Xchanging cements alliance and deal with Alexander Mann Solutions

(By Anthony Miller – Friday 31st July 2009 9:15am). Ahead of its interim results on Monday, ‘the other’ UK BPO player, Xchanging, has consummated its relationship with RPO (recruitment process outsourcing) firm Alexander Mann Solutions via a marketing alliance and a procurement BPO deal. The alliance builds on a relationship at Xchanging’s flagship client, BAESystems, in which AMS displaced Xchanging for the onsite bit of its HR BPO contract (see Xchanging update).

We anticipated this would presage a more formal tie-up. What we didn’t expect was for AMS to be big enough to warrant outsourcing to Xchanging, but that’s exactly what has also happened. In its biggest ever procurement BPO deal, Xchanging is to take over the management of AMS’ indirect procurement spend, which apparently totals £825m over 5 years. That’s an awful lot of paper clips! TechMarketView subscription service clients can read more about AMS in the UKHotViews archives (see Alexander Mann Solutions make recruitment the process), and we’ll bring you more after Monday’s results.

Phoenix flutters

(By Anthony Miller – Friday 31st July 2009 8:45am). The market’s love affair with infrastructure support services group, Phoenix, dampened a bit this morning as the company reported a 5% like-for-like revenue decline in the quarter (see here). Phoenix had been on a pretty good roll of late (see Phoenix rises) and was indeed the best performer in the FTSE SCS Index last quarter (see our latest IndustryViews Quoted Sector report).

CEO Nick Robinson reiterated the comments he made in the FY results in June, that “there are fewer large scale multi-million pound, multi-year contract opportunities in the Partner business' market. Opportunities and contracts in this business currently tend to be for projects of a smaller size.” This has long been our worry (see Phoenix sees growth slow), especially as Partner Services contributes just over 40% of Phoenix’s revenues and profit contribution. However, Phoenix’s Mid-market division (38% of revenues) was hardest hit, especially in product sales and professional services. Nonetheless, Robinson reported margin improvement in Partner Services and Business Continuity, partly though cost control and partly through a more profitable service mix, which is holding the group margin steady. Although the order book is down 6% since the end of March, the pipeline is looking healthier but deals are taking longer to close. Annualised contract values are down 2% since March, which shows the positive mitigation from recurring revenue streams.

Robinson is calling an ‘in line’ year, but it seems a little early for that degree of confidence given they still have 8 months to go. But let’s hope so anyway.

Civica end-runs Capita, buys another, and wins biggest ever deal

(By Anthony Miller – Friday 31st July 2009 8:15am). It’s been a heck of a week for 3i-backed public sector software and services firm, Civica. Just a couple of days ago they acquired Cheshire-based mobile software and consultancy firm, Limesoft. Then on the very same day, Civica announced its biggest ever contract with Luton Borough Council as prime ICT contractor for the BSF (Building Schools for the Future) programme. The £44m deal spans ten years and Civica will work in a consortium headed by QED Wates. The original deal was signed in January.

Then today we heard the news that Civica has picked up the IBS OPENSystems revenues and benefits software business from Capita. Capita was forced into the sale by the Competition Commission (see Capita forced to sell IBS R and B business and prior posts) which ruled that the UK’s leading BPO player already had more than its fair share of the R&B market. The irony is that Civica had previously told the Competition Commission that it will not pursue expansion in the R&B market “for the next two to three years while it was in the process of moving its existing customers on to the new version of its R&B software system”. Obviously the opportunity was too good to miss! Civica is paying Capita £10m cash, no strings, for the IBS R&B business. Capita paid nearly £80m to take out AIM-listed IBS in June ’08. The R&B business comprised about a third of IBS revenues, so it looks like Civica got a really good deal.

We have long commentated on Civica, a public-to-private-to-private saga which TechMarketView subscription service clients can follow in the UKHotViews archive. Civica claims an ‘adjusted’ operating profit of £21m on £134m in revenues for the year to 30th Sept. ’08, with £101m from its own software. This would likely put Civica among the Top 50 suppliers of software and IT services to the UK market and a Top 20 software player.

Quartermaine confirmed as President BT Global Services UK

(By Richard Holway 8.00am Friday 31st July 09)I understand that, yesterday, Mark Quartermaine was confirmed as President of BT Global Services operations in the UK. Mark has been 'acting' in that role for several months (See BT GS Part 7 and BT GS Part 8 ) so this is a welcome move to add some stability to the organisation.

In addition, I understand that Rogier Bronsgeest is joining BT GS from Getronics as President of Customer Services Operations. The much respected Patrick O'Connell, who played such a vital role in turning around BT's NHS contracts, becomes President, Major Programmes where his responsibilities include the Defense Fixed Telecomms Service, DWP, delivery for the 2012 Olympics ...as well as the NHS. The only question here is how many NEW large, complex major programmes BT GS will take on in the future...

Yahoo + Microsoft "Nobody gets it"

(By Richard Holway 7.00am Friday 31st Jul 09) "Nobody gets it" was Steve Ballmer's (CEO Microsoft) comment on the FT today - Yahoo and Microsoft on defensive. Yahoo shares extended the slump yesterday - now down 15% since the deal was announced. Ballmer also added that the deal was "a little bit complicated" but added a dig that it was us analysts who had the trouble coming to grips with it.

I'm a simple guy. It's not that I can't get to grips with complex deals. It's far more that my long experience tells me that, just like 'complex' companies, 'complex' deals never seem to work. For one thing it's going to take an age to get this one through the various regulatory bodies. During that the competition (not just Google but search engines like Baidu in China) will make hay. Then there are the complex integration issues. Here you have to integrate teams that will continue to work for different companies! Sales with Yahoo. The technical bits with Microsoft.

It's not so much complicated. It's more like a nightmare.

Patni getting back on track

(By Anthony Miller – Thursday 30th July 2009 2:30pm). I thought it was a more mature, and subdued tone from Patni management on today’s 2Q09 concall – and I took some comfort from that. It’s been a while since I last tuned in to a Patni call as, frankly, I thought they’d have trouble getting back on track after much turbulence in recent times. But it does seem that back on track is where they are, with the best operating margin (15%) for a few quarters. OK, this is not in the same league as the India-based Tier-1 players like TCS, Infosys and Wipro, but it is appropriate for their size, with some $680m in revenues over the past 12 months. Management expects them to be able to hold this margin level within 100-150 bps, currencies permitting.

Patni is still very small in the UK. When I spoke to management today, they said that the UK makes up about 70% of their European revenues, which I reckon puts them on a run rate of some £40-45m p.a. Europe has been declining in the mix of late, and is now 14% of total revenues. Indeed Europe was flat at constant currency, prompting CEO Jeya Jumar to comment “Europe has been stable for too long"! But I think they will find it hard to make serious headway in the UK and Continental Europe through lack of scale, though they have won some decent deals here (see Patni scores new contract with Bupa).

One thing did stand out on the call today. Patni was the first India-based player I heard talk about its Cloud strategy other than to say they have one. Patni was more specific. They are building cloud ‘frameworks’, not to offer ASP/SaaS applications, but as an integral part of their AM offering, i.e. to help clients move legacy apps to ‘the Cloud’ or from one cloud to another. Early days, of course. They have fewer than five clients in pilots for now, but the fact that they are actually doing something is I think quite far-seeing. I will certainly get back on track myself with Patni as it’s starting to sound interesting again.

SAP update

(By Anthony Miller – Thursday 30th July 2009 10:30am). To be honest there’s not much to add from yesterday's SAP 1H09 concall - which needed real stamina to get through. Management is ‘cautiously optimistic (favourite phrase for the time I would say) that the worst is behind us’ (I would vote for caution over optimism). And very little elaboration on SAP’s SaaS initiatives. On the albatross that is Business ByDesign, they have put in some new features and expanded controlled availability, though didn’t give the numbers. SAP promised that customers would have “no integration issues” with its new large enterprise offering (see SAP to try again with SaaS). Now they have to prove that they are not just a case of ‘long on promise, short on delivery’. But even with all of this, at least its SI partners are still making a good living out of SAP-related services.

Atos and Capgemini UK update

(By Anthony Miller – Thursday 30th July 2009 10:15am). There were some common themes that came out of my conversations with Atos UK CEO, Keith Wilman, And Capgemini CEO, Technology Services NW Europe, Christine Hodgson, after their 1H09 results (see UK star shines brightest at Atos and Capgemini - talking about the important things). Perhaps the most telling is that for both companies, the UK businesses were the stars of the show, Atos UK showing 6.4% organic growth and 8.2% margins, and Cap UK with 12.7% organic growth (!) and 8.1% margins. Why was this so? Mainly because both have a very high exposure Public Sector and to Outsourcing.

Both players have marquee outsourcing contracts in the public sector, Atos with the likes of DWP, MoJ and more recently subbing to IBM in ID Cards (the identity management bit, not the cards themselves), whereas Cap is of course embedded in the Aspire contract at HMRC, and also has deals at the Learning & Skills Council, Met Police and some local authorities. Indeed I understand that some of Cap’s local authority delivery is starting to come from offshore. This, by the way, is not unique to Cap, but of course is not much advertised for reasons which we covered just yesterday (see Public sector IT offshoring makes front page news). One of Government’s (of any colour) biggest challenges on the whole offshore debate is how to balance pragmatism with politics. But both Cap and Atos say that public sector business is still tough to win, with contracts being delayed just like in the private sector (Wilman gave the example in one deal where the bid manager is already on his second run of paternity leave!).

In the private sector both players honed in on ERP, and especially, SAP, as being good for business. It’s still mainly ‘keep the lights on’ type projects and of course cost-cutting through rationalisation. But there are new contracts being awarded. Just last month, Cap won a major deal with Cadbury for the second phase of a major international SAP roll-out. Hodgson also called out Business Intelligence as a very hot area, with its BI team pretty much maxed out.

Their views on the UK competitive landscape were quite diverse. Of course, they are archrivals in UK public sector and for much this reason, Atos also sees Fujitsu too. But Wilman commented that they have not been seeing much of Logica recently and nothing of Steria, which is a little surprising I feel. Atos has also been giving the leading India-based players a good run for their money, beating TCS and Wipro in some key insurance deals. Hodgson called out a more active Axon since its acquisition by HCL, but made the point that they “never, ever take Accenture for granted”.

Both Wilman and Hodgson seemed cautiously optimistic about the rest of the year, but neither went as far as calling the bottom. Prudent, I would say. Let’s see if Logica thinks likewise Friday week.

Market reacts positively to BT's Q1 results

(By Richard Holway 8.30am Thursday 30th July 09) BT's results for Q1 (to 30th June 09) showed revenues of £5.2b - up 1% but down 3% excluding currency etc. PBT fell 45% to £272m.

But the market seems to like what it reads. BT's shares are up 12% at 126p in early trading (9.00am). That means BT is up 75% since its 3rd March 09 low of 72p.

At BT Global Services, revenues were up 4% at £2079m but down 4% excluding currency fluctuations. "The underlying decline is largely due to the impact of mobile termination rate reductions and lower call volumes in continental Europe and the continued decline in our UK calls and lines business. "

BTGS reported an operating loss of £124m - they made a minimal £1m profit in Q1 last year. However EBITDA of £62m was double that in Q4 - so the direction looks positive. BTGS says that "underlying operating costs of £1,853m for the quarter increased by only 1% representing continued improvement in the sequential trend from the previous two quarters." Bluntly I expected a significant decrease particularly as BTGS reports that "total labour resource was reduced by around 2,300 in the quarter. "

But at least at this stage there is no further news of write offs or other disasters. We'll bring you further news - particularly relating to BTGS in the UK - later.

Capgemini - talking about the important things

(By Anthony Miller – Thursday 30th July 2009 8:00am). You want to know the real difference between Capgemini and Atos Origin? Top management talk about different things. Whereas Atos management show the pretty organisational charts and talk about strategic objectives, Cap talks about the things that really matter. I don’t just mean offshore – though that is absolutely top of their agenda. I mean things like the new propositions they are taking to market to play to the downturn. Offers like an integrated AD&M (application development and management) offering, sold onshore but, yes, delivered offshore. Plus big pushes on Business Intelligence, Testing (now nearly 6,000 FTEs) and ERP. Cap makes you believe that not only do they know what they need to do, they also know how they are going to do it.

That said, Capgemini made it – just – to its 1H09 guidance given back in February, with a “modest decline” (-2.2% organic) in group revenues and margins “which should remain above 6.5%” (actually 6.6% - phew, that was close). So, growth much in line with Atos yesterday (see UK star shines brightest at Atos), but that’s rather where the similarity ends. Despite Cap’s margin contraction (1H08: 7.6%) Cap outperformed Atos’ 4.6% margins. Indeed, Cap expects margins to expand in H2, guiding “around 7%” for the year.

But I must pick up on a comment that CEO Paul Hermelin just made on the concall. “A few years ago, Capgemini was 100% onshore. Now we are at 28% offshore. We are aiming for 40%. This is a 15 –year programme. It’s impossible to do this without restructuring. This is not just managing the pyramid (i.e. loading up with trainees) – we are transforming the company.” This is really what it is all about. The only thing I don’t agree with is that they are putting all the restructuring costs below the line as “although this is a long process – there will be only one of this type of transition.” That I might be so bold as to call long-sighted myopia!

Anyway, I will be talking to Capgemini CEO, Technology Services North West Europe, Christine Hodgson, shortly and will bring you a more detailed view on Cap’s UK business later.

Sky reinforces Beer Syndrome

(By Richard Holway 8.00am Thursday 30th July 09) Further to our long running Beer Syndrome series (latest edition Click here) - where since Oct 2007 we have said that "Staying in is the new Going out" - Sky today have yet again provided 'proof of concept'.

Today BSkyB has announced results for year to 30th June 09. Sky's subscriber revenues are up 10% in the year (to £4.1b). They added 124,000 new subscribers in Q4 (to 9.4m) and Sky HD subscribers doubled to 1.3m.

Although this is exactly in line with my Beer Syndrome one might expect hard up stay-at-homers to opt for FreeView. But, just like with Apple, it appears that if you have a desirable product (in Sky's case - Sports) then customers will find the money. Obviously in this case by not going out!

Microsoft + Yahoo - at last!

(By Richard Holway 1.00pm Wednesday 29th July 09) After 18 months writing about the various variations of Microsoft and Yahoo couplings (for the latest see our post of 19th July 09 Microsoft + Yahoo - on again?) it has literally just been announced that Microsoft and Yahoo have at long last agreed a deal. As the FT reported - Microsoft and Yahoo agree search deal - "in a joint statement, the companies confirmed the widely expected deal, which will give Microsoft a 10-year license to integrate Yahoo’s search technology into its existing search platforms, while Yahoo will become the “relationship sales force” for premium search advertisers for both companies."

My initial view is that this is a long way away (perhaps the best description would be "this is $47.5billion away") from the deal on the table 18 months ago. It's also a long way from that 'rumoured' last week (we did advise you not to believe Yahoo rumours!) in that there is no 'boatloads' of upfront cash (that's the term Yahoo's new CEO Carol Bartz used to say what she wanted). Indeed, is there any at all? Sure, there is opportunity for Yahoo to cut costs and share in future ad revenues. But this is not a gear change for Yahoo.

Indeed, initial reaction is that Yahoo shares have slumped 7%.

Conversely, it looks good for Microsoft as Bing now takes over from the Yahoo search engine. That gives Microsoft some scale in search to compete against Google. And they seemed to have acheived that at a knockdown price.

Update - 8.00am Thurs 30th July 09. Well, it looks as if the market agrees with my assessments. Yahoo shares slumped 11% yesterday whereas Microsoft put on 1%. If I was a Yahoo shareholder, I'd be pretty upset. The destruction of shareholder value over the last few years takes your breath away. I thought the AP story - Yahoo comes full circle in its retreat from search - was an excellent read.

Conversely, from a Microsoft viewpoint, it looks like a good deal. Read Lex in today's FT. But the deal is of such blistering complexity and could take an age to implement, that the only real winner out of all of this is likely to be...Yes, you guessed it, Google.

Perhaps now that's settled, Microsoft can concentrate on the real battle right now - who is going to win in the Cloud.

Public sector IT offshoring makes front page news

(By Richard Holway 1.00pm Wednesday 29th July 09) It was only a matter of time before the public sector offshoring of IT jobs to India made it to the front page. That's exactly what happened today in The Times - see Union fury as Civil service outsources jobs to India. The story was picked up by the BBC and other media too. Today's story was about a pretty limited 100 jobs at the British Council.

Our reporting on the Operational Efficiency Review and our recent subscriber-only report - The Effects of a Conservative Government on UK SITS - both highlighted IT offshoring as the 'Elephant in the room'. The OER made not one reference to offshoring in its 100 pages. In our conversations with the Conservative Party spokesperson, everytime I mentioned offshoring there was a deafly silence - until he went 'off-the-record'.

Like all things political, I really think we should have an open and honest debate about this. The public sector finances and spending are in a hole - indeed a bigger hole than anything I've seen in my lifetime. All parties will have to cut public spending. The British people understand that and that's why they reject Gordon Brown's assertion that you can continue to spend, spend, spend. But cutting spending does not automatically mean you have to cut public sector service levels. As most, if not all, private companies have found you can deliver more and more for less and less. The private sector has embraced offshoring as one of the ways it has achieved that. The public sector could make substantial cuts in spending whilst also maintaining service levels by embracing offshoring more.

But, as we know, it comes at a price. I am passionate (see the IT Manifesto - Making BrITain Great Again) that we boost the number of entry-level IT jobs in the UK. Although that sounds a difficult 'circle to square' it is not impossible. I think part of the way of doing business with companies that have significant offshoring operations should be a 'pact' that the relevant proportion of their campus recruitment should be in the UK.

For example TCS makes c$1b out of its c$6b global revenues from the UK. This year it will take on 25,000 graduates in India but NOT ONE in the UK. If it agreed to take on UK graduates in proportion to its UK revenues, it would recruit over 4000 here! Now, I know that’s unlikely (indeed the UK couldn’t even fill that number) BUT zero is far too far the wrong way!

But, at the very least, we should have an honest debate on this subject.

SAP ‘swings and roundabouts’ guidance change

(By Anthony Miller – Wednesday 29th July 2009 9:45am). Margins higher, revenues lower. No surprises there, then, in SAP’s change to its FY guidance in today’s 2Q09 report. This was almost an inevitable consequence of the even steeper dive in software revenues, down 40% to €543m in constant currencies, compared to -34% in 1Q09. Group operating margins expanded by 3.5 pts to 27.7%. There was very little comment on SAP’s SME SaaS offering, Business ByDesign, but we hope to hear more on this afternoon’s concall, after which we will bring you more.

Getronics UK for sale?

(By Richard Holway 9.30am Wednesday 29th July 09) Looks like KPN might be considering a sale of Getronics UK. See Microscope Future of Getronics UK in doubt. KPN bought Getronics in 2007. KPN have since divested various bits of the Getronics business including the Spanish and Australian operations, its government and healthcare business and, most recently, its business applications services arm, which went to Capgemini.

At yesterday's briefing KPN's MD Eelco Blok said “The UK market remains our most exposed part of the international business....The UK is the predominant factor in the downward trend”.

So a divestment here too looks a very likely option.

Datamonitor boosts profits margins

(By Richard Holway 9.00am Wednesday 29th July 09) Poor old Informa is really suffering in this economic climate - see FT today Informa tumbles and warns on outlook. As Prime Minister MacMillan once said when asked what he feared most, so Informa could equally reply "Events, dear boy, Events".

But it's their Datamonitor division which most interests us (and a number of our readers) as they own Ovum, Butler, Orbys etal (although we are still unsure if the much trailed new rebranding has taken place). Informa's results yesterday said that Datamonitor had boosted operating profits by 23% to £53.8m. Revenues were up 5% at £185.6m - but only 1% organically. Datamonitor says that 80% of clients renewed their contracts - although we would expect a number of those would be at a reduced level.

But, let's face it, a 30% operating margin is pretty impressive. Mike Danson would be proud! But whether you can keep quality at the highest levels AND make these kind of increased margins in today's harsh climate is questionable.

Anyway, it really does look as if Danson made the wisest of moves selling Datamonitor in 2007. (See my 21st July 09 post The return of Mike Danson.) When he sold Datamonitor in 2007, Informa shares were over 600p - today they are 237p.

Chocolate Syndrome replaces Beer Syndrome?

(By Richard Holway 8.00am Wednesday 29th July 09) Followers of my Beer Syndrome series (for latest ramblings see my 27th July 09 post - Beer Syndrome still alive and kicking ) will know "Staying in is the new Going out". Clearly I'm most interested in how this affects the way we 'consume' tech. But it looks as if we consume other things whilst sat in front of our new LCD TV watching Sky HD or playing with our IPod Touch games downloaded from the Apple Apps Store. As the BBC reports - Stay at home boosts Cadbury - looks like we are eating much more chocolate with Cadbury's UK sales up a pretty amazing 12% in H1 2009.

So maybe I should change my theme to the Chocolate Syndrome? Although I'm unsure which is the least healthy!

UK star shines brightest at Atos

(By Anthony Miller – Wednesday 29th July 2009 7:45am). It looks like Atos UK CEO Keith Wilman has done it again, delivering the best growth in both revenues and margins in the group’s first half. While Atos group revenues declined 2.4% organically yoy to €2.6b, UK grew 6.4% to €446m, 17% of the total. All of Atos’ other country markets were in decline, Benelux by nearly 12%. Group margins were essentially flat yoy at 4.6% whereas UK rose 1.9 pts to 8.2%, again higher than any other country market both in absolute terms and in expansion. Benelux was Atos’ next most profitable region, at 6.7% margin, though down 1.4 pts.

You can probably guess how Atos’ service lines performed – Consulting and SI were down, outsourcing up. To be precise, Consutling revenues crashed 23% to €133m (1.4% margin), SI fell by 9% to €974m (4.5% margin), whereas Managed Services grew 5% to €974m (3.6% margin). Hi-Tech Transactional Services (formerly Online Services – includes the Atos Worldline business) grew 7% to €434m and has the highest margin (14.4%). Medical BPO (UK) grew 2% to €74m but margins expanded nearly 4 pts to 11.4%.

Now for my usual gripe. Nowhere, but nowhere in today’s release is there mention of offshore, or for that matter, nearshore or any other type of shore. They did talk about the 1,400 subcontractors they laid off (down 36% since year-end and 40% higher than originally proposed) and the 1,300 employees they laid off. And remember, all this did is keep group margins flat. Tomorrow we’ll hear from Capgemini and Friday week from Logica. I’m sure you’ll hear them talk about offshore as a fundamental part of their strategy as they usually do. Of course, both also have a high exposure to the Benelux market too, around 15-16%, so it will be interesting to see if they took share from Atos.

Anyway, the concall starts shortly and afterwards I will be speaking to Atos UK CEO, Keith Wilman, so I will bring you more later.

Tiscali bottom of the class

(By Richard Holway 7.00am 29th July 09) Long term readers will have shared my pain over the broadband service we get here in leafy Farnham. Farnham is hardly Dartmoor - but the service is pretty awful. Just about OK for my work during the day but using iPlayer is out-of-the-question in the evenings.

I thought that it was just the distance from the exchange, the copper wires and the general decay that BT has allowed in the infrastructure around here. But it also looks as if my choice of ISP - in my case Tiscali - also played a part. As you might have read in the Ofcom report yesterday - (see ComputerWeekly) - Tiscali came bottom of Ofcom broadband tests. Although I pay for 8mb, I never get it. Nationwide Tiscali users get just 3.2-3.7mb - the slowest of any UK ISP.

I do live in some hope though. Charles Dunstone's Carphone Warehouse has just taken over Tiscali. (See my 10th May post Carephone Warehouse buys Tiscali - Farnham holds its breath) He promises faster speeds. for Tiscali users But I doubt even he can do much around here. The real revolution would only come if we had fibre. And that would mean digging a trench and the Farnham treelovers (often including me!) would be up in protest.

IBM to buy SPSS for $1.2b

(By Richard Holway 7.00am 29th July 09) The software consolidation race continues apace. Last week EMC completed on its $2.2b acquisition of Data Domain and our own Micro Focus bought Borland. Now IBM (no sloth in the M&A stakes) has bid $1.2b for SPSS (a 42% premium on the previous close)

SPSS is the the 'predictive analytics' market - that means they make software to forecast customer and market trends in such things as online marketing campaigns.

If anything, the downturn has just accelerated the pace of software M&A - particularly at the very top level (eg IBM, Oracle, SAP etc). We see no reason for the speed to slow.

Micro Focus ambitions

(By Richard Holway 9.00am Tuesday 28th July 09) Yesterday Micro Focus completed all the regulatory paperwork to close the Borland acquisition. See Borland accepts Micro Focus bid.

A few weeks back, Steve Kelly sat in my house to discuss the IT Manifesto Making BrITain Great Again. Kelly really has done a great job at Micro Focus. But the feeling you got was 'this is only the start'. Above all, Kelly's ambition is to lead Micro Focus into the FTSE100 to sit along side Autonomy and Sage. Compared both to the US and to the contribution that software makes to the UK GDP, the sector is under represented in the FTSE100. This, of course, is because so many of the suppliers to the UK software market are not HQed in the UK. Kelly is on a mission to correct that...and sees Micro Focus as a torchbearer in meeting that objective.

Micro Focus market cap is now over £800m. Kelly would need to double that to stand any chance of getting into the FTSE100. But we'd love to see him try!

Highams’ anniversary waltz

(By Anthony Miller – Tuesday 28th July 2009 8:30am). Perhaps I am in a nostalgic mood as I feel compelled to write about companies I haven’t looked at in years but still find them knocking around, eking out a meagre (and sometimes not so meagre) existence in these troubling times. Such is the case for AIM-listed ITSA (IT staff agency) and ‘Little British Battler’, Highams Systems Services. They’ve been around since 1983, and listed on AIM in ’96 at (then) 72p valuing the company at £6.4m. By the end of FY99 Highams had hit £34m in revenues and £1.5m PBT; the company was then worth nearly £12m.

Different today, of course. Revenues this year (to 31st March ’09) were down 23% to £10.5m, though pre-tax losses narrowed from £1.9m in FY08 to -£300k. Highams is currently valued at less than £1m. Founder John Higham remains on the board as a NED and deputy chairman and appears to control 27% of the stock. Well, the company made it past its Silver anniversary – I wonder if it will make it through to its Pearl?

Sage expects ‘testing’ markets

(By Anthony Miller – Tuesday 28th July 2009 8:00am). No revelations – positive or negative – in Sage’s IMS today (see here) – just a ‘steady as she goes’ as the company heads towards an ‘in line’ year end in September. CEO Paul Walker is “planning for markets to remain testing” and expects Sage to pass the test, that is, within the context of its first organic revenue decline reported at half-time (see Sage suffers organic revenue decline). No specific comments today on Sage’s Healthcare division, the erstwhile Emdeon Practice Services. I was rather hoping to hear positive news based on Misys’ upbeat assessment last week of the expected impact of Obama’s fiscal stimulus package (see Misys ‘shows and tells’). I still think optimism on this is overbaked but nonetheless, surely Sage should see some benefit. Anyway, we will undoubtedly hear more at year-end.

Beer Syndrome still alive and kicking

(By Richard Holway 8.00pm Monday 27th July 09) In my post of 19th July 09 – Collapse of the Beer Syndrome? – I think I was far too hasty. It is certainly true that console sales – in particular the Nintendo Wii and Sony Playstation – have collapsed. But I now think that is because of a shift from consoles to handhelds – in particular to people playing games on their iPhones and iPod Touch devices. Add the two Apple devices together and you have around 40m handheld gaming devices! Over 1.5b apps have been downloaded from the Apple apps store. I know people are increasingly multitasking, but we do only have two thumbs! So playing a Wii and a iPod Touch at the same time is a physical impossibility!

The Beer Syndrome is based on the premise that “Staying in is the new Going out”. It has served me well for 18 months – and I actually have no reason to question its continued validity. Today Pace announced that it had tripled the number of set top boxes shifted in H1 2009. HD was the star. Indeed, it was also announced that sales of BluRay devices surged 231%. Separately Sky says that the number of UK HD subscribers now tops 1m and their subscriber levels continue to rise (now > 9m) despite the availability of FreeView.

So the Beer Syndrome is alive and kicking. But just like every other sector we analyse, we are changing our habits even in our own homes. Less playing with the console. More playing games on the iPod Touch. Fewer DVDs (down 10% in H1). More HD

New research from TechMarketView

If you’ve been dazzled by the brilliant revival in tech stocks over the past couple of months (see Whither tech stocks?), you might want to take a somewhat more measured view by reading the just published July edition of TechMarketView’s IndustryViews Quoted Sector report.

As usual, we take you through the short, medium and long-term performance of the major tech indices, and take a deeper dive into the recently enlarged FTSE SCS (software and computer services) index. Then, unlike most commentators, we move outside of the realm of the traditional players, setting them in the context of key adjacent sectors: ITSA (IT staff agencies), BPO, and the major European and Global IT services stocks.

Finally we hone in on four of the ‘Dearly Departed’ UK SCS companies that recently exited AIM; two went ‘belly up’ but the other two live on, once again under private ownership.

Companion reports IndustryViews M&A and IndustryViews Private Equity will be updated soon to give you what we think is the most complete assessment of UK software and IT services industry dynamics you can find in one place. And to be in that place you need to be a client of the TechMarketView subscription service. Puni Rajah (prajah@techmarketview.com) will be happy to show you the way!

Total battles on

(By Anthony Miller – Monday 27th July 2009 8:30am).There is something rather comforting when you look at the management line-up on a company website and see faces staring back as old as mine! So it is with policy admin software firm, Total Systems, which is still led by its founder, Terry Bourne, and whose Tech Director joined in 1977, Ops Director in 1979, and the ‘new’ FD in 1993. I only tell you this because Total, one of the ‘Little British Battler’ brigade, reported its FY09 results today (see here) and they are still battling on.

As it happens, the numbers were pretty good (if a little tardy, given their FY ended on 31st March). Revenues grew 21% to £4.9m (all organic) and operating margins expanded from 7.4% to 10.1%. Why so ‘low’ for a software player? Because over 80% of revenues derives from time & materials services. Little more than 10% comes from sales of Total’s own products and the balance from third-party software. By the way, there’s none of this ‘exceptional’ stuff in the P&L – it’s all ‘clean’. They also have over £3m in the bank and no debt.

But bad news is already on the horizon, with orders sharply down this FY and no expectation of improvement. Total depends somewhat on Capita’s fortunes in the insurance market, supplying its Ultima product to the BPO player. This is not brilliant news as Capita’s insurance business was flat in 1H09 (and see Growth slows at Capita). I also noted Total’s website carrying the logo of document management firm and ‘development partner’, Invu, another ‘Little British Battler’ facing its own challenges (see Invu raises £1.5m as revenues plummet).

I’d have to say our commentary on Total, whom we have followed for many, many years, has not always been kind (for example, see Total recall). Indeed, the company is little bigger than it was a decade ago, when it had £3.3m in revenues but a market cap of nearly £11m (today around £3m). But they are a survivor and I guess Total seems at least to be making a decent living for Bourne, who holds nearly 50% of the stock in his own name with another 7-8% held by other Bournes. Some may take comfort from that.

iTablet for Christmas?

(Richard Holway 7.00am Monday 27th July 09) I've talked about the Apple iTablet before here on HotViews. Now the FT today - Apple targets new player revolution - is openly talking of a Sept/Oct launch in time for the Christmas market.

Think iPod Touch with a 10 inch screen. WiFi not mobile. It would obviously be a boom for movie watching and game-playing. But it would also allow the return of the 'CD sleeve' as well as posing a major threat to the Amazon Kindle (book reader).

Apple has said that it doesn't want to compete in the netbook space. But the iTablet would offer an ultra light alternative to a netbook although the price range is likely to be $600-$1000. I can think of a number of the Holway clan who would say whoopee to an iTablet in their Christmas stocking!

Whither tech stocks?

(By Richard Holway 4.00pm 26th July 09) Each month recently, when we review the performance of the various share indices, we have noted how the FTSE SCS Index has not only substantially outperformed the FTSE100 but it had actually moved in a different direction. By the end of June 09, the FTSE SCS was up a remarkable 34% but the FTSE100 was down 4% YTD. We made the point repeatedly that we believed this was unsustainable. (For an excellent article on tech sector stock performance see FT 24th July 09 Investors switch on to tech )

One of the main reasons for the strong performance of UK SCS stocks is that earnings have held up well. In many cases this has been a result of cost cutting - not revenue growth. SCS has historically achieved its high ratings because of its high growth potential. Earnings growth without revenue growth is, of course, a trick you can pull off only for a short period.

Over every medium term period in the last 20 years, the FTSE SCS and FTSE100 have pretty much performed the same. Only exception was late 1999/early 2000 – and we all know what happened after that! Indeed that ‘bubble’ was but the “exception that proved the rule”. So our view was that in the second half of 2009, either the FTSE SCS was in for a crash OR the FTSE100 would rally and not carry the FTSE SCS with it.

Well, as you will no doubt have read in all the newspapers this weekend, the FTSE100 has had its best run in a long while. Indeed it is up 10% in 11 consecutive days of rises. The same cannot be said of the FTSE SCS index. In July to date, the FTSE 100 is up 8% but the FTSE SCS up just 2%. SCS is just a part of the market as a whole. Of course it will have stars and it will have laggards but we don’t know any real reason why, in its entirety, it should outperform. Overall we would expect SCS to perform pretty much ‘in line’ with the FTSE100 over any reasonable period (ie a year). Most analysts seem to expect the FTSE 100 to continue to perform well – afterall it has an almost impossibly long way to go to recover to the 6700 level it hit just two years ago back in July 07. This can only mean that, at best, the FTSE SCS is in for a period of flat-lining.

Invu raises £1.5m as revenues plummet

(By Anthony Miller – Thursday 23rd July 2009 9:45am). As we keep on saying, it is just so tough out there, especially for the ‘Little British Battlers’ like document management software firm, Invu, which announced both its FY results (see here) and a placing (see here) yesterday. This was I guess a bad news/good news story. The bad news was that Invu made a thumping £8.8m net loss as revenues plummeted 60% to £3.4m. The good news was that they managed to raise £1.5m in a placing and convertible loan notes issue, though this will dilute the stock by 31%. Non-exec chairman Daniel Goldman (son of the late Sage founder, David) called the year, “the most challenging of the Company's existence”. The news brought AIM-listed Invu’s shares down 16% to 2p, valuing the company at £2.7m. They had been as high as 24p a year ago.

You will be able to read more about the quoted sector scene next week in the latest TechMarketView IndustryViews Quoted Sector quarterly review where, among other things, we tell you about the AIM-listed UK software and IT services companies that didn’t make it.

Misys ‘shows and tells’

(By Anthony Miller – Friday 24th July 2009 9:30am). The Misys FY09 results analyst briefing yesterday (see Misys sticks to growth targets) turned into a bit of a ‘show and tell’, as Banking division head, Guy Warren, strutted his stuff with a demonstration of the Misys BankFusion development platform. And jolly impressive it was, too. Backed by a chorus from IBM CTO and ‘Distinguished Engineer’, Rashik Parmar, Warren showed how a bank could quickly reconfigure its lending qualification process to refer potentially ‘dodgy deals’ up the line. Misys CEO Mike Lawrie repeated the phrase ‘game changing’ several times for the benefit of the hard of hearing, though apparently these were the very words used by a top exec at one of Misys’ clients. Actually, as I said, it did look neat.

Lawrie admitted that Misys had been losing legacy BankMaster customers to Swiss rival, Temenos, though I got the impression he felt that the rot had pretty much stopped. However, BankFusion is apparently garnering interest from Misys’ Equation customers as a tool to add function rather than as a replacement. Indeed, a key part of Misys’ BankFusion strategy is to ‘surround’ existing legacy (and competitive!) products, as well as to sell its BankFusion-based Universal Banking application as a complete system to new banks. Universal Banking is already live at one client and they have a second implementation in progress. Lawrie is not expecting BankFusion/Universal Banking to generate much revenue this year though hopes that a growing order backlog will drive this business in FY11.

Allscripts-Misys CEO, Glen Tullman, was somewhat upstaged by Warren’s song and dance act, but in many ways the story he had to tell about the Healthcare division was just as captivating. You recall that Misys’ healthcare division was reformed by a sort of reverse-merger into US-listed Allscripts last year. Just last month, Misys’ sales and services chief, Eileen McPartland switched sides to become Allscripts’ COO (see Misys sales and services chief defects to partner). The focus of Tullman’s pitch was the $19b US Federal Stimulus package which promises up to a $44k hand-out to physicians who implement an electronic health record (EHR) system and can demonstrate ‘meaningful use’ (the latter term to be defined by the end of the year).

Now, regular readers will know I have been somewhat sceptical about whether a cash incentive is alone sufficient to drive mass migration to EHR (see The myth behind electronic medical records). My ‘issue’, if you want to call it that, is not that EHR is a bad thing – quite on the contrary. It’s that I suspect that implementing the IT side of EHR – which Tullman estimates will cost some $15-18k per physician – is just the tip of the iceberg. It’s the conversion of the legacy ‘paper mountain’ of medical records that will be the real challenge. The way the US stimulus package is structured leaves less money on the table for each year that passes, so physicians have a clear incentive to move sooner rather than later. Part of Allscripts’ own challenge is to get this message across to the 150k or so one-to-three man physician practices that do not have an EHR system (about 90% of that population), and then to provide the necessary implementation services to make it happen. They completely understand the mountain they have to climb and are trying to gear up for it. But matching the ramp-up in sales and implementation resources with the anticipated market demand will take both a crystal ball and inch-perfect planning.

One other observation strikes me. Isn’t it interesting that the US government’s approach to implement EHR nationwide is to fund physician’s choice. Our’s was to impose a one-size-fits-all (OK, may be ‘two sizes fit some’) solution. Which will be more successful – mandate the system or ‘empower’ the industry? I suspect I know the answer!

Oh, by the way, the numbers were quite good too, but you’ll have to read them for yourself as there’s lots of them.

Rapidhost gets Innovise as new ‘host’

(By Anthony Miller – Friday 24th July 2009 8:00am). Very much carrying the stamp of non-exec chairman and serial (parallel?) entrepreneur, Vin Murria, AIM-listed software and managed services player, Innovise (nee Contemporary Enterprises), has just completed its 11th (if I have counted them correctly) acquisition since its consolidation in 2002. This time the target was ‘leading’ web hosting company (‘leading’ as in £900k turnover and £100k operating profit), Bucks-based Rapidhost. Innovise will pay £800k in cash and (new) shares.

Hosting services appears to be a market ripe for consolidation. Back in May (see Iomart ‘hosts’ RapidSwitch) we told you about Iomart’s acquisition of Rapidswitch (they all seem to be ‘Rapid’, don’t’ they!). Iomart was loss-making on revenues of £12.6m (see Ufindus sale finds Iomart flush with cash). Innovise, on the other hand, made just under £1m PBT in the year to 30th Sept. ’08 on £8.3m revenues. Both of course pale besides hosting services ‘giant’ Telecity, with some £133m revenues and £20m PBT. Innovise has a market cap of around £16m vs Telecity’s £650m (!). Who’s turn next?

My part in Facebook's downfall

(By Richard Holway 7.00am 24th July 09) Thankyou to the reader who brought the recent survey by iStrategy Labs to my attention. They had researched Facebook's Social Ads platform and had come to conclusion that the number of users over 55 had grown by a staggering 500% in the last six months. Conversely 16% fewer school leavers and 22% fewer university students were using Facebook.

The conclusion was that, as Facebook is now mainstream with over 250m users worldwide, young people do not want to belong to the same 'club' as their parents or grandparents. I have to admit that the wide age usage of Facebook is its great attraction to me. iStrategy Labs does not say where the youngsters are now going.

So, sorry if my Facebook affection has driven its core users away!

Microsoft slumps

(By Richard Holway 7.00am 24th July 09) Microsoft’s Q4 results last night were even worse than expected with a 17% decline in revenues YoY to $13.1b. This was a billion light on expectations. Profits were down 34% at $3.05b. For the full year, revenues were down 3% at $58.4b. As might be expected, Microsoft shares slumped 8% in after hours trading. That said, Microsoft shares are still up around 60% since their $15 low on March 6th 2009.

Windows, Office, XBox, Server software and web advertising all contributed to the sales decline. Profits would have been even more badly hit but for the $750m operational savings YoY – about 10% of costs.

Microsoft is often referred to as a ‘bellwether’. But this time around Microsoft have special difficulties. Apple has shown that if you have great products with style that the public want – they will still buy them. IBM has shown that if you can help corporates to save money – they will buy from you. Intel has shown that if you have a cheap and powerful chip for netbooks – they will trade down and buy them. RIM has found that even consumers will buy your smartphone. Google has won in search and is now taking the battle to the Cloud. Microsoft doesn’t really have anything that fits in any of those bags.

In particular it has been hit by the rise of Netbooks. Much talked about here on HotViews in the last few years – so if this has come as a surprise to Microsoft they only have themselves to blame. Microsoft has had to offer a cheap version of XP to halt the rise of Linux on Netbooks. So Vista sales have been hit by a double-whammy (Netbooks and a general reluctance of corporates to upgrade) Microsoft Windows division saw a massive 29% decline in revenues to $3.1b in the quarter. Although Windows 7 is imminent, it is being priced to retain share – rather than profit.

The outlook doesn’t look great either. Microsoft says “it’s going to be difficult for the rest of the year”.

Who wants to be an ‘emerging challenger’?

(By Anthony Miller – Thursday 23rd July 2009 10:30am). Sometimes I truly wonder why companies put out press releases which to my mind are actually detrimental to the company’s image. We don’t usually write about the ‘news' that Company X is now in Analyst Firm Y’s “Mystical Dodecahedron” or whatever, but today’s ‘news’ from Cognizant just made me stop short and think. “Independent Research Firm Names Cognizant an Emerging Challenger”. Now, I happen to believe Cognizant is a pretty substantial, smart and savvy player in the offshore services market – so why would it want to be described as an ‘emerging’ anything? No, not all publicity is good publicity.

Twittering Sage

(By Richard Holway 10.30am 23rd July 09) I had many emails (and tweets!) from readers alerting me to Paul Stobart's (CEO at Sage UK) one hour Twitterfon yesterday.

I think the whole affair was summed up rather well in the FT today Twitter Sage - which reads:

There was further evidence that Twitter is not the medium for teenagers but for the middle-aged as Sage UK boss Paul Stobart , in his early 50s, held a Twitter event. He tweeted for an hour, answering questions from customers, resellers and competitors.

His messages - including that "acquisition remains on our agenda, but only if conditions and price are right" - were on the banal side but Panmure analyst George O'Connor waxed lyrical, saying he was "delighted Sage is taking an early stab at Twitter" urging readers to explore it as well. Which could further raise the average age of users.

I couldn't have put it better myself! But none of this changes the views of this 'middle aged user' on Twitter. I have tried and tried to get into it. But its shere volume of banality just drives me away. Facebook is so much better, purely because you tend to get no more than one status update per day per 'friend'. That's more than enough for me!

Borland accepts Micro Focus bid

(By Richard Holway 9.00am 23rd July 09) Just to close the loop on the Micro Focus bid for Borland (See our Monday post here or, if you are a subscriber, read our views on the acquisition in the archive), Borland shareholders have approved the increased $1.50 offer made on 1st July. So that just leaves Micro Focus shareholders to approve tomorrow - ie a done deal.

Micro Focus shares are up 14% since Monday when the legal action was settled. Indeed, Micro Focus are up 56% in the last year (ie since 23rd July 08) making them about the best performing share in the sector in the period. Lest I get into trouble, I declare that I am a Micro Focus shareholder - indeed rather pleased to be so as it is the best performing share (by far) in my portfolio in the last 18 months.

Misys sticks to growth targets

(By Anthony Miller – Thursday 23rd July 2009 8:30am). Confirming its FY09 results previewed last month (see Misys previews ‘improving’ FY results), Misys CEO Mike Lawrie stuck to his guns on current year growth targets, looking for 5-8% like-for-like growth and 18-20% adjusted operating margins in FY10. The year just completed saw 3% LfL growth and 17% margin (see here), so while the profitability target looks achievable, the question mark is surely over ‘organic’ growth. Misys’ ‘business of three halves’ takes some managing, with two parts in the finance sector (Banking and Treasury & Capital Markets) and the other (the largest by far), the hybrid Allscripts-Misys business, addressing the US healthcare IT market. Market conditions in none of these could best be described as plain sailing. Unfortunately, the Misys concall clashes with Capita’s so I will need to listen to this afternoon’s replay before I can put much more flesh on the bones.

Growth slows at Capita

(By Anthony Miller – Thursday 23rd July 2009 8:00am). Even the mighty Capita is not totally inured from the effects of the downturn. Though most other companies would bite their right arm off for 8% organic growth (11% reported) in current market conditions (see here), Capita usually does better. This time last year, in 1H08, Capita grew the top line by 20%, and at year-end, by 18% (12% organic). CEO Paul Pindar assessed that under 10% of Capita’s revenues (FY08: £2.44b) are exposed to the downturn but this was 'factored into its business plans'.

At first blush, other indicators look OK but not exciting (though Capita is surely the poster-child for ‘boring’ in the best possible sense). Operating margins eased 10bps to 11.4% but rose 30bps to 12.2% when ‘adjusted’. The bid pipeline was still pretty full, £3.0b compared to £3.1b at year-end. I also noticed that Capita’s offshore ramp appeared to be slowing. In February, at the FY results, Pindar was aiming to have 3,600 FTEs in India by the end of May ’09. Now he talks about having 3,700 by the end of the year.

Anyway, the concall starts soon and I will bring you more later.

10:30 am Post-briefing update

You can always rely on Paul Pindar to come up with just the most wonderfully frank and honest quotable quotes. At the briefing just ended, he was asked about the extra care Capita takes when deciding which contracts to bid for: “Just look at the NHS Spine and the ID Card project which are a complete nightmare ... we kept out of it”. How prescient. On the other hand, he almost went as far as showering praise on local government, which he described as “not badly run” – a real compliment coming from him. As for the health sector, “we can quickly find 30% savings in the back office”. Actually, I have little doubt they can. In fact Capita’s focus on back-office BPO is what makes it so incredibly ‘boring’. While the likes of CSC and BT struggle mightily trying to get the ‘pointy end’ of the NHS working better, all Capita wants to do is get its teeth into the paperwork mountain at the back end.

But let’s cover a couple of points I raised above.

Growth. Yes, underlying growth has indeed slowed – it’s now around 1%. However, revenues from recent ‘big-ticket’ wins and extensions, such as at Axa Sun Life (see Capita scores L&P megadeal at Axa) and the Learning & Skills Council (see Learner Support contract comes home to Capita) added a further 7% organic growth. In fact Capita secured deals with £814m aggregate TCV in 1H09, vs £626m in 1H08. Acquisition value was also down in 1H09 though the number of deals was up – nine deals totalling £93m compared to 8 at £129m in 1H08. But this is exactly the point of Capita’s three-pronged growth strategy. When all engines are firing, Capita gets about a third of its growth from each of underlying contracts, big-ticket wins, and M&A. When times turn tough (as they did in 1990/91), Capita runs the big-ticket business and M&A harder. The model works. By the way, Capita has no major deals up for renewal before 2012 – how’s that for visibility?

India. Well, Pindar can sometimes be too glib. In February, he set an expectation that Capita would reach 4,500 FTEs in India by the end of this year; they had 3,200 at the time. “It was my fault – I got it wrong – it was meant to be 4,000”. As I said above, the new target is 3,700. This will still put 10% of Capita’s workforce offshore, but I feel that Capita has taken its foot off this particular accelerator and I really do want to find out why. Customers may well have their pricing locked into the contract (as Pindar reminded us today). But even though Capita seems to be getting little customer push-back, I would have thought it would make sense to get ahead of the curve, so to speak, and move more work offshore, anticipating clients will not always remain so quiescent.

Notwithstanding all of the above, it’s really hard to be critical of a machine that just keeps delivering the goods. Capita remains the best performing stock over the long haul in the UK software and IT services world (in which we include BPO) and at current course and speed shows no absolutely signs of losing its ‘Boring Award’ this year (see Capita on track to retain Boring Award). By the way in the interests of ‘glasnost’ I must tell you – and sorry I didn’t before – that I have had a very small shareholding in Capita since the late 90’s. Never bought or sold since – so unfortunately it’s never going to be a life-changing investment no matter how long I keep it!

Charles Dunstone to be Chairman of Prince's Trust

(By Richard Holway 7.00am 23rd July 09) Many readers are either involved with the Prince's Trust or are aware of my own involvement in the Prince's Trust Technology Leadership Group (TLG). Therefore you will be interested to know that Charles Dunstone has been selected to succeed Sir Fred Goodwin as Chairman of the Prince's Trust.

Dunstone is, of course, the founder, CEO and main shareholder in Carphone Warehouse and, at 44, is seen as one of the UK's most successful entrepreneurs. Dunstone has been a Council member since 2000 and had headed the Prince's Trust trading activities which have made a significant contribution to our much needed fundraising activities. Dunstone has also supported and attended some of the activities of the TLG. Personally I think this is an excellent choice which sends out all the right messages about how entrepreneurs can make it big in the UK by hard work and flair - with an ICT tinge too!

Mastek – the ‘Little Indian Battler’

(By Anthony Miller – Wednesday 22nd July 2009 6:00pm). By jove it’s been a busy day in India! I didn’t get a chance to listen in to Mastek’s concall today but I am meeting UK management next month. Mastek is particularly interesting because of its high exposure to the UK – which accounts for nearly 60% of its some £120-125m p.a. revenues (to 30th June ’09). A goodly part of this comes from Mastek’s long-standing relationship with UK BPO leader, Capita. Mastek also subcontracts to BT in the NHS NPfIT Spine contract, though revenues from this deal apparently have been in faster decline than Mastek had anticipated. Mastek also won a spot on the recent NHS Scotland framework agreement (see NHS Scotland includes Indian Mastek in latest award). You may also recall our recent comment on Mastek’s relationship with UK ‘Little British battler’, Focus Solutions (see Focus and Mastek focus on Life and Pensions). So, though Mastek is really nowhere on the global radar compared to the India-based majors, it’s punching above its weight here in the UK. We shall bring you more on Mastek in due course.

Tech Mahindra sees ‘first signs of revival’ as BT turns the screw

(By Anthony Miller – Wednesday 22nd July 2009 5:15pm). Though top client (and shareholder) BT’s contribution to Tech Mahindra’s $228m Q1 ’10 revenues remained flat at 52% , this belied an unspecified decline in the core services Tech Mahindra provides to BT. It was only the recent new megadeals that kept BT revenues – which we estimate at between £75-80m in the quarter – stable. Tech Mahindra executive vice-chairman Vineet Nayar said that all the India-based players serving BT are seeing a drop in their revenues, as does indeed seem the case. We estimate that Infosys, for whom BT is also its largest client, saw revenues from BT drop 27% from £45m in Q409 to £33m last quarter. BT comprises about a third of Infosys’ UK revenues. And it sounds like BT is not going to increase spending with the India-based players any time soon, with no major IT projects on the horizon and pricing under pressure. So when Nayar referred to seeing “the first signs of revival” in the marketplace, we presume he wasn’t talking about BT! Nonetheless, he hedged his bets a bit, remaining ‘cautious’ and wanted to see another couple of ‘good’ quarters pass before he was prepared to call a trend. In any event, unlike larger peers, Tech Mahindra’s operating margins declined, both yoy and seq, to 25.5%, but they remain second only to Infosys.

On the Satyam – sorry, Mahindra Satyam – front, the news sounds positive. New CEO C.P. Gurnani told me that there had been no customer attrition since Tech Mahindra took control in April and that they had been winning new customers – 20 in fact, of which some 8 or 9 came from UK/Europe. Gurnani talked about Mahindra Satyam having “touched the bottom”, but set an expectation that revenues, when eventually reported, might come in a little under the $1.3b mooted at the time of the takeover. Gurnani also said that pricing was pretty much in line with Mahindra Satyam’s peers, with onsite prices even better due to Satyam’s traditional high exposure to enterprise application services (SAP, Oracle and all that). They are still hoping to have the restatement of Satyam’s accounts completed by the end of this year, then hopefully we’ll get better disclosure on the business. It will surely be good to see Mahindra Satyam ‘out of the closet’ again.

Wipro Q1 ’10 update

(By Anthony Miller – Wednesday 22nd July 2009 3:15pm). Premji stuck to his guns on market conditions (see Wipro sees first signs of stability) and said he was “more hopeful of the future than (he had been) in the past”. That said, Wipro still very much echoed many peers’ concerns on customer dynamics, especially pricing. Like Infosys and TCS, Wipro has pretty much sorted contract renegotiations but didn’t rule out a further round if economic conditions failed to improve.

The picture in Europe is much as peers'. Revenues fell 5% sequentially (constant currencies), compared to -3% ccy at Infosys. Europe remains 25-26% of Wipro’s global IT services business. They are clearly winning deals; nine of its 26 new clients came from Europe. Indeed, sourcing advisors TPI reported today that Wipro appeared among the Top 5 vendors in AD&M and network services deals in EMEA last quarter as measured by TCV (total contract value). Wipro management said they are seeing ‘interesting outsourcing opportunities’ in Germany and France. However, having to deal with workers’ councils on the continent means major deals are taking 1-2 quarters longer to finalise. Wipro is also hiring in Europe, with another 45 local heads added last quarter.

Wipro still lags larger peers on operating margins. Though up 1.8 pts yoy and 1.5 pts seq to 19.7%, Wipro’s Global IT Services margins still trail TCS (24.8%) and Infosys (30.1%). Wipro’s ‘pure’ IT services margins (i.e. excluding product sales – which carry a 4% margin) sit at 22.2%. Although it gets very little mention on the concalls, Wipro’s legacy Consumer Care & Lighting business (cooking oils and soaps through to lightbulbs) grew revenues 9% and now comprises 8% of the total, and runs a 15.2% operating margin. In a recession we all go back to basics!

I will be meeting Wipro Head of Europe, Ayan Mukerji, next month and will bring you more then.