In the late 1990s the world braced itself for what was billed as the great Y2K threat to the survival of modern, computer-driven business. A compliance scramble ensued, creating dreams of insatiable demand for IT systems and services.
Investor optimism was set on fire. In a presentation last year, Didata executive chairman Jeremy Ord summed it up: "There was so much activity in the whole market that it was easy to survive."
Easy to survive also meant easy to grow, particularly with the help of shares trading at p:e multiples like telephone numbers.
In early 2000 the inevitable happened. The bubble burst. The market proved again that in the short term it can make stupid decisions but in the long term it's a genius.
IT investors who fell for the "buy and hold" line learnt a costly lesson. Those who stayed put while R130bn was being wiped off the IT sector's market capitalisation will have come to realise that the business world's attitude towards technology has changed.
"This change is perhaps permanent," says UCS CEO John Bright. "Before business commits to IT spending it must be demonstrated to be really vital and able to enhance shareholder returns."
A corporate world bent on minimising the costs and maximising the benefits of IT is not the only reality the tech companies have had to adjust to. Another is falling prices.
This is nothing new to the sector, which has been characterised by dynamic "laws" of increasing efficiency in one form or another for decades. Since the 1970s, storage and processing capacity has doubled every 18 months, in line with the so-called Moore's Law. Software has its own parallel law from none other than Microsoft's Bill Gates: software speed doubles every 18 months.
Moore's and Gate's laws add up to one thing: falling costs. Gordon Moore, now chairman emeritus of US Intel Corp, the world's largest chip maker, sees no technological barriers to his "law" holding true for another 20 years.
Three years ago, falling demand and an evaporation of pricing power kicked in. The IT industry found it had too many players and excess capacity.
In November 2002, Ord shared Didata's perspective: "The whole IT industry, the telecommunications market, communications market, network market are all going through very, very difficult times and we are being hit in exactly the same way as everybody else is being hit."
Everybody? Not quite. There are tech groups that have survived and thrived. Over the past two years, six SA-listed IT companies have achieved growth in headline EPS of over 25%/year.
ERP.Com tops the list with a 175% increase in headline EPS over two years. It grew tangible NAV by 175%/year over the same period.
Mustek's 153%/year headline EPS growth earned it second spot. It was followed by Enterprise Outsourcing Holdings (115%), Datacentrix (93%), Compu-Clearing Outsourcing (46%), Aplitec (37%) and CS Holdings (26%).
What made the big difference? Enterprise Outsourcing Holdings (EOH) CEO Asher Bohbot provides the answer: "An IT company is no different from any other. As in running any other business, the same basics apply."
Those basics are a strong balance sheet, cash flow and positioning in stable industry sectors where revenue and margin stability are relatively secure.
Services such as systems integration, outsourcing and, more recently, security have produced the most IT success stories. Of the six top performers, only PC manufacturer and equipment distributor Mustek falls outside the generally accepted service model.
Not surprisingly, groups such as Didata have set their sights on becoming more service-orientated. With its new "DD Way" strategy, it is hoped, will come higher operating margins and the cash flow stability that service contracts provide.
But transforming from box-pusher to service supplier is not easy. Top-performing service groups are not newcomers to the sector; their positioning is a result of well-laid strategic plans dating back over many years.
Bohbot sums it up again: "Our success has been built upon a long-term policy of careful expansion and refusal to deviate from our core services business."
ERP.Com typifies the successful domestic IT service group. The company is not particularly big in market capitalisation terms. But it is big on the things that count these days: people, technology and financial strength.
ERP.Com CEO Peter Forsyth says: "From the start, we selected good technologies and focused on generating organic growth in the service sector." Equally important, he adds: "We focused on building our balance sheet and our skills base."
Datacentrix approached the service market with similar goals. Its balance sheet was built like a fortress. This positioned the group to benefit from the shake-out in the IT industry, which it is now doing with acquisitions to enhance market share and earnings.
Other IT groups that kept their financial powder dry in the boom times are also exploiting the potential to raid market share. "Acquisitions are now part of EOH's strategy," says Bohbot. "But they must fit into our business model and corporate strategy."
CS Holdings, too, has been acquisitive for the past two years. This has delivered strong revenue, market share and earnings growth - but a high market rating still eludes it.
Shell-shocked investors now like to see a high proportion of growth derived organically. This preference is supported by market ratings. Four of the five highest-rated IT shares, Compu-Clearing, Aplitec, Datacentrix and UCS, do not have a history of aggressive acquisitive growth.
Bytes Technology Group (BTG), another highly rated share in the IT sector context, is the odd man out, having made significant acquisitions since coming into Altron's fold. The latter's involvement is a factor. Perhaps more importantly, BTG has demonstrated its ability to expand acquisitively and simultaneously generate strong cash flow and organic earnings growth.
BTG has also backed its growing status in the sector with a dividend payment. It is no coincidence that, with the exception of Datacentrix, dividend payers get the highest ratings.
The IT market downturn has indeed separated the wheat from the tares.
Though most of these groups deserve better ratings, a return to the corporate free-spending days does not appear likely to come to their aid soon.
Computer Sciences banking manager Cecil Roets says "companies are looking at solutions rather than new projects". This trend enables companies such as EOH to remain upbeat on prospects. "We still see IT as a growth industry," says Bohbot.
