Software services
Market analysis
Worldwide business intelligence (BI) software revenue will reach US$13.8bn in 2013, a 7% increase from 2012. The market is forecast to reach US$17.1bn by 2016.The appetite for BI is complemented by more-tactical buying in business units for departmental and work group analysis, as well as for personal BI, enabled by the Nexus of Forces (cloud, mobile, social and information). These are fundamental drivers. However, in the near term, growth will be hampered by sluggish macro indicators as well as by slowing sales cycles of multimillion-dollar end-to-end BI deals. Compared with 2011 growth of 16 percent, 2013 and the coming years are expected to be slower, with growth in the high single digits.1
Greater adoption of on-premises and software as a service (SaaS) will drive a modest increase in worldwide software spending through 2014, according to a recent survey by Gartner. Regions with higher IT maturity, such as North America and Western Europe, expect lower or no budget increases over the next two years, while developing countries with immature IT infrastructure, such as Eastern Europe, Latin America and Asia/Pacific, will experience the largest budget increases in software spending.2
Cognizant reported the highest annual revenue growth among the Software Services companies in the analysis. Also the company has set FY13 revenue guidance of "at least 17% growth" to US$8.6bn, and GAAP EPS guidance of US$3.95. Including an approx. 1% growth from a recent acquisition, this goal is in line with recently provided incentive compensation targets which called for a 16% revenue growth.3
Cognizant realized in-line 4Q12 results with 3% QoQ revenue growth reaching US$1.95bn (in line with Street estimates of US$1.95bn). Europe grew a healthy 7.8% QoQ, with strength in both the UK and Continental Europe. 1Q13, the company anticipates revenue 2 7% QoQ to US$2.0bn.3
CSC completed the divestiture of its credit services business and its Italian consulting and system integration business in 4Q12. Both of these businesses were a part of the company's Business Solutions and Services segment and the divestitures reflect the company's ongoing service portfolio optimization initiative to focus on next-generation technology services. The Company received cash proceeds of US$1bn upon sale of its credit services business and paid US$35mn (US$43mn including the cash on the divested entity's books) in relation to the divestment of the Italian consulting and system integration business.4
CSC’s revenue growth deteriorated this quarter due to weak commercial business. However, margins were up indicating CSC’s success in cutting expenses. Margin expansion primarily stemmed from 10% margin in the NPS (North American Public Sector) business. The company also raised its earnings guidance from US$2.30-2.50 to US$2.50-2.70.5
Infosys reported a strong 4Q12 with revenue and margin growth ahead of consensus. Analysts are turning positive on the Infosys stock and are reversing the long-standing bearish view on Infosys. Revival in bread-and butter business (BPO and inframanagement services), flexibility in deals improving win rates, embracing a more realistic margin profile, re-engagement with employees and willingness to reinvest margin gains are central to the changed investment thesis.6
HCL reported a strong quarter and revenue growth which was primarily driven by the Infrastructure segment. Analysts believe that the margin resilience was a positive surprise in the December 2012 quarter and should lead to continued stock outperformance. On the positive side HCL reported 11.3% QoQ growth in financial services; BPO services turned profitable, and improvement in BPO margins should help HCL cushion the impact of cost increases to some extent. On the other hand, HCL was negatively impacted as the headcount trends in IT services segment continue to be weak and declined for the second consecutive quarter. Also telecom and enterprise applications revenues declined -1% to -2% QoQ while retail and manufacturing services were weak.7
TCS posted better-than-expected results and maintained its outlook of the next fiscal year being better year than the current one on improved client’s clarity on spending; better discretionary spending and European growth outlook; and improved deal flow momentum. TCS 4Q12 results were largely in line on revenues, but ahead on margins and PAT. The key disappointment was soft volume growth of 1.25% QoQ; however, analysts remain assured by management’s optimistic outlook on future growth and continue to like the tightly managed operations at TCS.8
- Gartner Press Release, Feb 2013
- Gartner Press Release, March 2013
- Oppenheimer, Feb 2013
- Company 10-Q, Jan 2013
- JP Morgan, Feb 2013
- JP Morgan, Jan 2013
- Morgan Stanley, Jan 2013
- Nomura Equity Research, Jan 2013
Revenue and gross margin
Revenue for Software Services companies showed a positive trend this quarter both sequentially and YoY with the exception of CSC whose revenue registered a 1.9% QoQ decline. Cognizant’s upward trend in revenue growth was broad based and BFSI, Healthcare and manufacturing revenue grew by more than 3% QoQ. CSC’s Managed Services sector and North American Public sector registered declines of 3% and 2.8% YoY but a 28.7% growth in Business Solutions & Services sector’s revenue led to an overall increase in revenue YoY. Revenue growth of 6.3% sequentially and 5.8% YoY for Infosys came predominantly from the non-top 10 clients. Also the Consulting and System Integration grew by 15% QoQ (including Lodestone) while pricing and volume went up by 1.8% and 1.5% respectively this quarter. HCL’s revenue grew 3.6% QoQ and 13% YoY majorly contributed by growth in Europe and Americas. The increase was directly attributable to growth across key service offerings led by Infrastructure Services and Custom Application Services. TCS reported a sequential growth of 3.3% and a YoY growth of 14% in revenue across all markets. Financial Services was the best performing sector while from a services perspective, there was a good traction for Consulting and Enterprise Solutions.
Gross Margin declined both sequentially and YoY for Cognizant and Infosys. Infosys’ 96bps sequential decline was due to the consolidation of Lodestone revenue which came at a very low gross margin. CSC registered a 153bps QoQ decline but when compared to the same period last year, gross margin for CSC improved from (20.03%) in 4Q11 to 20.79% in 4Q12. This was because the company had reached a settlement agreement with the U.S. government, under which it received US$277mn in cash and an estimated total contract value of US$1 bn. Thus the company recorded a pre-tax charge to write down its claim related assets and cash received leading to a negative gross margin in 4Q11. Gross margin for HCL improved both sequentially and YoY primarily due to higher revenues. TCS reported a 101bps growth in gross margin sequentially but a 66bps decline YoY.
Net income
Software Services companies reported improved profitability this quarter. Cognizant’s net income was almost flat vis-à-vis the previous quarter but grew 16.1% YoY. The growth in net income can be directly attributable to the increase in revenue. Net income for CSC was US$510mn in the current quarter as against US$130mn in the previous quarter and US$(1,390mn) in the same period last year. The YoY increase was due to the absence of the settlement charges the company incurred in 4Q12 which had led to negative gross margin and hence a negative net income in that quarter. Also the company reported an income of US$390mn from discontinued operations which led to the sequential growth in net income. Infosys net income was flat sequentially while it declined 5.2% YoY. HCL’s 9.7% QoQ growth and 59.1% YoY growth in net income was due to higher revenues and relatively low operating expenses. Net income for TCS grew marginally by 1.5% QoQ while the YoY growth was 16%. The increase was primarily due to higher revenues and other income.
Receivables
Days sales in receivables declined sequentially for all the companies in the analysis. The decline was due to the dual effect of fall in accounts receivables and increase in revenue for all companies (exceptions being CSC and Infosys which had a marginal decline in revenue and increase in accounts receivables respectively). When compared to the same period last year, Infosys and HCL registered an increase in DSO of 3 days and 1 day respectively while the other companies saw a decline. The highest YoY decline was for Cognizant whose DSO fell by 9 days.
benchmarks