Change management lesson from datacentrix

Students of change management and practitioners will gain a lot from commentary attached to the latest financial statement of JSE listed IT group Datacentrix.

In reporting the numbers for the year ended February chairman Gary Morolo, CEO Ahmed Mahomed and the team make some compelling statements which seamlessly mix sound theoretical fundamentals and practicalities.

More often than not corporations tend to employ such language to sugar quote bad performance. Remarkably this is not the case here. Datacentrix has held its own against competition under tough trading conditions of the past few years. It is the narration of how they did this which makes the latest financial statement noteworthy.

They managed a difficult task, akin to overhauling the engine while the car is in steady motion. The task was transforming the company from a “pure hardware supplier to a fully-fledged systems integrator and solutions provider”. This amid shifting industry dynamics which are brilliantly captured in their narration which follows here:

 

The Market

The world-wide IT industry has been impacted by a combination of factors, ranging from macro-economic conditions through to industry volatility. As a result of the global economic crisis, development of disruptive technologies and the continued commoditisation of infrastructure hardware, the industry is in a state of flux. These factors have necessitated a business model change for many organisations. On the international stage, it is evident that sizeable global players are trying to reinvent their businesses. While doing this, some organisations have made costly mistakes, albeit driven by necessity, to adapt to ever-changing sectoral pressures. The effects on companies have been varied, with some paying dearly for acquisition judgement errors, while others have embarked on a strategy to change their business model out of the glare of the markets by delisting.

The South African IT industry is experiencing pressure from the telecommunications industry. Telecommunication companies are facing their own challenges in the form of slowing revenues in their traditional voice business and are attempting to supplement this by extending offerings in the traditional IT sector, such as cloud computing, a strategy that they hope will diversify their income base and, in the process, drive data revenues.

With regards to the local environment, market conditions continue to be constrained, with industry growth estimated to be in the single digit range. Some competitors continue to seek growth through aggressive acquisition strategies, while others are facing sustainability challenges. Further consolidation of the industry is inevitable, and where appropriate, Datacentrix will play a proactive role in these market changes.

Commentary

The past few years, though profitable, have been challenging for the Group. As a consequence of both market dynamics and the change in the technology landscape, Datacentrix has strategically repositioned itself in the market, moving from being a pure hardware supplier to a fully-fledged systems integrator and solutions provider. This strategy has necessitated investment in infrastructure, as well as technical and managerial resources that were previously not required. These additional investments have been funded through the income statement, preserving the strength of the Group’s balance sheet. The consequence of the strategy over the last few years has been a change in client and portfolio mix, as is evident from the segmental report.

It is in this context that the directors of Datacentrix announce the financial results for the year ended 28 February 2013. The Group showed revenue growth of 9%, from R1.758 billion to R1.919 billion. Earnings declined by 15% from R90.8 million to R77.3 million. Headline earnings per share (“HEPS”) was 39.6 cents.

While Group revenue remained resilient, investments (in both resources and capital projects) and sustained gross margin pressures, resultant from a dip in the industry cycle, have weakened operating margins from 8% to 6%. The business is yet to reach optimal functionality in some areas, as certain of these investments have not yielded returns at this stage and, in some cases, have negatively impacted profitability. In general, as is the case with business, sales will initially lag investment cycles. Moreover, traditional revenue streams, such as the public sector, have dwindled significantly. Government revenue contributed 40% to 45% to Group revenue at its peak, and now accounts for less than 10% of total revenue.

The Group maintained sound financial and operational disciplines, with cash generated from operating activities amounting to R57 million, reflecting a closing cash balance of R274 million with no interest-bearing debt.

Operational Review

The Group has seen an improvement in trading conditions in the second half of the fiscal year after a particularly constrained first quarter and, consequently, first half of the year. Revenue was stronger in the commercial sector, while performance in the public sector continued to decline. The Infrastructure division contributed 35% of Group profit after tax (“PAT”), while the Managed Services and Business Solutions divisions added 38% and 22% respectively. This means that these two fairly new areas of business are now contributing a combined 60% of Group PAT.

Infrastructure produced an operating margin of 2.8% whilst Managed Services achieved 10.7% and the Business Solutions division 17.9%.

Datacentrix strategically invested in both capital expenditure and resources over the last four years. This investment phase is by-and-large drawing to an end, with Group capability significantly boosted by these investments, putting it in an enviable position as an end-to-end integrated IT partner.

The Group is a systems integration partner that has the required skills to successfully compete in providing a range of solutions – from basic infrastructure provisioning through to complex specialised solutions. This capability is further enabled through the Company’s consulting, design, deployment, management expertise and comprehensive vendor networks. Importantly, the Company has laid the framework to provide its own cloud offering, positioning it well within this space.

 

Leave a Reply

Your email address will not be published. Required fields are marked *