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Lehman Brothers does and seeks to do business with companies ...

  1. 1. Alan Hellawell Managing Director Global IT Services, Equity Research 212-526-3472 [email_address] Global Sourcing Trends
  2. 2. Table of Contents <ul><li>IT Services Broad Trends </li></ul><ul><ul><li>Continued Strength in global outsourcing market </li></ul></ul><ul><ul><li>Megadeal Slowdown </li></ul></ul><ul><ul><li>Offshore Providers gaining market share </li></ul></ul><ul><ul><li>IT Services Spending 7% global CAGR 2005-2009 </li></ul></ul><ul><ul><li>Large firms look to M&A to build scale, tap into talent pool, and add offerings </li></ul></ul><ul><li>The “New New” Markets: Asia </li></ul><ul><ul><li>Portfolio Theory: Not “India or Asia” but “India and Asia” </li></ul></ul><ul><ul><li>Many Players Expanding Presence in New New Markets </li></ul></ul><ul><ul><li>Success Criteria in IT Services </li></ul></ul><ul><ul><li>Contract Size Across the New New Markets </li></ul></ul>1
  3. 3. IT Services Broad Trends 2
  4. 4. IT Services: Broad Industry Trends <ul><ul><li>Continued Strength in global outsourcing market in terms of TCV </li></ul></ul><ul><ul><li>Megadeal Slowdown: trend towards size of deals dropping; number of contracts increasing </li></ul></ul><ul><ul><li>Offshore Providers gaining market share </li></ul></ul><ul><ul><li>IT Services Spending set to grow ( 7% global CAGR 2005-2009 ) </li></ul></ul><ul><ul><li>Consolidation : large firms look to M&A to build scale, tap into talent pool, and add offerings </li></ul></ul>IT Services largely recession-resistant; overall industry growth outlook promising 3 1
  5. 5. Global Outsourcing Market: Continued Strength Total Contract Value is up 3% year-over-year Source: TPI Index 2Q 2006 4 First Half Contract Signings (>$50M) 2001 – 2006 2
  6. 6. Global Megadeals Seen Slowing Down into 2H06 Fewer Megadeals in 2006. Trend towards average deal-size dropping; number of contracts increasing Source: TPI Index 2Q 2006 5 Industry-wide Mega Deal Contracts (TCV >$1B) 3
  7. 7. The Trends Favor Offshore Providers DiamondCluster Study: Onshore Providers Must Shape Up or Ship Out Buyers of Onshore Services Buyers of Offshore Services Client Expectations being met from Service Providers Buyers who abnormally terminated at least 1 outsourcing relationship in past year 30% 47% 28% 42% TPI: India-Based Providers Market Share of Industry-wide Contracts Grows As % of Total Contract Value 2003 2004 2005 2006 1% 1% 4% 5% Source: TPI Index 2Q 2006 Source: Diamondcluster 2006 Global IT Outsourcing Study 6 4
  8. 8. IT Services Spending: Lehman Brothers Global Forecast United States Western Europe Japan GLOBAL 2005 ($B) 2009 ($B) 252 324 196 84 617 253 105 818 6.5% 6.5% 6% 7% CAGR % Source: Gartner and Lehman Brothers Estimates 7 5
  9. 9. Industry Consolidation Likely Large firms look to M&A to build scale, tap into talent pool, and add offerings Source: Lyndhurst Partners Review and Lehman Brothers Estimates 8 M&A Activity Involving IT Professional Services Organizations May 05 – Mar 06 6
  10. 10. The “New New” Markets 9
  11. 11. “ New New” Markets Overview <ul><ul><li>Not “India or Asia” but “India and Asia” – Portfolio Theory </li></ul></ul><ul><ul><li>New New Markets no Longer a Potential Destination – Many Players Expanding Presence </li></ul></ul><ul><ul><li>Important Success Criteria in IT Services </li></ul></ul><ul><ul><li>“ Walking Before Running” – A Brief Analysis of Contract Size Across the New New Markets </li></ul></ul>Key Points 10 7
  12. 12. “ New New” Markets no Longer Potential Destination – . Many Players Expanding Presence Source: neoIT, Lehman Brothers, and Company Sources 11 8
  13. 13. 1. The World is Flat: Global Delivery a Key Ingredient for Success 1895 100 1869 28 LEGEND: Average working hours per year* Hourly Labor Cost Index* 38 1958 19 2225 16 2347 12 1950 1740 126 Source: NASSCOM and Lehman Brothers Estimates 12 9
  14. 14. Not “India or Asia” but “India and Asia” <ul><ul><li>Offshore locations part of a larger “portfolio” approach to diversifying risk, and opening up new “near-shore” opportunities </li></ul></ul><ul><ul><li>A recent risk and reward portfolio by neoIT suggested India 60%, Philippines 15% and Vietnam 5% weightings respectively </li></ul></ul>Projected Salary CAGR (2005-2010E) Source: neoIT 13 10
  15. 15. 2. It’s All About The People 727,000 654,000 514,000 242,000 232,000 1,773,000 427,000 293,000 210,000 285,000 6,386,000 Total Supply of Suitable Low-Wage Talent Source: NASSCOM and Lehman Brothers Estimates 14 Aggregate Suitable Graduate Talent Pool for Offshore IT & BPO 11
  16. 16. Important Success Criteria in IT Services Evaluation of ITO/BPO Success Factors Source: Lehman Brothers <ul><li>Scoring: </li></ul><ul><li>Philippines 3.75 </li></ul><ul><li>China 3.5 </li></ul>15 <ul><li>Vietnam 3.25 </li></ul><ul><li>Pakistan 2.75 </li></ul>12
  17. 17. Important Success Criteria in IT Services Global Portfolio Risk vs. Reward Global Portfolio Risk vs. Reward View in 2006 Projected Global Portfolio Risk vs. Reward View in 2011 Source: neoIT; Lehman Brothers Source: neoIT; Lehman Brothers 16 13
  18. 18. “ Walking Before Running” <ul><ul><li>We use contract size as a proxy for determining how robust a market is to host significant amounts of offshore work </li></ul></ul><ul><ul><li>China: $500,000 to $10 million </li></ul></ul><ul><ul><li>Philippines: $200,000 to $5 million </li></ul></ul><ul><ul><li>Vietnam: $50,000 to $1 million </li></ul></ul><ul><ul><li>Pakistan: $50,000 to $750,000 </li></ul></ul>A Brief Analysis of Contract Size Across the New New Markets 17 Lehman Brothers’ Estimated Range of One-Year Contract Sizes 14
  19. 19. Analyst Certification and Important Disclosures <ul><li>Analyst Certification: </li></ul><ul><li>I, Alan Hellawell, hereby certify (1) that the views expressed in this research email accurately reflect my personal views about any or all of the subject securities or issuers referred to in this email and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this email. </li></ul><ul><li>Important Disclosures </li></ul><ul><li>Lehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this email communication. </li></ul><ul><li>Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-2-LEHMAN to request a copy of this research. </li></ul><ul><li>Investors should consider this communication as only a single factor in making their investment decision. </li></ul><ul><li>The analysts responsible for preparing this report have received compensation based upon various factors including the Firm’s total revenues, a portion of which is generated by investment banking activities. </li></ul><ul><li>Stock price and ratings history charts along with other important disclosures are available on our disclosure website at www.lehman.com /disclosures And may also be obtained by sending a written request to: LEHMAN BROTHERS CONTROL ROOM, 745 SEVENTH AVENUE, 19TH FLOOR NEW YORK, NY 10019 </li></ul><ul><li>FOR CURRENT IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE </li></ul><ul><li>THE SUBJECT OF THIS RESEARCH REPORT, PLEASE SEND A WRITTEN REQUEST TO: </li></ul><ul><li>LEHMAN BROTHERS CONTROL ROOM </li></ul><ul><li>745 SEVENTH AVENUE, 19TH FLOOR </li></ul><ul><li>NEW YORK, NY 10019 </li></ul><ul><li>OR </li></ul><ul><li>REFER TO THE FIRM'S DISCLOSURE WEBSITE AT www.lehman.com/disclosures </li></ul>18 15
  20. 20. Important Disclosures (cont’d) <ul><li>Mentioned Stocks </li></ul><ul><li>Accenture Ltd (ACN - USD28.11) 1-Overweight / Positive J </li></ul><ul><li>Risks Which May Impede the Achievement of the Price Target: Our revenue and earnings estimates, price targets, and ratings would be revisited if a substantial increase or decrease occurred in spending on information technology solutions by commerical or public clients, Accenture's utilization and/or headcount, pricing for information technology services, or if the company's Bermuda-based corporate structure and resulting tax rate was materially affected by legislation. </li></ul><ul><li>Cognizant Technology Solutions (CTSH - USD62.01) 2-Equal weight / Positive C/J </li></ul><ul><li>Risks Which May Impede the Achievement of the Price Target: Our revenue and earnings estimates, price target and rating would be revisited if there was a substantial increase or decrease in spending on information technology solutions by consumers of IT services, if CTSH’s cost structure came under increasing pressure from wage inflation in low-cost locales such as India, if there was a substantial increase or decrease in new bookings in any of its niche markets, if there were any major challenges with carrying out its aggressive headcount increase objectives, or if the competitive pressure from the dominant major players increased significantly. </li></ul><ul><li>Electronic Data Systems (EDS - USD22.60) 2-Equal weight / Positive E/J/L </li></ul><ul><li>Risks Which May Impede the Achievement of the Price Target: Our revenue and earnings estimates, price target and rating would be revisited if a substantial increase or decrease occurred in new bookings or spending on information technology solutions by commercial or public clients or if EDS were to lose a material portion of its General Motors contract. </li></ul><ul><li>Infosys Technologies Ltd. (INFY - USD38.42) 1-Overweight / Positive C/J </li></ul><ul><li>Risks Which May Impede the Achievement of the Price Target: Our revenue and earnings estimates, price target and rating would be revisited if a substantial increase or decrease occurred in spending on information technology solutions by clients, trend towards using offshore services, pricing for information technology services, exchange rate of Indian Rupee vs. the US dollar, Infosys' utilization and/or headcount, or the general geo-political situation in that region. </li></ul><ul><li>Rolta India Limited (RTI.L - USD3.52) 1-Overweight / Positive A/D/J/L </li></ul><ul><li>Risks Which May Impede the Achievement of the Price Target: Our revenue and earnings estimates, price target and rating would be revisited if a substantial increase or decrease occurred in spending on information technology solutions by the government or private clients, Rolta’s utilization and/or headcount, or if there was an unanticipated shift in pricing for technology services. </li></ul><ul><li>Disclosure Legend: </li></ul><ul><li>A: Lehman Brothers Inc. and /or an affiliate managed or co-managed within the past 12 months a 144A and/or public offering of securities for this company. </li></ul><ul><li>C: Lehman Brothers Inc. and/or an affiliate makes a market in the securities of this company. </li></ul><ul><li>D: Lehman Brothers Inc. or an affiliate has received compensation for investment banking services from the subject company within the past 12 months. </li></ul><ul><li>E: Lehman Brothers Inc. or an affiliate expects to receive or intends to seek compensation for investment banking services from the subject company within the next three months. </li></ul><ul><li>J: Lehman Brothers Inc. or an affiliate trade(s) regularly in the shares of the subject company. </li></ul><ul><li>L: The subject company is or during the past 12 months has been an investment banking client of Lehman Brothers Inc. and/or an affiliate. </li></ul>19 16
  21. 21. Important Disclosures (cont’d) <ul><li>Guide to Lehman Brothers Equity Research Rating System </li></ul><ul><li>Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2- Equal weight or 3-Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (“the sector coverage universe”). To see a list of companies that comprise a particular sector coverage universe, please go to www.lehman.com /disclosures . </li></ul><ul><li>In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. </li></ul><ul><li>Stock Rating </li></ul><ul><li>1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. </li></ul><ul><li>2-Equal weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. </li></ul><ul><li>3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon. </li></ul><ul><li>RS-Rating Suspended - The rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Lehman Brothers is acting in an advisory capacity on a merger or strategic transaction involving the company. </li></ul><ul><li>Sector View </li></ul><ul><li>1-Positive - sector coverage universe fundamentals are improving. </li></ul><ul><li>2-Neutral - sector coverage universe fundamentals are steady, neither improving nor deteriorating. </li></ul><ul><li>3-Negative - sector coverage universe fundamentals are deteriorating. </li></ul><ul><li>Distribution of Ratings: </li></ul><ul><li>Lehman Brothers Equity Research has 1855 companies under coverage. </li></ul><ul><li>44% have been assigned a 1-Overweight rating which, for purposes of mandatory disclosures, is classified as a Buy rating, 33% of companies with this rating are investment banking clients of the Firm. </li></ul><ul><li>39% have been assigned a 2-Equal weight rating which, for purposes of mandatory disclosures, is classified as a Hold rating, 5% of companies with this rating are investment banking clients of the Firm. </li></ul><ul><li>17% have been assigned a 3-Underweight rating which, for purposes of mandatory disclosures, is classified as a Sell rating, 59% of companies with this rating are investment banking clients of the Firm. </li></ul>20 17
  22. 22. Important Disclosures (cont’d) <ul><li>This material has been prepared and/or issued by Lehman Brothers Inc., member SIPC, and/or one of its affiliates (“Lehman Brothers”) and has been approved by Lehman Brothers International (Europe), authorized and regulated by the Financial Services Authority, in connection with its distribution in the European Economic Area. This material is distributed in Japan by Lehman Brothers Japan Inc., and in Hong Kong by Lehman Brothers Asia Limited. This material is distributed in Australia by Lehman Brothers Australia Pty Limited, and in Singapore by Lehman Brothers Inc., Singapore Branch. (“LBIS”). Where this material is distributed by LBIS, please note that it is intended for general circulation only and the recommendations contained herein does not take into account the specific investment objectives, financial situation or particular needs of any particular person. An investor should consult his Lehman Brothers’ representative regarding the suitability of the product and take into account his specific investment objectives, financial situation or particular needs before he makes a commitment to purchase the investment product. This material is distributed in Korea by Lehman Brothers International (Europe) Seoul Branch. This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other instruments mentioned in it. No part of this document may be reproduced in any manner without the written permission of Lehman Brothers. With the exception of disclosures relating to Lehman Brothers, this research report is based on current public information that Lehman Brothers considers reliable, but we make no representation that it is accurate or complete, and it should not be relied on as such. In the case of any disclosure to the effect that Lehman Brothers Inc. or its affiliates beneficially own 1% or more of any class of common equity securities of the subject company, the computation of beneficial ownership of securities is based upon the methodology used to compute ownership under Section 13(d) of the United States' Securities Exchange Act of 1934. In the case of any disclosure to the effect that Lehman Brothers Inc. and/or its affiliates hold a short position of at least 1% of the outstanding share capital of a particular company, such disclosure relates solely to the ordinary share capital of the company. Accordingly, while such calculation represents Lehman Brothers’ holdings net of any long position in the ordinary share capital of the company, such calculation excludes any rights or obligations that Lehman Brothers may otherwise have, or which may accrue in the future, with respect to such ordinary share capital. Similarly such calculation does not include any shares held or owned by Lehman Brothers where such shares are held under a wider agreement or arrangement (be it with a client or a counterparty) concerning the shares of such company (e.g. prime broking and/or stock lending activity). Any such disclosure represents the position of Lehman Brothers as of the last business day of the calendar month preceding the date of this report. </li></ul><ul><li>This material is provided with the understanding that Lehman Brothers is not acting in a fiduciary capacity. Opinions expressed herein reflect the opinion of Lehman Brothers and are subject to change without notice. The products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. If an investor has any doubts about product suitability, he should consult his Lehman Brothers representative. The value of and the income produced by products may fluctuate, so that an investor may get back less than he invested. Value and income may be adversely affected by exchange rates, interest rates, or other factors. Past performance is not necessarily indicative of future results. If a product is income producing, part of the capital invested may be used to pay that income. © 2006 Lehman Brothers. All rights reserved. Additional information is available on request. Please contact a Lehman Brothers entity in your home jurisdiction. </li></ul><ul><li>Lehman Brothers policy for managing conflicts of interest in connection with investment research is available at www.lehman.com/researchconflictspolicy . Ratings, earnings per share forecasts and price targets contained in the Firm's equity research reports covering U.S. companies are available at www.lehman.com/disclosures.Complete disclosure information on companies covered by Lehman Brothers Equity Research is available at www.lehman.com /disclosures . </li></ul>21 18

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