| Tue 18 Nov 2003, 8:25 | | PRELIMINARY RESULTS FOR THE YEAR ENDED |
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DIMENSION DATA HOLDINGS PLC - PRELIMINARY RESULTS FOR THE YEAR ENDED
30 SEPTEMBER 2003
DIMENSION DATA HOLDINGS PLC
ISIN: GB0008435405
JSE Share code: DDT
PRELIMINARY RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2003
Dimension Data Holdings plc ("Dimension Data" or the "Group"), a leading global
technology Group, announces its results for the year ended 30 September 2003.
FINANCIAL RESULTS
* Total turnover of $2,100.3 million (2002: $2,187.3 million)
* Total operating loss before goodwill amortisation and exceptional items
$9.0 million (2002: Profit $45.4 million)
* Net loss on ordinary activities before goodwill amortisation and
exceptional items $36.3 million (2002: Profit $30.1 million). Total loss
$420.3 million (2002: $2,583.9 million)
* Basic loss per share before goodwill amortisation and exceptional items 2.7
cents (2002: Earnings 2.3 cents). Basic loss per share 31.3 cents (2002:
198.9 cents)
* All operating regions other than the US were profitable at the operating
level
* Positive cash flow from operating activities of $51.2 million (2002: $29.0
million)
* Cash at bank and in hand and short term investments $385.7 million (2002:
$415.4 million)
ABRIDGED PROFIT AND LOSS ANALYSIS
(Before goodwill amortisation, impairment and exceptional items)
Year ended Year ended
30 September 2003 30 September 2002
$"000 $"000
Turnover
Group turnover 2,014,795 2,120,562
Associates 85,464 66,769
Total turnover 2,100,259 2,187,331
Operating (loss)/profit before
goodwill amortisation
and exceptional items (14,886) 40,962
Share of operating profit in
associates 5,874 4,464
Total operating (loss)/profit
before goodwill
amortisation and exceptional items (9,012) 45,426
Investment income 3,634 1,340
Net interest (payable)/receivable (1,369) 2,604
(Loss)/profit before taxation (6,747) 49,370
Taxation (27,737) (13,461)
(Loss)/profit after taxation (34,484) 35,909
Equity minority interests (1,781) (5,809)
(Loss)/profit for the year before
goodwill
amortisation and exceptional items (36,265) 30,100
US cents US cents
Basic (loss)/earnings before
goodwill amortisation
and exceptional items per ordinary
share (2.7) 2.3
Year ended Year ended
30 September 2003 30 September 2002
$"000 $"000
Reconciliation to consolidated
profit and loss account
(Loss)/profit for the year before
goodwill
amortisation and exceptional items (36,265) 30,100
Goodwill amortisation - subsidiaries (344,415) (719,949)
Goodwill amortisation - associates (1,724) (4,331)
Net exceptional items (37,887) (1,889,710)
Loss for the period as presented in
the consolidated profit and loss account (420,291) (2,583,890)
GEOGRAPHICAL ANALYSIS
Year ended Year ended
30 September 30 September
2003 2002
$"000 $"000
Turnover
Africa 365,428 292,866
Asia 328,725 404,908
Australia 380,526 364,609
Continental Europe 382,123 360,774
United Kingdom 205,918 193,652
United States 346,051 503,753
Other* 6,024 -
Group 2,014,795 2,120,562
Associates 85,464 66,769
Total 2,100,259 2,187,331
Operating (loss)/profit**
Africa 5,413 20,027
Asia 2,187 16,961
Australia 12,431 10,188
Continental Europe 6,220 18,691
United Kingdom 11,010 8,644
United States (17,058) (9,021)
Other* (35,089) (24,528)
Group (14,886) 40,962
Associates 5,874 4,464
(9,012) 45,426
Goodwill amortisation (346,139) (724,280)
Operating exceptional items (38,463) (1,904,767)
Total operating loss (393,614) (2,583,621)
Operating margin**
Africa 1.5% 6.8%
Asia 0.7% 4.2%
Australia 3.3% 2.8%
Continental Europe 1.6% 5.2%
United Kingdom 5.3% 4.5%
United States (4.9%) (1.8%)
Group (0.7%) 1.9%
Associates 6.9% 6.7%
Total (0.4%) 2.1%
* Comprises Investment holding and management and Protocol
** Before goodwill amortisation, impairment and exceptional items
GROUP TURNOVER ANALYSIS BY SERVICE OFFERINGS
Year ended
30 September 2003 Africa Asia Australia
$"000 $"000 $"000
Product 123,062 202,268 282,109
Managed services* 175,815 67,035 44,173
Professional services 72,575 59,422 54,244
Group 371,452 328,725 380,526
Year ended United United
30 September 2003 Europe Kingdom States Total
$"000 $"000 $"000 $"000
Product 234,001 65,558 252,546 1,159,544
Managed services* 93,450 93,252 25,781 499,506
Professional services 54,672 47,108 67,724 355,745
Group 382,123 205,918 346,051 2,014,795
Year ended
30 September 2002 Africa Asia Australia
$"000 $"000 $"000
Product 101,654 250,148 284,166
Managed services* 95,107 54,739 48,603
Professional services 96,105 100,021 31,840
Group 292,866 404,908 364,609
Year ended United United
30 September 2002 Europe Kingdom States Total
$"000 $"000 $"000 $"000
Product 236,229 80,060 367,049 1,319,306
Managed services* 71,902 70,134 12,749 353,234
Professional services 52,643 43,458 123,955 448,022
Group 360,774 193,652 503,753 2,120,562
* Being process driven revenues of a recurring nature.
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 September 30 September
2003 2002
Currency Average Period Average Period
end end
South African rand 7.484 7.102 10.606 10.560
Australian dollar 1.526 1.476 1.850 1.841
Sterling 0.613 0.600 0.664 0.641
Euro 0.879 0.862 1.059 1.019
Key Points
* Good cash generation from operations, notwithstanding the trading loss,
utilised to further the evolution of Dimension Data"s business model.
* Strong cash balance, a competitive advantage.
* Improved strategic focus and competitive position:
** Re-emphasis of strategic importance of core Network Integration
business and focus on enhancing efficiencies
** Narrower focus on key business areas:
*** Network Integration
*** Application Integration
*** Platform Solutions
*** Customer Interactive Solutions
*** Security Solutions.
* Good progress in building Dimension Data brand evidenced by quality large
multinational and global customer wins.
* Progress in standardising offerings and execution capabilities globally.
* Results impacted by US dollar weakness average SA rand, Australian dollar
and Euro strengthened by 42%, 21% and 20% respectively against the average
US dollar rate over the year.
* Total revenues declined by 16% year on year in constant currency terms, and
sequentially by 7% in the second half of the year.
* Traction in demand for managed services and increased contribution from
higher value services.
* Further progress in realigning cost base to the lower demand environment,
with overheads down by 14% year on year in constant currency terms.
* Strong improvement in profitability ratios in UK and Australian businesses.
* Turnaround plans implemented in Asia and the US are delivering results.
* Poor second half performance from African business, which has been
addressed.
* Evidence of stabilisation in demand and pricing environment in the second
half of the year.
CHAIRMAN"S STATEMENT
Introduction
The year under review has been characterised by continuing challenging global
trading conditions. Dimension Data has responded by improving our strategic and
operational focus, enhancing the management team and delivery capabilities, and
further cutting costs whilst maintaining investment in the evolution of our
business model.
At the start of fiscal year 2003, Dimension Data embarked on a programme of
standardising the way we operate across the globe. The DD Way, our internal
change programme, forced us to examine and better understand what drives our
organisation internally. It was also the catalyst for a focus on transitioning
the Group into a more customer centric, outward looking organisation. This has
resulted in a marked improvement in the way in which Dimension Data engages with
customers, suppliers and staff.
This external focus on our customers, combined with the standardisation of our
delivery capabilities globally, has reinforced the Dimension Data brand as a
global provider of managed and professional services. The growing recognition of
Dimension Data"s brand and the Group"s capabilities is reflected in the quality
of our business wins over the past year. These include new contracts with
several well known global customers, such as Allianz, Airbus and a leading
global courier company. Enhanced offerings and strong customer relationships
have also enabled us to penetrate our existing customer base further as
evidenced by clients such as HSBC and a global pharmaceutical company, where we
significantly extended the scope of existing contracts.
Globalisation has seen many of our customers evolve from decentralised regional
operations into centralised global businesses. Customers increasingly prefer
dealing with IT partners who offer global solutions and services that help
maximise return on their investments. This trend has contributed to the
consolidation we have seen in the IT industry in the past year. In this
environment, our global footprint is vital to our customer engagement strategy.
It allows us to service our global customers locally and to understand and
capitalise on their IT strategies. In addition, we are increasingly working with
key alliance partners such as Cisco and EMC to understand the IT requirements of
their global customer base.
Period Under Review
Convergence of IT environments continues to fuel our Application Network vision.
Further progress has been made in improving the competitive position of the
business by refining our solution sets and tightening our focus on five focused
lines of business Network Integration, Application Integration, Platform
Solutions, Customer Interactive Solutions and Security Solutions.
We forged closer relationships with key vendors and continued to invest in
solution sales and delivery capabilities.
The challenging economic environment during the year forced us to take a
critical look at both our skills sets and management capabilities. The
significant personnel changes that we have made over the past 18 months, which
have seen key new appointments made in a number of regions, have resulted in a
broader and stronger management team, an improved skills base and a better
ability to sell and deliver services and solutions.
We have also focused on improving efficiencies in our core Network Integration
business in recognition of the fact that products will always form a key part
of our solutions offering. This being said, we remain committed to our target
to grow our services offering to more than 50% of turnover in the medium term.
After a number of years of pressure on product margins, some pricing stability
started to emerge in the second half of the year. However, services margins,
whilst still significantly more attractive than product margins, have come
under pressure, largely due to lower demand and an oversupply of skills.
Given the highly competitive trading and price environment, the process of
aggressively addressing our cost base continued in the period under review.
Over the year we cut costs in constant currency terms across all regions
although due to the fact that we report in US dollars, this is not apparent in
our financial results. The SA rand, Australian dollar, Euro and Sterling
foreign exchange rates strengthened against the average US dollar rate by 42%,
21%, 20% and 8% respectively over the year. The benefits of the cost cutting
measures taken have yielded very pleasing results in the UK and Australia where
profitability ratios improved significantly year on year.
The South African business reported a disappointing performance in the second
half of the year. Profitability was negatively impacted by lower volumes in the
Application Integration and Service Provider businesses as well as by the
strength of the SA rand which had the effect of reducing margins in dollar
based contracts. Management has addressed key internal issues and is focused on
improving profitability in 2004.
The turnaround plans in both our Asian and US businesses yielded satisfactory
results in the second half. With evidence of a stronger business outlook in
both of these regions, we are confident that profitability will continue to
improve in the new financial year. Although we have a small share of the US
market, we remain committed to our presence there and see it as vital to be
able to service multinational and global customers, many of whom have head
offices in the US.
A highlight of the year was the improvement in the Group"s balance sheet and
cash position. Strong cash generation in the second half of the year reversed
the cash consumed in the first half and for the year as a whole, the Group
generated operating cash of $51 million. Our cash position of $358 million at
year end is a competitive advantage of the Group.
Corporate Governance
We are pleased to be able to report that we have dealt with the majority of the
Corporate Governance recommendations raised by the King II Code on Corporate
Governance in South Africa and the Revised Combined Code in the UK. We remain
committed to addressing any outstanding issues and will keep our stakeholders
informed of progress. Dimension Data South Africa is committed to Black
Economic Empowerment as an economic and business imperative. It is a vital
initiative that will benefit both the South African economy and the Group
locally and substantial progress continues to be made in achieving the targets
set out by the Group"s internal black empowerment programme. We believe that by
transforming our South African business and meeting the Black Empowerment
Equity ownership criteria, we will enhance business opportunities and our
competitive positioning going forward.
Outlook
Following the realignments and rationalisations of the past two years,
Dimension Data is now well positioned to compete within the current economic
environment. Our key differentiator remains our ability to provide cost
effective Application Network solutions to our customers across a global
footprint. We have made good progress in building the Dimension Data brand and
in building quality, long term customer relationships. This is evidenced by the
quality of new business, particularly in the second half of the year. Going
forward we will maintain our tight focus on financial management, with a
specific emphasis on working capital management.
Whilst customers remain cautious about committing to new IT spend and focused
on extracting returns from current IT investments, there was evidence in all
regions that the demand cycle and technology-pricing pressures have stabilised.
Whilst we are not factoring any strong improvement in demand into our 2004
budgets, Dimension Data is now better placed to win market share due to a
tighter strategic focus, improved sales and delivery capabilities and strong
vendor relationships.
Thank You
We will be notifying shareholders in a separate announcement that Bob Mansfield
has resigned from the Board with effect from 17 November 2003, due to work
commitments. I would like to take this opportunity to thank Bob for his
significant contribution as a Director of Dimension Data and Datacraft Asia
over the last three years.
I would also like to welcome Dillie Malherbe a director of VenFin Ltd, who are
the holders of the convertible bonds, who has agreed to join our Board as a
non-executive director with immediate effect.
Finally, I would like to thank all of our customers, partners and friends for
their continued support. Everybody working at Dimension Data has been through a
tough period and we all look forward to better trading conditions.
The Company has emerged in a far healthier state as a result of the direct
input and performance of all involved.
Jeremy Ord
Executive Chairman
Enquiries:
Dimension Data Holdings plc
Jeremy Ord,
Executive Chairman
Malcolm Rutherford,
Chief Financial Officer
Karen Cramer,
Investor Relations (UK)
Mobile: +(44) 793 202 0296
Office: +(44) 20 7651 7000
karen.cramer@uk.didata.com
Bronwyn Nielsen,
Investor Relations (SA)
Mobile: +(27) 83 296 6910
Office: +(27) 11 575 0000
bronwyn.nielsen@za.didata.com
Internet address: www.didata.com
Brunswick Group
Tom Buchanan
+(44) 20 7404 5959
Note:
All references to $ are to US$
All references to gross and operating margins are before goodwill amortisation
and exceptional items
H1 2003 refers to the six months ended 31 March 2003
H2 2003 refers to the six months ended 30 September 2003
Changes between H1 2003 and H2 2003, where appropriate, are referred to as
sequential comparisons.
REGIONAL REVIEW
Operational Review
The year under review was characterised by continuing tough market conditions.
Our customers continued to demonstrate a preference for enhancing existing IT
systems rather than embarking on new investments. Much of our focus has
therefore been directed in the area of improving customer returns on existing
technology. The difficult trading environment was exacerbated by little IT
innovation and the perception that both technology and technical expertise have
been commoditised.
The Group"s revenue performance should be seen in the context of US dollar
weakness against the currencies in which we operate. US dollar revenues
declined by 4% year on year and increased sequentially by 7% in the second half
of the year. In constant currency terms, however, revenues declined by 16% year
on year and by 7% sequentially in H2 2003.
Gross margins improved slightly in the second half of the year and a continued
focus on matching the cost base to the current trading environment resulted in
further reductions in overheads of 14% in constant currency terms over the
year. Overall, the Group reported a second half operating loss of $4.5 million,
which is in line with the loss reported in the first half. With the exception
of Africa, all other regions reported improved operating contributions in the
second half of the year.
Africa
Good revenue growth of 25% in US dollars masked difficult market conditions
particularly in the second half of the year. The results should be seen in the
context of the 42% appreciation in the average SA rand foreign exchange rate
over the year. In constant currency terms revenue declined by 12% year on year
and sequentially by 17% in the second half of the year.
After a solid first half, the performance of the African business deteriorated
in the second half of the year due to lower volumes, particularly in the
Application Integration and Service Provider businesses. This was exacerbated
by the strong appreciation of the SA rand, which impacted margins on dollar
denominated contracts. Higher overheads also contributed to the deterioration
in profitability in the second half of the year although overheads in the
second half did include items of a non-recurring nature. Overheads in constant
currency terms were cut by 7% year on year and overcapacity in the services
business drove a 20% reduction in headcount. Internet Solutions achieved a
strong performance and grew market share in the corporate Internet services and
virtual private network space.
Several major services-led deals were won, many outside the core financial
services and telecommunications markets, traditionally the stronghold of
Dimension Data South Africa, reflecting the successful penetration into new
vertical markets. The outsourcing business, which capitalises on Dimension
Data"s GSOA services framework, was significantly extended in 2003. Notable
wins included a $1.4 million Managed Services contract with Sappi for the
desktop, server and LAN switching environments and a five year $6.4 million
outsourcing and Insite contract with Macsteel International to provide a
locally hosted SAP solution, international VPN connectivity as well as a hosted
calldesk.
Significant deals were signed with Afrox Healthcare to provide a range of
product, managed, hosting and security services, and with AngloGold and Metal
Industries Benefit Funds Administrators where Teamsource contracts were entered
into. A three year network migration and managed services contract was signed
with Toyota South Africa. Major telecommunications infrastructure rollouts were
won in conjunction with associate Plessey from Sentech in South Africa and MTN
in Nigeria.
Notwithstanding the disappointing second half result, the African region
remains Dimension Data"s flagship with good solutions offerings, substantial
market presence and long term customer relationships. Management changes have
been made and an aggressive plan to return the business to profitability is in
place. Current forecasts indicate that the trends established in Q3 and in the
early part of Q4 have been reversed and Africa is likely to show good profits
in the current quarter. Market share gains are being driven by focused business
units with dedicated sales forces.
Asia
Trading conditions in most countries in which Datacraft Asia (`Datacraft")
operates remained challenging. Demand from the enterprise and telecom service
provider sectors was subdued in the face of continuing economic uncertainties,
exacerbated by the SARS outbreak that was at its height in the third quarter.
Revenues declined by 19% year on year. Some stability started to emerge in Q4
resulting in a slowing in the rate of revenue decline to 3% sequentially in the
second half of the year. Gross margins came down to 15.7% from 18.3% in 2002
due largely to a reduction in business volumes. However, actions taken to
improve utilisation levels combined with an easing of pricing pressure on
product margins saw margins improve in the second half of the year.
The rationalisations and restructurings that were a feature of the period are
now largely complete. Overheads were reduced by 14% and headcount came down by
24%. Higher gross margins and a 10% sequential decline in overheads resulted in
an improved operating contribution of $2.2 million in the second half of the
year compared to break even in the first half. The year also saw the sale of
Datacraft"s Cabling business and the rationalisation of the iCommerce
operations, which are now fully integrated into the core Network Integration
business. An improved balance sheet, a successful focus on working capital
management and strong cash generation are further highlights of the period
under review.
Operating performances across the region were mixed. India continued to move
from strength to strength benefiting from good demand in the financial services
sector and for call centre integration services. Japan returned to
profitability in H2 2003 and China is showing signs of recovery with narrowing
losses over three straight quarters. In Korea, the restructuring exercise
enabled the business to substantially reduce losses year on year.
Customers responded well to Surveyor Secure, a vendor-independent security
assessment and risk management service that adds a consulting layer to
Datacraft"s security integration and outsourcing offerings.
During the year, over 30 Surveyor Secure deals were signed, thanks to
Datacraft"s precise methodology and partnerships that enable customers to
manage diverse network security and liability exposure. There were pockets of
good demand for VoIP and OSS/BSS solutions from the Service Provider customers.
A highlight of the year was winning a 40 month, $8 million managed services
annuity contract for Citigroup, to provide Uptime maintenance support services
in 15 territories across Asia Pacific on a 24 x 7 basis. A further highlight
was securing phase 2 of the contract with State Bank of India (`SBI"), valued
at $29 million, to implement SBI"s nation-wide corporate backbone and connect
its associate banks, networking branches, ATMs and other electronic delivery
channels.
Following the announcement of a strategic relationship with EMC, Datacraft
launched a range of networked storage solutions and related services. The
company also launched a set of Customer Interactive Solutions (CIS) to
capitalise on the customer contact centre boom in India and elsewhere in the
region. A new partnership with Microsoft was entered into, as part of the Group
initiative, to be one of Microsoft"s global system integration partners
offering solutions built around its .NET strategy.
The mood going into 2004 is more optimistic than it was six months ago. The
rationalisations are now largely complete and encouraging signs of improving
demand emerged in the fourth quarter based on monthly order rates and a growing
backlog. In 2004, Datacraft will remain focused on growing contributions from
Solutions and Services and on building and leveraging off the Cisco partnership
and the newly established relations with EMC and Microsoft.
Australia
The Australian business achieved a pleasing improvement in profitability in an
environment characterised by lower corporate and government spending. Reported
US dollar revenues grew by 4% supported by a strong Australian dollar. In
constant currency terms, revenues declined by 14% reflecting the overall market
decline as Dimension Data Australia maintained its leading market position.
In the second half of the year, which is seasonally a better period than the
first half, constant currency revenues increased sequentially by 13% on H1
2003. Good growth was achieved in the Network Integration business where a
number of large new contracts were closed and the Platform business benefited
from good demand for upgrades to Microsoft 2003.
Continued focus on `leading with value-add services" saw the gross margin
improve slightly on the prior year. A sharp focus on cost containment, mainly
through headcount reductions resulted in fixed overheads coming down by 15% in
constant currency terms over the year. The result was a pleasing improvement in
net operating margins to 3.3% from 2.8% in FY2002. Cash generation improved
over the year due to improved profitability and lower capital spending.
In a tough year a number of important foundations for future success were
established. In response to changing market demand and in support of our
Application Network Solutions vision, focused investments were made in
Professional Services and in developing services designed to ensure early
engagement in the customer planning and deployment lifecycle. Increasingly
strong `consultative customer relationships" were established through
engagements with WebCentral and Education Queensland.
The Security business, a new initiative, was well received by the market and
benefited from a focus on risk and policy advisory services that led to strong
downstream technology engagements, including a major deployment with
Australia"s premier media group, Publishing & Broadcasting Limited. New
strategic IT consulting initiatives created good pull through business across
the board.
Managed Services performed well in a period of significant customer price
sensitivity and competitive pressure. Managed Services contracts were signed
with Transaction Solutions and Coca-Cola Amatil.
Strengthening local vendor relationships with Microsoft and Cisco resulted in
improved market share. The impact of global initiatives and more effective
local engagement with Microsoft and EMC drove an improved performance from our
Application Integration business. The distribution business, Express Data was
appointed one of two strategic partners to Cisco where previously there were
three, which is expected to translate into market share gains in the new
financial year.
Other customer highlights of the year include a three year $1.3 million IP
convergence contract with Lend Lease Corporation, a three year $1.6 million
Uptime and professional services contract with Department of Employment and
Workplace Relations, a $2.5 million professional services and CIS contract with
Telstra and a $2.5 million IPT solution with Westpac which includes advanced
voice mail, unified messaging, computerised phone directory and web based
configuration.
Despite market expectations for slowing GDP growth in Australia in 2004,
Dimension Data expects to grow revenues in the new financial year through
increased solutions penetration of our existing client base. The focus remains
on improving the contribution from Professional and Managed Services through
more effective alignment of our capability against changing customer lifecycle
requirements, and on trimming the cost base.
Europe
The performance of the European business was impacted by ongoing difficult
market conditions and pressure on IT spending. Reported revenues increased by
6% over the year, benefiting from the weakness of the US dollar.
In constant currency terms revenues declined by 12% year on year and
sequentially by 9% in the second half of the year.
Pressure on margins in the network integration business was in part compensated
for by penetration into the new growth sectors of security, customer
interactive solutions and managed services as well as good traction in demand
for professional services.
Further progress was made in streamlining the European business, particularly
in the second half of the year when overheads came down sequentially by 12%.
Comprehensive turnaround plans were implemented during the year in both Germany
and France to drive revenue growth, improve our value proposition and reduce
costs.
A new CEO has been appointed in Germany and a new French management team drove
increased sales in H2 2003, reaping the benefits of a better customer
engagement strategy. The Netherlands, Belgium, Luxembourg and Italy were the
strongest performers.
The business benefited from a strategy of engaging key accounts with specific
solution offerings. Bids with a number of large, multinational customers, were
aided by streamlined processes and international sales efforts.
A three year, multi million dollar, multi country security and Uptime contract
was signed with Airbus. A successful focus on the pharmaceuticals industry
resulted in a three year, $4 million contract with Merck KG for product
procurement and related services, and a multi year framework agreement with the
European Agency for the Evaluation of Medicinal Products, for product
procurement, professional and support services. In the aeronautical sector we
won a three year, $1.2 million contract with EADS Astrium to provide a VPN
managed solution across France, Germany and the UK.
The economic outlook is improving and some pricing stability is apparent as we
enter the new financial year. Whilst visibility remains short and spending in
the German market is still on hold, elsewhere the demand cycle appears to have
bottomed. We expect to capitalise on the focused vertical sales engagement
model and enhanced ties with partners such as Microsoft and EMC in the new
financial year. The business is operationally in better shape and there is good
scope to improve the profitability of our biggest revenue contributor, Germany.
United Kingdom
The UK business made excellent progress in a troubled integrator market in
transitioning to a more focused and profitable business model. Demand for IT
services remained under pressure during the period under review, and whilst US
dollar revenues increased by 6% year on year, in constant currency terms, they
declined by 2%.
The performance of the UK business benefited from changes implemented in the
prior period. A new CEO and management team improved focus and succeeded in
growing Managed and Professional Services revenue by 24% year on year.
Dimension Data"s market position and delivery capabilities were enhanced
following a realignment of the skills base towards skills able to sell and
deliver solutions. Good progress was made in building long term relationships
with blue chip customers and experience gained in winning and delivering on
global accounts proved invaluable in tendering for further global contracts.
Significant progress was made in reducing overheads, which came down by 21% in
constant currency terms over the year. This resulted in a sharp improvement in
profitability over the prior year and operating margins reaching 6.9% in second
half of the year.
The UK"s market offerings were extended over the year to include Content
management, Voice Activated Solutions, Storage and IPCC. We won new business
from a large UK mobile operator in the content management and voice activated
solutions space and won a $7 million Cisco product, services and IPCC solution
contract with Streamdoor. Improved delivery capabilities resulted in better
profitability in the Advanced Infrastructure business where building service
solution contracts were won from Lime Street Development, Warwick University
and Swiss Re.
The Merchants Group, the UK"s managed call centre business was restructured
during the period under review and continues to provide global outsourcing
solutions through call centres in Scotland, Ireland, England and South Africa.
Significant success was achieved in onshore, nearshore and offshore solutions
and several large contracts, including deals with Unilever and Edexcel, that
will benefit 2004 revenues, were awarded late in the year.
Entering the new financial year there is evidence of an increasing propensity
for customers to plan new projects but as yet, this is not translating into
orders. Whilst we are not anticipating a strong pick up in demand, geographic
expansion into Northern England and Scotland is expected to drive revenue
growth in 2004. We also see opportunities in targeting medium sized enterprise
customers and in winning government business. Vendor relationships are strong
and opportunities are emerging to target customers in joint engagements. The
investment made in enhancing offerings in the areas of Storage, Security,
IPC/IPT and Call Centre Integration is also expected to bear fruit.
USA
Continuing difficult trading conditions for most of the year in North America
resulted in a 31% decline in revenue and an operating loss for the period. The
decline in revenues reflected volume contractions in both the Network
Integration and Application Integration businesses.
The performance of the Network Integration business was affected in the North
East by a sharp decline in IT spending from our primary financial services
customer base. A significant contributing factor to the decline in revenues was
the loss of a technology deployment contract, which contributed $80 million in
the previous financial year. Second half performances in our businesses in the
South East and mid Atlantic improved, and both businesses broke even.
Gross margins continued to come under pressure over the year, particularly in
the Application Integration business due to the structural degradation of this
market, the shift to offshore resources, and an oversupply of technical
resources. Utilisation levels in Managed Services improved following good
demand and the business was profitable from June onward.
An aggressive turnaround plan was implemented during the year that focused on
reversing declining revenues, matching costs to market conditions and returning
the business to profitability. Overheads came down by 36% year on year and
headcount declined by 33%. The US business exited the year profitable at the
operating profit level in the month of September.
The US region benefited from the Group"s global capabilities and was able to
win several new Fortune 500 customers. A highlight of the year was the signing
of a three year multi million dollar global contract with a leading global
courier company to supply technology and related professional services in 231
countries.
The Network Integration business was awarded a five year, $10 million WAN
Management contract by the Administrative Office of the United States Courts
under Dimension Data"s contract with the US General Services Administration. In
the Application Integration business we won contracts with the likes of
Volkswagen to design the next generation of VW.com and with another global
automotive company to design, develop, host, deploy and maintain a vehicle
inspection website.
Our market offerings evolved to include several key initiatives. Our leasing
offering provides clients the opportunity to lease software, services and
maintenance as a single solution. Dimension Data"s Health Alert Network
Solution is gaining traction and five states, in addition to the City of New
York Department of Health and Mental Hygiene, have selected the portal solution
to help combat bio-terrorism and the spread of infectious diseases. We achieved
further penetration of the storage market along with closer ties with EMC, and
numerous wins in IPT/IPCC made us one of Cisco"s top service providers. Our
digital publishing offering, which was previously marketed to the publishing
industry and sold to such organizations as Harvard Business School Publishing,
will be packaged and offered across verticals in the new financial year.
The focus in the new financial year will be on increasing revenues through
driving improved market penetration in our core Network Integration business,
increased sales focus in growth areas such as Storage, Security and IPCC and
leveraging off enhanced vendor relationships with Cisco, EMC and Microsoft.
Trading in the third quarter was poor but there was an improvement in demand in
the fourth quarter. Technology pricing appears to have bottomed in the second
half of the year and improved scale and utilisation should underpin services
margins.
Protocol
Protocol Venture Capital, established in 2001 as Dimension Data"s Business
Development Fund, has as its objective the establishment of strategic joint
ventures that enhance relationships with suppliers and clients and foster new
entrepreneurial businesses complementary to the Group"s existing business.
Protocol had a quiet year from a portfolio activity perspective with efforts
focused primarily on the growth of existing investments. In this regard there
was pleasing progress, with some strong performances from a number of portfolio
companies. No new investments were made, one investment was exited and two
others were written down to zero, with no additional or contingent funding
commitments, bringing the total investments under active management at year end
to 17. At year end Protocol"s investments were valued at $16.9 million,
compared to $17.7 million at 30 September 2002.
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 2003 financial
statements are consistent with those applied in the previous year.
Group Operating Performance
The weakness of the US dollar against the basket of other currencies in our
territories was significant. The average SA rand, Australian dollar, Euro and
Sterling strengthened against the average US dollar rate by 42%, 21%, 20% and
8% respectively over the year.
There have been no material changes to the Group structure compared to prior
periods.
Turnover
Total turnover including associates was $2,100.3 million (2002: $2,187.3
million). There were no major changes in the geographical mix of turnover. The
weakness of the US dollar masks a decline in revenues of 16% in constant
currency terms over the prior year.
Pleasing progress was made in the provision of Managed Services, which
increased by 41% to $499.5 million from $353.2 million in 2002. Notwithstanding
a decline in professional services revenues of $92.2 million (21%), the
contribution of services in the revenue mix increased to 42% from 38% in 2002.
The balance of revenue is made up of the sale of product, which at 58% still
represents the largest portion of Group turnover, particularly in Australia,
Europe and the US. 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. Nevertheless, the Group has seen some stabilisation of
product margins.
Gross Margin
The pressure that we have experienced on product margins over the past few
years abated in the period under review when there was an improvement in the
Group"s overall product gross margin. Services margins declined due to lower
volumes, particularly in the South African business.
Market pressures on pricing of product and associated services make it
misleading to look at turnover as the only measure of progress towards a
solutions based approach. Consideration has to be given to the gross margin
contribution in each region with the greatest improvement brought about by
improved services volumes in Australia and the UK.
Overheads
Fixed overheads excluding associates were $419.5 million compared to $415.6
million in 2002. The weakness in the US dollar masks the progress that was
achieved in reducing overheads, which, following significant rationalisations
implemented over the past 18 months, came down by 14% in constant currency
terms year on year and sequentially by 9% in the second half of the year.
When compared to H1 2003, the H2 2003 overhead cost savings of $14.3 million
and the reallocation of certain personnel costs of $3.6 million to cost of
sales, were partly offset by currency translation differences of $17.7 million.
Fixed overheads do not, however, reflect the Group"s total cost base. Included
in cost of sales is a personnel cost of $227.0 million (headcount of 4,937) and
infrastructure costs of $43.0 million. These have also been subject to
rationalisation programmes, where headcount was reduced by 14% (815).
The Group continues to invest in the execution of its strategy. In the current
year the Group expensed $22.1 million relating to Services and Solutions
development.
Taxation
Whilst the Group reported an overall loss before goodwill amortisation and
exceptional items, certain territories in which the Group operates reported
profits. This partly explains a Group overall tax charge of $27.7 million.
The other large contributor to the tax charge was the reversal of certain
deferred tax assets raised in prior periods. Prior years" deferred tax assets
were considered to be fairly valued except in the US and Germany, where
underperformance in the current year has resulted in future profit expectations
being lower than those projected in previous years. Given the uncertain
economic environment in these territories, it was considered prudent to reverse
these assets in the current year. This contributed $7.3 million to the tax
charge. Furthermore, no new deferred tax assets were raised on the potential
tax relief arising from current year losses.
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. Across the Group, $137.1 million of deferred
tax assets relating to losses have not been recognised. Of this amount $106.7
million relates to the US. However, the Group has recognised deferred tax
assets with respect to tax losses on timing differences where the Group
considers that it is more likely than not that these assets can be recovered.
Goodwill
Goodwill has historically been amortised over a maximum period of seven years.
Goodwill amortisation amounted to $344.4 million in 2003 compared to $719.9
million in 2002. In the light of the changed economic environment the Directors
have concluded that goodwill, henceforth, should be amortised over a period not
exceeding five years and have adopted this change in estimate in 2003. This
resulted in an accelerated amortisation charge of $48.8 million in the current
year. Goodwill has now been fully amortised and has a nil carrying value on the
balance sheet.
Operating Exceptional Items
Costs incurred in restructuring and downsizing resulting from deteriorating
economic conditions, are treated as operating exceptional items. Costs incurred
to improve efficiencies and to accommodate the Group"s go-to- market model, are
borne within normal trading operations.
Operating exceptional costs of $14.0 million relate to severance and other
associated costs across all regions. Capital assets have been written off in
Africa and Management and largely relate to an accelerated write down of IT
infrastructural leasehold improvements. These assets are not currently
generating a return and have been written down to reflect their economic value.
Operating exceptional items also reflect a release of US acquisition provisions
no longer required of $13.5 million as well as the write down of the carrying
value of certain assets brought forward in the Group of $9.8 million.
Liquidity And Capital Resources
Working Capital
There have been no material changes in working capital year on year.
Debtors have been well controlled during the year and reduced from $565.2
million to $503.9 million. Measured in days sales outstanding (`DSO"), debtors
have decreased from 59 days at 30 September 2002 to 57 days at 30 September
2003.
Stock has also been well controlled and has decreased to $88.6 million (2002:
$99.1 million).
Trade creditors days outstanding decreased to 53 from 54 in 2002, reflecting
current market conditions and the continued pressures that technology vendors
are placing on their partners.
Cash at bank and in hand was $357.8 million at 30 September 2003 (2002: $372.6
million). There was also $27.9 million of near cash and short term investments
on the balance sheet at 30 September 2003 (2002: $42.8 million). During the
year $43.7 million was expended to settle outstanding deferred consideration
liabilities. Vendor liabilities of $7.9 million, most of which will be expended
in the coming year, remain on the balance sheet.
There was a net cash inflow from operating activities of $51.2 million for the
year compared to $29.0 million in the previous year. This was driven by the
Group"s continued focus on working capital management and the resulting
improvement in debtors and stock balances.
In December 2002 $100.0 million 2002 convertible debentures were redeemed
together with the outstanding conversion premium of $1.4 million and in the
same month a $100.0 million convertible bonds bearing a coupon of 5.375% and
repayable in 2009 were issued.
Capital Reduction
The capital reduction referred to in the 2002 Annual Report and Notice of
Annual General Meeting became effective on 20 March 2003. The share premium
account was reduced by an amount of $4,334.1 million, which was applied to
eliminate the deficit on the Company"s profit and loss account at 30 September
2002. The share premium account was further reduced by an amount of $342.4
million to create a special reserv
