IT sector bites down on painful medicine

January 2009 was always going to be a nightmare month for most technology companies, as the weakness they warned of at the end of 2008 manifested itself in hard numbers and difficult decisions.

When companies reported their performances, the accompanying carnage was more shocking than predicted, with almost every day bringing news of big name IT company redundancies in the thousands. The lay-offs by industry bellwether Microsoft were probably most shocking of all.

Up until that point, the software giant’s solid performance was seen as justification
for the optimistic hope that the IT industry might come through the present downturn relatively unscathed.

In its second quarter of fiscal 2008, the company generated revenues of $16.63 billion, a year-on-year growth of just 2%. Microsoft’s legendary net income, meanwhile, fell by a painful 11% to $4.17 billion. But don’t feel too sorry for the Redmond, Washington company; that 25% net margin, means it still walks away with twice as much money as any other company in the industry.

Microsoft pointed to falling sales at its PC vendor partners as the source of its concerns. Client software, which includes operating systems, fell by 8% to $3.98 billion. Supposedly, this follows a slowdown in PC shipments (that has been confirmed elsewhere), but that explanation rather lets Microsoft off the hook for the unpopularity of its Vista operating system.

Nevertheless, the Client division was still eye-poppingly profitable with an operating margin of 74%.

That offers something of a contrast to its Business Software and Server & Tools divisions. Its Business division, which sells the Dynamics range of ERP software, saw revenue increase by a puny 1.3% to $4.9 billion, although margins remained at an incredible 64%.

Growth in the Server & Tools unit was more respectable at 15%, with revenues hitting $3.74 billion. Net margins were 40%.

The company tackled the slippage in overall profits head-on with the announcement that it is cutting 5,000 jobs (the company employs around 95,000 worldwide).

Reset baseline

While Microsoft is symbolically slimming, its partner Intel topped the month’s redundancy tally with the news that it is to let between 5,000 and 6,000 of its 83,000 employees go. The news shortly followed a precipitous fall in net profits in its final quarter of 2008, down 90% from $2.27 billion in 2007 to $234 million in 2008. That crash coincided with a relatively sedate revenue decline of 2% year-on-year, to $37.6 billion.

“The economy and industry are in the process of resetting to a new baseline from which growth will resume,” said Intel chief executive Paul Otellino. They are also testing CEOs’ abilities to put a positive spin on events, it seems.

Meanwhile, Intel arch-rival AMD delivered an uncharacteristic piece of good news, beating analysts’ predictions with its fourth-quarter financial results. That it achieved this with a 28% fall in like-for-like revenues to $1.12 billion and a $1.42 billion loss is testament to quite how low expectations are.

But redundancies were by no means restricted to US high-tech companies. Germany’s ERP giant, SAP, announced it was to reduce its 51,500 head count by 3,000 before the end of 2009.

The lay-offs, which the company expects to save it around €350 million, will “allow us to adapt to the tough market conditions and ensure the long-term competitiveness of the company,” said SAP co-chief executive Leo Apotheker in a statement.

That the company announced the redundancies at the same time as an 8% rise in revenue for its fourth quarter, to €3.49 billion, reveals quite how concerned it is about the fact that its software revenues fell 7%. Services revenues saved its blushes with an 8% rise, and helped push net income up by 13% to €859 million. SAP declined to provide a revenue forecast for 2009, saying that conditions were too uncertain to make predictions.

Elsewhere, applications infrastructure provider Citrix admitted it would be cutting some 400 jobs – around 10% of its workforce. In its fourth quarter, Citrix did manage to grow revenues, by 4% year-on-year, to $416 million, but profits simultaneously dropped by 5% to $60 million.

CFO David Henshall told an analysts’ call that the credit crunch was squeezing demand at both ends of the market. “Customers were hesitant to make large capital commitments, and on the other end of the spectrum the very small deals which tend to be related to employee growth [were also down],” he said.

The decision to axe a tenth of its head count must have been made all the harder for Citrix by the performance of its competitor in the virtualisation space VMware. That company increased fourth-quarter revenues by 25% year-on-year to $515 million, and its profits were up by 34% to $102 million. By the same token, however, Citrix’s troubles put paid to the hypothesis made by some that virtualisation is ‘recession proof’.

The real trend-bucker of the month was IBM, who despite a 6% year-on-year revenue drop in its fourth quarter saw quarterly profits grow by 12% to $4.4 billion.

The company attributed the revenue drop to currency fluctuations, and its profit hike to its strategy of focusing on its most profitable lines of businesses. Certainly, the company’s decision to sell off its PC division to Chinese manufacturer Lenovo in 2005 now looks prescient. That company issued a profit warning in January and, predictably, a plan to lay-off 2,500 employees.

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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