WestconGroup – Divisional report

Dolph Westerbos WestconGroup CEO

Cathy Jessup WestconGroup CFO


Performance
  • Revenue of US$4 869.6 million
  • Gross margins of 10.2%
  • Increased revenue in North America, Europe and Asia-Pacific
  • EBITDA of US$88.5 million
  • Building the foundation for future profitability
Corporate overview

WestconGroup, which goes to market under the Westcon and Comstor brands, is a value-added distributor of category leading security, unified communications and collaboration, network infrastructure and data centre solutions with a global network of speciality resellers. It also has strong capability practices in cloud, services and global deployment solutions.

Westcon-Comstor is represented across six continents, distributes to 180-plus countries and territories, operates more than 20 logistics/staging facilities and transacts with more than 20 000 customers globally.

Westcon

Operating in North America, Latin America, Asia-Pacific, Europe, Africa and the Middle East, Westcon provides solutions from a broad portfolio of premier vendors.

Westcon has deep expertise in the following technologies:

  • Security solutions: Blue Coat, Check Point, F5 Networks, FireEye, Fortinet, HP, Juniper Networks and Palo Alto Networks;
  • Unified communications and collaboration: AudioCodes, Avaya, Jabra, MultiTech Systems, Plantronics, Polycom and SMART Technologies;
  • Networking infrastructure: Aruba, Extreme Networks and Juniper Networks; and
  • Data centre: Citrix, Fujitsu, NetApp, Riverbed and VMware.
Comstor

Comstor is the Cisco-centred business unit of Westcon-Comstor, shipping to more than 100 countries. The business distributes the full line of Cisco solutions:

  • Cisco One Network Environment (“ONE”) enterprise networking: routing, switching, wireless LAN and network management;
  • Security: adaptive security appliances, email and web security (formerly IronPort), Sourcefire, Prime Security Manager, Meraki MX UTM appliances;
  • Collaboration: call control, presence, UC clients (desktop and mobile), contact management, content management, voicemail, web conferencing, video/telepresence infrastructure and end points social networking (on premise and hosted);
  • Data centre: rack and blade servers, UCS Director, Intelligent Automation for Cloud, Tidal Enterprise Scheduler, Nexus DC Switch Range;
  • SolutionsPlus and DevNet ecosystem partner applications;
  • Cisco Services: SMARTnet, Smart Care and Advanced Services; and
  • Software and IoT”: delivery of more outcome-based capabilities through software and networked connections, fulfilling the vision of “Internet of Things”.
Westcon-Comstor

Westcon-Comstor also has capability practices, or specialities, that it offers globally under its Westcon-Comstor brand:

  • Cloud: Amazon Web Services and Microsoft Azure and Office 365;
  • Services: supply chain, financial, education, technical support and professional; and
  • Global deployment solutions: logistics, staging, strategic stocking, configuration, project coordination, VAT recoverability; and global contracting, credit applications, and terms and conditions.

Despite a difficult macroeconomic environment during the year, particularly in emerging markets from which Westcon-Comstor derives a third of its business, Westcon-Comstor continued to invest in common tools and processes with the goal of creating exceptional customer experiences, driving operational excellence and providing new capabilities around services and cloud.

Roll out of its enterprise resource planning (“ERP”) software and systems, including SAP and a new human resources information system tool, and the creation of shared services centres and BPO in EMEA required significant investments. The company also began to see the benefit of creating new capabilities in its services business and cloud solutions.

Revenue contribution % by product category

  • Cisco
  • Unified communications
  • Security
  • Data centre and other

Revenue by business unit

  • Comstor
  • Westcon

Revenue by customer

  • Reseller
  • System integrator
  • Service provider
How Westcon-Comstor creates value
Vision and value proposition

Westcon-Comstor knows it takes more than anticipating technology trends to empower its channel customers. Understanding how those trends change the way businesses operate, delivering scale, and managing complexity in the channel, ensures its value. The company does that through education, technical design and business services – to become the trusted advisers of its customers. Westcon-Comstor works with the world’s best known and most innovative technology vendors to create effective routes to technology markets critical to its growth while also providing fast time to revenue. By providing the right products, services, fast-changing technologies and resources to capitalise on fast changing market opportunities, Westcon-Comstor has become the ICT channel’s go-to source for security, unified communications, network infrastructure, data centre, cloud and services solutions.

As a global value-added distributor at the centre of the technology supply chain, Westcon-Comstor is ideally positioned to enable both IT vendors (suppliers) and solution providers (customers) to effectively reach and support businesses of all sizes in any industry. Westcon-Comstor through its Accelerate Programme continually scans the market for emerging technology vendors who can help expand its portfolio of exceptional products and create the greatest opportunities for its customers. The skills, expertise, loyalty and dedication of its employees worldwide are the driving force behind not only the success of the organisation, but also that of its vendor and solution provider partners. Westcon-Comstor operates under the highest ethical standards and actively supports the communities, industries and markets where it conducts business through charitable and socially responsible programmes.

Westcon-Comstor’s strategy

Since its founding in 1985, Westcon-Comstor has evolved its business model with one clear principle in mind: enabling partners through focus and value-added capabilities. This strategy has allowed Westcon-Comstor to successfully navigate myriad market changes over the years, emerging stronger and more responsive to vendor and solution provider needs. Westcon-Comstor’s leadership team continues this practice today using five strategic priorities as its foundation:

  • Create efficiencies – drive operational excellence, deliver a consistent customer experience and provide a more automated, self-service business model. This is accomplished by standardising processes, a common technology foundation, developing shared services and optimising internal systems.
  • Enhance vendor portfolio – ensure the most relevant, fastest growing categories are represented, available and supported by adjacent technology practices. This heightens Westcon-Comstor’s ability to anticipate technology evolution, maintain its thought leadership position and accelerate incubation of promising vendor technologies globally.
  • Strengthen partner enablement – create a clear and compelling value proposition that makes Westcon-Comstor the distributor of choice for technology solution providers worldwide. Enhancements to eCommerce and self-service tools, business intelligence capabilities and globalisation of the Westcon-Comstor EDGE partner framework (“Engage, Develop, Grow, Extend”) help drive this initiative and build strategic relationships with global accounts.
  • Globalise services capabilities – become the worldwide channel leader in value-added, complementary white-labelled technology and business operations services. Technical services include first- and second-level technical support; new automated provisioning and configuration capabilities; and remote monitoring and professional services such as deployment, maintenance and solution design. These services are being enhanced with new capabilities in financial, marketing and business operations services.
  • Create channel cloud capabilities – build the most compelling offering combining technology with managed and digital services. Westcon-Comstor continues to evolve this new practice, optimising partner enablement services for the cloud. Westcon-Comstor’s BlueSky Cloud and Service Management platform, built to keep its channel customers at the core of the ongoing digital services lifecycle, reports key information and offers real-time analytics to help customers manage and grow their cloud business.

A key objective for Westcon-Comstor is improving profitability through its strategic priority actions. The company is driving its mix to services and other higher margin offerings, managing its operating costs and driving efficiencies. Examples include centralising and outsourcing transactional work; consolidating businesses, management, processes and locations; creating and deploying better tools for automation; and investing overall in IT.

Progress against strategic priorities
FY16 priorities   FY16 execution of priorities   FY17 priorities
Create efficiencies
  • Completed BPO in EMEA; Asia-Pacific plans under way
  • Reorganised elements of Latin America and Africa operations
  • Consolidated offices, managed headcount and base business operating costs
  • Completed SAP implementation in six Asia-Pacific countries; staged to launch new eCommerce, web presence and quote automation in North America
  • Continue to build efficiencies
  • Complete SAP roll out across Asia-Pacific, Europe and the Middle East
  • Complete BPO in Asia-Pacific
  • Plan for BPO in North America
  • Roll out productivity enhancement tools in North America and Europe
Enhance vendor portfolio
  • Focused on 16 global vendor market leaders with dedicated management, global strategy/approach, and regional alignment and execution
  • Added Amazon Web Services, Microsoft cloud and “born in the cloud” vendors to grow cloud business
  • Enhanced the global vendor incubation programme (Accelerate) to quickly and efficiently onboard new vendors
  • Continue to expand portfolio
  • Continued roll out of Accelerate emerging vendor programme
  • Broaden cloud vendor and ISV portfolio
Strengthen partner enablement
  • Began global implementation of a “Digital Transformation” project that enables better user experiences
  • Executed global contracts, business plans and credit services
  • Continue enablement
  • Launch Westcon-Comstor EDGE for cloud
Globalise services capabilities
  • Broadened services capabilities beyond core technical and supply chain services
  • Built “white label” offers
  • Evolved financial services to meet shift from CapEx to OpEx needs
  • Accelerate services business through stronger sales enablement
  • Globalise renewals support capabilities
  • Roll out new supply chain services capabilities
Create channel cloud capabilities
  • Built global cloud organisation structure and integrated into business planning and reporting processes
  • Launched BlueSky Service and Management digital platform in North America
  • Accelerate partners’ transformation to cloud
  • Build out vendor and ISV offering
Markets

The company experienced growth in its North America, European and Asia-Pacific markets. Westcon-Comstor experienced a difficult environment, especially in emerging markets in Africa and Latin America, but also witnessed a slowdown in North America and Europe, particularly in the second half of the year. This volatility resulted in a foreign exchange loss, extended accounts receivable collection times and increased bad debt expense in certain markets. Westcon-Comstor has taken necessary steps to reduce costs in challenged markets and to limit further exposure.

Performance

WestconGroup accounted for 75% of Datatec’s revenues (FY15: 75%) and 52% of its EBITDA (FY15: 56%). WestconGroup’s revenues were unchanged at US$4.9 billion (FY15: US$4.9 billion) with revenue growth in North America, Europe and Asia-Pacific offset by lower results in Latin America and AME.

Constant currency** sales increased 8% with higher results across all regions except AME. Of WestconGroup’s revenue, 37% was generated in North America (FY15: 34%), 33% in Europe (FY15: 32%), 10% in Latin America (FY15: 12%), 10% in Asia-Pacific (FY15: 10%) and 10% in AME (FY15: 12%).

Gross margins were 10.2% (FY15: 11.2%) with the decrease in margin largely attributable to the reclassification of outbound freight costs from operating expense to cost of sales in FY16. Adjusting FY15 in a similar manner results in a comparable FY15 margin of 10.3%. Gross profit was US$497.1 million (FY15: US$542.2 million). Adjusting FY15 for the outbound freight cost reclassification results in a gross profit decrease of 1.0% (adjusted FY15: US$502.2 million). Operating expenses were US$408.6 million (FY15: US$417.1 million). Adjusting FY15 for the impact of the freight reclassification results in an adjusted FY15 operating expense total of US$377.1 million. The underlying 8% increase in operating expenditure is due to a combination of US$14.7 million of foreign exchange losses associated with the devaluation of the Angolan Kwanza; US$14.9 million of restructuring costs mainly associated with the EMEA transformation and transition to BPO; increased provisioning against accounts receivable, particularly in Latin America and Africa; and higher headcount. Operating expenses as a proportion of revenue increased to 8.4% (FY15: 7.8% after freight reclassification). WestconGroup has initiated certain restructuring actions aimed at right-sizing its cost base.

WestconGroup’s EBITDA was US$88.5 million (FY15: US$125.1 million) with lower results across all regions except North America, while EBITDA margins were 1.8% (FY15: 2.6%), with lower margins in all regions except North America. Operating profit was US$62.2 million (FY15: US$100.2 million).

Net working capital days increased to 34 days (FY15: 27 days) driven by higher DSO and lower inventory turns offset by higher payable days. Higher net working capital days, reduced cash earnings and increased capital expenditure resulted in an increase of US$105.8 million in net debt to US$271.0 million.

Of the US$29.5 million capitalised development expenditure in FY16, the majority is attributable to the SAP ERP system roll out, productivity tool development through Digital Transformation and Cloud development.

Angola, in recent years, has been an important contributor to the profitability of the AME region. In FY15, revenue in the country totalled US$61.1 million. The weakened Angola economy, mainly as a consequence of the fall in the price of crude oil, has led to a material decline in the exchange rate of the Kwanza to the US Dollar. Additionally, the National Bank of Angola instituted capital controls that render the timing and quantum of conversion of Kwanza to the US Dollar very difficult and unpredictable. This resulted in foreign exchange losses of US$14.7 million in FY16, of which US$10.2 million has been classified as unrealised. Management has implemented a series of actions to control the exposure in Angola and other volatile markets and to minimise further losses.

WestconGroup has successfully implemented a restructuring and BPO transformation of its EMEA operations to deliver future improvements in operational efficiency. Total costs in FY16 were US$13.2 million and a further US$1.4 million is expected to be spent in FY17, as planned. The success of this project has resulted in similar initiatives being contemplated in Asia-Pacific and North America. In Asia-Pacific, the scope of this project has been finalised and will include elements of the finance and operations functions. Total costs in FY17 are expected to be approximately US$7.0 million. Similar planning work on North America is under way.

The roll out of SAP across WestconGroup will continue in FY17. The remaining countries in Asia are expected to go live in FY17, with the Middle East markets in H1 FY17 and continuing with other markets in H2 FY17.

** 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.

Partners: customer and vendor relationships

Westcon-Comstor’s partners include technology vendors, and customers such as value-added resellers, systems integrators and service providers offering technology solutions for small and medium-sized businesses, enterprise organisations, governments and other vertical markets around the world. Solutions include the design and configuration of unified communications and collaboration, mobility and data centre networks, as well as network extensions such as videoconferencing, network storage, unified messaging and network security. Westcon-Comstor also provides a range of comprehensive services to complement these solutions, such as Westcon-Comstor EDGE, its unique partner enablement platform.

Partner engagement programmes and an ongoing focus towards vendor relationships continue to create new market opportunities both now and in the future. Westcon-Comstor’s 16 global vendor lines provide the company’s foundation for future growth. As examples, Juniper was recently launched into China, NetApp was launched across Latin America, Palo Alto Networks was expanded to more countries, and Avaya’s Unified Communications as a Service solution is now marketed globally. Westcon-Comstor continues to build new strategic alliances with vendors across targeted categories in security, collaboration, hybrid storage and cloud.

Awards and recognition

Westcon-Comstor’s leadership, vision, programmes and performance continue to draw the attention of the technology market it serves. From vendor partners to technology journals, the reaction is clear: Westcon-Comstor’s relentless commitment to excellence transcends all facets of the organisation. Accolades include:

Westcon Global – Global Distribution Partner of the Year, Palo Alto

Westcon UCC – Unified Communications Best Practice, Plantronics

Westcon Australia and New Zealand – Distributor of the Year, Juniper

Westcon EMEA – EMEA Distributor of the Year, F5

Westcon UCC UK – Distributor of the Year, Avaya

Westcon Middle East – Best Business Development Initiative of the Year, APC

Westcon Africa – Sub-Saharan Africa Award – Distinction of Authorised Distributor, VMware

Westcon Africa – North Africa Award – Distinction of Authorised Distributor, VMware

Westcon MAT & Africa – Distributor of the Year for Emerging Markets, VMware

Westcon South Africa – Distributor Award of Excellence for High Performance and Achievement, Zebra

Westcon Security Africa – Distribution Contribution of the Year 2015, Juniper

Westcon LATAM – Worldwide Distributor of the Year for Emerging Markets, VMware

Westcon LATAM – Top Distributor, Fortinet

Westcon LATAM – LATAM Distributor of the Year, Aruba

Westcon Brazil – LAC Distributor of the Year, Citrix

Westcon Brazil – LATAM Distributor of the Year, Check Point

Comstor US – Global Collaboration Distributor of the Year, Cisco

Comstor Philippines – APJC DAP Distributor of the Year, Cisco

Comstor Philippines – Distributor of the Year, Cisco

Comstor UK – Networking and Infrastructure Distributor of the Year, Cisco

Comstor UK – Networking and Infrastructure Distributor of the Year, CRN Channel Awards

Comstor Africa – Collaboration Partner of the Year, Cisco

Comstor Africa – Africa Distribution Partner of the Year, Cisco

Comstor Middle East – Distribution Partner of the Year, Cisco

Comstor Belgium – Distributor of the Year, Cisco

Comstor Nordics – Distributor of the Year, Cisco

Comstor France – Distributor of the Year, Cisco

Comstor MCO – Distributor of the Year for Security, Cisco

Comstor Mexico – Distributor of the Year, Cisco

Comstor Brazil – Distributor of the Year, Cisco

Westcon-Comstor Sweden – North Europe Distributor Award, Juniper

Westcon-Comstor NOLA – Value Added Distributor, Citrix

Westcon-Comstor Brazil – 100 Best IT Companies to Work For

Westcon-Comstor’s executives are active members of the industry body, the Global Technology Distribution Council (“GTDC”), and its CEO serves as executive director on the Board. The GTDC is the industry consortium representing the world’s leading technology distributors who together represent more than US$130 billion in annual revenue.

Outlook

Under the leadership of CEO Dolph Westerbos – appointed late 2013 – and his executive leadership team, Westcon-Comstor is building a foundation for future growth.

Because of the company’s broad geographic portfolio, the worldwide economic slowdown impacted its business in FY16. As a result, the company has reduced its cost structure and derisked its business in volatile markets.

Westcon-Comstor will continue to invest in best-in-class common systems and processes to drive efficiencies and create exceptional partner experiences. It will continue to advance its ERP roll out, productivity tools, and BPO programme across its regions.

The company will also continue to expand its emerging vendor incubation plan, the Accelerate Programme, to ensure greater success and profitability for promising new technologies.

Globally, significant focus remains on growing and driving the company’s highly profitable services business and accelerating cloud.