Gartner Forecasted that the Worldwide IT Sector Would Tumble In 2015

As per the forecasted report by Gartner for the world IT sector, in the current year 2015, the Worldwide IT spending would decline by 5.5 per cent, as it was already predicted to decline by 1.3 per cent in April. The Gartner Worldwide IT Spending Forecast is the indicator of major technology trends that include hardware, software, IT services and telecom markets.

"We want to stress that this is not a market crash. Such are the illusions that large swings in the value of the US dollar versus other currencies can create," said John-David Lovelock, Research Vice-President at Gartner. "However, there are secondary effects to the rising US dollar. Vendors do have to raise prices to protect costs and margins of their products, and enterprises and consumers will have to make new purchase decisions in light of the new prices."

According to the report, communication services will continue to be the largest IT spending segment in 2015 with spending estimated at around USD 1.5 trillion. This segment is experiencing the strongest decline among the top five IT sectors. The price erosion and the competitive threats are preventing revenue growth in proportion to the increased use in most national markets. 

On the Software side, SaaS (Software-as-a-service) competition is supporting IT buyers and they have an upper hand. The enterprise software spending is expected to decline by 1.2 per cent in 2015. The report stated that most of the software vendors will not increase prices as SaaS is for market share, not profitability. Increasing prices could take them out of a sales cycle and these vendors cannot afford to lose a client as well. 

As the world IT sector for the coming period seems to be on a decline zone, the Indian IT sector has started giving out red signals. Major Indian IT companies have already posted business updates regarding the next quarter earnings which would be lower than expectations. Companies like Tech Mahindra, Persistent have already published a pessimistic note. 

Tech mahindra posted its business update last week. The company in Q1FY16 has some headwinds and tailwinds which could see a risk of marginal decline in both revenue and the EBITDA margin on a sequential basis. The reason for decline is the seasonally weak mobility business, dragging its Q1 revenues and EBITDA. Also H1B visa costs will be another factor leading to dragging margins.

Earlier, Persistent Systems too came out with its business update for Q1FY16. As per the business update via the BSE announcement, Persistent is expecting a decline in revenues for the quarter ended June 30, 2015 (1QFY16) along with decline in margins. Persistent Systems said in a filing with BSE, "The weakness in our current engineering business coupled with the quarterly variability associated with our IP business, could result in marginally lower USD revenue for this quarter as compared to the previous quarter."

If you look at the March 2015 quarter result for overall IT sector, the financial results were not that much encouraging. Additionally, the earnings downgrades by IT companies themselves ring a cautionary alarm against them. Hence we suggest readers to remain alert while investing in IT companies as their performance may further worsen in the coming quarters.