Datatec Limited (DTC) Earnings Call Transcript & Summary

Good morning. Today, we will be covering our First Half Financial Year 2024 Results Ended August. Just to look at the agenda, starting with a summary from myself. Then we will go through the detailed financial results presented by Ivan, the CFO. Then I will go through an operational review of the divisions. And finally, I will close with some forward-looking remarks. Summary. I'm on Slide 4. We had solid revenue growth of 15% and even better gross profit growth as the contribution rose 24%. This strong revenue growth, combined with healthy expansion in margins, drove EBITDA up $23 million or by 39% to $81 million. The leverage further down the income statement resulted in underlying earnings per share from continuing operations jumping more than fourfold to $0.096 per share. Slide 5. The main features of our H1 performance were the ongoing strength in results from Westcon, a solid performance from Logicalis International and a turnaround in Logicalis LATAM. We had good operating cash flows from all of the divisions. Slide 6. We continue to see strong fundamental demand in most of our sectors. Cybersecurity continues to stand out. We have seen a moderating of order intake, which helps the overall supply chain and backlog situation. Inflation and higher interest rates have fed through to pricing, and we continue to maintain strong working capital management. We expect an improved performance in this full financial year. I will hand over now to Ivan.

Thank you, Jens, and good morning, everyone. We are pleased to present another good set of results on the back of strong operational execution. Slide 8, the P&L. Revenues grew by 15% or 16% in constant currency. We had double-digit revenue growth in all our divisions. The prior year EBITDA numbers were boosted by $50 million of foreign exchange gains, of which $11 million were realized and $19 million were unrealized. In the current year, we incurred $13 million of foreign exchange losses, of which $4 million were realized and $9 million were unrealized. Prior year unrealized gains arose mainly on hedging gains in Westcon Europe, which offset pressure on gross margin as a result of the rapidly strengthening U.S. dollar during that period. The current year unrealized FX losses arose mainly in Logicalis Argentina, where there had been a sharp devaluation of the local currency during H1. The quality of earnings during H1 FY '24 was better than the prior year with a large share-based payments and restructuring charges not recurring. Net finance costs increased as a result of the higher interest rate environment and higher average utilization of facilities as a result of growth-driven working capital requirements. The effective tax rate of 37.5% is trending towards a more normalized rate for the group. All of our earnings per share metrics showed significant growth over the prior year. Moving to Slide 9, the segmental P&L. As mentioned earlier, the prior year Westcon result was impacted by significant FX gains. $32 million foreign exchange gains were incurred in Westcon last year, of which $19 million were unrealized. Slide 10. The geographic mix of revenues was relatively stable year-over-year. North America reduced due to more transactions being net revenue accounted during the current period. Slide 11. As the business has become less asset intensive over the years, software and services have grown significantly. Software is still approaching 50% of the revenue mix. Moving on to the balance sheet on Slide 12. The assets held for sale in the prior year relate to the Analysys Mason business, which was disposed of in the second half last year. The balance sheet remains healthy. Working capital expanded on the back of double-digit revenue growth. Net debt increased as a result of working capital requirements, as well as the payments relating to the Westcon EAP scheme. Liquidity remains strong. Slide 13 represents our segmental balance sheets. The slight reduction in Westcon net debt at the end of H1 is particularly pleasing considering the very strong growth in that period. For most of H1, Westcon continued to benefit from extended supplier payment terms to address supply chain constraints in the channel. These extra payment dates are expected to be reversed in H2. Slide 14, the cash flow statement. The cash flow statement for the comparative period is presented on a combined basis, i.e., including the results from Analysys Mason, which was subsequently disposed of. Cash generated from operations was positive despite working capital requirements and the settlement of the Westcon share-based payments during the period. In addition, a cash dividend of $14 million was paid in the first half. I will now hand over to Jens to cover the rest of the presentation.

Thank you, Ivan. I'm on Slide 17, Westcon International highlights. Another very strong performance. Revenues grew by 15% and EBITDA by slightly more at 16%. Cybersecurity continued to enjoy enhanced demand, while in this period, networking grew the most, supported by backlog unwind. A proportion of this growth was driven by improving product lead times, but the underlying trend remains solid. Even with this growth, a good balance to working capital management held the net debt steady. Slide 18, revenue. Of the 15% revenue growth, a portion was derived from an improvement in hardware deliveries, which are transactional, one-off in nature. The recurring revenue increase was a very respectable 12%. Recurring revenue is often a better indicator of the longer-term growth trends. Slide 19. All regions had very solid revenue growth. Total revenues topped $1.85 billion. Europe, by far the largest region, grew by $120 million or over 12%. The smaller regions of Asia Pacific and the Middle East and Africa grew even faster at a combined 20%. The overall growth translated into 16% in constant currency. Slide 20. We are just over 12 months from when the total backlog peaked at around $1 billion. The normalization since then has taken time but has been quite significant. We expect a continuing trending improvement but at a reduced rate. Slide 21. There was an increase in revenue contribution from the Comstor segment as the backlog unwind around Cisco hardware products and associated software solutions was much more pronounced. The broader SMB reseller category grew the most as this sector benefited from the backlog unwind on historical orders and also growth in new areas within cybersecurity and cloud. Larger service providers fell as a percentage of the total mix as the phasing of new large projects and historical inventory shortages still correct. Slide 22. The main technology categories remain similar as the networking sector was boosted by the backlog unwind. Even with the hardware backlog unwind, strong cybersecurity sales and a greater software mix increased net revenue reporting. This meant the ratio between software and hardware continued its bias towards more software with better recurring services and maintenance support. Slide 23. Last year's reporting was marked by a period of excessive currency turbulence, especially with the euro and pound versus the dollar. Because of our hedging policies, the overall impact was protected. While we made excess gains on hedging contracts, the recorded transactional gross margins were heavily impacted last year. We have since returned to a more normalized and stable situation where our gross margins are now close to 11%, which is historically at the high end of the range. This normalization makes the jump of 33% in gross profit contribution look quite large. Slide 24. In contrast to gross profit, this year's exceptional EBITDA performance has been masked by the ForEx exception in last year's result. Last year contained $32 million of ForEx gains, some unrelated to the reporting period, thus boosting the EBITDA in H1 of last year. This year's adjusted EBITDA is far more normalized and shows good progress in our aim to move towards 4% EBITDA as a target. The main drivers of growth were Asia Pacific, the Middle East and -- and the Middle East and Africa. Central costs edged up with investments in infrastructure and digital automation projects. Slide 25. Even with the robust revenue growth, net working capital was contained. Overall debt fell slightly as the backlog has improved, inventory has fallen, but this has also presented challenges on being able to supply large customers. DSO receivables days and DPO payables days outstanding were both pretty constant. The balance sheet remains tightly managed and inventory turns should improve if the supply chain continues to ease. Slide 26, outlook. The business is on a strong trajectory, the excellent operational execution with standardized automated processes and integrated global systems is a real differentiator. This is allowing the group to gain market share in certain areas and maximize the growth possibilities in innovative technology sectors. The strong buildup of the past few years is seeing some cooling off as economic challenges and high interest rates feed through. We believe the very positive secular trends will remain intact for our industry as borne out by recent large tech M&A transactions. Moving on to the Logicalis Group. Logicalis Group comprises Logicalis International and Logicalis LATAM. I am now on Slide 29, Logicalis International highlights. Our solid first 6 months, revenue growth was supported by some large deals in Europe, in Germany and Spain, in particular, while the U.K. was weak. The internal investment in modern technologies is improving execution. The overall backdrop to the business is encouraging. Product lead times have improved, and the balance sheet is well managed. Slide 30. The 12% growth in revenue all came from Europe. Germany and Spain had strong performances. Ireland and Portugal were solid, while the U.K. was again challenging. As the revenue increase was product driven, this has not yet fed through to recurring maintenance and support, which tends to lag. Recurring revenues edged up by just over 1%. Slide 31. The largest customers of Logicalis International are in Europe, both Germany and Spain have large, long-term repeat enterprise relationships. The bulk of the increase came from -- predominantly from these 2 countries. The U.S. had an increase in gross sales. However, a big pickup in net revenue accounting for this period suppressed the actual reported revenue growth. Slide 32. The improving supply chain dynamics have been supportive and should support growth in the second half. Asia Pacific structurally has the highest levels of inventory and work in progress. This is also expected to improve. Slide 33. Hardware product sales had the most growth, expanding from 41% to 46% of the segmental revenue mix. The percentage of software reduced due to the greater net revenue recognition in North America. Cloud-derived revenues continued their strong growth, increasing by more than 50%. Slide 34, gross profit. Gross profit grew by 15% or $21 million. This was greater than the growth in revenue and driven by the increase in product sales. Gross margins overall expanded to 24.5%. Slide 35, EBITDA. Adjusted EBITDA grew less than revenue as both the U.K. and South Africa, which are reported inside the EMEA segment had losses. The growth would have been about $3 million higher without those losses and would then have tracked the overall revenue increase. Slide 36. Levels of inventory and inventory days remained low. The year-over-year increase in receivables reflect the overall revenue increase. Overall net working capital fell to $41 million. Slide 37, outlook. The environment is clearly affected by higher borrowing costs and inflationary headwinds, even as the dollar remains strong. There is a shift to greater hybrid cloud configurations as businesses look to reduce the cost of public cloud consumption while harnessing the technology is used within. Supply chains should start to normalize. And as the digital world drives more software value, technology providers will adapt. I will move on now to Logicalis Latin America, Slide 39, highlights. The region remains challenging from a number of factors, notwithstanding the dire economic situation in Argentina. China slowed down with consequently weaker resource and commodities markets play a big part in South American economies. Despite this backdrop, there are some green shoots of promise in countries like Brazil and Chile, while Mexico remains robust. Logicalis LATAM made modest progress over this period as delivery lead times improved and revenues and EBITDA grew. Slide 40, total revenues. The top line recovery was solid as revenues expanded by 20%. Similar to Logicalis International, this growth was product driven and helped by the backlog unwind. The underlying recurring revenue business was stable despite the translation weakness of many local currencies during this period. Everything is reported in U.S. dollars. Slide 41. Encouragingly, all regions produced revenue growth with the largest increase coming from the solar region, which is the southern region of Latin America, which includes Argentina, Chile and Peru. The solar growth of 36% was driven by large mining projects, whilst NOLA, which includes Mexico and Colombia, had 23% growth and Brazil just over 10%. Slide 42. There has been a steady and progressive reduction in backlog in Latin America over the past 12 months. The backlog unwind in this reporting period supported revenues. Brazil still has a ways to go to completely normalize. This continuing normalization should compensate for the lower order intake in H1 for the full year period. Slide 43. The reduced revenue rate weighting of annuity services was mainly due to the translation of services build in local currency into U.S. dollars. The growth in hardware product sales is all based in U.S. dollars. Cloud revenues comprise both dollar-based product infrastructure and local currency build services. The growth in cloud revenues was over 20%. Slide 44. The increase in gross profit of 17% was slightly lower than the overall revenue growth and was weighed down by the very weak situation in Argentina. The growth in gross profit was attributed to the better product sales. Adjusted EBITDA, Slide 45. EBITDA margins increased modestly from a very low base. The growth was large in percentage terms, but small in quantum. Slide 46, working capital. As market conditions in Latin America remain fragile, supplier credit has remained supportive, and the business has executed well on cash collections. The improving supply chain has reduced lead times and backlog and has helped to lower the inventory. There has been good improvement in net working capital days and overall lower debt -- net debt. Slide 47. Lots of uncertainty remains, especially in Argentina. The major economies of Brazil and Mexico are looking better. The region historically has been a laggard in cloud adoption, digital infrastructure and the rollout of 5G services. As these trends develop, the longer-term outlook becomes more encouraging. The region will also be a beneficiary when global interest rates start to fall and commodities consumption improves. So I will move on to wrapping up the presentation with an outlook, Slide 49. Geopolitical risks, such as conflicts and unstable governments can create economic uncertainty. As a global business, we will never be immune to local or regional challenges, but of course, have the resilience of our diversification. The ordinary functioning of global supply chains is slowly resuming, but some industries such as semiconductors face renewed location and production limitations. Demand is easing in many areas of technology as the pent-up demand driven during the COVID years now unwinds and cycles start to normalize. We expect all our divisions to improve their performance over the course of this year. So that concludes the presentation, and we will hand over now to any questions. Thank you. Please use the question tab on the webcast to log any questions.

Jens, we have no questions so far.

Okay. Give it to a few moments. No, nothing?

Nothing.

Well, thank you very much, everyone, for attending. And we will be broadcasting our same format full year results towards the end of May. Thank you very much.