Telecom, networking decelerate tech spending

Three of the top four IT services companies in India disclose a YoY decline in tech spending among communications and networking clients around the world.

The June quarter earnings for India’s multi-billion-dollar IT services sector closed last month, with analysts highlighting multiple factors behind the slump. A key factor that caused the quarterly slowdown was the communications sector, which saw a year-on-year (YoY) decline for three of the top four IT services companies in the country.

HOW COMPANIES FARED

Tata Consultancy Services (TCS), the largest IT services company in India in terms of market share, stands out as the sole member among the top four to have avoided a segmental decline. However, the growth reported in its communications and media segment was notably slim. The company’s Q1 FY 2024 earnings reported revenue of USD 462.4 million from the communications and media vertical in the June quarter. This marked a marginal 0.5% YoY increase in constant currency (CC), which discounts currency fluctuations. Notably, the company’s revenues from the vertical stood at USD 461.1 million during the same period in the previous fiscal.

Companies in the telecom space are holding back tech spending amid upgrades to 5G infrastructure, with concerns including macroeconomic headwinds.

Overall, the company’s quarterly revenue grew 6.6% YoY to USD 7.23 billion, up from USD 6.78 billion in the year-ago period. The contribution of TCS’ communications and media clients dropped to 6.4% during the AMJ quarter, down 40 basis points from 6.8% during the previous year.

Communications and media is TCS’ smallest revenue contributor among major business segments.

In comparison, the same vertical represents the third-largest business avenue for India’s second-largest IT services firm, Infosys. The Salil Parekh-headed company saw a decline of 5.6% YoY from its communication clients in the June quarter, down from USD 570.2 million in the year-ago period to USD 540.5 million during the quarter. Overall, contribution to total revenue from communication dropped by 1.3 percentage points to 11.7% — down from 13% in the year-ago quarter.

The drop was even sharper for the Noida-headquartered HCL Technologies, whose telecommunications and media clients, clubbed together with publishing and entertainment, dropped 11.7% YoY during the quarter. Overall, HCL Tech’s revenue from this vertical dropped to USD 243.2 million during the quarter, down from USD 278.3 million during the previous year. Contribution from the segment dropped to 7.6% of HCL’s total revenue — down from 9.2% in the same period last year.

Wipro, too, announced a decline, with revenue from its communications sector clients dropping to USD 127.9 million this June quarter, down from USD 135.2 million during the same period last year. The drop comes off the backdrop of flat growth for Wipro, which saw its net revenue reach USD 2.78 billion, a marginal increase from USD 2.76 billion in last year’s June quarter.

WHAT THE LACK OF SPENDING MEANS?

The market dynamics show a clear decline in tech spending among telecommunications and networking clients around the world. Companies in the telecom space are holding back tech spending amid upgrades to 5G infrastructure, with concerns including macroeconomic headwinds leading to the slowdown in deal execution for companies.

It is this narrative that has remained common for all IT services companies during the June quarter; the chief executives of all four IT firms suggested that there are delays in tech deal execution by clients. This suggests that these clients are either prolonging their deal periods or cutting short existing deals by pushing back on discretionary spending. These discretionary spends in the communications space would include artificial intelligence (AI)-driven tech deployments for modernisation of services.

The one silver lining on the horizon is that companies are not outrightly cancelling the deals, but they are pushing the contracts back for more favourable business conditions, which analysts and brokerages point out is a showcase of the sector’s resilience.

THE MARKET PROJECTION

An analysis of Infosys’ quarterly earnings by brokerage firm BNP Paribas, published in a note to investors on 21 July, said, “Infosys’ sharp cut in outlook could dampen investors’ confidence in its guidance process. The business with a higher share of digital- and consulting-led projects is seeing a higher negative impact of discretionary project cuts, in our view. We see any widespread weakness in the IT Services companies’ stock prices post this result as an opportunity for investors to start building positions in the sector. Our sector top pick TCS is better placed in this dynamic demand environment, in our view.”

Telecom companies are holding back tech spending amid upgrades to 5G infrastructure and concerns regarding macroeconomic headwinds.

This shows that tech spending in the communications market is not entirely done away with — the cutdown is largely due to the adjustment of ongoing tech projects more to the tune of present economic conditions.

With most of the clients of the IT services firms coming from North America and Europe, the trajectory is a clear sign of how global firms in the telecom space are handling aspects such as 5G rollout, tech infrastructure upgrades, new software deployment, discretionary customer experience projects, private network deployments for enterprises, and more.

As such, analysts also note that this period of weakness could be used by communications clients to experiment with their various tools and services, in turn pushing for faster growth once the market starts showing signs of recovery.

By Vernika Awal

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