Information and communication technology (ICT) services company EOH's revenue for the six months ended January 31, decreased by 21.8% year-on-year to R6.35-billion, mainly as a result of lower hardware and software sales, as well as legacy public sector enterprise resource planning implementation deals not having repeated in the period under review.

The prior period comparative is also skewed by the inclusion of CCS and other businesses disposed of in discontinued revenue.

EOH's managed services among its core clients remained relatively flat, while the slowdown in the economy also contributed to the decline in revenue, with EOH’s legacy issues having had only a small impact, CEO Stephen van Coller said on April 7.

During a webcast presentation, he emphasised that the company was in a much better position to continue to support its clients during the current financial crisis and possible South African recession, having made significant progress in deleveraging its balance sheet, reducing its workforce while retaining key skills and talents, disposing or closing non-performing businesses and shoring up its long-term strategic plans for the group.

"There has been a turnaround in the business as revenue has stabilised, with normalised earnings before interest, taxes, depreciation and amortisation (Ebitda) for the half-year of R405-million, down from R675-million in the comparable period in 2019."

Continuing Ebitda is R280-million, down from R435-million, as Ebitda losses from noncore business lines reduced to R270-million from R585-million in the prior comparative period, largely as a result of improved management of eight poorly contracted legacy public sector contracts.

EOH reported a headline loss a share from continuing and discontinued operations of 395c, compared with a headline loss of 827c in the prior comparative period.

EOH Group FD Megan Pydigadu said each share held a net asset value of about R5.25, and that further disposals of businesses would have a neutral impact on this value.

The group's gross profit margin improved to 23.6% (continuing 23.5%) from 19.6% (continuing 15.8%) in the previous comparable period. This is mainly owing to a reduced contribution from hardware sales, as well as improved efficiency in the iOCO businesses. 

EOH had cash balances of R950-million as at April 2, 10% higher than on January 31, 2019.

BUSINESS STABILISED
Total operating expenses decreased by 31.5% to R2.28-billion from R3.35-billion in the prior period, largely driven by lower provisions and write offs as well as cost efficiencies.

The group saw a significant decline in impairment losses from the continuing business from R1.34-billion in the prior year to R152-million in the current year. These were necessary as part of the clean-up of the balance sheet in the prior year. 

The real estate programme is on track to close a further 24 property leases by 2021, with 31 leases closed to date with savings in excess of R70-million a year, Van Coller pointed out.

Historically, there was a lack of focus on working capital management with large tranches of cash tied up in debtors. During the prior year more than R400-million was realised from the debtors book and balances at the half year continued to be well managed reducing to R2.99-billion from R4.13-billion at the prior comparative period and R3.15-billion at the full year. Trade payables decreased by R447-million over the six month period to R2.56-billion as the group did not actively stretch payables over the half year.

Cash generated from operations after changes in working capital was R31-million (down from R82-million during the comparable period in 2019), but needs to be considered in light of the R227-million of one-off payments over the current reporting period. Cash conversion of total normalised Ebitda, when removing these one off costs and the impact of non-core businesses, is approximately 65%, the report says.

"Overall, our key businesses have delivered sound performances demonstrated by improved gross margins over the last six months. We have made good progress on cost management projects and achieved both our disposal and business closure targets, resulting in access to cash and a continued simplification of the business.

"Our focus remains on further reducing our debt burden and driving cost efficiencies notwithstanding the challenges brought by Covid-19. We still have some way to go on the streamlining of our business including our debt reduction," said Van Coller.

Owing to the heavy interest burden of the legacy debt, deleveraging the business through disposals has been a top priority for management, he added.

The deleveraging plan with lenders had been adjusted and extended by making the first target date July 31 to deleverage by R500-million instead of January 31, 2020. The group had deleveraged by R306-million at January 31, 2020 and by R430-million at the reporting date.

During December 2019, lenders gave EOH access to R236-million of disposal proceeds originally destined for deleveraging. A total of R125-million of these proceeds had been returned to lenders for deleveraging at the reporting date.

The revised deleveraging plan marginally increases the amount of the total deleveraging to R1.60-billion and extends the date for this to be completed to the end of February 2021 instead of the end of January 2021.

"Deleveraging continues to rely on the disposal of assets. The larger disposals of Denis, Information Services, Syntell and Sybrin are progressing well. Although the full impact of Covid-19 on these timelines is not fully visible, these processes remain substantially on track."

While only indirectly associated with the deleveraging, the group, is in the advanced stages of implementing a cash management pooling system, which should ultimately improve the efficiency of cash across the group and reduce the carry cost of holding these cash balances.

Since January 31, 2019, more than 40 businesses have been sold for a value of R1.17-billion or closed across the group and there has been significant traction on the rationalisation of legal entities.

TURNAROUND PLAN
EOH is 12 months into an anticipated two-year turnaround plan and the group sees stabilisation in its customer base and core revenues, having invested time and effort in ensuring transparency, governance reform and that perpetrators are held accountable for past transgressions. The visible and transparent actions have enabled the group to avoid government and Business Unity South Africa blacklistings, stabilise revenue and increase cash balances over the past year, said Van Coller.

In keeping with the objectives set out during its full year results in October, the company will remain focused creating more transparency in the business and financials, creating a fit-for-purpose capital structure and rebuilding credibility through establishing robust governance.

The business was initially configured into three key pillars – iOCO, NEXTEC and IP – as part of an evolving transition of the business to a sustainable future. Further evolution will ultimately see the group integrated into a single ICT business under the iOCO umbrella.

The future iOCO cluster is currently being and will continue to be managed around five core business lines which will be able to execute end-to-end solutions for all clients across the information technology spectrum. These core businesses effectively make up approximately 56% of current total revenue and over 61% of total gross profit.

Nextec comprises a diverse set of businesses across Consulting and Engineering offerings. The company has invested considerable time and focus on this cluster, which remains challenging.

"Following an extensive review, we have made significant progress in differentiating between businesses which we believe to be a strategic fit for iOCO and those which will potentially be liquidated or sold. Once the review process is complete, the Nextec business, which makes up 31% of the group’s total revenues currently, will no longer form a significant part of the Group. More than 47% of Nextec’s total revenue is currently classified as discontinued," EOH noted.

The IP grouping comprises businesses that have developed proprietary software and solutions for customers. These businesses, which contribute 13% of the group’s total revenues, have historically had higher growth rates and better gross profit margins than the other two groupings.

"A decision was taken to dispose of these assets as part of a strategy to deleverage the business and all but one, Sybrin, which did not qualify for the IFRS definition, are therefore classified as discontinued."

The core value proposition is that the iOCO business will be the preferred digital transformation partner for customers due to its end-to-end integration capabilities and highly skilled individuals. The services the group provides are systemic to South Africa’s economy, providing support into telecommunication companies, financial services in South Africa and beyond, as well as assisting many municipalities and core government functions.

"A number of digital transformation projects saw the implementation of improved systems and consequently improved integrity and quality of information for both financial and non-financial purposes. While there is more to do here, significant progress has been made and the benefits to decision making and understanding of the complexities of the business are tangible," said Van Coller.

COVID-19 RESPONSE
The core ICT business is classified as an essential service and will continue operating during the lockdown period.

The Group has a Covid-19 management team in place consisting of all the representatives from the executive committee as well as key operational and support functions. The team monitors the situation on a daily basis and ensures that adequate risk management and mitigation actions are taken, as well as appropriate communication and engagement with clients, staff and other stakeholders.

EOH has taken proactive steps to weather the financial impact of physical distancing and lockdown to limit the spread of the Covid-19 virus on its businesses, including the executive committee taking a 25% paycut, while many staff have agreed to take an 20% paycut and the company was looking at non-monetary means to remunerate them, including additional leave or shares through its employee share scheme. The final decision for employees' salaries will be made by 9 April.

Being systemic to South Africa’s IT backbone creates significant responsibility for the group during Covid-19 to ensure it remains robust in order to continue providing key services to its 5 000 long-term clients. These include many banks in South Africa and the rest of Africa, telecommunication companies, Eskom, municipalities and government agencies.

For this reason, the Board and management of EOH felt it necessary to take proactive steps to ensure EOH is prudent in these times of uncertainty. The group is also at the forefront of providing cutting-edge medical solutions through companies such as Nuvoteq and TCD.