EOH - Africa’s Largest Technology Service Provider

• Sound performances from key businesses
• Improved gross profit margins
• Strong and improving cash balances
• Stable core revenue and customer base
• Key financial indicators:
  • Total revenue – R6 354 million
  • Total gross profit margin – 24%
  • Total normalised EBITDA – R405 million
  • Total cash balances of R826 million (R950 million as at 2 April 2020)

EOH is 12 months into an anticipated two-year turnaround plan. Following the reputational crisis of the last financial year, the Group is pleased to see stabilisation in its customer base and core revenues. The management team’s highly visible and transparent actions in establishing robust corporate governance structures across the Group and further ensuring accountability for past transgressions has gone a long way to avoiding both government and BUSA blacklisting. This investigation is now complete.

The themes introduced at the full-year results in October 2019, are retained as a backdrop for the six-month period ended 31 January 2020 and comprise:

• Creating more transparency in the business and financials
• Creating a fit for purpose capital structure
• Rebuilding credibility through establishing robust governance

Evolving business model

The business was initially configured into three key pillars, namely 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. Since 31 January 2019 more than 40 businesses have been sold for a value of R1 170 million or closed across the Group and there has been significant traction on the rationalisation of legal entities.

iOCO

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 IT spectrum. These core businesses effectively make up approximately 56% of current total revenue and over 61% of total gross profit. The five main business lines, include:

• Solutions
• Technology
• Advisory and consulting
• Digital industries
• Manage & Operate and Connectivity

NEXTEC

NEXTEC comprises a diverse set of businesses across consulting and engineering offerings. We have 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.

IP

The IP grouping consists of businesses which have developed proprietary software and solutions for customers. These businesses, which contribute 13% of the Group’s total revenues, 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.

Clear path to extinguishing legacy cash draining issues

The current management team has been building the future business while simultaneously dealing with reputational issues. Now that these are firmly behind the Group, management can focus on additional legacy issues that remain a cash drain on the business and are confident of substantially resolving these in the next 12 to 18 months. They include:

Legacy contracts

Included in the iOCO business grouping are eight poorly contracted legacy public sector contracts. These are expected to be substantially resolved by the end of the calendar year. A total of R188 million in negative EBITDA from these legacy contracts was added back to calculate total normalised EBITDA. This is significantly lower than the R370 million reported in the prior period.

A number of EPC contract businesses, destined to be wound down or sold, as well as onerous contracts provided for, contributed negatively for a total value of R83 million to EBITDA and were also added back to total normalised EBITDA.

Once-off settlement costs

EOH cash settled a total of R227 million in OEM settlements, severance costs, disposal and advisory cost during the six-month period. While advisory costs are expected to continue during the next six-month period, these are largely linked to the disposal of assets and most of the meaningful costs in respect of OEM settlements and the ENS investigation are now behind us. A total of R130 million of these costs were added back when total normalised EBITDA was calculated.

Cost optimisation

Driving additional cost savings from legacy overheads, management cost structures, facilities and procurement has been a key focus area for the 2020 financial year. To date we have seen two senior management structures unwound and two are still being consolidated to accommodate the more focused and integrated business.

We have also seen good progress in our property optimisation programme with 45 building exits planned for the financial year, of which 31 lease exits have already been completed. Efficiencies have been identified in procurement and we are fast-tracking the use of centralised approved service providers. We have seen a reduction in employees to ~8 400 from ~10 500 at the end of the 2019 financial year as a result of the disposals completed over the period, retrenchments as well as normal attrition.

We will continue to look for opportunities where further cost savings can be realised and have already identified a further R100 million to R250 million in potential savings to be realised by the end of the 2021 financial year, which should significantly improve the cost structure for the business going forward. This is in addition to short-term liquidity measures implemented as part of the COVID-19 response.

Deleveraging imperative

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

The deleveraging plan with lenders has been adjusted and extended by making 31 July 2020 the first target date to deleverage by R500 million (previously 31 January 2020). The Group had deleveraged by R306 million at 31 January 2020 and by R362 million at the reporting date, with a further R68 million available for this purpose in a ring-fenced cash account. During December 2019 lenders gave EOH access to R236 million of disposal proceeds originally destined for deleveraging.

The revised deleveraging plan marginally increases the amount of the total deleveraging committed to lenders from R1 500 million to R1 600 million and extends the date for this to be completed to 28 February 2021 (previously 31 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.

Ethical leadership team with broad skills across finance and IT

We are pleased that the Group has continued to attract and retain top talent as we build a diverse, ethical and talented workforce. Ensuring that there is a breadth of skill at EOH will enable the development and implementation of solutions that add value to our clients. In line with this intent, the leadership team has been enhanced by the addition of two new members to the executive committee with experience in the ICT sector spanning over 20 years each. We now have a leadership team in place with broad skills across finance and IT. Furthermore, we have retained employees with strong technological expertise to run the various business units and ensure that we maintain our value proposition through the successful execution of our strategy. We continue to explore the right balance of incentives for the organisation.

The right people are also operating within a significantly improved governance, risk and control environment. 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.

Subsequent to the reporting date there has been a global outbreak of COVID-19. On 15 March 2020, the President of the Republic of South Africa announced a national state of disaster and on 23 March 2020 a 21-day National Lockdown was announced to run from midnight on 26 March 2020 to midnight on 16 April 2020. These actions are expected to have a financial impact on the Group going forward. 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.

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.

As a result, EOH has initiated a number of initiatives in this regard. These include:
1.	The CEO and executive committee taking a reduction of 25%
2.	A proposed 20% reduction across the board in cash salaries, with the exception of those earning less than approximately R250 000 per annum (in consultation with clients and staff)
3.	Negotiating rent holidays
4.	A review of all fixed-term and consultant contracts
5.	Reassessing the retirement policy for those over 65 years of age
6.	A review of variable pay elements including reimbursive travel and overtime
7.	A review of discretionary spend on travel, entertainment and events

Total revenue decreased 21,8% (continuing 17,4%) to R6 354 million (continuing R4 544 million) when compared to the prior comparative period, mainly as a result of lower hardware and software sales as well as legacy public sector ERP implementation deals not repeated in the current period. The prior period comparative is also skewed by the inclusion of CCS and other businesses disposed of in discontinued revenue. Encouragingly, managed services among our core clients, remained relatively flat. The slowdown in the economy also contributed to the decline in revenue with EOH’s legacy issues only having a small impact.

Total gross profit margin improved to 23,6% (continuing 23,5%) from 19,6% (continuing 15,8%) in the previous comparable period. This is mainly due to a reduced contribution from hardware sales as well as improved efficiency in the iOCO businesses.

Total operating expenses decreased 31,5% to R2  284 million (continuing R1  596 million) from R3 335 million (continuing R2 778 million) in the prior period, largely driven by lower provisions and writeoffs. The Group saw a significant decline in impairments and other losses from the continuing business from R1 779 million in the prior period to R688 million in the current period. These are necessary as part of the clean-up of the balance sheet.

Total normalised EBITDA for the period is R405 million (HY 2019: R675 million) and continuing EBITDA is R280 million (HY 2019: R435 million) as EBITDA losses from non-core business lines reduced to R270 million from R585 million in the prior comparative period largely as a result of improved management of the eight poorly contracted legacy public sector contracts. The NEXTEC business normalised EBITDA was negative during the period.

Headline loss per share from continuing and discontinued operations was 395 cents (HY 2019: 827 cents) while headline loss per share from continuing operations alone was 381 cents (HY 2019: 840 cents).

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 994 million from R4 125 million at the prior comparative period and R3 145 million at the full year. Trade payables decreased by R447 million over the six-month period to R2 558 million as the Group did not actively stretch payables over the half year.

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

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. We are part of the fabric of South African business and we are well positioned to play a pivotal role in the digital future of customers, both in South Africa and beyond. The management team, along with employees, have implemented and proposed a wide range of initiatives to reduce costs dramatically as part of our collective contribution to assisting corporate South Africa through the current crisis. We are in the process of consulting our customers and employees to finalise these initiatives.

The Group remains committed to ethical leadership and being a force for good in society through itspeople.

Approved on behalf of the Board of directors of EOH,

Stephen van Coller

Chief Executive Officer