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E-Gov Growth Worth An Investor's Look

Bill Loomis

By Bill Loomis

The first-quarter earnings season is complete and was as expected for technology stocks. I anticipated that commercial e-business solutions companies would exceed both our estimates and the consensus estimates for growth and profitability, and they did.

The traditional commercial information technology companies and the government IT companies generally were hurt by the Y2K lockdown, as expected. Both groups of companies, however, anticipate strong growth as year 2000 lockdowns and deferrals reverse and e-business projects continue to grow larger and require more integration with existing systems.

One area that increasingly draws interest from investors is e-government. Legg Mason held its annual technology conference for investors earlier this month, and one of the featured panels was about e-government. The opportunity is large and probably underappreciated by investors.

While government traditionally has been slow in adopting technology, participants indicated that government is moving very quickly ? relatively ? to the Internet and electronic business. The panelists agreed that we are very early in the market cycle for e-government, and that growth should be very strong for several years, though government business is, at present, a relatively small part of companies' revenue.

E-government rates of growth may still be slightly below commercial e-business rates, but the gap seems to have narrowed a bit as governments seem to be paying premium rates for e-business services, relative to the rates paid for other IT services.

Governments do not seem to be immune to time-to-market pressure, as citizens see what is available in the commercial world and have high expectations that their governments will allocate tax dollars toward technology to provide better services.

Widespread e-government likely will be hampered by various bureaucratic hurdles and interstate political issues. E-government will not be an overnight process; most likely, it will take years to mature.

All the panelists believed that application service provider (ASP) and Web-hosting services will become a larger part of government IT solutions, and said they are experiencing a significant pickup in interest from governments in ASP services. In fact, ASP often is being bundled as a part of larger procurements. However, it remains a very small part of the companies' revenue.

E-government will become a much larger part of government IT spending, but it will likely take a few years before it becomes a large percentage of most government IT companies' revenue. Yet, e-government is perhaps the fastest growing and most profitable area of government IT, and investors likely will be more attracted to the space over the next year.

The recent initial public offering of PEC Solutions Inc. may help increase investor interest in e-government. The Fairfax, Va.-based federal IT company is one of the few federal IT companies to have come public, and managed to do so during a tough tech market.

While the federal government may have made up 94 percent of PEC's revenue last quarter, the company's financial performance, a gross margin of 43 percent, operating margin of 14 percent, is much better than its peers, making it more comparable to commercial IT companies.

Perhaps PEC will represent a new wave of federal IT companies, much as Scient Corp. of San Francisco and Viant Corp. of Boston launched a new wave of commercial IT companies.

Bill Loomis is managing director of the Technology Research Group at Legg Mason Wood Walker Inc., Baltimore. He can be reached at wrloomis@leggmason.com. Within the last three years, Legg Mason has managed or co-managed an underwriting of PEC Solutions. Legg Mason makes a market in PEC Solutions. This information is based on sources believed to be reliable but is not guaranteed as to completeness or accuracy and is not intended to be an offer to buy or sell any security.

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