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IT service providers searching for stronger recovery

John Madden | Feb. 23, 2010
Judging by the most recent round of earnings reports (the latest being from HP), IT services providers appear fairly confident about future growth this year following a disastrous 2009.

Judging by the most recent round of earnings reports (the latest being from HP), IT services providers appear fairly confident about future growth this year following a disastrous 2009. However, as we roll through the first few months of 2010, providers are not ready to declare that a full global economic recovery is in process. In fact, many are still operating in a defensive mode, while preparing to switch to a more offensive posture in the coming months by continuing to realign and strengthen their current portfolios. We expect that it will take at least another financial quarter to glean a truer and fuller picture of services providers growth opportunities.

HPs results are a sign of the times

In its recent first-quarter earnings announcement, HP reported an 8.2% year-on-year revenue increase, with growth in its PC, printer and server divisions offsetting essentially flat growth in software and services. For services specifically, year-on-year revenues decreased by 1% to $8.7 billion, with the largest declines recorded in application services ($1.5 billion, down 8%) and business process outsourcing ($734 million, down 3%). Infrastructure technology outsourcing (ITO) increased 2% to $3.9 billion, while technology services, which houses the bulk of HPs IT support business, decreased 2% to $2.4 billion. It should be noted that, like some other providers, HP overall saw signs of growth in the Americas and Asia-Pacific, which reported year-on-year growth respectively of 9% (7% in constant currency) and 26% (19% in constant currency). However, growth in EMEA remained sluggish at 1% (down 1% with currency adjustments).

In his comments to analysts, CEO Mark Hurd said he sees momentum for all of HPs businesses particularly services, where Hurd pointed to a healthy deal pipeline despite flat growth. The company is continuing to realize cost benefits from the ongoing EDS integration, which according to HP is on schedule (although no specifics were provided on additional cost savings), and from continuing investments in process improvements for service delivery. We expect to see more evidence of this at HPs upcoming enterprise-focused analyst event in March.

Despite glimmers of sunshine peeking out from behind the stormy economic clouds, Hurd said the company would wait until the end of the first quarter before making more definitive statements about potential growth in the IT market for the rest of 2010. In the meantime, it will continue to push multiple services and solutions around its next-generation data center campaign, make R&D investments, pursue further cost-cutting initiatives, and make additional salesforce investments.

Other providers give the market similar messages

HPs services competitors are sending similar signals to the market in terms of future growth prospects. Capgemini recently announced its FY09 financial results, which showed a 3.9% total revenue decline from FY08. It stated that it will be able to emerge from the recession in a relatively solid position through investments in the public sector (including new entries into the North American market), strong growth in outsourcing, and effective headcount management, among other factors. Nonetheless, when looking ahead to 2010, Capgemini maintains a cautious tone. It anticipates increased activity in some regions such as North America and India, some sectors such as consulting, and in some verticals including (surprisingly) financial services. Other providers have made similar statements about this vertical.


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