Needham & Company Offshore IT Services March Quarter Preview: Expecting In-Line and Possible Upside Case for FY12
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Rating Summary:
12 Buy, 25 Hold, 6 Sell
Rating Trend: = Flat
Today's Overall Ratings:
Up: 4 | Down: 8 | New: 1
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Needham & Company Offshore IT Services March Quarter Preview
Analyst, Mayank Tandon, said, "We are neutral going into earnings season for the offshore IT services group. We believe the March quarter finished largely in line with expectations, and we do not expect the companies to materially change guidance. However, with an improving economic backdrop and greater clarity on IT budgets, we believe the tone around demand could be incrementally more upbeat. For the March quarter, our checks in the field indicate the US remained solid with corporations continuing to move forward with strategic IT offshoring decisions to reduce costs and improve efficiencies, while Europe improved slightly as the region showed signs of stabilizing following last year’s sovereign debt crisis. Banking and finance remained a soft spot with corporations delaying project starts, particularly related to discretionary projects, while healthcare and insurance turned in the strongest performances. We believe the companies recruited “freshers” proactively in anticipation of stronger growth over the seasonally stronger periods (June and September quarters), with average headcount up 3-5% Q/Q, and attrition remaining stable in the low to mid-teens."
"With the stocks rallying 15% YTD on average (versus roughly 10% for the S&P 500), we would not be surprised to see some profit taking during earnings season. However, with valuations still reasonable, in our view (the offshore IT group is trading <1x PEG), and potential for estimate upgrades over the seasonally stronger quarters as development/discretionary demand picks up, we encourage LT investors to use any weakness to buy the group. Cognizant Technology (Nasdaq: CTSH) remains our Top Pick, while in SMID we recommend Syntel (Nasdaq: SYNT), iGATE (Nasdaq: IGTE), and Virtusa (Nasdaq: VRTU) as incremental BUYs. However, we remain neutral on Infosys (Nasdaq: INFY), mainly because of valuation."
Analyst, Mayank Tandon, said, "We are neutral going into earnings season for the offshore IT services group. We believe the March quarter finished largely in line with expectations, and we do not expect the companies to materially change guidance. However, with an improving economic backdrop and greater clarity on IT budgets, we believe the tone around demand could be incrementally more upbeat. For the March quarter, our checks in the field indicate the US remained solid with corporations continuing to move forward with strategic IT offshoring decisions to reduce costs and improve efficiencies, while Europe improved slightly as the region showed signs of stabilizing following last year’s sovereign debt crisis. Banking and finance remained a soft spot with corporations delaying project starts, particularly related to discretionary projects, while healthcare and insurance turned in the strongest performances. We believe the companies recruited “freshers” proactively in anticipation of stronger growth over the seasonally stronger periods (June and September quarters), with average headcount up 3-5% Q/Q, and attrition remaining stable in the low to mid-teens."
"With the stocks rallying 15% YTD on average (versus roughly 10% for the S&P 500), we would not be surprised to see some profit taking during earnings season. However, with valuations still reasonable, in our view (the offshore IT group is trading <1x PEG), and potential for estimate upgrades over the seasonally stronger quarters as development/discretionary demand picks up, we encourage LT investors to use any weakness to buy the group. Cognizant Technology (Nasdaq: CTSH) remains our Top Pick, while in SMID we recommend Syntel (Nasdaq: SYNT), iGATE (Nasdaq: IGTE), and Virtusa (Nasdaq: VRTU) as incremental BUYs. However, we remain neutral on Infosys (Nasdaq: INFY), mainly because of valuation."
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