IT companies thrive

The information technology sector has been hit hard by cutbacks in business investment, but the best companies are thriving thanks to diversification. That’s the message from the latest SmartCompany Dun & Bradstreet industry growth list for the IT sector, which profiles Australia’s fastest-growing IT firms.

While the industry has seen businesses close up shop over the last 12 months due to the downturn, many are also growing through mergers and acquisitions.

The list contains a variety of firms, from giant InfoSys with revenue of $12.9 billion (14th on the list) through to infrastructure design firm Comsys Services Australia, reached 18th with just $1.2 million.

The combined revenue of the top 50 companies was just $20.9 billion, compared to the $79.9 billion recorded on the 2007-08 list. Average revenue also recorded a massive drop from $1.6 billion to just $308 million.

The companies on the list have used two distinct strategies to survive the downturn of the last 12 months: diversifying and providing a larger number of services, or concentrating on one specific area.

Datacom

The company that leads this year’s list, software developer Datacom, fits into the former category. The company posted revenue $23 million and sales growth of 415%.

The company offers a variety of IT-related services broken into three categories. Its first offers business transformation services, streamlining IT departments and development of software, the second is design and deployment of computer infrastructure and the third is business process outsourcing.

In a year when most businesses were eager to trim their IT budgets, Browne says Datacom has managed to record a 25% rise in profit. He claims the business is “recession-proof” as long as it focuses on its strengths.

“We focus on long-term relationships with clients and have contracted services to keep our revenue up. The benefit of this is that we can make investments with a long-term view, and we did that in order to avoid cutting staff and pulling our capacity this year.”

But like the other companies on the list, Brown says the results haven’t been as good as the company would have hoped.

“In Western Australia our results were substantially down, and while they’ve come back to where they were, we concluded there was an overreaction in the market. I hadn’t expected that.”

Browne suggests businesses which have suffered the most during the downturn haven’t sufficiently planned ahead, and were too vulnerable to customer spending or focused on too narrow a market.

“Companies whose business model relied on products, such as software and hardware, and were working to a volume of low margins, were more affected than anyone else. As discretional spending declined they had nowhere to move.

“And in the last year we’ve seen many of those companies go out of business. So we’ve shielded ourselves by spreading ourselves out a little bit, rather than just being in one market or sector. We’ve undergone a bit of contraction, but there’s a natural balance because our services are so spread out.”

During the rest of the year Browne expects activity in the industry to remain subdued. As a result, Datacom will look for developed businesses to acquire.

“We always look for opportunities, but we’re not interested in buying businesses under duress, we want to buy quality, profitable and sustainable businesses. I’m also looking at seed investments in our business that will pay off later down the line.

“This would include things such as new services. We’ve got a lot of services but not every location can offer them, so we’re also trying to improve all of our offerings in each state.”

Data#3

Data #3 has experienced some hard times since last year’s list was compiled, but it has nevertheless improved its performance and is also on the hunt for acquisitions.
 
During 2007-08 it recorded $363 million in revenue, and was 16th on the 2007-08 industry growth list. This year its revenue has jumped to $393 million, and the company placed 10th on the list.

Managing director John Grant believes the company has performed well despite suffering setbacks in a few of its divisions.

“I think we’ve demonstrated good half-year results. We haven’t finalised the announcements, but right now it looks like the top line growth is about 35% in revenue. Profitability is up, and that’s pretty damned good for the environment we’re in.

“I think our geographic performance improved. We were in Queensland originally and then expanded into other states, but we’ve seen offerings in other states grow. So we might be good in one area in one state, but not in the other, and that’s changing and we’re getting strong contributions from most locations.”

Grant maintains Data#3 has managed to survive by focusing and nurturing its best-performing services divisions.

“Our license solutions business continues to be the best performer nationally. The product solutions side of the business has grown strongly, and we’ve been able to fuel that by growing in different states. We’ve focused on changing the structure of our managed services to make it stand-alone, and that’s gone very well.”

But Grant says the business hasn’t been without its troubles.

“In our recoupment business, the profit is up but revenue is down. Things were pretty bad last year, but we managed to at least turn a profit in that area. This is our project division, where customers invest to take their businesses to market.”

“Also, our integrated solutions business, which has everything to do with host networks, data centre works, and the configuration and implementation of data, has been patchy. That’s the area which has been most susceptible to customer constraint, and it’s not in the growth scenario we’d like it to be.”

As for the year ahead, Grant says there will be considerable challenges within the business and in the industry as a whole. Without much growth to look forward to, Data#3 is on the prowl for acquisitions.

“The only mitigating factor in the industry in which we participate is consolidation, because it allows us to gain market share. That’s the upside of the situation at the moment. Other challenges inside the company will be investing in our sales people, which is a considerable effort and should help us out this year.”

“I think we’ve geared in budgets since 2009, which locks us into reduced spend in 2010. I don’t see that changing. I think the growth comes through market share, and the second half of 2010 won’t be much different from the first. However, there is an opportunity for corporate profitability in 2011.”

ComOps

Having started software development firm ComOps in 1972, Richard Bradley is no stranger to economic downturns. He maintains the company has survived the recent financial crisis by learning from the recessions of the past.

“We have never during a downturn slacked off on a number of things, including research and development. It’s important during down times. The toughest times in our industry were the beginnings of the 2000s, and so I’ve experienced a lot of things that I can use now.

“Many boards of directors don’t understand the significance of IT companies, whereas the smarter companies understand it can assist them. I’m a great believer that when times are tough, you need to get ahead and take advantage of other company’s sufferings, so to speak.”

The company has certainly delivered strong results. While Bradley says the upcoming report cannot be released as of yet, in 2008-09 ComOps recorded revenue of $17 million, an increase from $12 million in the previous year. It reached 15th on the list.

The business offers a number of different software solutions including enterprise management, work placement management for rostering programs and sales management technology.

The company has nevertheless been affected by the current economic environment. Bradley says while the group hasn’t lost any business partners, the procrastination from several customers has pushed back a number of deals into 2010.

“The second half of the year wasn’t quite as strong. We found companies postponed deals leftover from the first half, I still think they are very nervous about the conditions at the moment.”

“We have a huge prospect list, probably the biggest the company has ever had, but the indecision of our clients has been the biggest problem.”

As with the other businesses, Bradley says ComOps will be on the look-out for smaller businesses to acquire over the next 12 months.

“My brief is very simple – to expand this company as quickly and solidly as I can, and definitely part of that is acquisitions. We will look for any business that complements our current range, providing it’s profitable, perhaps play in a market we don’t play in, and can be negotiated at the right price.”