3 IT Companies Worth Watching

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

According to Global Industry Analysts, the global IT service market is expected to grow at a rate of 5.88% from 2011 to reach $1.2 trillion by 2015. To keep pace with industrial growth, IT companies have planned a combination of strategies including focusing on core business, improving financial ratios, acquisitions, and new contracts.

I am selecting the three companies in this article from this industry. These companies are continuously looking for growth opportunities by deploying various strategies in their operations. By analyzing these companies, investors will see how these strategies will impact the companies’ bottom lines and, thus, investor portfolios.

Divestiture and acquisition in focus

In May, Computer Science (NYSE: CSC) signed an agreement to divest its non-core business, Applied Technology Division, or ATD, to PAE for $175 million. ATD was providing its service through the company’s North American Public Sector primarily to the U.S. Army. However, the U.S. government expects to continue its exit strategy in Afghanistan, and this will reduce its exposure to the U.S. Department of Defense by around 6% to 30% of revenue.

This was its sixth divestiture of non-core low-margin business in the last seven months. Moreover, the company, with these divestitures, is looking to shift its focus to next-generation technology such as clouds, cyber, and big data. These technology sectors are expected to generate growth opportunities of 20%-25% of revenue in the next two to four years with the operating margin of more than 15% compared to its non-core low-margin businesses. The company anticipates revenue of around $13.75 billion in fiscal year 2014 with the increased operating margin of 8.3% compared to 6% in last fiscal year.

In June, Computer Science received a five-year contract for $13.25 million from the New Zealand Ministry of Health to deliver “MedChart.” It is the electronic medication management solution that will be delivered to 20 District Health Boards across the country. This program is used by various hospitals across Australia, New Zealand, and the U.K. The company provides web-based solutions to the hospitals through MedChart. These solutions include in-hospital prescribing, drugs administration solutions, and clinical decision-making.

With the use of MedChart, hospitals reported a significant reduction in clinical errors. The company expects MedChart, with its strategic and differentiated offerings, will generate opportunities for the company in its health-care segment. In addition to the $13.25 million contract, CSC has also signed a second contract worth $2.6 million for five years. 

Shifting towards next-generation technology

Recently, Xerox (NYSE: XRX) acquired Customer Value Group, or CVG, a leading software company. It is specializes in cloud-based accounts receivable and supplying the software of financial customer relationship management.

CVG has a client base that includes Fortune 500 multi-national corporations, which are using its “Value+” cloud-base software to enhance their cash collection abilities. This software simplifies the management of customer credit, cash collections, and settling disputes.

With this acquisition, Xerox will strengthen its presence as a standalone cloud based financial software application provider, helping other companies to manage their financials. Xerox is looking to expand its offerings through inorganic growth opportunities, and expects to generate revenue of $5.5 billion in the third-quarter and $5.96 billion in the fourth-quarter compared to $5.35 billion in the first-quarter of 2013.

The company's service segment contributed 52% in revenue last year. This segment includes business process outsourcing, information technology outsourcing, and document outsourcing. It reported year-over-year revenue growth of 4% in the first-quarter of 2013 which was mainly driven by 13% growth in its information technology outsourcing. This growth was fueled by a steady inflow of new contracts.

The company reported 64% year-over-year growth in service booking in the first-quarter of 2013. It expects service bookings to rise by 20% quarter-over-quarter in the second-quarter.

The company is focusing on maintaining a large volume of smaller deals, instead of mega-deals, and the renewal of contracts, which is normally in the range of 85%-90%. These small deals take less time to increase profitability. The service segment will see revenue growth of 6.6% year-over-year, and will reach $12.30 billion this year.

Targeting to improve financial

In January, Fidelity National Information Services (NYSE: FIS) acquired the remaining 78% stake of mFoundry for $120 million, for a total deal of $165 million. mFoundry provides mobile-based banking solutions to more than 850 retailers and financial institutions including Bank of America, PNC Bank, and Zions Bank. Clients use the technology to support their mobile applications and NFC technology.

This acquisition helped the company to expand its footprint in newer technology where it has vast growth opportunities. The company, with this acquisition, will increase its per-user revenue by 40%, and expects the incremented per-user revenue of $100 every year. It is currently serving nearly 19 million mobile banking users and 3 million remote deposit users.

It is also expected that the global mobile banking customer base will reach 1.1 billion by 2015 from the current level of 590 million users, leading mobile payment transactions to reach $1 trillion by 2015. With the purchase of the remaining stake of mFoundry the company has generated the revenue of $6 million in the first quarter, ended in March, and expects to serve more mobile banking users to generate higher revenue in near future.

The company has also planned to reduce its interest expenses by restructuring its debt portfolio. In April, it raised $250 million of 2% senior notes due in 2018 and $1 billion notes carrying interest of 3.5% due in 2023. The net proceeds will repay the higher interest bearing callable senior note of 7.625%, amounting to $750 million due in 2017, and expenses related to it. The company will also use these funds to reduce debts and move forward with its share repurchase plan. With these steps, Fidelity National expects the reduction in interest expense from $229.6 million in 2012 to around $187 million this year.

Conclusion

Computer Science, with its divestiture of non-core low-margin segments, is advancing towards next-generation technology, and MedChart is opening new opportunities for future growth.

Xerox, by acquiring CVG's Value+, has enhanced its client portfolio, and anticipates further growth in its revenue. It expects the service segment's new deal will improve its service margins.

Fidelity National, with the acquisition of mFoundry, plans to capture higher growth opportunities in mobile-based transactions, and is also improving its operating margins by reducing interest expenses.

Therefore, I recommend investors buy these stocks.


Shweta Dubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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