Dicker Data Limited (DDR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Dicker Data Limited Half Year 2021 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. David Dicker, Chairman and CEO. Please go ahead.

Hello, and welcome to our H1 for 2021. We had a pretty good outcome in this year's H1, especially considering what a fantastic result we had last year. But despite that, we were able to increase revenue by 6.3% and both net and pretax profits by 9.2%, both extremely good numbers, especially in such difficult situations that we currently find ourselves in. I feel that we have a good platform for the future, and while we closed the deal after the end of the H1, our Exeed acquisition is going to give us a very good platform for the future. I'm going to now hand over to Mary, who will give some much more detailed information on the actual numbers to the period. Thanks very much. Mary?

Thanks, David, and thank you to everyone for joining us on the call this morning. We're pleased to announce our half year results, and like David said, following some busy times in the last couple of weeks working on the Exeed acquisition as well, we're really pleased to be able to present the financial statements -- the half year financial results. In summary, and David has already mentioned it, in terms of revenue, we have finished the half year 6.3% up on what was a significantly positively disrupted half year last year. We see COVID pandemic and the shutdowns and the work-from-home movement that we experienced in the first half particularly. If we break it down a little bit further at a country level, Australia grew revenues at 5.4%, and New Zealand, we grew at 18.8%, setting us up in a good way with the acquisition that we've added there. We added 5 new vendors for the half year, which contributed $14.5 million of revenue. And we saw our existing vendors, and by existing vendors, that includes vendors we had on the books from FY '20 and prior and some of them starting to get full value for, grew by 4.6%. Overall profitability also improved with increase in other income and lower interest costs bringing profit before tax growth at 9.2% and basic earnings per share increasing to $0.185 per share, up 8.8%. If we start looking at the next slide on Slide 6 in terms of financial trends, you can see the trajectory on the revenue growth with a 14% CAGR increase. The second half of last year was softer than the first half. So we've got a good platform of growth for the second half of FY '21. On the margin side, we did see our margins abate a bit, and that's coming off a very strong margin half in FY '20 with the demand that we experienced in that period. So whilst margins are not down to sort of the average long-term trends, they are slightly lower than the previous year, partly supported by the fact that there's disruption still in the market with the supply constraints that we're experiencing. In terms of net profit, our margins are strong, again, reflected by not only the contribution from increase in gross margin contribution but also a reduction in interest costs and the increase in other income. If we look at -- in terms of the half year results, revenue finished at $1.069 billion. Gross profit increased by 3.3%, and again, like I said, as margins were tracking slightly lower than the previous year, but on the increased revenue, the contribution to the profitability increased. We've been able to obtain some operating cost leverage with operating cost as a percentage of revenue slightly decreasing and net profit after tax also increasing by 9.2%. If we look at the New Zealand results, this particular slide is reflected in New Zealand dollars. So the growth represented here is the 21.3% on the comparative period last year. And we have called out that we do see New Zealand as a great growth opportunity for us, and this is supported by our strategy to acquire Exeed in the New Zealand market. We are starting to see the metrics in our New Zealand business improve, and this will be bolstered with the addition of the Exeed business, which gives us the scale to work towards the metrics that we have in the overall Australian business and the consolidated business. If we look down at the balance sheet, again, quite solid result. We've been -- maintained strict working capital disciplines. We have seen inventory levels come down a little bit, partly because of the supply constraints, an improvement on the metrics around our service cover ratio and our debt-to-equity ratios as well. So we're in a good position in terms of supporting the future growth of the business. To give a little bit more information around the Exeed acquisition, which we announced after the half year results. So on 30th of July, we entered into a sale and purchase agreement to acquire the Exeed Group business operating across Australia and New Zealand. The purchase price was $68 million on a cash-free, debt-free basis, but we did assume the working capital debt that was on the balance sheet at completion, which was part of the transaction. We were able to complete the transaction on the 6th of August, but it has an effective date of 31st of July. So we will have 5 months of earnings contributed to the FY '21 results from the consolidated Exeed business into the Dicker Data business. In terms of the size of the opportunity, Exeed Group represents combined annual revenues of approximately NZD 380 million and EBITDA of about $15 million. Of that $380 million, $310 million is in the New Zealand business, and $70 million was part of the Australian Exeed business. The acquisition, particularly in respect of New Zealand, will propel Dicker Data New Zealand to be the second-largest distributor in the New Zealand market with -- we're estimating annual revenues at approximately $500 million there. I'm glad we'll be able to give a little bit more color on the New Zealand landscape in the business update. In terms of who is Exeed. So Exeed's a distributor very much like Dicker Data, has been in the industry for over 19 years, second-largest distributor currently in New Zealand. Their revenue -- revenues of New Zealand, $380 million, as I explained before. They have also got an established retail business with some very key vendor alignments there, particularly HP Inc., HP Enterprise and an Apple business, which we have previously not participated in. They've got 119 staff across Australia and New Zealand, and they've -- we get access to 1,200 new reseller partner base -- or there's some overlap on the partner base, but there's definitely an opportunity with a lot of unique partners as well. So at this stage, we're still working through the completion accounts and the quantifying the fair value of assets and goodwill component of the transaction and also assessing the synergies, which we would expect to derive from the transaction, and we'll be able to give further update on that in our next market update. I would like to hand it over now to Vlad to give you a business update, and we'll be able to take questions after that.

Thank you, Mary. Good morning, everyone. Just wanted to give you a business update, a bit of a feel for the market. Also, we're going to share with -- from now on, with you, our overall IT distribution market share position. We previously have been focusing a lot about corporates and commercial type of scenario because that was the 99.9% of our focus. Our focus will be slightly shifting, and I'll give you a little bit of color on why this is happening. But overall, Dicker Data has always been a very strong leading value-add technology distributor, and we continue to be one no matter what route to market we take, whether it's corporate, commercial, enterprise, and now we will start focusing on some selected consumer and retail markets. The acquisition of Exeed is giving us that opportunity to enter a multibillion-dollar revenue market. However, saying that, we have to be very, very selective in how we participate in it, so it does fit our performance-based and profit-driven model. But all in all, if you look at our half, it was a very, very busy half. Lots of things been going on in the market. Like David said, despite the very challenging times with some supply shortages and lockdown situation, we still performed incredibly, incredibly strong, especially given a 20% year-on-year increase in the same half last year. So if we look at Slide 13 in our IT distribution market share, we're holding 22% share in Australia, and now with acquisition of Exeed, we're moving to around 28% market share in New Zealand. So being -- from being 8% and being underrepresented in New Zealand, that acquisition is - confirms our commitment to New Zealand market. New Zealand market is a strong, developed, mature and innovative market, one of the most innovative and adoptive markets in the world. So we are very, very pleased to cement our position as a very strong value-added leading distributor across Australia and New Zealand. Now we're going to move into next slide, where there is -- showing a broad sector of our vendors. And while our vendor count is growing, I would like to point your attention that it's still not even half of the vendor count that we represent that have some of our competitors like Ingram Micro and Synnex-Tech. It's not a quantity of vendors. It's always been a quality of vendors. It's always been the position of where can we add value. Now, of course, as we started to move slowly but surely into some selected consumer business in Australia and New Zealand, the opportunity to bring new consumer brands into both Australia and New Zealand vendor portfolio is increasing. Obviously, one of the most exciting vendors was Apple that comes through the acquisition in the New Zealand business. So definitely will be an opportunity to see if we'll be able to start representing them in Australia in the future. But vendor logos are growing. Our presence is growing. Scale is getting bigger, and we're very, very happy about it. However, if I would highlight a couple of key transformative acquisitions that happened in the first half, and we move to Slide #15, and I'll just quickly go through the new vendors and what opportunities they bring to us as an organization. Fourth point is one of the leading cybersecurity vendors appearing in a global stage. So we're very, very happy to start our partnership with them. We expanded our partnership with HP by bringing HP large-format print division. Again, it's a very value-add piece. I think we'll be able to do good business there. We expanded our partnership further with Microsoft by signing Surface Hub. This is part of our AV strategy, again, very exciting. NVIDIA, Mellanox is actually adding to our already very strong networking portfolio with Cisco, Juniper, Hewlett-Packard Enterprise. Mellanox will be beautifully positioned into the lower end of our SMB markets. Jabra, again, a very strong UC and AV vendor, will be a great complement to our smart office strategy. One Identity, cybersecurity again. StarTech, a very strong peripheral vendor, perfectly positioned with our end-user compute push. Zoom is obviously a very well-known consumer brand, and we will try to push their solutions into the SMB and commercial market. And of course, one of the major acquisitions, not only of the half, but probably for the last couple of years, is the addition of the VMware business. This is an absolutely transformational acquisition, already starts doing really, really well. We've only been trading for about 4 months, and it's already exceeding any expectations even I had. So this is perfectly fitting with our multi-cloud hardware IT strategy. It links a lot of our current enterprise vendors together, and it was absolutely missing piece for us to continue conquering that hybrid cloud environment. So we're very, very pleased on this. If we look further to Slide #16 and looking at how long-term vendor diversification, we're seeing that we're perfectly following our strategy and top 5 vendors now representing 50% of our revenue, and it's a very, very big change from 9 years ago. Back in FY '12, our top 5 vendors represented 90% of our revenue. So we are diminishing the risk. We're improving our diversification, and we're building resilience, and this is very, very important. This strategy works very perfectly, especially in situations like we are in the last couple of years. Being diverse, having a diverse portfolio between hardware, software, communication, servicing and going -- and finding different routes to market and finding the opportunity to service different partner bases that give us a strong resilience and continuous growth even in the most toughest market environments. So is that going to dramatically continue changing? I don't think so. I think our top 5 vendors are always going to be very strong. We've built a lot of skills and speciality around these top 5. And I think it's probably going to stay somewhere around 50%, and I think as a strategy, we're very, very happy with that because, once again, we are not a broad-based distributor but value-add distributor, and our core value comes around servicing our partners in a very similar fashion that they get serviced by those vendors. So it's important for us to stay specialized. Okay. So now we look at Slide #17 and looking at revenue category and what worked well in half 1 and what didn't and opportunity. So once again, let's remind ourselves that we were going into first half '21 and putting us against an exceptional, let's just say, maybe a little bit unnatural 20% year-on-year growth on the same half last year. So we're always aiming, trying to get either flat or maybe a little bit slightly over on the revenue side. And we knew that PCs, for example, is going to -- PC sales and demand is going to normalize. We knew the challenges with such short supplies. We knew that some of the security and desktop virtualization vendors who've absolutely boomed in 2020 will normalize again. So -- and that's exactly what happened. If you look at our software, it kind of remained soft, not because we didn't -- most of the vendors grew really, really well, but some particular ones, because of this unnatural growth in previous half, sort of flattened out a bit. What we did see, though, a lot of enterprise projects started to come back. Overall, data center infrastructure is definitely a lot more active. We will see a lot more invoicing and pause happening probably more in the second half. Obviously, not in -- we haven't -- but amount of activities is definitely increasing. What worked really well is our networking business. I mean 2020, all those months in lockdown just prevented from a lot of deployment and installation of the networking infrastructure. That came back very nicely in the first half of this year. Unfortunately, now we're all in lockdown, so it's probably going to put a little bit more pressure on that number in this period of time. Servers and storage. Once again, it was flat year-on-year, but activity levels are high. So I'm expecting good growth. If we look at AV and Print segments, they're doing really well. Our subscription is growing. So look, overall, we've balanced our business beautifully in the first half. And if I look at our second half, and I would have a slight prediction of what's going to drive the growth in the second half, that's definitely going to be software, which will start picking up. We will probably see a bit slight upside on the PCs because second half of last year was a bit more normalized. We've seen more of a sustainable growth, not as unnatural, so that gives us an opportunity this year to probably drive a slightly better growth in the second half. It depends, of course, on so many other circumstances. But as we sit right now, I'm fairly confident. If we look at this next slide, #18, coping with market disruption. Well, again, I've said it before. We're just an incredibly resilient business. We're an important business. We're right in the heart of the digital transformation. And it feels like no matter what challenges the market sends to us, we're coping really, really well. We are adapting really quickly, and we're constantly looking at the different opportunities. So that diversification model really made a big difference. I think if -- some segments, we have a bit of a slowdown. We have other segments that are booming. So -- and we'll continue to see that. All right. If we move into next slide, same thing, just, again, talking about how well Dicker Data as an organization positions as an essential service. And again, despite all the lockdowns, we're operating. We've never stopped for a second. And in fact, as soon as we go all in lockdown, I can see some parts of my business becoming incredibly busy. So it depends on where we are, how quickly we can adapt and how quickly we can manage our customers. We are fully ready for Delta impact, whether it's the first wave or second wave. We've been in this situation before many times. We know exactly how to deal with it and how to get prepared. And when I look at the -- a vaccinated world, it's 3 months, 4 months from this point of time and looking more into, I guess, 2022, the technological revolution is going to continue happening. The digital transformation has been accelerated tremendously by all those events. The next 5 years is going to be core of all businesses to become fully digitized, transform in order to continue to perform and stand better to their competition. Again, we will be in the heart of this transformation. So nothing -- so here, it's just all upside for us and for anyone who's involved in the technology world. Moving into 2021 opportunities. Look, I think I've been talking a lot about those opportunities in the last couple of years. Not a huge change for us as an organization, except one circle there in the bottom right corner to selected retail. So of course, acquisition of Exeed giving us an amazing platform. The business has been driving the retail operation very, very efficiently. We want to start building up on that. We know that it's a great opportunity. We -- look, give or take, it's around $3 billion of available distribution markets. I'm not saying that we need to go for a large share portion of this $3 billion because it's done at -- in many instances at a very low margin. But our opportunity here is to disrupt a traditional retail fulfillment business as any distributor is doing now and move it more into value-add selected consumer fulfillment. There is so much of value-add the distributor can bring on board. And if we're successful in doing that, that will be a truly disruptive move on our behalf. It will bring us a lot of great margin, and we'll be able to enter that opportunity bubble with something very, very different to what perhaps some of our competitors are doing. So this is the opportunity. We've just started to build some strategies around it. I don't think it will be a very material -- outside, of course, already what we have -- we're doing with Exeed acquisition, I don't think it will be hugely material for the next 3 to 4 months, but it will be definitely a very, very strong opportunity going in 2022. Okay. Now if I just quickly run through some focus areas. Again, 5G rollout stands out. Unfortunately, it's been slowed down due to lockdowns in the last couple of years. Just simply a matter of deployment and installation of networking infrastructures couldn't really get the 5G taking off. Saying that, it's already moving faster, more in the consumer space, but it's been a bit of a slowdown in the commercial space. So we'll see that a great opportunity for us for the next couple of years. Hybrid cloud. It's with us. It's really adopted well. We have now all major cloud vendors, cloud infrastructure vendors and [indiscernible] to provide us. So positioned incredibly well to take full advantage of the growth here. This particular segment drives a very strong double-digit growth. It's been driving double-digit growth in the last few years. We're going to just see -- continue expanding it. If we look further on Slide #22. Managed service providers, professional service providers is the key customer segments that we're servicing. Again, if I look at where is the growth is -- were coming in the last 12 months, if I look at that enterprise space, it was all managed service providers. We have one of the best programs to service them. We have a very strong coverage around them. We are signing up new managed service providers pretty much monthly, and this is going to continue to drive a very good -- a very good growth for us and our organization. Unified communication and audiovisual, been a good strategy for us for the last couple of years, signing up Surface Hub and Jabra, and if you notice, it's a direct -- as a result of this strategy. So I will see a very strong double-digit growth here as well. And again, this is a very, very big opportunity for us. I think selected retail and value-added distribution into some consumer markets also will boost our opportunity here in UC and audiovisual. We move to Slide #23. So I spoke about selected retail strategy. Again, a very, very exciting opportunity. We have to be very careful about how we execute. We need to be very, very different in the way we go about it. But we're just simply super excited about entering that world with already a very strong platform that Exeed Group is bringing both Australia and New Zealand. So great, great opportunity for us. That's it. That's pretty much my update and my feel for the market, and we would be very happy to take any questions that you have.

[Operator Instructions] We have no further questions at this time. I will now hand the conference back over to Mr. Dicker for any closing remarks.

Thanks, everyone, for their time, and we're moving forward as ever, and the future looks very bright. Thanks very much, and have a nice day.

This concludes the conference for today. Thank you for participating. You may now disconnect.