The tech earnings season for Indian IT has seen the IT sector brutally fall out of
favor with investors. Several not-so-encouraging, even downright discouraging,
bits of news have emerged in the past few weeks which coalesce to cast a
shadow on CY13E/FY14E industry growth. In this piece, we examine the
principal pieces of news together with our interpretation.
News item #1. Global tech bellwethers spanning services & software
(Accenture, IBM, Oracle, SAP) have disappointed in their most recent
earnings print. Having parsed through the earnings call of these tech Services
bellwethers one factor seems evident to us: revenues have come up a bit soft
relative to expectations, but order bookings and order backlog trends have been
solid at Accenture and IBM Global/Technology Services, respectively (we’re
not talking pipeline here which has to converted to signings). Notably,
Accenture (OW) had its highest-ever bookings in a single quarter by a distance
and its annual guidance speaks to a 2H (2nd half) rebound. Couple this with the
fact that IBM’s Global Services grew backlog 5% at constant currency with the
major markets up for the first time since the end of 2010. In fact, bookings in
IBM’s Services business were up nearly 50% YoY.
News item #2. New license sales at the global software majors (Oracle/SAP)
have been patchy. Oracle’s sales force restructuring is underway, so it might
have been a bit of an internal sales issue as well. On its earnings call, this is
what Oracle management specifically said, “Since we've been adding literally
thousands of new sales reps around the world, the problem was largely sales
execution, especially with the new reps as they ran out of runway in Q3.” SAP
explained its license sales miss in Q1 due to weakness in Asia (not a big
geography for the offshore IT Services sector) but has retained its annual
guidance for 2013 implying sequential acceleration.
In addition, much of the current traction in enterprise solutions/package
implementation for offshore IT Services players does necessarily not accrue
from new license sales but in optimizing and/or optimizing existing
installations. Legacy installations are inefficient which need to be “fixed” or
they need to be upgraded (or they simply might be non-compatible with each
other, in which case, harmonization of multiple ERP systems across
geographies/LOBs is needed). To interpret patchy license sales at global
software majors as having consequences down the road for offshore IT services
companies is not necessarily right, in our view, given that incremental drivers of
this offering for these players don’t necessarily pertain to new license sales.
News item #3. The proposed immigration bill which impacts the offshore IT
Services industry. Proposed visa reforms have given the Indian IT sector a
binary risk/reward profile. If the currently proposed visa reforms are passed into
law without substantial watering down (especially of the outplacement clause),
then the sector faces business model risk. If visa reform bill gets substantially
diluted, then some stocks could be fundamentally under-valued. But the
overhang on stocks might stay unless language on subsequent drafts is
progressively diluted en route to the final outcome.
That said, this bill should not affect the behavior of clients over the near-term
(3-6 months) as this is likely to be a time-consuming debate going on till at least
October 2013 (as per Nasscom). So, we don’t think FY14 growth should be at
risk due to this; the consequences of the visa bill (as they currently stand)
substantially play out beyond FY14
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favor with investors. Several not-so-encouraging, even downright discouraging,
bits of news have emerged in the past few weeks which coalesce to cast a
shadow on CY13E/FY14E industry growth. In this piece, we examine the
principal pieces of news together with our interpretation.
News item #1. Global tech bellwethers spanning services & software
(Accenture, IBM, Oracle, SAP) have disappointed in their most recent
earnings print. Having parsed through the earnings call of these tech Services
bellwethers one factor seems evident to us: revenues have come up a bit soft
relative to expectations, but order bookings and order backlog trends have been
solid at Accenture and IBM Global/Technology Services, respectively (we’re
not talking pipeline here which has to converted to signings). Notably,
Accenture (OW) had its highest-ever bookings in a single quarter by a distance
and its annual guidance speaks to a 2H (2nd half) rebound. Couple this with the
fact that IBM’s Global Services grew backlog 5% at constant currency with the
major markets up for the first time since the end of 2010. In fact, bookings in
IBM’s Services business were up nearly 50% YoY.
News item #2. New license sales at the global software majors (Oracle/SAP)
have been patchy. Oracle’s sales force restructuring is underway, so it might
have been a bit of an internal sales issue as well. On its earnings call, this is
what Oracle management specifically said, “Since we've been adding literally
thousands of new sales reps around the world, the problem was largely sales
execution, especially with the new reps as they ran out of runway in Q3.” SAP
explained its license sales miss in Q1 due to weakness in Asia (not a big
geography for the offshore IT Services sector) but has retained its annual
guidance for 2013 implying sequential acceleration.
In addition, much of the current traction in enterprise solutions/package
implementation for offshore IT Services players does necessarily not accrue
from new license sales but in optimizing and/or optimizing existing
installations. Legacy installations are inefficient which need to be “fixed” or
they need to be upgraded (or they simply might be non-compatible with each
other, in which case, harmonization of multiple ERP systems across
geographies/LOBs is needed). To interpret patchy license sales at global
software majors as having consequences down the road for offshore IT services
companies is not necessarily right, in our view, given that incremental drivers of
this offering for these players don’t necessarily pertain to new license sales.
News item #3. The proposed immigration bill which impacts the offshore IT
Services industry. Proposed visa reforms have given the Indian IT sector a
binary risk/reward profile. If the currently proposed visa reforms are passed into
law without substantial watering down (especially of the outplacement clause),
then the sector faces business model risk. If visa reform bill gets substantially
diluted, then some stocks could be fundamentally under-valued. But the
overhang on stocks might stay unless language on subsequent drafts is
progressively diluted en route to the final outcome.
That said, this bill should not affect the behavior of clients over the near-term
(3-6 months) as this is likely to be a time-consuming debate going on till at least
October 2013 (as per Nasscom). So, we don’t think FY14 growth should be at
risk due to this; the consequences of the visa bill (as they currently stand)
substantially play out beyond FY14
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