NOMPU SIZIBA: Technology services company EOH released their interim results today [Tuesday April 16] for the six months ended January 2019. The company reported normalised Ebitda from continuing operations declined 64% to R387 million. That’s from R1.1 billion in the year prior. Revenue was more or less stable at R8.4 billion. The company reported that its group net asset value stood at R4.6 billion, which compares to R7.5 billion in the prior year. It has characterised the period under review as a difficult period, but it has set in motion processes to try and get the company on the right governance track following allegations – particularly around government tenders. The company says it plans to raise around R1 billion in the next year to deal with its debt pile.
To give us the back story on the company, I’m joined on the line by Stephen van Coller, group CEO of EOH. Stephen, apart from your revenue, your metrics have declined quite markedly. What are the main reasons for this performance?
STEPHEN VAN COLLER: The biggest issue has clearly been that we’ve had a lot of non-cash items sitting on the balance sheet that, because of the change in strategy and the change in focus we’ve had to write off, largely to do with things like the goodwill on acquisition on some of the businesses that are no longer core. So you have a difference between a forward-looking valuation and today’s valuation. Then some of the intangibles that we accrued as assets, because we thought we were going to use them in the future, but those lines of business we have discontinued or are going to discontinue.
NOMPU SIZIBA: Your gross margin reduced from 32% to 20%, and you’ve attributed this in part to losses made on some of your large multi-public-sector contracts. Just tell us about that.
STEPHEN VAN COLLER: Remember that at year-end, when we spoke about our big enterprise-resource planning projects that we’d been doing to go over with the public sector – these are very complex multi-year change projects that just really haven’t gone well and we’ve decided to discontinue them as a business line. We’ve been closing those contracts out, obviously not really turning any revenue. And so that obviously comes out of a cost-of-sales line without commensurate revenue that comes through.
NOMPU SIZIBA: So I suppose this partly explains why your operating expenses rose by some R2.1 billion – in part.
STEPHEN VAN COLLER: No. The operating expenses actually were to do with the write-offs in the goodwill in intangibles – and actually our operating expenses stayed flat, if you normalise them. So they didn’t only go up with inflation. Clearly we’ve been looking to manage them as hard as possible, given some of this margin shrinkage that we have seen.
NOMPU SIZIBA: So that R2.1 billion that I’m talking about relates to the once-off items?
STEPHEN VAN COLLER: That’s right.
NOMPU SIZIBA: It’s been well publicised that you lost a key contract with Microsoft. It’s rumoured that it’s on the back of governance concerns. Is that the end between you guys, or are you still hoping that the deal can be restored?
STEPHEN VAN COLLER: Well, we had a reseller agreement with them, rather than a contract. A contract as in a revenue contract. So what we do is we sell Microsoft licences into some of our systems-integration projects. In reality we don’t need to do any reselling. It’s a very low margin, but these big global resellers like to have partners within the country. So they’ve terminated that partnership. They have told me that they are doing their own internal investigation to understand what went wrong and, once they’ve finished those, they will then have a discussion with us on whether they want to reinstate the partnership or not. But they told me that will take between six and 12 months.
NOMPU SIZIBA: You’ve indicated a determination to deal with your debt level, which stands around R7.5 billion – correct me if I am wrong – and you plan to sell some non-core assets to raise money, specifically to deal with your debt mountain. What assets are you eyeing, and have you tested any of them in terms of market interest?
STEPHEN VAN COLLER: Yes. Firstly, that total liability relates to both debtors, normal trade debtors, which is about half of that. There’s about R3.2 billion of debt. We’ve got about R1 billion of cash. I would prefer to have a net debt probably a billion rand less than that, and this is why we are looking to sell R1 billion of assets. We showed in our presentation – people can go and have a look on our website – that basically we’ve got eight processes going, and some of them are quite advanced. They are already in the binding-office stage. Some of them are in the early process. Most of them have got at least two or three bidders, and in some cases we’ve got as many as five.
NOMPU SIZIBA: You have internal investigations ongoing around allegations of malfeasance, particularly when it comes to securing public-sector tenders. What work has been done in this regard and, in the process of these investigations, have any people yet been disciplined?
STEPHEN VAN COLLER: Yes. We have disciplined around eight people who were guarding these contracts. They’ve been suspended, fired, or they have resigned because they didn’t want to be interviewed by ENS. And ENS continues with that. We’ve opened up an app, we will expose it, which helps us with whistle-blowing, because it’s anonymous. We’ve also asked any of the staff to come forward with any information, and that’s really helped us move forward in this investigation and take the appropriate action.
NOMPU SIZIBA: At the top of our conversation you did talk about a new strategy. You are currently working on a strategic review of the focus in terms of your operations, your governance and your transparency. What have you mapped out for the way forward?
STEPHEN VAN COLLER: We’ve gone to quite an extensive strategic review. We went and debated and decided what the key differentiators for our business were. We then put all our businesses through that filter, and the ones that didn’t make it we are calling non-core and selling.
We end up with three pillars. The ICT pillar is largely the system integrator – that’s the historic business. It is very stable, very profitable, largely our cash cow; we are splitting that into a large and private-sector business, with international expansion, and a public-sector business which will be a black-owned and -run business. It is to do some private-sector work, but the idea is to deliver something that is in the spirit of the ICT charter. Then we’ve got Nextec, which is an IT incubator, where we buy smaller businesses, we consolidate them into a vertical service offering, we invest in them, we expand them, and then we put them into what I call our crown jewels, which are our IT businesses. These are high-margin businesses that deliver own IP into specific industry verticals, there are five of those. They are very profitable and very exciting for the future to rescale them.
NOMPU SIZIBA: Stephen, once you’ve addressed the governance issues at the company, and of course if economic growth does what we all want it to do, and that is to grow in the right direction, do you feel the company would be ripe to service more businesses and grow? What’s your outlook for the future?
STEPHEN VAN COLLER: Our business is largely a South African business and this is why we are trying to expand into Europe and the Middle East. But we are very much beholden to the South African economy. So [if there is] any growth in the economy we get a direct benefit of that. I do think, however, that it may be a little better after the election, but there is still going to be some way to go.
Also, while you are doing a restructuring, you are obviously expending a bit of money to clean up, so that will put a damper on things. My experience is that these reorganisations take at least 18 months to two years before you really start seeing the green shoots and you start seeing the business turning and growing again.
NOMPU SIZIBA: Well, all the very best with that. Thanks very much, Stephen, for your time.