IT Companies Shifting Focus To Next-Generation Technologies

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In order to establish footholds in an ever growing, globalized market, IT companies are realizing the potential of next-generation technologies like cloud computing and big data to open up new growth opportunities. According to Global Industry Analysts, the global IT service market is expected to reach $1.2 trillion by 2015, at a compounded annual growth rate of 5.88% from 2011. To increase their slices of the pie, three companies are harnessing these technologies to increase their prospects for growth.

Shifting from low-margin to higher-margin business

Computer Science Corporation (NYSE: CSC), known as CSC, is in a continuous process of divesting its non-core low-margin businesses. In last six months, it has divested six operational units generating $860 million in revenue.

With the proceeds of these divestitures, the company is focusing on improving its big data solutions. It will increase its revenue deployment on big data from 5% in 2012 to 25% in the next two to five years, which will raise its operating margin by more than 15% from the present level.

CSC has also witnessed a rise in higher value offerings like cloud computing, from 25% in 2012 to around 65% in its managed service sector bookings in fiscal year 2013. The company will generate revenue of $13.75 billion from this segment in fiscal year 2014 with an increased operating margin of 8.3% compared to 6% in last year.

In the first quarter of 2013, CSC planned for cost cutting of $1 billion-$1.2 billion in the next 18 months and $2 billion total in five years’ time. It plans to achieve these savings by optimizing enterprise systems, increasing use of shared services, and standardizing its service offerings. So far, its efforts have paid off: CSC saved $900 million compared to its target of $600 million in fiscal year 2013, which allowed it to revise its total cost cutting plan to $1.3 billion, with a $400 million target for fiscal year 2014.

Cloud computing with strong outsourcing business

Accenture's (NYSE: ACN) revenue in the second-quarter was driven by strong growth in its outsourcing business, which grew year-over-year by 9% to $3.3 billion. The company received new orders worth $9.1 billion, out of which $4.7 billion were in outsourcing. The continuing growth opportunities in Accenture’s outsourcing segment will allow the company to broaden its portfolio. Two-thirds of the company's employees have deep industrial experience, and the company is focusing on around 40 industries.

Accenture has also increased its marketing investments, which will help maintain strong order bookings in the coming months. It expects total new bookings in the range of $31 billion-$34 billion for the entire year. Accenture expects to generate revenue of $13.65 billion from its outsourcing business for fiscal year 2013, compared to $12.3 billion in 2012.

One arm of Accenture’s marketing strategy is an increase in social media, mobile computing, and the cloud. It will spend nearly $400 million by 2015 to develop its cloud-computing business, which recently reached the $1 billion mark, nearly 3.5% of 2012 revenue. The company is currently working with 25 cloud service providers, has worked on more than 4,000 cloud projects for clients, and has around 6,700 professionals trained to work in the cloud. Accenture expects its cloud business to grow in-line with or to exceed the projected growth of the global cloud market, which the IDC estimates will reach $98 billion by 2016, a growth of 245% from $40 billion in 2012.

Expecting growth from next generation technology

Wipro (NYSE: WIT) completed the demerger of its non-IT business in consumer care and lighting, infrastructure engineering, and medical diagnostic products and services, on March 31, 2013. These units contributed nearly 14% of Wipro's revenue, and only 6% in operating profit of last fiscal year. The assets and liabilities of the demerger undertaking were transferred to Wipro Enterprises Limited at book value. With its new exclusive focus on IT, Wipro expects to enhance its customer base, and does not anticipate that the demerger will affect its future growth. It has projected revenue of $1.61 billion from its global IT service for the first-quarter of 2014, up from $1.58 billion quarter-over-quarter. Wipro, with net cash of around $1.64 billion in 2013, plans to enhance its foothold in next-generation technology, and is continuously looking for partnerships with next-generation service providing companies. In May, it spent $30 million to acquire a minority stake of nearly 10% in Opera Solutions, a New Jersey-based big data company that provides mostly cloud-based analytical services to various industries.

It also acquired a minority stake of around 10% in Axeda, the U.S. based cloud-computing firm, for $5 million. Axeda’s core strength is in its cloud and machine to machine, or M2M, solutions. Partnering with Axeda benefits Wipro by providing faster M2M applications to customers and enhances its big data capabilities to generate better business solutions.

The global big data market was worth $6.3 billion in 2012 and is expected to reach $48.3 billion by 2018. The U.S. will lead in the global big data market by 2018, capturing around 54.5% of its market share. Wipro expects to be a leading player in that market, projecting revenue of $7.07 billion in fiscal year 2014 compared to $6.54 billion in 2013, recent acquisitions withstanding. 

Conclusion

By divesting its non-core low-margin businesses, and investing in next-generation technologies integral to its cost cutting plans, Computer Science will strengthen its overall margins. Accenture, with its growing order book and improving cloud-computing capabilities, seems to be a good pick. Wipro’s demerger of its non-IT business allows it to focus on its core business, and its acquisitions in next-generation technology companies will likely result in long-term future growth.

All of these stocks are a "buy" in the long-term.

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