Market

According to the European Information Technology Observatory (EITO), the total market for ICT services in Europe was worth about EUR 150 billion in 2008. The EITO estimates that the Nordic market for IT services grew 5 percent in 2008 to about EUR 10 billion. Growth was strongest in outsourcing.

Up to the end of 2008, Cybercom's market continued to be positive. The economic downturn, right at year-end, resulted in a general slowdown, with many customers demonstrating increased caution. The trend of gradually rising prices broke, and customer requests to renegotiate contracts with price cuts replaced the trend.

More and more customers are concentrating their purchases to fewer vendors through efforts such as framework agreements that have steered purchasing to fewer vendors, which has enabled Cybercom to expand its commitments. In several cases, Cybercom was selected as the main supplier of sophisticated consulting services, which further strengthened its position as a high-quality service provider.

Stefan Wård, IT analyst at Handelsbanken

To obtain an objective market description, Cybercom asked Stefan Wård, IT analyst at Handelsbanken, to share the bank's view of Cybercom's market. Wård based his analysis on the Swedish market.

“The Swedish economy has been severely hit by the global recession, and the economy entered into recession during the second quarter last year. Handelsbanken forecasts GDP growth to be -2.7% in 2009 which should make it the weakest year since 1940. The decline in GDP is even sharper now than at the onset of the last deep recession in 1991-1993. In the final quarter of 2008 the contraction in the Swedish economy was a record decline of 4.9%.

Looking at the Q4 GDP from the production side, industrial production, which accounts for around 20% of total production, fell by 13% y-o-y. Furthermore, total services production, which represents some 45% of GDP, fell by 6% y-o-y. The decline within services was broadly based on severe contractions for transport, business services, wholesale and retail trade. Construction activity also weakened substantially in Q4 on the back of increased financing difficulties. Personal services and services related to the public sector held up better. Looking at the demand side, the volume of export goods fell by close to 12% while the fall in imports was around 9% implying a negative contribution from net trade of around 1.5%.

Regarding fixed investment, the plunge in industrial production, a deterioration of profits, and the credit squeeze all point to lower levels of investment. Handelsbanken expects fixed investments to contract by 7.0% in 2009 from a growth rate of 7.5% in 2007 and 2.8% in 2008.

The weak outcome of the fourth quarter means that 2009 was entered with a very weak growth momentum. Demand for important export markets is falling dramatically, and the Swedish industry, with its big focus on investment goods and vehicles, has been hit especially had. The recent marked weakening of the SEK should dampen the effect, but the net contribution from exports is expected to be a drag on GDP growth of close to one percentage point in 2009.

The fundamentals for investments are also looking bad despite lower sovereign rates. The profit outlook has become gloomy, leaving little room for big investments. Also, the need for investments is not as big since capacity utilisation is low and continues to decline. Furthermore, financing is expensive and hard to find as the credit squeeze continues.

Handelsbanken also expects household consumption to decline in 2009 despite several positives, such as lower inflation and expansionary economic policy. The key to consumption is the labour market, and as Handelsbanken sees it, the unemployment rate is about to rise markedly. The weakness on the labour market will put a damper on wage growth, and disposable income growth will be lower in 2009 than in 2008. Moreover, the stock market crash has led to huge wealth destruction for households; and net financial assets are down 25% y-o-y. On top of this we have the concurrent decline in house prices and against this backdrop we foresee a dramatic increase in the savings rate.

The Swedish and Nordic IT Sector

We believe that 2009 will be characterised as a weak year also for the Nordic IT markets. In this review we have chosen to focus on the Swedish market as it accounts for the major part of both earnings and sales for Cybercom.

Our previously communicated aggregate forecast for the Swedish IT market has been for a flat development in 2009. Given the continued weakness witnessed in the first couple of months in 2009 we now believe that a small decline, measured as value of the market, is a probable scenario.

In the telecom segment where Cybercom has most of its activities we expect additional downwards adjustments to budgets which are likely to result in cancellations of projects and continued price pressure on activities still scheduled for execution. Despite this rather gloomy outlook we believe the decline in value of the market will be modest at around a few percentage points. We emphasise that most of the activities carried out today are difficult to cancel or reduce substantially without affecting the overall performance of the organisation.

In a medium to long-term perspective we consider the underlying demand for IT-services in the Swedish market to be robust. The use and importance of IT within corporations and organisations continue to increase. Drivers for IT spending also include motives for efficiency improvements and cost savings which could be argued to increase in importance in a situation were the underlying market conditions are weakening.

Even though we foresee weaker spending we expect this downturn to be less severe for the IT-services companies compared with the previous downturn seen in the wake of the dot.com crash in post 2000. We believe that both price levels and salaries are at a comparably lower level than in the last downturn which should work against a similar collapse in price and consequently profitability levels that we see witnessed last time.

We expect clients to continue to lower the number of preferred suppliers making it increasingly important to secure enough of strategic relationships as the number of projects is likely to be reduced. A likely consequence will be that the providers that are a successful in securing preferred supplier status will have a clear advantage when it comes to defending topline and profitability.

In summary
We expect 2009 to be a challenging year for the Swedish IT-services industry. We believe that the overall value of the market could see a decline in the range of 2-4%. The importance of having strong client relationships will be of high importance. The increased competition for the outstanding business is likely to result in continued price pressure. Utilisation rates are likely to come down from the historically high levels seen in the past few years. Despite this gloomy picture we believe that the underlying demand for IT-services, driven by the increased importance of IT within companies and organisations, remains robust in a medium to long term perspective. We also believe that the status of the supply side is in better condition compared with the previous downturn.