Calcadot

We believe that the next two years are going to be tougher than the last two years for many players in the Technology sector. The primary reason is the expected slowdown in the economy and the associated slowing in IT spend from corporate customers.

• New fancy software applications - for example CRM systems, Business Intelligence systems and even entire ERP systems for that matter.
• Major hardware/software upgrades – both in the desktop and server space. For example, a large corporate may delay upgrading their entire desktop PC and operating system environment. It may decide to sweat these assets for another year. Likewise, in the server room, it may decide to delay the purchase of the latest and greatest high-end servers.

• “Essential” or mission critical spend – such as desktop support, IT Security and disaster recovery. By this we mean software and services that are required to keep the IT infrastructure going…
• Long-term contracts - obviously more resilient. Although contracts up for renegotiation in the next year may not be renewed or may face pricing pressure.
• Anything that helps customers to save money – the tough times may give certain areas a boost such as managed print services or even IP telephony.
• Public Sector IT spend - this will likely be more than resilient – it is likely to grow strongly despite the private sector slowdown. This will help those companies well positioned for it. We have been following this area quite closely for a few years. Public Sector spend is happening and we believe it is on track.

Simeka interestingly appears to be fairly resilient with its high annuity and long-term contract revenues. It is also helped by the ongoing revenue streams of Mithratech and Premium Ideas in the prepaid voucher and packaging areas. These areas do business with the defensive mobile operators. Another point is that the SAB&T acquisition has improved Simeka’s public sector positioning dramatically.

MIS CDS is a well respected IT Security solutions company. It makes its money from selling IT Security products, providing consulting services and offering clients ongoing managed Security services. It has a fairly small staff complement of 65 people. The operations (support centre and security operations centre) are based in Maidstone, Kent with the sales function located in Basingstoke, much closer to its client base.

We visited the Maidstone offices and were shown around by CEO Dean Brazier. The offices are located in a quiet peaceful part of the country, an hour train ride from London. Unlike London, the place is quaint with much greenery. Cows grazing on fields can be seen nearby the offices!

Although MIS is similar to SecureData in South Africa, there is one key difference. SecureData in SA is a distributor of IT Security products – it sells its vendors’ products through a channel of resellers. In the UK, MIS is a reseller “further down the chain” – and sells directly to customers.
But where in the chain is it better to be? In South Africa and most emerging markets, the distributor often obtains exclusivity on or dominates key products. It does more for the vendor and usually earns higher margins. In the UK market however, the distributor typically never has exclusivity and typically only provides a logistics and credit management function. It typically earns lower margins. In the UK market, the reseller maintains the client relationship and usually earns higher margins. One could argue that the distributor holds more power in the chain in South Africa, but the reseller holds more power in the UK. This primary difference comes from the size of the market and the way the players are organised within it.

There are some good synergies of this deal for the group. Firstly, SecureData’s highly regarded IT Security consultancy, SensePost, can be leveraged more in the UK market within the MIS client base. Second, MIS has developed its own systems to provide Security managed services to clients. The processes and IP developed in the UK can be implemented in South Africa, where the market appears ready for such services. And finally, the UK operation can be used as a platform to sell managed services to European clients through European resellers. This has already been done to a limited extent, but it could be ramped up considerably. In time, we think the group should investigate offering these services out of the relatively lower cost South African operation.

Despite the opportunities, we also see some challenges. First is the loss of Dean Brazier as a permanent fixture to the South African operation. He will remain the CEO of the group, but has relocated to the UK. He will travel to SA about once every 6 weeks. Bear in mind that the South African operation is still currently a larger contributor to the group than the UK. Managing the group from abroad will no doubt have challenges. That said, we do have confidence in Brett Parker, who will be leading the South African operation.

Another issue is a potential channel conflict of trying to introduce the UK’s managed security services in South Africa, where Securedata is perceived as a distributor and not a customer facing entity. We made this point before when the group bought SensePost, but the feeling then was that SensePost was a highly regarded product agnostic consultancy. The arrangement seems to have been accepted.

Analyst disclosure : Irnest Kaplan currently holds shares in SecureData