Questionable profits

Investors in the IT industry’s biggest names had reasons to be cheerful in October 2009. The rate of revenue decline among such companies slowed, albeit slighty, and many companies reported growing profit.

That said, the reasons for that growing profit might not be so positive. A significant cost of doing business for an IT company is paying commission to its salespeople. When there are fewer sales, the cost of doing business goes down and profit increases – in the short term. Of course, it also points to slower growth in future, as there will be fewer customers to charge for support.

This effect was seen in action in applications giant SAP’s third financial quarter. Despite the fact that its revenue fell 9% year-on-year to C2.5 billion during the three months ending 30 September 2009, SAP saw net income grow by 12% to C435 million during the same period.

But the signs for future success were not positive. Software revenues (application licence fees) fell 31% to C525 million. This follows software revenue declines of 40% and 33% in the previous two quarters.

That fall was balanced by a 14% rise in support revenue – SAP’s biggest earner – to C1.3 billion, and a 23% rise in subscription and other software-related services revenue, which includes sales of its SaaS offerings, to C64 million.
Computing giant IBM also saw profits grow during the third quarter of the financial year, despite a 7% fall in revenues to $23.6 billion.

The computing giant’s net income for the quarter grew by 14% to $3.2 billion. Excluding the first quarter of the current financial year, in which net income fell by 1%, IBM has enjoyed a two-year run of double-digit growth in net income.

CEO Sam Palmisano attributed the most recent quarter’s profit growth to the company’s “long-term strategic shift to higher-value businesses”.

Revenue was down in all segments of IBM’s business, but pre-tax income for its global technology services division – by far its largest – grew by 24% to $1.4 billion despite a revenue fall of 4% to $9.4 billion.
Another area of growing profitability for IBM was the company’s software business, whose income grew 21% to $1.9 billion on revenues that fell 2% to $5.1 billion.

However, global business services and the systems and technology unit – which includes its mainframe and server businesses – were both profit drains, with pre-tax income falling by 9% and 20% respectively.

The benefits of pessimism

Throughout the downturn, software vendor Microsoft has been one of the gloomiest in its business forecast. “We remain more cautious than most about the state of the world economy,” CFO Chris Lidell said in April 2009. “While we’d all like to think the economic recovery will be soon and painless, we unfortunately think it will be slow and painful.”

But now, that pessimism is beginning to look like a shrewd investor relations strategy. During the software giant’s first quarter of the financial year, combined revenues fell to $12.92 billion, and net income dropped by 18% to $3.6 billion year-on-year. The results triggered a 10% jump in the company’s share price, as they significantly outstripped the expectations of investment analysts. “The numbers were unbelievable,” one analyst told reporters.

The company rejigged its reporting structure for the quarter, creating a ‘Windows and Windows Live’ division. This replaces what used to be known as its Client division and includes the online component of its Windows offerings, previously part of its Online Services division.

In its inaugural quarter, this division was Microsoft’s biggest loss-maker, with revenues falling 40% to $4.3 billion. This figure included some presales for its Windows 7 operating system, which went on general release in October.
Revenues for the Server and Tools division actually grew by 0.5% to $3.4 billion. The Business division, meanwhile, saw revenue fall 21% to $4.4 billion.

Networking equipment manufacturer Cisco has taken the opposite tack to Microsoft, uttering positive remarks for the economy even as its revenue tanked. That approach also appeared to have paid off when the company announced results for the first quarter of its new financial year. When the company revealed a 13% year-on-year revenue decline, down to $9 billion for the quarter, it was rewarded with a 3% share price hike.

So underwhelming have year-on-year revenue comparisons become for most IT suppliers that many are now turning to quarter-to-quarter changes to paint a positive picture.

Hence chip manufacturer Intel’s announcement that the jump in revenues it experienced between the second and third financial quarters of its financial year – up 17% to $9.4 billion – was the steepest in 30 years.

The announcement was welcomed as a positive sign of the state of the IT industry, as chip sales are considered a lead indicator for adoption of all kinds of system.

However, the company’s quarterly revenue was still significantly lower than it was a year previously: down 10% from $10.2 billion.

The sequential revenue hike was driven by a 19% quarter-to-quarter revenue increase to $4.1 billion for the company’s mobility division. Intel estimated that its revenues would be around $10.4 billion in the fourth quarter of the year.

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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