Welcome to the first edition of the EquaTerra Echo, a new quarterly research deliverable.
As an extension of EquaTerra's quarterly global Pulse Surveys, the Echo will each quarter deliver a wrap-up and analysis of events and trends in the global business and information technology (IT) services markets. It will draw on findings from EquaTerra's own research and client engagements as well as newly released research and commentary from select consultancies, research firms, equity analysts and news agencies.
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Current Market Overview
The demand for business process outsourcing and information technology outsourcing (BPO/ITO) continued to improve in 4Q09, according to EquaTerra and other firms that track market trends and developments. Demand for other types of third-party services such as consulting, IT systems integration and some application development services remained mixed with some signs of growth.
Improvements to outsourcing demand and deal flow that started in 3Q09 continued through the end of 2009. Predictions for 1H10 demand remain positive, although a bit murky. Improvements in the economy and resultant greater stability in buyer organizations is fostering improved deal flow, but overall lingering market uncertainty is still disrupting buying efforts. The following are key 1Q10 market conditions to monitor:
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- It is clear that buyers are maintaining a strong focus on cutting costs and keeping them in line with generally modest expected revenue growth, and continue to search for ways to overhaul the delivery of core business and IT services.
- The growth of the global business and IT service delivery continues unabated, despite increased protectionist and anti-globalization sentiments in segments of western economies and governments.
- Buyers continue to face challenges in successfully operating increasingly complex global service chains as the will to expand these service delivery networks often outpaces the ability to source and manage them.
- The ongoing evolution of traditional software and service delivery models through variations such as cloud computing, software as a service (SaaS) and remote infrastructure management (RIM) continue to gain momentum and capture buyer attention. There is still uncertainty in the market, however, as to how and how fast the adoption of these new models will play out, how they will fit with legacy models, and how much they will negatively impact vested software and service firms' interests.
- Top tier multinational and Indian service providers are registering improvements in their outsourcing businesses, more so than in other service areas, and continue to take share from smaller competitors, though there are still challenges to deliver on buyer needs and demands in a profitable manner.
Key News and Events
- Citi ¹ (www.citi.com)
- "Evidence is growing that IT services demand is steadily building. Data points from buyers (cited in Citi's CIO Survey), advisors (both EquaTerra and TPI) and vendors that have reported earnings so far suggest that: (1) decision-making has eased and there is a lot of momentum, particularly for services like applications outsourcing; (2) the 2010 budgetary cycle is easier and normal in terms of timing, with modestly higher budgets in 2010; (3) the spending environment turned encouragingly positive in the fourth quarter - we saw modest over-spending relative to the quarterly budget allocation after four consecutive quarters of under-spending; (4) we should expect steady growth in contract signings in 2010."
- Forrester* (www.forrester.com)
- U.S. IT sales will grow 6.8 percent to $568 billion in 2010, driven by software and computer hardware sales, and lead to a six- to seven-year cycle of IT growth and innovation; global purchases of computer equipment predicted to grow 8.2 percent, communications equipment 7.6 percent, software spending 9.7 percent, purchases of IT consulting and systems integration (SI) services will grow by 6.8 percent, and IT outsourcing services 7.1 percent.
- Gartner Group* (www.gartner.com)
- Worldwide IT spending will rise 4.6 percent to $3.4 trillion in 2010, on the back of an economic recovery and a declining dollar; all major segments such as computer hardware, software, IT services would contribute to the growth, with emerging markets leading the recovery.
- By 2012, 20 percent of businesses will have no ownership of IT assets.
- By 2012, India-based IT companies will represent 20 percent of cloud service providers in the market.
- NelsonHall* (www.nelson-hall.com)
- Q4 awards finish strong. Global total contract value (TCV) for BPO was $11.9 billion (up ~150 percent) in Q4 bringing FY09 to $23.8 billion (down 20 percent).
- BPO outlook for 2010 is up 20 percent on North American/commercial recovery; pricing expected to remain difficult given excess capacity.
- ITO Bookings up 32 percent in 2009 with a further 14 percent growth expected in 2010.
- TPI Index* (www.tpi.net)
- 4Q09 TCV up 47 percent Q/Q, 8 percent Y/Y, continuing the market turn begun in 3Q09.
- Americas annual TCV awarded was lowest of the decade, but…..
- Market bottomed in 1H09, turning in the second half.
- Market outlook for 2010 is positive.
- Most mega relationships signed in a quarter since 2Q08.
- Wells Fargo Securities ² (www.wachovia.com)
- On Accenture (ACN), January 11, 2010: "Trade press indicated (and company just confirmed) that Barclays Bank will be taking back in-house a five-year GBP 400 million applications outsourcing arrangement when the contract ends June 30. We estimate that this will impact FY10 (Aug.) revenue by $20-22 million, and FY11 by about $130 million. This represents about one half of 1 percent of our FY11 revenue estimate. ACN indicated that it continues to do some consulting work for Barclays. We note that Barclay's recently brought back in-house desk-top support being done by European IT service provider Getronics, so we assume this is a management approach issue, not a quality of work concern."
- On IBM (IBM), January 22, 2010: "IBM Services Produced Solid Q4 Growth and Margin Expansion, while Bookings Remain Biased to Long-term Deals. Similar to what we are hearing on the 'advisor' calls, clients are beginning to return (but slowly), a greater percentage of work is going to offshore locales, and service providers are running operations far leaner. Also, discretionary-focused work remains down yr/yr (cc) for both revenue and bookings. While the outsourcing industry appears to be clearly past the worst, the pace of recovery is so far shaping up to be a slow one."
- On Wipro (WIT), January 22, 2010: "Strong Results, Tone Similar to Other Tier I Offshore Services Providers. WIT reported FQ3 Global Services revenue of $1.127billion, up 5 percent q/q cc, topping the guided range. Global Services operating margin of 23.6 percent was unchanged q/q and up 310bps yr/yr on high utilization. EPS of $0.18 was $0.03 above our and consensus expectation. In-line with Tier I services peers Infosys (INFY, Underperform) and TCS, WIT is assuming share of IT budgets for offshore services to improve yr/yr, with overall IT budgets to be flat/marginally improved."
Select Earnings and News
- Accenture (ACN): will release 2Q10 earnings on March 24, 2010.
- ACS (ACS)*: reported 2Q10 earnings on January 21, 2010. Revenue of $1.66 billion (below $1.71 billion consensus) up three percent Y/Y, adjusted diluted EPS of $1.07 (above $1.01 consensus). Note: final board votes on the acquisition of ACS by Xerox are scheduled for February 5, 2010.
- Capgemini*: will release earnings on February 18, 2010.
- Cognizant (CTSH): will release 4Q09 earnings on February 9, 2010.
- Convergys (CVG)*: reported 4Q09 earnings on January 26, 2010. Revenue of $684 million (above $664 million consensus) down three percent Y/Y, adjusted diluted EPS of $.33 (above $.31 consensus).
- CSC (CSC): will release 3Q10 earnings on February 10, 2010.
- HCL Technologies* (listed in India): reported 2Q10 earnings on January 25, 2010. Revenue of 30.3B rupees (approximately $650 million, at consensus) up 28 percent Y/Y, consolidated net profit of 2.97 billion rupees (below 3.06 billion consensus) down 20 percent Y/Y.
- IBM (IBM): see analysis of results above.
- HP (HPQ)*: will release 1Q10 earnings on February 17, 2010.
- Infosys (INFY)*: reported 4Q09 earnings on January 25, 2010. Revenue of $1.23 billion (above $1.19 billion consensus) up five percent Y/Y, and adjusted diluted EPS of $.59 (above $.52 consensus).
- TCS* (listed in India): reported 3Q10 earnings on January 15, 20010. Revenue of 17.97 billion rupees (approximately $390 million, above consensus of 16.08 billion rupees), up 10 percent Y/Y, net profit of 76.5 billion rupees (above 74.54 billion consensus), up 39 percent Y/Y, diluted EPS of $.20.
- Wipro (WIT)*: reported 3Q10 earnings on January 21, 2010. Revenue of $1.13 billion, up two percent Y/Y, net income of $259 million, up 19 percent Y/Y, diluted EPS of $.18 (above consensus).
- WNS (WNS)*: reported 3Q10 earnings on January 21, 2010. Revenue of $96.8 million, down three percent% Y/Y, net income of $0.3 million, down 85 percent Y/Y, EPS of $.01 (below consensus).
Five News Articles Worth Reading
The Last Word and a Look Forward BPO and ITO market demand growth gained strength in 4Q09, according to EquaTerra and others that track and analyze the business and IT services markets. Ongoing pressure to reduce costs continues to drive demand as buyers remain focused on doing more with less. An improving economy and lack of investments in key operational areas over the past two years are also favorably driving demand as buyers seek innovative means to support growth and investments. Key to success for buyers and service providers in 2010 is to balance cost cutting and other frugal aspirations with the need to return to investing in and growing the business.
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