DATA#3 LIMITED — Interim / Quarterly Report 2009

Mar 15, 2009

INTERIM SHAREHOLDER REPORT 2008/09 FOR THE 6 MONTHS TO 31 DECEMBER 2008

Inside

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Inside
Financial summary	02
Financial trends	02
Managing Director’s review	03
Review of areas of specialisation	04
An outline of our business	06
Corporate directory	06

Pictures throughout capture some of the Data[#] 3 team at work around Australia.

“We are delighted to extend the run of ‘best ever’ performances to six years. The interim dividend of 20 cents per share is an 11% increase on the previous corresponding period and, in an increasingly challenging market, indicative of the inherent resilience of our diverse and customer focused business. The outlook is difficult to predict as shareholders would understand, however it remains our intention to do all that we can to at least equal the earnings result of the previous year and to remain strongly positioned for an improving market.”

Richard Anderson - Chairman

Financial summary

Consolidated Income Statement Sales revenue – Software Licensing Solutions – Infrastructure Solutions – People Solutions Other revenue Total revenue Total gross margin Gross margin percentage EBITDA [Earnings before interest (net), tax, depreciation and amortisation] Profit from ordinary activities before income tax expense Net profit after income tax Earnings per share Dividends per share	Half-Year 2008/09 $’000 Half-Year 2007/08 $’000 % Change 116,502 62,371 + 87% 91,918 73,575 + 25% 21,055 20,779 + 1% 537 583
	230,012 157,308 + 46%
	40,017 32,010 + 25% 17.4% 20.4% 5,880 5,054 + 16% 5,856 5,314 + 10% 4,040 3,713 + 9% 26.16cents 23.92cents + 9% 20.0cents 18.0cents + 11%

Consolidated Cash Flow Statement Net cash outflow from operating activities Net cash outflow from investing activities Net cash outflow from financing activities Net decrease in cash Cash at end of reporting period	Half-Year 2008/09 $’000 Half-Year 2007/08 $’000 (2,887) (6,089) (578) (322) (4,727) (3,983)
	(8,192) (10,394)
	8,822 6,973

The net cash flow from operating activities is historically an outflow in the first half due to high collections pre 30 June from the traditional sales peak in May/June followed by the associated supplier payments post 30 June.

The net cash outflow from investing activities related to payments for plant and equipment and software assets.

The net cash outflow from financing activities related to payment of dividends and payment for buy-back shares. Under the on-market share buy-back program 76,835 shares were acquired during the period at a cost of $398,231. No new shares were issued during the period and the company remained debt free.

Financial trends

Total revenue grew by 46% to $230 million with revenue under contract steady at 57%

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Internal expense

Internal staff costs & operating expenses as a percentage of gross margin increased from 85.2% to 87.5%

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Net profit after tax increased by 9% to $4.0 million

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Revenue by area of specialisation
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Software Licensing Solutions up 87% Infrastructure Solutions up 25% People Solutions up 1%

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EBITDA increased by 16% to $5.9 million

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Earnings per share & dividends per share

Basic earnings per share up 9% to 26.16 cents Dividends per share up 11% to 20.0 cents, representing a 76% payout

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02 Data[#] 3 Interim Shareholder Report 2008/09

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Managing Director’s review

Operating performance

In a half in which the market for our products and services was at best flat, we were able to increase our share of the market considerably to grow revenues 46% over the previous corresponding period (pcp). This is an outstanding performance and we have improved our strategic position in a competitive landscape that we believe will continue to see many struggle.

Our 2008 annual report predicted “overall market conditions to decline from that experienced in recent years”. Shareholders would be well aware of the increasingly difficult market and the lack of certainty in predicting when it will bottom and start improving. We have experienced declining expenditure by our customers in three areas:

• People Solutions, where permanent and contract recruitment have fallen considerably

• In ‘business as usual’ refreshment of technology infrastructure as customers extend the life of their existing hardware

• In business-enabling infrastructure projects which impacted on utilisation levels in some areas of our professional services business.

However the diversity of our business model allowed us to offset this impact on profitability with stellar performances from Software Licensing where revenue grew 87% on the pcp and from Infrastructure Solutions in the areas of data centre computing, contract product procurement and managed services where revenue grew 25%.

We also commented in our annual report that “we are targeting to gain market share to deliver organic growth in all areas of the business” . Shareholders will recall we recruited a large number of people in 2008, opened new offices in Adelaide and Perth and expanded our presence in Melbourne and Sydney. While we took on considerable additional expense in doing so, our objective was to gain a more significant share of the available market. We achieved this, with revenue increasing overall by 46% and by approximately 30% excluding the new locations.

We also expected “a very competitive market … translating as considerable pressure on pricing and margins”. We are certainly seeing pressure on pricing but primarily from customers seeking to extract more for their dollar.

This is translating to longer sales cycles and delayed decision making but had little impact on margins in the half. The decline we experienced in overall gross margin percentages from 20.4% in the pcp to 17.4% was primarily due to the larger relative proportion of lower margin software licensing revenue.

Expense levels overall were well up on the previous corresponding period with the cost ratio (total expense/gross margin) increasing from 85.2% to 87.5% largely due to an increase in expense in the People Solutions business of almost $1 million.

EBITDA increased 16% over the pcp and net profit after tax increased by 9%.

Outlook for the full year

We have operated successfully in a declining market in the first half. Most indicators point to the market declining further. While it may be difficult to see why we should be immune from its potential to affect earnings in the second half, we have a number of factors working in our favour:

• We have invested heavily in improving the skills of our sales and technical teams over the last year and this will enhance our opportunity to win against the competition

• We have a very skilled and engaged team. They are amongst the best in the industry and every day their commitment to ensuring our customers achieve their business objectives through technology is obvious

• The solutions we provide to our customers appeal to a very large proportion of their ICT budget and hence, even as these decline, the addressable market remains very large

• Through the strong relationships we have with our vendor partners we are well placed to leverage their investment in creating demand for their technologies

• We have a strong and unencumbered balance sheet and positive cash flows. These will allow us to weather storms many of our competitors could find difficult

• We are already seeing a ‘flight to quality’ from both customers and vendors and expect to see opportunities emerge which would not be accessible in more buoyant times.

03 Data[#] 3 Interim Shareholder Report 2008/09

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Review of areas of specialisation

As a consequence, we believe we can gain market share and maintain ‘top line’ growth through the second half and beyond. We may do this with reduced levels of profitability primarily because over 80% of our expense is people related and much of the balance is fixed. We are reluctant to let go of capability that has been hard won and will serve us well when the market turns. Having said this, we understand this has to be balanced with reasonable shareholder expectations. We will chart a course that ensures short term returns to shareholders ahead of like investments and puts us in the strongest position to capitalise on any upswing to maximise returns in the mid-term.

Specifically, looking forward to the second half, our view is framed by the potential impact of a much less predictable business environment both on the traditional seasonality in our profit toward the second half (2008: 43%/57%) and even more pointedly, toward the fourth quarter. In considering this, our objectives for the full year are firstly to provide dividends to shareholders of at least 46 cents per share, and secondly to at least equal the earnings result of the previous year. Our first half result and forward estimates support this position. We can be no more specific at this time as we believe there is no precedent to the current economic situation. Our commitment is to keep shareholders appraised should our view change.

In summary

We have performed very strongly in the first half in a difficult market and provided an increase in returns to shareholders over the previous corresponding period. We expect the market to become more difficult in the second half and can see this having the potential to dampen growth. However we have an excellent team to whom my thanks go for their continuing contribution and commitment; deep and long term relationships with our customers and strong vendor relationships that deliver us marketleading technologies on which to build our solutions. These factors combine to position us very well, and better than many, to continue to gain market share. We also believe that our strong balance sheet and cash flows provide us with flexibility in maintaining dividends to shareholders at least at historical levels.

John Grant – Managing Director

Software licensing solutions

Our software licensing and software asset management team grew the business very substantially over the pcp (+87% to $116.5 million) fuelled by strong performances in all existing geographies and additional contribution from our new operations in South Australia and Western Australia.

Key aspects of its performance include:

• Winning over 50 new customer contracts in the half

• Winning the NSW Department of Health enterprise agreement for Microsoft, our first major win in NSW government

• Winning the open tender for Large Account Reseller of Microsoft Software for the Department of Defence and all federal government agencies

• Strong growth in revenue from non-Microsoft partners

• A decline in sales gross margin % as a result of movement in the mix toward higher revenue lower margin contracts.

Key aspects of the expected outlook for the second half are:

• While at low margin, substantial revenue will flow from the federal government contract and a number of state governments are looking to apply this contract in their own jurisdictions

• In the light of the difficult market there may be pressure on some of our larger commercial customers to review software expenditure and this could put pressure on second half commercial revenues.

Overall, we expect solid growth in revenue in the second half relative to the pcp but at lower margin. Contribution to profit is expected to increase.

Infrastructure solutions

Our Infrastructure Solutions team grew the business substantially over the pcp (+25% to $91.9 million) fuelled by strong performances in all existing geographies and additional contribution from our new operation in South Australia.

Key aspects of its performance include:

• Improving execution of and growing revenues from the Queensland whole of government product contract

04 Data[#] 3 Interim Shareholder Report 2008/09

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• Winning several new long term managed services contracts

• Completing several significant projects in our data centre specialisation

• Strong performance from our Microsoft application services business

• Less than ideal levels of utilisation within some areas of our professional services business.

Key aspects of the expected outlook for the second half are:

• Continuing pressure on prices and gross margin given the general market conditions. This could impact the substantial project revenues in the business

• An opportunity to leverage general industry stress that will flow from the tighter market together with the relationships we have with our vendor partners to gain market share

• A number of large contracts placed on hold and recruitment ‘freezes’ put in place by many of our customers

• A relatively strong performance in Queensland despite the market downturn and difficulties in the government sector.

Key aspects of the expected outlook for the second half are:

  - While there is expected to be limited opportunity for growth in the ‘traditional’ recruitment markets, there will still be many projects requiring resourcing and a number of preferred supplier agreements up for decision in the second half

  - Introduction of new offerings targeted at HR consulting, workforce flexibility and outplacement

  - No exposure to the government market in Canberra where the contraction has been most marked

• Realisation of the revenue opportunity from new managed services

• contracts.

The trend in previous years is for profit to be biased to the fourth quarter. Consequently, in the current market, while we see opportunity for growth in revenue and profit in the second half relative to the pcp, the certainty with which we are able to forecast this is less than it has been in the past.

People solutions

Our People Solutions team experienced the most difficult market for many years. After a strong first quarter the abruptness of the decline early in the second quarter caught us and the industry at large by surprise. While revenues for the half didn’t decline over the pcp (+1% to $21.1 million), expense levels had been geared to high growth across the business but most particularly in NSW. The restructuring we had to undertake unfortunately saw a number of people leave the business and it took time to bring expenses into alignment with revenue. This impacted the business’s profit contribution by approximately $800,000 compared to the pcp.

• Availability of more skilled staff in the market with more competitive contract rates.

Overall we expect revenue and profit to decline in the second half compared to the pcp but to provide an improved contribution to profit compared to the first half.

Corporate services

Corporate Services and accommodation expenses increased by approximately 20% over the pcp, primarily through investment in new or upgraded premises and in projects to replace most of our core business processing platforms. These investments will continue into the second half with substantial benefits expected to flow over subsequent years.

Key aspects of its performance include:

• Strong first quarter across the business with a significant and abrupt downturn in the second quarter primarily effecting NSW and Victoria

05 Data[#] 3 Interim Shareholder Report 2008/09

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An outline of our business

Data[#] 3 is a significant national Information and Communication Technology (ICT) solutions company. Our vision is to be “an exceptional company – one that unites to enable our customers’ success through technology, inspires our people to do their best every day; and rewards investors’ confidence and support.”

Our core values define our culture – uniting for success; taking responsibility; exceeding expectations; striving for excellence and innovation; being flexible and adaptable; and showing mutual respect both inside and outside the business.

Data[#] 3 specialises in:

• Software Licensing Solutions – software licensing and software asset management to optimise our customers’ acquisition and management of software licensed in volume from global vendors

• Infrastructure Solutions – design, procurement and deployment of network and data centre hardware and software solutions as the foundation for our customers’ corporate software applications

• Managed Services – provision of outsourced services both on-premises and remotely to help our customers optimise the support and operation of their ICT systems

• People Solutions – provision of contract and permanent recruitment as well as performance management systems to optimise our customers’ investment in and return from their human resources.

These areas focus discretely on developing and applying market-leading expertise in the technologies and services that underpin their specialisations and applying this expertise to deliver ICT solutions that ensure customers achieve their business objectives through technology.

The business is supported by a range of corporate functions covering human resources, internal systems, organisational effectiveness, finance and commercial advisory services.

Our success is measured by the satisfaction of our people and our customers and the acknowledgement we receive from our peers and our vendor partners. Results in these areas during the first half have built further on our successes over many years.

Corporate directory

CORPORATE HEAD OFFICE &

SHARE REGISTRY

REGISTERED OFFICE

REGISTERED OFFICE Link Market Services Limited Level 2 Level 12 Data[#] 3 Centre 300 Queen Street 80 Jephson Street BRISBANE QLD 4000 TOOWONG QLD 4066

Locked Bag A14 SYDNEY SOUTH NSW 1235

T: 1300 23 28 23 This number is the central contact for our offices nation-wide in Brisbane, Sydney, Melbourne, Canberra, Perth and Adelaide and also in New Caledonia.

• T: (02) 8280 7454

• F: (02) 9287 0303

• E: registrars@linkmarketservices.com.au

• W: www.linkmarketservices.com.au

• F: 1300 32 82 32

• E: info@data3.com.au

ABN NUMBERS

Data[#] 3 Limited ABN: 31 010 545 267

Data[#] 3 Business Systems Pty Ltd ABN: 31 010 500 642

Gratesand Pty Ltd ABN: 49 002 725 171

ACN NUMBER

010 545 267

ASX CODE

DTL

• W: www.data3.com.au

06 Data[#] 3 Interim Shareholder Report 2008/09