Renewed focus on software and services has paid dividends for Faritec which yesterday posted annual results showing a healthy increase in revenues of 21%, taking it past the R1-billion revenue mark for the first time in its history.

The 21%  growth in revenues saw the company report turnover of R1,04-billion compared to R858-million for the year ended June 2007; Earnings before Interest, Taxation, Depreciation and Amortisation (EBITDA) increased by 109% from R26,5-million in 2007 to R55,5-million; Net profit before taxation increased by 84% to R37,4-million; Profit attributable to ordinary shareholders grew by 75% from R 16,5-million in 2006 to R28,9-million; Headline Earnings Per Share (HEPS) increased by 27% from 8,9 cents in 2007 to 11,3 cents in 2008; Earnings Per Share (EPS) is up by 33% from 8,5 cents in 2007 to 11,3 cents.
The group also reported cash on hand of R 18,7-million.
Simon Tomlinson, CEO of Faritec, says that the results are pleasing, with all indications confirming that the company’s strategic focus on growing the software and services businesses to improve the revenue mix is paying off handsomely.
“While the IBM- and HP-based hardware business continues to perform strongly, the improvement in our overall margin from 22,6% to 24,9% is evidence that our strategy is beginning to pay off,” he says, adding that the software and services portion of the business has grown from 41% to 46% of revenue, a development that is largely responsible for the increase in margin.
In addition to growing the software and services side of the business, Tomlinson says the second driver for the company’s success this year lies in its focus on selling solutions to customers rather than just products.
“We are seeing a definite growth in solutions sales and turnkey offerings that include hardware and software, as well as service contracts that provide the opportunity to increase our overall margin,” he says.
The growth in revenue has not been without its challenges, Tomlinson adds. He says that while the company has grown revenue organically and through acquisition from R530-million in 2006 to over R1-billion this year, this has led to a monthly revenue run rate increase from R44-million to approximately R100-million per month, while the company’s financing facilities have essentially remained the same.
“Besides placing strain on the company’s working capital and trade credit facilities, we have also been using expensive trade finance from our suppliers in the last year to assist with the management of our working capital and credit facilities,” he says. “As we expect to continue to grow organically and through acquisition, we require stable funding at competitive rates. Faritec has therefore secured access to stable funding for the next 5 years at competitive rates by issuing zaAA rated debentures to investors in the Capital Markets on the strength of our debtors’ book of prominent blue chip clients, which will provide immediate access to R100-million in finance at preferential interest rates.”
Looking ahead, Tomlinson says Faritec’s risk profile has improved significantly as the business has diversified, and the company’s efforts in raising its profile and marketing its offerings to the public sector are showing good results.
“We have made a significant investment in the public sector over the last year, this has resulted in us being awarded a number of tenders and being included on most of the transversal tender lists,” he says.
Having shown significant growth on the top line and demonstrated its resilience in the current tough economic conditions, Tomlinson cites macro conditions over which the company has no control as the reason for his cautious optimism for the year ahead.
“In light of global economic conditions and their impact on the local market, combined with political changes at home, we nevertheless remain positive in our ability to deliver value for our shareholders and maintain a sound return on investment,” he says.
Faritec's flexible and proactive approach to the market should stand it in good stead for the future, says Frost & Sullivan, but the success of virtualisation in the market will be key.
The consulting group says that Faritec announced last month that it intends becoming the African leader in virtualisation and it believes that Faritec’s approach to taking this proposition to market will determine how much it can take advantage of this trend.
“The last year has been quite a tough one for Faritec, with the company share losing more than 67% of its value,” says Frost & Sullivan analyst Lindsey McDonald.
“Market conditions have certainly been difficult and the impacts of the economic slowdown have been felt even in the IT sector. These conditions were expected by the company’s directors, however, and plans were put in place to address the awaited challenges.”
The company has branched out into new areas, one of which is the highly topical sphere of virtualisation, McDonald says. Faritec also concluded important deals in the South African financial services, telecommunications and government sectors, demonstrating its ability to meet the requirements of diverse customers. It also enjoyed first mover advantage, becoming the first African company to offer Google Enterprise Solutions.
“Faritec’s growth and acquisition strategy proved costly in the last year or two, but the company made the correct decision by embarking on this process,” McDonald says. “The next year ahead should be one in which the positive impacts of properly bedding down these acquisitions will be felt. The company’s public commitment to virtualisation and its partnership with global leader Google should assist it in achieving competitive advantage.”
Faritec also recently announced that it will raise R100-million from investors in the capital markets in a long-term debtors’ securitisation programme and that it has concluded an agreement to acquire the business of Ubusha and its 30% stake in Linux System Dynamics.
“These moves by Faritec to ensure cost-effective financing will put the company in a far more stable condition going forward,” McDonald says. “While some may think that another acquisition is perhaps too early, it is in fact a great move by the company. It will now be positioned as an expert in the access and identity management field, which will complement its existing services.”
Mc Donald suggests that, despite the challenging market in which the company finds itself, Faritec’s flexible and proactive approach to the market should stand it in good stead. If the company is able to demystify virtualisation and effectively communicate its value proposition, there are definitely opportunities in this new service line.
“The challenges facing Faritec are characteristic of the South African IT industry at present,” McDonald says. “Clients have less available budget, but maintain their high levels of demand for advanced solutions.”
Frost & Sullivan anticipates that over the next 12 months, Faritec will enjoy further growth into the rest of Africa, as well as further customer acquisition in South Africa. Mc Donald says it will be interesting to see market reaction to the share, as she believes the company is not currently as favourably perceived as it should be.