Bright future beckons for cloud pioneer

Grazed from Business Day. Author: Richard Hemming.

This week ASG showed that being a revolutionary can involve pain, particularly for shareholders.

The group has spent about $20 million in the past few years changing from being a traditional IT services provider to being a genuine cloud-based business.

The cloud we’re talking about here is not simply “hosting” or moving servers from the company onto a big data centre. It means being the direct provider of IT services. ASG is now the provider of systems such as Oracle, SAP and Microsoft to clients including Rio Tinto, ANZ, Sydney Water and government departments…

This week it announced a profit result that underwhelmed investors mainly because it has burned a lot of cash. Your humble columnist starts to worry when a company has less cash than he does. At June 30 it had $12,000 in cash and debt equivalent of about $51 million, $33 million of which must be paid back this year.
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ASG shares have fallen 20 per cent this week and at 67¢ it has a market cap of $60 million. It’s hardly IBM.

There are several factors in its favour, however.

The company has spent the bucks and has an unbelievable pipeline of work that it is bidding on for the next six months. The work is worth about $323 million, $108 million of which is cloud-based.

Another factor is that the personnel it had working on the cloud are now back earning increasingly valuable fees for the company. It can also sell its data centre in Perth for about $10 million.

SMS fights back

SMS Management & Technology chief executive Tom Stianos tells Under the Radar that, far from being out of the cloud revolution, his company is a beneficiary whether it takes place or not.

“We’re benign as to whether we’re in the cloud or not," he says. "At heart we’re a professional services integrator, not a technology or infrastructure provider.”

And who could argue? SMS is the flag bearer for IT services in Australia with a market cap of $428 million. Despite tepid earnings growth for the past year due mainly to slowing economic conditions, its average earnings per share growth is more than 25 per cent a year over the past eight years.

IT services is one of Australia’s fastest-growing industries because it can give companies the productivity edge and allow them to increase profits without more effort. SMS shares have climbed about 27 per cent in the past three months on the belief that spending in the sector will rise over the next 12 months.

Last week Radar argued that some were better positioned than others due to the changing nature of technology and its provision. We said that the likes of SMS and Oakton are missing out on the cloud revolution because their services are based on hiring out IT experts to client companies, rather than being an outsourcer of web-based technology services.

The revolution is being led by technology giants such as IBM, who are making billions of dollars in Australia alone as they provide companies with all their IT requirements.

Stianos says SMS is generating increasing profits from the cloud because it is being contracted by the likes of IBM and Oracle to implement IT business solutions due to its expertise in understanding industries.

“IBM brings us in to implement its FileNet System Monitor for banks which automates business processes because we know how mortgage processing works.

“You could argue that they have the technology specific [intellectual property], whereas ours is industry specific.”

A final word

Sigma Funds Management owns a stake in ASG. Its portfolio manager, Rajeev de Silva, sums up the situation nicely:

“ASG’s [chief executive] Geoff Lewis has a vision of IT services which we share and he’s executing it, whereas SMS is a good company and is more established. I expect to see more growth out of ASG than SMS driven by corporates moving to cloud-based solutions, and obviously ASG is coming from a much smaller base.”