AMS: A Bright Spot In IT Services Market
Investors continued to flee the information technology services stocks during the first half of March.
While the Dow Jones Industrial Average was up nearly 6 percent over the last two weeks, the Washington Technology Composite Index was down 5 percent. The Integrators Index, which comprises the lion's share of the WT Composite, was down 3 percent.
The concern weighing down the sector remains tied to the same question as six months ago: How will year 2000 compliance spending impact non-Y2K IT spending?
While we have seen Y2K compliance work dropping off much faster than anticipated six months ago, we also have seen much better-than-expected growth in certain areas of IT services that are more than making up for the Y2K drop in well-positioned companies.
Demand for Internet-related application development is soaring. This includes electronic commerce, Web-enablement of existing applications and emerging technologies such as data warehousing.
Another hot growth area is customer relationship management package applications, such as sales force automation and supply chain applications.
Application integration, or using middleware to tie together enterprise resource planning and other package software modules of different vendors, looks like another strong growth area over the next few years.
One integrator, American Management Systems of Fairfax, Va., is not seeing any adverse impact on its business from Y2K. AMS is a systems developer and integrator with commercial, state and local and federal government clients.
The company recently held its annual investor meeting, where officials had an upbeat outlook. AMS officials said they expect the company's earnings per share to come in between $1.42 and $1.52 this year, prompting many analysts (including myself) to raise their earnings estimates on the company.
AMS' commercial clients represented 50 percent of AMS' 1998 revenue of $1.06 billion. State and local government customers accounted for 27 percent of sales last year, with the federal government providing the remaining 23 percent.
AMS had considerable growth in its state and local government business unit, with revenue jumping 65 percent in 1998. The company entered last year with a record amount of financial systems development and health and human services systems development contracts.
Overall, the company expects revenue growth of 19 percent this year. AMS is aggressively pursuing electronic commerce projects in its vertical markets and is Web-enabling all of its existing products.
Electronic commerce application development and integration made up 4 percent of revenue in 1998, while Internet-related application development was 20 percent of revenue. AMS expects its Internet-related business to double in 1999.
Its federal revenue jumped 28 percent in 1998, a level of growth tough to find among federal integrators without the aid of acquisitions. AMS has benefited from the federal government's efforts to move from custom solutions to commercially proven package software solutions.
Consolidation in the federal market continues, with privately held Anteon Corp. of Fairfax acquiring publicly held Analysis & Technology Inc., subject to shareholder approval.
Anteon will pay $26 per share for Analysis, or 19.5 times the 1999 consensus earnings per share estimate and 22.6 times 1998 earnings per share.
With no end in sight for the consolidation in the federal market, Analysis & Technology probably will not be the last public federal company to be acquired this year.
Bill Loomis is managing director of the technology research group at Legg Mason Inc., Baltimore. He can be reached at email@example.com. This information should not be construed as advice designed to meet the investment needs of any investor.