Data#3 Limited

The Business

Data#3 resells and implements enterprise technology, principally Microsoft cloud and licensing products, alongside Cisco and other vendor hardware, to Australian corporates and government agencies. Software resale (cloud subscriptions and licensing) generates around 69% of gross sales, with the balance split between infrastructure hardware and networking, and professional and managed services. Unlike a pure distributor shipping boxes, Data#3 wraps implementation, support and consulting around every sale, which is what has kept it as sole panel provider of Microsoft products to the federal government for close to two decades.

Recent Performance

FY26 was a record year on every headline measure: revenue grew to $907 million, EBITDA margin expanded to 8.4% from 7.8%, and earnings per share rose roughly 13%. Infrastructure profit jumped sharply on a hardware refresh cycle and pre-buying ahead of a memory chip shortage, a tailwind we view as transient rather than structural. The shares have re-rated well ahead of this earnings growth: at $10.98 the stock trades on 31.2 times earnings and 18.3 times EBITDA, materially above the 22 times and 14 times commanded by the closest listed comparable, Dicker Data.

Outlook

We expect revenue and margins to keep expanding over the next three years, with growth led by continued cloud and AI licensing demand within the Software division as Infrastructure normalises off its current cyclical high. Margin expansion should continue but at a decelerating rate, since the cost efficiency gains that have amplified profit growth ahead of revenue growth for five years are running out of further room to compress. Earnings growth is expected to remain healthy in the near term before settling toward a more moderate, mid-single-digit pace over the following few years.

Key Risks

The valuation itself is a source of risk: a stock priced at 31 times earnings leaves little room for any disappointment in execution or sentiment. Interest income earned on the company's substantial cash balance contributes a meaningful share of pre-tax profit and is directly exposed to the Reserve Bank's rate path, a source of earnings that has nothing to do with the underlying reselling business and cannot be hedged away by management. A further restructuring of Microsoft's partner incentive terms is a recurring feature of how large software vendors manage channel economics, and would compress gross profit if it recurs.

What to Watch

The thesis-defining event is the half-year result due in February 2027, which will show whether the operating leverage behind five years of earnings outperformance is continuing or has largely exhausted itself.

• Feb 2027 H1 FY27 result — the pace of earnings growth in this result will be a key signal on whether operating leverage is decelerating.
• 1-2 years Services division turnaround — recovery under new leadership would be a positive signal for the higher-margin services mix management is trying to build.
• Variable Market re-rating risk — a shift in how the market discounts this stock's cash flows, in either direction, is the single largest swing factor for the shares from here.

Company Description

Data#3 operates as an IT value-added reseller across three divisions. Software, covering cloud subscriptions, licensing and increasingly AI tooling, is the largest at roughly 69% of gross sales and the fastest-growing. Infrastructure covers hardware, networking and data centre equipment, a more cyclical business tied to refresh cycles and component supply. Services wraps consulting, implementation and managed services around the product sale, the segment management is trying to grow because it carries higher margins and stickier customer relationships. The government channel, anchored by the federal Microsoft supply agreement, sits across all three divisions and represents close to 40% of group revenue.

Where the Growth Is

Software, and specifically cloud and AI licensing, is doing the heavy lifting. It generates roughly 69% of gross sales and has grown at double-digit rates as customers migrate on-premise systems to the cloud. That growth rate is decelerating, from 14.1% most recently toward an estimated 6% by FY31, as the migration wave matures. A newly launched AI Practice offers a partial offset if it accelerates as management hopes, though we assign a relatively low probability to that scenario playing out meaningfully within three years.

Competitive Position

The core competitive advantage is relationship-based rather than technological. Data#3 has been the sole panel provider of Microsoft products to the Australian federal government since 2008, a position renewed for a further five years in FY26. That renewal is the clearest evidence the advantage is durable, though we would characterise it as narrow rather than wide: it depends on continued government sovereignty requirements and on Microsoft continuing to route government sales through a channel partner rather than direct. Depth of vendor certification across more than 500 partnerships reinforces the position by making Data#3 the default integrator for complex, multi-vendor deployments that smaller resellers cannot service. We see this advantage as stable rather than widening, with a realistic durability of five to seven years before either government procurement rules or Microsoft's own channel strategy could erode it.

Management & Capital Discipline

Management has delivered five consecutive years of record earnings while running a conservative balance sheet: a 90% dividend payout ratio, no acquisitions, and no share buybacks, despite sitting on $326 million of cash. That is a value-neutral use of capital rather than a value-creating one. Communication style matches the conservatism: management rarely gives specific numerical guidance, preferring to let results speak for themselves, which has so far under-promised and over-delivered. The honest observation here is that this team is optimised for consistency, not for transformation, and shareholders should not expect the cash pile to be deployed into growth-accelerating moves.

Financial Position

Data#3 carries no debt and holds $326 million in cash, funded in part by a negative working capital cycle in which supplier payment terms exceed customer collection terms. The 90% dividend payout ratio is comfortably covered by free cash flow given the asset-light nature of the reselling model, which requires minimal capital expenditure. This is a balance sheet built to withstand a downturn: there is no refinancing risk, no covenant risk, and no capital raising overhang.