carimmohelp: Software: Key to a smart and prosperous future

понедельник, 1 августа 2011 г.

Software: Key to a smart and prosperous future

A look at how South African investors are able to benefit from it.

"We are witnessing a structural change in the IT market – customers are shifting more of their investments toward software as it continues to become a larger and more important component of the overall technology stack. As a result, we are seeing strong demand from our customers. " – Jim Hagemann-Snabe, Co-CEO of SAP, July 2011

Businesses that assist other businesses in working smarter, more efficiently and thereby making more money should do well in any economic environment, and software is usually used to fulfill this role.

In my view this is an underlying theme currently driving the business of B2B* information technology and those companies appropriately positioning themselves are directly benefiting as a consequence. Judging from its 1^st half results released this week, SAP AG, a €54bn provider of enterprise software that helps companies run more efficiently, is one such firm. SAP, which was founded in 1972 by 5 former IBM employees, reported 1^st half software sales growth of 26% (31% in constant currency, on the back of strong growth in all regions and industries.

In today's PSG Angle, however, I will not be discussing the German software giant, but rather touch on how South African investors are able to benefit from the above mentioned theme.

As most of you will be aware, there are no companies of significance listed on the JSE's IT sector that develop their own world class software or services. In simple terms, most investable companies operating in the local IT space are either resellers/integrators of soft- and hardware or providers of services, or both. As a natural consequence, research and development budgets of South African IT players are dwarfed by those of multinational companies such as Microsoft and SAP. As a matter of interest, Microsoft and SAP spent $8.7bn and €1.73bn on RD in their latest financial year, respectively.

Of particular interest to us, however, is the fact that one is able to benefit from the billions of RD spent by foreign companies by investing in IT firms listed on the local exchange. One such company we have liked for some time is JSE-listed EOH (Enterprise Outsource Holdings. The company derived 78% of revenues and 87% of profits before tax from software and services in the 1^st half of fiscal 2011. Its particular attraction is its strong decentralized business model, allowing the company to be nimble and its business units to become specialists in their respective fields, while having an incentive mechanism in place that drives overall group performance. The company partners or represents, many on an exclusive basis, a multitude of international software firms. Amongst others, EOH operates one of the largest SAP practices in South Africa, which according to my last management correspondence was made up of 8 underlying units. EOH, now valued at R2. 1bn, has built an enviable track record since its listing in 1998 but due to size considerations has only recently appeared on the radar screen of larger fund managers. As can be seen in the graph, the firm's track record of growing profits cannot be faulted.

In conclusion, in my view, the underlying theme driving global IT spend also applies to our country – SA's private and public sectors are in dire need of working smarter and faster - and the corresponding growth as experienced by SAP AG paints a rosy picture for a some of South Africa's IT players.

*business to business