Health Check Q1 2009: Techhology Services

Today, we delivered our analysis of how fifty of the largest providers of technology services performed in Q1 2009. Companies in our index include hardware, software, and pure services companies. Example companies include:

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

Analyzing the Q1 data, we saw three trends important to every provider of technology services:

 ONE:  PRODUCT REVENUES AND MARGINS DECLINED

Overall, companies in The Service 50 finally saw pressure on their top line revenues. In addition, both hardware and software companies saw product revenues decline.  The average product margins for Hardware companies declined 3% compared to the same quarter one year ago. A read out of how specific hardware companies faired is provided below. The table documents the general decline in product revenues, product magins, and operating incomes for these companies.

Hardware Companies Q1 2009

Hardware Companies Q1 2009

TWO:  SERVICES and SOFTWARE COMPANIES IMPROVED THEIR OPERATING INCOMES

Despite declining top line revenues, both services and software companies increased their operating incomes. This is no small feat in this economic environment.  Software companies experienced some of the highest services margins reported from any Service 50 snapshot. In addition, many software companies improved their bottom line. A readout of how specific software companies faired is provided below.  

Software Companies Q1 2009

Software Companies Q1 2009

THREE:  BALANCED REVENUES CONTINUE TO OUTPERFORM PRODUCT-CENTRIC REVENUES

Finally, we analyzed how different product-service revenue mixes performed in Q1. 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, once again, outperformed product heavy companies in Q1 2009. 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 the dynamic we have called the services buffer. This is the financial buffer services revenues and margins create for product companies when product revenues are flat or declining. Our prediction last quarter was that the services buffer would prove very important to product companies in 2009. The Q1 2009 snapshot reinforces that belief.

Company Type Performance Q1 2009

Company Type Performance Q1 2009

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One Response to “Health Check Q1 2009: Techhology Services”

  1. Brocade: Product Provider Perils « Service Visions Says:

    […] Margins are under incredible duress. This reality has been presenting itself in our Service 50 Analysis since Q1 of this year. For Brocade, they lost $36M in product margins dollars compared to one year […]

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