More caution than optimism

Analyst firm Forrester has produced a profoundly optimistic report on the IT sector, suggesting that a strong recovery in the US could begin as soon as the fourth quarter of 2009 with double-digit growth tipped for Q1 2010 on the back of delayed capital investment.

Companies will restore purchasing levels, said principal analyst Andrew Bartels, as they begin to realise “that the recession is not as deep or as long lasting as they feared.”

That said, in the short term the IT industry’s prospect are perhaps worse than expected, and Forrester downgraded most of its spending predictions for 2009 itself.

The performance of Oracle, the software, applications and middleware vendor, was symptomatic of the recession. The company reported revenues of $6.9 billion for its fourth quarter of the financial year, a 5% drop compared to the same quarter of last year, but managing to produce a record operating margin of 48%.

This measure of operational efficiency, the highest in the company’s history, came in spite of a 13% plunge in license revenues to $2.7 billion and an drop in operating income of 3% to $2.9 billion, which Oracle blamed on the rising dollar.

Falling license revenues are usually an ominous sign foreshadowing reduced support revenues, but new license revenues are down for almost all software companies, thanks to budgetary freezes at most IT departments, and for once the causal link may not apply.

Nonetheless, Oracle’s results carried the scent of heavy cost cutting. The firm came under fire in early June from a trade union in France after announcing it would axe 1000 of its 17,000-strong workforce in Europe.

Oracle’s immediate fortunes are hard to predict. Pending regulatory approval, it is about to acquire Sun Microsystems bringing it into, among many others, the hardware industry. That will doubtless reshape both the company and the industry itself.

But on the analyst call following its results, Oracle CEO Larry Ellison gave hardware vendors a glimpse of what kind of competitor they are about to find themselves with, when highlighting the performance of its recently launched Exadata database appliance.

“The Exadata Database Machine is well on its way to being the most successful new product launch in Oracle’s 30 year history,” he said. “In a recent competitive benchmark, a (data warehousing vendor) Teradata machine took over six hours to process a query that our Exadata Database Machine ran in less than 30 minutes. They bought Exadata.” Teradata has since questioned this remark.

Perhaps an even more telling sign of the times was the fact that IT and management consultancy Accenture took a beating in its third quarter, reporting a revenue decline of 16% year-on-year. Combined revenues fell to $5.5 billion in the three months ending May 31 2009, with consulting work down 20% and outsourcing revenue dropping 9%.

The plunging performance of the company’s consultancy practice was the result of three factors, it said: a move away from large consulting contracts, customers postponing the decision to extend existing contracts, and pricing pressure in the market.

Outsourcing growth, meanwhile, “has slowed moderately overall due to the continuing shift to lower cost resources at a reduced price level [and] lower volume of scope expansions on existing contracts,” said chief financial officer Pam Craig.

Accenture’s profitability also took a tumble during the quarter. Operating income fell by 15% to $732 million. The company also attributed this decline to a “significant negative foreign-exchange impact”, a common complaint among multinationals these days.

Glimmers of hope

So far so gloomy. But there are corners of the IT sector showing rude health. Open source systems vendor Red Hat, for example, reported continued strong growth in its most recent quarter, further flattering the ‘enterprise open source’ model.

The company’s first quarter revenue grew by 11% to $174.4 million. That was driven by growing subscription revenues – 85% of the company’s total revenue – which was up 14% year over year and 7% sequentially.

“A reflection of the value we deliver is the strength of our renewals,” said CEO Jim Whitehurst in the company’s earnings call. “I’m pleased to report that for the fifth consecutive quarter all of our top 25 deals that were up for renewals not only renewed, but did so at a total value of over 120% of their original value.”

“Even in this economic environment, CIOs continue to reevaluate their overall IT architectures in order to better take advantage of state of the art solutions such as virtualisation, cloud computing and middleware,” he added.

Also bucking the trend was Research in Motion (RIM). The Blackberry maker saw revenue growth of 53% to $3.4 billion, and added 3.8 million more subscriber accounts during the quarter (up 65% on the same quarter last year).
However, much of this growth – 80% in fact – came not from enterprise customers but from individuals, which now represent half the company’s account base. But the company also noted encouraging growth in many geographical regions, particularly Latin America, the Middle East, and parts of Asia.

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