IT sector sees little respite from dire recent financial performance

Salesforce.com, the software-as-a-service CRM pioneer, grew its revenue by a recession-defying 20% in its third financial quarter, ending July 31 2009, to $316 million. The company added 3,900 new customers during the quarter, taking the running total to 63,000. It processed 15 billion customer transactions, up 30% from the same quarter of last year.

More importantly for the company, net income rose 110% from $10 million in the same quarter of last year to $21 million. That pushed the company’s operating margin up to 9.3% from 6.1% in the third quarter of 2008.

That alone is unlikely to persuade its doubters, which include Oracle CEO Larry Ellison, that the SaaS model can generate the kind of profitability to which the software industry is used. Still, the upward trajectory of its profit marks Salesforce.com out from the majority of IT companies – including Oracle, whose net income fell 8% year-on-year to $1.8 billion in its most recent quarter.

On a conference call for investment analysts, CEO Mark Benioff revealed where some of the margin improvements came from. “I am excited to report that our transition from proprietary Unix servers to open, standard Dell servers, is yielding some pretty amazing efficiency improvements,” he said. “Today all of our application servers and roughly half of our database servers are now running on Dell, and they are delivering price performance improvements of roughly 20 times our previously-installed Sun Solaris servers.”

That endorsement will provide scant reassurance for Dell itself. The computer maker’s second quarter revenues fell 22% year on year to $12.76 billion – its fourth consecutive quarterly drop in sales. Sales had picked up since the previous quarter, however, and Dell took that as sign that the worst is over. "We would expect some pickup in the second half” said CFO Brian Gladden.

Beyond that muted optimism, perhaps Dell’s only cause for celebration is rival hardware maker Hewlett Packard’s troubled financial performance. In its most recent quarter, ending July 31 2009, combined revenues fell by 2% to $27.5 billion. But the fall would have been greater had it not been for a 93% revenue increase in the company’s IT services division up to $8.5 billion that was, according to the company, “due primarily to the EDS acquisition” in 2008. Discounting that 93% increase, revenues would have been closer to $23.1 billion, a 17.5% drop.

It is also worth noting that in the second quarter of last year (the three months ending June 30 2008), EDS took revenues of $5.6 billion. So even if the entire 93% rise in revenues at HP’s IT services business was due to the addition of EDS it would represent an approximate 26% fall in the acquired company’s quarterly revenues (although this a not comparison of precisely the same time periods).

Aside from the services business, all divisions saw double-digit revenue falls (save its financing arm). Most damaging, perhaps, was the 20% revenue drop for the Imaging and Printing Group – historically HP’s profit engine – to $5.7 billion. Operating profit for the division fell 4% to $960 million. Revenue for HP Software fell 22% but operating profit rose 13% to $153 million.

Geographically, HP’s Europe, Middle East and Africa division saw the steepest revenue decline, down 12% to $9.9 billion. This was in part explained by currency fluctuations, but CEO Mark Hurd also commented that the signs of recovery seen amongst US customers have not yet been observed in Europe.

“The US is beginning to do some refresh work and you are seeing that show up in the numbers,” he said in an analyst call. “Things are still not as robust in Europe.”

Strength in services

Cementing the impression that services-based businesses have fared better through the downturn than technology suppliers, two IT services companies reported growing profits in August 2009.

European IT services and BPO firm Logica grew pre-tax profits to £24 million for the second half of its financial year, up from £12 million for the same period last year. The company reported revenue growth of 6% (after correcting for the number of working days) to £1.87 billion, driven in the main by a 10% boost in outsourcing revenues.

At the same time, Logica cut the total number of subcontractors it employs by 20%. Beyond the 1,900 redundancies it has already declared, Logica said there would be no more internal job cuts.

Meanwhile, US IT services and outsourcing provider Computer Sciences Corp (CSC) managed to grow net income by 5.6% to $131 million for its most recent financial quarter, despite a decline in revenues of 12% to $3.9 billion.

CSC’s commercial outsourcing division and managed services arm each saw revenue fall steeply: by 22% to $840 million and by 17.6% to $1.56 billion respectively. These were tempered, however, by a 1.7% revenue increase for the North American public sector division to $1.52 billion.

The company also announced its intention to acquire the Brazilian division of bankrupt US management and technology consultancy BearingPoint. CSC described Brazil as South America’s “largest, most important and growing market.” The IT sector saw little respite from its dire recent financial performance in August 2009. But one company’s results suggest the industry may be insulated from such disasters in future by the move to cloud computing

Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media (now Bonhill Group plc) from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The...

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