IT services: Deal activity remains surprisingly healthy

17 Apr 2023 , 10:20 AM

Here are the key takeaways:

• Managed Services ACV grew 1% YoY/2% QoQ in Q1CY23, to USD9.8 billion, registering its best quarter ever on robust demand for ADM, ER&D and industry specific BPO. 
• ISG maintained its CY23 forecast of 5% YoY for Managed Services, as bookings remain strong with a focus on growing existing business. 
• As-a-service (AAS) ACV declined 13% YoY and was flat QoQ as enterprises slow down migrations, lengthen sales cycle, and optimize Cloud workloads. With the Big 3 hyperscalers posting their first YoY decline ever in ACV in Q1, ISG has further cut its growth forecast to 15% (from 17%).
• Hiring has slowed down as service providers focus on protecting margins. Hiring likely to resume in H223, to meet demand. 
• ISG highlighted that there has been no discernable slowdown in spending by BFSI customers. However, adjustment in spends towards increased innovation and productivity is visible.

 

Managed Services sees record activity in Q123

Managed Services saw another quarter of record bookings, with ACV above USD9 billion. As-a-Service (AAS) market ACV further declined amidst a worsening macro. Combined ACV declined 8%, as Discretionary projects are being paused. Combined ACV in Americas declined 7% YoY, led by weakness in As-a-Service market. EMEA declined 5% YoY, while APAC ACV declined 14% YoY, on the back of slowing growth of Cloud.

Notables from the concall

• Demand for enterprise digitization continues to be robust. Industry-specific BPO surpassed USD1 billion in ACV for the first time (20% YoY decline is due to a tough base); ER&D (+36%) and ADM (+23%) boosted growth, while sizeable decline in legacy infra (-16% YoY) continued. 
• Post significant hiring during the pandemic, hyperscalers are now undertaking right-sizing efforts. 
• APAC is bouncing back sequentially on the back of strong growth in Managed Services. An improvement in AAS metrics as China reopens and government regulation eases, may further aid growth.

Indian IT firms indicate near-term caution, even as deals remain strong

Indian IT firms’ commentary indicates near-term pause in Discretionary spending, albeit deal wins remain healthy and pipelines remain strong. Analysts at IIFL Capital Services expect Indian IT Services sector to clock USD revenue growth of 9% in FY23-FY25 (versus 16% in FY22) — still above pre-COVID levels. They recommend staying selective, with preference for INFO/TCS (large-caps) and PSYS/LTIM/COFO (mid-caps).