SMS, CSG and Oakton: IT service providers in the spotlight

It’s a busy week for investors who follow firms that provide services in the information technology space, with a number of leading IT service providers reporting full year results.

The $350 million SMS Management & Technology (ASX: SMX) has released its results and they weren’t particularly pretty, although the market had been forewarned on what to expect. Revenues fell 17% to $278.5 million and net profit after tax plummeted 31% to $21.1 million. Diluted earnings per share were 30.1 cents and dividends for the full year amounted to 25.5 cents and down from 30.5 cents in 2012.

Also reporting this week was CSG (ASX: CSV) which has a market capitalisation of $275 million. CSG last year moved away from the IT consulting sector by selling off its major division to instead focus on print equipment sales and services. This has left the balance sheet in a much stronger position and allowed the company to carry out both a share buyback and capital return, however the accounts do leave some question marks hanging over the firm and the market didn’t appear particularly pleased with the result, sending the firm down nearly 5% in early trade.

Meanwhile the $110 million Oakton (OKN) reported a 6% drop in revenue to $162 million and a 12% drop in adjusted net profit after tax to $9.16 million, which corresponds to 10 cents of diluted earnings per share. Like SMS, Oakton reduced its dividend for the full year to 9.5 cents, down from 11 cents in the prior year. Oakton’s management has moved to cut costs to protect earnings by boosting billable hours from Oakton’s Indian office where the firm increased usage to 20% of production from 10% in 2012.

Foolish takeaway

In its results SMS’s management stated that in the second half the company saw “further market deterioration and the season spike in demand usually seen in Q4 did not materialise.” Management also stated that a rebound in client demand in the first half of financial year 2014 was unlikely. Oakton’s management expressed a similar view in its outlook statement, suggesting challenging market conditions for at least the rest of calendar year 2013.

With the IT sector continuing to face headwinds now may not be the time for investors to pile in to the sector. However firms can only put off spending on critical IT systems for so long, which means at some point the tide should turn for the industry.

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Motley Fool contributor Tim McArthur owns a share in SMS Management & Technology.

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