Health Check: Technology Services

Last Thursday, we delivered our analysis of how fifty of the largest providers of technology services performed in Q4 2008. Companies in our index include hardware, software, and pure services companies. Example companies include:

• Accenture
• Cognizant
• Cisco
• HP
• IBM
• Infosys
• Oracle
• SAP

Analyzing the Q4 data, we saw three trends important to every provider of technology services.

FIRST TREND: TECHNOLOGY COMPANIES FAIRED WELL IN 2008

All three of the distinct types of companies in our index, hardware, software, and pure services companies, performed relatively well in a difficult 2008. Pure service companies like Accenture and BearingPoint improved their gross margins and profits. Hardware giants Cisco, HP, and IBM all improved Q4 2008 operating incomes percentages over their Q4 2007 percentages. Software giants Oracle and SAP did the same. The figure below shows the averages for the thirty-nine companies that were in the Q4 2007 and Q4 2008 snapshots. As can be seen, all categories trended up in 2008 except product revenues, which leads us to the second key observation.

Q4 2007 - Q4 2008

SECOND TREND: PRODUCT REVENUES AND MARGINS ARE UNDER PRESSURE

In the Q4 data, we finally saw the weakness in the global economy impact product companies in the Service 50. Specifically, in their product revenues and product margins. The figure below shows trends for hardware companies that were in the Q4 2007 and Q4 2008 snapshots. Once again, top line revenues and bottom line profits were up. However, what is going on in between shows aggressive cost management to offset pressure on product profits.

Hardware Companies Q4 2007 - Q4 2008

THIRD TREND: BALANCED REVENUES ARE OUTPERFORM PRODUCT-CENTRIC REVENUES
Finally, we analyzed how different product-service revenue mixes performed in Q4. The chart below breaks companies in the Service 50 into three buckets:

• Services Heavy: Companies with 65% or more of their revenues coming from services
• Product Heavy: Companies with less than 35% of their revenues coming from services
• Balanced: Companies with 36% – 64% of their revenues coming from services.

This analysis shows that companies with “services heavy” or “balanced” revenue mixes outperformed product heavy companies in Q4 2008.  This makes sense intuitively. If capital spend is tightening, services revenue streams become more important. Also, customers seem more inclined to invest in optimizing existing infrastructure than buying new products—this equates to more services spend, not product spend. This creates a dynamic we call the “services buffer.” This is the financial buffer services revenues and margins create for product companies when product revenues are flat or declining. Every indicator we see tells us this buffer will be critical to the profitability of many product companies in 2009.

Mix Performance Q4 2008

Tags: Product Services Mix, Technology Services Industry, The Service 50