IT firms may see delay in tech spending due to Silicon Valley Bank collapse

SVB lends and invests into tech start-ups, a borrower pool with tight inter-linkages. Start-ups also star in its depositor base, keeping their cash with the bank. And with liquidity ebbing and interest rates rising, several start-ups face a cash crunch

The collapse of Silicon Valley Bank in the US has sent startups and VC funds scrambling, but it may also result in enterprise clients pushing their IT spending decisions, said a note by Wedbush Securities.

This, in, turn, will lead to longer sale cycles and delay the actual budget cycle for this calendar year, the note said. This comes amid a challenging macro environment when companies are pointing out extended cycles and increased cost optimisation deals.

The primary spending impact will be in the banking, financial services and insurance (BFSI) and high-tech verticals, according to the note. BFSI contributes 20-40 percent of the sector’s revenues and has so far been a reliable spender as compared to 2007-08, and high-tech, which is a headwind, could cause a greater impact.

“Collectively, we believe these factors are impacting funding for committed engagements in both cost optimisation (run the operation) as well as transformational (grow the operation) areas,” the note read. Because of this and an “increased macro noise” the sector’s outlook remains fluid.

As funding challenges continue beyond the March quarter, the note said that it is now expected that there will be more back-end loaded contribution from digital-based services, and that Wedbush believes funding decisions have been pushed out despite most vendors pointing to a strong deal pipeline particularly in cost optimisation deals.

The challenges faced by Silicon Valley Bank now contribute to more uncertainty, it said, as it leads to a potentially more cautious spending outlook in the financial services vertical, and in the high-tech vertical, “cost-cutting initiatives may create even more material growth headwinds”.

In terms of companies, the note by Wedbush Securities said that Accenture’s FY23 guidance may be at risk, as the company has exposure is higher to discretionary spending, “including consulting (5 -10 percent of the mix), and digital (40 percent of the mix, excluding cloud).”

For Infosys, Wedbush expects the guidance for FY24 to be in the 8-10 percent range, as roughly 45 percent of the company’s revenue mix is from digital and 55 percent from cost optimisation services.

Cognizant is expected to see CY23 on-year growth to be down, excluding any large deal wins and the company’s exposure to BFSI and the communication, media, and technology (CMT) verticals, which account for nearly 50 percent of its revenues.