Overseas success for US IT giants

The cautious outlook of American businesses continued to impact the technology industry in May 2008, with the result that US vendors are increasingly looking to their operations outside the States to drive growth.

Take computer manufacturer Dell, for example: a company that has of late struggled to stem a gradual decline in revenues and market share.

In 2007, following the ejection of erstwhile CEO Kevin Rollins, the company announced a five-point plan to restructure its organisation and redefine its business model. Most significantly, it decided that it would sell hardware through third-party vendors, an explicit departure from the direct sales model upon which it built its name.

One year later, the Austin, Texas-headquartered company has at last seen signs of a turnaround. For the first quarter of its current financial year, the company booked revenues of $16 billion – a 9% rise from the same quarter of the previous year. Net profits were also up, growing by 4% to $784 million.

But that success was not driven in its own back yard. Quarterly revenue for the commercial operation in the Americas region grew by just 0.6% year on year, hovering around $7.2 billion.

Instead, it was the emerging economies that Dell had to thank for its return to form. By getting its stock in stores across China and India, where revenues grew by 33% and 52% respectively, Dell has finally connected with the markets where it has previously lagged behind vendors such as Hewlett-Packard and Lenovo. And for the first time in its history, the proportion of revenue that Dell took outside the US was more than 50%.

Meanwhile, business activities on its home turf are as turbulent as ever. In May, a New York court found the company and its financing division guilty of false advertising and fraud, a ruling which – if upheld – is expected to cost the company dearly in compensation charges.

One company even further down the road to global diversification is Hewlett-Packard. In its second financial quarter, the computer industry leader grew revenue by 11% to $28.3 billion. Again, the upswing was largely driven by sales abroad. Revenues at its US business rose by 4% to reach $11.1 billion, but its EMEA and Asia-Pacific arms both saw four times that growth (taking revenues to $11.9 billion and $5.2 billion respectively). “With 70% of revenue now coming from outside the US, we benefited from robust demand in emerging economies,” said CEO Mark Hurd. “The company’s financial outlook demonstrates its strength in the global market place.”

A slightly different pattern was evident at HP’s rival in IT services, Computer Sciences Corporation, in its fourth financial quarter. The company, which is best known for its large government IT contracts across the world, reported revenue of $4.48 billion in its fourth quarter – up 11% from the same period in 2007. The cost of long-term restructuring adversely impacted profits, which fell by 28% to reach $187 million for the quarter.

Unlike Dell, for example, CSC’s growth was driven by the US market. Its US commercial division saw revenues grow by 20% during the quarter to $1.15 billion. But it expects that to change. “The US is growing but not as aggressively as the other areas,” said Michael Laphen, CSC’s CEO and chairman, in a conference call following the announcement of the results. “We are seeing good activity in Europe and Asia.”

European dynamics

US-based companies tend to treat Europe as a whole, at least in their reporting. But recent financial reports from a pair of European IT services companies gave a more detailed view of dynamics within the continent.

Anglo-Dutch IT services provider Logica, for example, saw revenues grow by just 4% in the first quarter of its financial year, from £768 million to £856 million. It was Logica’s division in Germany that saw the most significant growth. German revenues were up 11% to £50 million. In the UK, quarterly revenues were flat at £175 million.

A similar story was seen at French IT services company Steria. The company ostensibly grew revenues by 38% to €438.5 million during its first quarter, but much of that was related to its acquisition of UK outsourcer Xansa. Pro-forma revenue was flat.

In fact, Steria’s revenues in the UK and France fell by 4% and 2% respectively, down to €193.6 million and €129.8 million. In Germany, though, revenues grew by 14% to €58.4 million.

It is tempting to see the success that IT services companies are having in Germany as a direct result of the country’s economic performance and softening attitudes towards outsourcing. In the first quarter of 2008, the German economy bucked the global trend and grew at twice the EU average rate.

But this view is contradicted by a sharp revenue drop at T-Systems, the IT services division of the country’s incumbent telco, Deutsche Telekom. The services unit saw revenues fall in its first financial quarter by 10.4% to €2.6 billion, although it also grew operating profits. The revenue decline was driven by a sharp decline in domestic contracts, which themselves dropped by 13%. International revenues actually grew by 3%.

So while European IT services companies appear to be struggling in Britain and France, in Germany the fragmentation of a market once dominated by state monopolies is creating new opportunities.

Further reading

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

Oracle’s financials disappoint investors looking for a hero Meanwhile, Red Hat proves the value of open source. Plus, IT companies flee London markets

Pete Swabey

Pete Swabey

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

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