BRR - Straight from the source

PRESENTATION BY JOHN GRANT, MANAGING DIRECTOR OF DATA#3 LIMITED (DTL)

“Smart Business eConference - DTL and ICT Solutions in Australia”

http://www.brr.com.au/event/47970

MONDAY, JULY 21, 2008, 3:00 PM.

DTL Thanks very much for inviting me to join the online conference. I am going to run you through an overview of Data#3 today, give you an update on the current operations of the business, look at what we have to offer the market in

10 ICT solutions in Australia, and also look through some of the investment rationale for Data#3.

In terms of the overview of Data#3, we commenced business in 1977 which makes us one of the longer-term organizations in the industry in Australia. We

15 traded as a private company from 1977 through 1997 and in that period of time did many things, from being firstly a small business operating out of Brisbane to running joint ventures around the rest of Australia particularly in the healthcare area to also having an office in Asia where we market healthcare system to the healthcare market in Asia, but primarily in that time

20 and those early days, we were software developer. In early 1980s, we also started to become a reseller of equipment to run that software on and that progressed through to where we are today. We were listed on the ASX in 1997. We are a national business today. We have got offices in Perth, Adelaide, Melbourne, Sydney, Canberra, Brisbane, and two regional offices in

25 North Queensland. We have just announced results from the 2008 year, the preliminary level anyway, with revenues to $360 million. We have 460 staff and 360 contractors. Our customer set is primarily in the mid to large corporate areas and in government. We have substantial government customer base, particularly in state government and some in federal. We

30 position ourselves as both a reseller of products from global technology providers and an integrator of those products to ultimately give solutions for customers.

Next slide gives you an overview of the financial parameters of the business.

35 On the 17th of July, the market data as you can see, market capitalisation of the business is at $93 million based on a $6.10 share price. Highs and lows, as you can see, the share price over the year. We have a dividend payout ratio of 76% at the last dividend payment and that is a percentage that we have been looking to increase progressively over time and we have done

40 that. Our capital structure has $15.5 million shares on issue and our top shareholders own 47% of those and shareholders even spread of 1770 investors. In terms of profit and loss performance, actual versus forecast for the 2008 year, (inaudible) (0:02:16) fully audited results yet, but our revenue has increased from $280 million to be just around about $360 million. That is

45 a significant gain. EBITDA increased to effect from $11.1 million to $12.8 million, which does represent a margin of 3.5%. Now EBIT up to $12 million, which represents earnings per share of $0.55 per share. The balance sheet. The balance sheet is pretty straightforward. We have some free cash and we will have more when we actually finalise the June numbers. Current assets of $59 million with all of that netting out to net assets of about $21 million in December 2007.

In terms of update on current operations, we made a market release on the

5 11th of July in relation to the 2008 financial year. We said in that release that revenue would be expected to be up to $360 million with EBIT up 21% on the previous year, which was and is for us though another record full-year result. We have an on-market buy-back which we have been exercising in recent times as well. We will keep that on-market buy-back in place for another 12

10 months. I suppose the most, if you like, satisfactory aspect of the performance in the second half was the return that we made or we got at least on the investment that we made in recruiting almost 50 people ex Commander in the February timeframe with all of the work that needs to go on integrating new people in the business. There was a lot of work done in

15 the period from March through to June and our objective was that we would cover the cost of that, which was estimated to be about $3 million in that part of the financial year. We would covered that with gross margin we generated, and in fact, we did do that. We had been suggesting to the market that we might fall short on that, but we did not and the consequence of that is that we

20 have had the performance that we looked like having. The Board will announce the fully audited results and the final dividend of the 25th of August.

Just moving onto the solutions aspect of our business end of this presentation, when we look at what we provide our customers, we first look at

25 what our customers view in terms of their IT solutions. And if you talk to customers, they will talk to you about their ICT systems. There are various aspects to it. First aspect is, and this is where IT is, if you like, an underpinner of the business strategy, businesses. They will look at their business strategies and then they will look at their ICT strategies in terms of how it

30 supports the achievement of that business strategy. They will then look at the software that they need for their business users in support of that ICT strategy. They will then look at the infrastructure, that is physical hardware, the networks, the equipment, and telecommunication links that need to be put in place to deploy that software. They will then look at how they manage the

35 operations of that and they will then look at the people that they need to run the systems for them. So that is sort of the logical structure, if you like, for the right customers to use the ICT systems. We build our business and the solutions that we provide around that very thing.

40 So the next slide there highlights for you, in the dark wording, the areas that Data#3 provides specialised solutions in. Firstly, we do provide specialised solutions in ICT strategy, then in the software area, and in infrastructure, and in managed services to deploy ongoing operations, and the people area.

45 The next slide then is a bit more specific about all of the elements of that and what it shows is the specific solutions that we have in each of those areas. I will just run through these quickly and lot of these will not necessarily be of significance in terms of the words that are used to perhaps some of the listeners to this presentation, but it does give you a good idea and understanding of the breadth of the solutions that we provide.

In the ICT strategy area, we have some consulting services around business

5 analysis and strategic ICT architecture. We help our customers lay out the architecture for their systems to support their business strategy. In software solutions, we specialise in software licensing for software (inaudible) (0:06:01) by customers, so that specifically refers to, an example would be Microsoft Software desktop where customers require significant numbers on

10 the license from Microsoft, and we manage all of that for our customers. We also manage their software assets or software as assets through software asset management capabilities that we have and consulting teams. We also provide our customers with business productivity and knowledge management software by using Microsoft technologies in developing software

15 to meet those needs. In the infrastructure area, the support software solutions, we have solutions in a unified communication and collaboration area which integrates, if you like, all of the communication streams that our customers can back up on, whether it be voice, whether it be data, whether it be fax, etc. We have identity management solutions as well which help our

20 customers uniquely identify individuals in their organization. We have consolidation and virtualisation solutions which allow our customers to look at their spread of computing resources in their organization and consolidate those down and then virtualise those as if they are actually getting greater value out of the investment that they make. We have connectivity solutions to

25 allow our costumers to connect both within their organizations and externally to customers. We help our customers manage their data lifecycle through storage devices and through retrieval solutions. We help the customers procure ICT product cost effectively by having made significant investments and supply change processes and management of that whole area. We offer

30 our customers solutions around systems management which is in the operational side of the IT system, and the managed operating environment, certainly the desktop, and we provide disaster recovery solutions. In the managed services area, we provide a range of managed services from outsourcing through to remote management. It has been one of the areas that

35 has been (inaudible) (0:07:51) over the last 12 months. In people solutions, we have a good permanent recruitment and a contract placement.

So the majority of the solutions are underpinned by technology from global leaders. We are not, as an organization, one that invests heavily to produce

40 unique intellectual property which becomes our product. Rather, we look to our major partners and to their partners to deliver a range of technologies through us from which we then build. So our major partners are Cisco, HP, IBM, and Microsoft. We have a number of other strategic partners through them such as Citrix, VMware, NetApp, and Symantec as you can see on the

45 slide. These organisations develop product which in a sense drives the adoption of computing (inaudible) (0:08:32) because they have the investment funds to do that and we work from that point. So all of our solutions other than those in the managed services area and in the people solutions area, all of our solutions are underpinned by technologies from these vendors.

We have a view on the next slide to how our solutions should develop over

5 time, and that view is influenced by how we see our customers adopting technology. The first arrowed section on that slide shows that there is a trend where customers are moving from the acquisition of products to the acquisition of ICT, what we call a service in an access sort of environment, and the phases that we see customers moving through, and these are not

10 necessarily exclusive phases but they are from phases which customers will move through over time. First, the customers will just buy products which enables them to do things that they do with their own expertise to get an outcome. Secondly, they will purchase expertise and this will be a one-off purchase which they will then apply to products that they have acquired to

15 again get an outcome which is their responsibility. Thirdly, they can look to an organization such as Data#3 to deliver them an outcome, typically an in-house outcome solution. Fourthly, they can look to an organisation such as Data#3 to in fact to deliver them an outcome but they will not take necessarily the responsibility for managing that outcome on an ongoing basis and so they

20 will outsource back to us. Last but not the least, we have customers who increasingly will look to turn on and turn off their access to ICT just as they require their access (inaudible) (0:09:57) which really implies Internet. You can see across that trend responsibility changes for the outcome from our supplier to the supplier at least. The left hand side of that trend is the

25 customer has got responsibility for the outcome and the right hand side is the supplier has got the responsibility for the outcome. Also, sort of form of the purchase changes from being an outright purchase to being a pay as you go purchase. From a supplier’s point of view, the sale margin changes as well from being low to high and I say it in relative terms because including the

30 margins in our industry, they are not high by any means. That is how solutions develop.

The next slide talks about how we deliver our solutions to our customers and there is a level of detail. Even though I am not going to explore in full, it is

35 suffice to say that we have a framework that allows us to connect the dots between the customer’s business outcomes or business objectives and the solutions that we provide. Our solutions embody the technologies from global vendors as described above to get into our own expertise, but also there is a cultural aspect to that in that how does a business such as Data#3 actually

40 engage with the customer and how do we make that meaningful, and culturally, we put a lot of efforts into that to make sure that we meet the customer’s expectations and get the level of satisfaction that we both expect.

Moving on now to investment rationale, there is no doubt that we have a very

45 good track record no matter which way you measure it in financial performance. See on that first graph our revenue growth over the last five years, both in terms of overall revenue but also in terms of revenue under contract, and we have not published that for this 2008 year but we will when we release results in August. You can also see then onto its right expense as a percentage of gross margin which is our measure of productivity, so it takes all the expense in the business and expresses that as a percentage of sales gross margin and that is meant to decline and you can see how it declines. Also, our net profit after taxes has been climbing year on year as you can

5 also see included. Therefore, our earnings per share and our dividends per share are also climbing. So the track record for the business from the point of view of financial performance has been nothing short of exceptional.

Further on the investment rationale, I mean, we have been a strong primarily

10 organic growth company. We had done some acquisitions, and in fact, we have done seven so we do have some experience in acquisition so while we have been able to get very strong organic growth tracks, acquisitions have really played a sort of second fiddle to our growth drivers. We have had consistent financial performance as the previous slide demonstrated and we

15 have given consistent shareholder return. We have very experienced long-term management in the business, management team, our senior leadership team of 12 people and they have over 130 years experience in Data#3 and over 250 years of experience in the industry. We have a considered approach to things. We would not call ourselves conservative. We would call ourselves

20 considered. Certainly, we will respond and respond quickly to opportunities as we did when we hired the 50 people ex Commander who came into the market in a very short period of time and we moved very quickly, but even in that, we were very considered in the way that we did that and we would (inaudible) (0:12:55) that we had quite a considered approach to the way we

25 run the business. So we think that all that plays very subtly into an investment in Data#3 and one where there will be the highest level that there possibly can be of return.

So look, I just hope that that gave the listeners some idea of Data#3 certainly

30 from the point of view of our background, of where our position today is in terms of ICT solutions that we deliver into the market in Australia and why we believe that Data#3 is a good investment. Thank you very much for listening.

INTERVIEW CONCLUDED

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