ITServicesInvestmentPerspective.ppt

greg gould u.s. it services april 2002,it services investment perspective,u.s. it services coverage group,key sector stock points,good overall demand and attractive valuations sector net income growth should reach 15% in cy02 increased focus on accounting helps investment case for processors and systems integrators tech rebound? favorite areas processing and outsourcing stock ideas: processing first data, concord, adp outsourcing acs, exult it consulting/systems integration accenture, kpmg consulting, cognizant,note: includes aud, csc, eds, fdc, ffm, fisv, ndc, payx. gs&co. and first call estimates.,valuation trends,industry perspective,large industry - $440 billion in worldwide revenue highly fragmented market the “center of gravity” has shifted to the larger firms areas with the highest growth potential bpo (business process outsourcing) platform consolidation / technology asset optimization network and desktop outsourcing mid-market outsourcing shift in payment systems,6,it services estimated market share of the top worldwide services providers,7,it outsourcing trends,expect 12-15% year-over-year growth in calendar 2002, similar to 2001 focus on corporate cost cutting should continue to fuel sales activity in 2002-2003 bpo is becoming increasingly important to the sector third-party financing “controversy” has receded demand from government clients will be an important incremental growth driver favorite stocks affiliated computer services (acs) exult (exlt) electronic data systems (eds),8,bpo (business process outsourcing) outsourcing evolves,$100-120bn market opportunity anticipate 15-20% sector growth, but likely faster in “early adopter” markets (e.g., hr, f&a) intellectual capital (vs. scale) is the critical success determinant attractive economics technology enablers eliminate important delivery and cost obstacles buyer familiarity with outsourcing eliminates psychological hurdles,9,bpo a comparison vs. traditional data center outsourcing,gross margin : 18-25% contract length - 3-7 years client expansion opportunity - moderate/high partnership attitude - moderate pricing metrics include: (1) resources used (2) service level agreement incentive (3) minimums. typical functions include: (1) data center operations (2) lan/wan operations (3) help desk (4) application maintenance (5) application development. it only key to success is scale the biggest challenge is infrastructure optimization 50% of the time the competition is internal when there is competition the focus is on price and service level agreements,gross margin: 30-40% contract length - 3-7 years client expansion opportunity - high partnership attitude - high pricing metrics include: (1) volume of throughput (2) service level agreement incentive (3) minimums. typical functions include: (1) human resources (2) sales, marketing and customer care (3) payment servicing (4) finance and administration (5) logistics. it and process key to success is standardized workflow, process automation and self-service the biggest challenge is re-engineering to best practice 100% of the time the competition is internal winning the business is based on best practices and cost reduction,example: claims processing,example: data centers,10,it consulting/systems integration trends,some reasons for hope the tone of business appears to be stabilizing bigger is better the larger firms are on a multi-year trendline to gain market share maturation of the internet tech cycle services now leads technology implementations demand drivers technology platform consolidation cost cutting through process re-engineering application outsourcing technology asset optimization erp, crm, network consulting, security and infrastructure software risks inherently low visibility close rates pricing europe “changing” complexity of engagements,11,it consulting/systems integration trends,consulting spin-offs by auditors unlikely to boost demand much potential $2-4bn opportunity announced intentions by pwc and deloitte to spin-off should limit client attrition inherently volatile overall business trends this may get lost in the noise,12,offshore development and maintenance,likely one of the most important issues to confront the sector in years business model has been “stress-tested” a major focus for many firms cost arbitrage likely to continue for years project management (not simply staffing) is the critical long-term success determinant risks revenue cannibalization internal “buy-in” execution,13,government picking up and slowing down,$90-100bn market opportunity federal should remain healthy, but beware of homeland security “hype” state and local market should decelerate is this a repeat of the corporate market in 2000?,14,our investment framework,15,the analyst “checklist”,sales model pipeline management size, composition, growth of sales force marketing strategy partnerships/alliances,finance/administration daily operators project methodologies institutionalized ability to change,service offering delivery capability business case justification project management skills average project size rate of repeat business strong client references,culture/core values experience retention career path professional development recruiting,organic vs. acquired vision objectives obstacles/challenges acquisition strategy,key competitors differentiators barriers to entry win rate why win/lose,scalability profitability visibility revenue mix broad & deep equity ownership,growth operating margin financial consistency balance sheet,market position,sales and marketing,operational infrastructure,value proposition,management/people,growth strategy,competitive positioning,business model,financial model,size market growth state of the market,16,favorite stocks in it consulting/systems integration trends,accenture (acn) kpmg consulting (kcin) cognizant (ctsh),17,payment processing trends,debit will drive growth sector revenue growth could accelerate as the mix of debit continues to rise credit card spending growth is running at 7-8%, in line with prior recessionary levels debit networks will take center stage in 2002 following major acquisitions by concord and fdc in 2001 pricing trends remain benign in merchant acquiring, and there are some signs of improvement favorite stocks concord efs (ceft) first data corp (fdc),18,payroll processing trends,sector earnings growth should reaccelerate as interest rates stabilize add-on services that wrap around payroll and international expansion should help support 2002 earnings perhaps the most attractive long-term growth market benign competitive landscape natural leverage in business only 30% pen