Datatec Limited (DTC) Earnings Call Transcript & Summary

Good morning. We are presenting today our full year financial results to the year ended February 2025. I'm starting on Slide 4, Datatec Group financial results summary. We had a very solid year with strength in all our main divisions. The new format of IFRS revenue reporting is different to previously. In our results summary, we have highlighted gross invoiced income, which represents our total sales. The total invoice value of everything we sold rose by $114 million to $7.74 billion, while our gross profit rose by $48 million. Reduced operating costs meant that adjusted EBITDA rose by more than gross profit at $54 million, which was a rise of 28%. This leverage resulted in a big jump in underlying earnings per share of approximately 80% when comparing like-for-like to last year, including unrealized ForEx movements. Overall, an exceptional set of results. With our improving profitability and cash generation, we have taken the decision to increase our dividend, boosting the payout ratio from 3:1 to 2:1. This is an increase of 50% and equates to a 114% increase in the total dividend paid for the year. It is clear that the growing impetus across our group is being fueled by accelerating demand for enterprise and data center AI infrastructure. This is no longer the domain of the cloud hyperscalers. In fact, their previous dominance has exacerbated the problem. Everyday businesses are rushing to AI enable themselves but have neither the right infrastructure, networks or elevated security to move to embrace AI solutions. Companies like HPE, Dell and IBM are rushing out new products. For example, take note of Cisco's new AI pods for enterprise data centers often powered by NVIDIA. Pretty much all the segments that we operate in are starting to see what could become a monumental and sustained retooling of the IT landscape. We continue to see the pivot to more software, more services and more recurring revenue. This trend is the main driver behind the new definition for IFRS revenue. Many of our peers and competitors are doing the same. Overall, our margins continue to expand while the quality of our earnings grow with better cash generation, improving working capital and lower interest rates. We are well placed in this increasingly complex technology world where IT infrastructure demands, bandwidth capacity and the threat landscape are rising exponentially. I'll hand over now to Ivan.

Thank you, Jens, and good morning, everyone. We are pleased to present an excellent set of results for FY '25. Slide 8, the financial performance, P&L. Revenues continue to be impacted by an increasing portion of software and services being accounted for on a net basis, including as a result of the accounting policy change, which I will explain later. We, therefore, believe that gross profit provides a more accurate reflection of the underlying performance of the business. We also now disclose gross invoiced income on our presentation, which basically represents gross sales for the business. Gross profit increased by 5.6%. We had good quality of earnings with adjusted EBITDA growing by over 28%. Net finance costs increased as a result of higher interest rates as well as higher average utilization of facilities. All of our earnings per share metrics reflect a significant improvement over the prior year, with both headline earnings per share and underlying earnings per share increasing by almost 80% over the prior year. Slide 9, the financial performance segmental. This slide shows the segmental income statements. On here, we also show gross invoiced income. All 3 of the divisions produced a much improved operating performance. Slide 10, gross invoiced income by geography. Over 90% of our business involves selling U.S. technology to international markets with our own value-added local services. The geographic mix of revenues was relatively stable year-on-year with Europe remaining over half of the business. Slide 11, hardware versus software and services. Hardware by value continues to decline as recurring software grows, pulling through annuity services. This analysis is presented on a gross invoiced income basis. More software is being met accounted, including all Westcon software. Slide 12, balance sheet summary. We ended the year with much reduced net debt on the back of very strong working capital management. We've also seen an improvement in our net asset value. The balance sheet remains healthy with strong liquidity. Slide 13 represents our divisional balance sheets. All of our divisions ended the year with improved net cash or debt. Slide 14, cash flow statement. We had excellent operating cash flows, up significantly from the prior year. In the prior year, the Westcon EAP scheme was settled. We also paid a cash dividend of just over $12 million during the year. Slide 15, revenue accounting policy change. I would now like to deal with the change in accounting policy with regards to revenue recognition, especially in the Westcon business. Revenue from sales arrangements, where the company acts as an agent, is accounted for on a net basis. And the commission or gross margin earned on a transaction is recognized as revenue. Where the company acts as a principal in a transaction, the revenue is recognized on a gross basis. In line with changes in peer reporting and changes in how vendors deliver software, Westcon is now considered to act as an agent in all of its software transactions and therefore, accounts for all software on a net basis from FY '25 onwards. The change in policy does not apply to the Logicalis businesses as the primary responsibility for delivering the software can be with either the vendor or with Logicalis, depending on the nature of the arrangements, which would include bundled arrangements. Logicalis, therefore, assesses on a transaction-by-transaction basis, whether it acts as an agent or a principal. I will now hand over to Jens to cover the remainder of the presentation.

Many thanks, Ivan. I'm starting with divisional summary and starting with Westcon. Slide 18 highlights another strong year where the operational leverage in the business model continues to improve. The total gross sales value of order intake grew 15% year-over-year, while EBITDA increased an impressive 25%. Behind this performance was a solid recovery in networking for enterprises and continuing strong growth in cybersecurity. These trends are being underpinned and even accelerated by the demands AI adoption will put on company's infrastructure. The need is now there for many businesses and enterprise users. It is no longer just hyperscaler providers that must AI-ready infrastructure in place. Gross invoiced income. Our new definition of previously quoted gross revenues is now gross invoiced income. This top line grew by 3.3%, driven by a $700 million or 15% increase in order intake during FY '25 versus the previous year. Recurring gross invoiced income rose by 14% to approximately $3.5 billion. This includes all software term licenses and annuity maintenance and services. Sales by geography. All regions, except the Middle East and Africa had top line growth. Reported revenues under our new IFRS disclosure showed a reduction, but this was entirely driven by how software is now recognized as gross profit only and not a drop in our total invoiced or sales value. This rebasing of revenue recognition will change trend in future periods as the hardware to software mix rebalances. Top line analysis. Top line gross invoiced income shows that Comstor Cisco unit contributed 30% of the total mix, while Westcon delivered sales now represent 70%. The contribution across customer categories remains very similar with the majority of the business coming from mid-sized value-added resellers. All the customers are channel partners, such as IT infrastructure solutions providers, security integrators and managed services companies. Gross invoiced income by technology category and the segment. For the first time, cybersecurity made up over half the total sales. This pivot to greater cybersecurity with data center infrastructure will continue to grow rapidly. AI adoption significantly increases the threat landscape as processing capability becomes exponentially more powerful. More cyber means more software as most security solutions have a much higher software content and sometimes are hosted in the cloud. There are also networking solutions which are either virtual or part of a hybrid cloud infrastructure solution. These are also software base. 2/3 of the business now comes from software, resold maintenance and services, which are all capable of being renewed. Gross profit. Gross profit increased by $38 million or close to 10%. The most significant regional increase in both absolute and percentage terms was Asia Pacific. Adjusted EBITDA. Impressively, most of the gross profit increase converted into adjusted EBITDA, which rose by 25%. The $30 million increase was the largest in many years. The growth was broad-based with every region contributing. EBITDA. Reported EBITDA also exceeded the growth in gross profit. However, the strong rising valuation of the business increased the IFRS 2 charge needed for the employee share incentive program. There was also some fundamental restructuring in Europe, which is included. Working capital. A very strong working capital management period. The year-end closing net debt was $59 million better than the prior year, reducing to $30 million. Net working capital days decreased significantly, outstanding debtors days fell and inventory turns increased as overall inventory levels also fell. This solid picture, whereby receivables remain smaller than payables, means the overall funding for the business improves as profits grow. Net debt/cash. This reintroduced slide shows the net debt cycles plotted monthly over the past 3 years. It illustrates the quarterly working capital swings, whereas investment grows as order intake and purchases increase and investment then reduces as invoicing and cash collections rise. It also shows that growth drives working capital but that the recent low points in debt are moving closer to zero at both half year and full year-end. Outlook. While tariff uncertainty is creating some concern around unknown implications for U.S. domestic consumption, we don't believe the export of U.S. technology is in any way a factor or headwind internationally. Many positive themes are combining that collectively will help propel Westcon to the next level. With AI now at the forefront of many enterprise strategies, IT infrastructure and especially cybersecurity is set to get a next-generation boost. Moving on to Logicalis. Slide 31 highlights a very good year for both order intake growth and cloud-based revenues. The company continues to invest internally in its modernization of business systems and tools. There was very good operational leverage down the income statement, driven by excellent EBITDA growth and supported by strong working capital management. Gross invoiced income. No change to the total gross invoiced value of everything sold. It was flat on last year. However, order intake grew with an increase in long-term managed services contracts. The growth in managed services contracts and phased multiyear software term licenses underpinned the recurring growth of 8%. Sales by geography. The move to the new IFRS reported revenue disclosure has not been impactful on Logicalis as a lot of the business is undertaking as a prime contractor of IT capital equipment and managed services. Nonetheless, the new revenue reporting method was unchanged to last year, which showed an overall reduction as more net accounted software was sold. At the gross invoiced income level, Europe declined, Asia Pacific was flat and the U.S. had strong product sales. Gross invoiced income by segment. Previously reported gross sales or total revenue is now gross invoiced income. The category split and comparables are the same as before. It shows hardware shrinking in value, while software services and recurring annuity revenues collectively grew. All cloud-directed solutions, both product and services, grew by 23%. Gross profit. The $19 million increase in gross profit translated into a gross margin of 30% as transactional margins across both product and service categories increased. Adjusted EBITDA. The adjusted EBITDA rose by more than the increase in gross profit as overall operating costs fell. This productivity improvement produced good operational leverage as adjusted EBITDA margins expanded to a new high of 8%. The conversion of gross profit to EBITDA is the key measure of profit generation. EBITDA. Last year's EBITDA was negatively impacted by a one-off tax item and M&A integration costs, making the comparative increase this year look greater. The $90 million of EBITDA includes approximately $2 million of IFRS 2 share-based compensation charge. All regions showed good growth with roughly similar levels of EBITDA coming from the U.S., Europe and Asia Pacific. Working capital. Inventory has come down and stayed down since the supply chain constraints of more than 2 years ago. Receivables and inventory fell as did payables outstanding to creditors. A very solid improving net working capital picture that helped to drive better cash generation. Outlook. The main area of internal focus is the better use of digital technologies to drive down and maintain tight control of operating expenses in what is fundamentally a people business. Externally, the focus is moving to capture new opportunities that play to the core strength of Logicalis and complement its strong installed base. AI adoption will result in many enterprises moving to hybrid solutions to operate their own infrastructure and not outsource everything to cloud providers or hyperscalers. Lastly, Logicalis LATAM, Slide 41 highlights an improving picture across Latin America. After more than 4 years of downturn in the region and internal execution challenges, the newly reorganized operation is starting to gain better traction. The business has been rightsized, principally in Brazil, the largest market. New executive leadership for the region and within Brazil for both sales and finance is in place. The results have started to improve, led by a pickup in order intake and the far more stable situation in Argentina has reduced ForEx losses. All these factors contributed to a better profitable performance. Gross invoiced income. The rightsizing across the business lowered top line sales, reducing both total gross invoiced income and recurring. The late unwinding of the legacy backlog in the previous year meant that the start of last year was met with a much lower order book. However, the order intake situation has recovered well throughout the year. The remodeling of the business with a reduced reliance on telco customers meant overall sales declined. The effect of this was greatest in the largest market of Brazil. SOLA, or Southern Latin America, benefited from the recovery in Argentina. Gross invoiced income by segment. Segment analysis shows the continuing move to increased annuity services. The decline in cloud revenue is not a trend but reflects the loss of a significant customer contract in Brazil. Gross Profit. The effect of rightsizing the business principally in Brazil led to the decline in gross profit. The shape of the business and quality of the gross profit margin is starting to improve. Consequently, gross profits fell by less than revenues. Adjusted EBITDA. Both Brazil and Chile went through fundamental restructuring and leadership changes. There was also a small tax credit and an IFRS 2 expense. The charge and the credit largely netted off. Removing these items meant the adjusted EBITDA grew by over 50%. EBITDA. Like Logicalis International, overall operating expenses fell. This, combined with a small tax credit and much lower ForEx impact in Argentina, meant that reported EBITDA increased similarly to adjusted EBITDA but was actually closer to 70%. Working capital. The improving situation in Argentina played an important role in the normalizing of the regional working capital. Net working capital reduced as receivable debtors, inventory and payables to creditors all came down. Year-end net debt in Latin America reached a multiyear low. Outlook. There are a confluence of positive factors emerging across Latin America. The business model and leadership team have been reorganized. There is a more diversified customer base with less telco-centric dependency. There has been a sharp improvement in the economic situation in Argentina, and there is an improving technology balance with some gains in market share. So that ends the divisional presentation, and I will move now to wrap up with a final slide on Slide 51, and some closing remarks. It is becoming clear that AI will gain broad-based adoption, well beyond the domain of hyperscalers and cloud providers of all forms. AI, other data analytics and machine learning platforms require so much processing power but often running solely in public clouds is not an option. Hybrid cloud setups where on-premises local infrastructure provides fast processing of sensitive data and special security needs are essential. For example, look at how quant funds operate and then magnify this. In summary, all our businesses are experiencing the shift to more software and services with greater annuity. We believe we are well positioned in the crosshairs of both strengthening demand for our solutions and benefiting from the operational leverage. That concludes the presentation. And I will hand over now to any questions. Thank you.

Thank you, Jens. Just a reminder that questions can be logged on the webcast. We have our first question from Viwe Kupiso from Prescient Securities. Well done on the strong results. How is the recent rally in the share price impacting management thinking about share buybacks moving forward?

Thanks, Sharne. Well, all I can -- all we can say in regards to that is that we are continuing with our predefined share repurchase program. But of course, we don't provide any of the specific details or parameters.

Thank you. Our next question is from Katherine Thompson from Edison. Net debt reduced significantly by the end of FY '25. How sustainable is this low level of debt?

Okay. Thanks, Sharne. So I'll take that question. Yes, Katherine, so net debt, the closing position did reduce quite significantly over the prior year. But you would have also noticed that your average utilization of facilities during the year was much higher than that specific point in time. And that's most visible sort of in the Westcon business, which is the most working capital-intensive part of the business. And we now showed sort of on a slide how the sort of net debt fluctuated on a month-by-month basis for the last 3 years. So you could see from there that the average debt levels are a lot higher than the -- sort of then the closing position. That said, with the sort of the shift to sort of more software and services that we've seen over the last few years and the trend that is expected to continue, you would expect that your working capital utilization or the average utilization of the facilities over time should come down. So I would say sort of as a general holistic trend, you would expect overall debt to continue to decrease as more structural changes in working capital are experienced.

We've got a second question from Katherine. Could you talk through the trend for gross invoiced income through the year by division, how did you exit FY '25?

Well, obviously, gross invoiced income is basically top line sales. And if you look at the latter part of the year and headed into this year and what we expect going forward, we expect our top line to grow at a low single digits in all of the divisions. That's most probably a theme across the group in general. But obviously, our gross profit given the ongoing mix change and increase in services and software and so on, gross margin -- or gross profit, sorry, should grow faster than the top line. And that's -- and therein you get the leverage, obviously, as you go further down the income statement.

Thank you. We currently have no further questions.

All right. thank you very much.

We will be presenting again, obviously, as usual, at our interims in October. Thank you very much.