Unlike manufacturers with visible inventory, technology services companies sell expertise delivered over time, so the best clue to future revenue lies in signed contracts. Announcements of large deals frequently lift sentiment, and the Infosys Share Price has at times reacted noticeably to major contract news. However, the headline number rarely tells the complete story. Investors must understand how contract value, duration and conversion interact. Likewise, anyone examining the TCS Share Price around quarterly deal disclosures learns that the market weighs both the size and the quality of new business.
What Total Contract Value Means
Total contract value (TCV): what it is and what it’s not
TCV is the sum of the lifetime value of the deals signed during the period. Deals signed in the period can have a big value, but it’s spread through several years: this is why a big success in terms of deal wins does not automatically translate into revenues.
Investors should look at the ratio between TCV and trailing revenues to assess the opportunity: a consistent ratio throughout the periods shows that the company has a consistent ability to capture value in the form of new work that will be performed in the future.
Quality over quantity
Deals’ value is not expressed the same way: transformational programmes with great pricing and long-term commitment have more value than commoditised work. The same goes for renewals: they might represent a small percentage of the overall revenue but protect the company from churn. And last but not least, the type of work differentiates between maintenance and growth-oriented deals.
Within the maintenance scope, having contracts focused on cloud, data engineering, and cybersecurity is a sign of opportunity. Whereas legacy work might be subject to pricing pressure and lower margins in the long term.
Vendor consolidation trends
Many clients tend to consolidate their vendors, reducing the overall number of partners, to standardise processes, benefit from better pricing, and streamline operations. This puts pressure on smaller players, whereas larger and more established vendors can gain market share by renegotiating better terms with clients. This trend helps explain why some of the biggest vendors in the space still win large mandates despite a generally cautious macroeconomic outlook.
Conversion and execution risks
While signed deals are an important metric, they only represent the potential revenue of the company: there is always the risk that the client will postpone the start of the work or reduce the scope, thus leaving the contractor with lower revenues than expected. Execution capability is then a very relevant metric to understand if and how much revenue from the signed deals will actually impact the company’s bottom line. Costs might increase due to project mismanagement, and project margins can be under pressure if the company needs to hire more people to accommodate the additional work.
Using these insights: building a tracker sheet
To track these ratios and metrics, build a simple spreadsheet with the relevant facts, such as the TCV value, growth rate, and the management guidance for the pipeline for the quarter. By analysing this information, you will be able to understand how much deal momentum impacts revenues and margins. Combine this with the general perception of the market, and you will be in a great position to assess if the company has the opportunity to reward your patience as a shareholder.