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SMS Technology grows among the gloom

In a market where companies are looking for ways to cut costs and defer spending, you’d imagine a company providing consulting services — and technology related consulting at that — would struggle to show growth.

Yet grow is exactly what SMS Technology and Management (ASX: SMX) has done.

The consulting and services provider managed to rack up a $31m net profit for the last financial year, 3% above 2011 levels. Revenue grew an even more impressive 10%. SMS put their sales success down to a broadened service offering and a new national structure.

SMS CEO Tom Stianos said:

“In the face of volatile market conditions, SMS has once again shown its resilience and strength by growing market share. This reflects the success of our broadened service offering to clients that was facilitated by our investment in the national practice structure in the prior year.  During the year, we signed contracts worth $392m, up 12% on the prior year.”

It’s not all beer and skittles (or should that be Coke and pizza for the IT crowd), though. Alert Fools would realise that sales which grow faster than profits means either that a company’s expenses are growing too quickly, or that the company is facing pricing pressures and cutting its margins as a result.

A quick look at the SMS income statement shows that despite revenue growing at 10%, employee costs grew by 12%, administrative expenses by 37% and occupancy expenses by 21%.

The company is obviously pleased with its market share growth, but as a wise man once told me, “you can’t bank market share”. Growth is wonderful, but cash is far better!

Still, SMS is doing better than fellow services provider Oakton (ASX: OKN) which reported a full year loss yesterday and shareholders will be eagerly awaiting results from UXC (ASX: UXC) and Data#3 (ASX: DTL) which will be released in the coming weeks (though the latter’s shareholders will be breathing more easily after the company announced it would deliver profit ahead of expectations).

Foolish Takeaway

One swallow doesn’t make a summer, and one year of margin erosion doesn’t spell disaster. Similarly, reduced percentage margins but growing profits is better than higher margins, but less cash to show for it.

However, SMS shareholders would do well to keep an eye on the company’s margins and growth in expenses, just in case the situation continues.

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Scott Phillips is an investment analyst with The Motley Fool. You can follow Scott on Twitter  @TMFGilla The Motley Fools purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691)

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