Software services

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Market analysis

The Software Services players in our sample performed well in Q4 2016 with an 8% increase in revenue year over year and a 0.4% increase quarter over quarter. Profits increased by 4% year over year, but declined by 4% sequentially. Computer Sciences Corp (CSC) reported the sharpest decline in net income of 28% year over year, but grew over 107% sequentially.

The ISG Outsourcing Index, which measures commercial outsourcing contracts with annual contract value (ACV) of US$5 million or more, was US$9.6 billion in Q4 2016, down 5% from Q4 2015.  However, for the full year, ACV reached US$37.4 billion, a 9% increase over US$34.4 billion in 2015. The growth was led by the as-a-service segment, which had a 38% gain in ACV in both year-over-year and sequential terms.

The migration from traditional sourcing to as-a-service sourcing is gaining momentum as enterprises increasingly embrace the digital opportunity to transform their operations, enhance their engagement with customers and better leverage their connections with suppliers. This shift demands speed, mobility, innovation and increased productivity from service and technology providers, who are investing in digital platforms and services and adapting their delivery models to this new paradigm. Decline in traditional sourcing ACV is likely the result of fewer megadeals during the year.

The ACV of Infrastructure-as-a-Service (IaaS) outpaced Software-as-a-Service (SaaS) as the strongest growth area. In Q4 2016 alone, IaaS ACV was three times that of SaaS. For the full year, IaaS ACV jumped 54% to reach US$10.0 billion, while SaaS ACV increased by 13% to reach US$4.6 billion.1 

In Q4 2016 the American outsourcing market generated an ACV of US$4.7 billion (+5% year over year). ACV in the Americas has outpaced the Europe, Middle East and Africa (EMEA) region in eight of the past 10 quarters. For the full year, the Americas ACV grew 14% and reached US$18.4 billion compared to 2015. Growth was driven by the as-a-service segment, which experienced a 37% growth totaling US$8.5 billion. Among industries, Financial Services experienced a 12% increase in traditional sourcing ACV over last year and grew to US$2.31 billion driven by the digitization of banking services. Healthcare’s ACV also hit an all-time high and reached US$1.28 billion driven by new opportunities in care and claims management, as well as present and possible future changes in Medicare, Medicaid and compliance.

Asia Pacific’s combined ACV was US$1.1 billion for Q4 2016, an increase of 15% year on year. Full-year 2016 ACV was 16% higher than 2015 at US$4.3 billion, with as-a-service ACV increasing by 51% to US$2.3 billion. Asia Pacific’s as-a-service ACV now accounts for 53% of total ACV.  As-a-service growth in both SaaS (+25%) and IaaS (+64%) was the highest of all three regions. In 2016 Australia and New Zealand, the region's largest market, saw traditional sourcing ACV rise 29% year on year. By industry, Telecom and Media saw a year-over-year increase of 12%, despite dropping against its five-year average. Manufacturing saw significant gains, jumping 60% over 2015.1

On a company level, Computer Science Corp (CSC) reported revenues of US$1.9 billion in Q4 2016, a growth of 10% year over year and 3% quarter over quarter. The growth was primarily driven by the recent acquisitions of  Xchanging and UXC. Both these acquisitions have been largely integrated and have positively contributed to the year-on-year growth as well as margin improvement due to cost synergy realization in Q4 2016. In Q4 2016 CSC’s agreement with MetLife went live as planned and began generating revenue.

On 23 December 2016, CSC filed with the SEC that it is looking to raise up to US$250 million by selling off some of its account receivables. The move is aimed at diversifying the company’s funding structure and enhancing its liquidity and capital efficiency. The receivables would come from certain CSC subsidiaries, such as Alliance-One Services Inc, CSC Agility Platform Inc, CSC Consulting Inc, CSC Cybertek Corporation, Mynd Corporation and PDA Software Services LLC. CSC has created a 100% owned special purpose entity called CSC Receivables LLC to buy the receivable acknowledgements and bundle them together.

 

1.ISG, Jan 2017