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No SAPping of the growth Accent(ure)
Results of global IT majors reinforce our positive view on Indian IT
Analysis of the December 2010 quarter results of global IT majors provides interesting insights into the emerging business
dynamics in key service lines and verticals for Indian vendors. While license sales at SAP and Oracle are strong indicators
of the prospects of the enterprise application services (EAS)/ package implementation (PI) segments for Indian IT vendors
(implementation usually lags license sales by a few quarters), order booking numbers at IBM and Accenture throw light
on the trends in outsourcing and consulting spends. Post-results commentary by IBM, SAP and Accenture has reinforced
that IT services demand remains strong and that demand remains balanced between the maintenance and discretionary
segments.
Results of global IT majors reinforce our positive view on Indian IT: (1) Record software revenues at SAP, (2)
Highest growth in license sales in nine quarters at Oracle, (3) 'Terrific' growth in outsourcing order book at IBM, and
(4) Highest consulting bookings in ten quarters at Accenture.
SAP/Oracle - stellar growth in software / license sales; bodes well for EAS revenues of Indian majors:
SAPs' 4QCY10 software revenue grew by a stellar 34% YoY. Likewise, Oracle's new license sales grew 21% YoY for
the quarter ended November 2010. Oracle guided that strong growth (10-20% YoY)
would continue in the February-ending quarter. New license sales at SAP and Oracle
drive PI revenues for Indian IT companies with a lag of a couple of quarters. Strong
license sales growth at both SAP and Oracle bode especially well for Infosys (25.9%
of revenue from PI/Consulting) and HCL Tech (21.3% of revenue from EAS). TCS lags
Infosys and HCL Tech in the service line, with EAS contributing just 11.9% of revenue.
One key reason for TCS' underperformance has been its historically high exposure to
the Auto vertical and a sharp deterioration in Auto fundamentals, especially in the
US, during the downturn.
IBM - outsourcing signings strong; indicate robust overall demand for IT
services: Services results from IBM reinforced the strength in global demand
environment for IT services. Total services signings were up 18% YoY for IBM to
USD22b. Outsourcing signings were especially strong - up 24% YoY to USD14b.
IBM signed 19 deals above USD100m in 4QCY10, well higher than the 10 deals it
signed in 3QCY10.
Accenture - other end of the spectrum; booking growth stronger in consulting:
We also want to emphasize the strong consulting order booking growth at Accenture
in 1QFY11. Consulting orders (which include implementation/SI) increased by 6.3%
QoQ to USD3.72b - the highest in 10 quarters.
Implications for our IT universe - large and transformational deals return;
pick-up in discretionary segments more favorable to Infosys/HCL Tech: Though
exact dynamics from quarter to quarter may vary from company to company (e.g.
IBM's outsourcing orders witnessed higher growth than consulting in 4QCY10, whereas
ACN's consulting orders grew faster than outsourcing orders), the net takeaway remains
that demand is picking up across Run the Business (e.g. ADM) and Change the Business (e.g. PI/Consulting/BI)
segments (as HCL Tech defines them). Large deal activity remains robust and transformational engagements are
picking up. Within our coverage, we maintain a positive stance on Infosys and HCL Tech, given (1) higher exposure
to higher realization/higher margin discretionary segments, and (2) more levers available at each company to manage
margins better.
SAP: Announces record software sales - up 34% YoY,
24% CC; expect Infosys, HCL Tech to gain the most
SAP's 4QCY10 software revenue increased to EUR1.5b (v/s EUR1.12b in 4QCY09),
up 34% YoY and 24% in cross-currency terms.
Total software and software related services (SSRS) revenue was EUR3.26b (v/s
EUR2.57b in 4QCY09), up 27% YoY. The growth number however, includes the
contribution from Sybase acquisition. We await further updates to know the organic
CC growth in software revenue. (In 3QCY10, SSRS revenue had grown 19.6% YoY
to EUR2.32b, though excluding Sybase, the figure was EUR2.23b, implying 15% YoY
growth).
Oracle's new software license sales grew 21% YoY in 2QFY11 (quarter ended
November 2010), the highest in nine quarters. Oracle has guided 10-20% growth for
3QFY11.
Bearing on Indian IT companies
SAP/Oracle software revenue growth has a bearing on EAS demand for Indian IT.
Growth in EAS/PI revenue lags license sales by a couple of quarters.
Infosys, which derived 25.9% of its revenue from PI/Consulting in the December
quarter, and HCL Tech, which derived 21.3% of its revenue from PI/Consulting in
the same period, are likely to be the key beneficiaries of the pick-up in license sales
at SAP and Oracle. Higher exposure to discretionary services and early indications
that discretionary/transformational activity is picking up (reaffirmed by SAP/Oracle)
prompt our overweight stance on Infosys and HCL Tech. TCS lags Infosys and
HCL Tech in the service line, with EAS contributing just 11.9% of its revenue. One
key reason for TCS' underperformance has been its historically high exposure to
the Auto vertical and a sharp deterioration in Auto fundamentals, especially in the
US, during the downturn.
IBM: Stellar performance in services signings driven by
outsourcing bookings
IBM declared its 4QCY10 results on 18 January, a highlight of which was healthy order
bookings in the services segment, a comparable segment for Indian IT.
Results highlights
Revenue at USD29.0b, up 7% YoY (constant currency). Geographically, US grew
9% CC YoY, EMEA 4%, and APAC 7%.
Net income at USD5.3b was up 9% YoY; diluted EPS at USD4.18 was up 16%.
Total Global Services revenue increased 2% YoY in CC terms to USD15b.
IBM guided at CY11 operating EPS of USD13, up 11%.
Services signings
Total services signings during the quarter were USD22.1b, up 18% YoY. This is the
comparable segment for Indian IT players. Transactional signings were USD8b (up
8% YoY) and outsourcing signings were USD14b, up 24% YoY and 23% CC (v/s
USD5.7b in 3QCY10; signings were down 14% YoY in 3QCY10).
IBM signed 19 deals over USD100m during the quarter (v/s 10 deals in 3QCY10 and
15 deals in 2QCY10).
The services backlog increased to USD142b, up USD7b QoQ and USD4b YoY.
Management commentary
IBM had a great quarter in terms of outsourcing signings. The outsourcing backlog
has been very stable, which is the biggest driver for next year's outsourcing revenue.
The company expects 3% YoY growth (CC) in outsourcing revenue from the existing
backlog alone.
The company expects better growth rate in services in 1QCY11 v/s 4QCY10 on the
back of a strong backlog and expects to extend that performance through the year.
The stellar services signings were driven by growth markets, where IBM's signings
were up more than 250% YoY, including big contracts like the one Bharti rolled out in
Africa (BRIC countries revenue in 4Q was up 17% YoY, China was up 25%).
Key takeaways for Indian IT
IBM holds bellwether status for the global IT services industry, given its leading market
share worldwide. One may argue that Indian IT companies are doing well on account of
share gains, courtesy the continued trend towards offshoring; however, services results
from IBM reinforced that even the global demand environment for IT services is strong.
The share gains off global IT majors thus remain an incremental opportunity to the
already robust outsourcing demand
Accenture: Broadbased growth; consulting order
bookings support revival in discretionary spends
The key highlight of Accenture's 1QFY11 (quarter ended November 2010) results was
the 6.3% QoQ growth in consulting bookings to the highest level in ten quarters. Growth
was broadbased, with four out of the five verticals growing in double digits QoQ. Key
positives from the results were: [1] broadbased growth further alleviating macro concerns,
[2] strong growth in BFSI on the back of robust consulting orders, and [3] healthy trend in
consulting encouraging for Indian top-tier companies aiming to boost their offerings higher
up the value chain.
Results highlights
Accenture' 1QFY11 revenue grew 11.5% QoQ to USD6.05b, higher than the company
guidance of USD5.6b-5.8b. Consulting revenue grew 15.3% QoQ and 14% YoY,
while outsourcing revenue grew 6.5% QoQ and 10% YoY.
The company guided 2QFY11 revenue of USD5.6b-5.8b, and increased its full-year
revenue growth guidance to 8-11% (from 7-10%, earlier).
Total order bookings were USD6.31b, up 14.1% YoY, but down 3% QoQ. However,
consulting orders at USD3.72b grew 6% YoY and 6.3% QoQ, while outsourcing orders
at USD2.59b grew 28.2% YoY but declined 13.7% QoQ. The company maintained its
order booking target of USD25b-28b in FY11, an increase from USD25b order booking
in FY10.
Four of the five verticals grew in double digits QoQ, with BFSI growing the fastest at
16.7%, Communications & Hi-Tech at 10.3%, Products at 10.1%, and Resources at
11.3%. Healthcare & Public Services grew 8.8% QoQ, given somewhat sluggish
spending patterns in the public domain in Europe.
Annualized attrition rate for the quarter declined to 15% v/s 17% in the previous
quarter.
Key takeaways from management commentary
Technology consulting bookings were strong, as clients continue to seek strategies
that they can implement to improve their technology infrastructure. This bodes well
for top-tier Indian players seeking to boost their offerings higher up the value chain.
Growth in IT services through 2010 was more a function of increased confidence
among clients than pent-up demand per se. This alleviates some concerns that growth
in FY12/CY11 could be much lower than that in FY11/CY10, given the general
expectation that one-time factors like pent-up demand and M&A integration had aided
demand in FY11.
Positive bearing on Indian IT: Strong consulting activity and BFSI growth
Double-digit growth across the verticals reaffirms the broadbased nature of IT
spending among clients. Broadbased growth has also been a feature of the last two
quarters for HCL Tech and TCS.
Order bookings in consulting in 1QFY11 were the highest in 10 quarters for Accenture,
which is an encouraging sign for top-tier Indian players like TCS and Infosys, that
are striving to strengthen their offerings higher up the value chain.
BFSI, a core vertical for Indian IT, was the strongest growing vertical for Accenture.
Accenture had earlier indicated strong growth in consulting segment in BFSI space,
which bodes well for discretionary spends in the vertical.
Implications for our IT universe - large and
transformational deals return; pick-up in discretionary
segments more favorable to Infosys/HCL Tech
In summary, we believe that the numbers reported by MNCs are extremely encouraging
in terms of implications for Indian IT, with the following being the key takeaways:
Demand is picking up across maintenance and discretionary segments as reflected by
outsourcing order growth at IBM and Consulting order growth at Accenture. Large
deal activity remains robust with companies witnessing a pick-up in transformational
engagements as well.
Double-digit sequential growth across the verticals at Accenture reaffirms the
broadbased nature of IT spending among clients, alleviating fears of a slowdown in
momentum.
Strong license sales growth at both SAP and Oracle is a precursor to the strength in
Enterprise application revenues for Indian vendors.
We believe that Infosys and HCL Tech are generally better placed to tap into improving
discretionary spends, given that Infosys derives 25.9% of its revenues from PI/EAS
with HCL Tech deriving 21.3% of revenues. In contrast, TCS lags Infosys and HCL
Tech in the service line, with EAS contributing just 11.9% of its revenue.
Within our coverage, we maintain a positive stance on Infosys and HCL Tech, given (1)
their higher exposure to higher realization/higher margin discretionary segments, and (2)
more levers available at each company to manage margins better.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
No SAPping of the growth Accent(ure)
Results of global IT majors reinforce our positive view on Indian IT
Analysis of the December 2010 quarter results of global IT majors provides interesting insights into the emerging business
dynamics in key service lines and verticals for Indian vendors. While license sales at SAP and Oracle are strong indicators
of the prospects of the enterprise application services (EAS)/ package implementation (PI) segments for Indian IT vendors
(implementation usually lags license sales by a few quarters), order booking numbers at IBM and Accenture throw light
on the trends in outsourcing and consulting spends. Post-results commentary by IBM, SAP and Accenture has reinforced
that IT services demand remains strong and that demand remains balanced between the maintenance and discretionary
segments.
Results of global IT majors reinforce our positive view on Indian IT: (1) Record software revenues at SAP, (2)
Highest growth in license sales in nine quarters at Oracle, (3) 'Terrific' growth in outsourcing order book at IBM, and
(4) Highest consulting bookings in ten quarters at Accenture.
SAP/Oracle - stellar growth in software / license sales; bodes well for EAS revenues of Indian majors:
SAPs' 4QCY10 software revenue grew by a stellar 34% YoY. Likewise, Oracle's new license sales grew 21% YoY for
the quarter ended November 2010. Oracle guided that strong growth (10-20% YoY)
would continue in the February-ending quarter. New license sales at SAP and Oracle
drive PI revenues for Indian IT companies with a lag of a couple of quarters. Strong
license sales growth at both SAP and Oracle bode especially well for Infosys (25.9%
of revenue from PI/Consulting) and HCL Tech (21.3% of revenue from EAS). TCS lags
Infosys and HCL Tech in the service line, with EAS contributing just 11.9% of revenue.
One key reason for TCS' underperformance has been its historically high exposure to
the Auto vertical and a sharp deterioration in Auto fundamentals, especially in the
US, during the downturn.
IBM - outsourcing signings strong; indicate robust overall demand for IT
services: Services results from IBM reinforced the strength in global demand
environment for IT services. Total services signings were up 18% YoY for IBM to
USD22b. Outsourcing signings were especially strong - up 24% YoY to USD14b.
IBM signed 19 deals above USD100m in 4QCY10, well higher than the 10 deals it
signed in 3QCY10.
Accenture - other end of the spectrum; booking growth stronger in consulting:
We also want to emphasize the strong consulting order booking growth at Accenture
in 1QFY11. Consulting orders (which include implementation/SI) increased by 6.3%
QoQ to USD3.72b - the highest in 10 quarters.
Implications for our IT universe - large and transformational deals return;
pick-up in discretionary segments more favorable to Infosys/HCL Tech: Though
exact dynamics from quarter to quarter may vary from company to company (e.g.
IBM's outsourcing orders witnessed higher growth than consulting in 4QCY10, whereas
ACN's consulting orders grew faster than outsourcing orders), the net takeaway remains
that demand is picking up across Run the Business (e.g. ADM) and Change the Business (e.g. PI/Consulting/BI)
segments (as HCL Tech defines them). Large deal activity remains robust and transformational engagements are
picking up. Within our coverage, we maintain a positive stance on Infosys and HCL Tech, given (1) higher exposure
to higher realization/higher margin discretionary segments, and (2) more levers available at each company to manage
margins better.
SAP: Announces record software sales - up 34% YoY,
24% CC; expect Infosys, HCL Tech to gain the most
SAP's 4QCY10 software revenue increased to EUR1.5b (v/s EUR1.12b in 4QCY09),
up 34% YoY and 24% in cross-currency terms.
Total software and software related services (SSRS) revenue was EUR3.26b (v/s
EUR2.57b in 4QCY09), up 27% YoY. The growth number however, includes the
contribution from Sybase acquisition. We await further updates to know the organic
CC growth in software revenue. (In 3QCY10, SSRS revenue had grown 19.6% YoY
to EUR2.32b, though excluding Sybase, the figure was EUR2.23b, implying 15% YoY
growth).
Oracle's new software license sales grew 21% YoY in 2QFY11 (quarter ended
November 2010), the highest in nine quarters. Oracle has guided 10-20% growth for
3QFY11.
Bearing on Indian IT companies
SAP/Oracle software revenue growth has a bearing on EAS demand for Indian IT.
Growth in EAS/PI revenue lags license sales by a couple of quarters.
Infosys, which derived 25.9% of its revenue from PI/Consulting in the December
quarter, and HCL Tech, which derived 21.3% of its revenue from PI/Consulting in
the same period, are likely to be the key beneficiaries of the pick-up in license sales
at SAP and Oracle. Higher exposure to discretionary services and early indications
that discretionary/transformational activity is picking up (reaffirmed by SAP/Oracle)
prompt our overweight stance on Infosys and HCL Tech. TCS lags Infosys and
HCL Tech in the service line, with EAS contributing just 11.9% of its revenue. One
key reason for TCS' underperformance has been its historically high exposure to
the Auto vertical and a sharp deterioration in Auto fundamentals, especially in the
US, during the downturn.
IBM: Stellar performance in services signings driven by
outsourcing bookings
IBM declared its 4QCY10 results on 18 January, a highlight of which was healthy order
bookings in the services segment, a comparable segment for Indian IT.
Results highlights
Revenue at USD29.0b, up 7% YoY (constant currency). Geographically, US grew
9% CC YoY, EMEA 4%, and APAC 7%.
Net income at USD5.3b was up 9% YoY; diluted EPS at USD4.18 was up 16%.
Total Global Services revenue increased 2% YoY in CC terms to USD15b.
IBM guided at CY11 operating EPS of USD13, up 11%.
Services signings
Total services signings during the quarter were USD22.1b, up 18% YoY. This is the
comparable segment for Indian IT players. Transactional signings were USD8b (up
8% YoY) and outsourcing signings were USD14b, up 24% YoY and 23% CC (v/s
USD5.7b in 3QCY10; signings were down 14% YoY in 3QCY10).
IBM signed 19 deals over USD100m during the quarter (v/s 10 deals in 3QCY10 and
15 deals in 2QCY10).
The services backlog increased to USD142b, up USD7b QoQ and USD4b YoY.
Management commentary
IBM had a great quarter in terms of outsourcing signings. The outsourcing backlog
has been very stable, which is the biggest driver for next year's outsourcing revenue.
The company expects 3% YoY growth (CC) in outsourcing revenue from the existing
backlog alone.
The company expects better growth rate in services in 1QCY11 v/s 4QCY10 on the
back of a strong backlog and expects to extend that performance through the year.
The stellar services signings were driven by growth markets, where IBM's signings
were up more than 250% YoY, including big contracts like the one Bharti rolled out in
Africa (BRIC countries revenue in 4Q was up 17% YoY, China was up 25%).
Key takeaways for Indian IT
IBM holds bellwether status for the global IT services industry, given its leading market
share worldwide. One may argue that Indian IT companies are doing well on account of
share gains, courtesy the continued trend towards offshoring; however, services results
from IBM reinforced that even the global demand environment for IT services is strong.
The share gains off global IT majors thus remain an incremental opportunity to the
already robust outsourcing demand
Accenture: Broadbased growth; consulting order
bookings support revival in discretionary spends
The key highlight of Accenture's 1QFY11 (quarter ended November 2010) results was
the 6.3% QoQ growth in consulting bookings to the highest level in ten quarters. Growth
was broadbased, with four out of the five verticals growing in double digits QoQ. Key
positives from the results were: [1] broadbased growth further alleviating macro concerns,
[2] strong growth in BFSI on the back of robust consulting orders, and [3] healthy trend in
consulting encouraging for Indian top-tier companies aiming to boost their offerings higher
up the value chain.
Results highlights
Accenture' 1QFY11 revenue grew 11.5% QoQ to USD6.05b, higher than the company
guidance of USD5.6b-5.8b. Consulting revenue grew 15.3% QoQ and 14% YoY,
while outsourcing revenue grew 6.5% QoQ and 10% YoY.
The company guided 2QFY11 revenue of USD5.6b-5.8b, and increased its full-year
revenue growth guidance to 8-11% (from 7-10%, earlier).
Total order bookings were USD6.31b, up 14.1% YoY, but down 3% QoQ. However,
consulting orders at USD3.72b grew 6% YoY and 6.3% QoQ, while outsourcing orders
at USD2.59b grew 28.2% YoY but declined 13.7% QoQ. The company maintained its
order booking target of USD25b-28b in FY11, an increase from USD25b order booking
in FY10.
Four of the five verticals grew in double digits QoQ, with BFSI growing the fastest at
16.7%, Communications & Hi-Tech at 10.3%, Products at 10.1%, and Resources at
11.3%. Healthcare & Public Services grew 8.8% QoQ, given somewhat sluggish
spending patterns in the public domain in Europe.
Annualized attrition rate for the quarter declined to 15% v/s 17% in the previous
quarter.
Key takeaways from management commentary
Technology consulting bookings were strong, as clients continue to seek strategies
that they can implement to improve their technology infrastructure. This bodes well
for top-tier Indian players seeking to boost their offerings higher up the value chain.
Growth in IT services through 2010 was more a function of increased confidence
among clients than pent-up demand per se. This alleviates some concerns that growth
in FY12/CY11 could be much lower than that in FY11/CY10, given the general
expectation that one-time factors like pent-up demand and M&A integration had aided
demand in FY11.
Positive bearing on Indian IT: Strong consulting activity and BFSI growth
Double-digit growth across the verticals reaffirms the broadbased nature of IT
spending among clients. Broadbased growth has also been a feature of the last two
quarters for HCL Tech and TCS.
Order bookings in consulting in 1QFY11 were the highest in 10 quarters for Accenture,
which is an encouraging sign for top-tier Indian players like TCS and Infosys, that
are striving to strengthen their offerings higher up the value chain.
BFSI, a core vertical for Indian IT, was the strongest growing vertical for Accenture.
Accenture had earlier indicated strong growth in consulting segment in BFSI space,
which bodes well for discretionary spends in the vertical.
Implications for our IT universe - large and
transformational deals return; pick-up in discretionary
segments more favorable to Infosys/HCL Tech
In summary, we believe that the numbers reported by MNCs are extremely encouraging
in terms of implications for Indian IT, with the following being the key takeaways:
Demand is picking up across maintenance and discretionary segments as reflected by
outsourcing order growth at IBM and Consulting order growth at Accenture. Large
deal activity remains robust with companies witnessing a pick-up in transformational
engagements as well.
Double-digit sequential growth across the verticals at Accenture reaffirms the
broadbased nature of IT spending among clients, alleviating fears of a slowdown in
momentum.
Strong license sales growth at both SAP and Oracle is a precursor to the strength in
Enterprise application revenues for Indian vendors.
We believe that Infosys and HCL Tech are generally better placed to tap into improving
discretionary spends, given that Infosys derives 25.9% of its revenues from PI/EAS
with HCL Tech deriving 21.3% of revenues. In contrast, TCS lags Infosys and HCL
Tech in the service line, with EAS contributing just 11.9% of its revenue.
Within our coverage, we maintain a positive stance on Infosys and HCL Tech, given (1)
their higher exposure to higher realization/higher margin discretionary segments, and (2)
more levers available at each company to manage margins better.
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