EOH HOLDINGS LIMITED - Update on the Microsoft relationship

Release Date: 25/03/2019 11:06
Code(s): EOH
 
Wrap Text
Update on the Microsoft relationship

EOH HOLDINGS LIMITED
(Incorporated in the Republic of South Africa)
(Registration number 1998/014669/06)
JSE share code: EOH ISIN: ZAE000071072
("EOH" or "the Group")


UPDATE ON THE MICROSOFT RELATIONSHIP


Shareholders are referred to the SENS announcements released on 12 February 2019 and 18 February 2019,
as well as the cautionary announcement released on 19 February 2019 and are hereby advised as to further
developments relating to EOH'S Microsoft contractual relationships.

Following expiry of the 30-day notice period relating to the termination of the Microsoft Channel Partner
Agreement ("the Channel Partner Agreement") with EOH Mthombo, as detailed in previous
announcements, the termination has become effective and EOH is no longer a reseller of Microsoft software
licences. Acceptable arrangements with a pre-existing Microsoft Channel Partner, independent of the Group,
have been secured. Further to this, on 12 March 2019, a number of EOH group companies received a 30-day
notice period of Microsoft Ireland's intention to terminate the Microsoft Partner Network Agreement ("the
Partner Network Agreement"), without providing reasons for the termination.

While we understand the need for Microsoft to interrogate and finalise their own investigations, we are
disappointed at the unilateral manner in which Microsoft has terminated the relationship prior to giving
consideration to the impact on South African corporates. Further meetings and correspondence between EOH
senior executives and local Microsoft leadership are ongoing to discuss the impact of these terminations and
to seek a responsible solution that would limit the impact on all affected customers. EOH have provided a
number of suggestions to Microsoft for consideration. We await their feedback.

During these engagements, Microsoft's local office advised EOH that they had initiated their own
investigations into contracts involving Microsoft and Government which may take 6 to 12 months to conclude.
They advised they would not be able to enter into any discussions regarding re-instatement of the partnership
until they had concluded their investigations.

Impact

While the immediate short-term impact can be managed, EOH is assessing and discussing various
alternatives to ensure the long-term continuity of service to all customers and to maximise value for
shareholders. EOH is confident that this can be achieved.

As previously disclosed, the Channel Partner Agreement (as software licence re-seller division) is not
material to EOH and reported a total profit before tax of approximately R10 million during the last financial
year.

The impact of the latest notices is still being assessed, but early indications are that:

    -   Our Microsoft related bespoke application development, its largest business, will be predominantly
        unimpacted.
    -   Any long-term impact on the IP businesses, including the core IP that has been developed for re-sale
        utilising Microsoft technologies, can be mitigated through migration to other cloud providers.
    -   Our CRM (Dynamics 365) and Productivity Solutions business will be impacted in terms of access to
        partner support portals.
    -   Our Microsoft-related managed services business and clients will experience no impact as these
        services are provided on client infrastructure and platforms.
    -   Our Cloud business and platform business and the re-sale of Azure cloud offerings will be impacted
        in the short-term and EOH is in discussions to find a solution to ensure continuity of service and
        revenue streams.

While EOH's assessed impact of the latest notification on profit before tax is estimated at less than R20 million
during the current financial year, this will bring the total impact of Microsoft exposure to R30 million profit
before tax. Moreover, there is an overall medium to long-term go-to-market and credential impact and risk
in not retaining Microsoft Gold Partner status.

EOH apologises for any uncertainty and inconvenience caused and will continue to use our best endeavours
to ensure there are no outages or disruptions to any client services as a result of the terminations.

Governance

Various investigations are progressing to determine any wrongdoing on the part of EOH, its customers, its
partners or its employees. To date we have migrated the legacy public sector business under a new structure
and employees implicated in wrong doing have either been suspended or have resigned. We are committed
to concluding the reviews as quickly as possible and have a team of people under the auspices of ENSafrica
dedicated to this. We have also implemented a new framework under which all public sector transactions
and related Enterprise Development Partners are reviewed, screened and independently vetted by
ENSafrica.

Furthermore, a sub-committee of the board comprising independent non-executive directors and the CEO has
been formed to evaluate the findings and determine the most appropriate manner in which to act. We will
engage with any affected entities and authorities to ensure appropriate accountability as required. We have
filed a section 34 report in terms of the Prevention and Combatting of Corrupt Activities Act.

EOH wishes to reaffirm its commitment to ethical leadership and robust and transparent governance
practices. EOH has a zero-tolerance approach to unethical or fraudulent business practices and is committed
to addressing any such activities in a responsible and effective manner.

We remain engaged with customers and other partners and will communicate with the market again as soon
as we have further information. Stakeholders are invited to send any queries to ir@eoh.co.za.

25 March 2019


Sponsor
Java Capital

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