The Software services companies in our study performed well this quarter with year on year growth of 7.7% and sequential growth of 1.5% in revenue. Revenue growth was led by HCL Tech and Cognizant. Net income also grew by 10.7% in Q1 2017 compared to the year earlier but was flat sequentially.
The ISG Index™, which measures commercial and public sector outsourcing contracts with annual contract value (ACV) of US$5 million or more, reported first-quarter ACV of US$10.5 billion, up 12% over the first quarter last year, and up 13% sequentially from the fourth quarter of 2016. Continued growth in the combined commercial market was fueled by the as-a-service (Infrastructure-as-a-Service and Software-as-a-Service) segment, which reported growth of 39% over the prior year, to US$4.4 billion. Traditional sourcing, meanwhile, dipped 1%, to US$6.2 billion, yet was up 17% compared to the fourth quarter of 2016.
The public-sector had a combined market value of US$12.9 billion, down 21% year over year, but reported growth of 17% sequentially. Traditional sourcing, which represents the major share of spending in the public sector, was US$12.5 billion, down 22%, due to lower demand in the U.S. and Europe. The combined market for both commercial and public sector sourcing recorded 11 consecutive US$20-billion-plus quarters, four of which were more than US$25 billion. These have become benchmarks — anything below US$20 billion mark is thought to be a weak quarter.
In the as-a-service segment, Infrastructure-as-a-Service (IaaS) was particularly strong in the first quarter reaching US$3.3 billion, up 79%, while Software-as-a-Service (SaaS) declined by 18%, to US$1.1 billion. The Financial Services sector generated US$8.4 billion in ACV during the trailing 12 months, a 15 % increase over the prior year and it accounted for 29% of the Financial Services market in that period.1
Software Business Services emerged as another strong performer. In the trailing 12 months, its ACV increased 26%, and was up 80% versus the same period two years ago. As-a-service accounted for 63% of the total market ACV, up from 51% two years ago.
In terms of region, Americas delivered its best-ever quarter, with ACV of US$5 billion, up 11%. This was led by a continuing robust market for as-a-service solutions, which rose 29% over last year. In this segment, IaaS surged 63% in the LTM period, while SaaS declined 10%. The traditional service domain, IT outsourcing (ITO) dropped 10% over the trailing 12 months and business process outsourcing (BPO) declined 6%.
EMEA turned in its second-best quarter ever, with ACV of US$4.4 billion, up 13%. With adoption of as-a-service solutions still lagging behind the other two regions, EMEA's growth remained more dependent on the traditional market, which reached US$3.2 billion, up 3% over last year, fueled by six mega-deals (contracts exceeding $100 million in ACV) during the quarter. The as-a-service market, meanwhile, climbed 48%, to US$1.2 billion.
Asia Pacific reached its best combined sourcing ACV, US$1.1 billion, since early 2014 – the fourth consecutive quarter the region has generated ACV in excess of US$1 billion. Combined ACV jumped 16%, led by as-a-service growth, which was up 59%.1
IT services company Cognizant acquired Brilliant Service Co. Ltd. of Japan for an undisclosed amount during the quarter. Brilliant is expected to add mobility and Internet of Things [IoT] skills to Cognizant's digital solutions consulting group. The acquisition is part of a larger and consistent strategy to add both capabilities and geographic reach through smaller, tuck-in deals. Osaka-based Brilliant Service was founded to provide iOS and Android platform applications primarily to Japanese enterprises. It has capabilities in creating digital solutions for smartphones, wearable terminals and embedded devices. The company has a customer segment focus on telecommunications, consumer goods and manufacturing & industrial companies.
In the last week of December 2016, CSC filed with the SEC that it wishes to raise up to US$250 million by selling off some of its account receivables. The move is aimed to diversify the company’s funding structure and enhance its liquidity and capital efficiency. The receivables would come from certain CSC subsidiaries, such as Alliance-One Services Inc., CSC Agility Platform Inc., CSC Consulting Inc., CSC Cybertek Corporation, Mynd Corporation and PDA Software Services LLC. CSC has created a 100% owned special purpose entity called CSC Receivables LLC to buy and bundle the receivable acknowledgements.2
DXC Technology Company reported results on behalf of Computer Sciences Corporation ("CSC") for Q1 2017 due to the merger of CSC and the Enterprise Services business of Hewlett Packard Enterprise into DXC Technology. The diluted earnings per share from continuing operations was US$(1.05) in the first quarter, compared with US$(0.78) in the year ago period, due to the merger-related integration and transaction costs, as well as pension and restructuring costs. Income from continuing operations before taxes was US$(187) million for the first quarter, compared with US$(187) million in the year ago quarter. Consolidated segment commercial operating income, which includes GBS (Global Business Services) and GIS (Global Infrastructure Services), excluding certain items, was US$248 million compared with US$156 million in the first quarter of fiscal 2016. Consolidated segment commercial operating margin on the same basis was 13.1% compared with 8.6% in the year- ago period.
1. ISG, Jan 2017
2. Seekingalpha.com, May 2017