Before the long weekend here in the U.S., our teams will be publishing deeper analysis on some of the vendors that released earnings earlier this quarter. As always, our approach starts with the individual companies, then builds to an understanding of the larger market.

Additionally, don’t miss this Wednesday’s webinar Bringing the best: Talent and technology in management consulting. Register today!

Tuesday

• The combination of Atos’ integration and technology capabilities with Google Cloud technologies, made possible by the pair’s global partnership, which marked its first year on April 24, is expanding Atos’ cloud client reach and driving revenue opportunities in secure hybrid cloud orchestration, data and AI, machine learning, and digital workplace solutions for enterprises. The acquisition of Syntel expanded Atos’ cloud advise-build-run portfolio and client reach, notably in North America, and provided critical scale for Atos’ Business and Platform Solutions division, which will accelerate Atos’ cloud advisory and implementation activities. Integration of security services and products into cloud solutions, enables Atos to transform clients’ IT and business models and securely support and manage both cloud and legacy IT environments. — Elitsa Bakalova, Senior Analyst
• The most recent edition of TBR’s Colocation Benchmark highlights how hybrid IT adoption is a driving force behind colocation adoption as colocation providers offer both data center space and connections to leading cloud providers. The availability of hybrid PaaS and IaaS offerings such as Microsoft Azure Stack and, soon, AWS Outposts provides additional opportunities to extend enterprise colocation environments. — Cassandra Mooshian, Senior Analyst
• TBR’s Cloud Professional Services Market Forecast details how healthy growth will persist across cloud professional services markets despite automation’s downward pressures as hybrid IT sprawl proliferates. Accenture and IBM remained the top two vendors overall in cloud professional services in 2018, while Accenture is expected to take on significant additional market share through 2023 as it benefits from its C-Suite exposure and position as a technology-agnostic third-party expert. — Cassandra Mooshian, Senior Analyst

Friday

• TBR’s initial look into Hewlett Packard Enterprise’s (HPE) 1Q19 performance deep dives into HPE’s infrastructure strategy amid recent ongoing changes as HPE enters the final year of its Next initiatives. Commoditization continues to take its toll on infrastructure vendors’ bottom lines, increasing competition and encouraging more nuanced strategies to get ahead. — Stephanie Long, Analyst
• The 1Q19 Fujitsu Cloud report deep dives into Fujitsu’s cloud strategy amid recent changes. As the company no longer competes for new IaaS opportunities outside of Japan, Fujitsu is leaning on partners and their expansive customer bases more significantly and strategically amid the company’s own strategic shift. — Cassandra Mooshian, Senior Analyst

Finally, publishing this week from John Caucis are 1Q19 assessments of federal IT majors CACI and Leidos, including key developments from the quarter and detailed analysis of each company’s fiscal performance. Nearly a year after losing out to General Dynamics in the competition to acquire CSRA, CACI aggressively jumped back into the M&A fray, spending nearly $1 billion on acquisitions during the quarter to deepen its capabilities in C4ISR, cybersecurity, signals intelligence and electronic warfare for the U.S. Department of Defense and intelligence community. In the past, CACI’s MO regarding acquisitions was often paying a premium to scoop up differentiating solutions capabilities, and after paying $225 million to acquire N.Y.-based Mastodon Design and its 50 employees, it appears CACI retains an aggressive, but judicious, M&A posture. CACI delivered 12%-plus year-to-year growth during 1Q19 — more than half inorganic in nature. Federal IT peer Leidos delivered strong organic growth in its first quarter following its “year of transition” in 2018, suggesting its revamped growth strategy, which hinges on effective leverage of the information systems and strategic solutions assets acquired from Lockheed Martin nearly three years ago, is working. With its operational and organizational revamp around its core markets complete, Leidos is beginning to turn its attention to adjacent market opportunities, including in the U.K., where it plans a significant ramp up of recruiting activities in 2019.

We know Moore’s law drives consolidation in the industry. What we do not know, however, is if any two hardware-centric vendors can come together and build a business accretive to the top line. Michael Blumenthal tried this strategy by combining Burroughs and Sperry to create Unisys, and that certainly did not work. More recently Dell acquired EMC, and while jury remains out on that consolidation play, early indications have been positive.

HPE hardware acquisition history

Hewlett Packard Enterprise (HPE) has deployed this strategy multiple times over the years. Today HPE announced it will acquire Cray for $1.3 billion, which equates to $35 a share, or a $5.19 premium over yesterday’s closing price of $29.81. Similar hardware-centric deals HPE has conducted over the years include:

• Acquiring Apollo after its first-mover advantage in engineering workstations was eclipsed by Sun Microsystems
• Acquiring Compaq after it had acquired Tandem and Digital Equipment Corporation (DEC), which had likewise struggled as much in business model integration as with technology integration
• Acquiring SGI, which was hemorrhaging cash but was a strategic HPE OEM partner that HPE could not afford to let fail or be acquired by a rival
• And now Cray, the last of the venerable high-end niche vendors to double down on higher-margin high-performance computing (HPC)

HPC becomes mainstream as accelerators keep pace with big data compute demands

HPC certainly has growing appeal. That appeal stems from several economic drivers

• As always, Moore’s law theory gets borne out in reality as cost and form factors decrease to the point where distributed computing (a fundamental tenet of Ken Olsen’s original business plan for DEC in the early 1960s) can be done at the board level if not the chip level. Graphics processing units (GPUs), tensor processing units (TPUs) and field-programmable gate arrays (FPGAs) can keep pace with increasing demands coming from big data analytics.
• Supply chain excellence and software tuning of these commodity components can allow for custom-designed systems, purpose-built to the compute demands of the HPC customers.
• IBM certainly keeps innovating in HPC, especially with its RISC-based Power chips suited for analytics.
• Lenovo has taken a huge bite out of HPE’s share of the HPC space through its design engineering and supply chain flexibility, manufacturing commodity Intel boards at scale through Lenovo’s global manufacturing space. Per Lenovo it went from having none of the top 500 HPC installations in the world in 2014 to having 140 of them in 17 countries in 2018. Much of this success came at HPE’s expense.

Will the acquisition go against type and be viewed as a sane move?

A definition of insanity is to engage in the same activity over and over again while expecting a different outcome. HPE’s history has been to acquire struggling firms in niche hardware areas in hopes of growing share. With fewer and fewer silicon-centric vendors left standing, the odds of success can certainly increase in time.

The Cray acquisition may well aid HPE in stalling Lenovo’s recent successes in the HPC space, but Lenovo’s operating best practices are well suited to commoditizing markets. Supply chain excellence honed to attack the hyperscale market brings decided cost advantage to the HPC space. Talent recruited from Intel and other firms likewise gives Lenovo the software tuning competencies necessary to extract fit-for-purpose performance from commodity chipsets.

Quantum also looms large on the horizon as the next chapter for the high-end compute requirements to help solve the world’s intractable problems. Seven nanometer wafers may not be the end of the line for silicon innovation, but it is certainly getting close. This acquisition seems poised to satisfy the immediate here and now, while once again being eclipsed by niche innovation elsewhere, with that elsewhere coming in the quantum domain in three to five years.

Recent articles have come out suggesting HPE is cutting back on quantum research, intending instead to extract more life out of the traditional computing space with processors for deep learning and analytics. HPE has certainly acquired a company that has been admired for decades as being the “tip of the spear” in silicon innovation. HPC innovations certainly can work for today, but that tip of the spear will be blunted by the inexorable laws of physics, making further silicon innovation increasingly more challenging. Future offerings in what has been Cray’s core market will come from quantum innovators. Once quantum reaches economic advantage over high-end classical computing, the industry will see yet another round of business exits for those vendors lacking transformation fearlessness. Like many of HPE’s other hardware-centric acquisitions, this move appears to have reasonable short-term impact and limited long-term upside.

As we move further into May, we will shift from initial earnings reports to larger, detailed reports on the vendors we cover, plus the benchmarks and market forecasts for the broader areas, such as cloud and telecom. And definitely do not miss Wednesday’s webinar on digital transformation.

Monday

• The IBM Cloud report highlights how cloud remains an increasingly key component to IBM’s hybrid business model and long-term strategy. IBM reported single-digit cloud year-to-year growth, at 7%, a remarkably smaller rate than its larger cloud peers, which underscores the continued messaging and go-to-market shortcomings it needs to overcome. Cloud is often relied on as IBM tries to bounce back, but the cloud business also needs some attention. IBM will continue to sell off noncore software assets to hone its hybrid IT focus and messaging — the success of which is largely contingent on the planned acquisition of Red Hat in late 2019 by IBM. — Cassandra Mooshian, Senior Analyst

Wednesday

• Strengthening its focus on premium customers enabled AT&T to improve the EBITDA margins of its Mobility and Entertainment Group divisions in 1Q19, despite competitive pressures hindering subscriber growth. Though AT&T will continue to trail T-Mobile in postpaid phone net additions throughout 2019, AT&T will boost Mobility margins through its premium unlimited data plans and by being disciplined in its device promotions. Conversely, AT&T continues to lose video subscribers to over-the-top platforms, but the operator’s higher DIRECTV price points will help strengthen Entertainment Group margins. — Steve Vachon, Analyst

Thursday

• TBR’s first public sector IT services report of the quarter, Raytheon Intelligence, Information & Services (IIS), will discuss how Raytheon’s IIS business group continues to deliver market-leading fiscal performance, despite the run-off of a major defense sector support contract. IIS delivered double-digit top-line growth in 1Q19, driven principally by continued robust expansion of its core cybersecurity and space programs. Growth in these key sectors, particularly in the classified arena, was critical in enabling IIS to deflect the impact of declining work volumes on the Warfighter Field Operations Customer Support program, though the wind down of this program will become increasingly taxing during 2019. Meanwhile, a newly centralized base of operations in the United Arab Emirates will generate mindshare and market share gains for Raytheon in the Middle East while the company positions itself at the forefront of the 5G revolution in federal IT as the premier contractor to escort defense agencies into the 5G era. Finally, Raytheon is targeting the lucrative European security market as an opportunity to leverage its cyber leadership and expand international sales. — John Caucis, Senior Analyst
• Cisco strengthens its portfolio by attaching services to new product offerings to capture data center, IT infrastructure and workplace transformation engagements. However, declines within its deferred revenue signal the company could face challenges in maintaining services revenue expansion. — Kelly Lesiczka, Analyst
• Capgemini continues to sustain its profitable growth through an operating model based on three pillars: a unified go-to-market strategy that presents one face to the client and sells the entire Capgemini portfolio, industry focus, and an agile and competitive portfolio. Changes Capgemini made during 2018 to its portfolio, organizational structure and sales model enable the company to address rising demand from clients’ business side and strengthen relationships with clients to expand wallet share. Offering industry expertise, such as through the new Unified Commerce Solution for Grocery, enables Capgemini to attract clients’ C-Suites by addressing their business-specific needs. Capgemini has a competitive portfolio and global services capabilities around fast-growing and emerging solutions and revitalized core outsourcing offerings that will continue to drive revenue growth for the company. — Elitsa Bakalova, Senior Analyst
• Industry specialization is becoming a central focus of Atos’ strategy as the company articulates and delivers digital value and customer excellence leveraging its technology expertise and partnerships in areas such as security, cloud, IoT and quantum computing. One of Atos’ strengths is its ability to strictly execute on the plans it sets for its financial performance over three-year horizons and present consistent messaging to the industry analyst community. TBR expects Atos to execute on its plan to provide clients with innovative solutions that enable technology-powered strategies and business models. Deconsolidating Worldline as a stand-alone business as of Jan. 1 is a logical move that will have an immediate positive impact and enable Atos to focus on its core digital services activities. — Elitsa Bakalova, Senior Analyst
• Despite the maturing smartphone market and competition from new mobile virtual network operators such as Xfinity Mobile and Spectrum Mobile, significant opportunity remains for T-Mobile to sustain subscriber growth, exemplified by the company gaining higher postpaid phone net additions in 1Q19 compared to 1Q18. Decreased postpaid phone churn, which has been lower than that of AT&T the past two consecutive quarters, is a main driver of T-Mobile’s higher net additions, as customers are becoming more satisfied with T-Mobile’s service options, network coverage and customer service. — Steve Vachon, Analyst
• The strength of its broadband business will enable Comcast to sustain Cable Communications revenue growth through 2020 despite continued video subscriber losses as consumers shift to over-the-top offerings. Comcast will also sustain revenue growth long term through the company’s burgeoning businesses, including Xfinity Mobile, Xfinity Home and its machineQ IoT venture. — Steve Vachon, Analyst

Friday

• Fujitsu Services benefits from portfolio investments but needs to reorient its focus on client retention to sustain growth. We expect Fujitsu will look to its services portfolio offerings and onshore centers, showcasing its technology expertise to create differentiation and extract additional wallet share as well as generate opportunities outside its traditional client base. — Kelly Lesiczka, Analyst