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In the eyes of Wall Street Research in Motion just crossed from wunderkind to overhyped stock. Plus, SOA fortunes and bumper buy-backs.

In business, the problem with being a runaway success is that any slight deceleration of profit and revenue growth will be seen as a sign of the beginning of the end.

That is the lesson that Research in Motion (RIM), maker of the BlackBerry mobile email device, has learnt this month.

Since launching the BlackBerry in 2002 (it previously manufactured pagers), the Canadian company has maintained a staggering rate of revenue growth and – more recently – profitability. As the device has become the ubiquitous accessory for managers at all levels of business, RIM’s revenues have been doubling year on year.

But this year the story has moved on. For one thing, the disastrous fortunes of the financial services industry – where a BlackBerry is as much a part of the uniform as a pinstripe suit and a pink newspaper – does not bode well for the company. Of more immediate concern is the fact that the business market is now well penetrated and the company is becoming more reliant on customers upgrading from older models.

And there is the spectre of the iPhone, Apple’s mobile Internet device that has many reviewers labelling BlackBerry as yesterday’s fruit. This backdrop goes far to explain the stock market’s reaction to RIM’s most recent financial results.

In September 2008, the company reported revenues of $2.58 billion for the second quarter of its financial year, up a colossal 88% from the same quarter the year before – an increase in earnings per share from $0.50 to $0.86 and in net profits from $287.6 million to $495.5 million

But with the announcement of these impressive numbers, the company’s share price fell by 20% overnight. Why? Because the earnings per share fell one cent below the consensus of analysts’ expectations. And that missing penny confirmed a perception among investors that RIM has transitioned from wunderkind to over-hyped stock.

Wall Street is capricious, however, and that transition could be reversed. RIM has three major product releases scheduled for the coming months, including its iPhone contender, a touchscreen-enabled device called, bizarrely, ‘The Storm’. With these it must prove it can still dominate the business user market even as budgets diminish and the iPhone drops in price.

SOA fortunes

Another IT company closely associated with the financial services industry is Tibco. Though less visible than the ubiquitous BlackBerry, the kind of high-end integration and service-oriented architecture (SOA) infrastructure products it sells are equally crucial for the high-speed transfer of information that the sector depends on.

Tibco’s revenue growth may have not been on the same scale as RIM’s, but was still strong. Its takings in the third quarter of the financial year were $162.3 million, representing year-on-year growth of 20%.

While revenues from the financial services sector grew a meagre 5%, the fact that it made up for this sluggish performance in other sectors bodes well for Tibco’s future.

“From a vertical market perspective, government, energy and telecommunications did particularly well with year-over-year growth of 134%, 78% and 61%, respectively,” said Tibco CEO Vivek Ranadivé in a statement.

Tellingly, sales of SOA software – an area the company has bet heavily on – grew by just 5% year on year. Meanwhile, Progress Software, which also sells SOA infrastructure products, saw revenues grow an even scantier 4% in 3Q of the financial year, from $122 million to $127 million.

But this does not mean end-user organisations are not adopting SOA. A look at the middleware revenues of companies such as Oracle and IBM suggests that they are spending on SOA, but not necessarily with the independent vendors.

Share buy-backs

With the financial services sector in freefall, two IT giants took the opportunity to remind investors how reliable – and generous – they can be.

In September 2008, both Microsoft and Hewlett-Packard announced sizeable share buy-back schemes. Using surplus cash to buy their own shares at a premium is a way for companies to reward their investors, as it inflates the company’s stock price and the earnings per share.

Microsoft’s announcement that it would spend an eye-popping $40 billion on its own shares by 2013 represents the largest single buy-back pledge in financial history.

The buy-back scheme and an 18% increase in dividends succeeded in pushing its share price up – albeit by just 1%. Microsoft’s share value has fallen by 30% during the year, in part due to the failure of its bid to acquire Internet giant Yahoo!

Hewlett-Packard announced a comparatively modest $8 billion share buy-back plan, but it had little effect on the company’s stock price.

Share buy-backs and dividend hikes are not the kind of behaviour traditionally associated with technology companies. Typically, excess cash is spent on research and development to create future products; some observers saw Microsoft and HP’s move as an admission that they are not as focused on innovation as they were in the past.

But others saw quite the opposite story. With ample shares under their own control, these companies now have the stock options to tempt talented new recruits, of the type that might now be leaving the financial services industry in droves.

Further reading

FINANCIAL REPORT SEPTEMBER 2008
The importance of being global
Dell's global diversity drives a comeback, which Sun is keen to mimic. Plus, Novell earns its crust from open source and CA looks back on track

FINANCIAL REPORT AUGUST 2008
Decapitation spree hits IT sector
AMD and Alcatel-Lucent wave farewell to top brass after disastrous results, while VMware's new CEO rings the changes

FINANCIAL REPORT JULY 2008
Accenture's battle of many fronts
Global consultancy warns of coming competition from emerging economies. Plus, Oracle sees profit in consolidation, not software-as-a-service