Services Weekly Preview: January 14-18

As the first quarter of the new year gets rolling, TBR’s Services team will be reporting on IT services vendors’ 4Q18 earnings, evaluating their performance and strategies, and pulling through trends across the entire IT services space.

A recap of TBR’s 3Q18 findings can be found in the IT Services Vendor Benchmark, now available for download in TBR’s Client Portal.

Here’s what’s you can expect this week:

Wednesday: 

• In 3Q18 we estimated Accenture’s revenue would expand 9.6% year-to-year in 4Q18 due to Accenture’s ability to convert bookings to cash and established delivery frameworks. Seasonal softness and headwinds among Financial Services clients in Europe and U.S. Federal caused bookings to decelerate and consulting book-to-bill ratio to drop under 1, at 0.99, for the first time since 3Q15. Accenture reported revenue growth of 7.3% year-to-year in 4Q18 due to some of these headwinds. However, we expect Accenture’s ability to execute on its consulting-to-operations approach will help it gain traction and expand wallet share among its 182 Diamond clients, including the 13 clients it gained in FY18.
• In our Accenture Healthcare IT Services report, we note Accenture’s M&A ambitions in the healthcare sector seem to have cooled. Accenture finished 2018 without making a major healthcare-related acquisition, despite large companies, both inside and outside the technology services sector, leveraging M&A to enter the digital healthcare space and accelerate investment in healthcare IT innovation. While a continued robust volume of M&A activity in healthcare IT is expected in 2019 and will only serve to further inflate the valuation of healthcare IT acquisition targets, Accenture’s fiscal health surpasses most competitors’ and it could compete vigorously for these acquisitions. Because Accenture is focused on using M&A to enhance nonhealthcare-related growth initiatives, high-quality healthcare IT and consulting assets are falling into the hands of competitors with aggressive M&A strategies. TBR expects Accenture will stop allowing peers (especially smaller peers) to snatch up high-quality assets, IP and capabilities and will narrow the healthcare IT capabilities gap, as it has done in the digital market space.

Friday: In 3Q18 we estimated Wipro IT Services’ (ITS) revenue would remain flat from the year-ago quarter as weaknesses in core services and solutions offset expansions in the company’s digital business. Wipro ITS’ ability to upsell its clients helped extract additional wallet share from its top five clients; however, the company faces pressure in client retention, as its total number of active clients dropped during 3Q18. We expect these challenges combined with the elimination of Wipro ITS’ data center hosting business will have negatively impacted revenue performance during 4Q18.

Last week TBR rolled out its initial assessment of Tata Consultancy Services (TCS). In 3Q18, based on TCS’ historical conservatism regarding acquisitions, TBR predicted TCS would likely remain quiet on the M&A front in 4Q18: The company “has demonstrated a strong preference for expanding its portfolio and global delivery resources organically rather than through M&A.” Over the last two years (driven by the digital wave), we have observed TCS earmarking free cash flow and investment capital to internal R&D and co-innovation with clients at regional innovation hubs rather than making acquisitions (unlike more acquisitive peers, such as Accenture and Cognizant). However, TCS surprised us with not one but two acquisitions in November: BridgePoint Group (financial services consulting) and W12 Studios (digital and creative design). Given TCS’ four-year hiatus from M&A and that these acquisitions are small-scale and will not impact TCS’ revenue substantially (TBR estimates they will contribute only $10 million to $20 million in new organic revenue annually, compared to TCS’ $20 billion in sales expected in FY19), we do not expect TCS to acquire again until these new assets are fully and successfully integrated. Given TCS’ four-year hiatus from M&A, and even though these acquisitions are small-scale and will not substantially move the revenue needle for TCS (we estimate both companies will only contribute between $10 million and $12 million in new inorganic revenue on an annual basis – TCS will generate over $20 billion in sales in its fiscal 2019), we expect TCS will not make further acquisitions until the newly acquired assets are fully and successfully integrated.  We believe this quiet period could end, however, by 2H19, as TCS is compelled to shed its traditional aversion to inorganic growth to keep from losing more addressable market to peers such as Accenture, which has acquired its way to the top of the digital marketing space. For additional information on TCS, contact Senior Analyst John Caucis at [email protected].

In the next few weeks we will issue our initial 4Q18 reports on each vendor in TBR’s Services portfolio.