Since 2005, TSIA has been tracking service revenue and profit trends for the technology industry in our widely followed Service 50 index. We aggregate the financial performance of 50 of the largest global providers of technology services to identify service revenue and profitability trends, while also providing critical observations based on the current quarterly update.
In recent history, these trends have very clearly pointed to an increasing reliance on both service revenues and profits to sustain the health and growth of technology product companies.
Watch our recent Service 50 Q2 webinar, in which we identify the latest observations and trends for the technology services industry, complete with detailed data on how these top 50 companies are currently performing in Q2. Here’s a recap of some of the key points we covered.
What the Technology Industry Can Learn from These Top 50 Companies
Our objective is to identify and track 50 of the largest global providers of technology services and solutions—hardware, software, and pure service companies. This is not, however, the 50 largest companies by revenue, but simply a good representation designed to get an idea of how the technology industry is performing overall.
TSIA members have the benefit of having a repository of this public financial data, which shows the key trends in the technology services industry, such as total service revenues, service revenue growth, service margins, and what type of product and service mix these top 50 companies currently offer.
The Q2 Bump
Since we began tracking this data in 2005, we’ve noticed a recurring phenomenon year after year; in the second quarter, companies experience a significant increase in service revenues, as much as 5%, creating a noticeable spike, which we refer to as the “Q2 bump.”
The "Q2 Bump" makes a regular appearance year after year.
Comparing Q2 2013 to Q2 2014, hardware companies have bounced back, which is excellent news, given the fact that they’ve been crushed in recent years in terms of revenue growth. Software companies, interestingly enough, were growing a bit better, but still experienced only a tepid increase overall.
The Q3 Splat
Just as we’ve historically seen a nice uptick in revenues in Q2, it is always immediately followed by a sharp dip in Q3. We know it’s going to go down; we just have to hope it doesn’t go down too much.
If you don't know to expect it, the "Q3 Splat" can look pretty frightening.
What This Data Means For the Industry
While tech revenue is growing on average, even with the Q2 bump, product revenues are steadily shrinking while service revenues continue to rise. Service revenues have been growing faster than product revenues for quite awhile, and will only continue down this path as companies focus on selling more subscriptions rather than assets.
Unfortunately, if you continue to only sell traditional products and traditional services (e.g., support, implementation, technical training), you’re going to see your revenues start to go down. Product-attached service revenues will not decrease immediately, but eventually those too will decline, simply because these services are still directly dependent on the sale of products.
Though service revenues are on an upswing, the summit for global service margins appears to be flattening, but a significant shift is taking place underneath this plateau. While the numbers appear to remain stable, this is merely because companies are making the transition from offering products and product-based services to expanding their service portfolio to Level 3 and Level 4 services, creating a better mix of product and service-based offerings. If the mix changes enough, we will get high margin subscriptions and managed service dollars, and possibly see it go even higher.
It might not look like it, but there is a lot happening underneath that plateau.
Mix it Up
The next thing we like to examine is what types of product and service mixtures these companies have implemented and where their total revenue is coming from. Even though we’re seeing topline revenue growth, 60% of product companies are still experiencing declining revenues when compared to those who successfully mix products with services or are service-only organizations.
The best solution to make it through this industrywide transition is to continue to transform your services portfolio, putting new and interesting services on the table that don’t resemble previous ones, such as managed services, information services, or adoption services, and to monetize them. By offering services that are not dependent on product sales, your company can transform from a Level 2 supplier to a Level 3 or Level 4 supplier with a healthy mix and a more sustainable business model.
All of this data and more, including a PDF of this presentation and unlimited access to these reports, is available for TSIA members. Our members will also have access to a new widget we've developed that allows you to take an even closer look at Q2 data for 2014.
TSIA Members can use this widget to get a detailed overview of the current performance of the top 50 tech service companies.
In the upcoming TSW Service Transformations conference in Las Vegas, we will also be diving deeper into this subject by discussing what your company is doing to expand your service offerings and how you can transform your current business model to one with more profitable revenue streams.
Listen to this informative webinar and get the data you need to stay abreast of the latest industry trends.