DATA#3 LIMITED - Annual Report 2023

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Message to Shareholders

It was also pleasing to see a return to more in-person engagement, with COVID-19 impacts now largely behind us. The team has been returning to the office and increasing face-to-face attendance at several industry conferences. Our own JuiceIT conference in February saw over 1,500 customers across Brisbane, Adelaide and Perth, demonstrating the expanding national reach of our business.

Dear Shareholders,

We’re pleased to report that financial year 2023 was another successful year for our customers and people. This was in an environment of heightened inflation, geopolitical instability and ongoing supply chain constraints, all of which have directly and indirectly impacted the Australian economy.

We continue to see strong growth across public and private sector customers, with a focus on the education, healthcare and resources sectors, which have demonstrated consistently strong growth. In line with our strategy to grow more rapidly in the two largest Australian IT markets, Victoria and New South Wales, we made excellent progress in these regions.

We were also confronted with some of the highest staff turnover the industry has ever witnessed as the IT sector saw its own “great resignation” with excess demand for staff and an under supply of candidates. We were fortunate to maintain levels of staff turnover well under industry averages, reflective of our core focus on our people.

We saw strong revenue growth across our business divisions, particularly across most of our Services business as we continued to deliver on our Services growth strategy. This will help to grow our margins and recurring revenue base. We have continued to invest in the Managed Services business and onboarded many new customers in FY23. We expect to realise the benefits of this investment as contracts mature following their initial transition phase and profitability generally increases from year two onwards of typically five-year contracts. Following a competitive tender during the year, we secured a major Enterprise Managed Services contract with the Future Fund Management Agency, our largest to date, to manage its entire IT environment including providing services remotely and providing a growing team onsite in its Melbourne offices.

The business performed remarkably well against this backdrop, significantly outperforming IT market growth rates. This shows the resilience of the Data[#] 3 business model and strength of our longstanding supplier relationships and customer base, particularly among large enterprise and government customers.

FY23 results overview

Despite the uncertain operating environment creating volatility, especially early in the year, our FY23 revenue grew to a record $2.5 billion, up 17% on FY22. This was driven by our customers continuing to invest in digital transformation, enterprise security, networking, and multi-cloud, together with record levels of demand for our major vendors.

At the forefront of a growing IT market

This flowed through to net profit before tax of $53.2 million, up 20.7% on FY22. Earnings per share of 23.96 cents were up 22.2%, and the board declared a fully franked total dividend for the year of 21.90 cents per share, an increase of 22.3% on FY22, representing a payout ratio of 91.4%. Data[#] 3 has traditionally experienced a skew in its earnings towards the second half of the financial year due to a concentration of sales orders in May and June. Pleasingly, this is lessening as our business becomes more predictable and we grow our recurring revenue base, now at 65% of total revenue.

The IT market continues to grow both domestically and internationally, as decision makers increasingly seek automation and opportunities for driving greater efficiencies. Gartner has forecast Australian IT spending to grow 8.4% in 2023 to almost $118 billion, led by digital investment programs.

This year, Artificial Intelligence (AI) has truly entered the mainstream as a business priority. While it is early stages for the industry and difficult to quantify the potential impact, we are assessing widespread applications across our customers’ transformation projects. AI is becoming a major digital milestone with operational technologies like robotics becoming integral to our transformation solutions, and we are already seeing rapid product development incorporating cloud, hybrid work, security, connectivity and data analytics.

We are aligning ourselves with the global market leaders in AI especially through our partnership with Microsoft, so we are at the forefront of this change as our customers’ enabling technology is increasingly AI driven. We are also looking at opportunities to apply AI within our own business to further improve operational efficiencies.

Customer success continues to be a key differentiator with Data[#] 3 at the front of the curve, having developed deep expertise in our lifecycle approach. Our vendor relationships continue to be a significant focus especially though our commitment to customer success, which is reflected in the multitude of awards we received this year.

In FY23 Data[#] 3 was awarded a significant number of vendor accolades, including three worldwide partner awards and more than 15 regional awards. This is a real testament to our business and reflects the recognition of Data[#] 3 among our partners. Notably, we were named as the winner of the 2023 Microsoft Surface PC Reseller Worldwide Partner of the Year, demonstrating excellence in innovation and implementation of customer solutions.

Management changes

During the year, as part of our succession program, we farewelled Brem Hill who retired as CFO at the end of March 2023 and will leave at the end of 2023 after 32 years with Data[#] 3. Brem, who joined Data[#] 3 in 1991, then still a small private business valued at less than $10 million, has seen it grow to a market capitalisation today of nearly $1.2 billion. On behalf of the Board, we would like to thank Brem for his incredible service and wish him well in his well-earned retirement.

We welcomed Cherie O’Riordan as our new CFO after an extensive search process. Cherie joined Data[#] 3 from Cardno Limited (ASX:CDD) where she was CFO and Company Secretary. Cherie has more than 20 years’ experience in corporate accounting roles with numerous ASX-listed companies, and we are already benefiting from her extensive financial and strategic business leadership, governance, compliance and complex project delivery experience.

Environmental, Social and Governance (ESG)

One of our key objectives is to lead our industry in ethical business practices.

We received the 2023 Enlightened Growth Leadership Award by the Frost & Sullivan Institute for the second year running, in recognition of our commitment to harnessing the power of people and technology for a better future. This is the only award that considers the synergy between financial growth, corporate social responsibility and ESG.

Additionally, this year our Reconciliation Action Plan (RAP) working group was firmly up and running, and we presented our first milestone achievement – our Reflect RAP, which details Data[#] 3’s vision and direction for reconciliation. The working group is responsible for developing and implementing meaningful measures to advance reconciliation and reflects an ongoing commitment that will evolve and grow as we learn and progress on our reconciliation journey.

Addressing our environmental impact is among the most pressing priorities facing today’s world, and we take this duty seriously. Working with external consultants and following comprehensive analysis of our business operations, we have set a firm target to be net zero by 2032, before the Brisbane Olympic Games, and are pleased to report that phase one of our three-phase process for net zero was completed this year.

Another priority has been overcoming the key barriers faced by women when entering and progressing their careers in the sector. Data[#] 3 is proud of the steady progress made towards a more diverse workforce, with female representation across our workforce at 33% – well above an industry average of 29%.

During FY23 we also continued to support several key local, national, and international charities, both financially and by promoting volunteering activities for our employees.

Outlook

Our strategic priorities remain the same with our focus on solutions, people and community, customer experience, and operational excellence.

We expect technology, and specifically digital transformation, to continue to play the leading role in Australia’s economic future. The trend to digital transformation is systemic and long term, and we will continue to accelerate growth of our Services businesses and further cement our leadership position.

The growth in our Services business aligns with our global vendor incentive programs, and we expect to see increasing profitability from the many new Managed Services contracts secured during FY23 as they mature.

The excess backlog as previously reported was realised during the year. Our strong growth in FY23 from higher volumes saw us carry a further backlog into the year-end, although this has returned to pre-pandemic levels as a percentage of revenue. We also continued to refine our supply chain processes and controls to better deal with product delays.

We continue to experience a steady increase in the pipeline of large integration project opportunities across our corporate and public sector customers, and our Services growth strategy will improve our overall margin profile while complementing our growing Software and Infrastructure business units. For example, the Brisbane Olympics in 2032 presents a significant opportunity especially given the Queensland Government’s procurement policy to favour Queensland-based providers.

With our leading market position, strong supplier relationships, longterm customer base and experienced team we are confident in our outlook as we enter FY24, despite an expected slowdown in general economic activity. The industry is rapidly progressing and we are well positioned to benefit.

Thank you for your continued loyalty and support. We look forward to updating you on our progress throughout the year.

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Richard Anderson Chairman

Laurence Baynham CEO and Managing Director

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Data[#] 3 Customer Story

Teachers Mutual Bank Limited

Teachers Mutual Bank Limited opted for a ‘pay-as-you-go’ Dell end-user computing (EUC) solution, with devices and services provisioned via a customised DaaS portal hosted by Data[#] 3. This allows for streamlined procurement, and a decreased IT workload. When a new device is needed, a request is entered in the portal, and the assigned Data[#] 3 DaaS Customer Success Manager fulfils the order from local strategically cached stock, without taking the bank’s IT staff away from their priority tasks and delivering a zero-touch deployment.

Teachers Mutual Bank Limited earns time and focus through investment in a DaaS solution from Data[#] 3

Teachers Mutual Bank Limited is one of Australia’s largest mutual banks. In its 56[th] year of operation it has over 230,000 members and more than $10.4 billion in assets. Teachers Mutual Bank Limited is a Certified B Corporation, aligned with its purpose to provide banking for good, for those who do good. Providing the best return means the organisation must play to its strengths. Already, the IT team had begun a sustained effort to reduce admin-heavy tasks in order for its skilled resources to focus on projects that drive better services and deliver meaningful outcomes. To make the most of available skilled resources, Teachers Mutual Bank Limited wanted an end-user computing solution that would eliminate administrative burden.

With the DaaS solution now in place, Teachers Mutual Bank Limited is considering further outsourcing options that will complement their IT team’s strengths. As well as the benefits of predictable costs and simpler cashflow that arise from shifting from a capital to operational expenditure model where possible, the increased time and focus enable the team to build on their excellent work through the pandemic.

My view is that, like us, Data[#] 3 is an organisation that does what it says it will do and if we work with them, we can get rid of components that bog us down, so we can do other things without hindrance.

Gerard Smith, Chief Information Officer, Teachers Mutual Bank Limited.

Teachers Mutual Bank Limited sees the smart use of technology as a way to continually build on the service it offers to Members. Given the technology skills shortage affecting all industry sectors, it was vital to enable the bank’s valued IT team to focus on these high value tasks. Additionally, the bank wanted to switch from the capital expenditure of device acquisition to an operational expenditure model.

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Data[#] 3 in FY23

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RevenueRevenue People
$2.2B
$2.5B
1,400+
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Listed on the ASX in

Listed on the ASX in Years in business Facilities across Australia + Fiji 1997 45+ 12

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Transacting customers

Project hours

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5,000+ 554,900

Customers

Professional services projects

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Public sector and large corporate
• Health, education and resources industries

2,500+

ESG update

HRD Employer of Choice – 8[th] year in a row
• Cisco Global Partner of the Year – Security • Microsoft Surface PC Reseller Worldwide Partner of the Year • Microsoft Surface+ Worldwide Partner of the Year
Recipient of the Enlightened Growth Leadership Award by the Frost & Sullivan Institute
• Creation of Reflect Reconciliation Action Plan

Financial Summary

Total gross profit ($M)

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Total revenue ($M)
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Net profit after tax to members of Data[#] 3 Limited ($M)

Basic earnings per share and dividends per share (cents)

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The following table sets out our performance in FY23 compared with previous years:

	FY17 $’000	FY18 $’000	FY19 $’000	FY20 $’000	FY21 $’000	FY22 $’000	FY23 $’000	% change
Total revenue	1,098,221	1,181,411	1,415,569	1,625,941	1,956,188	2,192,997	2,564,570	+16.9%
Total gross proft	158,879	160,112	173,907	187,979	194,746	218,218	250,651	+14.9%
Total gross margin %	14.5%	13.6%	12.3%	11.6%	10.0%	10.0%	9.8%
Earnings before interest (net) & tax Proft before income tax Proft after tax attributable to members of Data#3 Net proft margin %	21,665 22,402 15,375 1.40%	19,498 20,399 14,078 1.19%	25,758 26,564 18,112 1.27%	34,079 34,066 23,636 1.45%	37,664 36,943 25,414 1.30%	45,196 44,093 30,262 1.38%	50,973 53,234 37,030 1.44%	+12.8% +20.7% +22.4%
Return on equity %	37.0%	31.6%	38.5%	45.2%	45.1%	49.0%	54.2%
Basic earnings per share	9.99 cents	9.14 cents	11.76 cents	15.35 cents	16.51 cents	19.61 cents	23.96 cents	+22.2%
Dividends declared per share	8.9 cents	8.2 cents	10.7cents	13.9 cents	15.0 cents	17.9 cents	21.9 cents	+22.3%
Payout ratio	89.1%	89.7%	91.0%	90.6%	90.9%	91.3%	91.4%
Share price at 30 June	$1.73	$1.60	$2.12	$4.54	$5.61	$4.66	$7.20	+54.5%
Total shareholder return,
based on dividends paid during year	72.7%	-3.1%	38.9%	119.9%	26.7%	-13.9%	+58.9%

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Operating and Financial Review

The global computer chip shortage and supply chain constraints and delays, which impacted our hardware vendor partners and almost the entire industry in recent years, eased further in the second half of this financial year, and the supply chain is returning to a pre-pandemic normal. However, the backlog in infrastructure is higher than pre-pandemic and is commensurate with the 40% growth we have achieved in the last four years.

The IT market globally and locally has seen much change during the FY23 period. Despite the pandemic lifting, we experienced severe supply chain constraints combined with high staff turnover at the beginning of FY23. Like all sectors, IT also saw high wage growth, inflation and rising interest rates.

These challenges, however, did not hinder the Australian IT market which grew between 5% and 6%. In particular, the large corporate and government customers of Data[#] 3 continued to increase their technology spend on digital transformation projects. Our core business includes connectivity, collaboration, modern workplace, end-user computing, multi-cloud and enterprise security offerings. These solutions have been, and continue to be, a high priority for our customers, and their investment in IT infrastructure, software and services forms an essential part of Australia’s economic development.

FY23 also saw the launch of ChatGPT and Generative Artificial Intelligence (Gen AI) truly entered the mainstream. The CEO of Microsoft, Satya Nadella has commented that we are at the beginning of a new era of IT and that generative AI will be as impactful as cloud or the internet. Looking beyond the hype of Gen AI, we are already starting to see it applied across each of our solutions and internally in our systems.

As the financial year progressed, we saw improvements in supply chain and staff turnover returned to pre-pandemic levels. Our customers’ spend continued to grow with higher growth in the education, health and resource sectors.

We see scope for integration in existing solution categories as customers transform their environments to be more competitive or efficient. For the most part, technology innovation is iterative and incremental, as we find new ways to use existing technologies and improve on what’s come before.

These projects extend across our solutions portfolio and include infrastructure, software and services. Our aim is to provide a full lifecycle of services from advisory to implementation and recurring support services. Typically, these projects span multiple financial years. The innovative digital network for the Queen’s Wharf development in Brisbane is an example of such a project, where we are designing, building, installing and supporting the entire digital network. Our market leadership, full lifecycle service offering, strength of vendor relationships and track record put us in a competitive position for these major projects and there are other similar projects currently underway or in the pipeline.

It is becoming apparent that we are at the start of a major ‘step’ change for the global IT market. We are yet to determine the potential financial impact on our business.

Equally, security solutions are growing in demand as customers respond to the ever evolving and increasing threat of cyber breaches, seen by many as their number one business and risk management imperative.

Operational overview

Performance against strategic priorities

We have made steady progress against all our strategic objectives and priorities in FY23, as summarised below:

Accelerating Services – Services growth continued to be a high priority in our FY23 strategic plan. We continued to expand our offerings across the service lifecycle (including consulting, implementation and support), with particular emphasis on growing the high value Consulting and Managed Services businesses to improve our overall services margins. Further investments were made in growing our Managed Services business, primarily in our people, and we onboarded many new customers during the year. We are pleased with the strong revenue growth that has been achieved in both of these businesses. We expect to realise the benefits of the Managed Services investment from FY24 onwards, and to improve profitability post the initial transition phase. Managed Services contracts are typically five years, and profitability generally increases from year two onwards. The growth in Services also aligns with the new global vendor incentive programs which are increasingly shifting towards services solutions.
Solutions – we have continued to enhance our solutions to adapt to changing market demands. Every customer has a business strategy that includes digital technologies, and all digital technologies require a foundation of multicloud, networks, end-user computing and security. In FY23 we saw particularly high growth in our software licensing. We have continued to help our customers build their digital foundation and partnered with specialist providers to our targeted industry sectors. We have also continued to expand our solutions across the customer lifecycle, encompassing consulting, design, deployment and then support services.
Customer experience – building on our customer success framework, we continued to gain competitive advantage by utilising data and telemetry within our solutions for customers. This strategic priority focused on consistently achieving successful customer outcomes and incremental revenue streams. Our objective is to understand and measure every customer touchpoint and to continue to invest in technology to help us improve the overall customer experience. We continue to work jointly with our major vendors on embedding our data analysis into customer contracts and service level agreements. In addition, the lifecycle of services for our solutions continues to provide opportunities to expand our relationship with existing customers, as well as attract new ones. We appointed a Chief Technology Officer, specifically to build and strengthen our relationships with world-leading technology partners and to ensure we are ahead of the technology curve. We also appointed a Chief Customer Officer to further leverage our customer success teams and to optimise services opportunities across all functional areas.
People and community – our employee value proposition continues to be enhanced so that we can attract, develop and retain the best talent. In conjunction with our People Solutions business, we have strengthened our talent sourcing strategy with a focus on our graduate recruitment program, traineeships and industry placements.

We have also selectively adopted greater offshoring for non-customer facing services where it makes strategic and economic sense. We are committed to a sustainable social responsibility framework that supports our business, customers, partners and other stakeholders and continue to refine our environmental, social and governance (ESG) goals and initiatives as we strive to improve our performance in this important area.

Operational excellence – we continued to enhance our operational efficiency across a range of projects. The most significant project was the implementation of our new ERP system based on the Microsoft Dynamics 365 cloud platform. This project was completed successfully and involved considerable upfront investment during FY22 and ongoing system enhancements during FY23. We expect it to generate a solid return on investment over time with longer-term productivity improvements, in addition to other benefits such as additional security features. $6 million of capitalised development costs are being amortised over a five-year period and there will be ongoing costs as we continue to enhance the new platform. There are many other internal digital transformation projects underway that will further enhance our scalability, security, reporting and productivity.

In addition to the above strategic priorities, there are other indicators we utilise to determine the health of the business. These include our customer survey, people satisfaction survey and independent external awards and certifications. We are especially pleased with our performance in each of these areas.

Customer satisfaction

Our annual customer satisfaction survey produced another very high overall rating consistent with prior years. Our customers’ top priorities as identified in the annual survey are security (the number one priority for the eighth year in a row), cloud and networking.

The regular “customer pulse” surveys continued to provide instant customer feedback on projects, service desk calls and services in general. These surveys have proved to be very useful sources of information for insight into areas of improvement and investment to ensure we are delivering enhanced customer experiences. The regular pulse surveys help us to remain agile as customer needs change.

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People satisfaction

We ended FY23 with 1,447 people in the group, up from 1,378 people at the end of FY22. This includes a combination of permanent, contracted and casual staff. For the past 16 years we have surveyed our people’s satisfaction, and the summary for FY23 was as follows:

strong participation in the survey
another outstanding result, matching the previous year’s record overall satisfaction score
98% of our people recommend Data[#] 3 as an excellent company to work for
98% of our people said they feel they belong at Data[#] 3
97% of all new starters have stayed with the business for more than 12 months
15% of our people were promoted internally during FY23

Vendor relationships and external awards

We continue to strengthen our partnerships with key vendors, the most significant relationships being with Microsoft, Cisco, HP, Adobe and Dell. These are leading global vendors that account for a large proportion of the addressable market in large corporate and public sector organisations.

In FY23 we achieved significant market share growth with each of our vendors, consolidating our position as their leading partner in the region. This growth is largely the result of our considerable investment in the vendors’ technologies with specialist certifications for our services businesses. One example is the Microsoft Azure Expert Managed Services Provider (MSP) certification which Data[#] 3 is one of few organisations in Australia to have attained. Many vendor certifications require considerable investment which limits the number of partners that are endorsed by the global vendors, further strengthening our competitive position.

It is recognised that the major vendors prefer working with fewer, larger partners that can deliver critical mass in their target markets. Customers, meanwhile, prefer to concentrate their IT spend with a single provider as they transition from legacy systems. This significantly enhances the value of established solution providers such as Data[#] 3 that can deliver a full breadth of services.

In addition to Microsoft, Cisco, HP and Dell, we work with hundreds of other vendors such as Citrix, Lenovo, Palo Alto, Mimecast, Fortinet, Apple, Veeam Software and VMware. Our vendor management and solutions team constantly scan the market for new and emerging vendors that complement our existing solutions and offerings.

Increasingly the vendor channel programs are focusing on the adoption and usage of their technologies. Many vendor programs have a customer experience emphasis which focuses on the full lifecycle of their products combined with our specialist services. The programs are, therefore, promoting longer-term, ongoing customer engagement rather than short-term initial transactions. This translates into greater opportunities for organisations with services teams that are skilled in the associated technologies.

Each year we receive national and international recognition from our global partners, and we are delighted to have been recognised with the following prestigious global awards for 2023:

Cisco Global Partner of the Year – Security
Microsoft Surface PC Reseller Worldwide Partner of the Year
• Microsoft Surface+ Worldwide Partner of the Year

Cisco has more than 60,000 partners globally, and the 2023 award is the fifth consecutive year we have succeeded in winning a global award.

There are over 500,000 Microsoft partners globally, and for an Australian company to win global awards is a significant achievement.

The Surface PC Reseller Worldwide Partner of the Year Award recognised Data[#] 3 as the Surface PC reseller that has demonstrated outstanding leadership in delivering Microsoft Surface PC device solutions to our customers. The award recognised the partner that delivered the highest-quality service to Microsoft Surface customers, with strong growth in new customer additions while maintaining and growing our existing Surface customer base.

The Microsoft Surface+ Worldwide Partner award recognises the Surface partner that has brought the best of Microsoft together by pairing Surface PC and/or Hub with Microsoft modern solutions including Microsoft 365, Autopilot and Device as a Service.

Data[#] 3 is also the number one Microsoft security reseller in Australia and number five globally, which aligns with our strategic priority of growing our security business.

In addition, we are pleased to have been acknowledged with the following regional awards over the past year:

HRD Employer of Choice Award
Microsoft Surface Reseller of the Year for Asia
Schneider Electric IT Solution Provider of the Year
TasICT Best Security Initiative
ARN Enterprise Partner Innovation Award
Cisco ANZ Partner of the Year
Enlightened Growth Leadership Award by the Frost & Sullivan Institute for ESG & CSR
Hewlett Packard Enterprise (HPE) Platinum Partner of the Year
Aruba GreenLake Partner of the Year
Aruba As a Service Partner of the Year for the Asia Pacific and Japan (APJ) Region
HP Services Partner of the year
HP AMD Greater Asia Reseller of the Year
Palo Alto Networks Security Growth Partner of the Year
Delinea APAC Enterprise Partner of the Year
Delinea APAC Marketing Event of the Year
Jabra APAC Top Public Sector Sales Award

Our Group Manager of Organisational Development and Human Resources was also named as winner of the Australian Reseller News (ARN) Achievement Award for 2023 for her outstanding contributions to the ICT industry.

Financial overview

The Data[#] 3 group delivered another strong financial performance in FY23 off the back of continued investment by our customers in digital transformation, enterprise security, networking, and multi-cloud, together with record levels of demand for our major vendors. We benefited from improvements in the global supply chain in the second half, which in turn reduced our inventory holdings and aged debtors.

During FY23 we realised the excess backlog from FY22 as previously reported. The unrealised backlog at the end of June 2023 has largely normalised; however, in absolute terms, the value of the backlog is commensurate with the over 40% growth in our Infrastructure business achieved in the last four years.

Total revenue increased by 16.9% from $2,193.0 million to $2,564.6 million, fuelled by the continued strong growth in multi-cloud revenue and revenue from the sale of products that facilitate our customers' investments in cloud solutions, such as storage and networks. Pleasingly, we also saw strong revenue growth across most of our Services business, as we continued to drive our Services growth strategy.

We saw solid growth across most of our business areas and regions, as detailed in the ‘Operating results by functional area’ section and are well placed to continue growing our Services business in FY24 and increasing returns on investments made this financial year.

Approximately 65% of our total revenue is recurring, derived from multi-year contracts with government and large corporate customers to fulfil their essential IT requirements. Recurring revenue mostly relates to software and services and represents locked-in spend, typically on three to five-year contracts. It does not include any other revenue where customer spend is not committed.

The longer the customer relationships, the more revenue and gross profit they usually generate, which is why we continue to focus on driving our recurring revenue base. This also helps improve visibility and predictability of earnings and should, over time, lesson the profit skew towards the second half, as we saw in FY23.

Total gross profit (excluding other revenue) increased by 14.9% from $218.2 million to $250.7 million, with total gross margin of 9.8% (FY22: 10.0%). The pleasing improvement in the Services gross margin from 31.4% to 36.4% was offset by proportionately stronger growth in the lower margin Infrastructure and Software businesses, a continuation of what we saw in the first half. Product gross margins decreased from 6.3% to 5.7% due to the relative mix of higher volume, lower margin and more competitive deals such as end-user computing, and a slight reduction in vendor rebate percentages compared to prior year as rebate recognition gradually shifts to services.

Total revenue ($M)

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1,181.4 1,415.6 1,625.9 1,956.2 2,193.0 2,564.6
FY18 FY19 FY20 FY21 FY22 FY23
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Total gross profit ($M)

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160.1 173.9 188.0 194.7 218.2 250.7
FY18 FY19 FY20 FY21 FY22 FY23
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Internal staff costs increased by 15.7% from $153.0 million to $176.9 million, representing an increase in headcount and general remuneration increases. We have continued to recruit new staff to increase our capacity, particularly in our Services business units, and our total headcount (excluding contractors) increased by 15.4% during FY23. In addition, we have experienced general wage inflation in FY23; however, there has been no material impact on profit as the increased costs have been built into our cost base and reflected in pricing, which varies across different contracts.

Other operating expenses increased by 12.2% from $21.7 million to $24.3 million, reflecting the amortisation of costs incurred on our Dynamics 365-based ERP replacement project in the previous financial year and an increase in travel and other expenses as in-person business activities returned to more normal levels post pandemic.

Our internal cost ratio (staff and operating expenses as a percentage of gross profit) increased slightly from 80.1% to 80.3% representing continued investment in people and systems, predominately in our Managed Services business. We are confident in our ability to deliver operating leverage while continuing to invest in the business and should start to realise the benefits of our updated ERP system and related process improvements in FY24, as well as improved profitability as our Managed Services contracts mature post their transition phase.

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The group’s total profit before tax increased by 20.7% from $44.1 million to $53.2 million, with the pre-tax profit margin increasing from 2.01% to 2.08%, and profit after tax attributable to shareholders increased by 22.4% from $30.3 million to $37.0 million. This represented basic earnings per share of 23.96 cents, an increase of 22.2% from 19.61 cents in the previous year.

The board declared fully franked dividends of 21.90 cents per share for the full year, an increase of 22.3%, representing a payout ratio of 91.4%.

Return on equity was 54.2% (FY22 49.0%).

Profit after income tax ($M)

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14.1 18.1 23.6 25.4 30.3 37.0
FY18 FY19 FY20 FY21 FY22 FY23
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Basic earnings per share & dividends per share (cents)

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9.14 8.20 11.76 10.70 15.35 13.90 16.51 15.00 19.61 17.90 23.96 21.90
EPS
DPS
FY18 FY19 FY20 FY21 FY22 FY23
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Balance sheet and cash flow

Our balance sheet at 30 June remains strong and debt-free, with significant improvements in inventory holdings and trade receivables, resulting from continued easing of global supply chain constraints in the second half.

The cash balance increased from $149.5 million at 30 June 2022 to $404.8 million at 30 June 2023, reflecting our typical 30 June temporary cash surplus driven by early customer receipts prior to supplier payments falling due. The temporary cash surplus at 30 June is greater than the prior year and unusually inflated due to more customers electing to pay invoices early, combined with the growth in sales in FY23.

Trade receivables and payables are relatively high at year end due to the typical May/June sales peak. Trade and other current receivables at 30 June 2023 were $454.8 million and trade and other current payables $775.6 million, reflecting the timing differences in the collections from customers and payments to suppliers around 30 June.

The key trade receivables indicator of average days’ sales outstanding (DSOS) increased from 28 days in FY22 to 33 days in FY23, mostly due to collection delays caused by supply chain constraints and partial deliveries in prior periods; however, DSOS remains ahead of industry best practice and is starting to improve as we see a continued reduction in partial shipments.

Total inventory holdings decreased from $33.1 million to $19.4 million with the continued easing of global supply chain constraints. Importantly, all inventory is committed to customer contracts, therefore we carry no inventory risk.

The net cash flow from operating activities was an inflow of $291.0 million, predominately due to the traditional May/June sales peak and the spike in collections and early customer payments before the end of June. These collections generate temporary cash surpluses which subsequently reverse after 30 June when the associated supplier payments occur.

Despite the material cyclical fluctuations in our cash position, we continue to manage working capital efficiently and remain self-funding with no external debt. Excluding the end of financial year spike in cash held, “free cash” flow is typically around $15 million, however this was reduced temporarily as a result of the inflated inventory balance held for most of FY23.

Operating results by functional area

The core Data[#] 3 business is structured around three functional areas – Software Solutions, Infrastructure Solutions and Services – operating across eight regions. Business Aspect operates independently but within the Data[#] 3 group structure.

Pleasingly, we experienced moderate to strong revenue growth in all areas of the business during the year, except for Maintenance Services which saw a relative decline against a particularly strong FY22.

Revenue trend by functional area ($M)

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FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
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Software Solutions

Software Solutions achieved strong revenue growth, increasing by 15.3% to $1,652.5 million.

The Software Solutions business helps customers maximise business value from their software investments through effective procurement, deployment, management and optimisation. Software Solutions delivered exceptional performance in FY23 underpinned by our market leading position in Public Sector verticals as well as customer acquisition in the commercial sectors. Customers are continuing to invest in public cloud offerings with subscription services for Microsoft Azure and Office 365 delivering consistent and annuity-based growth, particularly in security.

Software Advisory Services, including Software Asset Management services and related consultancy services, have become increasingly popular as customers seek to drive efficiency across their software portfolio. Software Advisory provides excellent links between the customer’s software licensing agreements and Data[#] 3’s Project and Support Services, which help with the deployment, adoption, and management of the software.

Services has expanded its lifecycle, and packaged services offerings are being attached to software sales and drive customer outcomes and loyalty throughout the product lifecycle. This is consistent with our approach to align with major global vendors who are rewarding partners for delivering on customer success and overall long-term customer experience.

Infrastructure Solutions

The Infrastructure Solutions business achieved strong revenue growth of 28.6% to $566.2 million during the year and pleasingly saw the easing of global supply shortages and delays in the second half.

The Infrastructure Solutions business engages with customers across a broad range of business outcomes. It provides the technology to support those outcomes, by providing notebook computers through to networking, collaboration, data centre, and multi-cloud solutions. The business helps customers procure and maximise returns from their infrastructure investments. It also leverages Data[#] 3’s warehouses, digital customer platforms, and customer success teams to provide industry-leading solutions to customers.

The past year has seen continued customer investment in security, networking, and multi-cloud solutions. Customers have increased confidence in moving to As-a-Service or consumption-based solutions, which supports our strategy of increasing recurring revenue. Data[#] 3’s continued focus on customer success has contributed to customer confidence in our ability to provide these solutions throughout the lifecycle of solutions.

There is continued movement in technology spending as customers refine their approach and policies to hybrid work, deal with rising security concerns, and continue to expand networks across broader footprints. We have also seen a resumption in large scale infrastructure projects, particularly in the public sector.

Data[#] 3 continues to out-perform market growth rates, with revenue in the Infrastructure Solutions business growing over 40% since FY19. While industry demand for enduser computing reduced, Data[#] 3 was still able to grow its devices sales by 6%. Customers are still challenged by the management and orchestration of moving between public and private clouds, which provides further opportunity for Data[#] 3 to provide support to customers in the management of their applications.

We received an unprecedented number of awards, being recognised by key partners for security and As-a-Service, which aligns with our ability to deliver on our customers’ priorities through our solutions strategy.

Data[#] 3 retained its position on the HP Global Partner Advisory Board, Microsoft Surface Global Advisory Board and remained a member of the Cisco, HPE/Aruba, Dell and Lenovo Advisory Boards for Asia Pacific.

The company’s relationships with its major global vendor partners at this level continue to be a significant differentiator.

Services

Growing our Services business is central to Data[#] 3’s growth strategy as it is integral to our Software and Infrastructure businesses while continuing to support higher margins and recurring revenues.

The Services function has a wide portfolio of services and capabilities including the following:

Consulting (through Business Aspect) for management and information technology consulting services
Project Services for the design and implementation of technology solutions
Support Services (comprising Managed Services and Maintenance Services) for annuity-based contracts
People Solutions for the provision of contractors and permanent staff.

Consulting

Business Aspect has extensive consulting skills, experience and expertise in digital transformation, cloud strategy, architecture, security, risk, control, planning, design and governance. In delivering its services, Business Aspect addresses all layers of the business, including people, organisational change, process change and information management.

We were pleased to see revenue increase by 25.0% to $33.2 million in FY23, with improved growth in Queensland and the ACT.

Business Aspect remains strategically important, and we continue to see increased interaction and joint engagements between Business Aspect and Data[#] 3 teams.

Project Services

Project Services had another strong performance and benefited from the steady increase in larger infrastructure-related projects, growing revenues by 11.9% to $74.5 million in FY23. The services associated with these larger infrastructure-related projects typically span multiple years, and the business enters FY24 with a solid pipeline of work and high utilisation levels.

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Support Services (Managed and Maintenance Services) Support Services revenues increased overall by 2.6%, comprised of a strong performance in Managed Services which was up by 31.1% to $39.3 million, offset by an underperformance in Maintenance Services, which was down by 3.9% to $125.0 million against a particularly strong prior year.

We are pleased with the success of our Managed Services offerings, fuelled by our Microsoft Expert Azure Managed Services Provider accreditation. This certification places Data[#] 3 among the elite ranks of Microsoft Azure Managed Services Providers globally.

We have continued to invest in the Managed Services business and onboarded many new customers in FY23. We expect to realise the benefits of this investment as contracts mature following their initial transition phase and profitability generally increases from year two onwards of typically five-year contracts.

We will continue to align our Support Services to the flow of work from our Project Services team, and to work closely with our key vendors to provide complementary support services.

People Solutions

People Solutions delivered another record result with revenues increasing by 9.3% to $68.1 million, as we continued to adapt our offerings to the changing employment market and increased our focus on accelerating services with strategic augmentation.

Multi-cloud

Multi-cloud is a mixed computing environment where applications are run using a combination of computing, storage, and services in different environments including the following:

public clouds
private clouds
on-premises data centres
active “edge” locations

Multi-cloud is inherent in most of our solutions, which means there is little value in reporting on it separately. Multi-cloud is now viewed as the new normal rather than on-premises vs cloud.

Data[#] 3 is Microsoft’s largest reseller in Australia, and our cloud services strategy contains major elements of Microsoft’s product offerings such as Azure, Office 365 and Dynamics 365. Major vendors want IT services providers to take the customer on a journey, to help them generate efficiencies and adopt greater cloud usage.

At the base level, cloud services annuity revenue with Microsoft subscription licenses is a substitute for our traditional license business. Our role is to help our customers migrate applications to the most appropriate cloud solution. This may include private or multi-cloud where customers can use a mixture of cloud services and software and manage both with a common set of tools. Vendors such as Cisco, Microsoft, HP and Dell Technologies are major players in this market segment, and Data[#] 3 is a dominant reseller for each of these global vendors.

An ideal engagement would see us provide services at every stage of our solution lifecycle: consulting, design and implementation, and managed or support services for both public and private clouds, and this continues to be an area of significant focus. The more we grow our cloud business the more access we have to customer data and insights, which in turn allows us to enhance our overall lifecycle services. It also helps determine where we focus our ongoing investment.

Performance by region

Performance across the states varied, reflecting local market conditions and the relative scale of our business in each location.

FY23 Revenue split by region (Total $2,561M)

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Fiji 0.4% QLD 19% NSW 15% ACT 27% VIC 19% TAS 2% SA 7% WA 11%

Queensland – returned to a strong performance as supply chain issues were resolved, with 19% growth on FY22.
New South Wales – benefited from continued focus and investment, delivering strong market gains and 15% revenue growth in FY23.
ACT – again achieved strong revenue growth across in FY23, up 27% which was even higher than prior years.
Victoria – our team continued to drive its growth strategy with 13% growth on FY22.
Tasmania – delivered a solid result; however, revenue decreased 10% on a particularly strong prior year.
South Australia – continued to make excellent progress, delivering a 17% increase in revenue.
Western Australia – continued its strong performance, achieving 8% revenue growth.
Fiji and the Pacific Islands – FY23 proved to be another difficult year for Fiji and the Pacific Islands as the region’s economy recovered from pandemic lockdowns and reduced tourism; however, we finished the year with revenue growth of 19%.

ESG

Our vision is to harness the power of people and technology for a better future, and we are committed to an ESG framework that makes a meaningful difference. We’re delighted to share that we’ve made some further progress in FY23, which will be outlined in full in our ESG Report.

In addition to awards for our solutions and technical expertise, Data[#] 3 was delighted to be named recipient of the Enlightened Growth Leadership Award by the Frost & Sullivan Institute in FY23. Representing approximately the top 1% of all companies globally, the award recognises organisations that are committed to making the world a better place and that are part of the solution to challenges the world faces today. This is the only award that considers the synergy between financial growth, corporate social responsibility (CSR) and ESG.

We were also proud to have been named as a winner of the 5-Star Employer of Choice Award for 2023 (500+ employees) by Human Resources Director Magazine (HRD) for the eighth year in a row. This award is not limited to the IT sector; it covers all industries and includes many multinational entries.

As the largest Australian IT services and solutions company, we have a responsibility to contribute to the reconciliation of the nation. Last year, we formed a Reconciliation Action Plan (RAP) working group consisting of committed staff who are passionate about reconciliation and who understand the cultural importance of reconciliation. Following significant work and engagement across the business, the working group successfully launched its Reflect RAP in July 2023.

Addressing our environmental impact is among the most pressing priorities facing today’s world, and we take this duty seriously. We have been actively pursuing environmentally sound practices to incorporate into our daily business activities, such as choosing to support suppliers with a strong environmental track record and repurposing ageing equipment, with which we also support our customers. Data[#] 3 is building on our work to reduce the impact of our operations. We are ambitious in our pursuit of net zero and are focussed on defining and improving our Net Zero Strategy.

As we continue to grow our business financially, we believe we have an increased obligation to do what is right for the communities in which we operate. During FY23 we continued to support several key local, national, and international charities, both financially and by promoting volunteering activities for our employees.

Strategy and outlook

Our strategy is the pathway to enabling our customers’ success. It unites innovative solutions, remarkable people and organisational excellence through our solutions framework. We believe making our customers more successful consistently over time will deliver exceptional and sustainable performance.

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Our plan is to deliver technology to support our customers’ business objectives, utilising our core technology solutions across the following categories:

Cloud, Modern Workplace, Security, Data & Analytics and Connectivity.

These solutions are delivered using our Customer Solutions Lifecycle (PDO2) methodology, comprising Position, Plan, Design, Deploy, Operate and Optimise phases. Each customer’s business objectives may have multiple solutions, and each solution may apply to multiple business objectives. Our solution categories contain over two hundred specific solution offerings.

Our strategic priorities for FY24 include the following:

Solutions – accelerating Data[#] 3’s services and optimising vendor programs
People and Community – connecting Data[#] 3 with its people and the communities in which it operates
Customer experience – differentiating Data[#] 3 through the experiences we deliver to our customers
Organisational excellence – connecting and simplifying Data[#] 3 to deliver an agile and efficient business

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