The dot-com crash is the best-known financial catastrophe since the Great Depression. It is still fresh in the minds of both technology industry professionals and the investors that got their fingers burnt

The IT sector is therefore acutely aware of the possibility that, even when luxuriating in double-digit top-line growth, its fortunes can quickly be reversed. There are certainly no early warning signs of an IT downturn – yet. Indeed, news from the industry’s bellwether companies has so far been a cause for optimism.

If businesses are reducing software spend in preparation for a downturn, it has yet to manifest itself in SAP’s financial fortunes. In January 2008, the company reported quarterly revenues of a3.2 billion for its fourth quarter of fiscal year 2007, up 13% from the same quarter in the previous year. Meanwhile, software licence revenue, the key indicator of both current and future prosperity, grew by a healthy 14% over the period to reach 1.4 billion.

However, profits were not heading in the same direction. Net income at the German company fell by 6% to 804 million, although SAP attributed much of this to costs incurred in developing Business ByDesign, its recently launched software-as-a-service platform.

Even more impressive revenue growth was evident in the final figures of business objects, the business intelligence company that SAP is in the process of acquiring. There, fourth-quarter revenue grew 20% to hit $444 million.

And SAP is confident that the combined company will be stronger than the sum of its parts. The company predicted that Business Objects will contribute between 12% and 15% of sales growth during 2008 – bumping the total company’s expected sales growth up to between 24% and 27% for the year. If lean times are approaching, no one has told SAP.

Meanwhile, IBM – the world’s second-largest IT company – took the unusual step of delivering its financial report early in an attempt to soothe the concerns of technology investors. Four days ahead of schedule, the company revealed that end-of-year quarterly revenues had increased by 10% year on year to reach $28.9 billion.

The company derived much of this growth from its IT services arm, where revenues surged 17%. The company’s software division also grew well with a 12% rise in revenue. The systems and technology unit, meanwhile, took in $6.8 billion – down 4% compared to the same quarter last year, affected again by mainframe price erosion.

The news from IBM and SAP boosted optimism on stock markets. SAP saw its shares rise 4.21% after reporting its results, while IBM, whose financial performance contributes to the Dow Jones Industrial Average, triggered a cross-market up-tick.

It may yet be premature of the IT industry to breathe a sigh of relief. A significant part of IBM’s revenue growth was a side effect of the weakening dollar. While Indian IT services companies have seen the value of their contracts with US companies shrink as the dollar has fallen against the rupee, IBM – with its increasingly global customer base – has seen the dollar value of its work abroad grow.

This may be true for many technology companies. After all, IT has played a large part in contributing to the ‘flattening’ of international business in the 21st century and might hope to reap the dividends. But all IT companies still rely heavily on the US market, which could yet begin to tighten its technology spend.

Offshore stability

Currency fluctuations aside, there was no evidence that caution among US companies has yet had any repercussions for the Indian IT services companies, though commentators had expected that they, with their large customer bases of financial services companies, would be the first to feel the impact of the credit crunch – to date this has not happened.

In January, Infosys kicked off a flurry of strong results from Indian outsourcing providers. Revenues for its three months to 31 December 2007 were up $1.08 billion, a 32% year-on-year rise; profits for the quarter were up 25% to $310 million.

Close competitor Wipro also posted strong revenues, up 32% at $1.33 billion for the same period. Some of that growth came from its interests outside IT services (including light bulbs), but its core IT business grew impressively too: revenues hit $917 million for the quarter, up 26% on the quarter a year earlier.

But growth at rival firm satyam was stratospheric in comparison. The company’s revenues for the quarter were up 49% year on year to $562.9 million.

Despite the strong numbers (at least measured using US accounting rules), executives at the Indian services giants remain wary of the impact of the potential fallout from a weakening US economy. “Many of our customers will be setting their [IT] budgets in the coming quarter. We’re keeping in close contact with them about this and should get a better picture of what is happening in the coming weeks,” says Infosys’s senior VP and executive council member, BG Srinivas.

There is a strong chance that cuts to IT budgets will encourage companies to invest more, not less, in offshore outsourcing, he suggests. Nevertheless, Infosys’s strong growth outside the US, particularly in Europe, will help shield it from any subsequent slowdown in spending there.

Further reading

Currency commotion The escalating value of the rupee is beginning to damage the Indian IT services industry's revenues.

SAP rethinks software SAP’s on-demand applications offering, Business ByDesign, may turn the company into a mass market vendor.