Q2 21 results underline the rapid, and sustainable, rebound of the IT services market
Most IT services companies have released their second quarter earnings this week. Overall, results are excellent. After registering four straight quarters of revenue decline, growth is back for a large majority of the sector’s actors, sometimes even in the double digits (Alten, Capgemini, OBS, TCS, Wipro…). This improvement was widely expected thanks to a very favorable comparison base, the second quarter of last year marking the start of the pandemic and a low point in terms of activity. But the recovery seems stronger than expected driven by digitalisation, cloud, data and security. Indeed, the Covid-19 pandemic has put pressure on companies to find cost efficiencies and cloud and data capabilities are considered as one of the key requirements needed in order to advance their digital transformation agendas and drive value creation. In that context, consulting (C&SI) is currently one of the most dynamic market segment as companies assess their next steps and large tender offers, for transformative projects, are in the pipeline.
The strong growth seen in Q2 should therefore continue over the next few quarters as the fundamental drivers remain intact. Most listed companies continue to be optimistic on demand for the second half of 2021 and a record of them have even raised their annual sales target (Accenture, Capgemini, Cegedim, Sopra Steria, Spie…) even though these guidances were probably generally cautious as they were issued at the beginning of the year, in a context a very low visibility. This optimism comforts us in our market forecasts for a return to growth for the IT Services market in 2021 (+3,0% expected by PAC for Western Europe), a forecast that might even have to be raised if the market recovery confirms itself in Q3. It is important to note though that the labor market is tight in most geographies, capacity usages and outsourcing are up, and some specialized skills are in short supply. This lack of key competencies in some strategic areas (cloud, cybersecurity, data) could therefore be the main damper on future growth and all large groups have mentioned their intention of acquiring some skills through small or medium size acquisitions.
The recovery is seen across all market verticals. For different reasons, the public sector, the health/pharmaceutical and the financial sector fared much better than the market average in 2020 and continued to post modest growth early into 2021. But most of the growth acceleration perceived in Q2 was driven by a rebound in the sectors hit hard by the pandemic such as automotive and manufacturing. On the other hand, levels of activity have not yet completely recovered to pre-pandemic levels in aeronautics. Sopra Steria, for example, is now generating a quarterly run-rate of €70m in revenues with Airbus, well above the €60m of last year, but still below the €80m level achieved in 2019.
France was the large economy which saw its IT services market decline the most last year (-7,9% according to PAC) due to very strict lockdown measures and a high exposure to sectors hit hard by the pandemic (aeronautics/automotive/tourism). It is therefore not surprising that France is leading the way in terms of rebound with double digit growth for Capgemini, Atos, OBS, CGI, Spie, Alten to name just a few. But recovery is happening across all geographies and the United-States have generally been seen as having an 12/18 months lead in terms of cloud adoption, a lead that could even increase as cloud adoption is slowed down somewhat in Europe by a lot more questions around data security and sovereignty.
Alten and Capgemini posted the most impressive results with sales up organically by 19,7% and 12,9% respectively, the latter mentioning that such strong growth and labour tightness in the US is pushing companies to look for offshore capabilities to meet demand. After two years of revenue decline, IBM manages to stabilize its revenues thanks the success its Red Hat and its cloud offering (up double digit) while the GTS division offering IT services and is to be spun-off as Kyndryl, registered a 4% organic decline in revenue. Orange’s IT&IS division, which was a rare player to post growth in 2020 during the pandemic, continues its excellent performance with 10,8% growth in as the group benefits from its strong positioning on the most dynamic segments of the market (cloud and cybersecurity). The creation of Bleu with Capgemini in order to build a “cloud de confiance” in France should help maintain this positive dynamic as it will become the de-facto reference for the public sector’s cloud ambitions.
In all this positive news flow, Atos’ Q2 21 results stand out. After five straight quarter of declining sales, Atos’ revenues finally stabilised but this performance was below the group’s expectations and led management to revise downward its guidance for the year (stable growth vs. +3,5/4% beforehand). Indeed, if the group benefits from the positive trends in digital, cloud, security & decarbonization (53% of its revenues, growing at 12/15%), this is partly done at the expense of traditional infrastructure spending where revenue declines are now in the order of -20%. In that context, Atos has decided to accelerate its repositioning on the growing businesses by announcing that it was looking for partnerships (up to disposals) around its unified communications & collaboration activities (Unify), low-end infrastructure support services (datacenter hosting) and selected niche activities, representing approximately 20% of its revenues. We do think this is the right strategy for Atos and it should allow it to achieve solid and sustained growth as it has all the right tools to succeed in this new market context (IP in cloud and security, leader in decarbonization). This is underpinned by quite a few contract wins in the past few months (Cloud services with the Flemish Government, TMT contract with EY, Cloud and Edge contract with a major international logistics company) and a book-to-bill ratio that stood at 109% at the end of Q2.