Big Data The Buzz For UXC
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Capitalised at $234 million, UXC is Australia’s largest locally owned and managed IT services company. It is arranged in three business areas, comprising 12 business units.
If you are looking for a big economic theme to try to exploit, you could do a lot worse than “Big Data” – an economic theme so profound that fund manager Fidelity Investments refers to it as a second “industrial revolution.”
Big data refers to the massive stores of data generated by companies from their operations, and the difficulty of organising it and “mining” it for insights than can be of business or social value. Big data is well beyond the capabilities of standard database software to handle, so specialised services to capture, sift and analyse it, using smart algorithms and high-speed technology, are coming to the market. These services handle both the amount of data (volume) and the speed with which it arrives (velocity), which most businesses generating the data cannot.
Big global funds are tapping into this theme through stocks like General Electric, IBM, Oracle, Microsoft, SAP and Symantec, all of which have invested heavily in global data centres designed to interpret big data; or the the chip stocks like Intel, Micron, Freescale , Xilinx and SanDisk; or networking giant Cisco Systems, all of which are plays on big data.
Big data is not a new, or special concept, but many new tools and procedures are being developed for managing it. According to technology research firm Telsyte, the use of big data applications and services in Australian organsiations with more than 20 employees has passed 25 per cent and is forecast to reach 65 per cent by 2018. Telyste expects this threefold increase in update to be driven by a number of factors including more customer interactions occurring through digital channels, a move from “reactive” to “proactive”, or “predictive”, business intelligence and analytics, and better use of available real-time data from existing IT and device infrastructure.
Telsyte is owned by IT consultants UXC Limited (UXC), which is one of the best exposures that Australian investors can get to big data. UXC says it is also working to leverage the potential of the data generated by interconnected Internet-enabled machines (where big data meets the “Internet of Things.)
Capitalised at $234 million, UXC is Australia’s largest locally owned and managed IT services company. It is arranged in three business areas, comprising 12 business units:
1. Advisory & Consulting
UXC Consulting – provides consulting services on strategy and architecture; information management; business transformation; IT service management; communications; project, portfolio and program management; and security.
UXC Professional Solutions – provides a broad range of services to help large Australian enterprises and government departments deliver IT projects.
UXC Saltbush – offers services in information security and cyber-security assurance, consulting, development, solutions and training, with Australia’s only cyber-security focused registered training organisation (RTO).
UXC Training – the education division of UXC Consulting, providing training courses across a comprehensive range of certifications and accreditation in program and project management, change management, IT service management, governance, and standards.
Telsyte – delivers research, strategic insights and advisory services, covering emerging technologies, mobility, enterprise IT, digital media and telecommunications.
2. Enterprise Applications
UXC Eclipse – provides Microsoft-based industry-specific business solutions to the enterprise and mid-market sectors, across a range of industries including retail, mining and resources, wholesale and distribution, asset management, manufacturing, education and government.
UXC Oxygen – a SAP consulting and services company
UXC Red Rock Consulting – the largest independent provider of Oracle consulting and managed services in Australia and New Zealand.
UXC Keystone – provides cost-effective service management solutions.
UXC Cloud Solutions – integrates UXC’s entire set of capabilities, specialises in cloud-based business management applications designed to enable businesses to reduce costs, increase productivity and enable mobility.
UXC White Labelled – a specialist provider of e-commerce solutions to the retail industry.
3. IT Infrastructure
UXC Connect – the IT infrastructure business, which operates and manages a customer’s entire technology and application environment. Services include network infrastructure and wireless, collaboration, data centre, cloud, entertainment and content, enterprise mobility, operational intelligence, managed services and support services.
For the year ended 30 June 2014, UXC lifted revenue from continuing operations by 8%, to $643 million, a record result. Full year underlying EBITDA (earnings before interest, tax, depreciation and amortisation) slipped 2% lower to $36.4 million, but there was a strong 7% lift in the second half, to $24.4 million. Net profit fell by 34%, to $15.7 million, again with a significant improvement in the second half. The full-year dividend came in at 3 cents, fully franked, down 0.55 cents.
Given that the company completed and integrated five acquisitions in the Applications segment for the year, this was a creditable result. A stand-out in the result was the 29% increase in annuity revenue: this now represents 27% of UXC’s business. Revenue ‘locked-in’ through annuity contracts and backlog of work represents 60% of the company’s FY15 revenue target, up from 46% in FY14.
The Enterprise Applications business delivered 74% of pre-tax profit: its revenue rose 15% to $322.1 million, but pre-tax profit was up by 8% due to a slippage in margin. Consulting generated 16% of pre-tax profit: there, revenue fell 6% to $84.9 million, but pre-tax profit rose 20% on the back of improving margin (which almost doubled in the second half.) Infrastructure revenue lifted 6% to $236.4 million, but pre-tax profit fell 52% – however, there was a strong turnaround in the second half.
The company says margins were below-target in all three divisions, withe the business finishing the year at a pre-tax profit margin of 7.6%. But with increased revenue anticipated in FY15, further improvements are expected.
The balance sheet finished the year in a strong position, with net debt of just $4 million, which analysts expect to turn into a net cash position during FY15, leaving scope for further acquisitions.
Expansion of the North American business should also flow through in FY15. In December 2013, UXC acquired Tectura Corporation, an established Microsoft Dynamics ERP and CRM partner to medium and large companies in the US and Canada. Before that, UXC’s North American business consisted of about US$10 million in revenue: the acquisition of Tectura has lifted this to about US$70 million a year, and UXC says the North American business could generate over US$100 million a year in revenue in the next three years. UXC now has a strong relationship with each of the four key application vendors (Oracle, SAP, Microsoft Dynamics and ServiceNow), a healthy balance sheet and a solid reputation and track record for delivering on large contracts.
The analysts that follow UXC expect it to lift earnings per share (EPS) by 19% this financial year, to 5.9 cents, and boost its dividend by 0.6 cents, or 16%, to 4.4 cents. At 73 cents, the stock is priced at 12.4 times expected FY15 earnings, and a prospective fully franked dividend yield of 6%.
Further out, in FY16, the analysts’ consensus looks for UXC to lift EPS to 6.5 cents, and the dividend to 4.9 cents, placing the stock on a FY16 price/earnings (P/E) ratio of 11.2 times earnings and dividend yield of 6.7%.
Those are fairly attractive numbers for a company that is leveraged to big data, cloud solutions, the growth of Software-as-a-Service (SaaS) and the Internet of Things. In the short term, the analysts that follow UXC have a consensus price target of 88 cents on the stock, which offers potential upside of 20% from the current price of 73 cents.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au