IT Services Industry Outlook 2024

The following analysis considers the 119 major publicly listed automobile companies with a market capitalisation above $1 billion. The numbers in the tables are expressed in millions of dollars except for percentages and ratios.

If you are looking for more comprehensive historical data about the IT services industry, please refer to this page contaning the most relevant industry data going back to 2012.

Summary:

• Industry Overview
  • Segment Analysis
• Industry Performance
  • Profitability Metrics
  • Financial Ratios
• Megatrends
• Regulatory Compliance
• Estimate Industry Growth
• Market Share and Competitors Analysis
  • Market Share Forecasts
• Selected Company Valuation
  • Accenture plc
  • Infosys Limited
  • VeriSign, Inc.

Industry Overview

The IT Service industry comprises all those companies providing a broad range of information technology (IT) services aimed at helping other businesses achieve higher degrees of efficiency and effectiveness in their day-to-day operations by leveraging their professional knowledge and expertise to deliver insights and recommendations tailored to the needs of their clients.

Examples of services and solutions offered by IT service firms are strategic consulting, system integration, hardware and software development, cloud infrastructure, network support, business process outsourcing, data management, and cybersecurity.

Segment Analysis

The IT services industry is divided into three main segments: the Consulting and Digital Transformation segment, the Cloud and Infrastructure Services segment, and the Industry Specific Platforms and Solutions segment.

Consulting and Digital Transformation

The Consulting and Digital Transformation segment comprises companies which provide consulting services to help businesses implement digital technologies to enhance their operations and efficiency.

The services and solutions offered in this segment include:

Strategy Consulting and Advisory, helping clients create digital transformation roadmaps by selecting the right technologies that would best fit clients’ goals.

Process Automation, to automate repetitive tasks and improve clients’ operational efficiency.

Enterprise Architecture, helping clients design and optimize IT infrastructure aligned with their business goals, ensuring scalability and flexibility.

Cybersecurity, to develop and implement strategies to protect clients’ assets, manage risks and ensure regulations’ compliance.

Examples of publicly traded companies operating in the Consulting and Digital Transformation segment are Accenture plc, Capgemini SE, Infosys Limited, Wipro Limited, HCL Technologies Limited, CGI Inc., and Cognizant Technology Solutions Corporation

Cloud and Infrastructure Services

The Cloud and Infrastructure Services segment comprises companies which provide cloud-based solutions to help business enhance their IT infrastructure.

The services and solutions offered in this segment include:

Cloud Migration, assisting businesses in migrating their application, data and workloads from on-premises servers to the cloud, ensuring a smooth and efficient transition.

Cloud Management, helping clients manage and optimise cloud environments by monitoring performance and costs on an ongoing basis.

Hybrid Cloud Solutions, helping clients leverage both cloud providers and on-premises cloud solutions for better performance and flexibility.

Data Center Services, to help clients collocate, host and manage data centers.

Network Infrastructure, managing network solutions ensuring their clients safe and reliable connectivity on-premises and outside clients’ facilities.

Storage Solutions, help clients safely and efficiently store data.

Examples of publicly traded companies operating in the Cloud and Infrastructure Services segment include International Business Machines Corporation (IBM), NTT DATA Group Corporation, Kyndryl Holdings, Inc, DXC Technology Company, Fujitsu Limited, Samsung SDS Co., Ltd., Computacenter plc, and Snowflake Inc.

Industry-Specific Platforms and Solutions

The Industry-Specific Platforms and Solutions segment comprises companies developing tailored solutions suitable for specific industry needs. Sectors like banking and insurance, healthcare, retail, manufacturing, energy, telecommunications, and public services all have their sector-specific needs and regulations to comply with.

Companies operating in this segment, like Infosys Limited and Tata Consultancy Services Limited (TCS), developed a comprehensive set of solutions, implemented by an experienced team of professionals, to effectively tackle the specific needs of their clients operating in different sectors.

Other than the three main segments, the IT Services industry is populated by a constellation of relatively smaller companies offering technology solutions – usually software applications – aimed at satisfying specific clients’ needs.

In this category are included companies like Shopify Inc., offering e-commerce solutions enabling its clients to set up online marketplaces; Twilio Inc., which offers customer engagement solutions like e-mail and messages to improve customers’ experience and retention; Okta Inc., which offers access management solutions enabling its clients to have full control on individuals accessing the corporate network; and VeriSign Inc., operating in the domain segment.

Despite the presence of a few large players like IBM and Accenture, due to the rapidly changing environment – driven by the quick adoption of new technologies – and relatively low barriers to entry, the IT Services industry is very competitive registering a Herfindahl–Hirschman index (HHI index) of 0.43, or 427.6 points.

The Herfindahl–Hirschman index is used to measure the level of competitiveness/concentration in an industry with HHI below 0.15 (or 1.500 points) indicative of unconcentrated, or very competitive, industries; HHI between 0.15 and 0.25 (or 1.500 and 2.500 points) indicative of moderately concentrated industries; and HHI above 0.25 (or 2.500 points) suggesting that industries are highly concentrated, or scarcely competitive, like oligopolies.

Industry Performance

From 2013 to 2023, the industry’s revenues grew at a CAGR of 4.3%, increasing 1.53 times from $378.3 billion to $578.1 billion.

Profitability Metrics

As of 2023, the industry’s operating margin stood at 10.7%, reflecting in-line performance with the industry median value of 10.9% of the past decade. The total operating profit was $61.7 billion in 2023.

Looking at other measures of profitability, in 2023 the gross margin sat at 33%, in line with the median value of 32.8%, while the free cash flow margin was 6.4% – again in line with the past decade’s median value of 6.5%.

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Collectively in 2023, the free cash flows to the firm (FCFF) registered a value equal to $36.7 billion.

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Financial Ratios

As regards solvency ratios, the debt-to-enterprise value ratio for the IT services industry is 5.6%, while the debt-to-equity ratio is 18.2%.

The interest coverage ratio instead, showing how much the operating income covers interest expenses, is equal to 9.51, which would translate into a credit rating for the IT services industry equal to Aaa/AAA based on Moody’s rating standards.

Finally, the unlevered beta of the IT services industry – which is the beta depurated by the debt leverage – has been 0.72 for the past 2 years, and 0.77 for the past 5 years.

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Megatrends

Thanks to the rapid emergence and evolution of new technologies, which disrupt and influence the way enterprises do business, the IT Services industry can rely on numerous catalysts to boost future growth.

The secular megatrends shaping the industry are:

Digital Transformation and Automation, the rapid development of AI and Robotic Process Automation enabled firms to improve the efficiency, effectiveness, and safety of their business processes.

Edge Computing, enabling IoT integrations and real-time processing of data in industrial and urban environments to improve process efficiency and repetitive task automation.

5G, empowering firms with faster internet connectivity to support real-time data processing.

Cybersecurity, like Zero Trust Architecture where no user or device, inside or outside the network is trusted by default, aimed at protecting firms’ assets and improving risk management.

Big Data, permitting data driver decision-making, real-time analytics and predictive analytics improving firms’ strategy planning and budgeting.

Blockchain technologies, improving trust among economic operators and eliminating the need for intermediaries thanks to supply chain transparency, digital identity, smart contracts, and DeFi.  

Industry 4.0, comprising operational efficiency and profitability improvement driven by new technologies such as advanced robotics, 3d printing, and IoT predictive maintenance.

Remote working, relying on collaboration tools, Virtual Reality workspaces, and VPN for secure connection to the enterprise network outside of firms’ facilities.

Regulatory Compliance

Although the blossom of new and disruptive technologies benefits the IT Services industry, over the past years concerns for data protection and individual privacy protection have risen among governments and international institutions.

This led to the introduction of stringent regulations and frameworks that IT Services companies must comply with to ensure the protection of both their clients and their clients’ customers’ data and information from any potential threat.

Examples of regulations firms are obliged to comply with are:

Data protection and privacy regulations, like the EU GDPR and the Californian CCPA.

Cross-border data transfer regulations, like the EU-U.S. Data Privacy Framework (formerly Privacy Shield) providing a detailed mechanism for the transfer of personal data from the EU to the US.

Cybersecurity regulations, a set of policy frameworks for computer security on how organizations can prevent cyber-attacks like the NIST Cybersecurity Framework (USA) and EU Network and Information Systems (NIS) Directive.

Estimate Industry Growth

To capitalize on such opportunities, over the past decade, collectively the industry registered a median reinvestment margin of 3.4%, which comprises investments made in capital expenditures, R&D, and acquisitions.

In terms of efficiency and return on investments, the IT Services industry median sales to invested capital in the period 2013-2023 is equal to 1.85, meaning that on every dollar invested the industry generates $1.85 of revenues.

Combining both the reinvestments made through the past decade and the industry’s ability to generate a return from the investments made, the 2024 expected growth rate for the industry is 8.7%. A detailed explanation of how we came up with the industry’s expected growth rate, as well as many more useful industry data, can be found in this post on my website BlackNote Investment.

By 2033, the IT Service industry revenues are expected to reach $1.06 trillion, increasing 1.83 times from the $578.1 billion registered in 2023 at a CAGR of 6.3%. We projected the industry’s expected revenues 10 years from now, applying the expected growth rate of 8.7% and allowing it to slowly decline as the industry approaches the economy’s perpetual growth rate, represented in this case by the USD risk-free rate.

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Market Share and Competitors Analysis

The industry is highly competitive and no company has a dominant position. The following table provides a snapshot of the top 22 companies in the IT Services industry accounting for 74.9% of total market share by revenues.

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Market Share Forecasts

Basing our assumptions on analysts’ expectations (source: TIKR Terminal) and industry trends, we have estimated the future market share by 2033 for the top 20 companies operating in the industry and how their market position will change compared to 2023 levels.

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Selected Company Valuation

The following is a selection of companies operating in the IT services industry for which we present a snapshot of their operations and valuation using the DCF method.

The comprehensive analysis of the selected companies is available on our Seeking Alpha profile where you can assess all the underlying assumptions for future growth, margins, free cash flows, and the quantified risk/reward of potential investments.

Accenture plc ($ACN)

Full Analysis on Seeking Alpha

Accenture is a US company operating in the Consulting and Digital Transformation segment.

Over the period 2013-2023, revenues grew at a CAGR of 8.4% increasing from $28.6 billion to $64.1 billion, while its market share increased from 7.6% to 11.1%. 

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Looking at measures of profitability, the median operating margin stands at 14.6%, the median gross margin sits at 31.6%, and the median free cash flow margin is 7.9% with free cash flows to the firm sitting at $5.06 billion in 2023.

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Over the past decade, the median reinvestment margin was equal to 4.2%. In terms of efficiency, the median ROIC was 66.7% while the sales to invested capital ratio sat at 6.2.

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Accenture’s market share is expected to be 10% by 2033, while its operating margin is projected to remain around 16%. The FCFF margins instead are expected to be 7.9%.

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With these assumptions, using a discount rate of 7.8% in normal growth and 7.7% in perpetuity, the present value of Accenture’s cash flows is equal to $171.6 billion or $274 per share.

Infosys Limited ($INFY)

Infosys Limited is an Indian company operating in the Consulting and Digital Transformation segment.

Over the period 2013-2023, revenues grew at a CAGR of 8.4% increasing from $8.25 billion to $18.6 billion, while its market share increased from 2.2% to 3.2%. 

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Looking at measures of profitability, the median operating margin stands at 24.3%, the median gross margin sits at 34%, and the median free cash flow margin is 13.3% with free cash flows to the firm sitting at $2.5 billion in 2023.

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Over the past decade, the median reinvestment margin was equal to 3%. In terms of efficiency, the median ROIC was 34% while the sales to invested capital ratio sat at 2.1.

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Infosys Limited’s market share is expected to remain 3.2% by 2033, while its operating margin is projected to remain around 20.7%. The FCFF margins instead are expected to be 13.3%.

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With these assumptions, using a discount rate of 7.4% in normal growth and 7.5% in perpetuity, the present value of Infosys Limited’s cash flows is equal to $98.7 billion or $23.8 per share.

VeriSign, Inc. ($VRSN)

Full Analysis on Seeking Alpha

VeriSign is a US company operating in the domain registration segment.

Over the period 2013-2023, revenues grew at a CAGR of 4.5% increasing from $965 million to $1.49 billion, while its market share remained around 0.3%. 

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Looking at measures of profitability, the median operating margin stands at 63.2%, the median gross margin sits at 84.2%, and the median free cash flow margin is 58.7% with free cash flows to the firm sitting at $793 million in 2023.

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Over the past decade, the median reinvestment margin was equal to negative (4.3%).

VeriSign’s market share is expected to be 0.2% by 2033, while its operating margin is projected to remain around 70%. The FCFF margins instead are expected to be 50%.

_{by BlackNote Investment}

With these assumptions, using a discount rate of 7.7% in both normal growth in perpetuity, the present value of VeriSign’s cash flows is equal to $20.9 billion or $209.7 per share.

If you are looking for financial data to support your valuations, on BlackNote Investment you can find the expected growth rate for 37 different industries used to forecast companies’ future revenues.

Additionally, the site offers useful data such as equity risk premiums for 39 different countries, used for calculating discount rates, as well as expected earnings growth rates for those countries based on analysts’ expectations.

Detailed industry and sector reports are also available, containing data like total revenues, total free cash flows, median operating margins, return on capital, as well as beta and financial ratios used to assess companies’ risk.

Feel free to use them in your analysis.