“Elitsa Bakalova, Senior Analyst at research firm Technology Business Research, Inc, said in a report that the Atos-DXC transaction could form the world’s second-largest global IT services vendor, closer to the size of Accenture ($45 billion revenue in 2020) and larger than TCS ($22 billion revenue in 2020). IBM Services, after the Global Technology Services spin-off, is estimated to have a revenue of $23 billion in 2021.” — The Hindu
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.
Despite COVID-19 pressures, Tata Consultancy Services (TCS) has not shied away from enacting bold initiatives, evidenced by the announcement of Vision 25×25 during the company’s CY1Q20 earnings call. Even in the face of decelerating revenue growth in the first quarter, executives remained optimistic, suggesting that — unlike the broader trend in the IT services industry — TCS is not ruling out investing in M&A if the price is right. For TCS, key characteristics of its business model enable the company to kick the tires in the M&A market and take advantage of favorable valuations brought about by a dwindling number of interested buyers.
Massive scale and healthy balance sheet support M&A consideration
A strong financial model provides the foundation for TCS’ capital allocation strategy and gives the company more flexibility compared to its peers around strategic investments. For example, TCS’ operating margin was 25.1% in 1Q20, far exceeding TBR’s benchmark average of 9.6% and surpassing all of TCS’ India-based peers by over 400 basis points (Infosys’ operating margin trailed closest behind at 21.1% in 1Q20). Additionally, TCS is backed by massive conglomerate Tata Group and has limited long-term debt, putting it in a comparatively lower-risk position even during a time of global macroeconomic uncertainty, provided the company can mitigate impacts to its top line in the coming quarters.
In CEO’s words: “The best time to execute is when nobody else is buying”
Although TCS made two acquisitions in 2018, ending a four-year lull in the company’s M&A activity, competitors with more mature acquisition proficiencies such as Accenture, Cognizant and IBM usually tend to crowd the market and challenge TCS’ ability to gain market share in key areas. For example, Accenture remains committed to carrying out its $1.6 billion acquisition budget in FY20, evidenced by the five AI-centric purchases the company made in CY2Q20. Driving the optimistic viewpoint of TCS CEO Rajesh Gopinathan, however, are opportunities to pick up acquisitions at attractive price points as typically active buyers have lost purchasing power and/or voluntarily corralled investment strategies.
DXC Technology, for instance, remains weighed down by elevated integration costs and restructuring plans following six acquisitions in 2019, including the $2 billion buyout of Switzerland-based engineering firm Luxoft. India-based peer HCL Technologies (HCLT) is in a similar situation, as executives expressed a cautionary mindset while the company looks to complete remaining payments on the $1.8 billion purchase of several IBM software products such as Unica, Portal and Connections in late 2018. As HCLT CFO Prateek Aggarwal explained, “As you can imagine, these are turbulent times, and we don’t want to sort of fritter away the cash at this point in time.”
Previous investments display an audacious mindset amid macroeconomic turmoil
TCS’ acquisition strategy has historically been very selective, with the company opting to build its talent, IP and technology capabilities in-house and normally waiting several years before kick-starting new activity. During its most recent spending pickup, the company has stuck to low-risk and nonintensive purchases such as BridgePoint and W12 Studios in 2018, both consultancies with fewer than 50 employees and with estimated annual revenues of less than $5 million. In mid-2019 TCS also increased its stake in TCS Japan, a 2014 joint venture with Mitsubishi Corp., from 51% to 66%, in what was already a safe bet as the unit achieved double-digit constant currency growth in the two years prior.
TCS’ last large-scale acquisition came during a risky time for most companies — the peak of the 2007-2008 financial crisis. In the fourth quarter of 2008, TCS completed its acquisition of Citigroup Global Services Limited for $512 million cash and brought on 12,000 India-based employees to provide BPO services in the banking, financial services and insurance sectors. While TBR anticipates the company will likely stay true to its existing strategy around more tactical tuck-in plays versus making a bold large-scale merger, a reflection on the past reminds us that the option — and willingness — exists.
IP will remain at the forefront of TCS’ acquisitions strategy
TCS already touts scale and well-trained talent, leading TBR to believe that the company will focus on obtaining IP, filling portfolio gaps and expanding its addressable market when considering M&A candidates. Because of its selective M&A stance, TCS is often left playing catch-up in the M&A market, reflected in its 2018 purchases of BridgePoint and W12 Studios, which mimicked Accenture’s push around digital design capabilities, and TBR believes this trend will continue.
According to TBR’s 1Q20 IT Services Vendor Benchmark, “The acquisition pace slowed in 1Q20; the nature of acquisitions remained similar to that in 2019 as vendors look to build out emerging technology portfolios, including security and deepened software practices around Salesforce and Workday.” This sets the stage for TCS to follow in the footsteps of its India-centric peers Infosys and Cognizant, which recently completed the acquisitions of Salesforce consultancy Simplus, as well as Salesforce Platinum Partner and digital consulting firm Lev. In TBR’s view, the central component of TCS’ acquisitions strategy will be targeting M&A candidates that can quickly and cost-efficiently add to its IP portfolio, similar to HCLT’s purchase of several IBM software assets in 2018, as TCS has built lucrative services offerings around the success of its homegrown products and platforms, such as BaNCS and Ignio.
As Senior Analyst Elitsa Bakalova notes this week, “Partners are key contributors to Capgemini’s technology-enabled transformations around next-generation technologies, such as digital and cloud. The expanded partnership with Amazon Web Services enhances Capgemini’s AWS business in North America and improves its ability to advance cloud adoption in a strategic region for Capgemini’s global expansion. Additionally, the integration of Altran continues, and as of Jan. 27, Capgemini holds 53.57% of Altran’s share capital and at least 53.41% of Altran’s voting rights. Altran will improve Capgemini’s ability to deliver digital transformation to the industrial sector and position as an intelligent industry vendor that can provide solutions around Engineering 4.0 and Industry 4.0.” Across the IT services spectrum, TBR has seen substantial changes in the way vendors partner with cloud and software companies, an area we will examine in greater detail throughout 2020.
Additional assessments publishing this week from our analyst teams
“Tata Consultancy Services closed 2019 with continued revenue growth, which TBR attributes to ongoing investments in its solution suite and talent pool, alongside aggressive pricing. Strengthening its digital capabilities that enable technology-based transformation, at scale, for the company’s global clientele will drive further growth in 2020.” — Kevin Collupy, Analyst
“TBR expects T-Systems’ revenue growth will slightly accelerate in 4Q19 as the company benefits from an improved delivery network and a realigned portfolio that offers clients cloud, IoT and security capabilities that support growth initiatives. T-Systems leverages partnerships that enhance scale and help to embed emerging technologies within its core portfolio offerings and equip the company to drive revenue growth around these capabilities. As T-Systems infuses growth areas throughout its portfolio and realigns business segments to focus on these profitable avenues, including the establishment of an integrated telecommunications business that will house telecommunication services and classified ICT business, the company will be able to leverage more flexible delivery and innovation models to position as more customer-led and customer-centric.” — Kelly Lesiczka, Analyst
acquired assets to provide advanced security and intent-based networking
solutions, we expect Cisco Customer Experience will benefit from
pull-through support and maintenance opportunities, allowing it to sustain
revenue growth in 4Q19. Additionally, portfolio growth to include hybrid IT and
multicloud will also provide migration and management engagements, creating new
areas of growth. Similarly, expanding its software and subscription portfolio
provides consistent revenue streams, contributing to Cisco Customer Experience
revenue growth through support and maintenance engagements. Leveraging its core
strength areas, such as security, networking and SD-WAN, will help Cisco to
maintain its existing engagements while also effectively combating competitive
pressures from vendors pursuing opportunities in similar growth areas. Cisco’s
technical expertise improves its ability to differentiate its professional services
portfolio from that of its peers.”
— Kelly Lesiczka
“The cloud solutions agreement with the National Association of State Procurement Officials through September 2026 is a milestone for Capgemini’s cloud services business in the U.S. as the simple contractual process will expand the company’s activities in the public sector, which TBR does not believe to be a leading industry in the country for Capgemini, unlike its business in financial services and manufacturing. Capgemini will provide joint offerings with Amazon Web Services, Microsoft, BMC, ServiceNow and Virtustream.” — Elitsa Bakalova
“TBR estimates HCL Technologies (HCLT) will sustain revenue growth of between 15% and 16.5% year-to-year through 2021, and will operate within its guided range of 16.5% to 17% in constant currency for FY20. Acquisitions provide HCLT with expanded market share and enhance portfolio offerings to appeal to dynamic client demand and propel revenue. Developing HCL Software and incorporating partner assets to support integration and management opportunities will create recurring and higher-profit revenue streams. We expect HCLT will leverage its software business to capture higher-value services engagements, but the company must be mindful of cannibalization within its traditional services streams, which comprise the majority of revenue. Additionally, deal size remains smaller than in previous years, with most clients in the $1-plus million category as HCLT benefits from an increase in software license and deployment deals. TBR believes most deals during the quarter were generated with new logos, as HCLT looks to drive recurring revenue streams tied to the HCL Software business unit, which will generate additional growth in the $1-plus million category from cross-selling and upselling other product and software offerings.” — Kelly Lesiczka
“IBM faced healthcare IT services (HITS) headwinds throughout 2019, plagued by media reports and customer dissatisfaction with emergent solutions leveraging AI, mainly Watson for Oncology. The newly appointed general manager of Watson Health, Paul Roma, will work to improve employee satisfaction in addition to building confidence among IBM investors and partners within the wider healthcare market. A more succinct portfolio and go-to-market strategy supported by recent internal restructuring efforts will be critical to returning IBM to growth in 2020, when TBR estimates the company’s annual HITS revenue growth will reach 2.2%. Further, IBM’s addition of Red Hat and background in emerging technology areas such as blockchain for insurance industries and AI — despite missteps in these areas in 2018 — will enhance the value of the company’s existing HITS suite and offer it differentiation in the market compared to peers.” — Kelly Lesiczka
Plus, this Wednesday, join TBR’s Chris Antlitz for his insights from TBR’s 2020 Telecom Predictions: “TBR’s research suggests 2020 will be a springboard year for the telecom industry’s development of the new architecture, with spend in the key markets of 5G, network virtualization and edge computing poised to ramp up significantly through the middle of the next decade. TBR also anticipates that systems integrators will play a much broader and key role in helping CSPs transform their businesses and networks and that webscales will increasingly encroach on CSP turf as they concurrently pursue new value created from the aforementioned technologies.”
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?
- 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].
In November our detailed report on Tata Consultancy Services’ (TCS) performance and strategy included a SWOT slide with the following item in the Threat category: “Competitors are building assets and scale quickly through acquisitions; TCS retains a conservative M&A stance.” Just a couple of weeks into 2019, we’re seeing a change from the company: a willingness to attack this threat head-on. As noted in our Jan. 10 initial response on the company’s 4Q18 earnings, “TCS’ purchase of London-based digital design atelier W12 Studios will be integrated into TCS Interactive beginning in 1Q19.” BridgePoint, a Georgia-based consultancy, and W12 Studios are TCS’ first acquisitions since 2014, ending a four-year hiatus in M&A for the largest of the India-based IT services majors TBR tracks.
While the acquisitions of BridgePoint and W12 Studios represent a commendable departure for TCS from its traditional aversion to inorganic growth, neither will significantly move the needle for TCS in revenue, added human resources, or market reach. It also remains unclear how much, if any, intellectual property or new client access TCS will obtain from either acquired company. In the digital marketing space, TCS gains no meaningful or material ground on any of its chief peers, particularly Accenture, which generates over $8 billion a year in digital marketing services revenue.
Reflecting these developments, we will update our SWOT slide in the coming full report.
We fully expect TCS will continue down the M&A path, particularly in the Consulting & Services Integration (C&SI) and Digital Transformation Services business lines, as both businesses built a war chest for acquisitions and need to enhance their offerings to continue to compete. Our most recent assessment describes the company as having “successfully repositioned, recalibrated and revamped its solution suite to go beyond operations optimization and deliver scalable, digitally based growth and transformation enablement for its global clientele. All of its internal delivery processes have also been completely renovated to support a growing volume of Agile-based projects in the company’s pipeline, while nearly three-quarters of TCS’ workforce has been upskilled in Agile methodologies. Digitally based engagements continue to constitute an ever-expanding share of TCS’ revenue base and order book, driving a strong deal pipeline that is well balanced across multiple geographies and vertical industry sectors.”
Look for our complete analysis of Tata Consultancy Services Feb. 1, 2019.
As the first quarter of the new year gets rolling, TBR’s Services team will be reporting on IT services vendors’ 4Q18 earnings, evaluating their performance and strategies, and pulling through trends across the entire IT services space.
A recap of TBR’s 3Q18 findings can be found in the IT Services Vendor Benchmark, now available for download in TBR’s Client Portal.
Here’s what’s you can expect this week:
- In 3Q18 we estimated Accenture’s revenue would expand 9.6% year-to-year in 4Q18 due to Accenture’s ability to convert bookings to cash and established delivery frameworks. Seasonal softness and headwinds among Financial Services clients in Europe and U.S. Federal caused bookings to decelerate and consulting book-to-bill ratio to drop under 1, at 0.99, for the first time since 3Q15. Accenture reported revenue growth of 7.3% year-to-year in 4Q18 due to some of these headwinds. However, we expect Accenture’s ability to execute on its consulting-to-operations approach will help it gain traction and expand wallet share among its 182 Diamond clients, including the 13 clients it gained in FY18.
- In our Accenture Healthcare IT Services report, we note Accenture’s M&A ambitions in the healthcare sector seem to have cooled. Accenture finished 2018 without making a major healthcare-related acquisition, despite large companies, both inside and outside the technology services sector, leveraging M&A to enter the digital healthcare space and accelerate investment in healthcare IT innovation. While a continued robust volume of M&A activity in healthcare IT is expected in 2019 and will only serve to further inflate the valuation of healthcare IT acquisition targets, Accenture’s fiscal health surpasses most competitors’ and it could compete vigorously for these acquisitions. Because Accenture is focused on using M&A to enhance nonhealthcare-related growth initiatives, high-quality healthcare IT and consulting assets are falling into the hands of competitors with aggressive M&A strategies. TBR expects Accenture will stop allowing peers (especially smaller peers) to snatch up high-quality assets, IP and capabilities and will narrow the healthcare IT capabilities gap, as it has done in the digital market space.
Friday: In 3Q18 we estimated Wipro IT Services’ (ITS) revenue would remain flat from the year-ago quarter as weaknesses in core services and solutions offset expansions in the company’s digital business. Wipro ITS’ ability to upsell its clients helped extract additional wallet share from its top five clients; however, the company faces pressure in client retention, as its total number of active clients dropped during 3Q18. We expect these challenges combined with the elimination of Wipro ITS’ data center hosting business will have negatively impacted revenue performance during 4Q18.
Last week TBR rolled out its initial assessment of Tata Consultancy Services (TCS). In 3Q18, based on TCS’ historical conservatism regarding acquisitions, TBR predicted TCS would likely remain quiet on the M&A front in 4Q18: The company “has demonstrated a strong preference for expanding its portfolio and global delivery resources organically rather than through M&A.” Over the last two years (driven by the digital wave), we have observed TCS earmarking free cash flow and investment capital to internal R&D and co-innovation with clients at regional innovation hubs rather than making acquisitions (unlike more acquisitive peers, such as Accenture and Cognizant). However, TCS surprised us with not one but two acquisitions in November: BridgePoint Group (financial services consulting) and W12 Studios (digital and creative design). Given TCS’ four-year hiatus from M&A and that these acquisitions are small-scale and will not impact TCS’ revenue substantially (TBR estimates they will contribute only $10 million to $20 million in new organic revenue annually, compared to TCS’ $20 billion in sales expected in FY19), we do not expect TCS to acquire again until these new assets are fully and successfully integrated. Given TCS’ four-year hiatus from M&A, and even though these acquisitions are small-scale and will not substantially move the revenue needle for TCS (we estimate both companies will only contribute between $10 million and $12 million in new inorganic revenue on an annual basis – TCS will generate over $20 billion in sales in its fiscal 2019), we expect TCS will not make further acquisitions until the newly acquired assets are fully and successfully integrated. We believe this quiet period could end, however, by 2H19, as TCS is compelled to shed its traditional aversion to inorganic growth to keep from losing more addressable market to peers such as Accenture, which has acquired its way to the top of the digital marketing space. For additional information on TCS, contact Senior Analyst John Caucis at [email protected].
In the next few weeks we will issue our initial 4Q18 reports on each vendor in TBR’s Services portfolio.
According to Technology Business Research, Inc.’s (TBR) 3Q18 Telecom Infrastructure Services (TIS) Benchmark, the TIS market grew as communication service provider (CSP) investment in areas tied to 5G-readiness increased. CSPs are rearchitecting their networks leveraging NFV, SDN and the cloud as well as implementing new business models, which requires growing spend across a broad range of professional services. Deployment services spend grew slightly, but the market will strengthen as the 5G spend cycle ramps up over the next couple of years, although the spend intensity will be lower than during the LTE cycle. RAN suppliers Nokia (NYSE: NOK), Ericsson, Huawei, ZTE and Samsung will capture incremental TIS market share as they drive high volumes of services attached to their 5G RAN. This is already occurring to some extent as CSPs densify networks as part of their 5G-readiness strategies. Though 5G will require significant hardware spend, the aggregate amount will be lower compared to LTE, which will drive vendors to explore new market areas, such as Industry 4.0.
The managed services market was flat year-to-year in 3Q18 as a decline in outsourcing was offset by growth in the out-tasking market. Generally, vendors are exercising pricing discipline when determining which outsourcing contracts to take on in an effort to improve margins. Ericsson is currently leading the way in this regard as it evaluates 42 contracts for exit or rescoping. Huawei, ZTE and CCS have been less concerned with price and are focused on consolidating the outsourcing market. Other vendors, including those that are historically hardware-centric with little to no footprint in the managed services market, are increasingly playing in out-tasking as they will manage applications deployed in CSP networks. Ciena (NYSE: CIEN) is an example of this trend.
TBR’s Telecom Infrastructure Services Benchmark provides quarterly analysis of the deployment, maintenance, professional services and managed services markets for network and IT suppliers. Suppliers covered include Accenture (NYSE: ACN), Amdocs, Atos, Capgemini, CGI, China Communications Services, Ciena, Cisco (Nasdaq: CSCO), CommScope, CSG International, Ericsson, Fujitsu, Hewlett Packard Enterprise (NYSE: HPE), Huawei, IBM (NYSE: IBM), Infosys (NYSE: INFY), Juniper Networks (NYSE: JNPR), NEC, Nokia (NYSE: NOK), Oracle (NYSE: ORCL), Samsung, SAP (NYSE: SAP), Tata Consultancy Services, Tech Mahindra, Wipro (NYSE: WIT) and ZTE.
“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.”
HAMPTON, N.H. (Jan. 5, 2018) — According to Technology Business Research, Inc.’s (TBR) 3Q17 Telecom Infrastructure Services Benchmark, leading vendors are making significant strategy changes and retrenching around their core competencies to weather subdued communication service provider (CSP) spend.
“Leading vendors are realizing they must transform themselves before they can effectively help their customers transform,” said TBR Telecom Senior Analyst Chris Antlitz. “New technologies and processes, particularly in the areas of cloud, artificial intelligence, cognitive analytics, automation and DevOps, promise significant agility, better outcomes and cost savings, and vendors must not only offer solutions that leverage these technologies to their customers but also adopt and employ these technologies internally to be credible, differentiate and remain competitive.”
Tier 1 network solution providers (NSPs) are going back to their product-led roots and doubling down on partnerships. Huawei, Ericsson and Nokia are all transitioning back to being product-led, which is an about-face from their prior strategy of being services-led. This strategy shift indicates that product-centric vendors have realized that the optimal go-to-market model is to stick to their core businesses and core competencies as much as possible and augment capabilities with partnerships.
TBR believes this strategy shift means NSPs will increase emphasis on product-attached services, which is their main telecom infrastructure services (TIS) profit pool, particularly maintenance services. This retrenchment by NSPs will also enable IT services companies to have a clearer path to capitalize on digital opportunities.
TBR’s Telecom Infrastructure Services Benchmark provides quarterly analysis of the deployment, maintenance, professional services and managed services markets for network and IT suppliers. Suppliers covered include Accenture, Amdocs, Atos, Capgemini, CGI, China Communications Services, Ciena, Cisco, CommScope, CSG International, Ericsson, Fujitsu, Hewlett Packard Enterprise, Huawei, IBM, Infosys, Juniper Networks, NEC, Nokia, Oracle, Samsung, SAP, Tata Consultancy Services, Tech Mahindra, Wipro and ZTE.
For additional information about this research or to arrange a one-on-one analyst briefing, please contact Dan Demers at +1 603.929.1166 or [email protected].
Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, and telecom vendors and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients’ needs. Our analysts are available to address client-specific issues further or information needs on an inquiry or proprietary consulting basis.
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