Datatec Limited (DTC) Earnings Call Transcript & Summary

Good day, everyone. We are presenting today our full year FY '22 results ended February. The agenda is as follows: Whereby I will provide an initial summary, then Ivan will cover the financial results following on with my operational and strategic review and outlook. If we could move to the agenda slide, which is -- sorry, we've seemed to have lost the slide here. Okay, that's fine. If we could move to the very first slide. And as we do, I just want to point out that there will be an opportunity for Q&A at the end of this presentation. But obviously, questions can be logged as we go along so in preparation for the -- my concluding remarks. So if we could go first to Slide 4, the financial results summary. Slide 4. We had a pretty strong year. And if it were not for the ongoing impact of supply chain disruption, our performance would have been even more robust. If just a portion of our excess backlog would have been invoiced, revenues could have exceeded $5 billion. Revenues and gross profit grew by 12%, adjusted EBITDA by 16% and underlying earnings per share by 38%. Slide 5. With the exception of Latin America, where economies remained weak and currencies took much longer to recover post the COVID pandemic, all other regions across the 3 divisions performed strongly. Software and services, which are mainly recurring continued to grow. Permanent changes to remote working for many organizations, greater digitization and increasing demand for national safety and cybersecurity in many parts of the world is pushing demand for many of the technology solutions and services we provide. The semiconductor shortages and supply chain constraints remain a headwind to strong fundamental demand and positive underlying trends. These trends are radically altering the way in which IT infrastructure is adopted and applications in the cloud are consumed. As a result, recurring or as-a-service solutions are becoming dominant. The Ukraine war and rolling zero COVID lockdowns across China have exacerbated already tight supply chains by reducing capacity further as fuel and shipping costs have soared. In line with our strong performance, our balance sheet strength continues to grow. Our geographic diversification, while complex to manage, provides multidimensional opportunities. I'll hand over to Ivan for the financial section.

Thank you, Jens. I'm on Slide 8, financial performance. Revenue for the year increased by 13% or 12% in constant currency. Revenue increased strongly in all our divisions. Our operating costs continue to be well controlled. There has been a significant increase in share-based payment charges as the valuations of our businesses continue to improve. No restructuring charges or exceptional items were incurred in FY '22, reflecting a better quality of earnings. Net finance costs increased in Logicalis as a result of significant increases in interest rates, particularly in Brazil during the year. The effective tax rate was 21% and improved significantly over the prior year as a result of recognition of additional deferred tax assets, improving profits and an improved mix of profits. There was a very healthy increase in earnings per share for all our earnings metrics. Slide 9. We produced a very pleasing performance in all our divisions on the back of very strong operational execution. In particular, the continuing improvement in Westcon is very encouraging, building on the momentum of the last 4 years. Analysys Mason once again had an excellent performance. The revenue and gross profit contribution by geography, Slide 10. The revenue and gross profit mix has been very similar to the prior year. Latin America has been the most challenged region this reporting period. Slide 11. As the business is becoming less asset intensive, software and services have grown significantly. Hardware is expected to fall below 50% of the overall revenue mix. Slide 12, the balance sheet. The balance sheet remains strong, driven by solid working capital management. We had very strong receivables collections during the year, which mitigated some of the cash outflows on the back of high growth. Net debt increased as a result of working capital investments, acquisitions and dividends paid. $43 million of cash dividends were paid during the year. Liquidity remains strong. Slide 13, the segmental balance sheet. The increased net debt in Westcon on a stand-alone basis is due to working capital investments and the $70 million repayment of intercompany loans to Datatec, which occurred during the year. Slide 14, the cash flow statement. We had working capital cash outflows on the back of strong trading and investments in working capital. Supply chain delays also impacted the working capital cash flows, where inventories grew where customers would not accept partial shipments. Despite this, our DSOs, or days sales outstanding, reduced on the back of very strong collections, producing positive cash flows from operating activities. I will now hand over to Jens to cover the remainder of the presentation, whereafter we will take questions.

Okay. Thanks, Ivan. Now moving on to the operational reviews, starting with Logicalis Group, Slide 17. Business would have been better if it were not for mounting backlog arising from supply chain delays and the semiconductor shortages. Despite this, fundamental demand remains strong as digitization and IT modernization around cloud technologies accelerates. This is driving a much higher software and recurring revenue mix. Slide 18. Revenues and gross profit grew everywhere in all regions by 14% and 12%, respectively. Overall gross margins were down slightly at around 25%. Latin America driven principally by Brazil had weaker margins as backlog grew delaying projects and services. This dynamic is still continuing. The increase in backlog due to global supply chain issues almost doubled last year from just over $200 million to $400 million. The majority of this was around Cisco. The more complex technologies had longer lead times. Latin America suffered the most from the excess growing backlog. EBITDA grew in all regions except Latin America for the reasons I just laid out previously. We have been investing in IT modernization solutions and services to help our customers move to the cloud. Last year included restructuring as a result of the COVID pandemic. EMEA had the largest growth increase and includes the acquisition of Siticom, the 5G and networking specialists in Germany. Revenue by segment, Slide 21. Software had the greatest percentage increase, increased digitization and as-a-service networking and IT usage through the cloud is driving this. Overall, we expect hardware to decrease in proportion as software and services grow faster. On the product side, more software sales are being generated from Cisco Solutions as technologies such as SD-WAN, virtual networking take hold and many forms of infrastructure moves to the cloud. Our supply chains stretch ever more. This is lengthening the holding period for inventory on large projects and the time customers take to pay us. Consequently, this also ripples into the time we take to pay our suppliers. This elongation of working capital is most probably here for a while. Overall, the balance sheet remains strong with net debt moving up to $151 million from $123 million, including $19 million out for acquisitions during the period. Outlook. The shift in world to hybrid working using hybrid, public and private cloud for many businesses is accelerating pace of digitization. In the face of this rapid IT modernization, we have a number of old world global challenges to contend with, with the consequences of the war in Ukraine, China lockdowns seriously affecting economies, inflation and supply chains. We believe these factors will create greater, longer-term reliance on technology use and, of course, communications in most societies. Westcon, Slide 25. Another very solid year for Westcon International. Despite the challenges of semiconductor shortages and supply chain constraints, all key P&L metrics improved significantly last year. The much improved operational leverage drove a 52% jump in EBITDA, which was more than fourfold the revenue increase. Order bookings increased by much more than revenue across all product lines exacerbating the backlog. We continued to manage cash collections strongly in this business. All regions had good growth and would have had similar gross profit growth were it not for a one-off cost of sales adjustment in the Middle East and Africa. This blunted slightly what would otherwise have been excellent progress. We report net revenues under IFRS, but just by way of information, our gross revenues touched $4 billion for the first time last year. Last year also marked a milestone in terms of full years of revenue growth. We have seen the most significant increase in backlog in Westcon as most complex networking and security products have a high degree of hardware and of course, include semiconductors in their solutions. As the software runs on this hardware, you can see the impact and considerable knock-on effect that hardware delays have on software. In total, the backlog jumped more than threefold from $261 million last year to well over $800 million at the end of the year. Most of this excess backlog -- sorry, most of this is excess backlog that wouldn't have arisen in times of normal delivery and shipping lead times. And we expect this dynamic to, of course, continue during this year. We can go to Slide 29 -- sorry, if you can go to Slide 28, where I'm out by one slide here. Slide 28, EBITDA by geography. What a continuing turnaround this has been when you consider 5 years ago, the business had lost more than $50 million in EBITDA. Such strong profitable growth has meant that the IFRS 2 share-based payment charge has, of course, grown considerably. Excluding this charge, EBITDA would have increased 65% compared to the reported 52%. Either way, when one considers the unfortunate legacy tax issue from the Middle East, the performance has been excellent. Central costs are now around 1% of revenues and should continue to fall in proportion. The Cisco Comstor business unit remained constant in proportion to the rest of the business, which includes all other vendors. Our smaller and midsized customers grew faster than large enterprise and system integrators as well as service providers, reflecting the pickup in many economies. In most countries, small and midsized businesses reflect the majority of economic activity. The reseller segment, which reflects this is now 54% (sic) [ 53% ] of the overall business. Slide 30. Cybersecurity encompassing network, cloud and endpoint remains by far the dominant technology sector. Networking plus security drives 2/3 of the overall business. Across vendor product lines, software is growing as a percentage of the total solution sold and a lot of this is as a service and therefore recurring. Over 40% of the business is capable of being renewed when you add up all the nonhardware categories, software, maintenance and services. Slide 31. Continued exceptional working capital and balance sheet management, even with the headwinds of severe product shipment delays turning inventory fast albeit larger -- with larger inventory with big improvement in DSO, debtor days, resulted in an overall reduction in net working capital days. We are in an increasingly unpredictable and uncertain world. The COVID pandemic and now the Ukraine war have exacerbated this. Both global and now more local supply chain disruptions are further being impacted by the recent surge in fuel and energy prices. Despite all this, long-term underlying demand for hybrid working, rapid digitization and connectivity to both private and public cloud infrastructure is increasing networking and security adoption. Lastly, moving on to Analysys Mason, the management consultancy division. Slide 34. Another very strong performance from Analysys Mason. This is the fifth year of sequential growth in performance along with expanded profit margins. The combination of M&A over the past 5 years and solid organic performance is sustaining this trajectory. We are seeing robust demand in many areas of converging network systems such as 5G and satellite, WiFi and wireless, IoT and security and ultra capacity broadband fiber connectivity. Around this is a growing ecosystem of new customers to complement traditional telecommunications operators, such as hosters and data center operators, Internet and content service providers, 5G and private network operators along with media, social networking and television. All these customers have not only technology requirements but also business transformation, regulatory and finance support which we provide. Analysys Mason has moved to a new profile of performance ratios as scale is generating more levers of growth. Revenues, gross profit, utilization and adjusted EBITDA have all improved significantly and are running at best-in-class ratios. The business is much larger than 3 years ago. Since FY '18, revenues have doubled, and EBITDA has more than quadrupled. This tremendous growth has meant the charge for employee-based equity compensation has also had to rise in tandem, which has had the effect of limiting the growth of our IFRS-reported EBITDA and profit. The outlook for this division remains very favorable. Even with uncertain global economic conditions, many state industrial defense-related and fixed or wireless-based telecommunication service providers are increasing their infrastructure investment. The business has reached a new trajectory with plans for further meaningful expansion. So I'm going to wrap up with some -- summarize with some concluding remarks. We are focused on our strategic priorities led first by improving the performance of the divisions, and we are actively exploring a range of scenarios across the group. We expect to be able to report later on progress bearing in mind the volatile nature of markets and macro conditions presently. Our focus is to continue to deliver growth and value. Of course, we are concerned about the deteriorating global supply chain issues and the situation in China is particularly worrying with places such as Shanghai completely shut down. It's become a closed loop of reduced supply chains leading to inflation, which is adding cost to the supply chains and therefore, creating further barriers. The Board is focused on driving shareholder value as we implement opportunities identified from our strategic review. So that concludes the presentation part. If we could move to the moderators for fielding any -- if you've got any questions.

We have 1 question at the moment on the chat from John Davis asking if you're able to share more color on the SENS announcement released this morning regarding the potential transaction.

Well, we obviously -- we can't say anything specifically, hence, the cautionary, other of course, then to point out that we do have a history of good value unlock when it comes to sell-side transactions. So we'll obviously be expecting to report more on this going forward, but it's obviously the cautionary relates to an update on -- sorry, relates to transaction possibilities in process.

[Operator Instructions] Here is the next one from Duncan McLeod from TechCentral. In light of the cautionary this morning about Analysys Mason, are you able to provide an update on your strategic thinking around unlocking shareholder value and where the opportunities might lie, asset sales, asset listings, et cetera.

Well, I mean I've just addressed that in the previous one. I mean all of the above, and we will be providing obviously more color on the Analysys Mason transaction possibilities as we go forward and hence, the cautionary. And I can just echo what I just said previously, we obviously have a history of good value unlock when it comes to strategic disposals or other realization mechanisms.

Thank you for the clarification, waiting for further questions from the audience [Operator Instructions]. Gentlemen, we don't seem to have any further questions on the chat at the moment. Would you like to make any closing remarks?

No, not -- I mean that was a pretty comprehensive update. We'll obviously be reporting again in terms of our interims in October. And of course, we'll be updating as we go along with anything related to the cautionary which we announced this morning. So if there's no further questions, Fred, do you want to do a quick...

No further questions.

Nothing else on your panel, okay, then we can...

Oh, wait, wait. Sorry, there just 2 that popped up now. A question from Nick [ Rehler ] from Signal Asset Management. It's the same question. It's also about the strategic update from -- with the support of Lazard. And from Business Day from [indiscernible], also part of the value unlock. Do you have any plan to separately list Westcon International and Logicalis, which I think you've answered previously as well.

Correct.

With that, I think that closes the Q&A session. Thank you.

Thank you very much, everyone.