FTSE 350 Review: Software companies scramble to find AI uses

Almost all reports published by software sector analysts are now some variation on the theme of 'artificial intelligence winners and losers'. The consensus is that generative AI will disrupt the industry; the uncertainty, as ever, is in how this change will manifest itself.

There are wider trends at play. Last year, IT spending slowed as companies focused on efficiency and tried to consolidate around a smaller number of software vendors.

The expectation is that companies' growth will reaccelerate as they rush to integrate generative AI into their businesses. Global IT spending grew just 3.5 per cent last year, according to research firm Gartner. However, it is expected to rise 8 per cent in 2024 as spending shifts further towards automation, cost control and efficiencies. Gartner is calling this the “new wave of pragmatism”.

Microsoft (US:MSFT) hopes to be a leader in this new age. In January, it expanded the availability of its AI-enhanced version of Office 365 to businesses of all sizes. Jefferies analyst Brent Thill sees this decision as evidence that the company has been able to lower computing costs and expects adoption to ramp up in the coming months.

This is good news for IT services provider Bytes Technology (BYIT), which has Microsoft Azure expert status in the UK. In other words, if a company wants to adopt Microsoft’s software and cloud computing capacity, it can go to Bytes for help. In the six months to August, Bytes’ gross invoiced income rose 38 per cent, in part thanks to “winning large public sector Microsoft contracts”. Correspondingly, Bytes’ share price is up over 65 per cent in the past year.

For similar reasons, Investec has picked out IT services business Computacenter (CCC) as one of its recommendations for 2024. Earnings growth was flat last year. However, the broker is forecasting that, as “one of the main global resellers” of computing infrastructure, Computacenter's growth will pick up in the months ahead. The company has partnered with Nvidia (US:NVDA) and already flagged an AI trial project with a multinational tech company worth hundreds of millions.

Amid all the hype around new technology, Sage (SGE) has shown it is still possible to keep growing with conventional, productivity-enhancing software. The accounting software company has completed its transition to the cloud, and has been reaping the benefits. In the three months to December, its total revenue grew 10 per cent to £573mn, while its cloud computing business expanded 18 per cent.

But even Sage, with all its recent success, feels the need to point out its AI capabilities. In its full-year report, it mentioned its investment in new digital assistant Sage Copilot, and its “deepened” relationship with Microsoft and Amazon.

In 2024, in short, there is a lot riding on AI. Nvidia’s success shows there is demand for the computing hardware. However, the software companies will soon need to show the technology can improve productivity, or else investors will start to lose faith.