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Overall revenue growth year-to-year for the vendors in TBR’s IT Services Vendor Benchmark will accelerate during 2025 aided by managed services activities, innovative portfolios and upskilling

As we review financial results from 3Q24 and 4Q24, we will likely see that macroeconomic uncertainty caused an overall IT services revenue deceleration in 2024. However, IT services spending will continue as clients seek run-the-business managed services opportunities to operate in challenging market conditions.
 
A new wave of outsourcing demand is picking up speed as buyers are inclined to switch from innovation to business resiliency in the event of economic turbulence. Multiple IT services providers are racing to capture as much business in the managed services space as they can before GenAI [generative AI] picks up and threatens the core value proposition centered on human-backed service delivery.
 
While vendors are experiencing a slowdown in consulting activities due to limited discretionary spending, the U.S. Federal Reserve’s three federal funds rate reductions during 4Q24 and general market expectations of two cuts in 2025, will likely improve buyers’ confidence and boost discretionary spending. TBR expects IT services peers with established consulting capabilities will race to capture the potential rise in spending, compelling vendors to constantly evaluate their value propositions to ensure trust and service quality. This is especially important as the prolonged slowdown in discretionary spending has given buyers an opportunity to assess digital stacks and vendors’ performance.
 
TBR expects IT services revenue growth for benchmarked vendors to accelerate during 2025 compared to rates in 2024. Broad-based investments in innovative portfolio offerings and acquisitions along with upskilling existing employees and recruiting higher-caliber talent in onshore and nearshore locations will contribute to revenue growth acceleration.
 

To position for growth in 2025, vendors continue to pursue opportunities around AI and GenAI, expand outsourcing capabilities through engineering services, and build local relationships in India

3Q24 Trends

Vendors invest in AI and GenAI solutions: While the overall short-term revenue growth slowdown in TBR’s IT Services Vendor Benchmark suggests some vendors might be in financial distress, the pipelines of AI- and GenAI-related opportunities suggest vendors are capturing emerging opportunities. Procurement, sales and marketing, customer service and software development are the go-to use cases around GenAI adoption. Use cases with demands on data, dependencies on external data and/or long horizons to ROI remain the subjects of innovation sessions, proofs of concept and road maps.
 
Vendors develop engineering services portfolios: Multiple IT services providers are enhancing their outsourcing capabilities by investing in engineering services and silicon design services. Such initiatives position vendors for a new wave of outsourcing services funded by operational technology buyers, which are a new type of buyers for some of the vendors. GenAI provides a new conduit for managed services opportunities, as the integration of new applications and infrastructure gives vendors a natural starting point to build their managed services pipelines. Enhancing outsourcing capabilities by investing in engineering services and silicon design services will help vendors control the GenAI-related disruption of human-driven service delivery models and mitigate potential revenue cannibalization.
 
Vendors develop innovation capabilities in India: India remains a region of investment — from both a revenue generation and a global service delivery standpoint — as vendors strive to build relationships with local clients to diversify geographic reach. According to TBR’s Fall 2024 Global Delivery Benchmark, “investing in India remains a priority for most vendors, as the low-cost labor in the country continues to offer a way for vendors to improve profitability. The difference this time is that vendors also aspire to drive sales from within the country. Lack of native industry-skilled consultants, combined with a smaller number of industries that are ripe for digital transformation compared to Western economies, might create a profitability headwind if vendors lack the C-Suite permission and brand recognition.”
 

 

Vendors use acquisitions to deepen functional and industry expertise and grow revenues

IT services providers are gradually accelerating acquisition activities compared to 2023 as they strive to diversify portfolios with niche expertise and expand client reach. In 3Q24 IBM used acquisitions to expand client reach across sectors and enhance capabilities.
 
During the first nine months of 2024 IBM completed three acquisitions in IBM Consulting and five acquisitions in IBM Software, supporting IBM’s strategy to expand in hybrid cloud and AI. IBM paid a collective cost of $2.8 billion. In comparison, IBM completed seven acquisitions during the first nine months of 2023 for an aggregate cost of $5 billion, approximately $4.6 billion of which was for the Apptio acquisition.
 
Accenture’s acquisition strategy remains unrivaled, with the company spending $6.6 billion on 46 transactions in FY24 (ended in August 2024), up from $2.5 billion in FY23 and $3.4 billion in FY22. The company plans to spend another $3 billion in FY25. The broad-based targets Accenture pursues highlight the company’s efforts to maintain a diversified portfolio and skill sets while ensuring it captures inorganic revenue boosts and positions itself for long-term organic revenue growth.

Industry view

While financial services is a leading revenue contributor for some of the 17 benchmarked vendors with available data, accounting for 25% of total revenue in 3Q24, revenue growth in the vertical has declined for the past three consecutive quarters. Macroeconomic headwinds in financial services subsectors, such as mortgages, asset management, investment banking, cards and payments, have been negatively affecting vendors’ performance in the sector.
 
These headwinds have been driving revenue growth deceleration for some of the vendors in the U.K. & Ireland and in North America, typically the two largest revenue-contributing geographies for IT services activities in financial services for the covered vendors. Other vendors are alleviating revenue growth pressures by ramping up activities with large banking clients in areas such as cost takeout and transformation programs.
 
Financial services will remain a leading revenue-generating segment for some of the subset of 17 benchmarked vendors with available data. TBR expects revenue growth pressures in financial services to ease in 2025, as some of the leading IT services providers in the segment, including India-centric Cognizant, TCS, Infosys, Tech Mahindra and Wipro, experienced revenue growth in 3Q24, albeit in the low single digits.
 
Such vendors are benefiting from increased interactions among financial services clients, as these clients look to drive IT modernization and optimization for efficiency and enhanced experience. Financial services is a leading revenue generator for India-centric vendors. These vendors — along with Capgemini, which has stabilized revenue growth in the sector — are optimistic about future revenue performance in financial services, as discretionary spend continues to improve among clients in the capital markets, mortgage and card processing sectors in the U.S., a trend that began in 2Q24.
 
Other vendors, such as Accenture and Kyndryl, continue to report declining revenues but are ramping up activities with alliance partners and winning new deals, which will contribute to revenue generation and help alleviate revenue growth pressures during 2025.

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Expansion accelerated in the federal IT market in 3Q24 as renewed M&A activity by several federal IT vendors augmented strong, stable demand for digitally based IT modernization

Statutory year-to-year revenue growth for the 11 benchmarked vendors in the U.S. federal market on a weighted average basis rose 100 basis points sequentially, increasing from 8.3% in 2Q24 to 9.3% in 3Q24. Acquisitions by AFS (Cognosante), BAH (PAR Government Systems Corporation [PGSC]), CACI (Quadrint in 1Q24 and Azure Summit Technologies [AST] in 3Q24), CGI Federal (Aeyon), General Dynamics Technologies (Iron EagleX) and KBRWyle (LinQuest) generated an inorganic tailwind to overall market growth of roughly 180 basis points in 3Q24.
 
Federal IT executives (e.g., CACI CEO John Mengucci) have indicated that the M&A market became more buyer-friendly during 2024, prompting several benchmarked vendors to leverage acquisitions to address portfolio gaps in multiple areas, including digital transformation (DT) and emerging technologies for classified defense and intelligence operations. Vendors have been acquiring, and will continue to hunt for, smaller peers with scalable cloud and digital modernization capabilities as well as deep existing (and likely cloud-related) relationships with federal agencies.
 
Underpinning inorganic market growth is enduring robust demand for digitally transformative technologies in AI, cloud, analytics and data science, as well as the continued need to upgrade baseline IT infrastructures across the federal sector to accommodate digital modernization.
 

Civil agencies continue to aggressively invest in cybersecurity, health IT and Agile-based software systems, leading to sustained double-digit civil sector IT spending growth

Weighted average growth in the civilian sector accelerated 80 basis points sequentially, rising from 9.6% in 2Q24 to 10.4% in 3Q24. Vendors including BAH and Leidos have posted multiple quarters of double-digit growth in their respective civil units as of 3Q24, with robust rates of growth expected to persist well into 2025. Sector growth was sustained at or near 10% throughout federal fiscal year 2024 (FFY24) as demand among civil agencies remains robust for comprehensive zero-trust and cyber incident support solutions, particularly by the U.S. Department of Homeland Security (DHS), the Department of Health and Human Services (HHS), the IRS and NASA.
 
Attracting and retaining cybersecurity talent also remain top priorities for nearly all civilian agencies, which are tapping vendors like AFS, BAH and Deloitte Federal for human resource advisory services. NASA launched an eight-year, $2 billion program, NASA Consolidated Applications and Platform Services (NCAPS), during 3Q24 to develop and deploy Agile-based software for over 200 IT systems, with vendors including CACI among the primary awardees.
 
Health IT is generating new revenue and profit streams for the benchmarked vendors, and agencies including the HHS (and its subagencies, CMS, the CDC and NIH) are seeking agencywide AI and analytics adoption services. The top five benchmarked vendors in year-to-year civilian sector revenue growth in 3Q24 were AFS (25%), BAH (16.1%), SAIC (10.8%), Maximus (9.3%) and CACI (7.9%).

Federal IT spending remained robust throughout FFY24, and the market appears poised for another strong year in FFY25, even as CY25 begins with yet another continuing resolution

TBR projects weighted average year-to-year federal IT services revenue growth for the 11 benchmarked companies will decelerate to between 8% and 8.5% in 4Q24, down from 9.3% in 3Q24. We anticipate weighted average year-to-year revenue growth in the defense sector will fall to between 6.8% and 7.3% in 4Q24, down from 8.6% in 3Q24, while civilian revenue growth remains between 10% and 10.5% in 4Q24, in line with the 10.4% increase in 3Q24.
 
Four leading federal systems integrators — BAH, CACI, Leidos and SAIC — as well as smaller federal IT peer KBRWyle elevated their respective revenue growth forecasts for their current fiscal year when tendering 3Q24 fiscal results, indicators that the federal IT macro environment will remain mostly growth-friendly through FFY25.
 
The new federal fiscal year began with a continuing resolution (CR) that extended government funding until Dec. 20, when a subsequent CR was enacted to fund federal operations until March 14, 2025. Further CR extensions in FFY25 would cause budget delays that could impede the ability of federal IT contractors to convert backlog into revenue, but most vendors expect revenue growth to remain on a solidly upward growth trajectory in FFY25.
 

 

Pressures on resource management teams at federal IT contractors continue easing as the federal technology labor market returns to pre-pandemic rates of employee attrition and retention

Federal IT vendors are expanding training of their workforces across a variety of emerging technologies, including AI, analytics, cloud, EW, SIGINT and communications. The competition for talent in federal IT continues to cool, according to executives at several vendors, who have indicated that current trends in the labor market in federal technology are reminiscent of those seen in 2020. Recruiting and upskilling initiatives at federal IT vendors emphasize skills in AI/GenAI, machine learning and security technologies.

Spotlight on IT and professional services vendors serving the public sector: Resource management

Leidos CFO Chris Cage noted in the company’s 3Q24 earnings discussion that employee retention levels remain at all-time highs, as the federal IT labor market continues to cool after the hyper-competitive, post-pandemic period. BAH CFO Matt Calderone indicated his firm received over 100,000 applications in one month during 3Q24.
 
Amanda Christian, CACI SVP of Contracts and Subcontracts, is leading an effort to consolidate the company’s finance, accounting, contracts and subcontracts activities to enhance cross-collaboration and improve the company’s already strong win rates on net-new awards and recompetes.
 
Peraton continued to support Dakota State University’s CybHER Security Institute this summer to encourage young girls to pursue careers in cybersecurity. The company has recently ramped up its efforts to develop a cybersecurity talent pipeline. Peraton has promised to double its related apprenticeships, hire over 200 interns, set up an initiative to help people pivot into cybersecurity, and expand its ties with community colleges over the course of 2024.

 

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FWA will persist as the dominant 5G use case for operators for foreseeable future as ROI of emerging use cases for 5G SA and 5G-Advanced remains uncertain

Communication service providers (CSPs) in many countries (developed and developing) globally will leverage 5G fixed wireless access (FWA) to provide competitive high-speed broadband services. CSPs view 5G FWA as a viable and, in many cases, more cost-effective alternative to traditional fixed broadband services.
 
In many cases, FWA also provides CSPs with a time-to-market advantage versus traditional, fixed-access operators in greenfield environments such as rural areas. According to the November 2024 Ericsson Mobility Report, more than 130 CSPs globally are currently offering 5G FWA services.
 
The U.S. remains a market leader in FWA adoption as T-Mobile and Verizon recently updated their FWA customer targets to reach 12 million and up to 9 million customers, respectively, by the end of 2028. Additionally, TBR believes fiber-poor markets, such as Germany, the U.K. and India, are especially attractive candidates for 5G FWA as they provide a faster and more cost-effective way to deliver fiber-like services to end users compared to building out fiber to the premises (FTTP). TBR notes that deploying fiber everywhere is not economically feasible and that governments are becoming more aware that FWA is a viable alternative.
 
Despite its potential to generate revenue and customer growth, TBR believes FWA is largely viewed as an ancillary offering in the mobile industry and is lacking a level of attention and innovation in the market. Additionally, existing standards do not adequately account for FWA, and network architectures are not optimized to fully support this use case. Spectral efficiency technologies tailored to optimize FWA traffic could free up significant capacity on existing networks, which could then be utilized for other purposes.

Lack of a clear ROI for the private sector to justify investing sufficiently in 6G puts the fate of the technology into the hands of the government

The telecom industry continues to struggle with realizing new revenue and deriving ROI from 5G, even after five years of market development. TBR does not see a solution to this challenge, and with no catalyst on the horizon to change the situation, CSPs’ appetite for and scope of investment in 6G will likely be limited. TBR expects CSP capex investment in 6G will be subdued compared to previous cellular network generations and deployment of the technology will be more tactical in nature, which would be a marked deviation from the multihundred-billion-dollar investments in spectrum and infrastructure associated with the nationwide deployments during each of the prior cellular eras.
 
In a longer-term effort to address this situation, TBR expects the level of government involvement in the cellular networks domain (via stimulus, R&D support, purchases of 6G solutions and other market-influencing mechanisms) to significantly increase and broaden, as 6G has been short-listed as a technology of national strategic importance.
 
With that said, 6G will ultimately happen, and commercial deployment of 6G-branded networks will likely begin in the late 2020s (following the ratification of 3GPP Release 21 standards, which is tentatively slated to be complete in 2028). However, it remains to be seen whether 6G will be a brand only or a legitimate set of truly differentiated features and capabilities that bring broad and significant value to CSPs and the global economy. Either way, the scope of CSPs’ challenges is growing, and governments will need to get involved in a much bigger way to ensure their countries continue to innovate and adopt technologies deemed strategically important.
 

 

Global CSP spend on 5G infrastructure is slowly growing following a dip in 2024 as CSPs reassess their capital allocation and become more conservative

A pull forward of capex into 2023 in the U.S. and India resulted in a decline in CSP 5G capex in 2024, but slow growth will resume in 2025 as CSPs gradually deploy additional 5G base stations for coverage and capacity as well as roll out 5G core.
 
Though some CSPs will continue to test and commercially deploy the newest technologies for 5G, most CSPs are in no rush to deploy 5G Stand-alone or 5G-Advanced due to the lack of ROI-positive B2B use cases.
 
FWA is one key area that will receive increased attention and investment through the forecast period as more CSPs legitimize the technology as an economically viable means of bridging the digital divide and bringing more competitive broadband services to existing markets that have fixed access.
 

 

CSP investment in 5G infrastructure and technologies is being limited by ROI uncertainties

Phase 3: Ecosystem maturity (2025-2030)

• Most CSPs will have at least begun commercial deployments of 5G SA.
• Global operators implement 5G-Advanced, which is dependent on a 5G SA core, to realize benefits in areas including network performance, sustainability and enhanced AI/machine learning (ML) capabilities.
• Network slicing will mature and become commercialized, likely creating new 5G B2B revenue opportunities for operators.

Enterprise 5G use cases in areas including private cellular network and multi-access edge computing will gain greater traction but account for a relatively limited portion of overall CSP revenue. FWA will remain the most predominant 5G revenue-generating use case, likely contributing tens of billions of dollars in net-new revenue annually for CSPs globally.
 
The first 6G specification in 3GPP Release 21 is expected to be finalized in 2028. Initial commercial 6G network deployments are expected by 2030.

TBR assessment

CSPs are becoming more conservative about investing further in their 5G networks until they see a clear path to ROI. LTE remains sufficient for most customers, and the technology is likely to persist in the market for an extended period. This CSP approach is drawing out the migration to the new RAN architecture (e.g., open vRAN) and to 5G SA, which uses a 5G core. 5G-Advanced will lead to a slight increase in capex but will not reach anywhere near the peak levels experienced in prior years.

Scope of government support for the telecom industry will increase and persist to facilitate 6G market development

The persistent lack of ROI to justify private sector investment in 6G (and cellular networks more broadly) will ultimately push governments further into the telecom industry, prompting them to increase the scope of their involvement in the wireless technology ecosystem as well as embed these support structures more deeply in the market.
 
During the first half of the 5G cycle, governments from various countries around the world pumped many hundreds of billions of dollars in aggregate into their respective domestic technology sectors via various stimulus programs, which provide direct or indirect capital, low- or zero-interest rate loans, as well as subsidies and other means of market support. Governments have also been fostering and overseeing various consortiums and other initiatives to promote 6G market development.
 
Still, additional government backing will be required to enable the full benefits of 6G to come to fruition. Governments have a vested interest in supporting the telecom industry and the broader technology sector as the telecom industry provides innovations of societal and national security importance and serves as foundational infrastructure to support long-term economic development.

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Persistent TIS revenue contraction will cease in 2025 as growth catalysts emerge

While TIS revenue continued to shrink among the vast majority of benchmarked vendors, TIS operating margins continue to recover as the business mix becomes more favorable and India’s coverage builds wind down

Aggregate telecom infrastructure services (TIS) revenue among benchmarked vendors declined 4.8% year-to-year in 2Q24, falling across all segments and regions. All but six vendors saw TIS revenue decline year-to-year in 2Q24. Several vendors, including Nokia, Ericsson, Samsung and Ciena, are seeing sharply lower revenue in India as 5G RAN rollouts by Reliance Jio and Bharti Airtel have gone post-peak. This will create difficult comparisons for vendors through at least 3Q24. Huawei and ZTE are also seeing their maintenance revenue in India evaporate as their installed bases of LTE and optical equipment is replaced by trusted vendors.
 
Simultaneously, vendors such as Cisco, CommScope, Fujitsu, NEC, Nokia and Samsung continued to be hampered by U.S. Tier 1 communication service providers (CSPs) significantly reducing or shifting their capex budgets following a peak in spend in 2022. Lower spend on 5G RAN deployments in China, which also peaked in 2022, is impacting a narrow set of vendors, including China Communications Services (CCS), Ericsson, Huawei, Nokia and ZTE, as new deployments in the country are focused on capacity enhancement, which is typically less intense from a TIS perspective.
 
The shift that is occurring as CSPs wind down their 5G coverage rollouts in the key countries of China, the U.S. and India and focus on densification is helping drive operating margin growth. Declining deployment activity, which tends to carry the lowest margins among TIS segments, in these markets — especially India — is helping to improve operating margin.
 
In 2Q24 deployment services constituted 17.7% of aggregate revenue, down 110 basis points year-to-year. Benchmarked vendors’ aggregate TIS operating margin increased year-to-year for the third consecutive quarter, following six consecutive quarters of declines. Aggregate operating margin grew from 10.8% in 2Q23 to 11.6% in 2Q24.
 
TBR attributes the increase in large part to a favorable revenue mix, with maintenance services growing to 34.1% of aggregate revenue, up 100 basis points year-to-year. The 5G gear vendors have built out in the aforementioned countries over the past few years is leading to follow-on support revenue.

With CSP 5G spend post-peak in India, the U.S. and China, RAN-centric vendors universally saw their TIS revenue decline in 2Q24

 

 
2Q24 Total Benchmarked Revenue for IaaS and PaaS (Source: TBR)India-based IT services firms Tata Consultancy Services (TCS) (a Tier 1 supplier in 2Q24), Infosys, Tech Mahindra and Wipro are winning deals from CSPs to support their evolutions to digital service providers. These vendors are helping customers migrate network and IT applications to the cloud and implement new business models. These firms have recently been hampered in part by lower application integration spend as CSPs in key markets such as the U.S. and Europe adopted a cautious cash flow management posture and paused some digital transformation activity.
 
Like Tier 1 vendor Amdocs, Tier 2 vendor CSG is a SaaS-centric, primarily BSS-focused, company offering revenue management and digital monetization products in a scalable managed services model. CSG has expanded account share among key clients in the U.S. over the last several years — namely, cable operators Charter and Comcast — and abroad, particularly in APAC and with an unnamed client in CALA, where CSG is ramping up a relatively large BSS contract. CSG’s TIS revenue declined in 2Q24 due to lower revenue from an unnamed global telco in Europe.
 
Samsung has executed on significant 5G work for CSPs that are based primarily in the U.S., India, South Korea and Japan. Samsung’s TIS revenue declined year-to-year in 2Q24 due to slowing spend at Verizon, which is Samsung’s largest customer by revenue, as well as in India, where Samsung participated in 5G RAN rollouts for Bharti Airtel and Reliance Jio, though at lower levels than Ericsson and Nokia.
 
Like RAN vendors in India, Ciena’s TIS revenue in the country declined significantly as 5G-adjacent projects wound down. Ciena offset this decline with strong software-related services revenue growth in developed countries.
 

 

Vendor SL&C revenues largely declined as large-scale 5G and greenfield rollouts wound down and new network business models and arrangements proliferated

Site location and construction (SL&C) work is often subcontracted to local vendors (such as CCS) with better access to resources in a given area. The SL&C market is in decline as temporary gains driven by 5G deployments in China and the U.S. as well as some greenfield deployments have concluded.
 
Pockets of growth include fiber rollouts for broadband access, backhaul and/or fronthaul, and the deployment of small cells. However, the relative volume of spend on these tasks is significantly lower than that for traditional SL&C for macro cell sites.
 
TBR has a negative long-term outlook for the SL&C market as CSPs shift their focus to adding incremental capacity to their existing macro sites, partially offset by growing CSP investment in small cell sites. This densification primarily consists of software upgrades and/or requires adding new radios to existing sites. CSP consolidation also weighs on the SL&C market.
 
New network architectures and business models, including network-sharing arrangements, neutral host providers, satellites to provide coverage for rural and/or remote locations, and third-party infrastructure owners such as tower companies increasingly owning cell sites and promoting the colocation of operator equipment, also reduce the need for net-new sites.

North America TIS revenue continued to decline in 2Q24, but at an improving rate as growth catalysts begin to emerge, including in Canada, where recent M&A and vRAN investments are driving growth

Benchmarked vendors logged a 1.4% year-to-year decrease in aggregate TIS revenue growth in North America in 2Q24, a dramatic improvement from an 8% decline in 1Q24 as year-to-year comparisons turned more favorable and Ericsson began to receive meaningful revenue from its Cloud RAN rollout for AT&T.
 
Still, revenues declined due to numerous factors, including Verizon’s and AT&T’s C-Band rollouts being post-peak as well as T-Mobile’s build-out of its 2.5GHz spectrum being post-peak. In addition, CSPs are awaiting government funding before expanding their fiber footprints, and DISH drastically reduced spending in 2H23 and 1H24 after it reached a key coverage milestone in June 2023 and it neared bankruptcy before receiving new funding in 2H24.
 
TIS spend in the region is positioned to grow in 2025 as comparisons become more favorable and CSPs focus on building out fiber access, including by leveraging the BEAD Program, through which CSPs will receive federal funds that are currently being disbursed to states to bring broadband to the unserved and underserved.
 
The BEAD Program has seen numerous delays and will likely run through the mid-2030s, later than the original 2028 time frame. The program will benefit a somewhat different slate of vendors compared to the midband 5G build-out, as fiber will be the primary technology deployed. Nokia will be one of the biggest beneficiaries due to its embrace of Build in America requirements. Ciena will also benefit, due in part to its 4Q22 acquisitions of Benu Networks and Tibit. Meanwhile, Ericsson and Samsung will have no role in BEAD-related fiber deployments, though they could participate in fixed wireless access (FWA) build-outs.
 
5G development continues in Canada through measures including builds in the 3.5GHz spectrum band, BCE’s capital investment acceleration program, Telus’ vRAN build leveraging HPE and Samsung, and the replacement of equipment from China-based vendors. Tier 2 operators in Canada are also advancing their 5G strategies.
 
Canada CSPs are focused on deploying fiber across their footprints and will expand 5G services to new spectrum bands, including the 3.8GHz band, which Bell Canada began deploying in 1H24. Rogers’ acquisition of Shaw Communications is also driving spend due to investment commitments made by the merged entity and Videotron, which acquired a piece of Shaw.