Software services

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Market analysis

The Software Services sector performed well with respect to revenue growth, posting year-on-year average revenue growth of 9.0% and sequential growth of 5.0%. In contrast, profitability was far off the mark, with an average decline of 26% year on year and 25% sequentially. Computer Science Corp and Cognizant Technologies led the profitability decline, off 113% and 40%, respectively. The decline in net income for Computer Science Corp was due to US$57 million of restructuring and US$70 million of transaction and integration-related costs.

The Software Services market is rapidly changing. In recent years, there has been fast growth of the as-a-service market which has negatively impacted service providers. The overall market is now expanding to include Infrastructure-as-a-Service (IaaS) and Software-as-a-Service (SaaS) segments, in addition to traditional outsourcing, which continues to lose share to cloud-based infrastructure and software platforms. The as-a-service market, which includes IaaS and SaaS activity, represents more than one-third of the combined global market for sourcing services. As more and more work is automated and moved to the cloud, traditional outsourcing activity will decline.

According to the ISG Outsourcing IndexTM, which measures commercial outsourcing contracts with annual contract value (ACV) of US$5 million or more, ACV for the combined global market— representing both traditional and as-a-service sourcing activity—was US$7.9 billion in Q2 2016, down 2% from the prior year. Traditional sourcing was down 17%, to US$5.1 billion, while as-aservice sourcing climbed 45%, to US$2.8 billion. The decline in traditional outsourcing is due to the sluggishness in new scope contract awards, particularly in the information technology outsourcing (ITO) space, which saw its ACV decline 24% from the prior year. As-a-service growth, meanwhile, was driven by a 70% increase in IaaS ACV.1

Regionally, the Americas saw its combined Q2 2016 ACV grow by 7%, to US$4.2 billion, pushed by surging as-a-service market that generated US$1.8 billion in ACV, up 49% over the prior year. The traditional sourcing market recorded its tenth consecutive quarter of ACV in excess of US$2 billion and outpaced the quarterly ACV of the Europe, Middle East and Africa (EMEA) market for the first time since Q1 2013. The Europe, Middle East and Africa (EMEA) market, far less reliant than the Americas on as-a-service activity, saw its combined second-quarter ACV drop 18%, to US$2.7 billion. Traditional sourcing, at US$2.0 billion, was down 28%, while the as-a-service market, at US$654 million, was up 38%.1

Q2 2016 ACV in the combined Asia Pacific market rose 13%, to US$989 million, with the as-a-service market growing 42% even as the traditional sourcing market remained relatively flat (in a range between US$500 million and US$600 million) for the sixth straight quarter.1

As-a-service growth will remain the driving force for the time to come. At the half-year mark, 36% of the combined market is accounted for by as-a-service ACV. Traditional sourcing had a slow start in Q2 2016.1

In company news, Cognizant Technologies reported a revenue for Q2 2016 of US$3.37 billion, up 9.2% from US$3.09 billion in the second quarter of 2015. But net income was US$252.4 million, a 40% decline compared to US$420.1 million, in Q2 2015 and a 43% decline sequentially from US$441 million. This was due to the principal operating subsidiary in India, which repurchased shares from its shareholders, which are non-Indian Cognizant entities in May 2016. This resulted in a one-time remittance of US$2.8 billion of cash from India. US$1.2 billion, or US$1.0 billion net of taxes, was transferred to the US, with the other US$1.6 billion remaining overseas. As a result of this transaction, the parent company incurred an incremental 2016 income tax expense of US$237.5 million, of which US$190.0 million was recognized in the quarter ended June 30, 2016 and approximately US$23.7 million will be recognized in each of the quarters ending September 30, 2016 and December 31, 2016.

CSC has announced that it has unanimously approved a plan to merge the company with the Enterprise Services segment of Hewlett Packard Enterprise (HPE). The new company is expected to have annual revenues of US$26 billion. The merger is expected to be completed by the end of March 2017. Following the transaction, CSC and HPE shareholders each will own approximately 50 percent of the new company’s shares. The merging of these businesses will offer additional strength in customer service and IT operations; experience and IP in areas such as financial services, healthcare and life sciences, transportation, consumer products, and insurance; 85 delivery centers and 95 data centers across 70 countries; capabilities in next-generation cloud, security, application development and modernization, big data and analytics, mobility, workplace, and advanced business process and IT services.

1. The Global ISG (Information Services Group) Outsourcing IndexTM, July 2016