13 November 2017

Datatec Limited

Results for the six months ended 31 August 2017

Datatec Limited ("Datatec", the "Company" or the "Group", JSE and LSE: DTC), the international information and communications technology (ICT) group, is today publishing its unaudited interim results for the six months ended 31 August 2017 ("the Period" or "H1 FY18").

Highlights

·    Value unlocked through two significant disposals:

o Sale of Westcon Americas and 10% of Westcon International to SYNNEX Corporation for up to US$830 million

o Sale of Logicalis SMC, Dutch business unit for US$42 million

·    Plan to return US$350 million of cash to shareholders

·    Any deferred consideration received from SYNNEX will be returned to shareholders

·    Westcon International to be streamlined

·    Positive outlook for Logicalis in second half

·    Continuing operations: revenue US$1.84 billion (H1 FY17: US$1.98 billion); EBITDA US$7.7 million (H1 FY17: US$24.4 million

·    Underlying* earnings per share 1.4 US cents (H1 FY17: 12.5 US cents)

Jens Montanana, Chief Executive of Datatec, commented:

"Although the first half headline results were disappointing, we have generated exceptional value through the successful sale of our Westcon Americas business and recently the smaller disposal of the non-core Logicalis SMC business.

"In the near term, we plan to return US$350 million of cash to shareholders in a structured way to give them maximum flexibility and in due course return to shareholders any deferred cash consideration from the sale of Westcon Americas.

"The outlook for Logicalis, which contributed most of our profits, is increasingly positive with a number of important developments set to support an overall improvement in H2. We are moving rapidly to create the appropriate structure in Westcon International to support the direction of the business."

GROUP ACTIVITIES

Datatec is an international ICT solutions and services group operating in more than 50 countries across North America, Latin America, Europe, Africa, Middle East and Asia-Pacific. The Group's service offering spans the technology, distribution, integration and consulting sectors of the ICT market.

Following the sale of the Westcon Americas businesses to SYNNEX in September 2017, Datatec operates two main divisions:

·    Technology distribution - Westcon International: distribution of security, collaboration, networking and data centre products and solutions; and

·   Integration and managed services - Logicalis: ICT infrastructure solutions and services.

The specialist activities of Consulting and Datatec Financial Services are included with the corporate head office functions in the "Corporate, Consulting and Financial Services" segment of the Group.

STRATEGIC OVERVIEW

Datatec's strategy remains to deliver long-term, sustainable and above average returns to shareholders through portfolio management and the development of its principal subsidiaries providing technology solutions and services to targeted customers in identified markets around the world.

The Group completed two major disposals after the half-year, realising material returns to shareholders.

Effective 1 September 2017, the Group sold Westcon-Comstor's businesses in North America and Latin America ("Westcon Americas") and a 10% interest in the remaining part of Westcon-Comstor ("Westcon International") to SYNNEX Corporation for US$630 million in cash, with the potential for an earn-out of up to US$200 million in cash.

In October 2017, Logicalis also realised significant value from the sale of its non-core SMC consulting business to DXC Technology Company (NYSE: DXC) for US$42 million.

Following the disposal of Westcon Americas (the largest profit contributor of Westcon-Comstor) the remaining business, Westcon International, will be directly managed by the Datatec management team. This business, which has faced difficult trading for the last few years, will be reshaped through a combination of cost-reduction measures and business efficiency initiatives.

Westcon International currently retains the circa US$63 million annual central costs of Westcon-Comstor and has a transitional services agreement with SYNNEX, which will run until August 2018. Subsequently, Westcon International will be able to implement fully its plans to reduce the central costs and right-size the business.

Logicalis has now become the strongest part of the Group in terms of profitability and cash generation and continues to provide the widest geographical exposure with its substantial Latin American and USA businesses. The Group intends to continue to develop and grow the Logicalis business.

As announced on 24 October 2017, the AIM listing of Datatec shares will be cancelled on 8 December 2017. The AIM listing has not had the desired effect of diversifying Datatec's investor base and trading of the shares on AIM has dwindled to negligible volumes.

The Group's trading in H1 FY18 continued to be adversely impacted by the roll out of the SAP ERP system and business process outsourcing ("BPO") across Westcon-Comstor's operations in Europe, Middle East and Africa ("EMEA").

Westcon Americas and the Logicalis SMC business are classified as a "disposal group" in accordance with IFRS 5. The Group's results for H1 FY18 are reported in the form of the "continuing operations", excluding the disposal group.

Continuing operations had revenues of US$1.84 billion in H1 FY18 and US$1.98 billion in the six-month financial period ended 31 August 2016 ("the Comparable Period" or "H1 FY17"). Continuing EBITDA was US$7.7 million in H1 FY18 (H1 FY17: US$24.4 million).

Group total revenue, on the "combined" basis including revenue of the disposal group, for H1 FY18 was US$2.99 billion compared to US$3.04 billion in H1 FY17. Group combined EBITDA was US$39.3 million (H1 FY17: US$68.9 million).

Underlying* earnings per share ("UEPS") was 1.4 US cents compared to 12.5 US cents for H1 FY17.

Given the Group's dividend policy and as underlying* earnings in H1 FY18 would only support a negligible dividend, the Board is not declaring an interim dividend.

CURRENT TRADING AND OUTLOOK

While the Group's trading in H1 FY18 has been disappointing, the Board expects a much better performance from Logicalis in H2 FY18. 

Logicalis is expected to benefit from the contribution of Packet Systems Indonesia ("PSI") which was acquired in September 2017 and a major multi-year contract win in Latin America, which will underpin the performance of Logicalis in that geography. 

Datatec is continuing to focus on improving the financial performance of Westcon International and streamlining its operations.

PROPOSED DISTRIBUTION TO SHAREHOLDERS following the disposal of westcon americas

The Company has consulted with its principal bankers relative to adjusting its debt levels and agreed that $350 million of the designated free cash of $500 million may be distributed to shareholders. The balance of $150 million will be utilised to reduce the Group's residual interest bearing debt to mutually acceptable levels. For clarity, no part of the amount retained is earmarked for acquisitions and all will be applied to debt reduction and working capital funding.

The Board intends to distribute a special dividend of $350 million (approximately R5 billion) to shareholders as a cash dividend with a scrip distribution alternative.

To the extent that the full $350 million is not paid due to shareholders electing the scrip distribution alternative, the Board will use the full undistributed cash amount to do a general buyback of shares through the market under the authority granted at the Annual General Meeting on 14 September 2017. 

The formal dividend declaration is expected to be done before the end of November 2017.

Shareholders will be advised in due course when the result of the special dividend election is known.

In addition, a further special dividend will be declared and/or a share buyback effected from all of the SYNNEX earn-out consideration received by the Group. This is expected to be known and advised to shareholders in April 2018.

GROUP RESULTS

Revenue

Group combined revenues for the period were US$2.99 billion (H1 FY17: US$3.04 billion). Continuing revenues of US$1.84 billion in H1 FY18 (H1 FY17: US$1.98 billion) are included in the combined results as shown in the table below.

Group combined gross margins in H1 FY18 were 13.3% (H1 FY17: 13.8%) and continuing gross margins in H1 FY18 were 16.2% (H1 FY17: 16.1%). Combined gross profit was US$398.1 million (H1 FY17: US$419.8 million) including US$299.4 million (H1 FY17: US$318.0 million) gross profit from continuing operations.

Overall combined operating costs were US$358.8 million (H1 FY17: US$350.9 million), including US$291.7 million (H1 FY17: US$293.6 million) from continuing operations. Included in the combined operating costs are total restructuring costs of US$6.7 million (H1 FY17: US$7.2 million).

Combined EBITDA was US$39.3 million (H1 FY17: US$68.9 million) and combined EBITDA margin was 1.3% (H1 FY17: 2.3%). Continuing EBITDA was US$7.7 million (H1 FY17: US$24.4 million) and continuing EBITDA margin was 0.4% (H1 FY17: 1.2%).

Combined operating profit was US$10.0 million (H1 FY17: US$40.7 million) including a loss of US$19.0 million (H1 FY17: US$0.7 million) from continuing operations.

The combined net interest charge increased to US$17.0 million (H1 FY17: US$10.3 million).

Combined loss before tax was US$6.6 million (H1 FY17: US$34.3 million profit). Loss before tax from continuing operations was US$28.5 million (H1 FY17: US$2.1 million).

A tax charge of US$0.9 million has arisen on a loss from continuing operations of US$28.5 million. This is largely due to the fact that the tax credit associated with certain management and IT costs of the continuing business have been treated as a benefit arising for the disposal group. This is also reflected in the comparative numbers. The underlying tax rate continues to be adversely affected by losses arising in Westcon-Comstor's Asia-Pacific and Africa regions for which limited deferred tax assets have been recognised.

Underlying* earnings per share were 1.4 US cents (H1 FY17: 12.5 US cents). Headline loss per share was 5.8 US cents (H1 FY17: 9.1 US cents headline earnings per share).

Cash

The Group generated US$29.3 million of cash from combined operations during H1 FY18 (H1 FY17: US$24.2 million) and ended the period with a combined net debt of US$428.6 million (H1 FY17: US$251.7 million and FY17: US$396.5 million). The increase in net debt is a result of reduced cash earnings and funding of increased working capital. Of the net debt at 31 August 2017, US$273.4 million related to continuing operations and US$155.2 million related to the disposal group.

On 1 September 2017, the Group received US$630 million for the sale of Westcon Americas to SYNNEX.

Acquisitions

Effective 1 June 2017, Analysys Mason acquired 100% of the share capital of Nexia Management Consulting AS, a telecoms management consultancy company registered in Norway.

Effective 4 July 2017, Logicalis Group acquired 51% of the share capital in NubeliU, a South America-based company specialising in cloud computing projects based on OpenStack.

As a result of these acquisitions, goodwill and other intangibles assets increased by US$6.7 million and US$1.8 million respectively. None of the goodwill recognised is expected to be deductible for income tax purposes. The revenue and EBITDA included from these acquisitions in H1 FY18 were US$1.0 million and US$0.1 million respectively. Had the acquisition dates been 1 March 2017, revenue and EBITDA attributable to these acquisitions would have been approximately US$2.4 million and US$0.2 million for H1 FY18 respectively.

Acquisition-related costs of the above acquisitions of US$0.3 million are included under operating costs in the condensed consolidated statement of comprehensive income.

An assessment of the fair value of the assets acquired across both the acquisitions made by the Group is shown in the table below.

Shareholder distributions and dividend policy

The Group's policy is to maintain a fixed three times cover relative to underlying* earnings when declaring dividends. The level of underlying earnings in H1 FY18 would only support a negligible dividend under this policy so no interim dividend for FY18 is declared.

As set out above, the Board has determined a structured programme of dividends and share repurchases in order to return the majority of cash received from the SYNNEX transaction to shareholders.

Foreign exchange translation

Gains of US$8.5 million (H1 FY17: US$47.5 million) arising on translation to presentation currency are included in total comprehensive loss of US$0.3 million (H1 FY17: income US$62.8 million).

DIVISIONAL REVIEWS

Westcon-Comstor

Westcon-Comstor accounted for 76% of the Group's combined revenues (H1 FY17: 74%) and 62% of the Group's continuing revenues (H1 FY17: 62%). Westcon-Comstor accounted for 59% of its combined EBITDA (H1 FY17: 56%).

Westcon-Comstor is a value-added technology distributor of category-leading solutions in security, collaboration, networking and data centre. Westcon-Comstor is transforming the technology supply chain through its global capabilities in cloud, services and global deployment. It has teams in 50-plus countries, combining expert technical and market knowledge with industry-leading partner enablement programmes. Collaborating with its partners in a unique engagement model, Westcon-Comstor strives to provide an exceptional partner experience by delivering results together. The company goes to market under the Westcon and Comstor brands. Westcon-Comstor's portfolio of market-leading vendors includes: Cisco, Avaya, Polycom, Juniper, Check Point, F5, Palo Alto and Symantec.

With effect from 1 September 2017, Westcon Americas was sold to SYNNEX and the EMEA and Asia-Pacific businesses of Westcon-Comstor (Westcon International) continue under Datatec ownership with a 10% interest held by SYNNEX.

Westcon-Comstor's combined revenues increased by 1% to US$2.3 billion (H1 FY17: US$2.3 billion) with higher revenue in North America and Latin America offset by lower revenues in Europe, MEA and Asia-Pacific.

There was a decline in the financial performance of the EMEA region. Continued business transformation challenges in EMEA led to a drop in revenues of US$51.8 million in H1 FY18 compared to H1 FY17. The drop in revenue resulted in a reduction in gross profit of US$19.0 million in EMEA, representing the bulk of the drop in gross profit in Westcon-Comstor. Trading conditions in MEA were weak, particularly in South Africa.

Asia-Pacific revenues were US$16.6 million lower due to reduced sales in China; however, gross profit was US$1.6 million better than H1 FY17.

Westcon-Comstor combined revenue by technology category:

Westcon-Comstor's combined gross margins were 9.5% (H1 FY17: 10.5%) due to unfavourable geographic mix with lower margins in Latin America and MEA.

Combined operating expenses increased to US$197.3 million (H1 FY17: US$193.6 million). The 2% increase is primarily due to higher foreign exchange expense in Latin America and Asia-Pacific.

Restructuring expenses of US$4.3 million (H1 FY17: US$7.0 million) were incurred, mainly in North America, Asia-Pacific and Global Support related to BPO transformation. In addition US$1.4 million of expenditure was incurred in relation to the recently completed transaction with SYNNEX.

Combined EBITDA was US$19.0 million (H1 FY17: US$42.9 million). Westcon-Comstor's continuing operations (Westcon International) incurred an EBITDA loss of US$12.0 million (H1 FY17: US$1.2 million) and the disposal group (Westcon Americas) recorded EBITDA of US$31.0 million (H1 FY17: US$44.1 million).

Net working capital days decreased to 32 days compared to FY17 (39 days) primarily due to significant improvement in inventory turns in EMEA and Asia-Pacific. The improvement in net working capital days, partially offset by lower cash earnings, US$15.8 million of capital expenditures and the further purchase of US$2 million Angola government bonds resulted in a decrease of US$32.1 million in net debt to US$371.3 million.

Of this net debt, US$207.5 million is in the continuing Westcon International business and US$163.8 million is in the disposal group (Westcon Americas). Of the US$12.4 million incurred in capitalised development expenditure during H1 FY18, the majority is attributable to the SAP ERP system transition, cloud development and digital transformation.

From H2 FY18 Westcon International is being managed by the Datatec management team and the Group will be collapsing the Datatec and Westcon International head office functions to further streamline its operations. Westcon International is well positioned to benefit from its partnership with SYNNEX, continued growth in security and mobile networks, investments in its cloud practice as well as improving conditions in emerging markets.

Logicalis

Logicalis accounted for 23% of the Group's combined revenues (H1 FY17: 25%) and 37% of the Group's continuing revenues (H1 FY17: 37%).

Logicalis is a global IT solutions and managed services provider with expertise in data centre and cloud services, security and network infrastructure, workspace communications and collaboration, data and information strategies, and IT operation modernisation.

Combined revenues were US$693.7 million (H1 FY17: US$757.2 million), including US$0.3 million of revenue from acquisitions made during the period. Revenues from continuing operations (excluding Logicalis' disposal group, SMC) were US$677.6 million (H1 FY17 US$736.1 million). Services revenues were up 7.4% with strong growth in both professional services and annuity revenue. Revenue contribution by geography is shown below:

Revenue increases in Latin America were offset by decreases in Europe, North America and Asia-Pacific.

In Europe, the UK results have improved as the restructuring of the UK operation continued and it benefited from a large supplier credit. Latin America showed improvement notably in Argentina. North America was adversely impacted by weak trading conditions and product sales in the first half.

Revenues from product were down 16.5%, with decreases in Cisco, HPE and IBM.

Logicalis' combined gross margins were 25.2% (H1 FY17: 23.2%), benefiting from the improved services mix. Gross margins from continuing operations were 25.3% (H1 FY17: 23.3%).

Combined gross profit was down 0.4% to US$174.7 million (H1 FY17: US$175.4 million). Gross profit from continuing operations was US$171.4 million (H1 FY17: US$171.8 million).

Logicalis' combined gross profit contribution by geography is shown below:

Combined EBITDA was US$28.8 million (H1 FY17: US$33.0 million), with a corresponding EBITDA margin of 4.2% (H1 FY17: 4.4%). Combined operating profit was US$16.5 million (H1 FY17: US$20.3 million). Operating profit from continuing operations was US$16.0 million (H1 FY17: US$20.0 million).

Logicalis incurred US$2.4 million expenditure in H1 FY18 restructuring its UK and US operations. Combined EBITDA before restructuring charges was US$31.2 million with a combined EBITDA margin of 4.5% and operating profit before these restructuring charges was US$18.9 million.

At 31 August 2017, Logicalis has a net overdraft of US$1.9 million (H1 FY17: US$11.3 million net cash). The reduction in net cash was caused primarily by significant prepaid expenses in Latin America. The sale of the SMC business in October 2017 brought US$42 million of cash into the business in H2 FY18.

Logicalis continues to have a contingent liability in respect of a possible tax liability at its PromonLogicalis subsidiary in Brazil.

In July 2017, Logicalis acquired 51% of the share capital in NubeliU, a South American company specialising in cloud computing projects based on OpenStack. The 51% interest in NubeliU was acquired for a cash consideration of US$3.8 million. NubeliU's expertise in OpenStack will accelerate the global expansion of Logicalis' cloud computing and SDx (Software Defined everything) practices, strengthening its position as a cloud integrator and ensuring its ability to meet its customers' requirements on their journey to digital transformation.

In September 2017, Logicalis won a significant long-term project with a large service provider covering multiple territories within Latin America which will contribute significantly to the business in H2 FY18 and beyond.

Digital innovation is accelerating; business technology is undergoing a major shift. Logicalis is transitioning itself into a Digital Enabler for its customers, driven by the explosion of data, the rise of mobile and the cloud and many opportunities exist to tap into themes such as security to augment its strong networking heritage.

Logicalis is also investing in areas such as business intelligence and data analytics to grow its data centre infrastructure offerings for customers. Cloud continues to be a key feature in the business and IT strategies of customers and Logicalis is well positioned to support customers regardless of their cloud strategy.

Logicalis remains confident about the prospects for the industry and its positioning and expects a solid H2 FY18.

Corporate, Consulting and Financial Services

This segment accounted for 1% of Group's combined and continuing revenues (H1 FY17: 1%).

The Consulting unit comprised: Analysys Mason, a provider of strategic, trusted advisory, modelling and market intelligence services to the telecoms, media and technology industries; and Mason Advisory, an independent and impartial IT consultancy providing related strategic, technical and operational advice to the public and private sectors. Datatec's shareholding in Mason Advisory reduced to 42.5% at the end of H1 FY17 and accordingly it has been equity-accounted from that date.

Consulting revenues were US$18.5 million (H1 FY17: US$22.3 million) and EBITDA was US$0.9 million (H1 FY17: US$1.1 million). The H1 FY17 Consulting revenues and EBITDA include Mason Advisory but in H1 FY18 the Group's share of Mason Advisory's profit is included in "share of equity-accounted investment earnings". Both Analysys Mason and Mason Advisory achieved improved results for H1 FY18 compared to H1 FY17.

In June 2017, Analysys Mason acquired Nexia Management Consulting AS, a telecoms management consultancy based in Norway which will enhance Analysys Mason's existing track record in the Nordics, where telecoms, media and technology ("TMT") markets are among the most advanced in the world.

Datatec Financial Services is in a development phase of its business providing financing/leasing solutions for ICT customers. The business recorded revenues of US$0.7 million in H1 FY18 (H1 FY17: US$1.2 million) and an EBITDA loss of US$0.8 million (H1 FY17: US$0.3 million).

Corporate includes the net operating costs of the Datatec head office entities which were US$8.6 million (H1 FY17: US$6.0 million). These costs include the remuneration of the Board and head office staff, consulting and audit fees. In H1 FY18, foreign exchange gains were negligible (H1 FY17: US$1.7 million foreign exchange loss). The net operating costs included SYNNEX transaction related expenses of US$2.0 million in H1 FY18.

SUBSEQUENT EVENTS

On 1 September 2017, the sale of Datatec's Westcon Americas and 10% of the remaining part of Westcon-Comstor (Westcon International) to SYNNEX Corporation completed.

On 13 October 2017, Logicalis sold its SMC operation in the Netherlands for US$42 million in cash. Logicalis had acquired SMC on 4 March 2013 as one of the four European operations purchased from 2e2 for US$31 million. The purchase price attributed to SMC was US$5 million.

The profit on sale and associated adjustments from the two disposals noted above will be accounted for in the second half of FY18.

On 4 September 2017, Logicalis completed the acquisition, with its Indonesian partner Metrodata, of a majority stake in Packet Systems Indonesia ("PSI"), a leading ICT systems integrator and service company. PSI will be integrated with Logicalis Metrodata Indonesia ("LMI"), the existing Indonesian operation of Logicalis.

REPORTING

This interim financial report was prepared in accordance with the framework concepts and the recognition and measurement criteria of IFRS and its interpretations adopted by the International Accounting Standards Boards ("IASB") in issue and effective for the group at 1 March 2017 and the SAICA Financial Reporting Guides, as issued by the Accounting Practices Committees and Financial Reporting pronouncements as issued by the Financial Reporting Standards Council. This interim report was prepared using the information as required by IAS 34 - Interim Financial Reporting, and complies with the Listings Requirements of the JSE Limited, the AIM Rules for Companies, and the requirements of the Companies Act, No 71 of 2008, of South Africa. This report was compiled under the supervision of Ivan Dittrich CA(SA) (Chief Financial Officer).

The accounting policies and methods of computation applied in the preparation of these interim financial statements are in terms of IFRS and are consistent with those accounting policies applied in the preparation of the previous consolidated annual financial statements. The adoption of certain amendments to existing standards did not have an impact on the accounting policies of the Group.

DISCLAIMER

This announcement may contain statements regarding the future financial performance of the Group which may be considered to be forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty, and although the Group has taken reasonable care to ensure the accuracy of the information presented, no assurance can be given that such expectations will prove to have been correct.

The Group has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements and there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. It is important to note, that:

(i) unless otherwise indicated, forward-looking statements indicate the Group's expectations and have not been reviewed or reported on by the Group's external auditors;

(ii) actual results may differ materially from the Group's expectations if known and unknown risks or uncertainties affect its business, or if estimates or assumptions prove inaccurate;

(iii)       the Group cannot guarantee that any forward-looking statement will materialise and, accordingly, readers are cautioned not to place undue reliance on these forward-looking statements; and

(iv)       the Group disclaims any intention and assumes no obligation to update or revise any forward-looking statement even if new information becomes available, as a result of future events or for any other reason, other than as required by the JSE Limited Listings Requirements and/or the AIM Rules.

On behalf of the Board

SJ Davidson

Chairman

JP Montanana

Chief Executive Officer

IP Dittrich

Chief Financial Officer

13 November 2017

DIRECTORS

SJ Davidson°• (Chairman), JP Montanana• (CEO), IP Dittrich (CFO), O Ighodaro°‡, JF McCartney°†, MJN Njeke°, CS Seabrooke°, NJ Temple°•

°Non-executive  •British †American ‡Nigerian

*          Excluding impairments of goodwill and intangible assets, profit or loss on sale of investments and assets, amortisation of acquired intangible assets, unrealised foreign exchange movements, acquisition-related adjustments, fair value movements on acquisition-related financial instruments, restructuring costs relating to fundamental reorganisations, SYNNEX deal-related expenses and the taxation effect on all of the aforementioned.