South Africa continues to go through an immensely challenging period as it battles low growth, high unemployment, persistent load shedding, high inflation and interest rates, a weak currency, grey listing by FATF and deteriorating investor sentiment.

Notably, the IT sector itself shields EOH from some of the negative effects of the above-mentioned factors. This, as companies look for efficiency gains and more strategic use of information to maintain competitiveness, often turning to technology improvements that provide these solutions. Being at the forefront of the IT industry allows EOH to assist clients in their digitisation journeys as the Group leverages its end-to-end technology stack and development expertise.

EOH’s growth into East and West Africa, through its exclusive AVEVA distribution, and the investments into Europe and the Middle East through existing operations, also provides further revenue growth potential and geographic risk diversification.

The 2023 calendar year was a particularly difficult year as the corporate and public sector looked to re-consider expenditure to extract maximum efficiencies in a difficult global and local economy. In H2-2023 we saw a downturn in revenue on H1-2023 which continued into the first quarter of FY-2024. However, EOH has seen a slight recovery in the second quarter, seeing continuing gross revenue increase from H2-2023 by 4%. EOH had taken a strategic decision to hold onto key scarce billable resources in anticipation of the turn-around even though they were not 100% productive. This has had an impact on gross margins, but positions EOH well for an anticipated improvement in trading in H2-2024.

Growth

With an improved capital structure in place and significantly lower interest payments to our lenders, EOH is now able to make proper long-term decisions, including investments in growth opportunities. The fast-growing areas of digital enablement, as well as the scaling and development of our own-IP technologies, will continue to be prioritised. Organic investment into geographic expansion of our existing footprint, in Africa, Europe and the Middle East, has already begun.

In H1-2024 EOH invested R26 million into growth initiatives across the business. Approximately R7 million of the investment was into capital expenditures with R14 million operating expenditure, primarily linked to internal IT initiatives of R11 million, and R5 million into cost of sales. From a divisional perspective R7 million was invested into Infrastructure Services and R14 million into internal IT initiatives. The balance of the investment of R5 million was capex of R2 million in our RocketLab business, with R3 million in growth in our International business.

Efficiency

EOH has made great strides over the past few years in streamlining its operations and structures, including reducing corporate overheads and eliminating inefficient expenditure. For the full year 2023, EOH kept its operating costs flat overall despite an inflationary increase of 5% in salaries and in H1-2024 operating costs decreased by 3% compared to H1-2023 despite an inflationary increase in salaries. There is further work required to improve tax efficiency but with all the legacy obstacles out of the way this process remains a key focus area. EOH will continue to eliminate inefficient expenditure to keep the business as lean as possible.

Talent

EOH’s skills base is the core of the Company, and it is immensely proud of the tenacity and perseverance that all our people have demonstrated during this extremely difficult period. A key milestone has been EOH receiving the Top Employer certification for the second year running from the Top Employers Institute, the global authority on recognising excellence in people practices. EOH can now build on this foundation to further invest into its talent to ensure that it remains an employer of choice in the IT industry and continue to offer clients the best solutions and implementations available.

At Group level EOH saw a slight decrease of 2% in continuing revenue compared to H1-2023. Our Digital Enablement business showed good revenue growth at 9% and our International business continues strong growth at 11%. Revenue growth was again held back by Operational Technologies, where the delays in other large revenue contracts, resulted in a 19% reduction in revenue. The Infrastructure Services business, excluding the Enterprise Applications and Software Reseller business, saw an increase in revenue of 14%. The Enterprise Applications and Software Reseller business reported as part of Infrastructure Services had a decrease in revenue of 20% due to the loss of a significant contract in the Enterprise Applications business and EasyHQ recorded a marginal 3% revenue reduction.

At a continuing gross profit level EOH has seen a decrease in margins for continuing operations from 29% in H1-2023 to 27% in H1-2024. The Digital Enablement business has maintained a stable gross profit margin year on year, however, there was a decrease in gross profit margins across the other lines of business. EasyHQ continuing gross profit margin has decreased by 4%, which is directly related to an inflationary increase in the fixed cost base, not supported by the necessary increase in revenue. The decrease of 3% in the Operational Technologies gross profit margin, is as a result of the aforementioned delay in revenue contracts, which have a fixed cost base in place. The Infrastructure Services business had a decrease of 3% in their gross profit margin due to a change in sales mix, with higher hardware sales at lower margins.

Continuing operating expenses compared to H1-2023 have been well managed and are down from R829 million to R808 million despite an inflation related payroll increase of 6% and once off legacy costs of R10 million.

EOH achieved R97 million adjusted EBITDA from continuing operations for H1-2024 compared to R181 million in H1-2023.

Adjusted EBITDA for H1-2023 in the EasyHQ business included large benefits from delayed government grants, related to prior periods but received in H1-2023, of R12 million, as well as provision reversals and the recovery of previous debt and cash write-offs of R11 million, and an increased investment in people cost to support the growth phase of the business. Together with margin pressures and loss in revenue, these have all resulted in a significant reduction in EBITDA of R36 million compared to H1-2023.

Operating profit from continuing operations was R9 million for the period, compared to R110 million for H1-2023. This period includes an impairment of goodwill of R20 million, of which R16 million relates to the Operational Technology business, due to the aforementioned delay in contract revenues and stagnant growth.

The finance cost for H1-2024 of R68 million is significantly lower than H1-2023 of R102 million, which is due to the rights issue which closed on 10 February 2023, with a net R555 million being applied against the bridge facility. The Group further concluded a term sheet with The Standard Bank of South Africa Limited (acting through its Corporate and Investment Banking division) to refinance the remaining debt on 31 March 2023, which resulted in improved interest rates on its facilities, which now range between JIBAR+2.65% per annum to JIBAR+4% per annum, dependent on the leverage ratio. Our finance cost for H1-2024, further includes a once off legacy charge of R14 million, related to the Department of Water and Sanitation settlement.

Our tax efficiency remains a key focus area as we improve our corporate structures to normalise the tax charge. Our tax charge for H1-2024 includes a once-off charge of R7 million related to the compromise agreement reached with SARS on our PAYE dispute. Refer to note 22 for more detail.

EOH incurred a loss after tax from continuing operations for H1-2024 of R91 million.

Working capital and liquidity management are key focus areas of the business with net working capital of R171 million and cash and cash equivalents at the end of the period of R411 million, excluding the overdraft facility. Debt at 31 January 2023 was at R1 228 million and had subsequently reduced to R673 million, as at 31 January 2024 after paying down the bridge facility with the proceeds of the capital raise and other disposal proceeds.

Cash generated from operations is R201 million, however, cash generated from operations benefited from an early receipt of cash in our foreign operations, where the corresponding payable was only settled after the period end, however, excluding the above receipt, the cash generated from operations was R31 million.

EOH has spent significant time over the past year optimising and aligning its suite of products and services and refining how it approaches the market and now has a stable portfolio of products and services. The Group operates through four key product pillars; namely Digital Enablement, IT Infrastructure Services, Operational Technologies, together forming iOCO SA, and EasyHQ. The International business outside of sub-Saharan Africa focuses on Digital Enablement and selling of own-IP platforms. The product pillars have further been optimised into three operating structures, with an Executive Committee that has also been aligned along these pillars, improving efficiency and accountability in our reporting structures.

With the asset sale process aimed at reducing legacy debt now largely complete, the Group is in the process of disposing of various other businesses as part of a strategic portfolio clean up aimed at further streamlining the Group’s operations and aligning its business portfolio with its core objectives. The proceeds will further be used to deleverage the Group.

iOCO SA

Digital Enablement is at the heart of 4IR as well as our clients‘ digitisation journeys and includes application development, AI and automation, data and analytics, and cloud solutions. It also houses our RocketLab ventures, which is where EOH develop and scale exciting own-IP applications.

The Digital Enablement businesses experienced continued growth in H1-2024 with a 9% increase in revenues over the comparable period. The Digital Enablement business also performed well from an adjusted EBITDA perspective, increasing to R65 million from R52 million in H1-2023.

IT Infrastructure Services includes our Manage-and-Operate or Infrastructure-as-a-Service offering. This includes data centre and workspace services, network, connectivity and security solutions, Enterprise Applications and Software Reseller businesses.

The growth in revenue for IT Infrastructure Services (excluding the Enterprise Applications and Software Reseller business), which includes data centre, hardware sales and managed services, network, cloud and security solutions, also showed improved revenues of 14%.

Enterprise Applications and Software Reseller saw a 20% revenue decrease to R427 million, with adjusted EBITDA down by 26% to R39 million compared to R53 million for H1-2023. This business has seen continued industry-wide margin compression from OEMs, coupled with the loss of a significant contract in Enterprise Applications between H1-2023 to H1-2024, which it has not managed to replace. Management is implementing cost-saving initiatives in order to stabilise this business, as well as a strategic review of the components of Enterprise Applications.

The Operational Technologies business focuses on operational and industrial technology advisory, implementation and managed services. Many of the clients are involved in heavy industry and large-scale infrastructure projects. The business further includes the business which focuses on smart infrastructure solutions for buildings and municipalities.

Operational Technologies has continued to have a challenging six months due to delays in closing large revenue contracts which impacted revenues and adjusted EBITDA. Compared to H1-2023, revenue was down 24% to R426 million. This excludes Nextec Consulting and Infrastructure, which is explained separately below.

Nextec Consulting & Infrastructure

The Nextec Consulting & Infrastructure businesses, reported as part of Operational Technologies, had a decline in revenue performance of 8% from H1-2023 to R198 million and an adjusted EBITDA loss of R9 million, compared to R11 million adjusted EBITDA profit in H1-2023. This business has received significant turnaround attention over the last 18 months and the continued goal is to get this business to break-even in FY2024.

EasyHQ

EasyHQ is the pillar focusing on head office solutions for our clients and has a range of capabilities and technologies that assist businesses in managing the complexities and challenges of regulatory compliance. EasyHQ solutions include governance, risk, compliance, attestations, recruitment, training and HR management among others.

EasyHQ overall business revenue decreased by 3% to R431 million. The People Solutions business is the biggest contributor to revenue, with the Platforms Solutions business gathering momentum.

Margin management remains a core focus and has held up well despite the trading pressures experienced with a slight year-on-year reduction to 33%. This is mainly related to the inflationary increase in the fixed cost base.

The adjusted EBITDA decreased by 79% to R9 million, due to an increased investment into productive resources, to support the growth phase of the business, as well as the H1-2023 EBITDA including large benefits from delayed government grants related to prior periods received in H1-2023 of R12 million, which has not repeated in H1-2024, as well as provision reversals and recovery of R11 million.

There are significant interventions in this business in terms of improving margins. A cost management programme has been launched focusing on standardisation, automation and duplicate effort removal across the cluster, as well as driving balance sheet efficiencies.

iOCO International

The International business outside of sub-Saharan Africa focuses on Digital Enablement and selling of own-IP platforms.

iOCO International continues to perform well with revenue growth of 11% to R298 million in H1-2024. This performance has been driven by strong growth in our business in Switzerland, as well as consistently strong performance in the Middle East. Our business based in the United Kingdom had a slow start to the year in terms of revenue, however, it is consistent with the performance in H1-2023.

Adjusted EBITDA of R35 million is in line with H1-2023 performance. The business remains profitable from an adjusted EBITDA perspective at an 11.8% adjusted EBITDA margin, after accounting for investments into the top-line growth in terms of sales, pre-sales and solutioning.

The Group has managed to close out two of its significant legacy matters in the current 2024 financial year, which puts the Group in a position to now focus firmly on executing our Growth-Efficiency-Talent ("GET") strategy. These large legacy issues were the final piece of the very complicated puzzle that needed to be solved to allow the Group to operate as a normal business.

In January 2024, the various EOH entities implicated in the in the Mehleketo matter and the liquidators of Mehleketo concluded a settlement agreement in respect of the ongoing dispute between the parties. The settlement agreement sees the various EOH entities paying the liquidators an amount of approximately R49 million. Refer to note 17 of the interim condensed consolidated financial statements for the six months ended 31 January 2024.

Subsequent to the period end the Group reached a settlement with SARS in terms of the legacy PAYE matter within EOH Abantu Proprietary Limited ("Abantu"). Refer to note 22 of the interim condensed consolidated financial statements for the six months ended 31 January 2024. After a process of continuous engagement between the Group and SARS final settlement terms have been agreed as follows:

• The payment of R112 million, which was paid on 1 March 2024. This amount is in line with the provision raised and therefore will not have an effect on the Group’s interim condensed consolidated statement of profit or loss and other comprehensive income;
• Abantu forfeited its tax receivable credit of R6.9 million which has not been provided for and will therefore affect the taxation line item in the Group’s interim condensed consolidated statement of profit or loss and other comprehensive income; and
• Abantu will forfeit its assessed loss of R34.5 million. This will not affect the Group’s interim condensed consolidated statement of profit or loss and other comprehensive income nor its interim condensed consolidated statement of financial position as no deferred taxation has been previously recognised for this assessed loss.

Despite the economic headwinds faced in South Africa, EOH is well placed to compete in the ICT sector with its full stack of technology offerings, diversified client base, as well as its strong international performance, supported by our highly skilled employee base.

With the capital raise now complete and a more appropriate capital structure in place with reduced interest payments as well as closing out the last of the significant legacy items, EOH is now well positioned to execute its growth strategy and execute its business consolidation in iOCO and EasyHQ, which will enable the business to right size its cost structure and capitalise on the growing demand for digital transformation across its client base.

Stephen van Coller
Group Chief Executive Officer

25 March 2024