NelsonHall Industry Insight: January 16, 2012

The following extracts are  commentary and insight from NelsonHall Industry Insight, NelsonHall analysts weekly views on key industry developments that impact your sourcing. Register to receive your copy weekly  This newsletter forms part of NelsonHall's Key Vendor Assessments service. For further details, contact Paul Connolly

Significant News and Developments

SQS Guides on Higher Revenues and Lower Profitability

Jan 13, 2012 | Financial Results by Dominique Raviart

Software testing pure-play SQS has announced as part of a trading update that its revenues for 2011 would be above market consensus and profitability would be impacted by €2m transition costs.

Specifically:

• 2011 revenues have benefited from:
  - Primarily: strong performance in its Managed Services business, which contributed 20% of revenues
  - A healthy project services business, even in Q4 2011, in all its major geographies and sectors
• - An improved consultancy utilization rate onsite in H2 2011, thanks to the ongoing shift to offshore
• 2011 profitability is impacted by a €2m transition cost charge for two managed services contracts
  - SQS highlights that the profitability of those two contracts has improved and is negotiating with clients to recover some of the costs in 2012
  - SQS also stresses that all managed services contracts won in 2011 will be initially more profitable than those two and will not require additional transition costs.

The company is however maintaining its cautious approach and has overall frozen hiring.

SQS has reiterated it wants its Managed Services business to account for 50% of revenues by 2014.

Analyst comments:

This is third time in three years that SQS has increased its guidance on revenues while lowering guidance on profitability. SQS is changing - quickly - its business from professional services only to a mixed short- and long-term contract balance. The company is very successful in commercial terms. It did not predict the initial transition costs that would incur from large deals and its investments in building software testing factories in low-cost countries.

SQS signals that demand for testing professional services has held better in H2 2011 than it expected. The company had guided on a flat H2 2011, driven by lower project services spending.

The good resistance of project services in H2 2011 was expected. NelsonHall expects a limited decline in growth due to the economic recession and an unfavorable comparison basis. The real danger for testing professional services lies in 2012 and NelsonHall is expecting a 4% decline in spending.

(NelsonHall has just published its latest Software Testing Assessment and Forecast. For more information, contact to rob.hughes@nelson-hall.com)

Computacenter Pre-Close Announcement of 7% Revenue Growth in 2011

Jan 12, 2012 | Financial Results by Jamie Snowdon

As part of its pre-close trading statement, Computacenter has announced several financial performance indicators for 2011:

• Service revenues are up 7% ( 5% at CC)
• Group revenues are up 7% (2% at CC)
• Net cash was £111.5m at end of 2011, up from £111.0m y-o-y.

Service growth remained constant through H2 2011 while product revenues fell from the first half.

2011 key geographical financial performance indicators include:

• U.K: revenues are down 13%, although they improved quarter on quarter with a 6% decline in Q4
  - Of which services are down 2%, flat in Q4
  - Of which product revenues are down 18%, down 8% in Q4
• Germany: revenues are up 22% and up 18% at CC, thanks in part to a weak H1 2010
  - Of which services are up 15%
  - Of which products are up 26%.
• France: revenues are up 34% and up 8% excluding acquisitions
  Strong growth can be attributed to the acquisition of Top Info
  - Of which services are up 14% (6% CC excluding acquisition)
  - Of which products are up 38%.

Computacenter's contract base grew by 6% to ~£565m.

Computacenter will announce its final full year results on March 13, 2012.

Analyst comments:

The poor performance of Computacenter's U.K. business was offset by strong growth in France and Germany.

• The French unit benefited from the acquisition of Top Info and has also seen 6% organic growth in its services business
• Computacenter Germany secured its largest ever contract with an annual value in excess of £10m, this contributed to the 11% organic growth enjoyed by its services team.

Looking ahead, the U.K. business is expecting a boost from recent contract wins. Six managed services contracts signed in 2011 are expected to deliver annualized value of £60m, these contracts will come fully on line by H2 2012.

Infosys Announces Fiscal Q3 2012 Revenues Up 13.9% to $1,806m

Jan 12, 2012 | Financial Results by Rachael Stormonth

Infosys has announced fiscal Q3 2012 results, for the period ending December 31, 2011. Revenues were $1806m, up 13.9% year-over-year (up 13.8% in CC) and up 3.4% sequentially. Operating income was $560m, a margin of 31.0%, up from a margin of 30.2% in the prior year quarter.

Revenue mix by geography (with NelsonHall estimates of $ revenue and YoY growth) was:

• North America 63.7%, up 0.9% sequentially, up 1.1% in CC ($1150m, up 12.2% YoY)
• Europe 22.6%, up 13.7% sequentially, up 16.8% in CC ($408m, up 18.1% YoY)
• India 2.1%, down 1.3% sequentially, flat in CC ($38m, up 8.8%)
• Rest of World 11.6%, up 0.4% sequentially, up 2.5% in CC ($209m, up 17%)

Revenue mix by service type (with NelsonHall estimates of $ revenue and YoY growth) was:

• Application development 17.1% ($309m, up 24.9%)
• Application maintenance 21.8% ($394m, up 10.4%)
• Infrastructure management 6.1% ($110m, up 15.8%)
• Testing services 7.9% ($143m, up 18.4%)
• BPM 5.2% ($94m, up 5.8%)
• Other services 2.6% ($47m, down 0%)
• Consulting, PI and SI 30.6% ($553m, up 34.6%)
• Product engineering 3.6% ($65m, up 57.8%)
• Software 4.8% ($87m, up 3.2%)
• Other products/platforms/solutions 0.3% ($5m, down 90%)

Revenue mix by vertical (with NelsonHall estimates of $ revenue and YoY growth) was:

• Insurance 7.4% ($134m, up 0.4%)
• Banking and financial services 27.9% ($504m, up 14.4%)
• Manufacturing 20.4% ($368m, up 18.6%)
• Retail 15.2% ($275m, up 19.4%)
• Telecoms 9.8% ($177m, down 10.7%)
• Energy & utilities 6% ($108m, up 12.1%)
• Transportation and logistics 2% ($36m, up 26.6%)
• Life Sciences 4.1% ($74m, up 29.8%)
• Healthcare 1.8% ($33m, up 105%)
• Other Services 5.4% ($98m, up 30.9%).

During the quarter Infosys won five large deals, of which one a transformational deal. Two of the five large deals were >$500m: one a manufacturing organization in Europe and one a financial services firm in the U.S.

Infosys has revised downwards prior revenue guidance, which is now for:

• Fiscal Q4 2012, of $1,806-$1,810m,a YoY growth of 12.7% to 13.0%
• Full FY 2012, of $7,029m - $7,033m, a YoY growth of 16.4%.

Analyst comments:

Firstly, Infosys achieved prior guidance for the quarter ($1,805-1,843m, restated for constant currency), albeit at the low end. The slowdown we noted in the September quarter has now hardened and we expect Q4 to turn out to be even softer: among the vendors who provide guidance Infosys could be one of few to achieve it.

The margin improvement was due to rupee depreciation (11% in the last quarter alone): investments in sales & marketing are up year-on-year (from 4.3% to 4.9% of revenue), and the company is executing on the promise made last year to increase investments for future growth. Infosys highlights that its product and platform strategy is working well, with $300m in TCV of booked revenue in the pipeline (mostly for its SocialEdge and DigitalEdge platforms) and ten Finacle wins in the quarter.

The number of high value clients continues to grow (to take one example, the number of clients contributing >$90m revenue per year, at 16, has doubled since FY 2010). In addition Infosys has added 120 new clients in the last nine months, one of the highest additions it has ever achieved in a nine-month period.

Europe had its strongest quarter in terms of revenue growth for some time. The company secured two large wins in Europe (one of them the Syngenta application management deal) which will contribute to ongoing YoY growth until at least H2 FY 2013, even though overall IT spend in Europe is likely to decline in 2012. Germany and France, where Infosys has appointed country managers, have grown at 40%-50% YoY and the company intends to expand its nearshore centers in the Czech Republic and Poland. Infosys is experiencing growth in Europe both from:

• Existing clients in the financial services, manufacturing and retail sectors, with growth from existing programs and from cross-selling new services
• A significant jump in the number of new clients added during the quarter, with 14 new clients, equally spread across U.K. and the Continent.

In terms of service lines,

• Product engineering has now had six straight quarters of over 50% YoY revenue growth. The service line has been moved from the 'Products, Platforms & Solutions' group to 'Business IT Services'
• Infrastructure services had its strongest quarter since Q1 FY 2011 (the last time when we saw double digit growth). Some, but not all, of this is due to some reclassifying of some services from Consulting to Infrastructure services. Infosys is also winning IT infrastructure business bundled with applications services. This indicates success from the reorganization in which all the service lines have been combined within the Industry Sector Groups, enabling Infosys to go to market with more strongly integrated offerings
• The Infosys Consulting subsidiary, which slowed down in fiscal H1, has now been quietly folded into the package implementation and systems integration businesses, again embedded into the various Industry Sector Groups
• The BPO results disappoint, with just 5.8% YoY growth and a sequential revenue decline. In 2012 we would like to see more aggressive growth from Infosys in BPO, given it is the strongest area of outsourcing in the market currently
• Software also had a quiet quarter, but this tends to be a lumpy business.
• Mahindra Satyam to Offer TMMi-Based Assessment Services

Jan 11, 2012 | New Offerings by Dominique Raviart

Mahindra Satyam has bought a license of Experimentus' Assessment Method for offering TMMi-based testing and quality assurance services. The company is to have its testing personnel trained by Experimentus for offering such assessment services.

Accredited personnel from Mahindra Satyam will then validate and benchmark testers.

Experimentus' Assessment Method is TMMi Foundation accredited.

Analyst comments:

Experimentus is one of the few founding organizations of the TMMi Foundation. It is also one of the two providers of TMMi-based assessment services for certifying clients and organizations on their testing processes, in a similar way development organizations are certified against CMMi.

Experimentus has certified several clients including Barclays and more recently Spanish software testing vendor MTP. The license agreement allows the company to get royalties from its investment in its methodology while participating to establishing TMMi as a definite testing standard.

From a Mahindra Satyam perspective, this is a very clever move that provides light on its testing capabilities and positions the company as the "certifying organization of testing delivery organizations".

Capita acquires Salmat Speech Solutions in the UK

Jan 10, 2012 | Mergers and Acquisitions by Sarah Burnett

Capita's IT services division has acquired the U.K. operations of Salmat Speech Solutions, a specialist provider of telephony automation and voice recognition/ verification offerings.

The terms of the acquisition were not disclosed but under a partnership agreement Capita will get to use and market the advanced product set available from the Australian parent company.

Salmat's U.K. clients include Standard Life and Dublin Airport Authority.

Analyst comments:

This acquisition primarily is going to benefit Capita internally, enhancing its delivery capabilities for its growing portfolio of customer management services. Capita has invested heavily in this segment recently with a series of acquisitions in 2011 that include Call Centre Technology, Ventura and Vertex's private sector business.

Salmat's speech products include voice recognition for biometric and identification purposes which has applications in government and health sector as well as other verticals. The use of voice command interfaces and voice recognition is on the increase in the NHS to increase the productivity of medical personnel and for fast and secure access to patient records. Capita may well be able to take advantage of its acquired voice capabilities in these markets also.

GFI to Sell Canadian Operations for CAD $80m

Jan 10, 2012 | Mergers and Acquisitions by Dominique Raviart

French IT services vendor GFI Informatique has entered into exclusive negotiations with two unnamed investors to sell its 62.4% stake in GFI Solutions Group, its Canadian business, for a planned price of CAD 75m (~€57m).

The sale would allow GFI to decrease its debt level (€103m at end of H1 2011) and help financing other acquisitions in France and Southern Europe.

GFI has also announced the acquisition through GFI Solutions Inc. of Tender Retail, a Toronto-based company with a headcount of 30 active in payment software with a distribution network in North America. The acquisition is described as having been agreed with the potential buyers of GFI Solutions Inc. to facilitate the transaction.

GFI Solutions Group is a 1,000 headcount unit offering solutions in different sectors e.g. ERP, hospitality and payment processing software. The business was created based on several acquisitions including Fortsum, Accovia and Bell Solutions d'Affaires. In H1 2011 it generated revenues of €31.1m, and a €4.7m operating margin.

Analyst comments:

Since 2009, GFI management has been re-aligning the several businesses of the group into a more coherent business. The company has sold loss-making businesses, e.g. its Italian and German subsidiaries, and apart from France has only kept its presence in Spain, Portugal and Belux. GFI has also worked on its service offering in France to make it less dependent from its legacy in staff augmentation, which still represented 42% of revenues in H1 2011.

The divestment of GFI's Canadian operations is not a surprise. The new management team of GFI had warned it was probably not going to keep it, in spite of its relatively high margins, because of lack of synergies with GFI's core IT services business.

All in all, the divestment should reduce GFI's net debt by half and help financing the forthcoming purchase of several assets of Thales.

Phoenix Group Announces Rebranding Initiative

Jan 09, 2012

Phoenix Group has announced its intention to combine its separate brands, ICM and Phoenix IT Services, under one name: Phoenix.

Analyst comments:

Since its acquisition of ICM in 2007 Phoenix has gone to market under two brands: Phoenix IT Services and ICM. ICM providing business continuity services and Phoenix IT Services a broader range of IT infrastructure managed services, such as network and desktop services.

Today's announcement coincides with a reorganization being instigated by new CEO David Courtley: Phoenix is rationalizing into a single operation with five mark-facing BUs:

• Partners
• Telco
• Managed Services
• Business Continuity
• Hosting, where Phoenix is looking to develop its business, targeting the mid-market.

This reorganization, due to complete by March 31, brings some obvious advantages. The simplified structure will bring operational efficiencies and make it easier to demonstrate the company's scale and breadth of service offerings to clients. For the first time Phoenix will be properly able to go to market with its full range of offerings. Expect stronger marketing from Phoenix in 2012.