The IT industry’s long road to recovery

This month’s Information Age Index suggests that – in aggregate at least – the IT industry’s bad luck may finally be running out. However, a number of recent performances show that some vendors are still suffering from the state of the economy.

Hewlett-Packard, for example, suffered the steepest quarterly revenue decline since the economic crisis began in the final quarter of its financial year. For the three months up to the end of October 2009, HP’s revenues fell 8% to $30.8 billion.

With the exception of its IT services division, all units of the company saw declining revenues and profits that either shrank or stayed the same.

Not for the first time, however, HP’s services arm was its saving grace. Revenues for that division reached $8.9 billion during the quarter, up by 28% compared with the same quarter of fiscal 2008, and profit rose by 50% to $1.4 billion.

Those figures are all the more impressive given that for the first time year-on-year comparisons are now tracking back to a time when the company was already including figures for EDS – the IT services giant it acquired in the first half of 2008 – in its financial reports.

Thanks to its services business, HP drove overall net earnings to $2.4 billion despite its precipitous revenue decline.

The EDS and HP employees laid off after the acquisition may find this buoyant profit performance hard to swallow. However, it is becoming increasingly difficult for technology companies like HP to portray their profit lines as proof of success, as they are primarily driven by two factors.

The first of these is a lack of new sales, which saves the company from having to pay out commission to its sales force but also prefigures slow business in future.

The second mechanism is of course ‘restructuring’, otherwise known as redundancies. The downturn may well have given IT suppliers the impetus to become leaner, meaner organisations, but it will almost certainly also limit their capacity to capitalise on demand as it returns.

A more encouraging sign for HP and its investors will be the fact that its fortunes are improving in China, a market that many suppliers hope will be the life raft that helps them survive the turmoil in Western economies.

HP’s revenues from that country grew 20% during the quarter. The personal systems group, ailing in other locations, grew revenues by over 40% in China, the company said.

Also making the most of China’s growing appetite for PCs and laptops was Lenovo, the Chinese hardware manufacturer. The company grew revenues in its home market by 9% to $2 billion. However, slow demand in the US and Western Europe meant that, in total, Lenovo’s revenues fell by 5% to $4.1 billion.

The company nevertheless insisted that things are looking up. “We are starting to see positive signs that the worldwide economy is improving, and we will continue to focus on our long-term goal of growing our business profitably worldwide,” said Lenovo chairman Liu Chuanzhi.

Europe’s IT services industry

Hewlett-Packard’s services division may be propping up its business right now, but not all IT services suppliers are enjoying the same success, as the recent financial performance of Europe’s IT services industry demonstrates.

Atos Origin revealed that revenues for its third quarter of the financial year fell by 5.6% to €1.2 billion ($1.7 billion) compared to the previous year.

Like most companies in this space, Atos Origin’s consulting practice has been hit hardest by the downturn. Revenue for its consulting and systems integration division fell by 16.7% to €488 million. That was counterbalanced by a 3.6% increase in managed services revenue to €740 million.

Encouragingly, perhaps, Atos’s star market for the quarter was the UK, where revenues grew by 12% to €234 million. In France and Benelux, meanwhile, Atos saw revenues drop by 6% and 18% respectively.

A similar story unfolded for Capgemini. In its third financial quarter of the year, the French IT services provider saw revenues fall by 9% to €1.9 billion ($2.7 billion).

More than many of its European peers, Capgemini has a significant business in North America. That might have been an advantage, as some indicators point to a faster recovery in the US than in Europe. In this case, however, the opposite proved true – a loss of business under one of Capgemini’s US contracts brought about a 2.7% decline in outsourcing revenues, the company said.

The company did not break out the performance of its individual units, but it did say that revenue losses across its managed services, consulting and local professional services (i.e. ‘onshore’ outsourcing) divisions averaged 12.5%.

Two more French IT service providers continued the trend. In their most recent financial quarters, Groupe Bull revealed an 8.1% decline in revenues to €221 million ($316 million), while GFI Informatique saw sales decline by 6.3% to €169 million ($242 million).

Grim showings all round, but these companies could be forgiven for thinking that the worst may be behind them. November 2009 saw organisations including Swiss insurer Zurich, UK energy supplier BP and Cardiff County Council sign significant IT services contracts during the month – could this be the beginning of the end of the services sector downturn?

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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