| Wed 21 May 2003, 14:55 | | Datatec Limited - Financial Results And Further Ca |
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Datatec Limited - Financial Results and Further Cautionary Announcement
DATATEC LIMITED
Registration number 1994/005004/06
Share code: DTC ISIN: ZAE000017745
("Datatec")
* Revenue of R20 billion
* Headline loss per share of 68 cents
* Cash generated from operations of R1,2 billion
* Net tangible asset value per share of R15,91
Reviewed results for the period ended 28 February 2003 and further cautionary
announcement
Consolidated income statements
Reviewed Audited
period ended year ended
(R million) 28 Feb 2003 31 March 2002
Revenue 20 222 20 677
Continuing operations 19 194 20 316
Acquisitions 1 017 202
Revenue from ongoing operations 20 211 20 518
Discontinued operations 11 159
Cost of sales (17 757) (17 759)
Gross margin 2 465 2 918
Operating costs (2 283) (2 072)
Operating profit before financing costs
depreciation and amortisation ("EBITDA") 182 846
Ongoing operations 196 896
Discontinued operations (14) (50)
Depreciation (231) (200)
Operating (loss)/profit (49) 646
Income from investments 68 76
Financing costs (88) (172)
Share of associate company losses - (3)
(Loss)/profit before exceptional items and goodwill (69) 547
Goodwill amortisation (91) (133)
Goodwill impairment (111) (397)
Exceptional items 47 (93)
Loss before taxation (224) (76)
Taxation (26) (178)
Loss after taxation (250) (254)
Loss/(profit) attributable to outside shareholders 2 (11)
Attributable loss (248) (265)
Key ratios:
Gross margin % 12,2 14,1
EBITDA % on ongoing operations 1,0 4,4
Normal tax rate before exceptional items and goodwill % 75,2 30,6
Exchange rates
Average Rand/US$ exchange rate 9,7:1 9,6:1
Closing Rand/US$ exchange rate 8,1:1 11,4:1
Salient financial features
Headline (loss)/earnings (R millions) (94) 346
Number of shares (millions)
Issued 138 137
Weighted average 138 131
Diluted weighted average 138 133
(Loss)/earnings per share (cents)
Headline (68) 265
Basic (180) (202)
Diluted (180) (199)
Diluted headline (68) 260
Net asset value per share (cents) 1 982 2 791
Net tangible asset value per share (cents) 1 591 2 389
Consolidated balance sheets
Reviewed Audited
(R million) 28 Feb 2003 31 March 2002
ASSETS
Non-current assets 1 158 1 392
Property, plant and equipment 370 513
Capitalised development expenditure 90 131
Goodwill 449 419
Associated companies and investments 16 30
Deferred tax asset 233 299
Current assets 6 086 8 420
Inventories 1 668 2 397
Receivables 2 825 4 147
Cash and cash equivalents 1 593 1 876
Total assets 7 244 9 812
EQUITY AND LIABILITIES
Ordinary shareholders" funds 2 735 3 823
Outside shareholders" interest 153 199
Total equity 2 888 4 022
Long-term liabilities 115 58
Deferred tax liability 77 20
Current liabilities 4 164 5 712
Payables 3 377 3 733
Interest bearing payables 44 38
Amounts owing to vendors 62 90
Taxation 29 143
Bank overdrafts and trade finance advances 652 1 708
Total equity and liabilities 7 244 9 812
Capital expenditure incurred in current period 138 136
Capital commitments at end of period 73 64
Lease commitments at end of period 774 1 046
Payable within one year 137 196
Payable after one year 637 850
Abridged consolidated cash flow statements
Reviewed Audited
period ended year ended
(R million) 28 Feb 2003 31 March 2002
EBITDA 182 846
Loss on disposal of plant and equipment 7 1
Non-cash items - unrealised foreign exchange
losses/(gains) 45 (95)
Cash generated before working capital changes 234 752
Working capital changes 992 1 299
Decrease in inventories 113 1 611
Decrease in receivables 267 754
Increase/(decrease) in payables 612 (1 066)
Cash generated from operations 1 226 2 051
Net financing costs paid (20) (96)
Taxation paid (166) (268)
Net cash inflow from operating activities 1 040 1 687
Net cash outflow from investing activities (319) (520)
Net cash outflow from disposal of operations
and investments (19) -
Net cash inflow/(outflow) from financing activities 4 (100)
Increase in cash and cash equivalents 706 1 067
Translation difference on opening cash position 67 (637)
Cash and cash equivalents at beginning of period 168 (262)
Cash and cash equivalents at end of period (*) 941 168
(*) Comprises cash resources net of bank overdrafts
and trade finance advances.
Segmental analysis
Reviewed Audited
period ended year ended
(R million) 28 Feb 2003 31 March 2002
Revenue
Westcon 15 996 15 595
Logical 3 027 3 755
Mason 244 282
Other Holdings 944 886
Revenue from ongoing operations 20 211 20 518
Discontinued operations 11 159
20 222 20 677
EBITDA
Westcon 331 685
Logical 3 75
Mason 26 13
Other Holdings (59) (26)
Datatec Limited foreign exchange (losses)/gains (105) 149
EBITDA from ongoing operations 196 896
Discontinued operations (14) (50)
182 846
Operating (loss)/profit
Westcon 206 586
Logical (64) 12
Mason 20 6
Other Holdings (89) (50)
Datatec Limited foreign exchange (losses)/gains (105) 149
Operating profit from ongoing operations (32) 703
Discontinued operations (17) (57)
(49) 646
DETERMINATION OF HEADLINE EARNINGS
Attributable loss per the consolidated income statements (248) (265)
Headline earnings adjustments (net of taxation and
outside shareholders):
Goodwill amortisation 91 133
Loss on disposal of plant and equipment 5 1
Exceptional items: (53) 80
Loss on disposal and closure of discontinued operations 5 64
Write down of carrying value of investments 5 58
Recoupment of goodwill and trademarks previously
charged to equity (62) (71)
Proposed listing costs - 27
Other (1) 2
Impairment of goodwill 111 397
Headline (loss)/earnings (94) 346
Statement of changes in
ordinary shareholders" funds
Balance at beginning of period 3 823 3 205
Attributable loss (248) (265)
Shares issued 6 164
Deferred tax on goodwill previously charged
directly to equity - 97
Foreign exchange difference on equity loans net of tax (122) 87
Translation of foreign subsidiaries (724) 535
Balance at end of period 2 735 3 823
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 55% interest in
Affinity Logic and an 85% interest in RangeGate (operating in SA and the United
Kingdom ("UK")).
During the period ended 28 February 2003 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, and Nick
Temple was appointed as a non-executive director from 1 October 2002. Robin
Rindel resigned from the Group board with effect from 14 March 2003.
The Group has changed its year-end from March to February in order to align
itself with its major subsidiary, Westcon. Accordingly the financial results for
the period to 28 February 2003 are for the twelve months then ended for Westcon
and an eleven-month period for the rest of the Group.
2. COMMENTARY ON RESULTS
The Group"s financial results for the period ended 28 February 2003 reflected
revenue from ongoing operations of R20,2 billion compared with revenue in the
previous year of R20,5 billion. Operating profit before financing costs,
depreciation and amortisation ("EBITDA") from ongoing operations amounted to
R195,5 million compared with EBITDA in the previous year of R896,0 million. This
decline is largely as a result of the lower margins in the industry which were a
consequence of difficult conditions in the sector, costs associated with
downsizing and restructuring, as expected initial trading losses from the
recently acquired Landis Business Partners ("Landis") operations in Europe and
foreign exchange translation losses at the company level of R104,6 million
(2002: profit of R149,2 million) from the strengthening of the Rand.
Headline loss per share for 2003 amounted to 68 cents compared to earnings of
265 cents for the year to 31 March 2002. Performance expressed in US dollar
terms was substantially better than the Rand reported results.
Gross margins decreased from 14,1% in 2002 to 12,2% for 2003. This decline is
due mainly to the reduction in margins associated with the sales of Cisco
products and a decline in professional service revenue.
Financing costs decreased during the period due to the reduction in both
offshore interest rates and in working capital related debt.
The Group reviewed the value of goodwill carried on its balance sheet at the
end of the period. Goodwill relating to the Comstor division of the Westcon
group was considered to be impaired and an amount of R110,9 million has
accordingly been written off.
Exceptional items of R47,1 million were incurred during the period, related
to the net loss realised on the closure of Logical e-Business and Logical
Strategy and to the recoupment of goodwill and trade names which had been
charged to equity in prior years.
The effective rate of taxation on profit before exceptional items and
goodwill increased from 30,6% for the year in 2002 to 75,2% in 2003. The
effective rate is disproportionate due to the fact that certain subsidiaries
made losses, which will be carried forward for tax purposes, while other
subsidiaries made taxable profits in countries with tax rates equal to or higher
than the South African tax rate. Management has taken a very prudent approach to
recognising deferred tax assets for tax losses arising in 2003.
Cash generated from operations was R1,2 billion and at the end of the period
under review the Group"s balance sheet showed a positive net cash position of
R941,6 million, an improvement of R773,9 million over the prior year.
Amounts owing to vendors represent purchase considerations still outstanding
in respect of acquisitions. During the period the Group settled R222,7 million
of the amounts owing to vendors. These amounts were settled out of the internal
cash resources. At the end of the period, the Group reflected an amount of R61,7
million as owing to vendors, with a further estimated contingent liability of
R34,3 million (2002: R65,3 million) relating to possible future earnout
obligations.
Capitalised development costs have decreased in the period by R40,6 million,
with amortisation amounting to R36,6 million. Costs capitalised during the
period arose largely in Westcon, where an additional R37,1 million was
capitalised in respect of Westcon"s internally developed enterprise resource
planning system known as Compass.
The strengthening Rand resulted in R724,1 million being charged to equity
from translations of investments in foreign subsidiaries. After taking this
effect into account, ordinary shareholders" funds at the reporting date were
R2,7 billion, which represents a net tangible asset value per share of R15,91.
3. DIVISIONAL REVIEWS
3.1 Westcon
Westcon achieved revenue of R16,0 billion ($1,6 billion) for the period
under review compared to revenue of R15,6 billion ($1,7 billion) in 2002, a
decline of 2,6% in dollars, reflecting the weak economic trading conditions.
Gross margins decreased from 10,4% in 2002 to 8,9% for 2003, a decline of 15,0%.
This decline is due mainly to the reduction in global channel margins associated
with sales of Cisco products, the reduction or elimination of margin-enhancing
programmes previously offered by significant vendors and the highly competitive
nature of a contracting market. EBITDA margins reduced from 4,4% in 2002 to 2,1%
in 2003, due primarily to a reduction in gross margins in Westcon"s Comstor
division, which derives a material portion of all its revenue from sales of
Cisco products and R75,8 million ($7,7 million) losses incurred during the
financial year relating to the start up of the businesses acquired from Landis.
Excluding the impact of losses incurred by Landis, EBITDA margins would have
been 2,7% for the period. Operating profits amounted to R205,6 million ($20,9
million) (2002: R586,5 million, $62,8 million).
The Landis transaction was completed on 15 May 2002. It 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. In addition to the
purchase price, costs of $13,5 million were incurred relating to the acquisition
which included legal and accounting costs, travel costs, costs to involuntarily
terminate employees and other exit costs. The amount of goodwill recorded
resulting from this acquisition was R154,4 million ($15,7 million). Landis
achieved revenue of R998,4 million ($101,5 million), generated gross margins of
9,7% and incurred losses of R96,9 million ($9,9 million) in the nine-and-a-half
month period ended 28 February 2003. The operations are expected to achieve
profitability in the year ahead.
Despite the significant cash flow demands created by the Landis
acquisition, start-up of the new businesses and their ensuing working capital
requirements, substantial positive operating cash flows totaling $115,8 million
were generated during the period. These positive cash flows result from a
combination of the cash-basis earnings generated by Westcon coupled with
continuing improvements in working capital achieved by the company"s businesses.
Westcon has fully provided against its remaining Lucent inventory. The
provision now stands at R139,3 million ($17,1 million). Westcon management
believes that Westcon has a meritorious case against Lucent and is continuing
with the litigation.
Westcon"s $225 million revolving credit facility which was due to expire
on 31 December 2002, has been extended until 30 June 2003 at which time a new
syndicated facility will have been put in place. Westcon"s net cash position was
$68,6 million at 28 February 2003 (2002: debt of $39,6 million).
Cisco products contributed 51,7% (2002: 57,2%), Nortel"s products contributed
11,6% (2002: 11,6%), Avaya"s products contributed 11,5% (2002: 11,8%) and the
value products contributed 25,2% (2002: 19,4%) to Westcon"s revenue. The
Americas amounted to 59,6% (2002: 64,8%) and the UK and Europe amounted to 34,7%
(2002: 29,3%) of Westcon"s revenue.
3.2 Logical
Logical achieved revenue from continuing operations of R3,0 billion
($312,4 million) for the period under review compared to revenue of R3,8 billion
($390,0 million) in 2002, a decline of 19,9% in dollar terms, or 13,0% against
comparative periods. This decline was primarily a result of both the weak
economic conditions in the United States of America and uncertainty in the
market following the HP/Compaq merger. In addition, the uncertainty over Iraq
impacted the last four months of the financial year. The impact of the Peso
devaluation in Argentina contributed 3,5% of the overall 19,9% revenue decline.
Gross margins from continuing operations decreased from 24,9% in 2002 to 23,5%
in 2003 principally a result of a decline in professional services utilisation
and lower annuity services margins. In addition, pressure remained on product
margins, particularly for Cisco products. Year-on-year product sales were down
20,2% and sales of professional services declined 5,4%. On the positive side,
Logical achieved its goal of growing annuity revenue, with sales of maintenance
and managed services up by 25,0%.
During the period Logical closed two UK subsidiaries, Logical e-Business
Solutions Limited and Logical Strategy Limited. These disposals removed two non-
core businesses and a source of loss for Europe (losses before tax of R42,2
million ($4,4 million) were incurred for the period).
In order to diversify its product portfolio and to reduce dependency on Cisco
and HP, Logical acquired the assets and business of an IBM reseller in New
Zealand in November 2002.
The focus on Cisco for networking products and on HP for servers will be
maintained, but partnerships with new vendors and broadening the offerings in IT
systems (servers and storage) are planned in the markets where Logical is
currently networking centric.
EBITDA from ongoing operations amounted to R2,9 million ($0,30 million)
for the period when compared to R74,8 million ($7,8 million) for 2002 and
operating losses amounted to R64,6 million ($6,7 million) (2002: profit of R11,9
million, $1,2 million). The benefit of a continued focus on streamlining the
businesses with lower revenue was reflected in a significant reduction in
operating expenses, with costs of R708,3 million ($73,1 million) down 18,6% on
the previous year. The restructuring and reorganisation activity resulted in
costs of R34,9 million ($3,6 million), primarily for targeted head count
reductions, included in operating expenses.
Significant emphasis remained on the management of working capital.
Logical"s net cash position was $16,2 million at 28 February 2003 (31 March
2002: $16,0 million). Management is working to increase revenue while continuing
to focus on reducing operating expenses in order to improve profitability in the
prevailing difficult economic environment.
3.3 Mason
Mason achieved revenues of R243,8 million (GBP16,2 million) during the
period under review compared to R281,6 million (GBP20,4 million) in 2002. EBITDA
increased from R13,3 million (GBP1,0 million) in 2002 to R26,2 million (GBP1,8
million) for the current period and operating profit amounted to R19,9 million
(GBP1,3 million) (2002: R5,7 million, GBP0,4 million).
The difficult market conditions experienced during 2002 continued into
2003. The telco and service provider sectors continued to suffer from depressed
share prices and low profits, curtailing capital projects and thus spending on
consultancy. The UK 3G operators have continued to deploy their networks but at
a slower pace and with a lower requirement for consultancy. The UK Government
sector, however, has benefited from increased spending. In response to these
market changes, Mason has successfully repositioned its business to focus less
on telecommunications operators and more on the enterprise users. In 2001, the
telco sector represented 65% of revenue, compared to less than 30% in 2003.
The overall market remains tentative and there are no signs of a recovery
in the coming year. The company has however proven its ability to rapidly
respond to changing market conditions and this will sustain it in the future.
Mason is in an excellent position to continue its growth and geographic
expansion when market conditions improve.
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. Revenue for the period grew 8,5% to R772,8
million (2002: R712,6 million), which was substantially below expectation.
Operating results reduced to a loss of R5,2 million (2002: profit of R29,0
million), due to margin pressure from the appreciation of the Rand, a policy of
taking forward cover on foreign denominated liabilities, as well as weak market
conditions. Substantial reductions in costs have been, and are being,
implemented. Management has re-organised the SA operations into a far leaner
product-focused company, with non-core activities being outsourced. The
refocusing of the product range has been positive and should lead to reduced
stockholding, enabling the company to weather the depressed market conditions
and benefit from any upturn. Dubai-based OnLine Distribution continues to
perform exceptionally well.
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. Affinity Logic reported an
operating loss of R24,0 million (2002: R10,9 million) on revenue of R106,7
million (2002: R90,6 million).
The financial results have been significantly impacted by the demise of a
large client, CNA. Management has worked hard to minimise the financial impact
of this and continued focus on service delivery has resulted in opportunities to
serve the new owners of CNA.
If one excludes the impact of CNA, results show a growth in sales of 15%
and a R4 million improvement in operating performance over last year. The core
operations of Affinity Logic are profitable. The company continues to generate
positive cash flows from operations.
The market will remain tough for the next eighteen months. Accordingly,
the business will focus on cost management and organic growth in 2004.
In November 2002, Wooltru"s stake in Affinity Logic was acquired by management
and Datatec, increasing the Group"s shareholding from 47,5% to 55,2%, with the
balance held by management and Massmart.
RangeGate
RangeGate, located in SA and the UK, represents the Group"s mobile
technology systems integration business and provides mobile solutions to sectors
such as retail, industrial, manufacturing and transport and logistics.
Revenue for the period amounted to R65,6 million (2002: R83,4 million) and
operating losses amounted to R19,1 million (2002: R22,7 million). Accordingly,
substantial reductions in costs have been implemented. Management has
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 IT, networking and telecommunications industries have experienced a
period of sustained contraction. Vendors, intermediary suppliers and service
organisations have seen a marked contraction in the levels of business and
staffing numbers previously reported. The Group believes that in the medium term
performance should improve relative to the most recent reporting periods.
However, business confidence indicators are mixed and world economic recovery
remains uncertain.
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 are consistent with those of the previous
accounting period, other than the inclusion as an exceptional item in the income
statement of the recoupment of goodwill previously charged directly to equity.
Such recoupment was previously credited directly to equity and comparative
figures have been restated accordingly. Furthermore, the deferred tax benefit of
goodwill previously charged directly to equity has now been recognised as a
credit to equity and the comparative balance sheet has been restated
accordingly.
The financial information has been reviewed by Deloitte & Touche whose
unqualified review report is available for inspection at the Group"s registered
office.
6. FURTHER CAUTIONARY ANNOUNCEMENT
Further to the cautionary announcement dated 30 April 2003, Rand Merchant
Bank is authorised to advise shareholders that negotiations are still in
progress, which, if successfully concluded, may have an effect on the price of
Datatec"s ordinary shares. Accordingly, shareholders of Datatec are advised to
continue to exercise caution when dealing in their shares until a further
announcement is made.
7. DIVIDENDS
Until the Group returns to profitability, it is not considered appropriate 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
21 May 2003
Sponsor:
Rand merchant Bank
A division of FirstRand Bank Limited
Corporate finance
Directors: L Boyd* (Chairman), J P Montanana# (CEO), C B Brayshaw*, M Karpul*,
J F McCartney*+, D B Pfaff, 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: 21/05/2003 07:55:14 AM Supplied by www.sharenet.co.za
Produced by the JSE SENS Department
