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We parsed through the latest earnings transcript of Hyperscalers, leading SaaS companies, global system integrators (GSIs) and digital native providers to guage the demand outlook. Conversations are centred around three vectors – AI, clients’ buying behaviour and discretionary spend. We sense divergent sentiments across the tech value chain. Optimism is highest among upstream players. Hyperscalers are committing higher capex, citing strong AIled cloud demand. SaaS players are sanguine on stronger cloud adoption (Cloud ERP/Data Clouds) as enterprise get ready to leverage genAI capabilities. But cautioned against a still measured buying behaviour. Global SIs (CTSH, CAP) are still circumspect on discretionary environment, though pointed to a better Q3 (Jul-Aug-Sep). Digital native providers (EPAM, DAVA, GLOB), on the other hand, are least positive. This downward slope of optimism could mean two things – a) natural lag between upstream and downstream demand; b) enterprise reprioritising budgets to invest in upstream capacity crowding out services demand. Tough macro is not helping either. AI-led upstream demand, if sustains, should percolate down to services. But constrained enterprise IT budgets mean near-term demand could stay sluggish. Investors should stay selective. We prefer INFO/WPRO (expectations better aligned) and TECHM (turnaround) among large caps. We continue to see risk in LTIM.

* Hyperscalers – putting money where mouth is: Hyperscalers, to meet growing demand of Cloud and AI, have committed significantly higher capex in CY25 vs. CY24. MSFT mentioned cloud demand is outstripping supply. AMZN said they don’t spend capital unless they have clear signal it can be monetized. AMZN reckons 85% of global IT spend is still on-prem – leaving a lot of growth ahead. Importantly, MSFT saw growth in new workload migrations again. AMZN believes enterprises have completed lion’s share of optimization. These are early signs of resumption of cloud transformation journey.

* SaaS – banking on cloud adoption: Salesforce/Snowflake believes their enterprise-grade data cloud offerings are key for enterprise to leverage genAI capabilities. That said, Salesforce still sees a measured buying behaviour. It is more pronounced in EMEA as well as in Americas – especially in the tech sector. It likened the current economic condition to first half of last year. Snowflake, on the other hand, is seeing signs of stabilising optimization environment. SAP is seeing momentum in current cloud backlog (CCB). Interestingly, it expects maintenance and support revenues to decline as on-prem products go out of support by 2027. That could have an adverse impact on GSIs revenues, in our view. Though shift to cloud still presents a large offsetting opportunity.

* GSIs - beyond the trough? Both CTSH and CAP indicated no change in discretionary environment. However, CAP reiterated that the trough is now behind. It expects gradual recovery leading to a mid-to-high single digit (YoY) growth exit rate. At the upper end of their guidance, both CTSH and CAP have built improvement in discretionary environment. CTSH sees green shoots in BFS – that constitutes 60% of its financial services. CAP, however, continues to witness pressure in US banking sector. CTSH’s interventions have helped it stem leakages in BFS, likely informing its positive view.

* Digital Natives - least optimistic: EPAM cut its CY24 guidance from 1-4% to (2.5)-0%, the only guidance cut in the quarter. It scaled back its expectation of demand improvement through the year. GLOB believes near-term IT spend will likely remain soft. EPAM has seen some discretionary spend coming through, though it is now calling out timing of the recovery yet. Interestingly, GLOB/EPAM indicated that genAI projects are taking longer than expected to scale from POC stage. Complexity of projects and risk involved in core systems (for data transformation etc) is causing decision delays. Even the pace of technology change is preventing clients to engage in lengthy genAI projects.

* Sector view: Though improving upstream demand is a positive lead indicator, we believe near-term is likely to be muted. We prefer players where expectations are aligned and valuations are reasonable (INFO/WPRO). TECHM is a BUY on turnaround thesis. LTIM is Sell on limited earnings visibility and full valuations

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