Data Centres To Outperform During Recession

BMI View : Our bearish outlook for the Croatian economic recovery feeds into our low growth expectations for the country's IT market. However, we see opportunities in the cloud computing and data centre markets, as companies look to outsource ICT infrastructure in order to create cost efficiencies.

Croatia's largest telecoms provider, T-Hrvatski Telekom (T-HT) has opened a data centre in Zagreb, following a HRK62.5mn (USD11.25mn) investment and a partnership with Koncar Group. According to the operator, it will be able to offer users accommodation in the data centre, as well as remote monitoring and management of ICT infrastructure, allowing for cost efficiencies and optimal equipment operation.

T-HT's parent company, Deutsche Telekom, has sought to increase its presence in the IT market by leveraging existing network infrastructure to provide IT services, such as cloud computing, throughout its European markets. It is therefore of little surprise to BMI that T-HT has begun to invest in its own ICT business as well, as this segment has shown solid growth over the last two years, amid a stalling Croatian economic recovery. In 2013, revenues for T-HT's ICT business increased by 25.5%, partly as a result of low base effects but also because of the growing portfolio of cloud solutions offered by the company. ICT is gradually beginning to account for a larger portion of the company's total revenues, rising from 5.5% in Q113 to 7% in Q114.

ICT Revenues Growing Amid Slowing Economy
T-HT ICT Revenue Indicators, 2012-2014

BMI View : Our bearish outlook for the Croatian economic recovery feeds into our low growth expectations for the country's IT market. However, we see opportunities in the cloud computing and data centre markets, as companies look to outsource ICT infrastructure in order to create cost efficiencies.

Croatia's largest telecoms provider, T-Hrvatski Telekom (T-HT) has opened a data centre in Zagreb, following a HRK62.5mn (USD11.25mn) investment and a partnership with Koncar Group. According to the operator, it will be able to offer users accommodation in the data centre, as well as remote monitoring and management of ICT infrastructure, allowing for cost efficiencies and optimal equipment operation.

T-HT's parent company, Deutsche Telekom, has sought to increase its presence in the IT market by leveraging existing network infrastructure to provide IT services, such as cloud computing, throughout its European markets. It is therefore of little surprise to BMI that T-HT has begun to invest in its own ICT business as well, as this segment has shown solid growth over the last two years, amid a stalling Croatian economic recovery. In 2013, revenues for T-HT's ICT business increased by 25.5%, partly as a result of low base effects but also because of the growing portfolio of cloud solutions offered by the company. ICT is gradually beginning to account for a larger portion of the company's total revenues, rising from 5.5% in Q113 to 7% in Q114.

ICT Revenues Growing Amid Slowing Economy
T-HT ICT Revenue Indicators, 2012-2014

Croatia's economic recovery has fallen behind that of the rest of the EU, with problems of weak consumption and deteriorating labour market dynamics causing GDP to fall for the sixth consecutive quarter in Q114, down 0.6%. This caused an overall slowdown in Croatian IT spending during 2012 and 2013, and we do not expect this to improve significantly in 2014, as we forecast GDP to decline by 0.7%. Constrained government spending in particular is one of the key reasons for this slowdown, as the public sector remains the largest overall spender on IT products and services, in large part due to its stakes in companies across a wide range of industries, including in Koncar Group and T-HT.

However, IT outsourcing through data centres could be one of the segments to benefit from the economic recession in Croatia, as the government and Croatian companies look to cut costs and alleviate financial pressures. Banks and telecoms companies are among the lead sectors for IT outsourcing and the government's precarious fiscal position means it is highly likely it will look to cut its own IT costs by outsourcing to data centres. Meanwhile, growing demand for infrastructure-as-a-service (IaaS) and hosted computing is driving investment by data centre operators in Croatia.

Furthermore, BMI sees additional upside for data centres and cloud computing from Croatia's entrance into the EU, which should boost IT spending due to EU-driven modernisation projects. For example, the Croatian state received EUR240mn from the EU in June 2014 for the construction of high-speed internet infrastructure. This will benefit companies such as T-HT, investing in data-heavy services such as cloud computing, by improving the speed and capacity of existing network infrastructure.

Specifically for Koncar Group, we see huge opportunities for the company to develop its smart grid capabilities through its data centre partnership with T-HT. Koncar is primarily an electricity and power provider and the Zagreb data centre could be used to remotely monitor and control power grids, to create efficiencies and cost savings for the company, although we believe these developments are around two to three years away.

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