The IT sector is preparing for the worst

Part of a C-level executive’s job is to put a positive spin on even the most disastrous of financial results. This can often lead to hilarious feats of self-delusion. But listening to the IT sector’s leading lights in April 2009, one began to feel that they could perhaps be trying a bit harder

Typifying the bleak outlook characteristic of the industry last month was Microsoft. The software giant revealed that revenue for its third quarter of the financial year fell 6% to $13.7 billion. Net profit for the three months to March 31 dropped a substantial 32% to $2.98 billion.

Sales in the company’s client division, which sells the Windows operating system, fell 15% to $3.4 billion, while the Business Division, home of the Dynamics applications range and the Office desktop productivity tools, saw revenues fall 9.5% to $4.5 billion.

Bucking the trend, however, was the Server and Tools unit, where revenues grew by 7% to reach $3.5 billion.

But this did little to brighten the company’s gloomy outlook. “We remain more cautious than most about the state of the world economy,” said Microsoft CFO Chris Liddell. “While we’d all like to think the economic recovery will be soon and painless, we unfortunately think it will be slow and painful.”

Applications manufacturer SAP – which is rumoured to be in Microsoft’s acquisition sights after Liddell lined up a $3.75 billion loan – was no chirpier. The company’s combined revenue for its financial quarter ending 31 March was C2.4 billion, down 3% from the same quarter last year.

Even more distressing for the company, however, was the fact that software sales shrank by 33% year-on-year, from €622 million down to €418 million.

That steep fall was counterbalanced by flat services revenue of €1.7 billion. But the software sales shortfall is likely to foreshadow a decline in service revenue too.

Profit also fell, by 16% year-on-year to €204 million, gravely impacted by a €160 million ‘restructuring’ charge during the quarter, the company said. SAP announced in January 2009 that it was to reduce its 50,000-strong workforce by 3,000, which, it said at the time, would save it C350 million.

For the second quarter in a row, SAP declined to make a revenue forecast, so uncertain is it of its own prospects.

Bizarrely, it was left to Cisco, the company that saw the steepest decline in revenue, to restore some optimism to proceedings, albeit a distinctly modest variety of optimism.

The network equipment manufacturer revealed a 16.6% fall in revenues during the third quarter of its financial year, from $9.8 billion down to $8.2 billion. Profitability for the company fell even faster; net income dropped by 24% year-on-year to $1.3 billion.

But CEO John Chambers was nevertheless mildly upbeat. Speaking on a conference call for investment analysts, he implied that customer spending was expected to improve.

“For the first time in a number of quarters, many of our global customers are describing the business momentum in a different way,” he said. “They are seeing some stabilisation, a levelling out, as opposed to what has been over the last several quarters a continued deceleration in their business.”

Despite these remarks, Cisco clearly does not expect business to pick up that quickly. The company’s forecast for the coming quarter predicts revenue will fall between 17% and 20% year-on-year to around $8.5 billion.

There was some well-needed good news from the European IT market, with positive results coming from two European technology companies. Unfortunately, the first of these proved to be illusory.

UK-based accounting software vendor Sage saw revenues grow by 17% to £748.4 million in the last half of the financial year, but this was entirely due to the falling value of the pound.

If the company’s financial figures are corrected for currency fluctuations, revenues actually fell by 3% compared with the same period last year. Profit was also down 3% in the currency-corrected figures, to £159.3 million.

The good news from telecoms and data centre group COLT Telecom proved more substantial. The company almost doubled its profit in the first quarter of 2009 and reported a 32.7% increase in managed services revenue (to €37.3 million).

However, revenue growth in COLT’s primary product, its data telecoms division, was more sluggish, at 3.7% on the first quarter of 2008 to €199.7 million. Total revenue growth was 1.3% to €416.2 million.

Profitability was also on the rise for US-based virtualisation software provider VMware. Net income for the first quarter of its financial year was $69.9 million, up 62% from $43.1 million in last year’s first quarter.

Revenues, meanwhile, grew a modest (but in this context, impressive) 7% year-on-year to $470.3 million.

However, there were ill portents in the numbers: Licence revenues for the quarter fell by 13% to $257 million. This was compensated for by a 48% rise in services revenue, up to $213.3 million.

The company predicted that revenues will either remain the same or shrink in the second quarter of the financial year. “Due to the tough economic conditions, we expect customers will continue to keep a very tight rein on their IT spending, particularly new investments,” said VMware CFO Mark Peek.

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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