| Wed 27 Oct 2004, 9:10 | | RESULTS FOR THE SIX MONTHS ENDED 31 AUGUST 2004 |
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DATATEC LIMITED - UNAUDITED RESULTS FOR THE SIX MONTHS ENDED 31 AUGUST 2004
DATATEC LIMITED
(`Datatec`)
Registration number 1994/005004/06
Share code: DTC
ISIN: ZAE000017745
* Revenue up 11% to $1,25 billion
* Headline earnings per share improves to 0,10 cents
* Net tangible asset value per share up 19% to $2,29
* Net cash at period-end up 10% to $97,4 million
GROUP INCOME STATEMENT
Restated Restated
Unaudited Unaudited Unaudited
six months to six months to year ended
US$ 000`s 31 Aug 04 31 Aug 03 29 Feb 04
Revenue 1 251 281 1 130 071 2 346 948
Continuing operations 1 242 065 1 059 407 2 230 692
Acquisitions 1 623
Ongoing operations 1 243 688 1 059 407 2 230 692
Discontinuing operations 7 593 70 664 116 256
Cost of sales (1 126 565) (987 838) (2 071 528)
Gross margin 124 716 142 233 275 420
Operating costs (114 468) (129 915) (251 632)
Operating profit before
finance costs,
depreciation and
amortisation (`EBITDA`) 10 248 12 318 23 788
Ongoing operations 9 991 8 527 18 668
Discontinuing operations 257 3 791 5 120
Depreciation and other
amortisation (7 675) (12 238) (22 727)
Operating profit before
goodwill impairment
and other income 2 573 80 1 061
Goodwill impairment (14 361)
Other income 81
Operating profit/(loss) 2 573 80 (13 219)
Exceptional items 55 148 (1 641) (2 883)
Interest received 2 274 9 242 5 150
Finance costs (4 493) (8 492) (9 570)
Profit/(Loss) before
taxation 55 502 (811) (20 522)
Taxation (180) (198) (5 861)
Profit/(Loss) after taxation 55 322 (1 009) (26 383)
Loss attributable to
outside shareholders (140) (966) (229)
Attributable profit/(loss) 55 182 (1 975) (26 612)
KEY RATIOS
Gross margin % 10,0 12,6 11,7
EBITDA on ongoing
operations % 0,8 0,8 0,8
Effective tax rate before
exceptional items and
goodwill % 49,0 49,0 173,9
Exchange rates
Average Rand/US$ exchange
rate 6,5:1 7,5:1 7,2:1
Closing Rand/US$ exchange
rate 6,7:1 7,3:1 6,6:1
SALIENT FINANCIAL FEATURES
Headline profit/(loss) 132 (556) (9,213)
Number of shares (millions)
Issued 138 138 138
Weighted average 138 138 138
Diluted weighted average 139 138 140
Profit/(Loss) per share
(cents)
HEPS 0,10 (0,40) (6,69)
Diluted HEPS 0,10 (0,40) (6,69)
EPS 39,98 (1,43) (19,32)
Diluted EPS 39,82 (1,43) (19,32)
Net asset value per share
(cents) 287 247 249
Net tangible asset value
per share (cents) 229 193 204
GROUP BALANCE SHEET
Restated Restated
Unaudited Unaudited Unaudited
US$ 000`s 31 Aug 04 31 Aug 03 29 Feb 04
ASSETS
Non-current assets 126 929 129 892 118 028
Property, plant and equipment 21 410 29 822 27 726
Capitalised development expenditure 12 065 10 961 11 769
Goodwill 68 498 62 890 52 024
Investments 745 667 920
Deferred tax assets 24 211 25 552 25 589
Current assets 826 965 782 100 860 956
Inventories 222 592 203 273 247 045
Receivables 404 376 401 577 428 810
Cash and cash equivalents 199 997 177 250 185 101
Total assets 953 894 911 992 978 984
EQUITY AND LIABILITIES
Ordinary shareholders` funds 395 968 339 616 344 283
Outside shareholders` interest 23 353 19 052 19 276
Total shareholders` funds 419 321 358 668 363 559
Long-term liabilities 1 231 1 187 3 656
Deferred tax liabilities 5 678 10 494 3 987
Current liabilities 527 664 541 643 607 782
Payables and provisions 414 524 455 231 497 342
Amounts owing to vendors 635 1 399 438
Taxation 9 909 7 422 13 604
Bank overdrafts 102 596 77 591 96 398
Total equity and liabilities 953 894 911 992 978 984
Capital expenditure incurred in
current period 5 232 4 273 9 809
Capital commitments at end of period 3 814 2 971 9 267
Lease commitments at end of period 122 672 95 376 127 196
Payable within one year 18 670 18 328 22 355
Payable after one year 104 002 77 048 104 841
ABRIDGED GROUP CASH FLOW STATEMENT
Restated Restated
Unaudited Unaudited Unaudited
six months to six months to year ended
US$ 000`s 31 Aug 04 31 Aug 03 29 Feb 04
EBITDA 10 248 12 318 23 788
Loss on disposal of
property, plant and
equipment 104 352
Non-cash items 103 3 989 5 833
Cash generated before
working capital changes 10 455 16 307 29 973
Working capital changes (32 966) (21 139) (58 995)
Decrease/(Increase) in
inventories 19 846 1 240 (41 457)
Decrease/(Increase) in
receivables 13 337 (63 092) (84 494)
(Decrease)/Increase in
payables (66 149) 40 713 66 956
Cash utilised from operations (22 511) (4 832) (29 022)
Net finance costs paid (2 219) 750 (4 420)
Taxation (paid)/refunded (4 047) 3 410 1 494
Net cash outflow from
operating activities (28 777) (672) (31 948)
Net cash outflow from
investing activities (23 775) (3 424) (8 243)
Net cash inflow from
disposal of operations
and investments 66 000 2 363 4 878
Net cash outflow from
financing activities (2 439) (16 908) (12 213)
Increase/(Decrease) in cash
and cash equivalents 11 009 (18 641) (47 526)
Translation difference on
opening cash position (2 311) 2 696 20 625
Cash and cash equivalents at
beginning of period 88 703 115 604 115 604
Cash and cash equivalents at
end of period (*) 97 401 99 659 88 703
(*) Comprises cash resources, net of bank overdrafts and trade finance
advances.
SEGMENTAL ANALYSIS
Restated Restated
Unaudited Unaudited Unaudited
six months to six months to year ended
US$ 000`s 31 Aug 04 31 Aug 03 29 Feb 04
Revenue
Westcon 1 043 972 859 724 1 840 500
Logicalis 140 866 138 126 263 663
AMG 19 023 13 783 27 352
Other Holdings 39 827 47 774 99 177
Revenue from ongoing
operations 1 243 688 1 059 407 2 230 692
Discontinuing operations 7 593 70 664 116 256
1 251 281 1 130 071 2 346 948
EBITDA
Westcon 9 881 17 815 36 171
Logicalis 1 737 852 (382)
AMG (79) 895 (723)
Other Holdings (1 548) (7 112) (9 671)
Datatec Limited foreign
exchange losses (3 923) (6 727)
EBITDA from ongoing
operations 9 991 8 527 18 668
Discontinuing operations 257 3 791 5 120
10 248 12 318 23 788
Operating profit/(loss)
Westcon 4 497 11 470 23 781
Logicalis 97 (1 795) (5 803)
AMG (214) 449 (1 400)
Other Holdings (1 909) (7 433) (10 330)
Datatec Limited foreign
exchange losses (3 923) (6 727)
Operating profit/(loss) from
ongoing operations 2 471 (1 232) (479)
Discontinuing operations 102 1 312 1 540
2 573 80 1 061
Total assets
Westcon 728 239 700 415 797 771
Logicalis 135 818 129 777 124 430
AMG 42 205 27 876 9 780
Other Holdings 47 632 53 924 47 003
953 894 911 992 978 984
DETERMINATION OF HEADLINE (PROFIT)/LOSS
Restated Restated
Unaudited Unaudited Unaudited
six months to six months to year ended
US$ 000`s 31 Aug 04 31 Aug 03 29 Feb 04
Attributable proft/(loss)
per the consolidated
income statements 55 182 (1 975) (26 612)
Headline (profit)/loss
adjustments (net
of taxation and outside
shareholders):
Goodwill impairment 14 361
Loss on disposal of plant
and equipment 104 209
Exceptional items (55 154) 1 419 2 829
(Profit)/Loss on disposal
and closure of
discontinued operations (55 154) 1 433 2 885
Other (14) (56)
Headline profit/(loss) 132 (556) (9 213)
STATEMENT OF CHANGES IN ORDINARY SHAREHOLDERS` FUNDS
Restated Restated
Unaudited Unaudited Unaudited
six months to six months to year ended
US$ 000`s 31 Aug 04 31 Aug 03 29 Feb 04
Balance at beginning of
period 344 283 337 886 337 886
Attributable profit/(loss)
for the period 55 182 (1 975) (26 612)
Shares issued 341
Prior period adjustment
adoption of AC 133 (393) (393)
Translation difference on
equity loans 890 (4 444) (579)
Tax effect of equity loans
movement (245)
Deferred tax on goodwill
previously
charged directly to equity 859
Translation of foreign
subsidiaries (4 387) 8 542 33 026
Balance at end of period 395 968 339 616 344 283
RECONCILIATION BETWEEN PREVIOUS SA GAAP AND IFRS
Unaudited six months to 31 Aug 03
US$ 000`s Effect of
Previous SA GAAP transition to IFRS IFRS
Gross margin 142 233 142 233
Operating profit before
finance costs,
depreciation and
amortisation 12 318 12 318
Operating profit before
goodwill amortisation,
impairment and other
income 80 80
Goodwill amortisation (6 218) 6 218
Goodwill impairment
Other income
Operating profit/(loss) (6 138) 6 218 80
Exceptional items (5 160) 3 519 (1 641)
Interest received 9 242 9 242
Finance costs (8 492) (8 492)
Profit/(Loss) before
taxation (10 548) 9 737 (811)
Taxation (267) 69 (198)
Profit/(Loss) after
taxation (10 815) 9 806 (1 009)
(Loss)/Profit
attributable to outside
shareholders (290) (676) (966)
Attributable
profit/(loss) (11 105) 9 130 (1 975)
ASSETS
Non-current assets 121 325 8 567 129 892
Property, plant and
equipment 29 822 29 822
Capitalised development
expenditure 10 961 10 961
Goodwill 53 400 9 490 62 890
Investments 667 667
Deferred tax assets 26 475 (923) 25 552
Current assets 782 100 782 100
Total assets 903 425 8 567 911 992
EQUITY AND LIABILITIES
Ordinary shareholders`
funds 331 724 7 892 339 616
Outside shareholders`
interest 18 377 675 19 052
Total shareholders`
funds 350 101 8 567 358 668
Long-term liabilities 1 187 1 187
Deferred tax liabilities 10 494 10 494
Current liabilities 541 643 541 643
Total equity and
liabilities 903 425 8 567 911 992
Unaudited year ended 29 Feb 04
US$ 000`s Effect of
Previous SA GAAP transition to IFRS IFRS
Gross margin 275 420 275 420
Operating profit
before finance costs,
depreciation and
amortisation 23 788 23 788
Operating profit
before goodwill
amortisation,
impairment and other
income 1 061 1 061
Goodwill amortisation (12 091) 12 091
Goodwill impairment (14 361) (14 361)
Other income 81 81
Operating profit/(loss) (25 310) 12 091 (13 219)
Exceptional items (6 438) 3 555 (2 883)
Interest received 5 150 5 150
Finance costs (9 570) (9 570)
Profit/(Loss) before
taxation (36 168) 15 646 (20 522)
Taxation (5 336) (525) (5 861)
Profit/(Loss) after
taxation (41 504) 15 121 (26 383)
(Loss)/Profit
attributable to
outside shareholders 521 (750) (229)
Attributable
profit/(loss) (40 983) 14 371 (26 612)
ASSETS
Non-current assets 105 439 12 589 118 028
Property, plant and
equipment 27 726 27 726
Capitalised
development
expenditure 11 769 11 769
Goodwill 38 923 13 101 52 024
Investments 920 920
Deferred tax assets 26 101 (512) 25 589
Current assets 860 956 860 956
Total assets 966 395 12 589 978 984
EQUITY AND LIABILITIES
Ordinary shareholders`
funds 332 506 11 777 344 283
Outside shareholders`
interest 18 464 812 19 276
Total shareholders`
funds 350 970 12 589 363 559
Long-term liabilities 3 656 3 656
Deferred tax
liabilities 3 987 3 987
Current liabilities 607 782 607 782
Total equity and
liabilities 966 395 12 589 978 984
As a result of adopting IFRS 3, combined with IFRS 1, the following material
adjustments were recorded:
- Goodwill is no longer amortised. No additional impairment losses were
considered necessary.
- As a result of goodwill no longer being amortised, deferred tax on goodwill
that can be claimed for tax purposes was impacted.
- Foreign currency translation reserves have been transferred to
distributable reserves.
- Exceptional items were affected by the reclassification from currency
translation reserve to distributable reserves at the date of transition.
- Minorities were affected by the above adjustments.
There was no change in net equity at the date of adoption of IFRS 1.
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 communications convergence products (`Westcon`), IT infrastructure
solutions and network integration (`Logicalis`) and strategic
telecommunications consulting (`Analysys Mason Group` or `AMG`). The Group
also has other interests, which are included with the Group Head Office
under Other Holdings. These interests include Westcon AME (operating in
Africa), Online Distribution (operating in the Middle East) and RangeGate
(operating in South Africa (`SA`) and the United Kingdom (`UK`)).
2. REPORTING
This report has been prepared in accordance with the Group`s accounting
policies which fully comply with International Financial Reporting
Standards (`IFRS`). The accounting policies were changed with effect from 1
March 2004 to comply with IFRS. The transition to IFRS is accounted for in
accordance with IFRS 1 (First-time Adoption of International Financial
Reporting Standards), with 1 March 2003 as the date of transition.
Comparative numbers have accordingly been restated.
3. COMMENTARY ON RESULTS
Management has reversed a declining trend in the Group`s financial results
for the past four reporting periods. The Group`s prudent financial
management and control has strengthened the balance sheet, cash position
and profitability. The financial results for the six months ended 31 August
2004 reflect revenue growth of 11% to $1,25 billion, compared with $1,13
billion for the previous comparable period, while operating profit before
goodwill impairment and other income grew from $80 000 to $2,6 million.
Headline earnings per share improved to 0,10 cents, compared with a
restated loss per share of 0,40 cents for the previous comparable period.
These results would have been substantially better had it not been for the
$8 million of non-recurring expenses encountered in Westcon.
The effective rate of tax on profit before exceptional items and goodwill
of 49% is high due to certain subsidiaries making 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 normal tax rate. Management has taken a prudent approach to
recognising deferred tax assets for tax losses arising in the current and
prior periods. This rate is currently the best estimate of the likely
effective tax rate for the financial year ending 28 February 2005, but
could vary significantly depending on individual subsidiary companies
performance during the second half of the year.
An exceptional gain of $55,1 million was incurred during the period,
relating to the sale of the Logicalis Australia and New Zealand businesses.
At the end of August, the Group showed a net cash position of $97,4 million
compared to a year-end balance of $88,7 million.
4. DIVISIONAL REVIEWS
4.1 Westcon
Westcon group`s revenue increased, across all divisions and geographic
regions, by 21,4% to $1,04 billion, however the gross margin for the
period declined to 7,6% compared with 8,9% in the previous comparable
period. The drop in gross margin was attributable mainly to lower
margins in Europe, coupled with continuing pressure on global channel
margins. The overall decline in gross margin is not a general trend,
as Cisco margins in the US and Asia-Pacific regions increased
slightly. EBITDA decreased from $17,8 million to $9,9 million and the
EBITDA margin declined from 2,1% to 0,9%. This was due to the decrease
in gross margins in Europe and non-recurring costs of approximately $8
million relating to the consolidation of facilities, the separation
costs of the former CEO and the expensing of the previously
capitalised IPO costs.
Management has taken action to reverse the decline in margin and the
losses in Europe, which are out of pace with the positive performance
of businesses elsewhere in the Group. Tom Dolan, the original founder
of Westcon, has been appointed CEO during the period under review. He
has undertaken a detailed examination of the processes and business
practices and has produced a plan to increase the gross margins and
return Europe to profitability. The plan involves applying the proven
US model to Europe to improve the overall control and efficiencies.
This entails a greater centralisation of marketing, customer
relations, rebates, stocking, warehousing and logistics functions with
the ultimate aim being more effective leverage of vendor relationships
to improve both margins and terms for stock rotation and returns. The
plan will cost approximately $4,0 million over the next two quarters
to implement and positive results of the remedial action are expected
in the next financial year.
During the period, Westcon`s operating activities utilised $36 million
of cash as working capital levels increased due to both increased
revenue in the current period as well as a reduction in payables as
the US took advantage of prompt payment opportunities with certain
vendors.
Westcon has strong international relationships with the market leading
vendors who are all showing growth. For the six-month period Cisco
products made up 57% of Westcon`s revenue followed by 11% for Nortel,
9% for Avaya and 23% for network extensions. Westcon actively
generates partnerships amongst smaller specialist and niche players.
From a geographic perspective, 55% of Westcon`s revenue was generated
in the Americas followed by 38% in Europe and 7% in Asia-Pacific.
The fundamentals of Westcon`s business remain strong with a stable and
growing customer base. Westcon has improved its customer retention
while the market remains highly competitive and has successfully
increased its market share particularly in important high growth
sectors such as convergence.
4.2 Logicalis
Logicalis has made solid progress in the six months ended 31 August
2004 and recorded its first operating profit in three years. Revenue
from continuing operations rose by 2,0% over the same period last year
to $140,9 million. This was 12,2% higher than the preceeding six
months. Margins remained steady in comparison with the previous year
and costs were tightly controlled to enable Logicalis to record an
EBITDA from continuing operations of $1,7 million compared to $0,9
million in the equivalent six months of 2003. A small operating profit
of $0,1 million was achieved in the period under review, which
contrasts with the operating loss generated by continuing businesses
of $1,8 million in the six months to 31 August 2003.
In March 2004, Logicalis sold its operations in Australia and New
Zealand to IBM for $46,1 million and the inter-company loans of $19,9
million were also repaid to Logicalis.
Revenue growth in the period under review was achieved in each line of
business: product sales, professional services and annuity revenue
(managed services and maintenance) with the US businesses contributing
67,8% of Logicalis` total revenue. Gross margins were fractionally
lower at 20,9% than in the six months ended 31 August 2003 (21,3%)
principally as a result of a change in the revenue mix within product
sales in the US. Operating costs were 19,6% of revenue compared to
20,7% in the equivalent period in the prior year.
Rigorous control of working capital was maintained throughout the
period and days` sales outstanding of 41 days was attained at 31
August 2004 compared with 43 days at 29 February 2004. Net cash
resources were $65,0 million compared to $25,8 million of net cash at
29 February 2004.
In accordance with its declared intention to focus its management and
financial resources on the US and UK markets, Logicalis acquired
Solution Technology, Inc. (`STI`) with effect from 1 September 2004.
STI is an IBM solution provider in the US and one of IBM`s top 10
business partners with annual revenue of $90 million. This business
will make a positive contribution to Logicalis` results in the second
half of the current financial year. Where there is good strategic fit,
management will take advantage of further opportunities to add value
to the business through acquisition.
4.3 Analysys Mason Group (`AMG`)
The past six months has seen a significant turnaround in the fortunes
of AMG. Revenue of $19,0 million was achieved (2003: $13,8 million), a
38,0% increase on the comparable six months. There appears to be a
recovery in the fortunes of the Telecoms operators and this, combined
with their desire not to be left behind on the launch of 3G, has led
to a significant increase in the demand for services in this sector.
There has also been some easing of the billing rate pressures that led
to depressing project margins in recent years.
AMG generated an EBITDA loss of $79 000, compared to EBITDA of $0,9
million in the comparable period. AMG incurred non-recurring expenses
of $1,7 million, resulting from the closure of the Mason Employee
Benefit Trust (`EBT`). The expense originated when Datatec bought the
remaining shares which the EBT held in Mason. EBITDA of $1,6 million
would have been generated, had it not been for this non-recurring
expense.
On 7 August 2004, Analysys Limited was purchased and merged with Mason
to create AMG, which is 14% owned by management. AMG has 300 full-time
employees with nine offices across six countries. Clear benefits from
working together have already been seen. With complementary skills and
global reach, AMG are uniquely positioned to take advantage of the
steady recovery taking place in the Telecoms sector.
4.4 Other Holdings
Westcon AME and Online Distribution
Westcon AME and Online Distribution are value-added networking
distributors, in SA and the Middle East, respectively, whose
operations mirror those of the Westcon group. Revenue from ongoing
operations for the period amounted to $35,8 million compared with
$44,8 million for the same period last year. Operating profit amounted
to $1,3 million compared with a loss of $0,8 million for the same
period in the previous year. This increase is primarily attributable
to a reduction in operating costs and careful management of the
company`s foreign exchange exposure.
The Group is in discussions with various parties to conclude a Black
Economic Empowerment (`BEE`) transaction for its South African
business.
RangeGate
RangeGate, located in SA and the UK, represents the Group`s wireless
mobile technology systems integration business, and provides mobile
supply chain solutions to sectors such as retail, industrial,
manufacturing, transport and logistics.
Revenue for the period amounted to $4,0 million compared with $3,2
million in the previous equivalent period. The Group is in discussions
with various parties to conclude a BEE transaction for its South
African business.
5 Westcon IPO (`IPO`)
The Westcon and Datatec Boards have decided to suspend the Westcon IPO
process for the time being. The reasons for this decision by the Boards are
firstly because the Nasdaq market has declined by approximately 10% and the
valuation ratios of Westcon`s major listed competitors have compressed
sharply since the Westcon IPO was first announced in January 2004 and
secondly the current financial performance of Westcon is below
expectations. Under these conditions shareholders would be unlikely to
obtain maximum value if the IPO was pursued.
The Board has also decided not to maintain Westcon`s IPO filing with the
Securities and Exchange Commission (`SEC`), and is accordingly temporarily
suspending the process. Substantial ongoing costs are incurred in
maintaining a filing with the SEC which include the external auditor`s
review of each quarter`s financial results. Accordingly all costs incurred
to date relating to the IPO have been expensed in the current period.
Management finds the circumstances that lead to this decision both
disappointing and frustrating, but still aims to proceed with a future IPO
of Westcon in conditions that will enable appropriate value to be achieved.
6. PROSPECTS
Significant progress has been made in turning around other operations in
the Group that had previously made losses. In particular, Logicalis, Online
and Westcon AME all made operating profits in the first half of the year.
To address the disappointing performance of Westcon during the period under
review, recent executive management changes, the streamlining of operations
especially in Europe and a drive to return gross margins to higher levels
should deliver better operating profits, given the continuing strong
performance of top line revenues.
The services divisions of Logicalis and AMG are showing signs of delivering
more predictable revenue and profit growth. Overall corporate spending on
IT infrastructure and professional services seems to have resumed modest
growth, however competition remains intense.
Management expects that the progress made in the first half of this
financial year will translate into increasingly profitable trading for the
remainder of the year and that the performance in all of the Group`s
operations will continue to improve through the second half and into next
year.
7. DIVIDENDS
It is presently the Group`s policy not to pay dividends. All capital is
retained to support future growth.
On behalf of the Board
L Boyd J P Montanana D B Pfaff
Chairman Chief Executive Officer Group Finance Director
27 October 2004
Directors: L Boyd* (Chairman), J P Montanana# (CEO), C B Brayshaw*,
D B Pfaff, C M L Savage*, C S Seabrooke*, N J Temple*# #British
*Non-executive
www.datatec.co.za
