Martin Hingley's Blog

ITC Industry Boom, Bust And Recovery

We’ve been working on our Q3 2011 industry stats, assessing the revenue, profit and headcount developments of over 100 leading and representative suppliers operating in the ITC market.
Over the last few quarters business growth for most vendors has been reasonable, proving that our industry has recovered well from the last downturn. We thought you’d like to see how the market is going and the precursors of the coming double-dip recession and consequential industry market decline.

The growth in revenues for the four categories of ITC offerings is shown in Figure 1. It shows the period between 2003 and Q3 2011, clearly illustrating both the dramatic downturn in 2008 and subsequent recovery. In Q3 2011 we saw all sectors apart from Telco Service turn down in a similar way to Q3 2008, albeit from less elevated growth in earlier quarters.

Profit Taking Follows A Three Year Cycle

We compare our industry’s revenues, net profit and headcount growth in Figure 2, where we’ve used a ‘rolling 4-quarter analysis’ by adding the total market for 4 trailing quarters together before calculating growth rates. The most striking finding is that net profit moves dramatically on a 3-year cycle – with very strong growth in 2004, 2007 and 2010, followed by strong negative troths in 2006 and 2009. Whatever happens to revenues in the next year it is inevitable that net profits will enter negative territory in 2012 and it’s reasonable to suppose it will reach the –20% rates we saw in the last two downturns. Revenue growth also turned down in the worst years for net profit growth and so it’s possible to argue we’re heading for something of a ‘perfect storm’ next year.

Powerful Currency Movements Disguise Local Country Growth Rates

To illustrate the changes we’ve looked at the exchange rate of all currencies against the dollar, having used a database using OANDA as a source. Using the rate in Q1 1999 as reference, we’ve plotted the changes for selected currencies in Figure 3. Those currencies above the 100% line are cheaper than the $US, whereas those below are dearer. Even beyond our industry you can note some interesting issues. In particular that:

• The Chinese Yuan Renminbi was pegged against the dollar until 2005, from when it has become dearer than its Q1 1999 value
• That the Japanese Yen became less valuable or 2 short periods, but is now the most expensive currency
• The Euro is also significantly more expensive, having crossed from being cheaper from its introduction in 1999 to 2003
• The UK Pound followed the Euro closely until 2008 when it was strongly devalued, stepping over from being dearer to cheaper in the process
• The Russian Rouble and South African Rand has been consistently cheaper than their Q1 1999 values

During the credit crunch the UK addressed the economic situation by massive devaluation like smaller EMEA markets: we can argue that strength of the Euro was unhelpful in helping PIIGS countries defend themselves.

It’s very important to get a handle on the changes in currency values in order to calculate how well country markets are performing, not least because these regularly exceed the change in ITC spending. Having done the calculations we represent the overall growth in ITC markets in Figure 4. It demonstrates a number of interesting trends. In particular:

• The consistently high growth in China
• The increasingly sluggish conditions in France, Germany and the UK
• The dip in Japanese spending in Q2 2011 which can be directly attributed to the affects of the great earthquake
• The reasonable growth throughout 2011 to date of the US market

Currency rates are likely to be come even more unstable as we enter the new downturn, especially for any country which decides to leave the Euro and re-establish its own. We intend to pay close attention.

Telecom Service Is Leading ITC Category In The Annual Period To Q3 2011

The ITC market was worth $6.9 Trillion in the year to the end of Q3 2011 and is broken down into categories and offerings in Figure 5. There have been some interesting developments. In particular:

• Telecom Service was worth $2.9 Trillion, 42.6% of the total
• IT Service was worth $1.6 Trillion (23.1%)
• Hardware was worth $1.5 Trillion (22.0%)
• Software was the smallest category – worth $0.9 Trillion, accounting for 12.3% of the total

Within the categories, wireless and fixed line account for around 90% of Telecom Service, PCs (followed by converged devices) remain the leading Hardware offering, implementation is the strongest IT Service offering, while application software continues to dominate the Software category.

NTT, HP and Samsung Are The Leading ITC Vendors

It’s a bit of an eye test, but market shares for the overall ITC market and each of the 4 categories are shown in Figure 6. In the overall ITC market NTT leads from HP, Samsung and Apple. It illustrates how small market shares are in most categories, with the exception of Hardware where Samsung leads Apple (which is now ahead of HP). Microsoft, Oracle and IBM are in the first three positions in the Software area, while NTT and IBM lead the Services category and Verizon, Telefonica and AT&T head the Telecom Service area. Let us know if you’re interested in investigating these stats more closely at the country, regional or offering levels.

Some Conclusions – Batten Down The Hatches

This post is the first of a number we intend to publish over the next month or so outlining and forecasting market growth in detail. From our initial look at Q3 2011 movements it looks as if we’ve got some interesting quarters ahead. In particular:

• The 3-year net profit cycle is heading downwards
• Revenues have turned down in all but Telecom Service, suggesting a parallel with Q3 2008
• Countries with their own currencies were able to devalue significantly in 2008
• The economic downturn combined with a high valued Euro is likely to force a number of countries to leave, causing significant disruption to ITC markets
• China sustained high growth rates in ITC spending throughout the last downturn and is likely to do the same this time

We are on the look out for countervailing businesses, as data centre outsourcing was in 2001 and consumer devices were in 2008. This time it looks as if Cloud Computing will be the one area where there has been enough investment for Service Providers and channels to make the most of the inevitable shift in user spending from Cap Ex to Op Ex.

Please contact us if you would like to have access to the detailed market stats behind this article which we can deliver to you in Excel pivot table format.

Filed under: Cloud Computing, Hardware, IT Service, Market Share And Forecast, Software, Surviving The Downturn, Telecoms Service Tagged: | currency, hardware, headcount, IT Service, ITC, Net Profit, revenues, software, Telecom Service