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

We are still cranking through our initial analysis of vendors’ earnings for the first quarter, with more detailed analysis available two weeks after the announcements.  

Monday

• Growth of Wipro IT Services’ (ITS) emerging business lines, such as Digital Ops and Platforms, shows recent investments are paying dividends; however, steep declines in its legacy outsourcing business are offsetting gains. Though Wipro ITS is moving in the right direction, it will require a more aggressive acquisition agenda to compete with peers. — Kelly Lesiczka, Analyst, Professional Services Team 

Tuesday

• In TBR’s 1Q19 IBM Initial Response, we discussed the waning IBM Z product cycle and its effect across IBM’s businesses. In TBR’s full report on IBM, we will unpack some of the company’s strategies that were announced at IBM THINK 2019 as well as explore the impact of IBM’s quantum computing breakthroughs on its strategy and business performance.
  — Stephanie Long, Analyst, Data Center Team

• Despite experiencing pockets of growth, such as in consulting and cloud, IBM Services’ revenue continued to decline in 1Q19. IBM Services’ struggles to balance market demand with stakeholders’ expectations and the company’s relentless emphasis on improving profitability via productivity, such as implementing new ways of working and infusing automation and AI into processes, overshadowed any revenue growth. IBM has the incumbent advantage, which has been built on the company’s portfolio breadth, global scale and years of execution, making it one of the most trusted technology brands for large enterprises. However, IBM Services will continue to experience fierce competition from peers, such as Accenture, which is using its industry and functional expertise to expand client mindshare, particularly as it invests in talent development and intellectual property and shifts its value proposition to becoming a technology-enabled solutions broker. — Elitsa Bakalova, Senior Analyst, Professional Services Team

Wednesday

• TBR’s 1Q19 Sprint Initial Response will examine why the proposed T-Mobile merger is in Sprint’s best interests, as Sprint’s long-term survival as a stand-alone company is threatened by the company’s weak financial position, subpar network quality and struggle to attract customers apart from utilizing aggressive pricing tactics. — Steve Vachon, Analyst, Telecom Team
• Ericsson is successfully executing its strategies on multiple fronts, as demonstrated by the company’s organic sales growth and improvements in gross and operating margins in 1Q19. Its U.S.-centric 5G strategy has enabled the company to secure large-scale contracts with the country’s Tier 1 operators, as well as with U.S. Cellular, for 5G-ready RAN and LTE densification, and Ericsson will be able to sustain revenue growth throughout 2019 as these contracts ramp. Increasingly optimized headcount and the restructuring or exiting of unprofitable Managed Services and Digital Services contracts are benefiting margins.

Thursday

• Execution of T-Systems’ transformation plan, combined with increased client adoption in emerging areas, will help the company capture sustainable growth. During 1Q19 T-Systems expanded its presence in Europe to increase its work with its existing clients, leveraging its portfolio investments. — Kelly Lesiczka, Analyst, Professional Services Team 

• Mode 2 and Mode 3 services and solutions transition HCL Technologies’ (HCLT) portfolio into newer areas and help extract additional wallet share from clients. Additionally, HCLT pursued investments in 1Q19 to develop niche portfolio offerings, such as within the digital marking services space, to help differentiate from its India-centric peers. — Kelly Lesiczka, Analyst, Professional Services Team 

Friday

• Integrating Capgemini’s established management consulting expertise with digital design and creative studios, as well as with the broader capabilities across its portfolio, will enable the company to provide holistic, consulting-led offerings and approach clients with a business transformation value proposition. — Elitsa Bakalova, Senior Analyst, Professional Services Team

Two weeks in a row cranking out tons of analysis around technology companies, their strategies and performances, and how we see the market changing constantly. As always, connect directly with the analysts if you have questions.

Monday

• In TBR’s 1Q19 Fujitsu Cloud Initial Response, we discuss Fujitsu’s strategy and next moves after its decision last October to stop international sales of K5. An increasingly strategic partnership with Microsoft coupled with continued enhancements to its data center and managed services businesses and capabilities will be ever more critical to the vendor’s long-term success outside Japan. — Cassandra Mooshian, Senior Analyst, Cloud and Software Team

Tuesday

• In TBR’s 1Q19 Alphabet (Google) Initial Response, we track Alphabet’s ability to supplement core advertising revenue with sales of its Hardware products, Cloud services and YouTube subscriptions, as well as its investments in original and licensed video content that have begun to pressure margins. Alphabet’s Other Bets also comes into focus as the company leverages investments in the businesses within this segment, such as Waymo autonomous driving, Verily life sciences and Wing drone delivery, to create revenue streams that are sustainable over the long term. — Michael Soper, Senior Analyst, Telecom Team

• Leidos begins 2019 with a renewed focus on growth and continued robust activity within its public sector healthcare business. TBR’s 1Q19 Leidos Initial Response will highlight two new collaborations to illustrate the increasing strategic importance of healthcare in Leidos’ revamped growth strategy, as well as updates on the company’s ongoing consolidation of its physical assets in the U.S. and expansion of its footprint in the U.K. — John Caucis, Senior Analyst, Professional Services Team

• Digital marketing services (DMS) remains a growth opportunity — expected to reach $132 billion by 2023 — as CX-related content deployment advances to maturity. In TBR’s 2Q19 Digital Transformation Insights Report: DMS, TBR benchmarks 19 vendors that are well positioned to increase their share of the addressable DMS market, which on average expanded in revenue 22% year-to-year in 4Q18, through 2023.— Boz Hristov,Senior Analyst, Professional Services Team

Wednesday

• In TBR’s 1Q19 Apple Initial Response, we will report on Apple’s efforts to shift toward a more services-oriented model as it combats slower product revenue due to lengthening smartphone ownership cycles and global saturation. While Apple’s extensive ecosystem puts it into a strong position to enter the vast content services ecosystem, the company will have to navigate busy service and content markets and overcome experienced and embedded competitors, such as Netflix, Amazon and Spotify. — Daniel Callahan, Analyst, Devices and IoT Team 

Thursday

• With nearly $1 billion in new acquisitions in 1Q19, M&A is once again taking center stage in CACI’s overall growth strategy, enabling the company to align well with shifting defense and intelligence priorities emphasizing agile solution development, accelerated acquisitions cycles, and advanced communications and security products for warfighting and intelligence missions.  TBR will have in-depth analysis of CACI’s most recent acquisitions to expand its portfolio of cyber, electronic warfare and communications intelligence capabilities in our 1Q19 CACI Initial Response. — John Caucis, Senior Analyst, Professional Services Team

Friday

• Cognizant’s strategic framework is in place, enabling the company to capture and accelerate digital opportunities. The recent acquisition of Meritsoft, which will add SaaS capabilities to its Digital Operations arsenal, reaffirms Cognizant’s commitment to digital and will help the company expand its digital platforms within its addressable market. — Kelly Lesiczka, Analyst, Professional Services Team 

• Steady expansion of the number of clients in Tata Consultancy Services’ (TCS) largest segments illustrates the continued traction of TCS’ Business 4.0 framework, designed to drive digital enablement. TBR’s 1Q19 TCS report will discuss hiring trends and margin projections during the remainder of 2019. — Kevin Collupy, Analyst, Professional Services Team

• As Infosys evolves its value proposition and go-to-market strategy, investments in AI, cloud and design thinking remain at the forefront of company executives’ agenda. A recent uptick in performance, evidenced by the healthy pipeline of large deals the company signed in FY19 for a total contract value of $6.28 billion, gives Infosys the confidence to invest and tout capabilities in new areas to secure long-term growth through product-enabled services. Doubling down on its position on the services supply side through investments in innovative portfolio offerings could help Infosys solidify its standing as a trusted outsourcer as it converts bookings to cash.
• — Boz Hristov, Senior Analyst, Professional Services Team

This week TBR will also publish several special reports on recent analyst events, including PwC’s Risk Summit and EY’s annual analyst event.

From time will tell to now is the time

In late 2013 TBR published The next 5 years: A successful strategy for Infosys that examined what it would take for Infosys to catch up with multinational corporation rivals such as Accenture and IBM. We believed Infosys needed to build up nearshore Americas capacity and capabilities, acquire consulting capacity in Europe, and invest in IP — and we were right. More than five years later, Infosys is aggressively executing in all of these areas. But success did not come easy, as the company witnessed a spate of executive departures, including its CEO. Additionally, revenue growth fluctuated: 5.8% in FY13, 11.5% in FY14, 5.6% in FY15, 9.1% in FY16, 7.4% in FY17, 7.2% in FY18 and 7.9% in FY19.  While Infosys is showing appetite to transform its sales strategy through aggressive hiring and training of sales and support staff, the company’s delivery framework remains fragile.

Investments in onshore and nearshore personnel in the U.S. and Europe, including the opening of Innovation Hubs (five in the U.S. and two in Europe) to support Agile-based projects, are positive steps forward. However, it appears these investment decisions were forced on the company by market demand and peer pressure. Recent purchases, including 75% of Netherlands-based ABN AMRO subsidiary Stater, Nordic-based Salesforce consultancy Fluido, and U.K-headquartered digital agency Brilliant Basics, suggest Infosys is well positioned to grow its revenue share from Europe-based operations from its current 24% to 30% in the next two years. These investments have taken a toll on company margins, which declined from 25.8% in FY13 to 22.8% in FY19.

Departing from a margin-first culture is not easy, especially as founder N.R. Narayana Murthy remains involved in board decisions, although behind the scenes. Infosys is trying to offset some of its resources investments by expanding proprietary and co-developed industry-centric IP, but monetization of such offerings is a challenge. Former CEO Vishal Sikka tried to rotate the entire 200,000-plus services workforce to act as a software-like company with the associated KPIs and culture changes, but he failed.

March marked the end of Infosys’ first year in its three-year go-to-market strategy, during which it vigorously shifted the composition of its sales to digitally enabled awards, which contributed 31.2% of total sales in FY19. Navigating the dynamically evolving IT services market will not be an easy task as the company balances execution with operational efficiency to meet stakeholders’ expectations. While the company had the last five years to stabilize its performance and realign portfolio and skills to market demand, the accelerated cycle enabled by adoption of digital transformation initiatives has invited many new participants into the IT services space, forcing Infosys to look for blind spots.

Infosys is far from reaching the scale of Accenture and IBM. However, the company still has a chance to secure a top 3 ranking among its India-centric peers either by doubling down on what it does best — participating on the services supply side — or becoming an exclusive partner for managed services to one of the many consultancies aggressively moving into the IT services space.

TBR published initial findings on Infosys’ 1Q19 quarterly earnings in its recent Infosys Initial Response. TBR will dive deeper into Infosys’ resource management strategy in the April 2019 edition of TBR’s Global Delivery Benchmark. 

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