Signs of decline

When analyst company Gartner explained its revised IT spending projections for 2009 in a webinar in March, it crystallised the mood of the industry. And that mood is, unsurprisingly, gloomy.

While the hardware sector will see the steepest decline in revenues, there is bad news for all sectors. Gartner downgraded its projected growth for the enterprise software segment, for example, from around 7% to 0.3%.

That will come as no surprise for the applications, middleware and database software vendor Oracle, for whom that decline is already affecting financial performance.

Oracle grew its revenues by just 2% from $5.2 billion to $5.4 billion in the three months to the end of February, a disappointing result for a company that has enjoyed consistent double-digit quarterly revenue growth rates for several years.

But in both Gartner’s predictions and Oracle’s financial results, the falling numbers are accentuated by the strengthening dollar, meaning that the value of sales made abroad have eroded. Oracle said that had currency rates remained constant, quarterly growth would have been a robust 11%, not the anaemic result it posted.

Notwithstanding the fall in growth, the company’s net income held up: profits fell by 1% to $1.33 billion. But again, if the effect of currency fluctuations were removed, net income would have grown by 14%, Oracle executives point out.

Oracle was understandably cautious about the coming quarter. Revenues could do anything between growing 2% and shrinking 3% in its fourth quarter ending 31 May, it says.

But it is not time to feel sorry for Oracle CEO Larry Ellison just yet. Despite this sluggish revenue and income growth, the quarter saw the company achieve an operating margin of 36%, the highest third-quarter margin in its history.

Another first for Oracle was the announcement of a dividend for investors. This is unusual for a company listed on the growth-orientated NASDAQ stock market, and will be frowned upon by many in the IT sector who think companies should drive spare cash into new products. In this climate, however, investors will most likely appreciate the cash return.

The dividend payment sparked speculation that Oracle’s long run of acquisitions, that has seen it take in such companies as JD Edwards, PeopleSoft and BEA, may be drawing to a close, allowing the company to channel its cash elsewhere. But that was soon eclipsed by the resurrection of an old rumour linking Oracle with enterprise Linux vendor Red Hat.

Open source software was one of a few areas about which Gartner analysts have something positive to say – others are web conferencing, software-as-a-service and virtualisation. “Any technology that helps people cut their costs is gaining in appeal,” analyst Fabrizio Biscotti said.

In revenue terms, Red Hat’s financial results for its fourth quarter of 2009 lent support to that Gartner observation. Quarterly revenues were up 18% over the same period last year to $166.2 million.

Red Hat CEO Jim Whitehurst attributed much of this growth to renewal rates among customers using the advanced version of its Red Hat Enterprise Linux (RHEL) operating system in their rapidly expanding virtualised environments.

“This growth percentage is being driven by further adoption of virtualisation using RHEL Advanced Platform, as nearly half of the top renewal customers upgraded to or increased the number of RHEL Advanced Platform servers in their data centres,” he said.

But it was not all good news for the Linux house: the company’s quarterly net income fell by 27% to just $16 million.

Holding up

Gartner’s 2009 predictions for the IT services sector were perhaps the best of a bad bunch; the analyst company’s growth forecast for the sector was downgraded by just 2% to -1.7%. “Much of IT services spending relates to mission-critical services,” said Richard Gordon, Gartner’s head of global forecasting. “Spending on IT services can safely be cut only in moderation.”

However, consultancy services are the most vulnerable, Gordon added, as they often related to new projects, many of which have been postponed in light of the economic backdrop.

True enough, technology and management consultancy and outsourcing provider Accenture saw demand for its consultancy services shrink during its most recent financial period.

The company generated overall revenues of $5.3 billion during the second quarter of the financial year. Once converted into dollars, that represents a 6% decline compared with last year’s second quarter, although when reported in local currencies, it rose 3%.

It was specifically the pure management consultancy practice that saw slowing demand. “Technology consulting continues to grow, with increased demand for services related to IT infrastructure cost reduction, compliance, data security and data privacy,” said Accenture COO Steve Rohleder on a conferenace call for analysts.

And the company’s outsourcing business fared well too. “Demand for application outsourcing remained strong as clients seek opportunities for near-term cost reductions,” said Rohleder.

“We are also seeing demand in business process outsourcing, particularly in finance and accounting and procurement,” he added. “This demand, coupled with the increased activity we are seeing in the pipeline, clearly supports our view that there is an acceleration in outsourcing opportunities.”

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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