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IT sector now knows a lot about survival
CRITERION: Tim Boreham From: The Australian
March 31, 2010 12:00AM

AS serendipity would have it, your columnist was cowering in a dark room in the late 1990s, too fearful of the Y2K virus (and the pending GST) to invest in the red-hot tech stocks of the new economy.

Still, Criterion made up for this dotcom (later crash-dotcom) era reticence by subsequently backing some tech plays that fell from grace.

He still cringes at his zeal for Arasol (which was meant to corner the Asian market for optical chips but went broke instead), high-speed encryption house Senetas (which stumbles on) and the inscrutable Nexbis, which has become a corporate governance disaster zone.

But we shouldn't let the outlying bad apples tarnish a sector that has displayed better survival traits than Bear Grylls, the Man vs Wild he-man who eats spiders and scorpions for their carbs (but often enjoys the taste, too).

The irony is that rather than being dotcom glamour stocks, the survivors exude all the excitement of a cost accountant's 50th birthday knees-up.

Consultancy SMS Management and Technology (ASX code: SMX) is a classic example, given it was caught up in the palaver of the dotcom crash through its reverse takeover of dotcom darling Sausage Software. SMS chief executive Tom Stianos argues his outfit is "better than surviving".

"SMS wasn't really a dotcom company, it was a robust positive cashflow business," he says.

While the Y2K scare brought forward IT spending and created a three-year lull, the business never faltered.

Stianos says SMS has always focused on the core operational activities that keep companies humming, rather than "sexy discretionary" stuff.

"But it would be fair to say a lot of the promises of the dotcom bubble are being fulfilled, not through esoteric solutions but through the back-office of corporations and the well-established service providers."

Other well-established IT providers are TechnologyOne (TNE), Data#3 (DTL), CSG (CSV) and Oakton (OKN).

Rather than being an amorphous lump, the companies service different parts of the IT chain.

Data#3 is more of a product supplier and reseller. CSG is more involved with facilities management and has a printing business.

Slightly more broadly, another solid performer in the wider tech sector is Melbourne IT (MLB), the domain-name registrar that expanded into other internet-related services.

We also should mention home-grown hero Computershare (CPU), which struts the global stage in registry management and proxy solicitation and is well placed for an expected global surge in corporate deals.

Overall, the sector was a picture of consistency during the recent half-year reporting season.

Data#3 blazed the trail, delivering a 17 per cent interim profit rise to a record $4.73 million on 33 per cent revenue growth.

However, chief executive John Grant warns that competition on pricing and margins is still intense and that customers are keen to do more with less.

Queensland-based Technology One's full-year earnings slipped 8 per cent to $15.6m, despite an 11 per cent rise in revenue to $122m.

But executive chairman Adrian di Marco remains sanguine about the outlook on costs and contracts, and the company has a long-term track record with profitability.

CSG reported an 11 per cent earnings increase (to $12.3m) on a 30 per cent revenue rise.

Management reported a steady increase in government work, but its short-term prospects will be more affected by its $84m acquisition of NZ printing business Konica Minolta Business Services.

Generally, we agree with SMS's Stianos: despite a couple of shaky years, the tech bust left no ill-effects on the sector's reputation or performance.

But, just quietly, we miss the fun.

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