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IT Services: Back Up Truck on Cognizant; Accenture Outlook
Solid; Capgemini's Pipeline Comment Misunderstoo
Highlights
Today's piece summarizes findings from our latest channel checks on the consulting/systems integration
and offshore markets and from Capgemini's analyst day, including offline discussions with several
Capgemini executives. In addition, we've further studied recent concerns hurting Cognizant's stock, and we
address basic questions facing Accenture ahead of its June 23
rd
earnings report. Key conclusions include:
Heightened concerns of late about Cognizant's Q2 are unfounded, and we think investors should take the
opportunity to aggressively buy Cognizant following its recent pullback. We are reinstating Cognizant
as our best idea.
Capgemini's Analyst Day comment about "a plateau in its systems integration pipeline" has been
misunderstood. This comment should not be cause for concerns about a "double dip" in demand, with
our view on this front confirmed by our discussion with Capgemini's CFO.
Following its pullback off of its all-time high stock price due to Cognizant / Capgemini related concerns
that we think are unfounded / misunderstood, Accenture's risk/reward now looks more attractive ahead of
its upcoming May quarter earnings report.
Findings from Capgemini's analyst day and from our broader industry checks on the consulting/
systems integration and offshore markets
Pipeline surge followed by pipeline steadiness does not mean demand slowdown is brewing: Capgemini
at its Analyst Day this week said that its pipeline of large systems integration deals has reached a
"plateau". Importantly, we think this is actually healthy for demand and the overall growth outlook
versus Street expectations, rather than an indication of a slowdown (as some have interpreted). The
background here is that Capgemini's pipeline in calendar Q1 surged well beyond the company's
expectations. And, we emphasize that, after a pipeline surge (partly based on pent-up demand coming
into fruition), it is natural for the sales pipeline to pullback some, as bookings are drawn from the
pipeline and the pace of recovery subsides (meaning the pipeline struggles to be replenished back to the
surge-driven peak level). So, given this natural dynamic, we see a bullish indication in the fact that
Capgemini's pipeline has been able to sustain its Q1 peak level. In other words, a further increase in the
pipeline beyond Q1 is not needed in the near/medium term for the systems integration business to sustain
above-normal growth; instead, if the pipeline can be sustained in the vicinity of the Q1 level, we think
this should be sufficient to sustain bullish growth trends in the systems integration business.
We asked Capgemini's CFO if his systems integration pipeline trend is potentially an indication of a
"double dip" in demand. His response firmly stated that he sees "no signs" of a double dip.
On a related note, we strongly think Capgemini's pipeline trend would show an even stronger trend, if
Capgemini had more exposure to transformational services and sole-sourced deals, as opposed to more
transactional deals won through a bidding process. Note: About 75% of Capgemini's deals stem from
bids, while this figure is less than 50% at Accenture. In other words, given our view that a
transformational services demand wave is underway and that share gains are accruing to firms with the
strongest cross-selling ability, we think this environment favors Accenture (i.e., transformational
services leader, with over half of deals sole sourced) and Cognizant (i.e., very strong client mining or
cross-selling ability).
Our latest research says consulting/systems integration demand is remaining healthy, though we think the
rapid-resurgence phase is largely completed (not surprisingly, at this stage of the cycle).
Prices on new consulting/systems integration deals are increasing, and should continue to slowly rise:
While Capgemini cannot declare that its overall average price is on the rise, it confirmed that pricing on
new deals has improved, and it stated an expectation that cyclical trends should help overall pricing.
We see multiple indications of late that the top Indian firms (Cognizant, Infosys, TCS, Wipro) have
encouraging sales pipelines, likely signalling bullish revenue growth in upcoming quarters.
Geographies having generally weak demand are: UK (in government segment) and Netherlands.
Geographies having generally strong demand include: the rest of Europe, US, and emerging countries.
Industry verticals having generally weak demand are: government (i.e., weakness in UK and US, with
France strong now but with risk of government spending slowdown after elections in France) and
telecom. All of the other major verticals are generally showing strong demand.
Digital transformation needs and mobility trends (e.g., refer to our recent mobility/cloud services
presentation replay) are increasingly catalyzing demand interest from senior clients. Looking forward,
we maintain that mobile apps will drive increased IT services demand, particularly due to needs to
connect the proliferation of mobile apps to servers.
Latest implications for Cognizant, Accenture, CSC, Capgemini, others
Cognizant: An analyst in India in recent days has been making a negative call on Cognizant's June
quarter, and we think this call will prove to be unfounded. We think the recent Cognizant concerns are
way overblown -- e.g., Lloyds headwind is old news and has now subsided; Cognizant's pipeline and the
offshore market's pipeline are thriving; worry about Q2 sequential growth being weaker than expected is
likely unfounded; we clearly do not agree with the assertion that Cognizant has tried to "talk down"
expectations for Q2. CTSH’s stock is highly attractive at this valuation!
If Cognizant were trying to "talk down" expectations for Q2, then we expect Cognizant would have
communicated very differently in our fireside chat with Cognizant's COO/CFO Gordon Coburn at
Bernstein's Strategic Decisions Conference on June 1st (replay available). We asked Gordon about an
assertion by Infosys that discretionary spending decisions have slightly slowed. If expectations needed
to be tempered, it would have been easy for Cognizant to simply agree with this assertion. Instead,
Gordon maintained Cognizant's consistent commentary about healthy discretionary services demand,
with no cause for worry about slowness in clients' decision making.
We remain quite comfortable with our 8.5% sequential revenue growth estimate for Cognizant in
Q2:11. This level of sequential growth, if posted by Cognizant, would likely be quite bullish for
Cognizant's stock. We also maintain 33% or more revenue growth for full-year 2011 is quite feasible.
We do not see signs of problems with Cognizant's sales pipeline. We think Cognizant's pipeline
experienced marked strength in Q1 and is benefiting from a continuation of healthy demand for top
offshore players (e.g., Cognizant, Infosys) and systems integrators (e.g., Accenture).
While we do not think these firms' sales pipelines are accelerating meaningfully beyond calendar Q1
levels (e.g., since the resurgence from pent-up demand is no longer as strong), we think their pipelines
are being sustained at very healthy levels, quite capable of supporting our above-consensus revenue
growth estimates for Cognizant, Accenture, and Infosys.
Accenture: We expect Accenture (in its upcoming earnings report) to continue to convey a decidedly
positive tone about demand, and we expect Accenture will remain quite comfortable with its FY12 local
currency revenue growth guidance of 7-10%. This should alleviate recent investor concerns about
pipeline trends (and could also help sentiment for Cognizant's stock). At the same time, as we've
explained in our prior research on Accenture, we expect Accenture's growth pace in its high-end
consulting subsegment to somewhat temper in upcoming quarters (as this is logically needed following
heightened growth over the past year). Still, we think above-consensus revenues are doable, even after
last two quarters of substantial upward revisions to consensus, and we like the fact that consulting
bookings for the May 2011 quarter should be helped some by a relatively easy Y/Y growth comparison.
CSC: We have picked up multiple indications recently that CSC's large deal with Zurich Financial is
experiencing troubles (note that we think CSC bid aggressively to win this deal), and this reinforces our
concern that CSC is facing problems that go well beyond the NHS deal and the Nordic region.
Client-mining / cross-selling prowess is increasingly key for IT services firms to achieve growth, and this
favors Accenture and Cognizant; and this disfavors CSC, HP/EDS, and IBM (for details, see research
link to - IT Services: Why Should Traditional IT Outsourcers Struggle to Grow? Can This Be Fixed?).
Note: In order to improve their client-mining ability, Capgemini and CSC need to invest to build more
Accenture-like "partner" roles, and this will take considerable time and investment. We think Capgemini
is better positioned to embark on this path than CSC.
Investment Conclusion
Ratings across Computer Services stocks: We have outperform ratings on Cognizant, Sapient, Accenture,
and ADP. We have market-perform ratings on Visa, MasterCard, Paychex, and Infosys. And, we have an
underperform rating on CSC.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IT Services: Back Up Truck on Cognizant; Accenture Outlook
Solid; Capgemini's Pipeline Comment Misunderstoo
Highlights
Today's piece summarizes findings from our latest channel checks on the consulting/systems integration
and offshore markets and from Capgemini's analyst day, including offline discussions with several
Capgemini executives. In addition, we've further studied recent concerns hurting Cognizant's stock, and we
address basic questions facing Accenture ahead of its June 23
rd
earnings report. Key conclusions include:
Heightened concerns of late about Cognizant's Q2 are unfounded, and we think investors should take the
opportunity to aggressively buy Cognizant following its recent pullback. We are reinstating Cognizant
as our best idea.
Capgemini's Analyst Day comment about "a plateau in its systems integration pipeline" has been
misunderstood. This comment should not be cause for concerns about a "double dip" in demand, with
our view on this front confirmed by our discussion with Capgemini's CFO.
Following its pullback off of its all-time high stock price due to Cognizant / Capgemini related concerns
that we think are unfounded / misunderstood, Accenture's risk/reward now looks more attractive ahead of
its upcoming May quarter earnings report.
Findings from Capgemini's analyst day and from our broader industry checks on the consulting/
systems integration and offshore markets
Pipeline surge followed by pipeline steadiness does not mean demand slowdown is brewing: Capgemini
at its Analyst Day this week said that its pipeline of large systems integration deals has reached a
"plateau". Importantly, we think this is actually healthy for demand and the overall growth outlook
versus Street expectations, rather than an indication of a slowdown (as some have interpreted). The
background here is that Capgemini's pipeline in calendar Q1 surged well beyond the company's
expectations. And, we emphasize that, after a pipeline surge (partly based on pent-up demand coming
into fruition), it is natural for the sales pipeline to pullback some, as bookings are drawn from the
pipeline and the pace of recovery subsides (meaning the pipeline struggles to be replenished back to the
surge-driven peak level). So, given this natural dynamic, we see a bullish indication in the fact that
Capgemini's pipeline has been able to sustain its Q1 peak level. In other words, a further increase in the
pipeline beyond Q1 is not needed in the near/medium term for the systems integration business to sustain
above-normal growth; instead, if the pipeline can be sustained in the vicinity of the Q1 level, we think
this should be sufficient to sustain bullish growth trends in the systems integration business.
We asked Capgemini's CFO if his systems integration pipeline trend is potentially an indication of a
"double dip" in demand. His response firmly stated that he sees "no signs" of a double dip.
On a related note, we strongly think Capgemini's pipeline trend would show an even stronger trend, if
Capgemini had more exposure to transformational services and sole-sourced deals, as opposed to more
transactional deals won through a bidding process. Note: About 75% of Capgemini's deals stem from
bids, while this figure is less than 50% at Accenture. In other words, given our view that a
transformational services demand wave is underway and that share gains are accruing to firms with the
strongest cross-selling ability, we think this environment favors Accenture (i.e., transformational
services leader, with over half of deals sole sourced) and Cognizant (i.e., very strong client mining or
cross-selling ability).
Our latest research says consulting/systems integration demand is remaining healthy, though we think the
rapid-resurgence phase is largely completed (not surprisingly, at this stage of the cycle).
Prices on new consulting/systems integration deals are increasing, and should continue to slowly rise:
While Capgemini cannot declare that its overall average price is on the rise, it confirmed that pricing on
new deals has improved, and it stated an expectation that cyclical trends should help overall pricing.
We see multiple indications of late that the top Indian firms (Cognizant, Infosys, TCS, Wipro) have
encouraging sales pipelines, likely signalling bullish revenue growth in upcoming quarters.
Geographies having generally weak demand are: UK (in government segment) and Netherlands.
Geographies having generally strong demand include: the rest of Europe, US, and emerging countries.
Industry verticals having generally weak demand are: government (i.e., weakness in UK and US, with
France strong now but with risk of government spending slowdown after elections in France) and
telecom. All of the other major verticals are generally showing strong demand.
Digital transformation needs and mobility trends (e.g., refer to our recent mobility/cloud services
presentation replay) are increasingly catalyzing demand interest from senior clients. Looking forward,
we maintain that mobile apps will drive increased IT services demand, particularly due to needs to
connect the proliferation of mobile apps to servers.
Latest implications for Cognizant, Accenture, CSC, Capgemini, others
Cognizant: An analyst in India in recent days has been making a negative call on Cognizant's June
quarter, and we think this call will prove to be unfounded. We think the recent Cognizant concerns are
way overblown -- e.g., Lloyds headwind is old news and has now subsided; Cognizant's pipeline and the
offshore market's pipeline are thriving; worry about Q2 sequential growth being weaker than expected is
likely unfounded; we clearly do not agree with the assertion that Cognizant has tried to "talk down"
expectations for Q2. CTSH’s stock is highly attractive at this valuation!
If Cognizant were trying to "talk down" expectations for Q2, then we expect Cognizant would have
communicated very differently in our fireside chat with Cognizant's COO/CFO Gordon Coburn at
Bernstein's Strategic Decisions Conference on June 1st (replay available). We asked Gordon about an
assertion by Infosys that discretionary spending decisions have slightly slowed. If expectations needed
to be tempered, it would have been easy for Cognizant to simply agree with this assertion. Instead,
Gordon maintained Cognizant's consistent commentary about healthy discretionary services demand,
with no cause for worry about slowness in clients' decision making.
We remain quite comfortable with our 8.5% sequential revenue growth estimate for Cognizant in
Q2:11. This level of sequential growth, if posted by Cognizant, would likely be quite bullish for
Cognizant's stock. We also maintain 33% or more revenue growth for full-year 2011 is quite feasible.
We do not see signs of problems with Cognizant's sales pipeline. We think Cognizant's pipeline
experienced marked strength in Q1 and is benefiting from a continuation of healthy demand for top
offshore players (e.g., Cognizant, Infosys) and systems integrators (e.g., Accenture).
While we do not think these firms' sales pipelines are accelerating meaningfully beyond calendar Q1
levels (e.g., since the resurgence from pent-up demand is no longer as strong), we think their pipelines
are being sustained at very healthy levels, quite capable of supporting our above-consensus revenue
growth estimates for Cognizant, Accenture, and Infosys.
Accenture: We expect Accenture (in its upcoming earnings report) to continue to convey a decidedly
positive tone about demand, and we expect Accenture will remain quite comfortable with its FY12 local
currency revenue growth guidance of 7-10%. This should alleviate recent investor concerns about
pipeline trends (and could also help sentiment for Cognizant's stock). At the same time, as we've
explained in our prior research on Accenture, we expect Accenture's growth pace in its high-end
consulting subsegment to somewhat temper in upcoming quarters (as this is logically needed following
heightened growth over the past year). Still, we think above-consensus revenues are doable, even after
last two quarters of substantial upward revisions to consensus, and we like the fact that consulting
bookings for the May 2011 quarter should be helped some by a relatively easy Y/Y growth comparison.
CSC: We have picked up multiple indications recently that CSC's large deal with Zurich Financial is
experiencing troubles (note that we think CSC bid aggressively to win this deal), and this reinforces our
concern that CSC is facing problems that go well beyond the NHS deal and the Nordic region.
Client-mining / cross-selling prowess is increasingly key for IT services firms to achieve growth, and this
favors Accenture and Cognizant; and this disfavors CSC, HP/EDS, and IBM (for details, see research
link to - IT Services: Why Should Traditional IT Outsourcers Struggle to Grow? Can This Be Fixed?).
Note: In order to improve their client-mining ability, Capgemini and CSC need to invest to build more
Accenture-like "partner" roles, and this will take considerable time and investment. We think Capgemini
is better positioned to embark on this path than CSC.
Investment Conclusion
Ratings across Computer Services stocks: We have outperform ratings on Cognizant, Sapient, Accenture,
and ADP. We have market-perform ratings on Visa, MasterCard, Paychex, and Infosys. And, we have an
underperform rating on CSC.
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