Logicalis – Divisional report

Mark Rogers Logicalis CEO

Robert Bailkoski Logicalis CFO


Performance
  • Revenue flat at US$1 532.8 million
  • Gross margins of 23.1%
  • Results negatively impacted by strong US Dollar
  • Acquisition of ATIG in the US and Thomas Duryea in Australia
Corporate overview

Logicalis Group (“Logicalis”) is an international multi-skilled solution provider providing digital enablement services to help customers harness digital technology and innovative services to deliver powerful business outcomes.

Logicalis’ customers cross industries and geographical regions; and the company’s focus is to engage in the dynamics of its customers’ vertical markets; including financial services, TMT (telecommunications, media and technology), education, healthcare, retail, government, manufacturing and professional services, and apply the skills of its 4 000 employees in modernising key digital pillars; data centre and cloud services, security and network infrastructure, workspace communications and collaboration, data and information strategies, and IT operation modernisation.

Logicalis is the advocate for its customers for some of the world’s leading technology companies including Cisco, HPE, IBM, CA Technologies, NetApp, Microsoft, Oracle, VMware and ServiceNow.

Logicalis has revenues of over US$1.5 billion and operates in Europe, North America, Latin America and the Asia-Pacific region.

How Logicalis creates value

Logicalis’ go-to-market strategy is built around engaging with its customers to deliver tangible business outcomes through implementation of data centre, networking, communications and collaboration solutions, mobility, data and information analytics, cloud services, and its Optimal Service portfolio: integration and professional services, lifecycle and managed services and cloud solutions, with a growing focus on embedding security across all the technology offerings.

Logicalis continues to evolve its market offering, and it is seeing growth in new markets, specifically in its Internet of Things (“IoT”) practice in Brazil, its Independent Software Vendor (“ISV”) practice in North America, and in its IT Service Management (“ITSM”) practices in Europe.

Furthermore, Logicalis works with both IT and now line-of-business stakeholders to align business strategy with technology investments, driving strategic business objectives through the intelligent adoption and application of technology for competitive advantage. In the last 12 months, Logicalis has seen the growth in the Consulting and Advisory Services area of its business, and has created an European Advisory Services group, mirroring its already successful practice in Latin America.

Logicalis demonstrates its value through its ability to service the changing demands of a more digitally literate customer, employee, student, or citizen, who now demand improved access to experiences, services and products, driven by increased use of mobility, social media, data analytics and cloud.

Logicalis’ goal is to be a strategic partner of the CIO, enabling them to satisfy and operate all aspects of IT more effectively, accelerating the adoption of automation across its core platforms and applications, investing in the systems and processes that drive agility into IT service delivery, and improving the satisfaction of users by responding to the changing demands for technology-led business innovation across all areas of its organisation.

Logicalis has an independent and therefore flexible and objective approach to how customers own, operate and consume core IT services which enables it to achieve its core business goals. This drives Logicalis’ revenue streams in systems integration, lifecycle and managed services, and a growing opportunity in provisioned cloud services. Logicalis seeks to help all stakeholders understand the value of technology investments, and choose the ownership, operational and consumption model that is right for their individual business circumstances.

Logicalis’ strategy

Logicalis’ strategy is based on four key success factors:

  • Technical excellence in advanced and emerging technologies;
  • Industry and business know-how and intrinsic understanding of its customers’ business challenges;
  • The ability to define, package and deliver solutions and services that meet the business or technology demands of its customers; and
  • The capability to support the changing operational and IT consumption demands of its customers.

The result of this strategy is a strong customer base across the Europe, North America, Latin America and Asia-Pacific regions.

Revenue by segment

  • Product
  • Professional services
  • Maintenance and managed services

Revenue by vendor

  • Cisco
  • IBM
  • HP
  • Other

Logicalis’ strategic goal remains the maximisation of growth in profit and value by gaining strength, capability and market share in its main markets and establishing Logicalis as the IT partner of choice for customers. Logicalis’ key aims include the following:

  • Achieve above industry average EBITDA ratios and cash conversion;
  • Continue with balanced growth, organic and through acquisition;
  • Offer lifecycle IT solutions and services in all operating territories;
  • Maintain leadership in innovation for its solutions and service offerings;
  • Increase annuity (recurring services revenues) sales;
  • Focus on customer business needs at both the CIO and line-of-business levels;
  • Invest in processes, people and systems that provide its customers with consistent industry best-in-class service;
  • Leverage knowledge and best practice processes in all territories; and
  • Attract and retain high-calibre employees.

To achieve these strategic objectives, Logicalis continues to focus on building long-term relationships by:

  • Engaging with customers at all levels and across stakeholder communities;
  • Focusing on business outcomes and value;
  • Positioning itself as a trusted and capable partner for technology and service excellence; and
  • Expanding its portfolio of Logicalis products, solutions and services through investment in resources, expertise, partnerships and acquisitions.

Logicalis’ strategic positioning provides benefits and also carries business-specific risks, examples of which are discussed below.

The market transition to cloud is now happening at a more controlled pace. Logicalis’ customers are now strongly investing in cloud services, particularly around cloud on-premises and hosted infrastructure services (private cloud and managed private cloud). Logicalis has been able to capitalise on this move, especially in the private cloud market, but it’s now seeing demand from its customers to access the public cloud as part of a hybrid cloud strategy. This is particularly evident in North America and Europe, where public cloud is gaining maturity and acceptance, creating requirements for new partnerships and skills availability in its business. To respond to this, Logicalis has invested in hybrid cloud services in all markets and its recent acquisition of Thomas Duryea in Australia positions Logicalis well to capitalise on this.

Logicalis generates a disproportionate percentage of its operating profits in Brazil and its market position there also presents possible business risk. A slowdown in the Brazilian economy, resulting in a slowdown in the service provider market, has impacted the business during FY16 and could impact its future growth potential and profitability. Logicalis is building a broader customer base in Brazil, in enterprise and the public sector markets, to manage the impact of this risk.

Progress against objectives
FY16 objectives   FY16 execution of objectives   FY17 priorities
  • Continue to increase the services and annuity revenue mix
  • Services and annuity revenue increased by 10% on a constant currency basis, although the mix showed a modest decline as product revenue increased by 13%
  • Continue to focus on improving the services and annuity revenue mix
  • Increase offering of data analytics and security services
  • Reposition the UK operation following the expiry of the Welsh government contract
  • Improve the performance of the Australian operation
  • Restructuring in the UK and Australia continued during FY16 and benefits are expected to be delivered in FY17 and beyond
  • Improve operational leverage by managing the cost base effectively such that operational costs reduce as a percentage of revenue
  • Achieve revenue growth in excess of the market rate by concentrating on higher growth segments and further engagement with vendors growing at faster rates
  • Revenue increased by 12% on a constant currency basis
  • Market growth on the same basis is estimated at low single digits
  • Increase offering of data analytics and security services
  • Seek further acquisition opportunities
  • Ensure successful integration of recent Inforsacom acquisition in Germany
  • Four new acquisitions completed during FY16
  • Inforsacom performed ahead of expectations in FY16 and integration activities are ongoing
  • Seek further strategic acquisitions
  • Ensure successful integration of ATIG (USA) and Thomas Duryea (Australia)
Markets

The demand for IT infrastructure in the markets in which Logicalis operates was again mixed during the year. The market for networking technology products, servers and storage grew in the US and western Europe but was down substantially year-on-year in Latin America. Consequently, total Logicalis revenues remained flat during the year. In particular, demand from the telecommunications operators and service providers in Brazil was weaker due to the continued impact from the economic slowdown.

For IT infrastructure, the outlook for growth remains broadly flat. Analysts are predicting modest growth in IT investment in 2016 across the geographic markets in which Logicalis operates except for Latin America, where market uncertainty in Brazil is causing general unease for service providers and telecommunications operators. However, certain key areas within Logicalis’ portfolio are expected to grow rapidly over the course of 2016 and beyond. These include private cloud and computing, big data and analytics and security.

Logicalis is fully engaged with the acceleration of the move towards IoT, capitalising on the “smarter resources” opportunity (people, offices, streets, cities, factories and universities) in Latin America in particular.

Logicalis sees a continuing desire among its CIO and line-of-business stakeholders to build true multi-source multi-service environments, bringing a single portfolio for the business from both internal IT services and the growing mix of IT as a Service (“ITaaS”) offerings.

According to Logicalis’ third annual survey of over 400 CIOs worldwide, almost one-third (31%) of CIOs globally are routinely sidelined when it comes to making IT purchasing decisions, but a growing number (42%) are now actively embracing a new internal service provider model in an attempt to stay relevant to line-of-business colleagues.

The phenomenon of Shadow IT, when line-of-business executives bypass the IT department and CIOs in making IT investments, is now a reality for the vast majority – 90% of CIOs worldwide find themselves bypassed by line-of-business at least sometimes. With CIOs gradually losing the battle to retain the balance of power in IT decision-making, two-thirds (66%) of CIOs still hold the balance of power over spending, making more than 50% of purchase decisions. This shows that the threat from line-of-business driven IT choices is forcing CIOs to realign their IT strategy to better serve the needs of their line-of-business colleagues, and transforming IT to become the first choice for all IT service provisions.

CIOs are just about maintaining overall control of IT spend, but with the democratisation of IT through technology consumerisation, ubiquitous mobility, growth in the cloud and business transformational technologies such as analytics, line-of-business colleagues’ power in decision-making is only going to present increasingly tough challenges for the CIO and the wider business executive.

However, it seems that transformation is taking shape within IT departments. CIOs are freeing themselves from the day-to-day operational tasks, with 38% now spending at least 50% of their time on strategic activities. It seems clear that CIOs are seeking to regain control by establishing “internal service providers” capable of delivering the choice of services their organisation needs, whether those services are built and operated internally, sourced from managed service partners or are consumed from the cloud.

Given the need to align business demand and agile technology supply, Logicalis is helping its customers explore and invest in the next generation of internal IT platforms such as private cloud and emerging software-defined networks (“SDNs”) and data centres (“SDDCs”).

Alongside these technology transitions, the market continues to demand more consulting skills in best practice IT operations and processes, connecting technology platforms to day-to-day internal IT service delivery, and enabling organisations to blend services internally, from partners, and from the cloud into a coherent whole. Logicalis continues to invest in these skills across its business and expects growth in these areas beyond 2016.

As Logicalis’ customers move to a model where they have a blend of internally and externally provided systems, solutions and services, Logicalis continues to invest in defining and bringing to market pre-packaged solutions and services, allowing customers to consume best practice and agile IT solutions directly from Logicalis Managed Services or from its cloud platforms (currently located in 11 locations, across Asia-Pacific, Europe, Latin America and North America).

Performance

Logicalis’ management is focused on building a strong business through organic growth and acquisition and has delivered a reasonable financial performance in the year under review in difficult trading conditions and against the headwinds of a strong US Dollar.

Revenue, excluding sales to other Datatec companies, was flat at US$1.5 billion (FY15: US$1.5 billion), including US$53.6 million of revenue from acquisitions made during the year. Revenue performance was deflated by the impact of a strong US Dollar, particularly versus the Brazilian Real. On a constant currency** basis, revenues increased by 12.0%.

Logicalis achieved gross margins of 23.1% (FY15: 24.2%). This was impacted by the devaluation of the Brazilian Real versus the US Dollar and a general decline in service margins. As a consequence, gross profit was down 5% to US$353.4 million (FY15: US$371.6 million). EBITDA declined by 17% to US$80.9 million (FY15: US$97.0 million), resulting in an EBITDA margin of 5.3% (FY15: 6.3%).

After charges for depreciation and amortisation of intangible assets, operating profit was down 24% to US$56.4 million (FY15: US$74.2 million).

DSO for accounts receivable of 45 days at year-end was exceptionally low, mainly due to stronger cash collection on a specific number of large deals transacted towards the end of the financial year (FY15: 58 days). Changes in customer mix also influence this metric. Logicalis’ DPO for accounts payable worsened to 82 days (FY15: 89 days) as the impact of payment holidays taken in FY15 unwound. Net cash was US$77.6 million, only 6% lower than US$82.4 million at 28 February 2015 despite making two large acquisitions during the year. An operating cash conversion ratio for the year of 74% of EBITDA was offset by acquisitions funded in the year, capital expenditure on fixed assets, taxation and increased interest payments.

**The pro forma constant currency information, which is the responsibility of the Datatec directors, presents the Group’s revenue for the current year had it been translated at the average foreign currency exchange rates of the prior year. This information is for illustrative purposes only and because of its nature, may not fairly present the Group’s revenues. The Group’s auditors have issued a limited assurance report (in terms of ISAE 3000 Assurance Engagements other than Audits or Reviews of Historical Information) on the pro forma financial information presented, a copy of which is available for inspection at the Company’s registered office.


Effective 1 May 2015, Logicalis UK acquired Trovus, a leading provider of analytics dashboard solutions to business executives.

Effective 1 September 2015, Logicalis USA acquired the trade and assets of Advanced Technology Integration Group (“ATIG”). ATIG provides IT and professional services including data centre, unified communications, cloud and infrastructure integration throughout the Midwest, and also in select east and west coast markets of the United States.

Effective 1 October 2015, Logicalis acquired Lekscom Limited, a Jersey-based networking and collaboration provider, adding new capability to bolster its Channel Islands operation.

Effective 1 December 2015, Logicalis Australia acquired Thomas Duryea, a leader in designing, building and deploying data centre, data management, enterprise information systems, systems management and cloud environments for mid-sized and large enterprises in Australia, building strength and adding scale to its existing Australian operations.

Partner and vendor relationships

Logicalis continues to build strong relationships and partnerships with key stakeholders in its business, customers and vendors, and service partners.

Its strategy of building strong customer intimacy continues to enable Logicalis to grow its relationships and solution and service engagements with existing clients.

Its strong relationship with Cisco (Logicalis’ primary vendor partner) in its core products was maintained in FY16. However, a number of countries were presented with specific awards in its strategic priority revenue segments, such as Logicalis US winning the Cisco 2016 US Nationals Cloud Reseller Partner of the Year Award and Logicalis’ Latin American businesses winning the Cisco Cloud Builder Partner of the Year. In addition, Logicalis UK was recognised as the Cisco Service Partner of the Year.

In FY16, Logicalis Spain was awarded Partner of the Year by IBM.

Outlook

Logicalis’ operational priorities for the coming year are to continue to demonstrate the value of IT to its customers. Logicalis will continue to engage with clients through solutions and service-led sales engagements, and build out a common portfolio of solutions and services in geographies where it currently concentrates. Logicalis will maintain its focus on investing and innovating in its main areas of growth – data centre, networking, communications and collaboration, cloud solutions and managed services. Emerging trends such as private cloud, security services, mobility, business analytics, IT service management, big data, and cloud consumption are creating new opportunities to further differentiate Logicalis in the market and with customers.

General market conditions for IT products and services is forecast to improve in FY16 but trading conditions, particularly for product sales, remain challenging. The strong growth in cloud-based solutions is disrupting the IT market. Logicalis will closely manage operating costs and maximise the opportunities provided by its multinational customer base. In addition, Logicalis expects to benefit from the changes in customers’ consumption demands, and further benefit from the investments it has made in data centre and cloud-based services in order to grow its annuity-based managed services.

The two main financial goals for the coming year are the same as in prior years, namely to achieve a revenue growth rate in excess of the market and increase operating profits.