IoT is not a technology or a market, but it certainly drives revenue

TBR estimates the contribution of commercial IoT to the overall IT market will increase from $456.1 billion in 2019 to $1.7 trillion in 2025, a CAGR of 24.9%. IoT is not a technology or a market, but a technique for applying IT components, made more relevant by the increased ease of connecting sensors and collecting and processing data. It serves as a tool in the larger toolbox of traditional IT solutioning. As vendors and customers move beyond the stigma that IoT is exotic, untested and expensive and begin to understand that IoT is just an iteration of everyday IT solutioning, IoT is being implemented at an increasing rate, albeit slowly and steadily. While these projects are generally smaller, as customers leverage IoT to solve targeted problems and prove ROI, they are set to grow over time and expand into parallel projects, contributing long-tail revenue to vendors that are amenable to projects that are smaller in scope.Dan Callahan, Analyst (See his special report here.)

Additional assessments publishing this week from our analyst teams

TBR’s 2Q19 Hewlett Packard Enterprise (HPE) initial report dives into the recent infrastructure-centric developments within HPE. This particular report will discuss in detail HPE CEO and President Antonio Neri’s pledge to offer everything “as a Service” by 2022 and the ongoing cloud-centric developments the organization has been making to better address the needs of digital transformation. Edge computing is another focus of the vendor, which TBR will touch upon in the initial response and examine more deeply    in the full report. Stephanie Long, Analyst

Leveraging acquisitions to strengthen vertical expertise and product offerings improves HCL Technologies’ (HCLT) competitive position relative to peers. HCLT benefits from the addition of market expertise as well as headcount to support its transformation initiatives. Through inclusive training programs, HCLT equips its existing employees to work with digital technologies in the vertical areas.
Kelly Lesiczka, Analyst

Partnering with technology-led vendors enhances growth segments and will help T-Systems generate revenue growth. However, as the company is slow to reorganize and adopts IFRS 16, profitability continues to struggle. Lesiczka

DXC Technology reinvests savings from automation and facility rationalization to help fund the costs related to attracting and retaining higher-value resources skilled in industry, consulting and/or emerging technology areas. We expect substantial inorganic revenue boosts beginning in 3Q19; however, margins will be pressured in the short term as integration costs mount from the Luxoft acquisition. Kevin Collupy, Analyst

HCLT sets strategy; makes smart move to software

HCLT’s recent acquisitions will develop software services and consulting capabilities, enabling the firm to evolve its strategy to better compete in the dynamic IT services market

At the end of June, HCLT finalized its acquisition of IBM Software products (analysis and details of which can be found in our most recent full report on the company). We believe HCLT is taking the right approach as it develops a dedicated software business unit, as opposed to transitioning corporate culture, sales models and brand identity from an outsourcer toward a software-centric organization, a strategy pursued by Infosys that resulted in culture clashes and conflicting company visions. There are bright spots in developing software products and offerings with a vertical orientation. For example, Infosys’ Finacle platform and Tata Consultancy Services’ BaNCS solution enable both firms to generate banking processes and system transformation engagements that propel financial services revenue. HCLT’s launch of HCL Software as a small business unit will help the company offer products and enterprise software without shifting the entire organization’s vision but still reaping the benefits of an increase in managed services opportunities tied to license and subscription-based revenues around the new products. HCLT is also better suited to bundle its legacy IT and emerging technology offerings using its product-focused sales staff.

In addition, the acquisition of Strong-Bridge Envision will help HCLT strengthen its advisory services. However, TBR believes the company may want to further develop its ability to guide digital transformation projects, pursuing a partnership with an established consulting brand such as PwC or EY. The additional advisory services improve HCLT’s ability to market its software portfolio while folding in offerings that address client demand for business process transformation offerings.

In a messy, transitioning and highly competitive IT services and software market, we think HCLT has been making smart moves to evolve its strategy. As 2019 winds down, we will continue looking at the company’s progress against peers and within the broader digital transformation landscape. 

Embedding multicloud and software-driven services in portfolios helps vendors execute on strategy, expand addressable markets

Google Cloud revenue surpassed the $2 billion mark in 2Q19, doubling in size in six quarters. Under the guidance of CEO Thomas Kurian, Google Cloud is improving its enterprise appeal by launching its multicloud management tool set, Anthos; leveraging acquisitions to build out its migration, storage and analytics capabilities; and expanding its global sales and delivery capacity. Similarly, Salesforce complements internal innovation around solutions such as Customer 360 with ongoing acquisition activity and investment in its partner network. TBR estimates the vendor attained $3.95 billion in revenue as sales teams expanded single-product customer engagements, many of which are led by Service Cloud, into multiproduct deals.

Additional assessments publishing this week from our analyst teams

Capgemini continues to gain momentum in cloud services, with cloud revenue driven by offerings in the Capgemini Cloud Platform portfolio, which supports clients when building, migrating and managing applications and infrastructures in cloud environments. By delivering a cloud-first option, Capgemini enables enterprise and public sector clients to become agile through offerings related to data center modernization, cloud-native solutions, application modernization, intelligent applications, and emerging technologies such as IoT, blockchain and AI. Offering each client its entire portfolio enables Capgemini to provide holistic transformational solutions and effectively compete with peers. Elitsa Bakalova, Senior Analyst

TBR’s Public Sector IT Services Research practice will publish its 2Q19 ManTech report this week.  With top-line revenue expanding 9.4% year-to-year to $537 million, ManTech should be one of the top-performing vendors in 2Q19 in terms of sales growth. ManTech’s top-line expansion owes largely to accelerating spend among classified customers in the Department of Defense (DOD) and Intelligence Community that are increasingly engaging ManTech to enhance warfighting capabilities across all domains, but particularly in space and cyber. ManTech’s addressable market is set to expand and diversify into the civilian sector as the integration of Kforce Government Solutions (KGS) continues. KGS will add 500 employees with large-scale IT infrastructure modernization and transformation expertise, primarily with the Department of Veterans Affairs, to ManTech, while contributing roughly $100 million in revenue (based on revenue of $98 million reported by KGS in 2018). Inorganic sales will largely accrue in ManTech’s Mission Solutions and Services segment, where the core customer focus is the DOD, the Department of Homeland Security and federal health agencies. Look for TBR’s 2Q19 Perspecta report next week, as we examine how the company is leveraging its R&D-led approach to maintain its growth momentum as it begins its second full year as an independent, federal IT competitor. John Caucis, Senior Analyst

Weakness in Cognizant’s core industry segments overshadowed increased growth in digital in 2Q19. The company’s ability to rapidly scale its digital revenue will be key to offsetting this weakness, specifically in Financial Services and Healthcare. In the near term, Cognizant must emphasize cross-sales of acquired assets, such as Zenith Technologies, within its existing and acquired install bases. Kelly Lesiczka, Analyst

Why license when you can buy? Salesforce to acquire ClickSoftware

After 3-plus years of licensing, Salesforce intends to acquire ClickSoftware to augment Field Service Lightning

One week after Salesforce completed its acquisition of Tableau, the vendor announced its intent to acquire ClickSoftware, a field service management solutions provider, for $1.35 billion. ClickSoftware is a practical acquisition target for Salesforce; the vendors have been partners since 2016 and Salesforce licensed ClickSoftware’s field service scheduling and optimization technology to build Salesforce Field Service Lighting. Once the acquisition closes, Salesforce would integrate the remaining capabilities from ClickSoftware’s flagship product, Click Field Service Edge, such as demand forecasting and contractor management, into Field Service Lightning. These additional capabilities would better enable Salesforce to fulfill customers’ field service needs, particularly those of enterprises to manage the scheduling and dispatching of large field service employee bases.

Field Service Lightning is part of Salesforce’s Service Cloud, which exceeded $1 billion in revenue for the first time in 1Q19. TBR expects Service Cloud will surpass Sales Cloud as Salesforce’s largest revenue driver this year. Based on the inflated value of technology companies, ClickSoftware’s revenue contribution to Service Cloud would likely be marginal. Rather than acting as a catalyst for Service Cloud’s revenue growth, ClickSoftware would fill capability gaps in Salesforce’s soon-to-be flagship offering. Why would Salesforce make this acquisition after a four-year-long successful partnership in licensing ClickSoftware’s technology? Well, that licensed technology would become part of the foundation for Field Service Lightning. If a competitor was looking to purchase ClickSoftware’s technology, it could leave an unexpected gap in Salesforce’s portfolio following a fast breakup between the two vendors. So, why not get hitched and make sure no one else takes ClickSoftware off the market?

Salesforce’s front-office portfolio will help the vendor fend off competitors in the field service space

Augmenting Field Service Lightning with the remainder of ClickSoftware’s technology will better enable Salesforce to compete with vendors such as Microsoft, SAP and most notably Oracle. In 2016, when Salesforce first launched Field Service Lightning and partnered with ClickSoftware, Microsoft, SAP and Oracle were acquiring around field service. Since then, each vendor has developed a field services value proposition. For Microsoft, field service is a module within its Dynamics 365, where the vendor also offers AR apps and HoloLens devices that can be utilized by field service workers. Oracle and SAP are leaders in the ERP market but are complementing their field service applications with growing front-office and service-related SaaS offerings. However, a broader and more deeply integrated front-office portfolio would help Salesforce fend off competition, particularly if it integrates a field service leader into its arsenal.

Acquisitions help European-heritage vendors Atos and Capgemini continue expanding in North America and globally

Atos is preparing to accommodate the explosion of data across enterprises by effectively managing, storing, securing and analyzing data. Revenue and cost synergies from the Syntel acquisition will enable Atos to achieve its financial goals in 2019. Newly established relationships with technology partners, the release of new product offerings that support edge and quantum computing, and the planned acquisition of IDnomic in cybersecurity will improve Atos’ ability to deliver business outcomes to clients through next-generation technologies and  sustain the company’s growth through 2020. Atos Europe-based rival Capgemini is reaping the rewards of its strategic expansion into next-generation and industry-specific solution areas, as evidenced by sustained midsingle-digit organic revenue growth over the past several quarters and an increase in digital and cloud revenue as a percentage of total revenue, from 45% in 1H18 to 50% in 1H19. The planned acquisitions of Altran and KONEXUS Consulting Group will solidify Capgemini’s ability to deliver digital transformation to industrial and energy & utilities clients and expand its reach across clients’ C-Suite, increasing its access to budget stakeholders. Portfolio expansion and bookings growth with technology partners such as Amazon Web Services and Microsoft will enable Capgemini to maintain its digital and cloud momentum and modernize its applications development and maintenance services portfolio to sustain growth in Application & Technology, which accounted for 71.1% of revenue in 2Q19. — Elitsa Bakalova, Senior Analyst

Additional assessments publishing this week from our analyst teams

Utilizing partners and leveraging emerging technologies enabled Cisco Customer Experience to maintain profitability and generate growth in 1Q19. As the company continues to invest in its portfolio to offer a broader range of software-driven services, such as for security solutions, and leverage its partner network to support the development of emerging technologies and delivery, we expect revenue growth will improve in 2H19. — Kelly Lesiczka, Analyst

Fujitsu Services’ portfolio investments such as for cloud and hybrid IT are evolving, but an increased pace of restructuring and new branding initiative would further sustain growth. Fujitsu continues to update North America and Europe sales operations to drive productivity and adoption around new portfolio offerings, which will help the company offset challenges within its legacy business. — Kelly Lesiczka

AT&T is becoming a more profitable company despite market saturation, competitive challenges and shifting consumer trends limiting subscriber growth. AT&T’s Entertainment Group and Mobility EBITDA margins continue to improve as the company moves from promotional pricing and transitions customers to premium service plans to boost average revenue per user. Subscriber growth remains challenged, however, due to T-Mobile’s continued dominance in postpaid additions, Xfinity Mobile’s growing momentum and video customers moving to rival streaming platforms. — Steve Vachon, Analyst

T-Mobile’s strong financial and subscriber performance in 2Q19 highlights how the company’s long-term outlook remains favorable regardless of whether the proposed Sprint merger gains final approval. 600MHz network deployments are at the foundation of T-Mobile’s success as its expanded LTE coverage, which is now on par with that of Verizon and AT&T, contributed to reduced churn in 2Q19, enabling T-Mobile to increase postpaid and prepaid subscriber net additions year-to-year despite the maturing wireless market. —Steve Vachon

The federal IT earnings season concludes at TBR this week as Perspecta releases its 2Q19 fiscal results after the close of business on Wednesday, August 14. FY20 began for Perspecta in 2Q19, its second year as an independent federal IT contractor, and the company looks to build off a strong close to FY19, when it successfully defended its incumbency on several ongoing federal programs and accelerated bookings of net-new awards. TBR projects the company will realize year-to-year growth in 2Q19 of between 4% and 5% to reach revenue of between $1.08 billion and $1.09 billion, owing in part to $1.7 billion in new cybersecurity-related programs won during the quarter — much needed contract awards that will help offset the loss of the $2.9 billion NASA End-User Services and Technologies contract to Leidos in 1Q19. Federal budgets in IT and programs to support national defense priorities are expected to sustain growth into 2020. With this spending environment as a backdrop, Perspecta appears well positioned for improving growth and profitability in its FY20. — John Caucis, Senior Analyst

Apple faced another quarter of sluggish revenue as Western consumers hold out for the next generation of the iPhone. However, the company is growing its install base in China and emerging markets, which are paramount for its long-term services play, through discounting, reselling and financing iPhones and other Apple devices. — Daniel Callahan, Analyst

Lenovo has had a few stellar quarters in a row, as it consolidated premium PC market share, reaped higher ASPs as a result of the Intel silicon shortage and benefited from inorganic revenue compares from its Fujitsu PC business acquisition. As we move into 2Q19, inorganic growth will decrease (only one month will include inorganic revenue), the silicon shortage will begin to subside and PC consolidation opportunities will slow. TBR still expects Lenovo will see growth, but it will fall in the midsingle digits. Details on Lenovo’s mobile and data center business will be published this week in TBR’s 2Q19 initial response on the company. — Daniel Callahan

And this week join TBR for a webinar, “The Evolving Battleground for Winning Private Cloud Customers.”  

Blockchain in the context of digital transformation: A slow-moving, inevitable revolution

In fast-approaching fourth industrial revolution, bureaucratic labor will become as nonessential as manual labor became to the agrarian economy with the advent of the combustion engine. Blockchain technology will enable smart contracts throughout our economy and will be the red thread stitching together multi-enterprise business networks for frictionless commerce that will greatly reduce demand for bureaucratic labor. As one management consulting partner put it, “If you are not at the point of consumption or at the point of creation, then your job will disappear.”

In TBR’s latest Digital Transformation Insights Report: Emerging Technology, Senior Analyst Boz Hristov and Principal Analyst Geoff Woollacott describe in detail how blockchain technology sits firmly in the hype phase today and, in little more than a decade, has reasonably distinguished itself from cryptocurrency even as blockchain underpins that digital reality. Solving the coopetition paradox, revolving around establishing common governance and standards across competitive and cross-industry ecosystems, is the biggest challenge, yet offers the long-tail opportunity for vendors.

Additional assessments publishing this week from our analyst teams

IBM Services remains challenged by its internal portfolio and resource transformation, such as in traditional infrastructure management and technology support, and reported a fourth consecutive quarter of revenue decline in 2Q19. Pockets of revenue growth in constant currency in business and technology transformation areas, such as consulting, application management and cloud, indicate IBM Services’ portfolio transformation to higher-value services is working. While profitability will remain IBM Services’ core priority in 2H19, the company’s work with clients around advising, moving, building and managing next-generation technology solutions will continue to increase and begin to offset revenue growth pressures in 2H19. — Elitsa Bakalova, Senior Analyst

TBR’s IBM report highlights some of the recent developments in IBM’s Systems Hardware portfolio as the market awaits the newest refresh of IBM Z, which is likely to be announced at the end of 2019 and become generally available at the start of 2020. Hardware-centric investment trends are also highlighted, for both IBM’s traditions Systems Hardware portfolio and its investments in quantum computing. TBR’s financial projections in this particular iteration of the report include how TBR anticipates the Red Hat acquisition will impact corporate numbers. — Stephanie Long, Analyst

Lackluster performance in traditional IT and telecommunications continues to weigh down T-Systems’ revenue, but cloud-based services will help revenue rebound in 2Q19. Strengthening its partner network improves T-Systems’ innovation as well as drives adoption of its cloud and IoT capabilities. For example, its recent partnership with Software AG allows T-Systems to underpin its Cloud Internet of Things platform with the Cumulocity IoT platform, expanding its delivery scale in Europe and North America.
Kelly Lesiczka, Analyst

HCL Technologies (HCLT) emphasizes its engineering and R&D core services to support foundational revenues as the company balances acquisition integration with portfolio management. With the completion of its acquisition of IBM Software assets at the beginning of July, HCLT launched HCL Software, which we expect will help the firm deliver software and product solutions that bridge HCLT’s legacy services with its Mode 2 and Mode 3 emerging technologies and services, particularly for cloud, digital and analytics, and security. — Kelly Lesiczka

In our upcoming DXC Technology Initial Response, TBR will look at whether DXC has been able to overcome recent pressures stemming from completion of several large contracts without replacement and ongoing headwinds in legacy applications work. — Kevin Collupy, Analyst

Additionally, check out our recent insights into IoT and KPMG, available in our Special Reports section.  

Investments in acquisitions and startups enrich Capgemini’s next-generation solutions portfolio and improve its competitive position

Capgemini has taken multiple steps to enhance its portfolio to drive transformations through next-generation technologies and create business value for clients. The acquisition of Altran to deliver digital transformation in the industrial sector, enhanced relationships with Microsoft around Microsoft Azure solutions and with SAP around certification of industry innovation accelerators in manufacturing and retail, and investment in startups and joint commercial activities exemplify Capgemini’s recent activities to advance its competitive position,” said Senior Analyst Elitsa Bakalova. “Offering deep industry expertise improves Capgemini’s ability to address clients’ business-specific challenges. The company will continue to experience momentum in cloud services, with cloud revenue driven by offerings in the Capgemini Cloud Platform portfolio that support clients when building, migrating and managing applications and infrastructures in cloud environments. Offering each client its entire portfolio of solutions enables Capgemini to provide holistic transformational solutions and effectively compete with peers. The expanded partnership with Microsoft around Microsoft Azure solutions will enable Capgemini to increase cloud professional services activities, especially around cloud application development and maintenance.”

Additional assessments publishing this week from our analyst teams

Apple continues to pursue both service and hardware initiatives to maintain growth. The company is leveraging services and its wide install base to grow continuous revenue streams as device refresh activity wanes amid lengthening device life cycles and slowing hardware advances. While services are growing as a cornerstone strategy for Apple, the company also remains focused on maintaining its market perception as the most advanced smartphone producer. TBR expects the iPhone 11, which is slated to be released later in 2019, to have steady sales, but Apple will likely not see breakout sales like that of the iPhone X until the release of the 2020 model, which will deliver larger hardware upgrades such as 5G enablement. — Dan Callahan, Analyst

Google doubled its revenue over the past six quarters, surpassing $2 billion in 2Q19 as the vendor migrates customers to Google Cloud Platform (GCP) and attains particularly strong revenue growth from selling analytics. Google’s PaaS business will continue to drive revenue growth as enterprises integrate their hybrid environment with Anthos and leverage Google’s analytics, AI and machine learning offerings. In addition, Google supplements growth with G Suite as the company’s growing sales base brings industry-specific versions of the collaboration suite to market and cross-sells G Suite into GCP-oriented customer engagements. — Jack McElwee, Research Analyst

Cognizant has reworked its corporate strategy to emphasize the criticality of digital technologies to its growth plans. Pursuing acquisitions, such as that of Meritsoft, enables Cognizant to diversify its revenue mix, fostering new sources of digital revenues within key verticals. We expect Cognizant will maintain steady revenue growth year-to-year, largely led by demand around its digital operations capabilities.    — Kelly Lesiczka, Analyst

An integrated sales structure, paired with investments in price-competitive AI solutions and on-site presence, will help Infosys transform its brand identity. At the same time as Infosys builds a healthy pipeline, the company may need to calibrate stakeholders’ expectations around margins to sustain trust. — Boz Hristov, Senior Analyst

Reinforcing Verizon’s reputation as a premium wireless service provider will be essential for the operator to sustain revenue growth in the 5G era, as competitive pressures from T-Mobile will intensify, especially given the pending Sprint merger. Though Verizon will continue to trail T-Mobile in postpaid phone net additions over the next several years, Verizon will be able to sustain revenue growth by attracting customers willing to pay a higher price for the operator’s network coverage and premium unlimited data plans. Steve Vachon, Analyst

Sprint continues to undercut its rivals as the operator remains reliant on competitive pricing to attract subscribers given its subpar network coverage, though the company is moving away from more aggressive promotions, such as its previous Cut Your Bill in Half offer, to improve average revenue per user (ARPU). Sprint will continue to struggle to balance ARPU and subscriber growth, however, as many customers are unwilling to pay higher prices for the company’s network quality and Sprint is experiencing high churn rates from customers rolling off promotional pricing offers. — Steve Vachon

Public sector IT services spotlight: The U.S. federal earnings season continues the week of July 29 with three services-led defense contractors — Booz Allen Hamilton (BAH), Leidos and ManTech — releasing their fiscal results for the second calendar quarter of 2019.

As reported on Monday, July 29, Booz Allen Hamilton delivered 10.8% year-to-year growth during 2Q19, the first quarter of its fiscal 2020, and 100% of BAH’s growth was organic as the company continues to eschew acquisitions. BAH’s strong performance in 2Q19 reflects how ideally positioned the company is to serve its federal clientele, as well as a growing number of commercial entities, with a high-value, differentiated solutions suite spanning the strategy, mission and critical IT needs of public and private sector clients alike. As a result of its strong 2Q19 year-to-year growth, BAH is also likely to be the top-performing organic growth vendor in TBR’s upcoming 2Q19 Public Sector IT Services Benchmark (publishing in early October). BAH’s growth and margin performance (operating margin of 9.8%) in 2Q19 mostly outstripped that of the trio of federal competitors that released 2Q19 earnings and fiscal performance last week: Raytheon (YTY growth of 5.3%; operating margin of 9.1%); General Dynamics Information Technology (YTY contraction of 11.6%; operating margin of 7.1%); and Northrop Grumman Technology Services (YTY contraction of 0.4%; operating margin of 10.8%). We believe BAH’s performance relates directly to its solution set, which sits at the juncture of federal agency IT and mission objectives with a differentiating blend of consulting, technology and emerging solutions.           John Caucis, Senior Analyst  

Leidos will release its earnings on Tuesday, July 30, and is expected to post top-line, year-to-year growth of between 5% and 7% to reach about $2.7 billion in 2Q19 revenue. Growth will derive from Leidos’ continued strong pace of new awards, net increases in volume across several high-profile programs, and improving win rates, which are accelerating the conversion of pipeline opportunities into bookings and revenue. Leidos should also be able to offset the wind-down of existing programs and some limited currency headwinds from unfavorable swings in the U.S. dollar. The company has guided for 2019 revenue of between $10.5 billion and $10.9 billion, implying a median 5% growth rate, and record backlog levels achieved in prior quarters positions Leidos well to achieve its projections. — John Caucis  

Finally, ManTech will release its 2Q19 fiscal performance and earnings after business hours on Wednesday, July 31. ManTech’s latest strategic acquisition (Kforce Government Solutions, or KGS) will add roughly $100 million in new revenue and expand ManTech’s opportunity set in the federal civilian segment, augmenting robust Department of Defense (DOD) and intelligence growth while inorganically boosting ManTech’s top-line growth (projected to be between 6% and 8% in 2Q19). ManTech’s top-line growth in 2Q19 should be significantly augmented by the KGS acquisition, as the purchase closed in April and immediately began to contribute inorganic revenue to ManTech’s top line. On an organic basis, classified customers continue to accelerate spend with ManTech, while spending on behalf of ManTech’s principal DOD and Intelligence Community clients continues trending upward. Prior to the KGS acquisition, ManTech tendered a 2019 outlook for full-year 2019 revenue of between $2.05 billion and $2.15 billion, implying growth of between 4.7% and 9.8% over FY18 revenue of $1.96 billion. KGS is expected to contribute between $60 million and $80 million in inorganic revenue during the latter nine months of FY19; this compelled ManTech to elevate its prior guidance for FY19 revenue to instead reach between $2.13 billion and $2.21 billion, implying growth of between 8.8% and 12.8% over FY18. — John Caucis  

Understanding an acquisition: Capgemini snaps up Germany’s energy-centric KONEXUS

Capgemini’s acquisition of KONEXUS, a 30-person Germany-based energy strategy and management consultancy, triggered a reaction at TBR, as earlier this year we had looked at consulting for the energy sector and had been surprised at the relatively small number of acquisitions across the firms we track. Thirty management consultants will be a fractional addition to a company of Capgemini’s size with headcount of roughly 215,000, and the revenue increase will likely be marginal, but the decision speaks to Capgemini’s strategy to build capacity in both emerging areas and areas where the firm has established strengths. Perhaps Germany’s politically charged Energiewende will limit the impact of KONEXUS on Capgemini as a whole, as the strategic advice for companies working in Germany’s energy sector may not easily translate to other countries and regions. More likely, though, energy companies globally will face ever-increasing political pressures to reform and will seek strategic guidance — maybe ever-increasingly from Capgemini.

In our May 2019 full report on Capgemini, we noted that the company’s Energy, Utilities, and Chemicals practice earned the smallest share of revenue by industry (11.3%, but was leading in growth compared to other verticals) and predicted the company would seek acquisitions that will “bolster its services expertise around digital and cloud, such as in automation, analytics, cloud, digital services, AI and IoT, in addition to expanding its onshore presence.” With that context, acquiring KONEXUS appears to be a small move tangential to the company’s broader strategy. Folding KONEXUS into Capgemini Invent could be a way to use experienced management consultants to guide innovation and transformation engagements with a broader set of clients. Some of Capgemini’s peers have similarly made acquisitions expected to provide traditional benefits — enhanced offerings, new clients, additive revenue — while also changing go-to-market strategies, operational approaches to engagements, and overall brand. That may be too much to expect from KONEXUS, but this may indicate where Capgemini is headed.

Look for our initial assessment of Capgemini’s earnings this week.   

While competitors stumble and struggle, Raytheon continues to outperform in IT services for the U.S. federal government

The U.S. federal earnings season kicks off the week of July 22, with legacy defense contractors General Dynamics, Northrop Grumman and Raytheon releasing their fiscal results for the second calendar quarter of 2019.

  • General Dynamics IT (GDIT) passed the one-year anniversary of its $9.7 billion acquisition of CSRA in 2Q19. Absent the inorganic impact of the integration of CSRA — and GDIT’s attempt to camouflage the multifaceted disruption — and GDIT’s portfolio makeover to improve the top line, not surprisingly, we expect sales to fall precipitously in 2Q19. In 1Q19 the bulk of GDIT’s new awards were concentrated in the defense sector. Bookings trends inverted somewhat in 2Q19 for GDIT, with a blitz of civilian sector deal activity with a potential aggregate contract value near $2.4 billion. Much of this new work will be to digitally modernize back-office processes or IT infrastructures for civilian agencies; for example, GDIT won a subcontractor position in 2Q19 on a potential $2 billion IT modernization engagement for the Department of Energy.
  • 2019 is shaping up to be another difficult year for Northrop Grumman Technology Services (TS) as headwinds from large-scale contract expirations continue to impede the company’s goal to revive top-line growth amid its ongoing restructuring program. Northrop Grumman will have to fall back on its margin performance as the best indicator of the success that its operational and portfolio realignment is improving TS’ overall cost structure. Northrop Grumman raised full-year 2019 margin guidance for the TS segment last quarter, and Northrop’s management appears comfortable standing by the elevated outlook, validating the company’s efforts to streamline operations and expand higher-value revenue streams in its order book.
  • Raytheon Intelligence, Information & Services’ (IIS) is expected to again be one of the top performing vendors in TBR’s Public Sector IT Services Benchmark in 2Q19 — IIS’ parent company’s massive merger with United Technologies (announced on June 9) notwithstanding. The Raytheon-United Technologies megadeal will result in a $73-plus billion technology giant broadly diversified across global aerospace, defense and commercial markets. Not to be lost amid the hubbub of the merger is how IIS is expected to again deliver robust growth and TBR public sector benchmark-leading margin performance in 2Q19 while expanding its book of business in the lucrative cyber and space sectors as well as with classified programs. — John Caucis, Senior Analyst  

Additional assessments publishing this week from our analyst teams

Leaders in TBR’s Public Cloud Benchmark continue to deliver strong results, but their closest competitors are aggressively innovating to challenge them. Google and IBM have enlisted Kubernetes to help them decouple PaaS business from Microsoft’s and Amazon Web Services’ (AWS) IaaS-led strongholds on the market, while pressure on Salesforce from both full-suite and modular CRM competitors is building. — Meaghan McGrath, Senior Analyst

Microsoft’s Commercial Cloud business continued to grow in FY4Q19, to $11 billion. Office 365 and Azure products accounted for 52% and 33% of total Commercial Cloud revenue, respectively. Though not yet the primary revenue driver of its Commercial Cloud business, Microsoft’s Azure portfolio is critical to the vendor’s long-term cloud growth, prompting investment in its developer community and tools as well as in high-profile partnerships that challenge AWS. — Meaghan McGrath

Tata Consultancy Services’ (TCS) revenue increased 8.6% year-to-year to $5.5 billion in 2Q19, highlighting the successful alignment of TCS’ service delivery frameworks with the needs of its global client base. Digitally based engagements constitute an ever-expanding share of TCS’ revenue base and backlog, and TCS claims nearly one-third of its revenues are digital-related, which would explain the top-line growth despite marketwide pressures facing legacy services, such as traditional outsourcing engagements. — Kevin Collupy, Analyst

Atos is well positioned to compete in the dynamic digital transformation (DT) services market. With Atos’ shift to an industry-specific go-to-market strategy, developing outcome-based vertical solutions will help Atos not only build a business case that persuades clients to invest in DT but also expand mindshare among existing clients, a necessary move as Atos tries to grow sales from digital services. Expanded cloud capabilities with partners such as Microsoft and Google Cloud enable Atos to design, build, manage and deploy cloud solutions and grow revenues in the segment. Two cybersecurity capabilities set Atos apart from its IT services peers: its portfolio of security services and IP-based solutions, and its verticalized cybersecurity offerings. Partnerships with established technology vendors and increasingly with startups enable Atos to innovate its portfolio and expand client reach. — Elitsa Bakalova, Senior Analyst

Fujitsu continues to invest in its portfolio offerings to provide vertical-oriented solutions, including within travel and transportation as well as healthcare. As the company looks to focus on its primary markets, Fujitsu expands its talent bench to support market presence and portfolio development, evidenced by the opening of a security operations center in its office in Canberra, Australia. The center will enable Fujitsu to maintain its client base in the region while also capturing upselling opportunities. We expect these investments will allow Fujitsu to build out its presence outside Japan to bolster revenue streams. — Kelly Lesiczka, Analyst

Recently, Analyst Stephanie Long hosted a webinar on how the quantum computing market will evolve from research-centric to commercial use cases as the technology reaches economic advantage — algorithm by algorithm — in the next two to five years. Once this occurs, developments will be rapid and organizations with the foundation built to take advantage of quantum computing will quickly reap the rewards of their early investments. Quantum computing, as a transformation-inducing technology, will impact multiple aspects of the IT environment, including power consumption, data generation, security and classical computing tie-ins. The swift impact of quantum computing will be a key factor in determining who wins and who loses in this technological transformation. Check out the replay of this webinar anytime in TBR’s Webinar Portal.

TBR upcoming research dives into quantum computing market

If you are a skeptic of or bullish on the quantum computing market, or somewhere in between, TBR has insights to share with you! Over the next few months, TBR will dissect the developments occurring in the quantum computing market and share a lot of interesting findings.

The week of July 15  

  • TBR’s blog will feature an infographic highlighting some of the key findings from TBR’s recently published Quantum Computing Market Landscape. According to the report: “At its core, quantum accelerates the mathematical computations seeking to map and compare high volumes of independent variables. Machine learning (ML) is expected to be a key use case for quantum computing initially, as the faster time to insight will enable organizations to train their computers significantly faster than could be done with classical computers.”

The week of July 22

The week of Sept. 9

  • TBR is going to Quantum.Tech! This quantum computing-centric industry event will host analysts, customers and vendors over two days and dive into the real world application of quantum and the rapid development of this emerging market. Reach out directly to Long ([email protected]) or Woollacott ([email protected]) to set up a meeting with them during the conference. 

The week of Sept. 16

  • Long and Woollacott will recap Quantum.Tech as well as share their key takeaways from the event and projections around quantum’s impact on the greater IT market in a TBR special report.