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3 micro-cap IT services companies to watch

IT services companies are fascinating to learn about because they are always innovating and adding on new applications that the world is always looking for to make things better, faster, cheaper. They can be a little mystifying if you don’t know too much about their technology.

Investors should always be willing to do research in new or unfamiliar industries so at least they understand the basics. There may unknown growth stories to discover.

Oakton (ASX: OKN) provides consulting and technology services for business, government, industry and financial services. It has strategic partnerships with such big names as Oracle, IBM, Microsoft and SAP, as well as with cloud infrastructure providers.

In August  it was awarded a multimillion-dollar contract along with Empired (ASX: EPD) from Barrick Gold Corporation (NYSE: ABX) to supply a cloud-based services system, of which Oakton will be the service integrator.

Net profit after tax and abnormals for 2013 was down from $11.8 million to $9.16 million. The company explained that part of the decrease came from a reduction in performance of its ACT location due to a significant slowdown in Federal government spending. Its newer WA location was growing, it reported, and is now contributing 3% of total revenue.

GBST (ASX: GBT) specialises in IT services for financial services companies involved in fund administration and securities transaction. It has been steadily growing its revenue over the past three years, and NPAT after abnormals has risen from $1.3 million to $6 million during that period.

In October, it announced that HSBC has entered into a global agreement with it to provide a third-party clearing platform for its broker-dealer community.

About 34% of the company’s revenue comes from Europe, North America and the Middle East, so it has significant overseas exposure to larger financial markets.

Data3 (ASX: DTL) deals in IT integrated solutions and managed services for industries both domestically and in Asia Pacific. It offers supply chain solutions for ICT hardware, and operates three warehouse and data integration centers in Brisbane, Sydney and Melbourne.

Earnings over the past 10 years have grown well, generating compounded annual growth of 18.3% on average over that period. Return on equity was 35.8% and with its net gearing at – 246%, it has a solid financial base to grow upon. Its business addresses the hybrid IT environment which covers the on-premise to outsourced to cloud needs of clients.

Foolish takeaway

The services these companies provide will be more and more in demand as businesses move from in-house IT systems and venture further into the cloud. Integration, scope and new application capability will drive these micro-caps, so look into them further to see what kind of expansion they are planning.

Because the industry itself is quick and always moving, their ability to innovate and provide what customers need will determine their future.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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