Leader in IT in Morocco: Interview with Disway

Interview with Hakim Belmaachi, CEO of Disway

Please give us an overview of the economic conditions in Morocco and your outlook for 2014 and onward.

First we need to look back at what happened in 2013, which was mainly a year in which we saw a lack of liquidity into the banking system that basically affected the whole economic environment. We’ve seen a lot of players struggling in terms of finding the right financing for their activities. In our case, as a provider of credit for our customers, we found ourselves in a position where we needed to extend credit terms to a lot of customers.

I think that situation also affected the government which is a key player in the economic environment as well in terms of spending and driving a lot of activities in the economy of the country. That was what happened in 2013 and I think we’ve seen a lot of changes happening during the last year. The stock exchange market has moved ahead with new IPOs coming in. That should drive more investment and liquidity into the local economy. I think we are confident that by the second half of 2014 we should see some recovery, both into the financial space and into the economic space as well.

Please give us a brief history of Disway and how you became the biggest distributor of electronic equipment in Morocco.

Disway is the result of the merger between the two previous largest IT distributors in Morocco, even the three largest ones. I think that restructuring and merging those two companies has allowed us to be the leader in the segment. We’ve been in this market for about 32 years now. Also, the business model we use makes it so that we are directly in the front line with the big IT players, like HP, Dell, Microsoft, Cisco and so on which allows us to have access to the latest technologies and promote them in the local market.

The business market that we use, selling to a channel of resellers, makes it so that we are in a high-volume business instead of being in a niche market. I think it is also by investing during all those years in key elements like logistics. We recently invested in the airport area in a new logistics platform on about three hectares of land. We have a world-class logistics platform managed using a warehouse management system. All of that allows us to add a lot of value to our customers and that’s why we have been present in this market for so long. We hope to be there for the next 30 years at least.

Adding value and bringing a lot of assets into the market for our suppliers and customers in terms of logistics, marketing, and strong financial health is very important. We’ve been listed in the stock exchange for almost eight years now. This also allows us to finance our growth and expansion. Opening your equity to external shareholders is key for driving the growth and financing the growth. In our business, growing means adding more equity and being able to finance a lot of assets. That’s key if you want to grow.

Are you still going to pursue organic growth as you have previously done or are you looking to do some acquisitions in the future?

That’s a tricky question but I think that our growth can be two-fold. The first way is what we used to do – adding new brands and extending the perimeter we are working in. That allows us to have access to new segments, whether in terms of products or channels. The second way is extending geographically and definitely we’ve been doing that organically in Tunisia, as we opened our own subsidiary. The market in Tunisia was difficult during the last three years after the uprising and so on.

The key thing is extending to other African countries; that’s where we can drive more growth. Our plan is definitely to find the right mix, depending on the countries, between doing it on our own and doing acquisitions. We are actually working on several plans and targets to see what the best option for us is. This is something that we are actively working on, to make sure that we have something in 2014 being closed. Expanding geographically is something that is part of our growth plan because we need to also minimize the risk that we have in a specific country in terms of market turnaround and so on, and make sure that we are diversified both in terms of suppliers and products, but also diversified geographically.

To achieve the necessary growth, I think you have to be constantly renovating. Can you talk to us about some of the products you have recently introduced in the market here in Morocco?

Traditionally, I think our business model has been a replica of what is happening in other mature markets. Basically, you have the big IT vendors selling to wholesalers like us, or distributors, who in turn allow them to have access to the market and distribute their products to a channel of resellers. But that model is challenged in some ways by the fact that first, the market is shrinking a little bit because we see the traditional PCs and notebooks market growth is slowing or even shrinking in some markets. But also, margins in distribution are reducing year after year.

So we definitely needed to find a change in our business model and the way we derive value to our shareholders. We decided last year, and we’ve been working on that for about eight months, to launch our own brand on what we call the smart mobile devices, which is smartphones and tablets. We started by launching a new brand of tablets called Yooz. That brand is owned and designed by Disway in Morocco and manufactured in Asia as most IT products are. We are planning to extend that brand to a lot of different products specifically in that segment of smart mobile devices.

We’ve seen very positive feedback from the product so far and we are very happy with the outcome during the last quarter when we launched that brand. We are coming out with new products already that are very well-positioned. I think the market has been targeted in its niche segment – people who can afford to buy a table that is $700 or $800 is probably a niche market in markets like Morocco and elsewhere in Africa. But the volume market is in a segment where you can sell at between $200 and $300 maximum and this is where we are focusing our energy. Our key target segment is going to be that one. That’s going to allow us to drive tremendous growth.

I was talking about the decrease in the traditional notebook and desktop PCs. Even in Morocco I think the decrease was almost 20% last year but the growth in tablets is almost 50 to 80%. So definitely if you want to be a key player that exists tomorrow, you need to be present in that segment. This is what we’ve done with the new brand that we launched a couple of months ago.

To drive earnings, sometimes companies purchase their own shares. Have you purchased your own shares recently, or do you think that’s a good idea for enhancing earnings for shareholders?

We used to do that. We did that in 2007 and 2008 until 2009, but I think that the program and what is allowed by the regulatory authority has changed drastically. I think that the flexibility of the program is not what it used to be. It’s more difficult to use it as a tool for regulating the share price. I’m not a big advocate of that type of program and I think to drive value and share price, the best thing to do for the manager is to concentrate on driving more profitability. Profitability comes from selling higher margin products and extending to other markets. There are also things we’ve done internally by reorganizing our marketing department.

We now have a clear focus between what we call volume product, where we sell big volumes but tiny margins, and what we call value business, where we sell more technical products like servers, storage, the cloud, software solutions, security and so on that requires a lot of investment in terms of engineering, sales support and so on, with lower volumes but higher margins. We are focusing heavily on that value business. We have very strong brands that we distribute in that segment like HP in the server segment, EMC in storage, and so on. We are driving more focus on that segment which helps us drive more margin and therefore should affect our share price.

With the share price today, if you look at it, the stock exchange in Morocco has been struggling over the last four years. There is a lack of liquidity and the volume of exchange is so tiny that it is not significant whether any share price is increasing or decreasing if you compare it to the volume being exchanged during the day. I think we are still lacking from a strong value market that can make a market more efficient and I think we can characterize the current stock market as not being very efficient.

You talked about the problem with liquidity in 2013 and I think there are some clouds on the horizon for 2014, especially with the US stopping their quantitative easing. Is the company positioned financially in case there are financial problems to continue its operation and also to continue giving credit to its suppliers?

Luckily, today if you look at our balance sheet, we finance our activity with 70% as equity and only 30% as debt which is very low in terms of leverage. That means that we can easily reverse that trend. Normally we could be at 30% equity and 70% leverage and debt, so that means we have a lot of room for growing and doing more leverage on our equity. First, we are confident that we can definitely keep sustaining our business and growth if necessary in terms of our equity that we hold. Second, we have a very good track record and we’ve been raising a lot of cash in the past by using what we call commercial paper, like a short-term bond.

That commercial paper that we have been raising, and we have authorization from the local regulatory authority to raise up to 300 million dirhams, allows us to be more confident in case we need to do that very shortly. Another key thing is that we’ve been very steady in terms of making sure we have a good credit rating with all the key players in the financial sector in Morocco. That is key for keeping the credibility of the company in terms of raising cash if needed. But so far, with the very low leverage that we have, we don’t have any issue with that.

You require a lot of currencies to do your buying. Do you do any currency hedging to protect your earnings from any sharp declines?

Definitely. We have a treasurer that is almost dedicated to that task. 98% of our purchases are done in foreign currency, with most of it in Euros and part of it in US dollars – about 70/30. In fact, it is mandatory for us to do that and we’ve been successful in even driving profits from our activity in the hedging. That’s key. When you’re in a business where margins are very tiny, if you don’t pay attention to all those small details, and currency fluctuation is one of them especially on the US dollar which is very volatile compared to the Moroccan dirham, it is mandatory for a business like us to pay close attention to hedging and currency fluctuation. We do that on a daily basis – we work with the trading desk in all banks. We developed our own models for making sure we can be successful in driving that. So far, we have been very successful. We are in positive net cash in terms of driving the hedging activity.

What are some of the current challenges for the industry?

I think there are many challenges facing all players in the industry. We’ve seen some of the big players struggling with the shift that we’ve seen to mobile whether it’s in software or the form factor, moving from a desktop to a laptop to smartphones or tablets. That’s changing the business model. Also, the business model itself is changing. Today, a lot of companies realize that IT should be used as any commodity is. Instead of buying the server and the software that goes with it, I should probably just pay for a service and get access to messaging, accounting, CRM system, and any type of IT service.

Basically, the big challenge is exchanging both the business model of the software vendors and the key hardware vendors as well, as well as the whole supply chain for them. For us, tomorrow, instead of selling the server and the software, we are probably going to sell services because some companies would rather buy services and not bother buying the hardware, managing it, doing the backups, and having IT people specialized in managing that infrastructure. Basically this is something that we’ve seen a strong adoption of – what we call the cloud, which is the buzzword for it. Besides being a buzzword that is trendy, we’ve seen a strong adoption of the cloud and a big focus from all the key players whether it’s Google, IBM, Microsoft, or HP. All of them are moving to that trend and trying to sell their products, services and software through the cloud. That means changing the whole business model of the industry and making sure to adapt and be able to do it.

In more mature markets, we’ve seen the small and medium businesses driving adoption faster because they realize that it’s more cost-effective and less of a hassle to buy those services and pay a monthly fee like you buy electricity or you buy any other kind of commodity instead of having to manage all of that. Oddly enough, in Morocco or other less-mature markets, we’ve seen large companies adopting the cloud even before the small and medium businesses are because I think they have more maturity and understanding that also instead of having capital expenditure, they prefer to have that in operation expenditure – replacing CAPEX with OPEX. They realize that they are better off just buying a service that is constantly upgraded, managed and taken care of by people who are specialized in driving that themselves, whether they are a bank or so on.

If you look back ten or twenty years ago in Morocco, for example banks or industries had IT departments much bigger than any IT consulting company in the country which is kind of odd if you look at it this way. I think it’s a trend we see and it’s going to happen in those countries that we will see more small and medium businesses adopting the cloud and moving to the cloud for all kind of services. I think that’s one of the big challenges. Even the devices to access the cloud are going to be different. You don’t need very powerful PCs to access the cloud. What we call a thin client is enough because you are just accessing something and the processing power is managed elsewhere; it’s centralized. We are going back to the IT of the 70s but in a different way. The widespread use of mobile devices everywhere makes it more mandatory to be able to access those applications in any place anywhere through the internet. I think that’s a business model that is completely changing and IT vendors are adapting to it. Companies who don’t do this will definitely disappear.

What is your vision for Disway? Where do you want to take the company moving forward?

I think Disway has proven to be very successful but it invested through some people on key elements of differentiation, such as logistics and IT systems. We have a website that allows our customers to drive their business online directly and so on. I think the key challenge for us is to export that trend and that model to other countries. This is our biggest challenge but also our biggest opportunity for growth. This is where we can make a difference because when we look at a lot of countries, the key players in place probably don’t have the financial structure that we have, the processes – we are ISO certified, the IT systems, the logistics and all of that. I think we can easily transpose and use all that added value elsewhere. I’m confident that we can first be a key player by having our own brand in some product segments. We can make a difference because there is a market for that, especially in those countries. People look for well-priced products with good quality. We can also succeed by using the business model that we implemented in Morocco in other countries in Africa.