Diversification boosts profit at Datatec
DEFENSIVE trading by Datatec has protected the technology group from global financial woes, letting it post an 18% rise in revenue and a 13% rise in net profit as an improved business mix nudged up its profit margins.
But its shares lost 10% early yesterday to trade at R20,20 despite strong results for the six months to August .
CEO Jens Montanana said Datatec’s diverse activities and its spread into many emerging markets had kept it strong.
Its largest division, Westcon, which distributes technology equipment, had a disappointing period because of the economic slowdown in the US.
In contrast, its Logicalis division, offering technology services and implementation skills, had an exceptional first half, producing just 25% of the revenue but almost 45% of the profits.
“The quality of our business has improved significantly, and gross profits have risen for the fifth consecutive reporting period,” Montanana said.
The gross profit margin climbed from 12,9% to 13,6%,
The most noticeable change in recent years has been in Datatec’s geographic footprint. Three years ago it earned less than 10% of its profits in emerging markets, which now contribute 35%. That protected it from the financial slump in the US and Europe, since emerging markets are largely escaping the meltdown.
Datatec has recently invested in Brazil and India, gaining substantial coverage in both countries. Its new Indian venture should produce decent profits this year as it aimed to grow by up to 50% now it had Datatec’s global resources behind it.
Montanana expects no short term respite in the developed world’s economic turmoil, but said Datatec’s global footprint would keep it on track to achieve $4,6bn in revenue for the year.
Acquisitions are firmly on the radar, as the tough times will overwhelm technology companies with too much debt, too little economy of scale or insufficient kudos for clients to trust with their orders.
“There are going to be distressed or wounded businesses out there that we can attractively look at. We are going to be highly vigilant in seeing these opportunities,” Montanana said.
Such acquisitions would most likely be in the US, UK or Europe where companies were serving customers hardest hit by the financial crisis. Although it has liabilities of $1,2bn Datatec still has access to $400m in cash resources and credit facilities to fund those moves.
Controlling its cash and paring operating expenses are also key priorities. Westcon must cut its running costs in the US and Europe and will shed between 5% and 10% of its staff. Montanana played down the effect of that, saying some cuts would be achieved by not filling vacancies.
Although Logicalis offers outsourcing and professional services that are often nice to have rather than essential, Montanana doubts cash-strapped customers will cut their budgets in these areas. “They may cut back on capital expenditure but they might want to reduce their costs by getting Logicalis to run their data centres or take over their IT department,” he said.
Its third division is the telecoms consultancy Analysys Mason, which suffered a dip in revenue as companies cut back on seeking its advice. In response it had switched its consultants out of old economy countries into fast growing emerging markets where telecoms were still booming.
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