Raytheon makes a bold acquisition to diversify from core defense markets

By John Caucis, Senior Analyst and Public Sector Practice Manager; Sebastian Lagana, Senior Analyst; and Jane Wright, Senior Analyst and Engagement Managed

Raytheon will leverage Websense and other recent security acquisitions to penetrate the commercial market

While TBR believes Raytheon’s decision to acquire Websense from Vista Equity Partners and combine it with Raytheon Cyber Products is a bold move, we expect the company to face many of the difficulties its federally focused counterparts experienced attempting to enter the commercial cyber fray. Differing sales methodologies, cultural hurdles, talent retention, sales compensation, disparate client demographics and the entrepreneurial nature of commercial entities operating within the space have presented significant challenges. We believe the recent divestitures of commercially focused business units by companies such as Boeing and General Dynamics are a result of the companies’ inability to circumvent these challenges. Continue reading

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While Xerox’s 1Q15 services margin declined, 2Q15 strategies, including investments in sales coverage and training, will help raise productivity

By Dakin Smoyer, Research Analyst

Leadership and cost management will assist Xerox in improving performance in the government healthcare vertical

Even with total signings down 13% year-to-year this quarter, Xerox enjoyed a 91% renewal rate across DO and BPO services. While Xerox experienced modest margin improvements in DO and commercial verticals, services margin declined 110 basis points relative to the year-ago quarter due to higher costs associated with electronic health record (EHR) implementation contracts. With the continued disposal of ITO becoming final in 2Q15, Xerox expects an improved financial outlook for the rest of 2015, including an M&A budget pushed up to $900 million. TBR believes the company will target acquisitions in commercial healthcare and transportation while increasing productivity of its DO and BPO services, in part through investments in sales coverage and training. Continue reading

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Leaders with software backgrounds, a new service delivery structure and investments in automation set Infosys up to become an ‘as a Service’ company

By Bozhidar Hristov, Analyst

Investments in next-gen technologies enable Infosys to enhance delivery capabilities; lack of strategy consulting breadth and depth will prevent it from reaching its 2020 goals

Infosys’ recent financial performance has showcased the company is struggling to balance growth and innovation, leading us to believe the company will not be able to achieve its lofty goal set during its FY4Q15 earnings call: Generate $20 billion in revenue, operating margin of 30% and $80,000 revenue per employee by 2020. To achieve this goal the company will need to generate CAGR of 17%, and according to TBR’s IT Services Vendor Benchmark revenue growth will remain in the low single digits in the next few quarters, growing 1.2% year-to-year in 1Q15 for the 30 vendors (including Infosys) in the study. Infosys’ leadership is determined to spearhead the over-competitive IT services market through investments in automation, technology acquisitions such as Panaya and Kallidus, and employee efficiency programs such as training in Design Thinking. However, the lack of scale in its high-value strategy consulting bench will remain the company’s biggest hurdle to making inroads toward its goal. Continue reading

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Microsoft stays the course in choppy waters

By Kelsey Mason, Analyst

Focusing on lifetime customer value in the transition to cloud stabilizes Microsoft performance

In the words of CEO Satya Nadella, Microsoft has been able to “transform and perform” simultaneously, while competitors struggle to stay afloat in uncertain waters as customers move from license-based models to subscription. This is evidenced by Microsoft’s increasing focus on annuity relationships, which made up 82% of commercial revenue. Microsoft’s user-focused portfolio gives it a leg up in this transformation against its data center-focused peers, and TBR believes the company has handled business model shifts and changing consumption trends successfully. With emphasis on lifetime monetization over one-time sales for core products such as Windows and Office, Microsoft positions itself for continued success. The company has succeeded shifting Office to the cloud and intends to grow lifetime customer value by integrating other products to Office such as Dynamics, Power BI, Enterprise Mobility Suite, among others. Microsoft will also participate in partner ecosystem development for richer and deeper extensions to maintain the suite’s de facto status. Continue reading

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Unisys’ new CEO focuses on fixing the cost equation, before embarking on revenue growth for 2015

By Elitsa Bakalova, Senior Analyst

Continuing revenue and margins declines in 1Q15 necessitate Unisys embark on further restructuring, cost reductions and efficiency improvements in 2015

Unisys’ services revenue declined 6.3% year-to-year in 1Q15 but was flat on a constant currency basis, as over half of services were derived from outside Canada and the U.S. Despite overall revenue declines, the company’s success in the U.S. federal market continued, as it grew 13% year-to-year in 1Q15. Unisys’ gross margins declined to 14.1%, down 170 basis points, as startup investments for several multiyear engagements were incurred. Unisys reported that the continuing challenges in generating profits within services are necessitating an organizational redesign. While top leadership changes were made over the last several months, additional changes are underway, namely recruitment of core delivery leaders who will focus on cost effectiveness. Unisys also indicated a streamlining of the sales process, elimination of middle management layers and a change in the cost base for global delivery. The end goal is an 8% reduction in the Unisys workforce, or the elimination of ~1,800 people. The restructuring is expected to cost $300 million, to be incurred over the next two years, with an annual cost savings of $200 million. As a consequence, improvements in profits will be a slow journey, but the end result is an organization that can profitably serve the ever-changing IT services market. Continue reading

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AWS silences doubters

By Jillian Mirandi, Senior Analyst, and Meaghan McGrath, Analyst

With a 17% operating margin in the quarter and a $6.3 billion run rate, Amazon Web Services (AWS) proves the viability of the cloud IaaS business model

Amazon’s public release of AWS’ revenue and operating metrics gives the market long-awaited data around the public cloud IaaS business. The big takeaway, as TBR predicted, is that AWS is in the black. Revenue from AWS reached nearly $1.6 billion in 1Q15, growth of 49% year-to-year, and netted more than $4.6 billion in 2014. In 1Q15 AWS achieved a 17% operating margin, down from 23% in the year-ago quarter. Continue reading

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Revenue growth and profit growth indicate Google is beginning to adapt to a mobile-first ad environment

By Daniel Callahan, Research Analyst

Google’s advertising volume continues to climb, but struggles persist in monetizing mobile

Google remains focused on growing its mobile advertising business as it protects its desktop search business, and the company is consistently investing to improve technology and create new programs to increase the ability of its advertisers to serve advertising across multiple device and software ecosystems. However, even as Google invests in multiplatform ad technology and services, particularly in its mobile advertising business, slowing overall revenue growth and cost-per-click (CPC) declines — despite increased ad volume — illustrate Google’s struggles to fully monetize mobile. In 1Q15 aggregate paid clicks increased 13% year-to-year, evidence Google is successful in proliferating ads in the growing mobile marketplace. However, cost-per-click fell 7% year-to-year in 1Q15, highlighting the challenges Google will face through 2016 for mobile to supplant desktop-based search as Google’s bellwether product segment. Continue reading

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