T-Systems integrates security and IoT to offset revenue declines

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Deleon Narcisse, research analyst, at TBR, says pricing pressures in the ICT market impacted revenues, contributing to T-Systems’ declining revenue in Q2 2016.

Though on a half-year basis T-Systems’ revenue improved by 1.4 percent compared with the year-ago period, the company’s revenue contracted 3.1 percent  in Q2 2016 to €2 billion. Ongoing pricing challenges within the ICT space, alongside the negative impact of exchange rate changes, contributed to the decline. T-Systems’ operating margins also faced challenges during the quarter, with the company posting operating income of 0.5 percent in Q2 2016, down 100 basis points from 1.5 percent in 2Q15.

The company’s lower profitability was attributable to investment costs associated with developing services and solutions around digital technologies such as cloud and Internet of Things (IoT). However, T-Systems noted during its earnings release that cloud engagements now comprise over 70 percent of its revenue, growing more than 22 percent to €0.7 billion in 1H16. T-Systems’ cloud growth throughout 1H16 indicates investments such those in as Covata Safe Share are generating success for T-Systems’ cloud business, evidenced by its deal win with Messe Berlin in June. As a result, we anticipate cloud deals to improve revenue growth for T-Systems in the coming quarters.

T-Systems continues to expand capabilities around IoT, leveraging its security expertise to act as a value add for enterprise customers

With the scope of customers’ IoT environments continuing to expand, the vulnerability of client networks to cyber threats increases. As a result, T-Systems continued to integrate cybersecurity capabilities into its IoT portfolio. Building off investments made in April, such the SCADA Security solution and Cloud of Things Starter Kit, T-Systems bolstered the Magenta Security portfolio, by announcing a protective layer for networked devices.

The authority system, which assigns each device connected through the IoT network a unique identity, is managed by T-Systems’ Trust Center. As the system features automated identification capabilities and management by security experts from a secured, Telekom data center, T-Systems mitigates the risk, enhancing the value proposition of the Magenta Security stack to customers. We anticipate such investments to boost growth for T-Systems’ IoT revenues in 2016, as the company embeds Magenta Security capabilities within clients’ IoT environments to generate cross-selling opportunities.

Infrastructure investments demonstrate the importance of cloud for T-Systems and its ongoing transition toward transformational IT services delivery

Initiatives such as Open Telekom Cloud, which officially launched in March, and an upcoming digital services platform for mobile and web developers, demonstrate the importance of cloud to T-Systems and its drive to migrate up the value chain for IT services customers. To support its increasing cloud activities, T-Systems announced the expansion of its cloud data center in Biere, Germany, in March.

In July T-Systems stated it is adding three new data center modules to the facility that will increase capacity by 150 percent as of 2Q18. TBR views the move as a necessary step in the company’s journey to transformational services delivery. By enhancing the scope of its hosting and data migratory capabilities in Germany, T-Systems is better able to address onshore customers’ cloud needs at scale, appealing to enterprises in Europe seeking to shift legacy IT operations to a cloud-based infrastructure.