Getting ahead in the cloud

Can investors still make money from IT services?

Can investors still make money from IT services?

An ASX-listed technology services contractor failed to win a contract worth as much as $100 million to service Qantas. We hear that an Indian IT services provider underbid it by as much as 50 per cent.

Whether the Indian company got the contract is unknown, but it does highlight a beleaguered sector that is struggling to find its feet as a period of rapid growth draws to an end.

Companies such as SMS Technology, Oakton and Data#3 are relatively large now compared with where they were a few years ago, but their growth of more than 20 per cent a year has been based on geographic expansion throughout Australia: they have gone from being state-based to nationwide operations.

Last year their growth was closer to 8 per cent as a pincer movement worked against their profits. On the one side, providers of services such as code-writing are operating out of places with very cheap labour such as India; the other - the higher-value consulting and implementation side - is dominated by giants including Capgemini, IBM, Tata and Fujitsu.

Is there hope for the sector?

In contrast to the above, whose shares have suffered of late, the stock of another IT services group, UXC, has more than doubled in the past 12 months. The company has benefited after reducing costs by removing $11 million of contractor and subcontractor expenses. But this is only part of the story, says its finance director Mark Hubbard.

"We're the only company in the sector growing revenues because we're taking market share with our ERP [enterprise solution planning] applications," he says.

Hubbard says his group's implementation expertise enables it to give businesses certainty that "transformation" projects will be completed.

To an outsider, the acronyms and terminology in IT appear designed to bamboozle but Hubbard brings it back to numbers.

"Toyota wanted to upgrade its SAP system, which we won against the incumbent, Fujitsu. Oakton had a contract to assist in the tender and that gig would have been worth several hundred thousand dollars. Our gig was worth $7 million."

Ord Minnett IT guru Brad Dunn puts it this way for IT services investors.

"The industry is getting 'commoditised', but players that are exposed to growth areas such as the cloud and 'big data' will do well."

The cloud he's talking about is not simply "hosting" or moving servers from the company to a big-data centre; it means being the direct provider of IT services.

Dunn has a word of caution, though: "The cloud is going to be true in time, but I don't see how many applications can shift to the cloud in the next 12 to 18 months. There is no point having a whiz-bang cloud solution if phone lines can't transport it."

"Big data" refers to attempts to make money out of the reams of information held by groups such as credit-card providers, and Dunn says DWS is moving into this area. He adds that its earnings in this field are negligible and that IBM and Oracle are the big players in this space.

Radar hears rumours that the "for sale" sign is up at DWS, which is no wonder when it is trying to compete with market gorillas.

Richard Hemming edits the newsletter Under the Radar Report: Small Caps.

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