The Translink Corporate Finance IT Services Valuation Index for H2 2024 reveals a sector navigating a complex landscape shaped by persistent macroeconomic headwinds and evolving technological demands. While FY24 presented a “mixed bag” of fortunes across the different sub-sectors, the IT Services market demonstrated notable resilience, particularly in the latter half of the year, setting a cautiously optimistic tone for FY25.
Drawing on insights from 71 IT services companies across Translink’s global network, the Index highlights several key findings:
- Significant sub-sector divergence: Performance varied considerably across the three core sub-sectors tracked by the Index. General IT Services experienced a strong recovery, while Digital Consultancy & Transformation saw modest gains but faced stagnation, and Hosting continued its downward valuation trend.
- General IT Services leads recovery: This sub-sector, focused on mission-critical IT infrastructure, systems, and outsourced software support, saw its median valuation reach a five-year high of 14.8x EV/LTM EBITDA in Q4 2024. Investors favoured the predictability offered by higher levels of recurring revenue inherent in these business models.
- Digital transformation faces headwinds: The Digital Consultancy & Transformation sub-sector, encompassing advisory, implementation and integration services, experienced a slight valuation increase (from 9.8x in Q2 2024 to 10.6x in Q4 2024). It grappled with pricing sensitivity due to reduced discretionary spending, extended sales cycles, and project delays.
- Hosting valuations continue to soften: The Hosting sub-sector saw median multiples decrease from 14.7x in Q2 2024 to 13.4x in Q4 2024. Market consolidation, competitive pricing pressure and higher churn rates impacted performance, although some players bucked the trend through product innovation. The landscape was also notably altered by the $7.1bn take-private acquisition of SquareSpace.
- Cautious optimism for FY25: While significant challenges remain, including economic uncertainty and geopolitical risks, the outlook for FY25 is cautiously optimistic. Early signs of recovery, particularly in General IT Services, and an expectation of easing customer budget constraints support this view. Cybersecurity and AI are expected to remain as key growth drivers.
- M&A activity reflects selectivity: M&A deal volume in the IT Services sector saw a 29% decrease in FY24 compared to the previous year. However, this suggests a focus on quality and strategic fit, with deals being done for the “right assets,” particularly evident in the M&A uptick within the recovering General IT Services sub-sector.
Increased M&A activity in recovering General IT Services sector
Marc Irisson, Head of TMT Group and Partner at Translink Corporate Finance France, says FY24 was a period of contrasting fortunes within the IT Services sector.
“While macroeconomic pressures and cautious customer spending continued to impact areas like digital transformation projects, we saw a marked acceleration in the recovery of General IT Services. This divergence underscores the importance of understanding the specific dynamics within each sub-sector – factors like recurring revenue models, exposure to discretionary spending, and the adoption of next-generation technologies like AI and cloud create distinct valuation narratives.”
Andy Haigh, Partner at Translink Corporate Finance UK, adds that the Index details how the General IT Services sub-sector benefited from its perceived stability. “Investors gravitated towards the predictability of recurring revenues offered business focused on managed IT services prevalent in General IT Services. Higher recurring revenues, technological advancements, the ongoing demand for outsourced IT support and a notable revival among Indian IT service providers contributed to valuations reaching a five-year peak. We also observed a corresponding uptick in M&A activity within this space during the latter half of the year.”
Short-lived stability impacts Digital Consultancy & Transformation sub-sector
Conversely, the Digital Consultancy & Transformation sub-sector faced a more challenging environment. “Despite the long-term imperative for digital transformation, this sub-sector remained sensitive to this sub-sector remained sensitive to reductions in discretionary spend, extended sales cycles and project delays, which have led to relatively stagnant valuations, hovering around 10.6x LTM EBITDA. The growing gap between businesses leveraging cutting-edge Cloud and AI capabilities versus those reliant on legacy stacks is becoming increasingly apparent and will continue to shape demand and valuations,” explains Aaron Lowery, Assistant Director at Translink Corporate Finance UK.
The Hosting sub-sector experienced further valuation declines, with the median multiple decreasing to 13.4x . Early signs of stabilisation in H1 FY24 proved short-lived, impacted by weak financial performance reported by several companies and competitive pressures from dominant market participants, leading to higher churn rates.
AI and cybersecurity fuel FY25 growth
Looking ahead to FY25, Translink Corporate Finance anticipates a continuation of the gradual recovery, although significant growth across the entire sector may take time to materialise. “We are seeing early signs of improvement and there’s optimism that customer discretionary spending will begin to ease during 2025. However, businesses must remain agile and focused on strategic priorities,” says Irisson.
Cybersecurity is a key area poised for continued strength and increased M&A activity. Haigh adds, “The ever-present threat and increasing severity of cyber-attacks provide strong market tailwinds for cybersecurity-focused organisations. We expect this to drive further M&A as larger vendors seek to consolidate market share and acquire specialist capabilities.”
Furthermore, strategic investments in AI, cloud computing and data analytics will remain critical differentiators. Companies that can integrate these technologies to deliver scalable, efficient and secure solutions are expected to fare better.
Transformation and strategic investment shape the FY25 outlook
“While FY24 saw a dip in overall M&A volume, it highlighted a market focused on strategic rationale. In FY25, we anticipate renewed M&A impetus driven by the need for consolidation, capability acquisition – particularly on cybersecurity and AI – and geographic expansion. Despite the challenges, 2025 holds the potential to be a promising year of transformation and growth for well-positioned players in the IT Services sector,” says Lowery.
Translink Corporate Finance has deep sector expertise across the TMT landscape and extensive global reach, positioning it well to advise businesses navigating the complexities and opportunities within the evolving IT Services market.
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