report
Chief Executive Officer's report
Stephen van Coller Chief Executive Officer
Covid-19 has caused immense stress in society that is being prolonged by recurrent waves and the slow pace of vaccination. This is not only affecting the economy, but has a significant individual impact on employees and their families. While many are thriving in the work-from-home environment, some are finding it extremely challenging. Automation and technology are key enablers in the new hybrid way of working that must be complemented by empathic leadership that sets the desired outcome and non-negotiable rules and then lets employees play it their way within those parameters.
Rethinking the role of business in society
EOH sits at the heart of the Fourth Industrial Revolution with an ability to provide end-to-end solutions that are unequalled in its breadth in South Africa. This puts us in a strong position to support businesses looking to grow through innovation and technology, and to partner with business, civil society and government to find collaborative ways of solving the country's socioeconomic challenges. I firmly believe that a new approach to capitalism and a rethink of the role of business in society are desperately required. The unrest in July 2021 evidenced, more than ever, the urgent need to come together to map out a sustainable path for South Africa.
The Group's response to the unrest demonstrated our ability to leverage our technology IP and business relationships. We were able to provide over 8 000 cooked meals, prepared at restaurants that were otherwise unable to trade, move approximately 24 tonnes of groceries and facilitate trauma counselling for affected employees. We also created a platform for RebuildSA that provides a real-time link between volunteers, NGOs, sponsors and donors to channel support to businesses and communities affected by the unrest. EOH employees and partners directly assisted community clean-up efforts and, through Business Unity South Africa ('BUSA'), the Group supported more than 50 independent pharmacies to be reconnected and resume trading.
Increased uptake of the cloud and accelerating digitisation
The COVID-19 pandemic accelerated the pace of digitisation and consolidation of businesses into bigger ecosystems. It has driven a focus on greater efficiency, encouraging cooperation across business units as corporates look for solutions rather than products. The iOCO Services cluster, which we refer to as the 'Engine Room', is well positioned to address client needs as it is a single support structure with a vertically integrated product offering ranging from managed connectivity through to managed hardware and software. The future is moving towards everything as a service, particularly back office and infrastructure functions, and we have seen increased cloud uptake and spend on automation and application development.
We are also keenly focused on enhancing our end-to-end technology solutions with future generation offerings that will further entrench our role as a key technology solutions partner for leading companies. We established a standalone division called Rocketlab Ventures, which houses a few early-stage IP companies with differing value propositions (namely core banking software, HR software, business process digitisation software and fraud detection software). These companies currently have a proven track record with sustainable revenue and profits; however, they require additional capital and attention to scale the businesses. In addition to scaling existing IP businesses, Rocketlab Ventures will also have a product development arm utilising skills and expertise from the rest of the Group aimed at creating new IP with disrupting potential.
Our near-term priorities for the 2021 financial year were an ongoing focus on quality earnings, cost reduction and solving for the Group's substantial legacy debt and inefficient capital structure. We are keenly focused on enhancing our technology solutions with future generation offerings such as application development, security, automation, robotics and data analytics, further enhancing the Group's role as a key technology solutions partner for leading companies. This solutions focus requires that we have an intimate understanding of our clients' businesses and we appointed Ziaad Suleman as Chief Commercial Officer during the year to deepen client centricity.
We successfully resolved nearly all of the previously disclosed problematic legacy contracts, with seven of the eight settled and one in arbitration. This is a significant milestone for the Group towards stabilising the business as we have now closed out the legacy contracts and from an operational perspective, are not delivering on any of them.
The overbilling issues are concluded, with the Group settling with the Special Investigating Unit ('SIU') regarding the Department of Defence contract and the Department of Water and Sanitation contract nearing resolution. The resurfacing of legacy issues in the media is a regrettable ongoing distraction that associates EOH in its current incarnation in the public mind with the corrupt past activities of a few people. It bears repeating; companies do not commit corrupt acts, corrupt people within companies do.
Improved earnings quality and responsible cost management
Total revenue decreased to R7 882 million from R11 277 million in FY2020 mainly due to the disposals and the settlement of legacy contracts (which accounted for c.75% of the decline) as we exit non-performing and non-core businesses. The impact of Covid-19 was evident in delayed spending on large, planned IT projects specifically in the hardware space, which were affected by increased client migration to cloud alternatives.
Despite this decline in revenue, the quality of earnings continues to improve as evidenced by the sustained improvement in margins and return to operating profit. Gross profit margin increased to 28% in FY2021 (2020: 22%) which translates to a 6% increase, and the gap between reported EBITDA and normalised EBITDA (adjusted for one-off costs) narrowed further.
Total operating expenses decreased by 46% to R2 053 million from R3 788 million in the prior period, with the Group reducing its property portfolio from 56 to 33 buildings and reducing headcount by c.2000 largely due to asset disposals and contracts not being renewed. The financial performance for the 2021 financial year is further unpacked in the Chief Financial Officer's ('CFO's') report.
We are making good progress on disposing of targeted assets as part of our deleveraging strategy. During the year, we disposed of Syntell and Sybrin (subject to suspensive conditions) within our IP business cluster. More details of these transactions are available in the CFO report. The Group has been able to repay a further R433 million this year with the current total debt balance reducing to c.R2 billion from R4 billion in 2018. We successfully concluded negotiations with lenders to create a more sustainable debt structure.
The reduction of the core legacy debt and finalisation of the overall capital structure remain urgent business imperatives in order to decrease the heavy interest burden on the Group's cash resources and allow us to invest more meaningfully in growing our businesses. Pleasingly, the return to positive cash flow and the incredible contribution by our employees allowed us to appropriately reward our people for their performance.
iOCO delivered an operating profit and double-digit EBITDA margin for the year due to strength in the iOCO Services cluster, specifically Digital Industries, which has seen significant growth in its internet of things ('IOT') capability. iOCO is benefiting from its position as South Africa's leading end-to-end technology solutions provider with strong traction in client renewals, a re-entry into the public sector and the signing of new multi-year annuity deals in both private and public sector clients.
Strategic pillars
Positive momentum in new deals post-remediation
Major telco Contact centre optimisation
R204m
PROJECT DURATION: 3 years
Major mining company Critical comms solution
R111m
PROJECT DURATION: 3 years
International online education platform Tutoring services
R39m
PROJECT DURATION: 1 years
Public sector Dev services
R199m
PROJECT DURATION: 3 years
Large mixed-use
precinct development
Electronic surveillance and
security control
R81m
PROJECT DURATION: 5 years
TVET College Supply of end-user computing
R38m
PROJECT DURATION: 5 years
Utility Payroll outsourcing solution
R114m
PROJECT DURATION: 2 years
Major mining company Wireless comms infrastructure upgrade
R51m
PROJECT DURATION: 1 years
Medical scheme Business continuity services
R21m
PROJECT DURATION: 3 years
Revenue from NEXTEC was resilient despite the challenging economic conditions, with the NEXTEC People solutions business generating strong operating profit and EBITDA margins improving due to further efficiency gains and stringent cost control. The NEXTEC Infrastructure solutions business, however, remains under pressure characterised by contract delays. The NEXTEC businesses that remain core to EOH are self-sufficient from a liquidity perspective.
The planned sale of the remaining IP businesses was delayed by Covid-19, but remains a priority.
Outlook
While the outlook for the local market remains challenging, we see excellent potential to grow revenue, maintain margins and bring the NEXTEC businesses back to profitability. Completing the reorganisation and finalising an efficient capital structure will create a solid platform for future growth and investment.
EOH's international operations in the Middle East, UK and Europe remain exciting platforms from which to pursue growth across application development, security and cloud solutions, and also provide opportunities for EOH's IP platforms and potential strategic in-country partnerships. Our Egyptian hub enables us to expand our centres of excellence to further develop our human capital in another low-cost market. Egypt is a highly educated population which helps to diversify our skills base and reduces our business risk as part of our anti-fragile strategy.
Our progress in the past year positions the Group well for sustainable growth as the key technology solutions partner for leading companies, and to deliver on our aspiration to be a force for good in society.
Stephen van Coller
Chief Executive Officer