Data#3’s record year sets up a bigger Services opportunity

Record sales translate into faster profit growth

Data#3 Limited (ASX:DTL) grew profit faster than gross sales in FY26, despite a squeeze on group margins and a difficult operating backdrop. Gross sales rose 12.7% to $3.385 billion, while profit before tax increased 14% to $78.8 million and net profit after tax climbed 13.1% to $54.5 million. Basic earnings per share rose 13% to 35.16 cents.

The company’s gross sales figure is a non-IFRS measure that includes transactions where Data#3 acts as an agent. Statutory revenue increased 6.4% to $907.3 million, while total gross profit rose 5.3% to $305.2 million. Average gross margin fell to 9% from 9.6%, reflecting the full-year effect of changes to Microsoft partner incentives and a lower contribution from the higher-margin Services business.

Software and infrastructure carry the result

Software Solutions remained the largest engine, with gross sales up 14.1% to $2.32 billion and management profit rising 7.7% to $41 million. Data#3 said growth came from Azure consumption, Cloud Solution Provider agreements, Copilot, non-Microsoft vendors and software advisory services, as it adjusted to Microsoft’s revised incentive structure.

Infrastructure Solutions also grew gross sales 14.1%, reaching $651.1 million, while management profit jumped more than 78% to $31.2 million. Windows 11 compatibility upgrades, device refresh cycles, AI-enabled hardware and data-centre demand supported the segment. The company also benefited from Cisco rebate changes that shifted more value towards Infrastructure Solutions, while it secured preferred partner status across several Cisco specialisations.

Services exposes the next execution risk

Services was the uneven part of the portfolio. Business Aspect consulting grew 22%, Managed Services rose 9.4% and Maintenance Services increased 11.5%, but Project Services fell 15.3% and People Solutions contracting and recruitment declined 8.7%. Segment management profit dropped 12.6% to $28.2 million, with softer project activity, delayed procurement and a weaker specialist labour market weighing on performance.

Data#3 plans to make Services a central FY27 priority, with a new leadership structure, more advisory capability, stronger sales discipline and greater emphasis on annuity-style revenue. The company also intends to establish a dedicated AI Practice, customer-facing delivery pods and a 24x7 Sovereign Security Operations Centre. Its five-year appointment as the sole panel provider of Microsoft products and services to the Australian Government provides a substantial public-sector platform, although the report does not quantify the revenue contribution expected from that arrangement.

Dividend strength meets working-capital pressure

The board declared a fully franked final dividend of 18.25 cents per share, taking FY26 dividends to 31.75 cents per share, up 13% from the prior year. That represents a 90.3% payout ratio, consistent with Data#3’s long-standing policy of returning most earnings to shareholders while preserving funds for growth.

The balance sheet remains debt-free, with $326 million in cash and net cash of $303.4 million after lease liabilities. But operating cash flow fell sharply to $23.3 million from $126.3 million. Data#3 attributed the decline partly to the timing of customer receipts around June, while inventory rose to $73.4 million from $18.4 million as the company brought forward hardware orders amid memory shortages and expected price increases. The report says the inventory is committed to customer orders, making its conversion into invoiced sales an important practical test for the year ahead.