Decapitation spree hits IT sector

In July 2008, the most revealing financial stories in the IT sector came from some of the industry’s many double acts.

Once upon a time, chipmaker AMD was seen as David to Intel’s Goliath. But in the past eighteen months, it has looked less like a plucky challenger and more like an also-ran. Its most recent financial quarter, the seventh consecutive quarter in which the company has lost money, did nothing to improve that image.

The company’s revenues for the second quarter of its current financial year were $1.35 billion, a sizeable drop of 7% compared to last year’s second quarter. But that is barely the tip of the iceberg: the company managed to lose $1.19 billion during the quarter – almost everything it earned.

Much of that loss resulted from an $880 million write-down of the value of the graphics chipmaking units it acquired from rival ATI Technologies in 2006. That figure adds to the $1.6 billion ATI-related write-down that AMD incurred in December. It is fair to say, therefore, that AMD paid at least $2.5 billion over the odds for its ATI units.

But not all of AMD’s jaw-dropping losses can be attributed to this ill-fated acquisition. It also lost $269 million in plain old operational over-spend.

This disastrous performance proved to be the final straw for AMD’s directors, and CEO Hector Ruiz promptly resigned his post after eight years as head of operations. He is to be succeeded by company president Dirk Meyer.

Speaking in his outgoing analyst call, Ruiz said that among his responsibilities as AMD’s new executive chairman will be to “lead our initiative to break our industry free from the grips of an illegal monopoly.”

To do that commercially will take some kind of miracle. Intel, the owner of said monopoly – legal or otherwise – grew its second quarter revenues by 9% year-on-year to reach $9.5 billion while net income soared by 25% to reach $1.6 billion.

However, in the first piece of positive news AMD has received in a long time, the European Union filed fresh anti-trust charges against the chipmaking giant. “Intel has infringed EU treaty rules on abuse of a dominant position with the aim of excluding its main rival,” an EU statement said. Those charges might yet prove to be the rock in AMD’s slingshot.

Star-crossed lovers

A strikingly similar story panned out when Franco-American telecommunications giant Alcatel-Lucent reported its second quarter results.

The company reported a quarterly loss of €1.1 billion during its second financial quarter of the year – its sixth consecutive loss-making quarter. Revenues were €4.1 billion, down 5.2% from the year-ago quarter.

Again, losses derived mainly from write-downs. Alcatel-Lucent suffered an €810 million hit on the value of its CDMA division.

Those shocking financial results were accompanied by the resignation of both CEO Pat Russo and chairman Serge Tchuruk.

The idea behind the 2006 merger of what were at the time two industry-leading companies was to create $1.7 billion -worth of ‘synergies’. Two years and over 16,500 redundancies later, the market capitalisation of the combined Alcatel and Lucent Technologies has dropped by over $20 billion. It has yet to report a profitable quarter.

Niclas von Stackelberg, an analyst for German investment bank Sal Oppenheim said the resignations were “a public admission, if ever one was still needed, that the merger was a failure”.

Changes afoot

Another head to roll in July 2008 was that of Diane Greene, co-founder and now former CEO of virtualisation software vendor VMware. Greene was ousted shortly before the company reported results for the second quarter of its financial year.

But unlike AMD or Alcatel-Lucent, those results were not as disastrous as the timing of the CEO’s departure suggested.

Quarterly revenues for VMware were $456 million, a 54% increase compared to the previous year and not a bad showing by anybody’s standards. But investors have high expectations for VMware, and the company’s share price dropped by 15% when it announced that it expected only ‘modest’ revenue growth in the coming quarter.

Alongside these numbers, the company announced that it is to make its ESX hypervisor technology available for free.

The company insists the timing of this announcement has nothing to do with Greene’s departure, nor the release of Microsoft’s alternative hypervisor Hyper-V, and it has been part of the plan since before Greene left.

Whose plan it was, however, is a different matter. Still pulling the strings at VMware is storage giant EMC, which owns a majority stake.

That company is currently enjoying a strong financial performance. Revenues for EMC’s second financial quarter of the year were up 18% to $3.7bn, while profits rose 13% to $378 million.

In VMware, however, it faces a complex investment challenge. In order to deliver maximum value for its own investors, EMC must maximize the value of VMware shares. But what if that means selling it off?

Speaking on the company’s analyst call, EMC CEO Joe Tucci again resisted calls to spin the virtualisation company off completely. “Right now we’re going to focus on getting VMware business back on the right track,” he said. “It’s still on a great track, but we’ve got to get it back in its almost perfect track.”

Further reading

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

Overseas success for US IT giants
As US companies turn to the emerging economies to drive growth, in Europe Germany is providing interesting new opportunities, while France and the UK remain challenging markets

Profits squeezed in tech sector
SAP and EMC see profits decline. Meanwhile, Indian IT outsources receive a one year exension on their tax holiday

Pete Swabey

Pete Swabey

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

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