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Datatec puts disappointing first half behind it, looks forward to improvements

Information and communications technology solutions and services provider Datatec on Monday said trading in the first half of its 2018 financial year had been disappointing, with the company reporting earnings before interest, taxes, depreciation and amortisation of $39-million for the six months ended August 31, compared with $69-million in the six months ended August 31, 2016.

The decrease was attributed to losses made by its Westcon business, with around $20-million lost, while its Logicalis division contributed $4-million in losses, Datatec COO Ivan Dittrich explained during a conference call.

However, the group has now sold its Westcon-Comstor businesses in North America and Latin America and a 10% interest in the remaining part of Westcon-Comstor to Synnex Corporation for $630-million in cash, with the potential for an earn-out of up to $200-million in cash.

Following the disposal of Westcon Americas – the largest profit contributor of Westcon-Comstor – the remaining business, Westcon International, would be directly managed by the Datatec management team.

This business, which has faced difficult trading conditions for the last few years, will be reshaped through a combination of cost-reduction measures and business efficiency initiatives.

Westcon International currently retains the $63-million a year 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 fully implement its plans to reduce the central costs and right-size the business.

Dittrich highlighted that the proceeds from the sale to Synnex would be used to return $350-million to shareholders through a special cash dividend, with a scrip alternative. “And any part of the $350-million that is not paid in cash will be used for a general share buyback as per the authority received at our last annual general meeting.

“The remainder of the purchase price proceeds [$150-million] will be used to settle transaction related expenses, fund working capital and, importantly, reduce [interest-bearing] debt,” Dittrich noted.

He added that any amount received on the earn-out would be returned to shareholders through special dividends and share buybacks.

Meanwhile, Datatec added that it now expected a “much better” performance from Logicalis in the second half of the year, bolstered by Logicalis expecting to benefit from the contribution of Packet Systems Indonesia, which was acquired in September and a major multiyear contract win in Latin America, which will underpin the performance of Logicalis in that geography. 

"The outlook for Logicalis, which contributed most of our profits, is increasingly positive with a number of important developments [and a robust pipeline] set to support an overall improvement in the second half. We are moving rapidly to create the appropriate structure in Westcon International to support the direction of the business,” Datatec CEO Jens Montanana said in the company’s financial statements.

In October, Logicalis realised significant value from the sale of its noncore SMC consulting business to DXC Technology Company for $42-million.

Noting that US profit – which dropped 9.8% from $62.4-million in the first half of 2017 to $56.3-million in this financial year – was impacted by a buildup of costs, paired with a greater-than-expected drop in products sales, Montanana said this “hiccup” marred what would have been a “very solid” performance, with every other region showing profit improvement at all levels.

“We expect to make up some, but not all of the shortfall in the second half,” he added.

Montanana further explained during the conference call that the company continued to see a move to cloud-based infrastructure services and, as such, the company would aim to address this opportunity.

“Traditionally information technology sales outside the network are expected to continue to decline, offset by cloud infrastructure services, security and the demand for mobility products,” he noted, adding that the recent addition of a five-year multinational contract in Latin America would further boost the Logicalis books.