IT Services Blog

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Demand Environment
  • Clients continuing to prioritize cost takeout over discretionary initiatives
    • But spending towards new growth areas like AI, cloud adoption, cybersecurity, data and analytics is observed
  • Clients have started to view IT investments more favorably post-election-related certainty and interest rate cuts in recent months
GenAI
  • Have built 4 small language models for banking, IT operations, cyber, and enterprises broadly
    • Have 2.5bn parameters, built using proprietary data sets
  • Developing over 100 new GenAI agents for deployment
    • Have live deployments, not just proof of concept
    • Typical business outcomes includes:
      • Time reduction
      • Cost reduction
      • Greater impact with customer base and growth
  • Working closely with GenAI partner ecosystem to develop joint solutions
  • Case studies:
    • Client: Large Technology Company
      • Project: Developed a Generative AI-powered research agent that generated comprehensive solutions within seconds for requests made for the product support teams
    • Client: Professional Services Company
      • Project: Created 3 audit agents to intelligently automate multiple tasks
  • Using GenAI for internal productivity
    • Small and large language models helping with software development
Revenue
  • CY24Q4 Revenue of $4,939mn, +6.1% YoY in CC
  • Regions (in order of growth):
    • India +40.1% YoY in CC
    • Europe +12.2% YoY in CC
    • North America +4.8% YoY in CC
      • Returned to positive growth trajectory after four quarters
    • ROW     -11.1% YoY in CC
  • Verticals (in order of growth):
    •   Manufacturing +10.7% YoY in CC
      • Automotive sector in Europe continues to remain slow
      • However, there is a continued momentum in areas such as engineering, IoT, supply chain, cloud ERP and digital transformation
      • The benefits of vendor consolidation are being more apparent, contributing to the growth of existing accounts and the establishment of new relationships
      • The pipeline is healthy, with a mix of large and small deals and a focus on cost takeout and portfolio rationalization
    •   Energy, Utilities, Resources and Services +8.6% YoY in CC
      • Macro headwinds and supply-demand imbalances continue to influence spending patterns
      • Growth in demand for electricity to cater to data centers is expected to bring in more investment in energy
      • Resources clients are more watchful about the changing geopolitical dynamics impacting the supply chain
      • Discretionary spend remains muted
      • Investment in industry clouds and energy transition solutions have helped win multiple deals
    •   Hi Tech +8.4% YoY in CC
      • Continues to remain soft
      • Some clients are reducing the run cost and pausing discretionary investments
      • Seeing opportunities in cost takeout deals, including legacy product management and managed services based business operations
      • Programs are driven by cloud computing and new tech like AI and ML
    •   Life Sciences +6.3% YoY in CC
    •   Financial Services +6.1% YoY in CC
      • Saw third consecutive quarter of volume growth
      • U.S. continues to grow strongly in this quarter and over the past few quarters
        • See discretionary spend increase in capital markets, mortgages, cards and payments
      • Have seen a revival in European Financial Services during Q3
      • Expansion into Nordics, Middle East, and Southeast Asia is also contributing to growth
    •   Communication +4.0% YoY in CC
      • Continues to face volatile macro environment, leading to growth challenges and rising OPEX pressure
      • Discretionary spending continues to be soft and current year growth is driven mainly by recent large deal wins focused on efficiency and consolidation
  •   Others +3.2% YoY in CC
  •   Retail +0.1% YoY in CC
    • Seeing an improvement in US with discretionary pressures easing
    • Companies are looking at investing in brand and technology initiatives
    • S/4HANA migration deadline is driving budget allocation to make enterprise workload compliant
    • Leveraging Infosys Topaz to showcase enhanced business value in predictive analytics and real-time insights and strategic decision-making
Bookings
  • CY24Q4 TCV of 17 large deal wins was $2.5bn
    • 63% was net new
    • Vertical-wise, signed 5 deals in Financial Services, 4 in Communication, 3 in Manufacturing, 2 each in Retail and EURS and one in Hi-Tech
    • Region-wise, signed 11 large deals in America and 6 in Europe, also includes a BOT deal to set up a GCC in India
  • Large deal pipeline has become stronger in CY24Q4
  • Seeing a 3.6% 9-month pricing realization tailwind
    • Seeing pricing as stable at this point in time
  • Decrease in share of to 5 clients is due to furloughs
Margin
  • CY24Q4 Operating margin of 21.3%, +80 bps YoY
    • Headwinds
      • 70 bps from furloughs and lower working days, offset by higher leave utilization and others
      • FY'24 comp increase, higher variable payout, impact due to amortization of intangibles from recent acquisitions and large deal ramp-up
    • Tailwinds
      • 40 bps from currency movements
      • 30 bps from Project Maximus​
      • 20 bps from lower costs relating to provisions for post-sales customer support and expected credit loss provision, offset by higher third-party costs
  • Wage hikes will happen in two phases
    • 1st phase starting January 1st
    • 2nd phase starting April 1st
    • Indian wages will increase 6% to 8% on average, with high performers getting more
    • Overseas increases will be low single digit
Employees
  • CY24Q4 Total employees of 323,379, +5,591 QoQ, +716 YoY
    • Second consecutive quarter of headcount addition
  • CY24Q4 Voluntary Attrition % (LTM - IT Services) of 13.7%, +80 bps YoY
  •  CY24Q4 Utilization (excluding trainees) of 86%, +170 bps YoY
    • 83% to 85% is the target range
  • Targeting 15,000 freshers for the year, with 20,000 expected for next year
Guidance
  • FY25 Revenue growth revised to 4.5% to 5.0% in CC
    • CY25Q1 has lower working days
  • FY25 Operating margin unchanged at 20% to 22%
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Demand Environment
  • Customer priorities continue to remain centered around cost optimization and business transformation
  • Expect client IT budgets to remain similar in CY25 with a positive bias
  • With the reduction in the interest rates, easing of inflation, and reduced uncertainty with the new US administration taking over, expect the discretionary demand to strengthen
  • Verticals:
    • Seeing early signs of revival in discretionary spend in BFSI and Retail
    • Manufacturing, Life Sciences, and Healthcare should start seeing growth in the medium term as near-term challenges have bottomed out this quarter
  • GenAI, AI, and cloud services continue to see significant growth
    • Customers are gearing up to leverage AI by focusing on application modernization and cloud
    • Helping clients build LLMs, benchmark their performance, and enhance their efforts in quantization
  • Clients are investing in
    • Agentic AI adoption
      • Represents the next stage of maturity in the exponentially evolving space of AI
      • Adds reasoning capabilities to large language models
      • Moving beyond initial wave of chatbots and RAG deployments of GenAI
      • Allows to design, train, and deploy agents that solve high-value business problems
    • Building a robust data foundation
    • Technology modernization
    • SAP S/4 HANA transformations
    • Cloud engagements
Revenue
  • CY25Q4 Revenue of $7.539bn, +3.6% YoY in SD, +4.5% YoY in CC
  • Vertical (in order of growth):
    • Energy Resources and Utilities +3.4%
    • Consumer +1.1%
      • Primarily driven by the improvement seen in retail in all major markets
      • Travel, transportation, and hospitality performed well in UK, EMEA, and APAC, but considerably slowed in the US due to a market specific issue and strained customer profitability
      • Retail growth strong in the fashion apparel sub-segments
    • BFSI +0.9%
      • Leading adopter of AI, GenAI, and other cutting edge technologies
    • Manufacturing +0.4%
      • Continue to see softness in CY24Q3 due to a combination of macro and industry specific issues in auto and aerospace, which have faced challenges from supply chain unrest and the labor market
      • Feel it will bottom out in CY25Q1 and growth will come back
      • Continue to capture demand on the back of significant investments in factor of the future, smart manufacturing, software vehicles, and GenAI
    • Technology & Services -0.4%
      • Client IT budgets continued to remain flat
    • Life Sciences Healthcare -4.3%
      • Client specific challenges called out last quarter are largely stabilized
      • MedTech industry is undergoing rapid transformation driven by the shift to intelligent devices and predictive AI, GenAI in genomics, cell therapy, and personalization
      • Customers are also investing significantly in scaling their digital manufacturing capabilities and building a resilient supply chain
      • Buyers waiting for more policy clarity in the US until discretionary spending returns
    • Communications and Media -10.6%
      • Continues to encounter challenges with demand, primarily led by technology-driven cost optimization
      • There are encouraging signs of a rebound in IT spending as telcos advance their efforts to expand into adjacent businesses while enhancing efficiency in their core operations
  • Geographies (in order of growth):
    • India +70.2%
    • Middle East +15%
    • Latin America +7%
    • Asia Pacific +5.8%
    • UK +4.1%
    • Europe +1.5%
    • North America -2.3%
Bookings
  • CY25Q4 Order Book TCV of $10.2bn
    • Highlight of the quarter was exceptionally strong and broad-based TCV, especially strong in:
      • North America $5.9bn
      • BFSI $3.2bn
      • Consumer Business $1.3bn
  • Saw the deferral of some projects based upon the ROI expectation which saw reprioritization
  • Seeing a decrease in the deal cycle by a few weeks on deals greater then $20mn
  • Verticals:
    • Good deals wins in BFSI, CPG
  • Geographies:
    • Europe has one of the best deals wins
Margin
  • CY25Q4 Operating Margin of 24.5%, +40 bps QoQ, -50 bps YoY
    • Headwinds
      • Furloughs
      • Q3 seasonality
    • Tailwinds
  • Margin aspiration remains 26% to 28%
Employees
  • CY25Q1 Closing headcount of 607,354, -5,370 QoQ
    • QoQ reduction was due to seasonality
    • Don’t see a correlation between headcount and growth in the short-term
  • LTM attrition of 13.0% in IT Services
  • Awarded 25,000 promotions, total year 110,000
Published on
Let's dig into the takeaways from Q1 CY2024 Earnings Calls.   Here are the 8 key themes I observed.
  1. Discretionary spending remains tight: The single most common line uttered by every CEO in their Q1 earnings calls was that discretionary spending remains tight.  CIO’s no longer have the extra money to spend on proof-of-concept and nice-to-have projects, and instead are facing choices of which of their technology spending categories to prioritize
  2. Near-term ROI is the biggest factor in winning deals: CEO’s reported that of the deals they did win, it was attributable to being able to return immediate ROI to the customer.  The key word is immediate, CIOs can’t invest in long-term ROI horizons that pay off in 2-3 years, they need to see a demonstration of how IT services are going to bring them economic value on day 1
  3. Digital transformation is still around and has a bright future: Despite the cuts to discretionary spending, enterprises are still spending on digital transformation, especially on projects related to building their digital core.  The digital core is a single version of truth for enterprise data, categorized into a single ontology, optimized with cloud, and consumable via an API.  Enterprises are realizing they can’t take advantage of the promises of GenAI and automation until they can supply those algorithms with quality enterprise data.  And the good news here is that most enterprises are extremely early in their digital core journey, with most estimates leaving 90% of the future work still to be done
  4. Investing in people is back: Accenture’s launch of LearnVantage, combined with its acquisition of Udacity set a clear signal that enterprises are looking to invest in reskilling their existing workforce, a potentially huge new market opportunity for service providers
  5. From the great resignation to the great stay: Attrition is back to pre-pandemic levels, hiring is significantly down, and most IT services vendors decreased in aggregate headcount as compared to a year ago; what a difference a year makes.  But the one metric that shows this isn’t sustainable is utilization.  Utilization is reaching near record highs for most vendors, which means that the short-term strategy of hiring fewer people and doing more with less can only go so far
  6. Margins are increasing, but their long-term stability requires a return to revenue growth: The majority of IT services vendors announced margin improvement initiatives in CY23, which yielded success into Q1CY24.  However, short-term cuts to spending on office space and headcount aren’t sustainable for long-term margin expansion, which will require a return to revenue growth
  7. The GenAI hype cycle is over: While many of the earnings calls still devoted significant time to discussion GenAI, the focus is moving away from the initial hype and into what is generating tangible growth.  One thing that is clear is that IT services vendors have an opportunity to help enterprises develop the guardrails and compliance frameworks that ensure LLMs and other GenAI algorithms are being used in a safe way, minimizing the risk of hallucinations and data training data leakage.  Additionally, the ability for code assistants to help understand legacy code in languages like Fortran and COBOL is driving real efficiency as historically developers in those languages had to invest lots of time in understanding messy code bases
  8. Q1 is predicted to be the bottom of the trough, but will it? At the end of CY23, CEO’s were predicting a return to growth in Q1CY24.  Now that Q1CY24 results are in we can see the Q1CY24 was another quarter of decelerating IT services growth (when viewed in constant currency).  The Better Way SmartView is the only market forecast that provides a quarterly view of the IT services market, I hope you are as excited as I am to get the Q2CY24 view and see when the market returns to growth! 

​Schedule an intro session with me today to learn more about the Better Way Research project.

Chad Huston

Better Way Research Project

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