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Why the Data#3 share price soared higher on Wednesday

While the Data#3 Limited (ASX: DTL)  share price has dropped this morning, down 2.43% to $1.60, after soaring almost 14% higher to $1.64 in Wednesday trade following the release of an earnings update.

Earnings growth returns

The information technology services and solutions provider announced that it expects consolidated net profit before tax (NPBT) for the first half of the 2019 financial year to be within the range of $8.5 million to $9.0 million. The earnings estimate is around 13% higher at the midpoint of the previous guidance issued at the company’s AGM in November, where first-half NPBT was forecast to be in the range of $7.0 million to $8.5 million.

The upwards revision to guidance is a substantial improvement over the prior corresponding period where Data#3 reported an unusually soft result due to a number of one-off events with NPBT coming in at $4.0 million. The result in the first half of FY18 was down 50.2% over the first half of FY17 when the company reported NPBT of $8.1 million.

FY18 was a subdued year for Data#3 with the company’s earnings and dividend both falling because of a number of operational issues. Although group revenue climbed higher by 7.6% to $1.2 billion, NPBT was down 8.9% to $20.4 million. As a result, the company’s dividend was cut from 8.9 cents a share to 8.2 cents a share.

The decline in earnings was attributed to lower than expected contributions from the acquisitions of Business Aspect and Discovery Technology that was not offset by organic growth in the company’s core businesses.

Foolish takeaway

The last 12 months have been difficult for small-cap information technology stocks as competition has intensified and the operating environment has become more challenging. Companies such as DWS Ltd (ASX: DWS) and RXP Services Ltd (ASX: RXP) have seen their share prices fall by 30.6% and 27.5% respectively over the last 12 months.

For long-term investors, today’s announcement appears to indicate that Data#3 is back on track after a softer FY18. However, investors should note that the business has been historically lumpy in terms of earnings skew and the company should provide more clarity on its second-half expectations when it reports its interim result next month.

At about 15 times forward earnings and with a dividend yield of around 6%, the stock looks to be a reasonably solid investment for income-focused investors that are comfortable with investing at the smaller end of the market.

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Motley Fool contributor Tim Katavic has no financial interest in any company mentioned. The Motley Fool Australia has recommended Data#3 Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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