Global information and communications technology (ICT) group Datatec CEO Jens Montanana says a disappointing performance by the company’s subsidiary in North America and a subsequent volume shortfall led to the group’s “underperformance” in the six months ended August 31.

“Performance in parts of Westcon’s North American business, where the new enterprise resource planning (ERP) software system has been implemented, has been disappointing,” he said in an interim results statement on Wednesday.

The JSE- and LSE-listed group achieved modest revenue growth of 6% to $2.7-billion, with expanding gross margins of 15% in the six months.

Twenty-seven per cent of group revenue was generated from North America, 34% from Europe, 18% from Latin America, 11% from Asia Pacific and 10% from Africa, India and the Middle East.

Despite the group’s gross profit lifting by 10% to $413.5-million for the half year, operating costs increased at a higher rate of 14% to $324.3-million, which narrowed the operating profit from $71-million in the second half of the 2013 financial year to $60.4-million for the first six months of the 2014 fiscal period.

“This drove a decrease in underlying earnings a share from $0.23 in 2013 to $0.19 for the six-month period, while headline earnings a share dropped from $0.20 to $0.18 for the period,” Montanana said.

Similarly, profit before tax narrowed from $60.4-million to $57.7-million.

WESTCON

At 71%, Datatec’s Westcon subsidiary – a speciality distributor in networking, security, mobility and convergence for leading technology vendors – accounted for the largest percentage of group revenue, despite the business experiencing challenges as a results of its transition from its existing global ERP system to a new platform.

The upgrade, which had, thus far, only been implemented in North America, formed part of a multiyear programme to improve and optimise Westcon’s systems and infrastructure capabilities.

“However, the transition in North America has caused operating disruptions, which have adversely impacted revenues, particularly in the high volume transaction business. The roll-out schedule has been adjusted and the amount of disruption is expected to decline,” said Montanana.

Overall revenues increased 3% to $1.96-billion, with increases in Latin America, Europe and Africa and the Middle East offset by lower sales in Asia Pacific and a significant decrease in North America.

The gross margin of 11.3% was consistent with the first half of 2013, as margin pressures in Latin America, Africa and the Middle East, and Europe, were offset by margin expansion in North America and Asia Pacific.

Significantly, operating profit narrowed from $53.4-million to $35-million.

LOGICALIS

Meanwhile, Datatec’s information technology solutions and managed services provider Logicalis accounted for 28% of the group’s revenues and 48% of earnings before interest, tax, depreciation and amortisation, after improving overall profits and revenues, particularly in its Latin America markets.

Revenue increased 12% to $767.3-million, including $58.4-million of revenue from the European operations of 2e2 – a company the group acquired in March for $31-million. Organic revenue growth was 4%.

Latin America remained the largest revenue contributor at 37% of total revenue, despite a further depreciation in the Brazilian currency relative to the dollar. The Europe region grew from 26% to 29% of total revenue, while North America’s share of revenues fell from 32% to 26%.

Operating profit improved by 45% to $32.7-million after charges for depreciation and amortisation of intangible assets.

Montanana held that, despite generally more positive macroeconomic news flow, trading conditions remained challenging but stable, particularly in Logicalis’ European and North American markets.

“The outlook in the Latin America region remains positive, with the exception of Argentina, where government-imposed import restrictions are disrupting normal business activities,” he said.

CONSULTING SERVICES

Datatec’s consulting services segment, which comprised providers of management consulting, advisory, modelling and market intelligence services to the telecommunications, ICT and IT industries, accounted for 1% of group revenues.

Revenues contracted slightly to $37.1-million, from $38.3-million for the comparable prior year’s six months, while gross margins expanded from 36.3% to 38.8%.

“This division has seen growing demand for core propositions, with an emphasis on projects in emerging markets. While the division continues to trade well in a few European jurisdictions, the management’s sentiment is that Europe, generally, still remains weak, but has been compensated by stronger sales in the Middle East, Asia and Africa,” said Montanana, adding that these trends were expected to continue into the second half.

CURRENT TRADING AND PROSPECTS

He further asserted that the group remained well positioned to support its vendors and customers, through its investments to drive scale and create broad international coverage, as its IT infrastructure migrated to cloud-based services, which was fuelling demand for networking, security, mobility and unified communications solutions.

However, in light of Westcon’s underperformance and the effect of continued disruption caused by the system transition, the forecast for the full financial year ending February 28, 2014, had been revised down from that originally presented on May 15.

Revenues were now forecast at between $5.6-billion and $5.8-billion, while profit after tax was expected to be around $88-million, and headline earnings a share forecast at $0.40.

The group would distribute to shareholders an interim capital reduction out of contributed tax capital, in lieu of a dividend of 80c a share for the six months.