The long and the short of IT
Trough economics
Less than 60 sleeps to Christmas. Less than 40 to annual predictions time. Gartner has jumped the queue and spilled the beans on 2025. Gartner sees tech spend growing 9.3% next year, accelerating from 7.2% this year. As we review the latest Q3 results, it is hard to see 9% upside, harder to see 7% this year. For the majority Q3 is about ‘striving,’ which is typical of the trough (i.e following expansion, peak, and contraction) phase. Blemishes are fewer now (hat tip: Empresaria), so too are ‘beat and raise’ (except SAP and ServiceNow), the majority quibble about the macro and geopolitics, the spending pause/sweat, the assets ahead of budgets and Elections. And yet. The overall impression is positive: knuckling down with re-structuring gains appearing in profitability and cash measures. Mr Market has echoed a brighter mood. UK tech TSR (n=71) is +4.16%YTD – reversing 2023 and 2022 fortunes, -5.31% and -20.43% respectively. We are in the trough, looking up not down.
Our latest results roll-call spans the tech universe: Atos, Coforge, Datatec, Empresaria, Gattaca, IBM, Randstad, Robert Half, SAP, ServiceNow, Softcat and Tech Mahindra. Read on. Data insights inform our cohort dashboards and views of the global tech-economy.
IT Spend in 2025
2025 is the first year when enterprise customers know enough about GenAI to create and fund scale adoption of the technology. There have been POCs aplenty. Worldwide IT spending is expected to total US$5.74tn in 2025, +9.3% Y/Y, according to Gartner. The analysts tempered their views on 2024 (reducing FY24 Y/Y growth to 7.2% from 7.5% prior) but see growth accelerating in 2025. John-David Lovelock, Distinguished VP Analyst at Gartner, comments that “current spending on generative AI (GenAI) has been predominantly from technology companies building the supply-side infrastructure for GenAI.” CIOs will begin to spend on GenAI, beyond proof-of-concept work, starting in 2025. Mr Lovelock thinks about the hype cycle (Recap: Gartner believes that GenAI enters the ‘trough of disillusionment’ in 1Q25) and adds that more money will be spent on AI projects. However, “the expectations that CIOs have for the capabilities of GenAI will drop” as the reality of what can be accomplished with current GenAI models, and the state of CIO’s data, will “not meet today’s lofty expectations.”
The largest spending growth in 2025 will be in Data center systems where Gartner sees spending growth after a hefty +35% in 2024. "GenAI will easily eclipse the effects that cloud, and outsourcing vendors, had on previous years regarding data center systems”. It took 20 years for the cloud and outsourcing vendors to build up spending to US$67bn a year on servers. The demand of GenAI will help nearly triple server sales from 2023 to 2028. As to the other segments: Spending on software is expected to increase 14% to US$1.23tn in 2025 +11.7% Y/Y, IT services is expected to grow 9.4% to US$1.73tn in 2025, +5.6% in 2024 as spending on these segments is expected to be on AI-related projects.
Gartner views
Source Gartner Group
Our preliminary 2025 Tech themes
2024 was dominated by GenAI, Magnificent 7 (the rise & fall), geopolitics, and the impact of Elections. 2025 brings the end of two years of recessionary fears, fiscal loosening, practical GenAI (even as the market gets concerned about the GenAI trough and those GenAI POC that didn’t translate to ROI, as GenAI recommended the wrong product/solution/streaming service/answer to questions etc). Additional concerns are the difficult/deteriorating geo-political backdrop, dwindling global workforce, and the consequences of all those new electors and presidents finding their legislative feet. We need to ‘survive till 2025’. Then as we look at our cohort segments we see:
Enterprise Applications: GenAI tech insertion crushes everything. The development of AI moves from standalone test cases and ‘labs’ to wider infiltration into enterprise applications, via extensions and agenticAI. This will create a new generation of ‘legacy’ applications and open the procurement door to new ‘nativeai’ suppliers. Incumbents will develop AI extensions. The word of the year is “Agentic AI’.
IT Infrastructure: The Great Refresh. The investments made in tech infrastructure during Lockdown are now depreciated and feeling tired. Datacenter investment surges due to the new compute demands from GenAI applications. There will be more ‘Them & US’ trade embargoes on chips (leading to further geopolitical instability), coupled with concerns on sovereign data & datacenters. At the user level, there is widespread anticipation of a device refresh cycle. Device spending, (c2x the size of data center spending) will largely be driven by replacements for the laptops, mobile phones, tablets and other hardware purchased during the work-from-home, study-from-home, entertain-at-home era of Covid. Microsoft withdrawing support for Windows 10 in Autumn 2025, drives a widespread desktop refresh.
IT Professional Services: How to get AI done? Investors switch from semis to Professional Services as they also ponder: “How do we get AI done?” IT Professional Service firms start hiring and re-training, plus software engineers leave user organisations to get re-trained in the industry. Accenture becomes the new OpenAI.
UK Tech TSR since 2020 (%)
Source: Company data, Yahoo Finance, Technology Investment Services
The latest results roll call
Data & Analytics
SAP: Cloud transition
SAP has been enduring a ‘cloud transition’ for years now and is in the middle of a large-scale downsizing, but for Q3 the company posted a ‘beat and raise’. Q3 illustrated some decent progress on the continued cloud migration: cloud now over 50% of Group revenue. Cloud revenue +25% Y/Y, with Cloud ERP Suite revenue +34% Y/Y as Group revenue was +9% Y/Y and up 10% at constant currencies. IFRS operating profit up 29%. The company also said that in-memory database system HANA is on its way to reach €1bn revenue since its market launch two years ago. On guidance SAP raises its 2024 outlook for cloud and software revenue, operating profit and free cash flow. SAP is in a pickle with US authorities on US government contracts, but didn’t disclose any new news at the analyst call, bar saying that it was caught up as part of a wider investigation. Also, no real new news on the ongoing restructuring, expected to affect 9 - 10k staff.
Christian Klein, CEO: “2Q3 was another strong quarter for SAP, and we are confidently raising our 2024 financial outlook. Cloud revenue growth developed remarkably well in the quarter, especially for our Cloud ERP Suite. . . A significant part of our cloud deals inQ3 included AI use cases.”
SAP Cloud as Percent of Revenue over 50% of total (%)
Source: Company data, Technology Investment Services
ServiceNow: GenAI transition
ServiceNow posted a ‘beat and raise’ Q3. Subscription revenue US$2,715m, +23% Y/Y, with Group revenue, US$2,797m, growing 22% Y/Y. Current Remaining Performance Obligations (cRPO) was US$9.36bn and grew 26% Y/Y. Unlike (say SAP) ServiceNow is among a group of cloud native software vendors who are now looking to re-position as AI platform companies. While not as ‘glamorous’ or visible as other AI areas, we see in operational AI the potential to offer fast ROI (rather than just POC). Similarish to ActiveOps (see here), there is a very tangible opportunity in this segment where ‘agenticAI’ can better integrate people and machine centric processes and in so doing create better operational visibility. Said Chairman and CEO Bill McDermot (formerly at SAP), “This remarkable momentum stems from both existing and new customers doubling down on their investments in ServiceNow as the AI platform for business transformation. The mandate to put AI to work for people represents a generational technology shift.” On the ‘follow the people’ notion we note that ServiceNow named Amit Zavery as president, chief product officer (CPO), and COO. Mr Zavery comes via 30 years in enterprise technology and previous leadership roles at Google Cloud and Oracle.
FD Technologies: Transaction proceeding: Bring on KX plc
Positive news from FD Technologies as it announces that shareholders have approved the sale of the First Derivative Business to EPAM Systems (see here). The Divestment remains subject to conditions and is expected to complete in Q4. The resultant entity, badged KX plc (POV) is then listed in LSE and should attract a global investor group.
The numbers we are tracking
Source: Company data, Technology Investment Services
Data & Analytics Dashboard
Source: Company data, Technology Investment Services
Updated Dashboard thoughts
No change to our cohort investment case. While it is too early in Q3 to draw meaningful cohort-wide conclusions, from the past two weeks the cohort is in ‘beat and raise’ mode. Continuing the theme through the cohort means that investors are likely to see the cohort as ‘growing into their valuations,’ rather than being more cautious that SaaS companies will continue to be victims of having ‘their’ budget siphoned off by GenAI POCs.
IT infrastructure Services
Datatec: Positive interim results
Datatec (interim results) captured our ‘gain from restructuring’ notion. Jens Montanana CEO: “The Group’s much improved year-on-year financial performance was underpinned by Westcon maintaining its positive profit growth trajectory and Logicalis International increasing its profitability strongly”. The results saw Datatec significantly strengthen operating cash generation and earnings at all levels. Despite a macro leading to a “softening” in some of its European territories, Datatec guided that all divisions should deliver a better full year over year performance. From the products “sectors such as cyber security and cloud infrastructure remain strong”. Note for Computacenter watchers/investors, Datatec identified weakness in networking product sales and highlighted weaker Cisco product demand. From the Datatec segments: (i) Westcon International’s revenue -2.9% Y/Y to US$1.80bn, Adj EBITDA +14.4% to US$71.2m. (ii) Logicalis International’s revenue -10.9% Y/Y to US$575.0m, Adj EBITDA +35.1% to US$38.4m. (iii) Logicalis Latin America’s revenue -18.1% to US$215.4m, Adj EBITDA -6.3% to US$5.6m.
Softcat: Finals positive
It was final results at Softcat. This marked another solid year punctuated by: gross profit +11.7% Y/Y to £417.8m, 9.3% Y/Y growth in operating profit, strong cash conversion coupled with positive guidance. For FY25, Softcat sees “another year of double-digit gross profit growth together with high single-digit operating profit growth”. CEO Graham Charlton called out the general weakness in UK economic conditions, which had a “dampening effect on customer demand throughout the year, resulting in longer sales cycles and deferred spending”. Customers are prioritising cost optimisation (i.e. not spending) and sweating existing assets (i.e. lengthening useful life) ahead of committing to major new projects, and highlighted that client device sales were especially impacted. In contrast to Datatec, Softcat flagged that growth across technology areas was widespread and it was “particularly strong in networking” and security driven by the continued high demand for cyber, with workplace impacted by a continued weak market for client devices. Recap: Softcat is an SME supplier – so different customer set to Datatec, and Westcon is a distributor, Softcat a VAR. At Softcat Gross Profit/customer was +9.7% to £40.6k as the customer base grew 1.8%, to 10.3k.
IT infrastructure Services Dashboard
Source: Company data, Technology Investment Services
Updated Dashboard thoughts
No change to our cohort investment case. While there is much potential for a Q4 budget flush positive surprise (i.e. – the negatives ease) companies are cautious and guidance better reflects the narrative of the Great Refresh view for 2025. That said with the wind-down in inventory, investors should prepare for re-stocking and a consequent impact on working capital. However the consequent revenue growth should ensure that the segment should offer superior returns in 2025, with 2024 more of as a hunker down period punctuated by delayed spend. More from Computacenter Q3, 28/10.
IT Professional Services
Coforge: Exceptional
Sudhir Singh, CEO and Executive Director, Coforge called it an “exceptional” quarter. The Order book, US$1.31bn, +40% Y/Y. The company added US$516m to the order book in the quarter – marking the eleventh consecutive quarter where order intake exceeded US$300m. Like others in the cohort, there was also a net headcount increase, + 5,871 FTEs, being +22.1% Q/Q making 32,483, including 4,430 staff from Cigniti. Revenue US$369.4m was +26.8% Q/Q, +32.8% Y/Y, with the EBITDA margin, 15.8%, +53 bps Y/Y.
Tech Mahindra: Exceptional EBITDA growth
Mohit Joshi, CEO and Managing Director commented that the overall IT services industry remains “soft” and it was the restructuring exercise (project Fortius) which resulted in margin expansion “for the third sequential quarter.” Of the financial highlights (i) Revenue US$1,589m +1.9% Q/Q, +2.2% Y/Y, EBITDA US$209m +61.4% Y/Y with the EBITDA margin, 13.1%, up 480 bps Y/Y.
IBM: “Great momentum”
Arvind Krishna Chairman, President and CEO stated that Q3 performance was led by double-digit growth in Software and the company sees “great momentum” in AI where the genAI book of business is >US$3bn, +US$1bn Q/Q. From the services area IBM saw “solid demand for large digital transformations”, the Book-to-bill ratio was 1.14. While there was “continued momentum in generative AI bookings” customers spend constraints was impacting revenue yield.
Atos: Reiterated guidance
The company reiterated FY guidance as it posted Q3/9 months revenue. Q3 revenue, €2,305m, was -4.4% Y/Y. Positively, this was in line with guidance from the 2 September business plan. As to the divisions: (i) Eviden was - 6.4% Y/Y with a market characterised by continued softness in the Americas and Central Europe; (ii) Tech Foundations was -2.6% Y/Y which reflected “lower scope of work and previously established contract completions and terminations”. Negative news: Group Q3 book-to-bill was 66%, from 84% last year. Q3 cash consumption of €-3m excluding change in working capital optimization for €232m. Positive news: the financial restructuring plan is guided to close in December 2024/early January 2025 and there is new governance in place with Philippe Salle named chairman and becoming CEO on February 1st – the sixth but it is difficult to keep track. Jean Pierre Mustier, Atos CEO is looking for a Q4 improvement stating that he expects “stronger commercial activity in the coming months, with the anticipated return of multi-year strategic contracts with existing customers”.
The numbers we are tracking
Source: Company data, Technology Investment Services
IT Professional Services Dashboard
Source: Company data, Technology Investment Services
Updated Dashboard thoughts
No change to our cohort investment case. We see GenAI revenue lines continuing to grow across the cohort. The companies have started to re-hire after a number of years of downsizing. They do this cautiously as they are re-building order books and have also re-built FTE utilisation. Increasing attrition tells us that staff see other opportunities and hiring. While in the short term hiring will depress the Productivity Index this should be welcomed as a sign of confidence in the outlook.
Recruitment
Randstad: Starts on adjacencies
CEO Sander van ‘t Noordende commented that the “challenging macroeconomic environment persisted over the quarter” but that trading conditions had stabilized across “some of our markets”. Like the recruiters Randstad has focused on execution and operational discipline. Reflecting our ‘make use of a crisis’ notion we see positively that Randstad acquired a digital healthcare marketplace, Zorgwerk, in the Netherlands.
Empresaria: Profit Warning
They informed investors in a trading Update that the challenging market conditions had “worsened in a number of markets and permanent recruitment demand generally remaining extremely subdued and so Q3 saw “some slowing”. Q3 NFI was -4% Y/Y, in H1 the fall was 9% Y/Y. The company warned that Q4 will be “worse than previously forecast with market conditions in Germany particularly challenging, at what is normally a peak time for our operations there, along with a continued deterioration of markets in APAC which in some cases had been relatively resilient”. Adverse trading conditions are to continue through H1/2025 resulting in FY Adj PBT “no less than £2.0m”. Note Adj PBT was £3.5m in FY23 and was £9.0m in FY22.
Our concern:
Empresaria needs a re-structuring exercise which is long over-due. The company offers temporary and contract recruitment, permanent recruitment and offshore services across six sectors: Professional, IT, Healthcare, Property, Construction & Engineering, Commercial and Offshore Services. The company is structured in four regions UK & Europe, APAC, Americas and Offshore Services.
Gattaca: Week-on-week progress
Final results (FY end 31/7) featured Group NFI, £40.1m, -5% Y/Y. The messages and positioning at Gattaca are coherent and plausible. FY Contract NFI was +3% Y/Y, as there was an 8% increase in contractors in the 6 months to 31 July 2024. Gattaca’s two largest sectors showed were positive: Defence +10% Y/Y, Infrastructure +14% Y/Y. Permanent NFI was -33% Y/Y in a “challenging market”. Group continuing underlying PBT was £2.9m, from £3.7m last year, net cash, £20.7m, from £21.6m last year. The market commentary was that the company remains mindful of the macro-economic headwinds “which continue to impact demand and candidate sentiment”. It is seeing permanent recruitment remaining subdued and is continuing its focus on contractor growth. As a negative it flags that profitability would be H2 weighted in FY25 as it reiterated prior guidance. On the call CEO Matthew Wragg mentioned some recent green shoots on permanent recruitment with week-on-week improvements. Despite other verticals showing better growth, the STEM focus is to continue.
Robert Half: Week-on-week progress
An earnings beat from Robert Half. Q3 net income was US$65m, with revenues US$1.465bn, net income of US$96m and revenue US$1.564bn a year ago. “Revenues and earnings for the third quarter exceeded our expectations, driven by very strong results from Protiviti,which posted sequential and year-on-year revenue gains,” said M. Keith Waddell, president and CEO. Like the wider cohort, Mr Waddell also highlighted that client budgets remain constrained, and decision cycles extended, and added that business confidence levels are improving, aided by continuing progress on inflation and the beginning of a global rate-cutting cycle. Like Gattaca, the improvements are seen in the “most recent weekly sequential results, which have been stable and consistent for the past 12 to 14 weeks”. We continue to be confident — both in our ability to weather the current climate and in our future growth prospects as the macro landscape improves.
The numbers we are tracking
Source: Company data, Technology Investment Services
Recruitment Dashboard
Source: Company data, Technology Investment Service
Updated Dashboard highlights
No change to our cohort investment case. We have been early to call the ‘turn’ in this cohort. All companies are mindful of the challenging headwinds yet are all better able to execute following their restructuring initiatives. While hiring intentions started to improve a quarter ago, it has not lead to widespread hiring. However, there are indications that week-on-week progress is telegraphing that the conditions have stabilised. Despite strong valuation support, investors will likely need ‘handholding’ as they consider when to buy from the trough as others remain ‘fearful’.
End notes & Disclaimer: Please read
All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. This is not investment advice. Opinions contained in this report represent those of the author at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. The author is not liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained herein. The information should not be construed in any manner whatsoever as, personalized advice nor construed by any subscriber or prospective subscriber as a solicitation to effect, or attempt to effect, any transaction in a security. Any logo used in this report is the property of the company to which it relates, is used here strictly for informational and identification purposes only and is not used to imply any ownership or license rights between any such company and Technology Investment Services Ltd. Email addresses and any other personally identifiable information collected in the provision of the newsletter are only used to provide and improve the newsletter.
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My name is George O’Connor. I am a tech investment and IT industry analyst. I explore shareholder value, its drivers, the best exponents, the duffers. The target readers are investors, companies, advisors, stakeholders and YOU. If you like this please subscribe and pass it on to colleagues and friends. That said, if you hate it - do the same. Thanks for dropping by dear investor.