Information Services Group, Inc. (III) Earnings Call Transcript & Summary

Welcome to the Second Quarter 2024 ISG Global Index Call. I'm Moshe Katri with Wedbush Securities, and I'd like to thank the team at ISG for their valued work on the industry and for asking us to introduce this call today. ISG has been hosting these index calls on the IT and business services industry for more than 20 years. ISG influences $200 billion of technology spending each year, giving them deep insights into the industry as well as key changes in enterprise demand. Next, I'll turn it over to Steven Hall, President of EMEA and Chief AI Officer at ISG. Steve?

Thanks, Moshe, and hi, everyone. I'm Steve Hall, President of EMEA and ISG's Chief AI Officer. With me today is Kathy Rudy, Chief Data and Analytics Officer; Namratha Dharshan, Chief Business Leader for ISG India; and Dave Menninger, Executive Director of ISG Software Research. This is our 87th consecutive index call. So whether you've been joining us for all these years or are new to the call today, thank you for investing some of your time with us today, and we will give you ISG's point of view on the health and growth of the IT and business services industries. So let me kick it right off with the market level set. The IT and business services industry continues to be in a low-single-digit growth environment as discretionary spending continues to be under pressure. Revenue growth for the industry slowed in the second quarter to just over 1% compared to just over 3% last quarter. Provider margins are also under pressure and margin growth declined for the second quarter in a row, resulting in less hiring as top-line growth stalled. Managed services booking growth is muted primarily due to softness in the BFSI sector. Cloud spend appears to be recovering faster with bookings growth up double-digits for the second quarter in a row, primarily due to recovery in the Infrastructure as a Service space. And finally, AI's project-based growth is very strong with activity up 60% on a trailing 12-month basis. But in our view, this growth is slightly masking underlying weakness in the IT businesses service sector. With that market level set, let's jump into our bookings analysis to see where the market is headed for the rest of the year. The global combined market ACV of $24.8 billion marked the best quarter since second quarter of 2022. Growth was driven by a resurgence in cloud spend with Infrastructure as a Service spend up 15% year-over-year and 3% quarter-over-quarter. The first half ACV of 2024 is up 6.3% from a year ago, a turnaround from first half '23's 10.8% year-over-year decline. The first half gains were led by a strong growth in the hyperscaler market. Managed services ACV of $10.1 billion this quarter, delivered the 7th consecutive quarter above $10 billion. The sector was flat quarter-over-quarter, demonstrating continued delays within the sector, but was up 1.2% year-over-year. The number of awards rose 7% year-over-year. Year-to-date, managed services ACV of $20.1 billion was flat compared to the prior year. There were 10 mega deals awarded this quarter, contributing over $1.2 billion of ACV, which was the same number of deals, but $500 million less ACV as a year ago. Small deal activity picked up by 8% year-over-year and the mega deal ACV of $1.8 billion fell 28% against the first half of 2023. Restructuring ACV dipped 5% year-over-year against a difficult compare and [ NewScope ] rose 5%. The as-a-service ACV has accelerated steadily from a year ago to $14.7 billion this quarter. The 11% year-over-year rise matches last quarter's increase in contrast to the 5 prior quarters of year-over-year decline. During the first half, the as-a-service ACV topped $29 billion, an 11% improvement on first half '23 and a stark reversal of the nearly 20% free fall in 2023. Now if we take a look at the managed services ITO, really follows one of the lowest quarters in the past 2 years. ITO rebounded to $7.7 billion in ACV this quarter, which was a 2% gain year-over-year. During the first half of the year, ACV was up 20 basis points year-over-year. The Asia Pac region rose 4.5% year-over-year and was just enough to overcome the 60 basis point decline in the Americas. EMEA overall was flat for the quarter. The ADM market saw $4.1 billion of ACV awarded during the quarter, 54% of the total ITO ACV,but was down 3% quarter-over-quarter and down 16% year-over-year. Compares will continue to be difficult with ADM as 2023 saw 3 consecutive quarters of $5 billion or more for ACV that was awarded. Once again, deals surged and applications bundled with infrastructure. Those deals gained 57% in the first half at almost $1.3 billion as activity remained buoyant, but it's been bundled with infrastructure deals over the past 2 quarters. The data center market saw a massive increase this quarter, delivering over $1 billion of ACV for the first time in 10 years. This was led by strong volume in several large data center deals. On a half year basis, though, the data center ACV was flat $1.5 billion in 2023 and 2024. So it appears to be a timing issue versus a broader change in the market. It's still too preliminary to see the overall impact of GenAI on ITO markets. Early signs, though, indicate a 30% cost reduction in ADM effort and similar savings in infrastructure-related activities. Now let's review the BPO market. Namratha, what we are seeing in the BPO space.

Thank you, Steve. For the first half of the year, BPO ACV of $5.6 billion was flat compared to the first half of 2023, but we saw a record number of awards of 457 this year compared to 403 during the first half of last year. This is a strong indicator that the deal sizes are decreasing and the potential reasons driving these deal sizes could be that AI is starting to kick in. We see smaller sized project-based work happening for GCCs and cost optimization continues to be a key ask from the enterprises. On a regional basis, although off of a smaller base, the Asia Pacific region led the way in BPO bookings growth. The Americas was down 6% year-to-date and EMEA, which accounts for approximately 30% of BPO activity was down 12% year-to-date compared to the first half of 2023. Now by functional area, the largest BPO segment, the industry-specific BPO saw over $1.8 billion in ACV during the first half and that was up 12% versus the first half of 2023. This is also where ISG is seeing strong demand on the ground in areas like card issuer services, retirement services and actuarial services. And based on what we are seeing with the clients, we believe this demand for industry-specific services will stay strong in the third quarter as well. Shifting to the ER&D market, we observed some heightened activity, especially in the energy and healthcare and pharma verticals. The number of ER&D awards was up almost 30%. And as you can see here, ACV was up 33% in comparison to the first half of 2023. The gains were broad-based across the world with each of the 3 regions up year-to-date, although Americas and Asia drove most of the upside, while EMEA was flattish. Given that ER&D market is sensitive to discretionary spend, this could be a good sign that the pressure is starting to ease. Steve did mention about the impact of AI on ITO. Now specific to BPO, enterprises are keen to adopt AI. But at the same time, they're also cautious and delaying the decision-making as they wait to see what kind of impact AI will have on their agreements. So while BPO demand remains steady, there is also an expectation of significantly increased savings in BPO agreements, primarily driven by AI. On that note, Kathy, over to you for an update on the regional demand.

Thanks, Namratha. Let's start with the Americas. On a quarterly basis, the Americas generated $4.7 billion of ACV, up 3% versus the second quarter of 2023. There were 4 mega deals in the quarter, but at the same time, there was a pullback in the number of small deals signaling discretionary spending continues to be under pressure. On a first half basis, managed services were down 2.4% versus the first half of 2023 with the BFSI sector continuing to drive the ACV shortfall. BFSI is down 17%, equating to nearly $600 million in the Americas in the first half compared to the first half of 2023. On the ground in the Americas, we continue to see banks be laser-focused on cost optimization and ensuring ROI from past investments, but we're also seeing a strong desire to not miss the boat on AI, which is driving new project-based work. Moving on to EMEA, there was $4 billion of ACV generated in the second quarter and that was down 8% compared to the second quarter of 2023. There were 4 mega deals awarded in the EMEA region during the quarter. Unlike in the Americas, small deal activity was strong in the second quarter. By region, the U.K. posted 6th consecutive $1 million quarter. And surprisingly, the DACH region was up 20% year-on-year. The second quarter was the best quarter for the DACH market since the fourth quarter of 2022. Both France and the Nordics pulled back in the quarter. On a first half basis in EMEA, ACV was down 3% year-to-date versus the first half of 2023. Like the Americas, softness in BFSI is responsible for the slowdown, which is down 14%. On the ground, we don't see any significant changes in demand in the third quarter, even with the changes spurred by recent elections. We believe the demand in the U.K. will remain strong, while DACH and France are likely to remain choppy. Cost optimization will continue to be the primary driver of managed services demand and decision-making will continue to be slow by macro and geopolitical uncertainty. Closing out with Asia Pacific. The second quarter was very strong, up 32% over the second quarter of 2023, making it the second best quarter in the history of the industry, with over 80 contracts over $5 million ACV awarded in the quarter. Much of the activity is very strong in terms of renewal activity. First half of 2024, up 26% versus the first half of 2023 is the best ever for the region. China and Japan drove much of the growth. And unlike the Americas and EMEA, BFSI is very strong in Asia Pacific, up 44% year-to-date, while ANZ fell by 22% overall. Let's move on to our industry update. This quarter, we're going to focus on the BFSI sector given how important it is to the performance of the overall industry. As you can see, in the first half of 2024, ACV for combined market is down 1% year-to-date versus the first half of 2023. The good news is as-a-service for BFSI is positive, up 11% year-to-date. However, as shown, managed services overall is down 11% year-to-date versus 2023. With BFSI making up nearly 30% of managed services ACV, the impact of BFSI on the overall managed service sector is critical. If you recall from our index session in January, we discussed the fact that the BFSI sector typically does not generate positive results after Central Bank rate hikes. More specifically, Dave shows that in 70% of the instances of a rate hike, ACV declines in the BFSI sector 12 to 18 months later. We believe we're seeing that decline now in the U.S. and in EMEA. In terms of what's driving the weakness in BFSI, our analysis shows it's a lack of large deals. In the first half of 2024, large BFSI deals, those with over $50 million in ACV, came in around $400 million lower than what the market typically sees. Just to give you some perspective on how important BFSI is to the IT services industry, if BFSI had been flat in the first half of the year, the market would have grown by over 3%. As tech spending has slowed from traditional spend and move to the cloud and AI, we're seeing BFSI enterprises reduce traditional outsourcing, especially on larger deals. This is to utilize some of that in-house talent that they hired before the market turned down in 2022. We're also seeing many banks double down on their global capability center plans, which is also impacting outsourcing spend. The good news is, is we fully expect the sector sales to improve material into 2025, and this is for 2 reasons. The last rate take was in July of 2023 and there is an early indication that we may see some easing of monetary policy later in the year as well as market comparison in the second half of the year are much easier to be. Steve, over to you for an update on what we see happening in cloud.

Great. Thanks a lot, Kathy. The Infrastructure as a Service market generated $10.9 billion of ACV, which was up 15% year-over-year. This was the best result for infrastructure since the third quarter of 2022. And on a first half basis, Infrastructure as a Service generated $21 billion of ACV, which was up nearly 15% versus the first half of 2023. The big 3 hyperscalers who make up over 75% of the ACV in this segment had a really strong second quarter, growing the ACV by nearly 30%. These were strong growth results for IS, which is a very different story than what we saw in 2023. So let's talk about what's behind it. Our buyer behavior data is showing that nearly 15% of enterprises plan on renewing or expanding an existing infrastructure service agreement over the next 12 months and nearly 40% plan on increasing consumption commitments over that same time period. We think this is a strong signal with the cloud optimization cycle that enterprises have been over the last 18 months is finally coming to an end. So I think we'll see higher growth there. We're also seeing AI drive the Infrastructure as a Service demand. As you'll hear from Dave in a few minutes, the hyperscalers are really trying to make it easier for enterprises to consume their new AI services, which should further drive up Infrastructure as a Service consumption. Let's move on to the Software as a Service market. In the second quarter, SaaS generated nearly $3.8 billion of ACV, but that was down 0.2% year-over-year. And on a half year basis, SaaS ACV was up only 1.7% to $7.7 billion. The top 10 SaaS firms grew ACV even less than the overall segment. So what's holding back growth in SaaS versus the growth we've seen in IS? We think there's a couple of reasons; budget and technical debt. On the budget side, we're of course very cost constrained environment right now and the per seat model that many SaaS providers use is in some ways easier to put cost controls on than it is the consumption-based model, which is the model that the infrastructure service providers use. We do see enterprises indicating that they are willing to pay more per seat for AI features, but we're just not really seeing that come to fruition yet. The second reason for muted SaaS growth is around technical debt, which may be holding back the growth of AI as well. This in turn may be also holding back the entire SaaS segment. Dave, do you want to discuss this in more detail?

Sure, Steve. The complexity of establishing Generative AI within an enterprise requires investment in skills and resources, but also in the software landscape that supports it. To be clear, just configuring an enterprise secure GPT chatbot is not the answer to help the workforce be more intelligent and engaged with GenAI in their day-to-day activities and their business processes. To become ready for Generative AI requires an understanding of the technological readiness of your platforms and your applications to interoperate with AI in a governed and secure manner, the nuances of which are very different across workplace productivity tools like Microsoft 365 or Google Workspace compared to business applications like Salesforce or SAP. And adopting AI-enabled workplace tools is different from what is needed to establish an AI platform on which you develop and deploy custom generated GenAI applications across the enterprise. Let me discuss the 2 big challenges enterprises face with AI adoption; cost and technical debt or modernization of existing infrastructure. The constant preparation for enterprise AI is not nominal and it also requires skills and trained resources that are not readily available in the enterprise. Costs include not just software, but services to bring GenAI to a reality to gain the efficiency improvements enterprises would like to achieve. You also need dedicated staff to govern and guide the use of AI and ensure that information is being managed and utilized effectively and appropriately. Workplace productivity tools like Microsoft 365 and Google Workspace are essential to the daily business activities of many individuals, including e-mail, word processing and spreadsheets. Enabling them with supercharged assistants is relatively easy, but it's not inexpensive. Google Gemini is priced as low as $20 per user per month for enterprise commitments. Microsoft with $30 per user per month with an enterprise commitment. These types of intelligent enabling capabilities to extend existing license productivity applications and they can add value that challenges IT budget allocation. Business apps like Salesforce and SAP that support your business processes in the front or back office for sales, service, operations, supply chain and finance are a bit different. Each has been implemented and customized with years of effort and the underlying application objects and data have been adapted beyond their standardized offering. SAP in their business AI and GenAI offering called SAP Joule, Salesforce Einstein AI, which requires more preparation to be ready to use in the enterprise. For example, SAP advertises clean core to get the foundation in place to layer Joule on top of applications. This messaging is now in full force in their executive communications if they want to gain buy-in to the business case for investments to their strategy. Pricing strategies vary. SAP is basing Joule pricing around the idea of a message. A message is a round-trip interaction with Joule. For example, the end user asking a question, getting an answer from Joule accounts as one message versus Salesforce which is priced at $75 for Service Cloud per user per month. But for Sales Cloud, you have to be at the Einstein 1 sales pricing level of $500 per month for all the Sales Cloud products or you have to negotiate pricing. Regarding functionality, we're now seeing these application companies demonstrate interoperability of their GenAI assistants, like SAP Joule working with Microsoft CoPilot at SAP Sapphire in June. So what's changing in the enterprise landscape for AI platforms? For much of the AI software economy, the discussion is about the use of AI by IT departments and data science teams. Interoperability of data and AI services across and inside native cloud computing environment is a key requirement. AWS, Google and Microsoft have an expanding portfolio of compute services, including enabling technologies for both data and AI. But it's not just the big 3 hyperscalers. IBM has introduced a set of open source large language models. Oracle recently announced its partnership with OpenAI and larger investment into NVIDIA GPUs. The interoperability of Oracle data and AI services across Google and Microsoft cloud compute environments are signs of making it simpler to blend AI and data services across cloud providers. We've recently completed our Buyers Guide assessment of dozens of AI and data platforms. Single vendor platforms that offer both services that co-exist and operate natively in the cloud tended to perform best and it shows the importance and interdependency of these 2 sets of capabilities. So in addition to hyperscalers, data platform providers, such as Databricks and Teradata, also performed well in our evaluation. Data is an integral aspect of AI and these combined offerings address more of the requirements that enterprises face. Despite the advances of this evolved generation of AI platforms, enterprise readiness is still an issue. Service providers have an opportunity to help enterprises implement AI, modernize data infrastructures and transform legacy systems. The budgetary challenges remain however, especially if software providers are extracting significant per user fees. Additional funds must also be allocated for implementation. While executives want GenAI and all its promise, it's not a light switch that you simply turn on. And any path you go down requires substantive investments. Steve, what are you seeing in terms of AI revenue?

Great. Thanks a lot, Dave. Well, first of all, let me say, really interesting on what's going on with the enterprise. And our acquisition of Ventana has really added such a new perspective to the index. So welcome to the team. Really glad to have you on board. And I think as we've talked internally, it's going to be interesting to see the productivity improvements that enterprises really see to see if that justifies the per seat basis as we go forward. But let me shift over to the enterprise real quick and what we're seeing on the service integration side. So with the SIs, it's clear that AI continues to drive efficiency across those enterprises and companies and we're even starting to see more and more where enterprises are experimenting with revenue generating POCs. I think this is probably the most interesting piece as we see that we'll see more and more business cases really driving top-line revenue as we go forward. Good news, AI-related projects for the SIs increased 61% over the trailing 12-month basis from the prior quarter. We expect that rate to remain really high until the numbers complete a 1-year cycle and we have a better base to work on. So from ISG standpoint, we're going to continue to report on this. We believe that we're seeing incredible growth on the AI side, but it will be a couple of quarters before the data set stabilizes. AI-related projects from the top 10 service providers that publicly report their AI revenue accounted for nearly 2.5% of the total revenue. We expect that share to rise slowly and steadily until it reaches sort of 5% to 10% of the revenue really as more proof of concept becomes stickier and really lead to projects that can scale. Our analytics show that AI-related projects are adding about 250 basis points to the annual growth rates of the industry. For example, the top 10 companies have grown their overall trailing 12 months revenue by 3.25%. But without these AI-related contributions, growth would have just been 0.7%. So I think you can see the AI boom may be masking some underlying weakness in the IT services market. And so we're seeing the growth with the hyperscalers. I think we're going to see that same growth generate with the service integrators. So although GenAI represents only a small portion of the bookings, it is gaining momentum, which I think is the key piece. So Namratha, do you want to walk us through the leaderboard this quarter?

Thank you, Steve. As a reminder, providers are listed in alphabetical order and positioning is based on annual contract values signed over the past 12 months. The company is new to the list are denoted with asterix. And also a reminder that the regional leaderboards can be accessed on the ISG website. We continue to see very little turnover in the Big 15 as the leaders have exhibited quite a strong hold on their positioning. So this quarter, we'll highlight a couple of larger Infrastructure as a Service providers. Microsoft signed a massive deal with Coca-Cola where the beverage company committed to about $1.1 billion to the Microsoft Cloud and it's Generative AI capabilities. We recently classified Microsoft as an exemplary in cloud computing platforms Buyers Guide, which was published last month. A lot of that is based on Microsoft's strong PCO and ROI, which is of course, very important in today's cost constrained environment. AWS also records strong activity during the quarter. Choice Hotels recently migrated its entire system infrastructure to AWS' cloud. The move to AWS is part of Choice Hotels' long-term technology road map and adoption of AI and involves decommissioning more than 3,700 servers, retiring over 300 applications and migrating more than 250 applications. In the Building 15, we saw several providers rejoined the leaderboard. German service provider especially earned the spot on the top 15 along with customer engagement leader, Teleperformance and document management tech provider, Iron Mountain. Staying in the Building 15, T-Systems won a 7-year contract from Danish Company, KMD, to operate its mainframe infrastructure for business-critical applications and data processing. They also won a contract from supermarket chain, Lidl, to provide fiber broadband connections to more than 3,000 German stores over the coming years. In the Breakthrough 15, we observed quite a lot of turnover in German service provider, Cancom, and Argentina-based Globant joined the leaderboard. Finally, in the Booming 15, we observed slightly less turnover than what is typical. Sonata Software was the lone new managed services entrant. Tata Technologies won work at Mitsubishi Electric India to deploy SAP S/4 HANA. The project integrated multiple business units, including factory automation systems, air conditioning systems and semiconductors and devices. They also signed a new JV with BMW to deliver software-defined vehicle solutions for BMW Group's premium vehicles and digital transformation solutions for its business IT. The JV will commence operations with about 100 employees and intends to grow to a 4-digit number in the following years. Congratulations to all the providers who made it to the leaderboard. And on that note, Steve, over to you to close us out with the forecast.

Great. Thank you, Namratha. So despite some great volume this quarter, the ACV was really flat on a year-to-date basis. The Americas and Europe both turned in weak numbers, though APAC performed fairly well. The mix in ITO and BPO continues to shift and the surge in ADM small awards that we've seen over the past several years has really slowed. As we cautioned previously, and Kathy discussed this, BFSI continues to struggle with the interest rate hikes since 2023. And activity in the financial services sector remains dampened, which is really impacting the overall growth of the market. The Infrastructure as a Service and SaaS markets are moving in different directions, again, really pushed by AI, as Dave discussed. In the Infrastructure as a Service market, enterprise optimizations are slowing as companies prioritize infrastructure modernization and AI experimentation. So that's a plus for the hyperscalers. And hyperscalers are also benefiting from AI-related revenue. And again, as Dave mentioned, the high level of customization with many SaaS products is really hampering the growth of AI-enabled solutions, which should provide opportunities for the SIs to help integrate these solutions without losing the additional functionality clients desire. I think you can see that uncertainty still persist in the IT services sectors. Managed services demand remains in a tight ACV range, again, 7 quarters of $10 billion with no clear catalyst to really spur discretionary spending until we get through some of the macroeconomic issues. Large contract awards are still focused on long-term cost optimization and transitioning to revenue generation more gradually than small discretionary projects, which is expanding the book-to-bill ratios in a positive way. Managed services will continue to rely on BFSI for recovery for sustained growth and AI is promising alibi with a little longer time scale to really reach scale. So given this entire picture, we have dropped our 2024 full year forecast for as-a-service by 100 basis points to 14%, really in the weakness in the pockets of the SaaS market that we discussed. We're also lowering our managed services forecast 100 basis points for managed services to 2% for 2024. The BFS market just continues to struggle with interest rates and geopolitical environment and we think that will continue to have a dampening impact on corporate spend. So this brings us to the end of the format of the formal call. We'll now open it up for questions. Please type your questions in the comments to the left or on the bottom of the screen. And Moshe, would you like to start with the questions?

So I have a couple. So it seems that the large deal wins that we've seen in the industry in the past 12 to 18 months are just starting to convert into revenues. How would you or what would you account for the slower than usual conversion rate? It's a bit unusual. And obviously, we've seen TCS this morning reporting stronger, I would say, there are stronger sequential growth we've seen probably since the pandemic was over, potentially a beneficiary of those improving conversion rates.

Yes. Let me start off, Moshe, with sort of the TCS announcement because I think it was a good news for the overall industry. They were up nicely. I think they saw some nice GenAI balance as well from what we saw. So really good returns from them. Overall, though, for 2023, we really saw this pullback on discretionary spend. And with 65% of the managed services awarded on the app space in 2023 and actually even going into 2024, that's really the best lever for IT organizations to hold back on spend. So what we saw at the enterprise level is really large scale adoption, some large deals going forward, but that's not really converting into revenue. And now we're starting to see that as we go forward. So I think you're going to continue to see a little weakness on the bookings, like we just talked about, that's starting to see some of those go forward as they begin to move forward which will flow into the revenue. And I'd like to welcome Stanton as well. I know a lot of our listeners know Stanton well. He couldn't join because he's in Houston with the lack of power, but we did get him to try to come in on phone. So Stan, do you want to try to add anything? And I know we're all hoping you're calm and cool.

Calm and cool. So that's what a whole home generator will do for you. So yes, we're good. So Moshe, great question. As Steve said, I think a lot of the impact here is the impact of ADM given how much that has grown over the past few years. That's 50% of the managed services ACV. You could say maybe 20% to 30% of an ADM deal is discretionary. So there's going to be more time and materials based. So we've seen enterprises pull back there versus the maintenance part of that agreement, which needs to go and fire up. So I think that's part of the reason, probably the largest reason for some providers not realizing the revenue that they've booked around these large ACV awards. But I think there's also another factor here, a little harder to quantify, but that's sort of the expectations around AI, specifically Generative AI. There is -- see this in the data and we're seeing with our clients is this expectation of effort reduction and therefore then cost savings in outsourcing due to GenAI. And I think that's definitely slowing down some not only decision-making, but even if decision has been made, given how fast this Generative AI emerged on the market, there's some slowdown in, hey, maybe we don't roll this part out yet until you tell us and commit to us what that productivity improvement is going to be from Generative AI. So I think it's a couple of factors that's slowing down that book-to-bill ratio.

That's great. And then we spoke about GenAI, obviously. From your perspective, how should we think about GenAI-related disruption for the industry? So some are talking about the fact that GenAI-related spending decisions are impacting or maybe deferring spending decisions on -- or for discretionary kind of related projects. Do you see that as a factor? And then in that context, some are also talking about a disruption or cannibalization for industries revenue growth in multiple areas, customer care, claims processing, obviously, that's on the BPO side, and then testing managed services and other areas. So how do you -- how should we think about this in terms of where we are in that whole cycle or process?

Yes. I think, Moshe, when we look at it broadly, AI is going to impact the 3 major segments a little bit differently. We're already seeing really positive impact on the hyperscalers, the cloud providers. You're seeing the growth up there. As we talked about on our AI's piece, we lowered the forecast down to 14% just because of some of the consumption, but we do see really strong AI path for the hyperscalers. Dave talked a lot about AI for the SaaS providers and some of the challenges that they have with the growth. He talked about sort of the challenges with core, getting back to the basics, the challenges of implementing GenAI when you're highly customized and what does that mean. And then, of course, on the SI side, we're seeing about 2.5% of the total revenue now being generated by AI capabilities. That was a 61% increase on a trailing 12-month basis. So we're starting to see more and more key pieces drove from that. I think there's going to be a couple of things. In the near-term, we're very focused on the cost optimization and the productivity improvements with GenAI. And we're seeing that across our business where whether it's 30% or 40% improvement in certain functions and goals, you're seeing a big productivity piece come to bear. I suspect you'll see that over the next couple of years. The question will be, does that add to the margins? Does it lower the overall price and margins or does that cannibalize some of the revenue for? I think there's still so much spend in the market and it's going to come from so many other areas other than just IT and core areas. I'm the fan of the high tide rises all boats. Maybe that's not a good one for Houston right now, but it certainly brings everything up. I do think, though, the market is also quickly shifting to revenue generating opportunities. If you think of all the challenges that this community can help solve from decarbonization to better sustainability to better understanding the supply chain, demand forecasting, those are all revenue generating type opportunities that organizations can do that all are going to require strong SI solutions built on AI built on these types of solutions that go forward. So I'm not a fan of the cannibalization. I think it's actually going to increase. That's all of our projections as we go forward. Dave, anything you want to add on it from a software standpoint?

Sure. I think there's some uncertainty because I think that the whole GenAI phenomenon creates the opportunity for disintermediation. So just like we saw with the Internet and new ways of doing commerce and new ways of booking a ride share, I think that there are opportunities for the various players in the market, whether they're software vendors or SIs to compete in parts of the market they didn't compete in before. Let me give an example. The data platform vendors could disintermediate a lot of the analytics vendors by simply incorporating -- I'm oversimplifying, obviously, but by simply incorporating GenAI to access the data directly. Now I don't know where this is all going to go, but there are these interesting opportunities, which all equate to uncertainty in the market. I wish I had a crystal ball and can tell you exactly what would happen, but there will be a lot of dynamic changes in the market, in my opinion.

And we've heard concerns over revenue cannibalization 7 to 8 years ago in the industry when cloud-related work was gaining traction. And obviously, these concerns ultimately turn out to be false. Do you feel that the concerns here as it pertains to GenAI are any different given the different dynamics here?

I think the different dynamics that are a little bit challenging on this one is the amount of compute power for GenAI initially with the models. And so you're not going to have every organization that can compete in that way with H-100 or the chips and be able to drive that. So that adds a different dimension. But if you look at the Microsoft announcement in June on what they're doing with MPUs and how they're rethinking the architecture of the PC and the kind of the growth of small language models, I think you are going to see -- begin to see a big growth of more AI to the edge, which will actually expand. So in general, I would say, just like the cloud, I don't think it's going to cannibalize, but I do think the core services are going to change over the next 5 to 7 years on where that revenue comes from, because the whole IT infrastructure is changing, spend is coming from so many different areas. So I do think we're going to be in this ever-changing growth cycle or change cycle right now. But I don't think you're going to see a big dampening on the SIs because of that.