IT spending resurgence rolls on

In the 18 months before it was eventually acquired by software giant Oracle, systems vendor Sun Microsystems was disastrously loss-making. In October 2008, the company recorded a loss of $1.7 billion for a single financial quarter.

So when Oracle announced in June 2010 that Sun contributed $400 million to its $2.4 billion net income during the first full quarter since the acquisition, it was met with some surprise.

Of course, this profit comes at a price. Oracle has introduced a number of measures to turn Sun’s business around, such as cutting out the channel partners in its 4,000 most valuable customer engagements and selling to those customers directly instead. But despite the claim CEO Larry Ellison made in January 2010 that “we’re not cutting Sun to profitability, we’re growing it to profitability”, job cuts are also part of the integration strategy. An SEC filing by Oracle in June revealed that it plans to incur between $550 million and $650 million in ‘restructuring’ charges as a result of the acquisition, suggesting significant redundancies in future.

Oracle’s overall revenue for the three months ending 31 May 2010 was $9.5 billion, up 35% from the same period last year. Of course, this was primarily the result of the addition of Sun. But there was organic growth too – sales of new software licences grew 14% to approximately $3.1 billion, while support fees rose 12% to $3.4 billion.

Recovering demand for enterprise software could also be detected in Red Hat’s financial results. The poster child for commercial open source software reported revenues of $209.1 million, up 20% from the same period last year, while net profit grew 30% to $24.1 million.

The company revealed that it had won a number of large new contracts during the quarter, and saw a 30% increase in services revenue. “This year has been about consistent execution in the most difficult economic conditions in our lifetime,” said CFO Charlie Peters. “We managed costs carefully while continuing to invest significantly.”

Red Hat’s stock price has more than doubled in the past year, but it is not just the investors that had cause for celebration. An SEC filing by the company revealed that CEO Jim Whitehurst’s salary rose 30% to $9 million during 2010.

While Red Hat and Oracle reported their strongest growth rates for some time in June, business started to improve for both companies some quarters before then. This has not been true for IT services and consultnacy provider Accenture, which has watched much of the IT industry bounce back while its own revenues continued to decline. But that came to an end in June 2010 when the company reported an 8% sales upswing to $5.98 billion in its third quarter of the financial year. Net income for the period also increased, by 5% to $563 million.

Accenture’s resuscitation can be traced to its software products and financial services divisions, where revenues grew by 14% and 12% respectively. The comeback was rather more muted for the company’s telecommunications and high-tech segment – which sells consultancy and services to telcos – with revenues creeping up by just 2% to $1.18 billion. Accenture’s US division remained its revenue stronghold, with sales in the region rising 11% to $2.51 billion, while EMEA and Asia-Pacific both registered single-figure growth.

The company was cautious in its forward-looking statements. “While recovery in the economic environment remains uneven, we continue to see increasing demand for our services,” said CEO William D Green in a statement.

Under the shadow

IT vendors that operate in the consumer space suffer the unenviable burden of constant comparison with Apple, the PC and smartphone manufacturer that seems to have defined a cultural era. So it was in June 2010, as two companies reported phenomenal growth but seemed to have their market perception defined by the fashionable device maker.

One was document creation and management software vendor Adobe. In the second quarter of its financial year, the company boosted year-on-year sales by 34% to $943 million. It attributed the jump in revenues to the latest refresh of its software package Adobe Creative Suite, which was released during the quarter. Net income at Adobe hit $148.6 million, up from $126.1 million in the year-ago quarter.

The company’s platform segment, which sells the Flash multimedia system, among other products, represented just 5% of the company’s revenue. Nevertheless, the company’s share price has fallen 13% since Apple CEO Steve Jobs announced that Flash would not be supported on its mobile device.

Apple has also been a thorn in the side of BlackBerry maker Research In Motion, whose investors seem pessimistic about its ability to stave off competition from, among others, the iPhone.

Despite adding approximately 4.9 million net new subscribers in its last quarter and growing revenues 24% year-on-year to $4.24 billion, the company’s share price fell 11% after the results were announced. “[Wall] Street is clearly concerned about RIM’s competitive position and future in the smartphone market,” wrote one investment analyst. He added that these concerns are “almost entirely without merit”.

Peter Done

Peter Done is managing director of Peninsula Business Services, the personnel and employment law consultancy he set up having already built a successful betting shop business.

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