The Translink Corporate Finance IT Services Valuation Index for Q3 2024 shows that the trading environment for most businesses in the IT services sector remains relatively unchanged from the previous six months. The gradual recovery in the sector has continued into the first half of FY24, with valuations across the sub-sectors holding steady.
Persistent market pressures
FY23 brought significant challenges, with high inflation, rising interest rates, geopolitical conflicts in Eastern Europe and the Middle East, and lingering effects of the COVID-19 pandemic all impacting valuations. Despite early optimism for 2024, expectations of improved trading performance have largely fallen short, as businesses face extended sales cycles and tighter client budgets. For the remainder of the year, Translink Corporate Finance expects no significant shifts in growth or valuations until 2025.
Digital consultancy and transformation
Companies in this sub-sector, which focus on advisory services, digital implementation, and software integration, had initially hoped for a strong 2024. However, valuations remain flat, with extended sales cycles and challenges in converting potential leads into firm orders. Growth prospects are modest, with expectations of only a 1% increase in the next 12 months. While most businesses face sluggish growth, Indian offshore companies stand out by gaining market share due to their cost efficiency. Deal activity remains low but concentrated in data services and cybersecurity.
General IT Services
The recovery in the General IT Services sub-sector, which provides outsourced IT infrastructure and systems, has been slow but steady. Valuations have levelled off after some positive movement in 2023, with customer budget constraints and elongated sales cycles hindering growth. However, companies with a focus on cybersecurity are performing better, driven by increasing demand amid global geopolitical tensions. While mergers and acquisitions (M&A) activity has softened compared to last year, there is still a reasonable level of deal-making.
Hosting sub-sector
In the hosting space, which includes cloud infrastructure and domain registration services, the deceleration in growth seen over the past two years has now stabilised. While some IT services companies have downgraded earnings forecasts, the upper and lower quartiles of valuations have remained relatively steady. Businesses like DigitalOcean have experienced slower revenue growth compared to previous years, but notable deals, such as the $6.9bn acquisition of Squarespace by Permira Private Equity, have provided a boost.
Limited growth outlook for the remainer of FY24
As hopes for a strong second half of 2024 fade, many businesses are downgrading their forecasts for the rest of the year. Political events, such as general elections in the UK and France, have had limited impact on markets, while the upcoming US election is expected to have a greater influence on the economic outlook. Despite the current challenges, companies that can leverage emerging technologies such as artificial intelligence (AI), cybersecurity, and scalable solutions are well-positioned to thrive in the future.
Emerging technologies driving the future
The sector’s future growth is expected to be driven by the adoption of advanced technologies such as AI, machine learning (ML), blockchain and cloud computing. These innovations offer transformative potential by automating tasks, enhancing security, and driving cost optimisation. However, the adoption of these technologies also brings challenges, including the need for workforce upskilling, regulatory clarity and heightened attention to data privacy and security. While these trends are promising, most experts anticipate meaningful growth will not materialise until at least 2025.
In summary, the IT services sector remains in a period of cautious recovery, with limited growth expected for the rest of the year. However, companies that adapt to emerging trends and technologies will be best positioned for future success as the market stabilises. Translink CF, with our expansive network and deep expertise, is your partner to get the deal done.