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Logicalis is transitioning into a ‘Digital Enabler’, investing in new skills and services.
Logicalis revenues remained flat at $1.5 billion (FY16 $1.5 billion), including $5.3 million of revenue from acquisitions made during the period, although in constant currency terms, revenues grew 2.1%. Services revenues were up 9.3% with strong growth in both professional services and annuity revenue, and the combination of slightly lower product sales with higher services sales helped to drive gross margins to over 24%. EBITDA and operating profit margins held up well and were similar to the prior year, despite restructuring and acquisition integration costs in the UK, Australia and Germany.
Revenues fell slightly in North America and Europe; however, all regions showed improvement in gross profit and EBITDA except Europe, which was driven lower by the continued restructuring of the UK operation. Latin America was adversely impacted by weak trading conditions in Brazil and the continued strong performance of the US dollar, which was mitigated by increased performance in Argentina following the relaxation of exchange controls and the subsequent buoyant trading environment. Despite these challenges, overall gross profit rose by $10 million.
Product sales declined by 6.2% primarily in the UK and the US, with decreases in Cisco, HP and IBM. This is consistent with the challenges experienced by major vendors in recent years as server and storage prices per unit have been reducing. This was balanced out, however, by a corresponding rise in both professional and managed services, now representing 35% of total revenues.
We expect to see continued growth in our services business for the foreseeable future. Given the long-term nature of services contracts, the revenue would be recognised over the period of the contract, rather than upfront which is typical with product sales. Cisco still makes up half of all product sales to Logicalis, while sales of products in the category ‘Other’ increased, represented primarily by Oracle, NetApp, VMware and ServiceNow.
Gross profit was up 3% to $363.3 million (FY16 $353.4 million) and operating expenses increased by 4%, due in part to incremental integration costs of acquisitions made in previous periods. Before restructuring costs, EBITDA was $81.2 million (FY16 $80.9 million), with a corresponding EBITDA margin of 5.4% (FY16 5.3%). Operating profit, before restructuring costs, was $56.6 million (FY16 $56.3 million).
During FY17, Logicalis acquired Lantares, a Spanish IBM Cognos Partner and professional services provider specialising in business intelligence and data analytics.
Logicalis remained in a net cash position of $18.1 million, despite the unwinding of several large customer transactions which positively impacted working capital in Y16, and a substantial prepayment made in Brazil associated with a customer transaction where the revenue will be received and recognised over future periods.
In summary, we believe Logicalis remains with a strong outlook and are optimistic about the future. We are looking to enhance our position in markets we already operate in, gain better scale in Asia, improve our performance in the UK and expand in Europe. We believe there will be a continual shift to cloud-based delivery of IT, but in a hybrid public and private configuration for businesses and enterprises. This will help to drive mobility solutions, network security and converged computing applications built in increasingly virtual environments using external data centres.