Morgan Stanley said its latest chief information officer (CIO) Survey revealed that the information technology (IT) spending expectations moderated, while IT Services spending growth expectations showed an uptick versus last survey.

Morgan Stanley conducted the CIO Survey during October through December 2022 with 100 decision makers, representing 100 enterprise IT organizations. Seventy-three respondents were from the US, while 27 from Europe, it said.

The brokerage said the survey respondents hold responsibility for purchasing, integrating and maintaining technology, and their responses represent enterprise customer adoption and purchasing behaviors for the fourth quarter of 2022 (4Q22).

The study showed the IT spending expectations moderated in 4Q22 survey versus 3Q22 survey, but the expectations were likely better than feared.

Morgan Stanley said the 4Q22 CIO Survey revealed the external IT spending growth for 2022 moderated to 2.9% (down 10 basis points versus 3Q22) and to an estimated 2.7% (down 10bps versus 3Q22) for 2023. The up to down ratio was downbeat at 0.3x, it added.

CIOs' expectations for the IT spending as a percentage of revenues in the next three years (increase to decrease ratio) came down to 3.3x versus 5.9x in 3Q22 survey, but still stand better than pre-Covid levels, the brokerage said.

Morgan Stanley said the IT Services spending growth expectations for 2022 inched up to 2.8% (versus 2.6% in 3Q22) after moderating for the past four consecutive quarters. In line with 2022, the spending expectations for 2023 also moved up to 2.5% (versus 2.2% in 3Q22's survey), it noted.

“As of now, the expectations of IT services spending growth will continue to moderate in 2023 versus 2022 (2.5% versus 2.8%, implying a 30bps moderation),” the brokerage said in an investor note.

Morgan Stanley said similar moderation was observed across the US and Europe versus prior expectations of a sharper moderation. It added that 2023 IT Services budget growth for the US moderated to 2.6% from 2.9% in 2022 and for Europe, it moderated to 2.2% from 2.4%.

The brokerage said industry verticals, including financial services and energy are likely to show moderation in growth in 2023, while retail and manufacturing should be resilient.

Within Indian IT vendors that are likely to show net rise in spending over the next 12 months, both Tata Consultancy Services Ltd. and Infosys Ltd. are on the positive side, it added.

Takeaways For Indian IT

• The CIO Survey is one of the positive data points highlighting some resilience in 2023 IT services budgets.

• The re-rating for Indian IT stocks would need a revenue upgrade cycle.

• For now, the CIO survey is an incremental data point to hold onto expectations of 5%-8% year-on-year revenue (YoY) growth in constant currency terms in FY24 (versus 8%-16% YoY in FY23).

Key Findings - Overall IT

• Software remains the fastest-growing segment in 2022, but growth expectations are generally decelerating across the majority of industry groups.

• 2023 Budget Growth: 4Q22 survey showed an uptick for IT Services and software versus 3Q22 survey, while other segments showed moderation.

• 2023 IT Services spending growth expectations show a 28bps deceleration versus 2022 levels.

• 40% of CIOs expect IT spending to increase as a percentage of revenue over the next three years, translating to a 3.3x up-to-down ratio.

• CIOs estimate that 27% of application workloads are running in the public cloud as of 4Q22, up from 25% in 4Q21. As per the survey, this will trend higher to 46% in three years.

• Both cloud application workload penetration today and CIOs' expectations for future workloads running in the cloud remained broadly stable sequentially.

Key Findings - IT Services

• IT Services spending moderation YoY is more apparent across US respondents than EU respondents.

• IT Services spending growth expectations have remained relatively durable.

• 4Q22 survey exhibits the highest over-to-under ratio for IT Services spending expectations since the start of the pandemic.

• Macroeconomic concerns driving project delays.

• On a net basis, subtracting the percentage of respondents indicating a decline, consulting & systems integration (31%) is expected to show meaningful spending increases over the next 12 months.

• Respondents indicate that security, software upgrades, and cloud computing are near-term priorities.

• There's incremental willingness to discount across most players.

• Spending intentions appear more balanced across providers.