trading
environment, the European business protected market share by focusing on the
retention of core customers and gaining a greater share of their IT spend.
Pockets of good demand were encountered in value-added areas such as IP
convergence, VoIP and security solutions. Benelux and Switzerland benefited from
strong respective market positions in the customer interactive and security
solutions. Germany showed good progress in the areas of security and operational
services.
To offset declining margins, a large scale re-engineering of the business was
embarked upon in the second half of the year. Significant rationalisations took
place largely in Germany, France and the Netherlands, with overall costs down by
9% over the year relative to budget.
The rightsizing of the businesses has resulted in more focused and efficient
operations going into 2003. Key initiatives for the new financial year include
building solutions synergistically across Europe in the areas of security, IP
convergence and contact centre integration. Focus is also being given to
improving sales management and productivity as well as the quality of the core
business by increasing services sales and annuity income streams. Other
objectives are to grow market share in Germany and achieve critical mass in
Italy and Spain.
The top customer wins during the year included:
- Essent Kabelcom, a multi year, $8.0 million, infrastructure technology
supply and services contract. Essent Kabelcom is an existing customer.
- Sogei, Societa` generale di informatica spa, a three year, $3.9 million
project to build a complex environment based on infrastructural
technology. Sogei is an existing customer.
- Interoute, a multi year, $3.1 million contract to provide services to the
owner and operator of Europe`s largest, most densely connected and
advanced intelligent IP network. Interoute is an existing customer.
- R+V Insurance Company, a multi year, $2.0 million contract to provide an
IT infrastructure which incorporates the flexibility to introduce new
technologies such as VoIP and is supported by Uptime services. R+V is a
new customer.
- Holcim (Schweiz) AG, a multi year, $1.0 million IP telephony installation
(including Primer and Uptime Services). Holcim is an existing customer.
United Kingdom
The revenue decline of 20% in the UK was driven by the business` focus on the
financial and media sectors where there was a sharp drop off in IT spend.
Despite a depressed demand environment, good revenue performances were seen
in the security, enterprise solutions, service provider solutions and
operational services areas of the business. The network infrastructure and
integration business suffered due to a drop in demand for infrastructure
upgrades and the application business also suffered in highly competitive market
conditions. The Merchants Group moved back into profitability in the second half
of the year following rationalisations in H1 2002 and improved utilisation
levels following new contract wins.
A comprehensive rationalisation programme was undertaken in the second half
of the year to address the deterioration in performance. This involved senior
management changes, overhead cuts, retrenchments, as well as measures to improve
sales productivity and vendor and partner relationships. The business focus has
been improved through cutting the number of business lines from 13 to five.
Increasing customer demand for a full solutions offering, combined with the
competitive environment, has led us to hone our offering to a more focused value
proposition particularly in the areas of customer interactive solutions, IP
convergence, security, service provider solutions and operational services.
A number of new managers and skills have been recruited to enhance our
ability to sell services and solutions and to focus on growing our annuity
income streams. Despite uncertainty surrounding the economic outlook in 2003, we
are optimistic about achieving improved profitability due to new management,
better skills, a simplified business model and more efficient cost structure.
The top customer wins during the year included:
- HSBC, a three year, multi million dollar contract to provide global
procurement and services for IP networking technology. HSBC is an
existing customer.
- Shimizu, an eighteen month, $17.0 million contract to design and
implement the electric cabling infrastructure to a new mixed commercial
and residential development in London. Shimizu is a new customer.
- Paddington West Key End Development, a three year, $11.0 million contract
to supply power and telecommunications infrastructure to 470 residential
and 13 retail spaces. They are an existing customer.
- Powergen, a three year, $4.7 million contract to provide Uptime and
Insite services. Powergen is an existing customer.
- Leading Global Life Sciences Company, a three year, $4.7 million contract
to provide technology, Uptime and Insite services. They are an existing
customer.
USA
In the US, revenue growth was achieved in the network infrastructure and
integration business. In addition, whilst the operational services business
performed well, the overall contribution from services fell short of target.
Following a decline in demand in a highly competitive market, revenue in the
application business decreased. Revenue growth in the network business was
partially driven by a number of strategic, low-margin technology transactions,
which are expected to translate into services business going forward.
Performances varied across regions. New York achieved strong revenue growth
and increased market share. The South East also delivered a relatively strong
performance benefiting from a niched service offering. Washington suffered due
to poor demand conditions and Boston, which was loss-making, has been
consolidated into the New York business, and now operates as a sales office with
delivery out of New York.
The applications business was rationalised throughout the year. Steps taken
to return the business to profitability include high-level management changes,
large-scale retrenchments (42% over the year) to drive improved utilisation
levels, and rationalisation of lease expenses. Scope remains to reduce costs
further in 2003.
Focus in 2003 will be on aggressively driving a higher contribution from
services particularly in the areas of security, enterprise solutions, IP
convergence and operational services. In addition, margin improvement will be
targeted by avoiding low margin technology sales. Through Dimension Data`s
service and solution capabilities, it is well positioned to benefit from further
consolidation in the US integrator market. Improved competitiveness and
profitability will be aided by the use of lower cost offshore delivery
capabilities in India and South Africa.
The top customer wins during the year included:
- Mazda North American Operations, a two year, $11+ million contract for
the revitalisation of Mazda`s online applications and services. Mazda is
an existing customer.
- A large Global Pharmaceutical company, a three year, $9.0 million
technology supply, services and consulting contract. This client is a
new customer.
- Volkswagen of America, a three year, $6.3 million contract to provide
account support, application development and application maintenance of
the English and French versions of VW.com. VW is a new customer.
- Ocwen Financial Corporation, a two year, $5.2 million contract to help
migrate its existing call centre operations to an infrastructure
technology IP based contact centre solution. Ocwen is a new customer.
- Goodrich, a two year, $1.0 million Operational Services engagement
including Insite and Uptime for the company`s global WAN. Goodrich is a
new customer.
Outlook
Significant resources and time have been invested over the past year in
improving the Group`s competitive positioning, focus and delivery capabilities.
A new management structure is in place and additional high-level skills have
been recruited to supplement the existing management team. Increased focus has
been given to solutions areas, security, customer interactive solutions, service
provider solutions and IP convergence. New operational services have been
launched and global sales and delivery capabilities have been significantly
enhanced.
In addition, incentivisation schemes have been adapted to drive revenue
growth in services and solutions sales and improve gross margins. The DD Way is
impacting positively on a number of areas of our business, including staff
morale, incentivisation and measurement, customer interaction and focus as well
as supplier relationships.
In a challenging demand environment with limited visibility, the focus going
into 2003 is on improving the sales mix and profitability rather than
aggressively growing turnover. We will continue to strengthen our position in
and protect the contribution from our core enterprise infrastructure offerings
where we will focus on efficiencies and on being more selective in terms of the
margins at which business is accepted. At the same time, with an increasingly
value-add led sales approach, we will be targeting a greater contribution from
higher margin solutions. We have seen some stability in the pricing environment
and expect gross margins in 2003 to be broadly the same as the second half 2002
levels. Following the restructurings we expect operating costs of approximately
$410 million in 2003. Change is being driven by new skills, training, improved
support structures and revised incentivisation schemes. We are confident of
growing demand amongst existing customers and winning new customers with a
differentiated and clearly defined offering of Application Network Solutions and
GSOA services.
FINANCIAL REVIEW
Dimension Data is listed on the London Stock Exchange and the JSE Securities
Exchange and is required to comply with UK reporting and corporate governance
requirements.
The accounting policies used in the preparation of the September 2002
financial statements are consistent with those applied in the previous year,
except for deferred taxation, which is now stated on a full liability basis in
accordance with FRS 19 and comparative financial information has been restated
as necessary.
Group Operating Performance
Turnover
In an environment of difficult trading conditions and continued economic
decline, total turnover declined by 11.1% from $2,460 million to $2,187 million.
This decline in turnover has masked the success that the Group has achieved in
implementing its strategy of moving towards more services and solutions based
turnover. Annuity revenue (defined as all revenue of a contract nature where the
contract extends beyond a year or, as in the case of recurring annual
maintenance revenue, revenue that has a high statistical likelihood of
recurring) has grown as a percentage of total revenue in each region. Annuity
revenue now represents 25.8% of Group revenues (2001: 21.2%). Other services,
such as professional and application services, increase the value-add component
of Group offerings to 39.9% (2001: 36.7%) of total revenue.
The balance of revenue is made up of the sale of network infrastructure and
directly related services which still represents the largest element of Group
turnover particularly in the USA and Europe. This particular aspect of the
business has encountered the greatest pressure on margins as channels to market
have commoditised and integrators have cut both their infrastructure and
services margins in order to retain and win business.
The Group`s acquisition strategy, which has successfully established its
global footprint and a reasonably even spread of revenue from the six regions in
which it operates, is largely complete. The increased contribution of the USA
from 17% to 24% reflects the impact of the acquisitions of Proxicom, Premier and
Matrix made during the 2001 financial year, which have now been included for the
full period. More than 50% of the Group`s turnover now comes from `developed`
markets and the geographic diversification provides some insurance against
cyclical, regional and seasonal fluctuations.
Although South Africa continues to be an important contributor to the Group,
the current year`s contribution has been severely impacted by the weakness of
the Rand relative to the US Dollar. The Dollar strengthened by 22% relative to
the Rand and South Africa`s contribution to total turnover has declined from 18%
in 2001 to 14% in 2002 as a result.
Gross margin
A headline review of gross margin belies the performance of the Group and the
vast strides that have been made in the implementation of Group strategy. The
gross margin for 2002 is 21.5% (2001: 23.4%). In the six months ended 30
September 2001, gross margin was 22.6%. It declined in the six months ended 31
March 2002 to 22.4% and declined further in the six month period to 30 September
2002 to 20.7%. Whilst market conditions did play a role in the decline as
explained later, the primary reason for the trend is due to a change in the
regional mix and revenue type.
The more a region has diversified its offerings away from network
infrastructure and integration to higher value added services, the better its
gross margin is likely to be. The skills required to deliver network
infrastructure and integration can, by and large, be extended to the managed
services and outsourcing environments where the value-add to the customer is
greater and gross margins are better. Since the revenue contributions of the
regions vary, the higher the relative increase in contribution from lower margin
regions, the less likely it is that overall Group margins will improve.
Overheads
Fixed overheads for the year were $416 million compared to a 2001 annualised
fourth quarter actual of $530 million and budgeted costs of $465 million going
into 2002.
Approximately US$25 million `investment` in new lines of business and
business solutions, building up global systems and capabilities and the DD Way
has been expensed in 2002. This represents expenditures which have had no
recognisable revenue benefit in the year under review but which are likely to
generate revenues in future periods. A similar amount is expected to be
invested in the new financial year.
Taxation
Whilst the Group reported an overall loss before adding back goodwill
amortisation and impairment and exceptional items, certain territories in which
the Group operates reported profits. As a consequence the Group has recorded an
overall tax charge.
The Group has significant deferred tax assets, the majority of which are not
recognised within the Group financial statements on the basis that their
recoverability cannot be forecast with sufficient certainty to meet the
recognition criteria under FRS 19. However, the Group has recognised deferred
tax assets with respect to tax losses on short term timing differences where the
Group considers that it is more likely than not that these assets can be
recovered within the foreseeable future. As at 30 September 2002 the net
deferred tax asset was $18.9 million (2001: $4.4 million). The year ended 30
September 2002 is the first full year for which the new accounting standard for
deferred tax has been adopted. The impact thereof is detailed in Note 5.
Goodwill and provisions
Goodwill is amortised over a maximum period of seven years. In accordance
with FRS 11, the Group updated its impairment tests performed at 30 September
2001 and 31 March 2002 which resulted in an impairment to the carrying value of
goodwill by an amount of $1.8 billion.
Worldwide African Investment Holdings (Pty) Ltd exercised their put option,
in respect of Plessey, against Dimension Data on 4 October 2002 and provision
has been made for valuation losses incurred in this transaction.
Operating exceptional items
As a result of the further rightsizing exercise embarked upon by the Group,
we have incurred significant severance and associated costs amounting to $30.4
million.
In the prior year, the Directors considered it prudent to record a provision
of $8 million against long outstanding and doubtful debtors in its China
subsidiary. After finalisation of the review early in the current period, it was
decided to increase this by $15 million to $23 million and to reflect this as an
operating exceptional item. This provision was later increased by a further $2.9
million to reflect uncertainty over the collectability of certain amounts due by
Worldcom.
Liquidity and Capital Resources
Debtors have been well controlled during the year and reduced from $711
million to $565 million. Measured in days sales outstanding, debtors have
decreased from 68 days at 30 September 2001 to 59 days at 30 September 2002.
Africa at 31 days sales outstanding (2001: 49) and USA at 46 days (2001: 72)
were the main contributors to the favorable decline.
Stock has also been well controlled and has decreased slightly to $99 million
(2001: $101 million). This decrease is net of an investment of $6 million in
maintenance stocks to support the increased activity around the operational
services, Uptime and Insite.
A decrease in trade creditors days outstanding from 79 in 2001 to 54 in 2002,
reflects current market conditions and the pressures that technology vendors are
placing on their channel partners. We do not anticipate that suppliers will
decrease terms further and expect creditors can be maintained at existing
levels.
The Group had $894 million in cash at the beginning of the year. The largest
outflows during the year related to the $234 million repayment of loan notes
outstanding for the acquisition of the remaining interests in Dimension Data
Network Services Ltd (formerly Chernikeeff Networks Ltd) in 2000 and a further
net $174 million of acquisitions and disposals which included settlement of
certain deferred consideration liabilities.
Operational cash flow was negatively impacted by a `once off` cash outflow of
some $74 million which was used to settle lease liabilities for excess space
requirements which the Group acquired with the acquisition of Proxicom Inc in
2001. Notwithstanding this outflow, the Group generated cash from operations of
$29 million during the year.
At the year end the Group had cash reserves of $373 million. Against this the
Group had liabilities of $103 million (including accrued interest) for the
convertible debentures redeemable in December 2002, $42 million for deferred
consideration liabilities and $28 million for a put option that existed over the
shares in Plessey (Pty) Ltd. Accordingly, the free cash position of the Group
at 30 September 2002 was $200 million. There was also $43 million of near cash
and near cash investments on the balance sheet at 30 September 2002 (2001: $26
million) which has been excluded from the calculation of free cash.
The Group has sufficient cash resources to meet its existing commitments.
However, taking into account seasonal cash requirements and restrictions on cash
in South Africa and Asia, as well as uncertain market conditions and a lack of
operating visibility in key geographic markets, the Board believes that it is
prudent to take advantage of the current low interest rate environment to secure
funding of ongoing operations. To ensure that the Group has sufficient resources
to withstand the continuing uncertainty in the market while at the same time
introducing enhanced financial flexibility, the Board intends, subject to
shareholder approval, to issue a new convertible bond of $100 million. Details
of the bond are included in a circular which was mailed to shareholders on 20
November 2002.
Capital reduction
The balance sheet of the Company reflects share premium of $4.8 billion and a
profit and loss deficit of $4.3 billion. Under these circumstances the Board is
unable to declare dividends to shareholders and wishes to position the Company
to be able to pay dividends to shareholders in the future. Accordingly, a
decision has been taken to appeal to the Courts to reduce the share premium
account to eliminate the profit and loss account deficit. Such a transaction
requires shareholders approval, which will be requested at the forthcoming
Annual General Meeting.
Interest Rate Risk
As the Group is in a net cash positive position, it is exposed to the effects
of fluctuating deposit interest rates. Whilst it is corporate policy to remain
as liquid as possible to take advantage of acquisition opportunities, certain
funds have been invested in short term deposits to minimise the effects of
fluctuating interest rates and achieve a satisfactory return for shareholders.
Global Risk
The Group operates in over 30 countries around the globe and is therefore
susceptible to different political, financial and economic risks in each region.
Business practices differ from region to region and this is most evident in the
payment of debt.
Operating globally may have increased the exposure to political instability
and different business practices but we have taken steps to mitigate this risk
and continue to monitor the regional performances.
CONSOLIDATED PROFIT AND LOSS ACCOUNT
for the year ended 30 September 2002
Restated
Note 2002 2002 2002 2001
Pre-exceptional Exceptional
items(Note1) Total Total
$`000 $`000 $`000 $`000
Turnover
Group turnover 2,120,562 - 2,120,562 2,401,503
Associates 66,769 - 66,769 58,755
Total turnover 2,187,331 - 2,187,331 2,460,258
Operating profit before
goodwill amortisation,
impairment and exceptional
items 40,962 - 40,962 175,970
Exceptional operating costs - (60,251) (60,251) (39,331)
40,962 (60,251) (19,289) 136,639
Goodwill amortisation (719,949) - (719,949) (601,796)
Goodwill and investment
impairment - (1,805,705) (1,805,705) (1,280,610)
Group operating loss (678,987) (1,865,956) (2,544,943) (1,745,767)
Share of operating profit
in associates 4,464 - 4,464 4,889
Goodwill amortisation,
impairment an
