Poor Infosys Earnings Lead To Drop In IT Services Market
In looking at the last twelve months' (LTM) earnings for offshore outsourcing companies, the median of all three tracked metrics has fallen since the September 25 report. LTM earnings, by definition, comprise the last four quarterly earnings statements. The three tracked metrics are gross margin and EBITDA as a percentage of revenue ("Gross Margin" and "EBITDA" in the chart below) and revenue growth. EBITDA is earnings before interest, taxes, depreciation and amortization.
The drop in median performance for offshore outsourcing companies can be laid at the feet of Infosys Technologies Ltd., the only company tracked in this category to come out with an earnings statement in the past four weeks. Infosys's revenue growth fell from 40.8 percent last quarter to only 9.5 percent in its most recent reporting period. Still, offshore outsourcing continues to flog all other categories with far superior performance.
Among IT outsourcers that Martin Wolf Securities tracks, NaviSite Inc. was the only company in the past four weeks to report earnings. Because NaviSite's EBITDA fell from 11 percent of revenue to 9.8 percent, the median EBITDA percentage fell for the category. This measure shows that NaviSite is holding onto a smaller percentage of its earnings. However, NaviSite's shrinking revenue did fall by much less in the most recent quarter (-0.7 percent) than in the previous quarter (-3.7 percent), and its improved gross margin percentage shows the company is reducing costs to compensate for lost revenue.
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Among commercial IT professional services firms, Accenture's earnings pulled down the median performance in the category by growing revenue only 6.6 percent compared to its previous quarter's growth of 9.4 percent.
In the chart, companies that deal more in products than services (IT direct marketers, IT computer products distributors, and IT resellers) appear to be doing better, but there is a little bit of distortion in the chart. Since the September 25 report, Martin Wolf Securities has stopped tracking SED International Holdings Inc. in the IT distributors category and has added Nu Horizons Electronics Corp. and Richardson Electronics Ltd., which are performing better than SED International. Martin Wolf Securities considers SED International too small to track, with a capitalized value of less than five million dollars.
Results for IT resellers are mixed this week because TransNet Corp.'s revenue grew by less in the most recent quarter (4.0 percent) than in the previous (11.4 percent), but the company must have reduced costs substantially because its gross margin rose as a percentage of revenue as did its EBITDA percentage. The IT Direct Marketers category (with companies including Dell, CDW and PC Mall) saw no change, as no new earnings reports have come out since September 18 in that category.
The data in the chart below is based on median operational performance measures of key technology sectors, provided by Martin Wolf Securities, which specializes in mergers and acquisitions. CRN follows the results for commercial IT professional services, IT direct marketers, IT computer products distributors, IT resellers, offshore outsourcers and IT outsourcers.
To see the company-level detail making up the measures in the Channel Benchmarks chart, see www.martinwolf.com.
