The long and the short of IT (2024)

Before we delve into Week 3 of Q2 reporting lets get distracted. The latest annual figures from the Investment Association, IA, concludes that UK investment managers have a fifth of equity assets (£780bn) in UK companies, 35% in North American ones, meanwhile Retail investors hold 26% of UK AUM, 20% in 2020. Is that community well served?

As we listened to Meta grumble about GenAI ROI stretching, we noted Capita rolling-out Copilot across the company to automate the routine, summarise complex documents, draft content, and allow employees to focus on higher-value work. At H1 results, newbie CEO Adolfo Hernandez said he is working to identify and action many initiatives that will make Capita a better company – (pov) the future for Verticals is AI-RAG, Mr Hernandez is starting in the right place. Further down the adoption path, Schroders CEO Peter Harrison has “embraced technological innovation and is now developing proprietary AI to capture efficiencies and improve client experience”. Schroders has “many unique use cases under development or deployed”. Also Schroders (hat tip) is joining with Phoenix Group to launch Future Growth Capital which supports the Mansion House Compact aim to unlock investment opportunities in private markets where it aims to deploy £10-20bn over the next decade - 'retail’ you won’t be orphans for ever.

Week Three has been mixed; weakening Mag7, folks forgetting the ill-effects of the hype cycle, Gartner downgrading IT spend forecasts, soft demand environment making caution, a slew of results spanning Mag7 (Apple, Amazon, Meta, Microsoft), Professional Services (Atos, CGI, Cognizant, FDM, Indra, Mastek, Reply), Infrastructure IT Services (CDW, Datatec, Insight), IoT (Microlise, Ondo, Quartex, Trackm8) and Games (EA, Roblox). We were encouraged by Robert Walters CEO Toby Fowlston who acknowledged that despite challenging market conditions “2024 is not a lost year”. Read on as we explore the emerging data points with thoughts framed by the Great Rotation and the Great Opportunity in a market “Where the Wild Roses Grow”.

Mag7 (Apple, Alphabet, Amazon, Meta)

The Q2s featured disappointing results, but, for us, the highlight was Meta which posted better-than-expected guidance for Q3, in a Q2 print which was ahead of expectations (source: Reuters). At Microsoft the earnings and revenue beat was neglected as attention focused on disappointing cloud revenue (note: Revenue from Azure and other cloud services was +29% Y/Y). Over at Amazon it was a case of “continuing to make progress on a number of dimensions”, said Andy Jassy, Amazon President & CEO but revenue, US$147.98bn was shy of consensus (US$148.78bn) as was Q3 guidance so the shares slide. Apple also beat the street as iPhone sales dipped, China was weak but thoughts of the usual September slate debuts buoyed enthusiasm.

Breaking the Mag7 formula Meta shares were higher on the news of US$5.16 EPS, revenue US$39.07bn, besting estimates US$4.7 and US$38.26bn respectively. With our Adtech readacross we warmed to the numbers on the ad side, but generally attention was focused on the Capex, US$8.47bn for Q2, with the annual spend revised to a range US$37 - $40bn, prior US$35bn. There is more skepticism around GenAI ROI, but remembering the hype cycle this is usual at this juncture.

Cohort valuation overview

Note: Priced 07 August Source Company data, Yahoo Finance, Technology Investment Services

AWS and Microsoft: The growth mojo fires up

Source: Company data, Technology Investment Services

IT Professional Services (Atos, CGI, Cognizant, FDM, Indra, Mastek, Reply)

It was a bumper week for IT Professional Services. IT Professional Service companies who are responsible for just shy of 3.4m FTEs out of our universe of c3.5m FTEs have now reported for the period to 30 June. As we updated the cohort dashboard the trends from Week 2 remained, namely; progress with GenAI pipeline, companies rebuilding bookings, some hiring lots of training and the segment doing better on KPIS like utilisation, attrition, profitability and cash. The segment is winning new customers and revenue growth has started to turn positive. For example, FDM won 29 new clients in the period, 26 Y/Y, and there revenue growth will recover. As we delve a little deeper, we note that the Offshore companies (accounting for nine of our 28 company cohort) are the majority of companies that are growing revenue sequentially and annually. They are most likely to be hiring (six of the eight companies who have increased headcount this quarter to date). We have a concern that in these challenging markets the offshore companies are using their price advantage to good effect, improving win rates against European and US peers. Recap the old quip in good times companies work to unpick the poor contracts that the signed in bad times!

Cohort valuation overview

Note: Priced 01 August Source Company data, Technology Investment Services

The offshore price advantage

Note: Priced 01 August Source Company data, Yahoo Finance, Technology Investment Services

IT Professional Services Dashboard

Note: Priced 01 August Source Company data, Technology Investment Services

IT Infrastructure Services (CDW, Datatec, Insight)

The Week 3 reporting companies echoed the themes of week 2 (revenue declines, somewhat improving profitability, cautious outlook statements and inevitable downgrades) we have seen that the inventory rebuild has not ‘played out’ as we had expected. (Foolishly) We have imagined that the cohort companies would now be re-building inventory (i.e. reporting working capital outflows), however this is not proving to be the case, so there is the possibility of a better-than-expected outlook for year-end cash positions - and yet the re-build could happen in Q3.

At Insight CEO/President Joyce Mullen stated: “Our strategy to focus on cloud, services, and the fastest growing areas of the market has delivered improved economics to our shareholders and supports our transformation to become the leading Solutions Integrator,” as she described the end market a “choppy product demand environment”. The commentary was echoed at CDW with CFO Albert J. Miralles saying that thru Q2 “economic uncertainty and increased technology complexity continued to weigh heavily on solutions spend”. However, there is also “refresh” which “drove broad-based demand for client devices". Thinking about that refresh point, and noting that Windows 10 goes end-of-life from 14 October 2025, we note:

• Industry analysts IDC opine that worldwide PC shipments reached 64.9m units in Q2, +3.0% Y/Y. Ryan Reith, group VP IDC's Worldwide Device Trackers stated that “two consecutive quarters of growth, combined with plenty of market hype around AI PCs and a less sexy but arguably more important commercial refresh cycle, seems to be what the PC market needed. The buzz is clearly around AI, but a lot is happening with non-AI PC purchasing to make this mature market show signs of positivity."

• At its Q2 results Microsoft’s Personal Computing unit, with the Windows operating system, gaming, devices and search advertising, contributed $15.90 billion in revenue. That outcome is up 14% and higher than the StreetAccount consensus of $15.49bn. The results benefited from a solidifying PC market with sales of Windows licenses to device makers +4% Y/Y.

Cohort valuation overview

Note: Priced 01 August Source Company data, Yahoo Finance, Technology Investment Services

IT Infrastructure Services Dashboard

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Note: Priced 01 August Source Company data, Technology Investment Services

IoT (Microlise, Ondo InsurTech, Quartex, Trakm8)

We hold a torch for IoT and the potential of ubiquitous communication from edge devices to create new business opportunities and models. Yet, IoT became somewhat of a orphan to market sentiment as GenAI washed like a tsunami over all other tech themes. For now (and we are mid -through the 5G primarily marketing phase), IoT remains small, but for us it is an overlooked segment which offers promise, and the cohort offers attractive valuations. The participants are small, and so play to the Great Rotation. Note for example:

• Quartix Group H1 revenue increased by 10% to £16.1m, £14.6m Y/Y. with flat Adj EBITDA, £2.7m, FD EPS 4.49p, 4.16p Y/Y. Commented Andrew Walters, Executive Chairman, “the company made very substantial progress in H1as new subscriptions +13% Y/Y with ARR + 11% Y/Y to £30.9m”. The Board guided that both FY revenue and profit would “moderately exceed market expectations”.

• Early stage markets are also characterised by disappointments. Final results from TRAKM8 saw revenue “heavily impacted by insurance capacity market with in excess of £5m estimated revenue lost”. Also Fleet software revenues down by £1.5m with significant contract award expected for next financial year ending 31 March 2025. The recovery of insurance policy sales has been slower than anticipated with a number of customers still impacted by capacity and competitive pricing challenges.

• The opposite is the case at Ondo InsurTech where final results featured 29% revenue growth to £2.7m with a reported operating loss of £3.2m. Ondo InsurTech is a PLC Awards winner. Pleasingly: (i) Total registered customers on platform +37% to 95,468. (ii) New roll-out deals signed with four US insurance groups: Nationwide, Pure, Mutual of Enumclaw, and Selective, (iii) Very strong customer endorsem*nts with +63 NPS (US), +91 NPS (UK) and +77 NPS (Nordics). (iv) Addressable Households under contract increased by 2.2x to 5.2m with 2% penetration at 31 March 2024 (31 March 2023: 2.4m with 3% penetration). Post Period the company raised £4.2m through a placing and open offer in May 2024.

• Microlise Group issued a positive H1 update with ARR +20.6% Y/Y (11% organic) to £54m, with revenue +15.4% Y/Y at £39.1m and Adj EBITDA +17% Y/Y. Of note customer churn an impressive 0.5%. Nadeem Raza, CEO commented: "I am delighted to report strong performance in the first half of the year, with significant recurring revenue growth following a strong period of delivery in the second half of last year and with new products from our successful acquisitions leading to an increase in cross selling and upselling”.

Cohort valuation overview

Note: Priced 01 August Source Company data, Yahoo Finance, Technology Investment Services

Gaming (EA, Roblox)

Is it too soon to revisit the Video Gamers? The shares are in can. But there is little confidence in the forecasts, given the woes from 2023. While the industry is still downsizing, numbers evidence is starting to suggest that the deterioration has been arrested. Note:

• EA Net bookings were US$1.262bn thereby exceeding the high end of the guidance range of US$1.250bn. CEO Andrew Wilson commented that the focus on “delivering bigger, bolder, and more connected experiences for our players has never been sharper”. This contrasts with the operational playbook at many gamers which is to downsize and look inwards.

• Roblox Q2 revenue +31% Y/Y to US$893.5m with Bookings +22% Y/Y to US$955.2m and operating cash, US$151.4m, +433% Y/Y as Average Daily Active Users, DAUs, were 79.5m, +21% Y/Y with average bookings/DAU, US$12.01, so +1% Y/Y.

Cohort valuation overview

Note: Priced 01 August Source Company data, Yahoo Finance, Technology Investment Services

Meanwhile: Gartner lowers IT Spend forecasts as “GenAI resembles a tax”

Worldwide IT spending is revised to tUS$5.26tn for 2024, +7.5% Y/Y according to the latest forecast by Gartner, Inc. Previously the analysts expected 8% growth. Says Gartner John-David Lovelock: “Generative AI (GenAI) is being felt across all technology segments and subsegments, but not to everyone’s benefit. Some software spending increases are attributable to GenAI, but to a software company, GenAI most closely resembles a tax. Revenue gains from the sale of GenAI add-ons or tokens flow back to their AI model provider partner.”

Global IT Spend estimates (USbn)

Source; Gartner Group July 2024

“Can’t get you out of my head” or How the Great Rotation is playing out

UK wider cohort shares re their 52 week high & Valuation overview

Note: Priced 1 August Source Yahoo Finance, Technology Investment Services

UK Tech Group TSR since 2019 (%)

Note: Priced 1 August Source Yahoo Finance, Technology Investment Services

Monitoring the small and large indices

Note: Priced 7 August Source Yahoo Finance, Technology Investment Services

End notes & Disclaimer: Please read

All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. This is not investment advice. Opinions contained in this report represent those of the author at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. The author is not liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained herein. The information should not be construed in any manner whatsoever as, personalized advice nor construed by any subscriber or prospective subscriber as a solicitation to effect, or attempt to effect, any transaction in a security. Any logo used in this report is the property of the company to which it relates, is used here strictly for informational and identification purposes only and is not used to imply any ownership or license rights between any such company and Technology Investment Services Ltd. Email addresses and any other personally identifiable information collected in the provision of the newsletter are only used to provide and improve the newsletter.

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My name is George O’Connor. I am a tech investment and IT industry analyst. I explore shareholder value, its drivers, the best exponents, the duffers. The target readers are investors, companies, advisors, stakeholders and YOU. If you like this please subscribe and pass it on to colleagues and friends. That said, if you hate it - do the same. Thanks for dropping by dear investor.