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India-centric IT services vendors focused on protecting margins to survive rough market conditions

Select vendors pursue alliances and deals in the growing cloud market to offset choppy financial performance

During the first couple quarters of the pandemic, Cognizant (Nasdaq: CTSH), HCL Technologies (HCLT), Infosys (NYSE: INFY), Tata Consultancy Services (TCS) and Wipro (NYSE: WIT), the India-centric vendors covered in TBR’s IT Services Vendor Benchmark, looked to form partnerships and sign new deals, especially those around cloud capabilities, with strong patterns of continued growth in cloud implementation, migration and advisory to offset deteriorating areas in traditional outsourcing engagements. For example, Wipro’s partnerships with cloud infrastructure experts, such as Google (Nasdaq: GOOG) and Microsoft (Nasdaq: MSFT), will allow Wipro to build solutions off these technologies and pair them with its advanced AI and automation capabilities to strengthen its position in the market.

To mitigate the damage caused by COVID-19, the India-centric vendors will also make resource management improvements, such as enhancing their training and hiring efforts, and solidify existing client relationships by supporting clients through optimization and digital transformation offerings as they transition to digital business practices. Cognizant must secure alliances to bolster the company’s cloud and analytics capabilities while focusing on internal stability.

HCLT performed rather well financially, all things considered, and should utilize its cloud and software power to further develop its portfolio mix, leading to improved client satisfaction. TCS, on the other hand, should capitalize on its global presence as well as its diverse portfolio to gain traction and improve its financial performance. Wipro also struggled during 1H20, but its financial performance is expected to improve if the vendor focuses on acquisitions, similar to its recent purchase of Europe-based 4C, to add new sources of cloud services revenue in the region while driving portfolio investments around cybersecurity. Similar to HCLT, Infosys came through 1H20 mostly unscathed, due to its healthy pipeline and a strong first quarter. The company should continue to tap into new areas of opportunity, such as digital transformation and blockchain, using its recent partnerships with Essential Utilities and the National Bank of Bahrain.

True to their business models even in a pandemic, India-centric IT services vendors prioritized margin protection as a primary damage control strategy during COVID-19. To adjust management operations and combat growing company expenses, IT service vendors will likely increase employee training and look to hire internally to fill positions. Additionally, TBR believes it is imperative for vendors to continue their focus on upselling to existing clients and leaning on strategic partnerships to offset revenue losses due to geographic macroeconomic disruptions.

Two Back, Three Forward: All about consecutive quarters

In our new weekly blog series Two Back, Three Forward, we look at two numbers in TBR reports from the prior week as well as three numbers from our upcoming reports, highlighting the analysis TBR provides and the vast amount of data — the numbers — we’re working with every day. It’s all about the data and what that data means to you.

Two Back

$1.47B, Cognizant’s 4Q19 earnings from financial services clients: As noted in our full report, Cognizant’s Financial Services (FS) revenue increased last quarter, but at a slower pace than the company overall, partly due to softness from European banking clients, according to Cognizant. We’ve heard this complaint from other India-centric vendors and will be publishing a special report this month on what those companies have been doing to offset those pressures. To keep some context, FS remains Cognizant’s largest vertical, at 34.3%, but this trend bears watching.

3, consecutive quarters IBM’s healthcare IT services revenue has declined: 2019 was unquestionably an off year for IBM’s healthcare IT services (HITS), but our most recent analysis indicates the company will rebound in 2020 through new leadership, partnerships and technologies. Considering IBM’s long history of excelling in all three of those areas, we’re predicting a modest 2.2% expansion this year. See the full IBM HITS report for all the analysis.

Three Forward

71.2%, contribution of DXC Technology’s Cloud Professional Services segment to overall cloud revenue, per TBR estimates: Nothing surprising about cloud professional services earning the greatest share of revenue, but what stands out is the 9.6% growth rate of that service line within DXC’s overall cloud practice. Ahead of the other service lines and far better than the company as a whole (-3% over the same period). As we note in the upcoming full report, “DXC’s established relationships with major public cloud providers such as Microsoft and AWS [Amazon Web Services] enable the company to build out integrated solutions and maintain healthy growth in 2020 providing cloud management and migration services.” Further, the company continues investing in cloud-savvy professionals even as it bolsters its traditional IT services talent. DXC’s long-term strategy, including around cloud, appears solid.

More than 50%, Capgemini’s digital and cloud revenues as a percentage of total revenue: Like most IT services peers, Capgemini has strategically shifted resources and investments toward new opportunities in cloud and digital, in part through expanding capabilities alongside partners, developing solutions with partners like AWS, and acquiring talent and IP. Even if revenue growth slows from 5.3% year-to-year in constant currency in 2019 to something closer to 4% in 2020, as Capgemini expects, we don’t expect digital and cloud revenues will ever again dip below the 50% line, even if Capgemini joins market leaders in moving beyond the term digital.

3, consecutive quarters in which Perspecta elevated its FY20 guidance: Due to accelerated demand and strong bookings of net-new work, Perspecta is now guiding for annual revenue growth of between $4.45 billion and $4.5 billion, or 4.1% and 5.3%, over FY19. Even with healthy revenue growth, TBR projects the company’s full-year gross margin will erode 2020 (declining from 24.9% in 2019 to 23.6% in 2020) due to  accumulating costs from its acquisition of Knight Point Systems, the launch of new delivery facilities, and investment in Perspecta Labs. Perspecta’s 2020 operating margin should increase 10 points over 2019, from 6.2% to 6.3%, as unprofitable contracts are completed and Perspecta converts strong bookings of more lucrative and net-new contracts featuring the company’s expanding store of homegrown IP. In all, TBR sees steady growth as more important than financial guidance adjustments, given our concern for strategy and performance, not stock price.

Big changes for Big Blue

Lots of news coming from IBM these past few weeks, and we have plenty of analysis on it from Geoff Woollacott, Stephanie Long, Elitsa Bakalova, Catie Merrill and Nicole Catchpole. IBM unveiled a new Power System and announced Ginni Rometty will be stepping down, making way for cloud champion Arvind Krishna to emerge as the new CEO, effective April 6. TBR’s 4Q19 IBM report will comment on these changes as well as touch on the overall health and performance of IBM corporate and its Systems Hardware business.

Additional assessments publishing this week from our analyst teams

“TBR estimates Wipro IT Services’ (ITS) revenue growth will accelerate in 2020, as the company leverages a broad network of centers opened throughout 2019, including centers dedicated to industry solutions and emerging technologies as well as centers that enhance core capabilities. An emphasis on centers will lead to cross-selling and upselling opportunities and improved client retention within Wipro’s addressable market. Additionally, increasing training and reskilling efforts will allow Wipro ITS to more effectively communicate its portfolio and manage client relationships to drive opportunities around its digital offerings. Wipro ITS’ ability to accelerate revenue growth will be contingent on securing deals around emerging digital assets — particularly through its now-robust cloud platform partner ecosystem — to expand its wallet share and mitigate its lack of digital scale compared to peers.” — Kelly Lesiczka, Analyst

“Recent acquisitions, such as that of Luxoft and Syscom, reinforce DXC’s focus on integrating acquired industry expertise into its distinct industry segments to create higher-value engagements and build longer-term relationships with clients. DXC will aim to capture technology demand in industries such as automotive, which aligns with industry strengths gained through strategic acquisitions such as Luxoft.” — Kevin Collupy, Analyst 

“Moving through 2020, Cognizant’s ability to create scale for its newly acquired digital solutions and services will be critical to driving growth, though its emphasis on digital will have an adverse impact on its traditional outsourcing business. We expect Cognizant will operate within its revenue guidance in 4Q19 as it emphasizes its digital portfolio to drive adoption of emerging technologies as well as looks to key verticals to generate use cases and drive growth opportunities.” — Kelly Lesiczka

“T-Mobile will end 2019 on a high note as the company’s annual postpaid net additions and adjusted EBITDA will surpass initial guidance expectations. T-Mobile’s momentum will continue in 2020 regardless of the outcome of the proposed Sprint merger, as the company’s widespread 5G coverage and expanding portfolio and service options will attract new customers.” — Steve Vachon, Analyst

In 4Q19 Google Cloud saw rapid revenue growth that paralleled and validated its continued and planned investments in infrastructure, R&D, talent, partnerships and expansion of its global footprint. TBR predicts this accelerated pace of growth, fueled by Google Cloud Platform and Anthos, will help the company close the gap with market share leaders Amazon Web Services and Microsoft. In addition, 4Q19 marks the first time that Alphabet disclosed Google Cloud revenue, a move that isolates and highlights the significant growth rate of this sector of the overall business. — Nicole Catchpole, Senior Analyst

On Wednesday Principal Analyst Ezra Gottheil and Analyst Eric Costa will host a live webinar and Q&A on TBR’s predictions for IoT in 2020 and beyond, including the more purposeful role of AI in IoT and how the conversational interface will demonstrate its relevance. Register today for “IoT settles in for the long haul,” and check out our Webinar Portal to view all of TBR’s previously aired webinars.

India-centric vendors defy gravity and all sensible expectations

An exclusive review of TBR’s IT Services Vendor Benchmark

Every quarter the large India-centric IT services vendors — Infosys, Tata Consultancy Services (TCS), Wipro, Cognizant and HCL Technologies (HCLT) — produce revenue growth and profitability that keep them in the top half, and sometimes in the top five, vendors TBR tracks, despite market trends that seem to run counter to their core strengths. As consulting-led digital transformations using emerging technologies and delivered on-site (not from offshore) drive investments and acquisitions, these five vendors manage to expand into new areas just enough, hire the right onshore talent, and manage costs to sustain their growth. But for how much longer?  

Join Kelly Lesiczka, Kevin Collupy, Boz Hristov, Elitsa Bakalova and Patrick Heffernan as they dig into key findings from TBR’s latest IT Services Vendor Benchmark.

Don’t miss:

  • How India-centric vendors compare to other leading IT services vendors
  • Which vendors are transforming faster and with better results
  • TBR’s predictions on where the IT services market is heading
  • Which vendors have the most to lose from sustained success among India-centric vendors

TBR webinars are held typically on Wednesdays at 1 p.m. ET and include a 15-minute Q&A session following the main presentation. Previous webinars can be viewed anytime on TBR’s Webinar Portal.

For additional information or to arrange a briefing with our analysts, please contact TBR at [email protected].

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

India-centric professional services rivals compete to prove themselves as front-runner in European market

Vendors look to Europe for new revenue pipelines, but some are falling short

India-centric IT services vendors are looking to do more in Europe, utilizing a few different strategies to get there, including pursuing acquisitions, developing new offerings and building on-the-ground workforces. This allows them to diversify revenue streams geographically. TBR feels this push into Europe is a crucial move for India-centric vendors, to not only remain competitive with each other and advance their bottom lines but also to reap the benefits that the European market has to offer, such as new investment opportunities and a larger talent pool for recruiting.

Vendors look to Europe for new revenue pipelines, but some are falling short

The five leading India-centric professional services vendors — Cognizant (Nasdaq: CTSH), HCL Technologies (HCLT), Infosys (NYSE: INFY), Tata Consultancy Services (TCS) and Wipro (NYSE: WIT) — explored new pipelines for expanding their presence into the mature and growing European market. Infosys worked to close the gap on HCLT in 1Q19, while TCS, Wipro IT Services (Wipro ITS) and Cognizant are feeling the pressure to conform to stay competitive.

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  

Cognizant’s 3 new acquisitions enhance digital and global reach

Cognizant has made seven acquisitions since the beginning of 2017, adding between 2,200 and 2,300 employees and over $500 million in acquired revenue (by TBR estimates). The company’s acquisition spree continued in recent months with three additional purchases. In August Cognizant bought SaaSfocus, a Salesforce consultancy based in Noida, India, with operations in Delhi and Mumbai, India, as well as Sydney and Melbourne, Australia. SaaSfocus has completed over 1,500 Salesforce engagements in India and Australia with clients across the financial services, insurance, manufacturing and automotive sectors, including Audi, Baxter and Holcim. SaaSfocus has also forged strategic integration, application and industry-specific partnerships with companies including Informatica, Jitterbug, MuleSoft, DocuSign and Cloud Lending Solutions. TBR estimates SaaSfocus will add between $3 million and $4 million in new revenue and over 350 employees (about 280 are providing service delivery from India).

In September Cognizant announced the acquisition of Kansas-based Advanced Technology Group (ATG), further expanding its advisory capabilities on the Salesforce platform, specifically around the management and implementation of quote-to-cash (QTC) solutions: configure, price, quote (CPQ) software; multiplatform contract life cycle management and billing; and automating QTC processes. ATG operates delivery facilities in Kansas, Missouri, Ohio and Montana and has IBM, Subaru and CenturyLink on its client roster. We estimate ATG will add between $2 million and $3 million in revenue and about 280 employees to Cognizant after it is fully integrated.

Finally, in early October Cognizant announced it would acquire Austin, Texas-based Softvision. Financial terms were not disclosed, but Cognizant was expected to pay as much as $550 million to acquire Softvision’s 2,800 digital product and design engineers working in 27 studios across 11 countries (though the majority of digital product development will be in North America). TBR estimates Softvision will add between $160 million and $180 million in inorganic revenue to Cognizant beginning in 4Q18.

Cognizant’s latest purchases deepen its digital engineering capabilities, particularly around Salesforce technologies, but short-term margin erosion can be expected as Cognizant integrates its latest buys. Even as enhanced Salesforce competencies position Cognizant as a leading cloud CRM, marketing and platform vendor, integrating three additional employee bases into a workforce already beset by high turnover may exacerbate Cognizant’s struggle to control attrition. Still, Cognizant’s newest acquisitions will further enable the company to fulfill its overarching strategy of driving digital to the core of client enterprises.

TBR continues to view Cognizant as a leader among the India-centric vendors, and the company certainly separates itself from peers with its aggressive acquisitions. Executing on integration remains the key, and TBR will closely watch (and report on) progress.

Top 5 IT firms hired over 37,000 people in Q2, the highest since Sept 2015

“Bozhidar Hristov, senior analyst at Technology Business Research, US, told the daily that cyclical changes – driven by rising attrition, demand for professionals with skills in new technologies that can not only execute on traditional outsourcing projects but can also drive design-led opportunities – are compelling Indian vendors to hire again.”

Cognizant, DXC, HCLT prepared to implement SCM systems for healthcare providers

In the current healthcare provider landscape, maintaining operational efficiency has proved to be costly and challenging. A patient’s information about products prescribed, drugs administered and services provided will flow through the hands of multiple stakeholders. Pharmaceutical manufacturers, insurance companies, hospitals, healthcare staff and the patient must somehow communicate information with each other to maintain accurate records and deliver appropriate care. Healthcare providers must seek new technologies to not only cut costs but also change the way they deliver their services.