Maggie Nolan, Research Analyst, William Blair, IT Services
Maggie Nolan, CPA, who joined William Blair in June 2015, is a research analyst covering IT services companies. Before joining William Blair, she worked at PwC in their financial services assurance practice.
Ms. Nolan graduated from Miami University with a Bachelor of Science degree in business with majors in finance and accounting.
In this 2,731 word interview, exclusively in the Wall Street Transcript, Maggie Nolan reveals her investing parameters and details the logic behind her current top stock picks.
“I am the IT Services Analyst at William Blair. IT services is somewhat of a broad term for my coverage. Within the industry, I generally look at a couple of subcategories.
I look at the traditional IT outsourcers, or SIs, I look at the next-generation custom product development companies, business process management and customer experience companies.
And I look at value-added resellers or IT solution providers. But what really ties them all together, and the commonality between all of these, is that they’re people-based businesses, and they’re obviously focused on technology services.
In general, what I’m looking for in an outperform-rated stock is strong financials, including the revenue growth and the margin profile.
I’m going to be looking for reliable cash flows, the earnings growth potential, effective capital deployment, and then just in general, an effective business strategy, or really the leadership effectiveness and how they’ve developed the strategy over time.
If you think about those a little bit more granularly, there are several key attributes. On the revenue side of things, it’s really going to the organic revenue growth profile.
And this can vary by those different buckets. So it can range anywhere from the low-single-digit growth levels — which would be in line with broader total IT spending growth — to anywhere above the 20% growth range in some of the fastest growing subsegments of the industry.
Other metrics I look at are the revenue per billable employee, because these are people-based businesses, customer concentration, and that vertical exposure or concentration within the revenue base as well.
Also along the lines of evaluating revenue, just the visibility into those revenue streams. So again, this gets at kind of the difference between some of the subsegments.
The visibility is really going to be a function of a couple different things. But one such thing is how much project work a company might be engaging in versus how much of the revenue base is more managed services.
But really, you can look at similar metrics when you’re considering those things like bookings, repeat business, and client tenure.
And then obviously, the margin profile of these companies is important. So the gross margin is going to reflect the employee costs.
But at this point, most companies are managing to and guiding to operating margin. I would say that expanding margins are generally preferred over peak margins, but that high-growth companies are often holding margins steady and reinvesting back into the business.
And then the balance sheet; we’re going to be looking for a strong balance sheet. You don’t typically see much debt in this industry, and then healthy free cash generation as well.”
Maggie Nolan sees the IT space from the perspective of a portfolio stock picker:
“It’s really about making an enterprise that is agile and can create something, scale it up, scale it down, completely change directions, and do all of that with ease.
So the companies that are best positioned in the IT services space to create that value proposition are the companies that are using agile development methodologies, the ones that don’t have any of the legacy baggage weighing them down.
So in the custom product development space, big companies like an EPAM (NYSE:EPAM), or an Endava (NYSE:DAVA), or Globant (NYSE:GLOB) or Grid Dynamics (NASDAQ:GDYN) that really aren’t exposed to any of the infrastructure outsourcing, or some of those other areas that have faced pricing pressure as digital transformation started stealing more of the IT spend.
And then on the business process outsourcing side, I would say those companies play a role in creating these frictionless experiences. So for actual process reengineering, you’d see companies like Genpact (NYSE:G) or WNS (NYSE:WNS) or ExlService (NASDAQ:EXLS) helping with that in areas like automation, data and analytics.
And then there’s a subsegment as well that’s a little bit more heavily weighted to the customer experience side of things, a company like TELUS International (NYSE:TIXT) or TTEC (NASDAQ:TTEC), for instance.
I think we’re still early in how all of this affects businesses across the globe. And cloud adoption is going to continue to progress. Companies are going to continue to embrace that agility.
And actually, COVID can help accelerate that, as companies rethink how they want to connect with their end customers going forward.”
This perspective on IT service company winners has created several current hot stocks picked by Maggie Nolan:
“I’ll start with a small-cap name that I’ve been pretty interested in for a while now. It’s a company called Perficient (NASDAQ:PRFT).
It has about a $2.2 billion market cap. They are a digital transformation consulting firm. They’re serving the Global 2000. The reason I think they’re really interesting right now is that the company is picking up a lot of momentum.
There are several growth tailwinds that I would outline. The first being they have a robust acquisition strategy, and have done some M&A over the years that has really produced nice synergies, and it’s been transformational for the company, kept them very relevant. And their positioning is very favorable.
We talked about this enhanced demand for digital transformation coming out of COVID. This is a company with 80% of what they’re doing in terms of revenue is going to be tied to digital transformation work. There’s definitely an opportunity for them there.
When you think about another sub-exposure, this is a company that has 33% of revenue in health care-related clients and health sciences. And so that’s an industry that we think is ripe for digital transformation.
There is a lot of opportunity there, there’s a lot of efforts from services companies across the spectrum to pick up market share there. And Perficient already has a nice brand name and a nice client base that’s starting to grow there.
And then, the last thing that I’ll point to in terms of the growth tailwinds is their maturing sales force.
They’ve made investments here a couple of years back. We’re seeing those clearly start to pay off in terms of the revenue acceleration they were experiencing pre-COVID. And now that’s picking back up as we see the light at the end of the tunnel here in terms of COVID.
So great growth tailwinds, combined with an opportunity for long-term margin expansion here.
They’re shifting more new work offshore and nearshore. That’s going to be higher margin for them going forward.
And so, you can see an opportunity for this company to grow their margin profile to the 20% EBITDA range in the medium term. I think you have a good buy here.
And that there is accelerating revenue growth coupled with margin expansion that oftentimes drives multiple expansion, when you’re thinking about those valuation multiples, plus additional upside from continued successful M&A strategy, and then transformational M&A that could push the structural growth rate of this company even higher.”
To get all of Maggie Nolan’s top picks, read the entire 2,731 word interview, exclusively in the Wall Street Transcript.
Maggie Nolan, CPA
Research Analyst
William Blair & Company, L.L.C.
email: mnolan@williamblair.com
