>COMPUTER SERVICES & IT CONSULTING (COWEN)

Industry Outlook

Computer/Business Services- Full Recap From

Last Week’s Tech Conference

Conclusion: Most IT Services vendors pointed to relative stability in IT spending trends, as funding remains firm for various cost-savings driven initiatives (application maintenance, BPO), while spending on discretionary, large projects remains cautious. Having said that, certain vendors highlighted improving pipeline conversions, with pricing pressure gradually abating (in
fact, most pricing renegotiations have already been completed). With somewhat improving visibility, partially driven by positive signals from the financial services sector (the industry’s largest vertical), the inflection point for the sector could be the September quarter, resulting in an industry-wide sequential revenue growth. Accordingly, we maintain our Outperform ratings on ACN, CTSH, INFY, WIT, ACS, VRTU, and NSTC.

■ Secular Growth Drivers Intact. We continue to believe that once spending decisions return to normalized levels, the offshore sector could continue to post strong revenue growth rates reflecting low penetration rates (IT spending dedicated to offshore projects as a percentage of overall IT budgets).

■ Pricing Trends Seem Manageable. While vendors have been working with clients in order to reduce offshore delivery costs by 10%-15%, greater mix of offshore execution and fix price work have resulted in an actual impact on pricing of 300-500BPTS.

■ EBIT Margins Sustainable. As we believe sector’s utilization rates are depressed by 500-1000BPTS.

■ Financial Services Could Lead The Spending Recovery. A number of vendors during our conference suggested improving pipeline conversion from this critical vertical (accounting for 30%+ of sector revenues), as the business environment in this vertical has stabilized.

To see full report: COMPUTER SERVICES & IT CONSULTING