Information Age: News, analysis & insight for IT & business leaders

Three months ago, many IT companies reported their first financial quarters since the recession began in earnest. But any hope that the drubbing they received back then was a one-off was misplaced, it became clear in July

Software giant Microsoft, which has not allowed itself any such optimism, saw a significant fall in both revenue and profit during the fourth quarter of its 2009 financial year. Its revenues for the quarter, which ended on 30 June 2009, fell by 17% year-on-year to $13.1 billion, while net income dropped 29% to $3.1 billion.

The quarter capped off a bad year for the company, in which total revenues fell by 3% to $58.5 billion. That is the first annual revenue decline for Microsoft since 1986.

The decline in revenues was especially pronounced in the Client division, which sells the Windows desktop operating system. Thanks to falling PC sales, that division saw a 29% sales drop to $3.1 billion in the fourth quarter, and a 13% fall to $14.7 billion for the year.

But every division of the business saw sales drop. Revenue for the Server and Tools unit, which sells server software and systems management tools, dropped 6% to $3.5 billion, and the Business division, which sells Microsoft Office and the Dynamics range of applications, suffered a 13% revenue drop.

Microsoft was equivocal about the future. “Looking forward, we do not expect trading conditions to improve much but neither in the short term do we expect them to worsen,” said CFO Christopher Liddell.

While Microsoft’s performance was dire by any measure, it came as little surprise. More shocking, perhaps, was server virtualisation pioneer VMware’s 20% decline in licence revenue during its second quarter.

The virtualisation leader’s net profit fell to $33 million from $52 million in the same quarter last year, on the back of flat revenues of $456 million. Licence revenue fell to $228 million. Even growth technologies like virtualisation, it seems, are being affected by the downturn. Following a dramatic slowdown in the first quarter, VMware’s latest results still beat Wall Street estimates and sent the software firm’s stock up 7%. The company blamed the “challenging macroeconomic environment” and said it was having difficulty closing large deals; small projects were still forthcoming, however. It also said the introduction of a new product, ‘cloud operating system’ vSphere, had affected sales by channel partners as they focused on training.

Rival virtualisation vendor CITRIX, meanwhile, saw second-quarter revenues that were similarly flat at $392.8 million. But net income rose 23% to $42.5 million, somewhat challenging the perception that VMware is the rockstar of the virtualisation sector. In Europe, however, Citrix’s revenues fell by 12% to $113 million.

One of the most optimistic of companies throughout the downturn, despite seeing some of the steepest declines, has been Cisco the world’s largest network equipment manufacturer. But even CEO John Chambers’ sunny disposition was challenged when revenues fell 18% year-on-year to $8.5 billion in the final quarter of fiscal 2009. Quarterly profit fell even more precipitously – down 46.3% to $1.1 billion.

Chambers pointed to quarter-to-quarter changes in order volume to find a silver lining. “While it is too early to say that this is a definite trend, and therefore the much-anticipated recovery,” he said in a conference call with investment analysts, “the sequential order numbers were very solid and more along the lines of our normal seasonal quarterly results for the first time in the last four quarters.”

Chambers also said that Cisco has now completed a round of ‘restructuring’ that saw the company shed between 1,500 and 2,000 employees (out of a total of more than 60,000).

Eastern profits

In the past, the enviable challenge facing Indian IT outsourcers was to scale up their operations fast enough to meet ballooning demand. But as demand slows, the task is now to put that rapid escalation into reverse. Looking at the profitability of two of the country’s Big Three, Wipro and Tata Consultancy Service (TCS), it is a trick they seem be pulling off with aplomb.

Total revenues during Wipro’s first financial quarter of the year, ending 30 June 2009, were $1.31 billion, up 5% compared with last year. But the IT products and services practice (Wipro also has a customer care and lighting division) saw its revenues fall by 3.3% to $1.03 billion.

But profitability, even in the IT services division, was on the increase. Group net income rose by 13% to $213 million, while operating income for IT products and services went up 16% to $230 million.

TCS meanwhile, saw net income grow 5.5% to $311 million for the same quarter, even as revenues shrank by 3% to $1.48 billion. As always with Indian companies’ financial performances, currency fluctuations play a significant role, and the rupee has weakened against the dollar in recent times, inflating the rupee value of contracts.

But the profitability of both companies also attests to their ability to cut operating costs quickly. Indian IT companies typically have many more staff than is required at any given time in order to retain the flexibility to take on new contracts, and reducing this surplus and freezing new hires has allowed them to increase margins even as revenue falls.