Martin Hingley's Blog

Q3 2010 ITC Market Highlights

• The likelihood of a double-dip affect on world ITC sales are subsiding
• The total ITC market grew by 4% to reach $1.547 trillion in the quarter
• Hardware has recovered from worst to best category with a 12% increase to $274 billion
• Software sales grew by 10% on an annual basis to reach $187 billion
• Telecom Service revenue reached $717 billion – 0% growth over Q2 2009
• IT Services revenue grew by 5% to reach $368 billion
• Net Profit continues its three-yearly cycle reaching a peak of 60% for annualised growth for the year to June 2010
• Headcount growth dipped below revenue growth for the first time since the beginning of 2009
• Wireless ($1.2 trillion) and Fixed Line ($1.4 trillion) Telecom service are the largest ITC offerings for the year to the end of June 2010
• Software as a Service is the fastest growing (62%) ITC offering for the year
• The USA is the largest ($1.7 trillion), China and India (both 16%) the fastest growing ITC country markets
• AT&T and HP had the largest revenues for the year, Compal (81%) the largest growth
• Samsung achieved the most impressive results of the leading suppliers
• ITCandor forecasts a 5% ITC market growth to $6.427 trillion in 2010

ITCandor Expects A 5% ITC Growth In 2010

Having completed our Q2 2010 assessments ITCandor has been forecasting the market. In previous periods we were worried that the fast recovery at the end of 2009 would result in plunging growth rates at the end of 2010 – something we described as a ‘double-dip’ downturn. We now believe there is less likelihood of this. Although Telecom Service has fallen from a growth of 7% in Q1 2010 to 0% in Q2, the IT categories all experienced positive growth – headed by Hardware (12%) and followed by Software (10%) and IT Service (5%). A view of the historical growth rates (expressed in ‘current’ $US) for each of the four ITC categories is shown in Figure 1.

ITC Net Profit Growth Continue On Its Three-Year Cycle, With Massive Growth In Q2 2010

While revenues and headcount grow and decline in annual periods with some quarterly variations (especially for suppliers selling mainly to large customers with direct sales forces), net profits follow a distinct three-year cycle. Figure 2 clearly illustrates the massive peaks and troughs of the ITC industry, comparing growth for these three measures on a rolling 4Q basis. The ups and downs of net profit are even more extreme when looked at on a quarterly basis of course. In fact the trough in net profits coincided with the worst of the market downturn in the middle of 2009. ITCandor predicts that the movements will become less exaggerated in the period to 2015.
Revenue dipped significantly in the downturn and has now recovered to a 5% increase. ITCandor predicts that the ITC market will continue at around 5% growth until 2014 when the increase saturation of the market will result in lower growth.
Overall ITC Headcount at the end of June 2010 was 21.5 million. This measure was less affected than revenues during the recession, but is now set to grow at a lower level close to 0% until 2014 when there will be a slight increase once more.

Wireless And Fixed Line Telecoms Service Are The Largest, SaaS The Fastest Growing ITC Offerings

ITCandor breaks the four ITC categories into 22 offerings and measures their growth on a quarterly basis. A comparison of revenue for the year to June 2010, revenue growth for that period over the previous year and net profit is shown in Figure 3. It demonstrates some interesting movements. In particular:

• Wireless and Fixed Line Telecom Services are the largest ITC offerings, worth $1.2 and $1.4 trillion respectively
• Software as a Service (SaaS) was the fastest growing, worth 62% more than in the previous year; however, at $24 billion, it is also the smallest of all the offerings
• Other hardware grew by 32%, spurred on by massive increases in microprocessors sales and, to a lesser extent, thin clients
• As we’ve mentioned a number of times before Outsourcing has failed to grow in the latest downturn to the extent it did in the previous one from 2001 to 2002
• Converged Devices, Internet, Broadband and Applications all contribute important components to Cloud Computing and have relatively strong positions

Of course these offerings are also subdivided into a number of smaller classes (Smart and Basic Phones, x86, Unix and mainframe servers, laptop and desktop PCs for instance), which ITCandor also tracks on a regular basis.

The USA Is The Largest, China And India The Fastest Growing ITC Country Markets

In our research we break the three continental markets into 16 major countries, as can be seen in Figure 4. Again we have compared revenue, revenue growth and net profit (in this case the total for all vendors operating in each country). We have recalculated the annual revenue growth of the country markets in local currency to take out the influence of fluctuating exchange rates. It shows some important differences. In particular:

• The USA is the largest ITC market, accounting for $1.7 trillion and a growth of 4% over the previous year
• The ‘Other Asia Pacific’ market was worth $1.2 trillion and has grown at 5%
• The EMEA country markets were all in slight decline apart from Russia, which grew at just 1%; profits from these countries were larger on average than for countries in other regions
• Brasil, Canada and Australia all saw declines in revenue
• Mexico, the ‘Other Americas’ and Japan all experienced good single digit revenue increases
• India and China were the star performers over the year, each delivering 16% growth; however ITC revenues here remain small in comparison with other countries

Overall Asia Pacific has grown more strongly than the Americas and EMEA has seen the worst growth over the last year. We see a number of important differences in growth by country going forward.

AT&T And HP Lead The ITC Market In Terms Of Revenue, Samsung And Compal In Terms Of Revenue Growth

We track multiple vendors to build the ITCandor market model, some of which we’ve captured in Figure 5. Again we’ve compared revenue, revenue growth and net profit. Absent from the chart are any vendors which had negative net profits such as France Telecom, Nokia, NEC, Telecom Italia, BT and Sprint, since the size of the bubble is dependent on this measure and I haven’t thought of a way for showing negative sizes! Due to space constraints we’ve also excluded the names many of the smaller vendors on the chart, so contact us if you want to know more about where your own company is positioned. There are some very interesting differences by vendor. In particular:

• AT&T led the market with revenues of $123 billion, a net profit of $13 billion and a revenue growth of 0% for the year
• HP was a close second with revenues of $122 billion, a net profit of $9 billion and revenue growth of 4%; it is the leader of the IT market of course
• Samsung experienced significant revenue growth (59%) in the year and is the next largest vendor in terms of absolute revenues ($101 billion)
• Microsoft was the leader in terms of absolute net revenue, achieving $19 billion for the year
• Compal – an OEM manufacturer of PCs and Converged Devices had the strongest revenue growth with an annual improvement of 81%
• Nortel had the worst revenue decline of course as the company was broken up and divisions offloaded

Suppliers can improve their positioning on this chart either through organic success (Apple and Intel); acquisitive companies (such as Oracle and HP) tend to rise higher with a reduced size.

Some Conclusions – A Certain Recovery, But Bumpy Ride Expected

Looking at the development of the ITC market it is clear to us that we have avoided the ‘double dip’ we feared – at least at the worldwide level. Unfortunately it may well become a feature of a number of EMEA country markets – in particular the UK and Italy. There has been a lot of excitement over the growth of emerging markets (Dell for instance reports BRIC country growth, but not EMEA, in its quarterly reports). Although our statistics find stronger growth these markets are still tiny in comparison with mature Western countries. The comparative profits returned are also far less. If anything the recession has hurt the industry more in emerging that emerged markets and it will take some time before the natural assumption that investments there will have fast payback.
It is interesting that many of the most successful offerings include areas from which Cloud Computing is being built. We have already noted Internet, Converged Devices and the like; but Implementation services are also growing due to the building of private Cloud Computing for large companies by the likes of IBM, HP and Oracle.
We believe that the disruption of the Icelandic volcano did slow the EMEA ITC market, although the disastrous oil spill in the Gulf of Mexico did not affect the US market. Clearly the natural disasters in Haiti, Pakistan, China and elsewhere will slow the development of the ITC market somewhat.
We’re sure that the three-year net profit cycle has some very important consequences – especially for investors in ITC companies. Please give us some comments if you have worked them out.

Filed under: Hardware, IT Service, Software, Telecoms Service Tagged: | Australia, Brasil, Canada, China, double dip, France, Germany, hardware, ICT, India, IT, IT sevice, Italy, ITC, Japan, Mexico, Russia, sotware, Telecom Service, UK, USA