Global Tech Review 2011

When Information Age cast its eyes over the IT industry’s annual performance at the end of 2009, it was an unsurprisingly grim picture. Businesses had slammed the brakes on IT spending in the wake of the credit crunch, and suppliers were lucky if their business grew at all, let alone in the 10% to 15% range that had defined the pace of the sector for the prior decade.

And while caution – and even pessimism – lingered on in 2010, it was a much better year for the IT industry.

Revenue growth rates, which in 2010 compared back to one of the industry’s darkest years, improved dramatically. The Information Age Index, which averages the revenue growth rate among the IT industry’s largest suppliers, went from -6.6% in January 2010 to 13.6% in December, an increase of 20 percentage points.

The industry is of course dominated by a handful of very large suppliers, and in 2010 many of these bounced back dramatically. Network equipment vendor Cisco, for example, saw revenues for the calendar year grow 19% to $41.6 billion, while chipmaker Intel’s sales shot up 24% to $43.6 billion.

Computer maker Dell enjoyed a similar rate of growth – revenues increased 18% to $60.7 billion – although it was helped along considerably by a number of recent acquisitions. Similarly, Oracle’s 38% revenue leap to $31.9 billion had more than a little to do with its acquisition of Sun Microsystems at the start of the year.

The sector’s two largest companies, Hewlett-Packard and IBM, whose breadth of offerings means they arguably represent the industry as a whole more than any others, were more sedate in their growth. HP grew sales by 10% year-on-year to $126.0 billion, while IBM grew by just 4% to $99.9 billion.

Larger companies whose 2010 revenue growth was decidedly underwhelming include security and storage giant Symantec, whose sales rose by 2% to $60.5 billion (an interesting data point for anyone still pondering the wisdom of its 2004 merger with Veritas) and systems integrator Unisys. Once one of the industry’s leading lights, Unisys’s star has faded considerably in recent years, and in 2010 its revenues contracted by 8% to $40.6 billion.

The fastest-growing segment of the IT sector in 2010 was ‘Development and integration’, as it had been in 2009. Companies in the segment averaged revenue growth rates of 24% for the year.

This may suggest that businesses invested in developing, integrating and modernising their existing software during 2010, although it may also be a result of the fact that the segment contains some of the smallest companies that Information Age tracks, meaning rapid rates of revenue growth are more likely. For example, the segment’s fastest-growing company, Unify Corp, is one of the smallest included in this analysis – it grew sales by 63% to $39.0 million.

The storage segment grew well, with storage suppliers averaging 16% growth, but this might have been higher had it not been for the widespread acquisition of independent storage vendors by IT giants such as HP and Dell. Information Age’s Effective IT Survey found last month that there was a sharp rise in storage virtualisation technology adoption in 2010.

Two companies in the storage segment are worthy of mention. One is Xyratex, a little-known provider of networked storage systems and the second-fastest-growing company in the IT industry in 2010. Its sales rocketed 85% to $1.6 billion during the year.

The other is Overland Storage. Despite the fact that it operates in the same technology space as Xyratex, Overland’s revenues fell the second most in the entire industry – by 19% to $62 million. All network-attached storage providers are not created equal, it seems.

The slowest-growing segment was IT services, with companies averaging revenue growth of 11%. This is by no means a sluggish pace, but that average would have been much lower had it not been for the Indian offshore outsourcers, famed for their rapid rates of growth.

It was the second-tier Indian suppliers that really shone through in 2010. Cognizant (headquartered in the US, but undeniably an Indian company) grew 40% to $4.6 billion, and HCL Technologies grew 26% to $3.1 billion. iGate, the segment’s fastest-growing company and another US/India hybrid, saw sales jump 45% to $280.6 million.

Fast-growing British companies included chip designer ARM Holdings, whose smartphone chip designs helped it grow revenues by 30% to £406.6 million

($631.3 million) for the year, and US-listed search specialist Autonomy, whose sales grew 18% to $871 million. Sage, the UK’s largest software company, saw revenues decline for the year, down 1% to £1.4 billion ($2.2 billion).

Which IT vendors were most profitable in 2010?

The various suppliers’ revenue growth rates give some insight into the kinds of IT products and services that sold well in 2010, and which companies successfully exploited the opportunity. But to see which suppliers were turning that growth into value for their shareholders, it is necessary to look at the profit numbers too.

Overall, the IT industry’s profitability improved during 2010. The average profit margin (net income as a proportion of revenues) was 7.1%, compared with 4.6% in 2009.

Interestingly, the most proportionally profitable of all the companies tracked was Novell. The systems and software vendor, acquired by private equity-backed Attachmate in November 2010, has flagged financially for many years, and yet in 2010 it posted a combined net income of $357.9 million. This was equivalent to 44% of its $811.9 million revenues for the year, and a substantial improvement on its $221.0 million loss in 2009.

The reason for this miraculous turnaround was not a radical improvement in Novell’s operations, however, but a single $302 million payout in the final quarter of the year, money it had previously set aside for taxes.

Just behind Novell in the profitability stakes were CheckPoint, the Israeli security company that topped the chart last year, and two British companies – the aforementioned Autonomy, whose net income rose 18% to $239.4 million (27% of sales), and Micro Focus, the Newbury-headquartered application modernisation and development tools vendor, whose net income increased 13% to $112.4 million (28% of sales).

In absolute terms, the single biggest profit made by any IT company was software giant Microsoft’s $16.5 billion net income. Also the sixth-largest profit proportionally, this shows that while many believe the company has lost its dominance of the sector in terms of technology, Microsoft still leads the industry when it comes to profit.

As for the biggest loss-makers, the chart was topped by e-learning tools vendor SkillSoft. The Irish company underwent some radical changes in 2010, agreeing to be bought out by a group of private equity firms in February. SkillSoft’s holding company went on to report a net loss for the year of $75.7 million, equal to 31% of its $242.7 million revenues.

The least profitable segment was communications and networking. Companies in the segment averaged a net profit margin of -1% for the year.

Networking equipment vendor Ciena Corporation was both the fastest-growing company in the whole industry (revenues rose 89% to $1.2 billion) and the second-biggest loss-maker – its $333.5 million loss representing 60% of revenues. Both those statistics relate to the company’s acquisition of Nortel’s optical networking business in November 2009.

There was no such excuse for business Internet service provider Level 3 Communications, storage networking equipment vendor Emulex or Networking Equipment Tech Inc, all of whom were among the top ten biggest loss-makers.

Why did so many networking vendors struggle to turn a profit in 2010? The reason may well be the continued dominance of the segment by networking giant Cisco, which earned a tidy $6.0 billion net income in 2010.

Surprisingly, IT services was among the most profitable segments. This is an area where margins have been squeezed in recent times, as the entry of offshore providers to the market has placed competitive pressure on pricing. However, in 2010 IT services providers averaged a net income of 9%.

One possible explanation for this is that IT services providers have traditionally employed a number of staff to sit “on the bench”, the extra capacity allowing them to add new contracts. However, in the wake of the credit crunch, many providers cut their staffing levels drastically. They are therefore now operating more leanly and profitably. How long this can last and whether it affects their ability to grow remain to be seen.

NEXT 2010’s biggest IT industry acquisitions

In 2009, mergers and acquisition activity in the IT industry slowed down significantly. This was due to a mixture of factors: economic uncertainty meant that potential acquirers were reluctant to make bold investments, while the weakness of the markets made companies that might otherwise have sold up feel undervalued.

In 2010, the industry made up for lost time. There was both a high volume of acquisitions during the year and a significant number of megadeals. There were, for example, 16 deals worth more than $1 billion, compared with ten in 2009.

IBM was an especially keen acquirer during the year, making at least one notable purchase every month. Its most expensive acquisition was that of data warehousing appliance vendor Netezza, which set IBM back $1.7 billion in September, followed closely by its $1.4 billion purchase of integration services provider Sterling Commerce in May.

Hewlett-Packard was a less frequent acquirer, but it was certainly not afraid to put its hand in its pocket. The company bought its way into the mobile operating system market in April by acquiring ailing device-maker Palm for $1.2 billion, and shelled out $2.4 billion for storage system vendor 3PAR following a protracted bidding war with Dell.

The single biggest deal of the year was Intel’s acquisition of security vendor McAfee (still pending regulatory approval). The $7.7 billion acquisition was emblematic of the integration of the security sector, traditionally one of the more independent corners of the industry, into the mainstream. Others examples of this include HP’s purchase of ArcSight and Fortify Networks.

As it announced the McAfee acquisition, Intel said it was motivated by the need to integrate security into IT systems at the processor level. There is certainly an argument that if security is to become embedded into other systems, then security vendors must themselves become embedded. But there is another, more commercial, cause for this integration too: the security market is all but saturated, and consolidation is now inevitable.

A generation of storage virtualisation companies was also assimilated by the major vendors in 2010. As discussed above, storage virtualisation was one of the few areas of technology to see a marked uptick in adoption in 2010, and the large vendors clearly decided it was a commercial opportunity they needed to own. After its bid to acquire 3PAR was thwarted, Dell went on to buy storage virtualisation vendors Compellent and Ocarina Networks, while EMC picked up ‘scale out’ network-attached storage supplier Isilon Systems for $2.3 billion.

The largest deal by a European company was SAP’s $5.8 billion acquisition of Sybase, whose mobile platform and in-memory database technology immediately became the twin spearheads of the German application-maker’s innovation strategy. The largest European company, or rather part thereof, to be acquired was German chipmaker Infineon’s wireless component business, which Intel took off its hands for $1.4 billion.

If 2010 was a strong year for acquisitions then 2011 may prove to be even better. As market conditions improve, suppliers who want to sell up will find more amenable offers on the table. And, as Bruce Richardson, chief strategy officer at ERP vendor Infor and former chief analyst at AMR Research, told Information Age in November 2010, “there are more companies up for sale now than there were in the whole time that I was an analyst”.

As for the IT industry’s overall financial performance in 2011, the critical question is whether suppliers settle back into the circa 10% rate of growth they enjoyed for most of the 2000s or, as some predict, that the industry is faced with a new, less expansive, economic reality. The answer to that question will have a profound impact on suppliers’ long-term strategic planning, which in turn affects which products and services are available on the market.

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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