Small-cap focus: IT service groups haul businesses into digital age

Cyber security groups have attracted attention in recent months, as high-profile hacks hitting businesses have spurred demand for their services.

But a longer-term shift by leading businesses to modernise their technology has also benefited a crop of British IT service companies, albeit with less fanfare.

With new competition from disruptive rivals forcing established companies to improve their digital services, groups in sectors from gaming to financial services are attempting to update their systems.

The government is also involved. The Cabinet Office recently outlined ambitious plans to use IT services to “transform the relationship between the citizen and the state”.

For some companies digital transformation is a big challenge and with Brexit discussions under way there is the added prospect of changes to tech infrastructure that could make it more difficult to outsource certain services. 

In this context, IT service companies such as Keywords Studios, Kainos and Microgen have benefited from rapid growth as they haul older businesses into the digital age. 

Keywords Studios

Keywords Studios is not a typical IT services company but works for the video gaming industry to develop more technologically advanced games. This means it acts like an outsourced producer for augmented and virtual reality, testing and providing support once games go live.

The Dublin-based company is listed in London and has attracted 21 of the largest 25 video game publishers as clients, including Electronic Arts, Activision Blizzard, Tencent, Konami, Sony and Ubisoft. It has also worked with Oculus and Google. 

Its more than 1,500 employees translate stories into different languages and make sure they are culturally adapted for players around the world. 

The company’s share price has almost doubled from the 2013 float price, to £2.67. The group last year bought Mindwalk for $5.5m, giving it access to the rapidly growing Chinese market.

“Keywords’ DNA is in reducing complexity for publishers, demand for which is likely to increase further as augmented reality and artificial reality is developed” said Neil Campling, global head of technology, media and telecommunications research at Northern Trust Capital Markets.

Pre-tax profits rose 85 per cent to €9.4m in the year to December 31 2016.

Kainos

As public bodies push to update creaking IT systems, Kainos has developed technologies specifically designed to make it easier for government departments to share information and plan work.

The company has targeted sprawling institutions with large volumes of data, capturing clients such as NHS trusts, the UK’s Prison and Probation Service and the Land Registry — as well as hospitals in the US. 

The group, which floated in the UK two years ago, employs just under 1,000 staff and has seen its shares more than double to £2.68 over the past year as the UK government pushes a so-called “digital transformation programme” to update its technology.

However its specific focus on British public bodies has made it vulnerable to central government policy and funding, with its most recent annual report blaming the NHS’s squeezed budget for a 12 per decline in its electronic medical records division. The group is expanding into other countries to offset this challenge.

“Kainos is very exciting because it has a very high public sector profile, which is something that is particularly growing right now with a government focus on digital,” said Richard Holway, chairman at TechMarketView. 

Microgen

A member of the old guard in IT services, Microgen provides accounting software for companies. It faltered for years following the dotcom boom, struggling to attract clients away from larger software suppliers founded after the bust. 

But over the past year, the London-listed company has again attracted the interest of investors after refocusing its attention on two core businesses: financial management software, and IT systems for trust and fund companies to speed up their operations. 

Microgen says it is benefiting from increased regulation, which has made business more complicated for trust and fund administrators globally and created an opportunity for technology to simplify operations.

But with significant competition coming from overseas providers based in countries such as India, where IT systems can be managed at a much lower cost, it has yet to return to its former success.

The share price has more than doubled to £3.16 in the past year. In the 12 months to December 31 2016 the group reported profits of £7.9m — up two-thirds on the previous year. At their peak in 2000, the shares traded at more than £10.