It is perhaps unsurprising that of the companies that published financial results in September (mainly non-US companies, as many North American businesses are in a quiet period) it is the IT support and services providers that lead the pack in terms of business growth.
Indian IT service provider Tata Consulting Services (TCS), for example, reported 37% growth in the first quarter of its fiscal year 2006 to $623.2 million, demonstrating the increasing willingness among Western businesses to entrust IT support to offshore companies.
TCS, which in early September was awarded the ‘UK Trade and Investment Special Recognition Award’ by the British Prime Minister, Tony Blair (to little fanfare in the UK), derived 65% of its revenue in the period from contracts in the United States and 25% in Europe. The company managed to inch down staff attrition, seemingly the curse of service companies in developing nations, from 7.9% annually to 7.6%, its quarterly report reveals.
However, European services companies turned out robust performances as well. UK-based SAP ‘business transformation strategy’ provider Axon Group, for instance, grew revenues by 51% in the first half of its fiscal year. This success, of course, mirrors the fortunes of business applications giant SAP, whose own revenues have swelled over the past year.
In 2004, Axon acquired Malaysian IT support company MyDruid, which was at the time a loss making operation. The revenue contribution from the Kuala Lumpur site was a modest £1.5 million ($2.65 million), but the strategy – to use MyDruid’s resources as an offshore outsourcing destination and a foothold in Asia – indicates that some European companies might yet profit from the booming Asian outsourcing market.
French IT services company Capgemini, Europe’s largest indigenous player, reported its first profit in three years. Although this dramatic turnaround may be a result of the fact that the company switched reporting conventions this year (from French to international accounting standards), the company nevertheless chalked up a year-on-year revenue growth of 17%, and an operating margin that has swung from -1.5% to 1.8% in the last twelve months.
Revenue from establishing and managing outsourcing contracts grew by 64% compared to the same period in the previous year. This growth was driven by a handful of large outsourcing contracts that Capgemini signed off in the first half of 2005, including a major deal with the UK’s Inland Revenue. As it ramps up its outsourcing activities, revenues from the company’s consultancy arm continue to shrink.
Capgemini’s CEO Paul Hermelin says that the price pressure the company was under, presumably in the face of offshore services companies, has began to ease and prices in the market have now begun to climb.
Not all European IT services providers were so upbeat. Tietoenator, the largest IT services company in Scandinavia, managed to keep apace with the sector, turning in revenue expansion of 12%, while acknowledging that this growth had been hard won. A statement from TietoEnator lamented that while demand for IT services was on an upward trend, “the gradually improving market conditions have not alleviated competition, which remains intense.”
Nevertheless, the value of the IT services business was demonstrated by UK-based Morse. Last year Morse instigated a major transformation of its business by ceasing its longstanding hardware reselling operations, and acquiring further consultancy capacity through the purchase of UK rival Diagonal. That transformation was rewarded by a return to revenue growth in the closing quarter of 2004, and in September the company announced a return to operational profitability and an 8% revenue hike for the first half of fiscal 2005.
Where are they now?
When Research in Motion’s BlackBerry mobile email device became the executive toy du jour in 2003, many foretold of the demise of the PDA. But two companies synonymous with PDAs, Palm (formerly PalmOne) and Psion, both reported financial performances that exceeded expectations this month.
Despite poor take-up of its Treo smartphones in Europe and the acquisition of its dismembered software arm PalmSource by a Japanese competitor, Palm grew revenues by 25% in its first quarter of 2006, as compared to the previous year.
Worldwide sales of the Treo grew by 160% in that time, spurred by its popularity in North America. And the announcement in September that Palm is to produce versions of the Treo that run on erstwhile arch-rival Microsoft’s Windows Mobile operating system would suggest there is more growth to come.
Meanwhile, the UK’s Psion, which has long given up making its late-1990s, must-have handheld, managed a financial performance that surprised even its closest watchers. Although the company’s revenue growth (also 25%) was largely provided by sales of shares in the mobile operating system developer Symbian, Psion also won lucrative contracts providing ruggedised RFID readers for, among others, the US military.