The share price of IT solutions group SMS Management & Technology Limited (ASX: SMX) has been on a steady decline since hitting a post-GFC high of $7.44 in late 2010. The current share price of just over $3.70 is a sign of the tough trading environment IT management and solutions companies have faced in recent times
As the global economy has recovered from the GFC, the majority of companies in developed nations have been forced to maximise profit while revenue growth was low to anaemic. This involved cost cutting via job shedding and improvements in efficiency, the results of which dropped straight to the bottom line of the balance sheet and made shareholders happy.
Interestingly, despite being one area that can significantly enhance efficiency, IT infrastructure spending has plummeted and has taken with it the share price of many of the industry's big names. The revenues of SMS, and major rivals UXC Limited (ASX: UXC) and Oakton Limited (ASX: OKN), have fallen from highs in previous years. However, some market commentators are suggesting that a revival in IT spending, particularly from the government, could be the turnaround the sector is waiting for following the release of the commission of audit report last week.
Turnaround time!
The report recommended upgrading a host of aging government platforms, including the Centrelink payment system, and shifting the majority of systems to the cloud as a means of reducing the government's $5 billion information management bill.
The upgrades could include a massive integration of a host of government systems that analysts and industry experts believe could be tailored as a pay-as-you-grow model for the government. The total spend is expected to be in excess of $1.5 billion.
Likely to happen?
It'll be interesting to see if the government takes the investment approach to IT spending that it doesn't appear to be taking to other proposed cuts expected to be announced in the budget. Recent commentary has focussed on the increased taxes, new levys, and cuts to various funding areas that could be announced during the budget, but little emphasis appears to have been placed on infrastructure and efficiency spending.
Foolish takeaway
Spending money to save money appears less and less likely based on recent media commentary of what to expect in the budget. The media tends to miss certain important points however, and I believe we could see some significant infrastructure spending announcements that will help to deliver a budget surplus over the longer term. The short vs long-term thinking of the government is key here, investors should keep a close eye on the budget announcement to see if the IT sector will be one of the few winners.
