Varying accounts

Nobody was expecting the month of October to bring much good news on the financial front. The best that could be hoped for from the IT vendors that reported their financial results during the month was some sign that the sector might not be as badly affected by the global economic meltdown as some others.

At first glance, the numbers published by many IT giants in October might have signalled the recession was already biting hard. That’s how things looked at Sun Microsystems.

The server, Java and open source software vendor has been struggling to retain growth and profitability for several years now, but when it warned investors a week in advance that its first quarter financial results would be ‘worse than expected’, Sun delivered.

The company reported a lost $1.9 billion during the quarter on revenues, down 7% to $2.9 billion. Most of that loss derived from a $1.45 billion write-down on previous acquisitions. In other words, companies that it bought in the past are now – perhaps in light of the changing economic environment – worth about $1.5 billion less than it paid for them.

However, the wider issues was one of demand, says Sun – or the lack of it. Product sales were down 10.9% compared to the previous year, at $1.76 billion. “The economic downturn continued to weigh on our customers, especially those that contribute to our traditional high-end businesses,” Sun’s CEO and president Jonathan Schwartz said.

While the downturn is certainly a factor, Sun’s troubles cannot be explained away so easily. At a meeting with Sun’s executive management team after the results were announced, shareholders let their thoughts be known.

“Why is Sun falling while HP and IBM’s revenue continue to increase? How long can you be in freefall and still survive?” they asked.

Richard Gardner, a Citigroup analyst that tracks the company, reflected that something has to give. “The probability of a transformational event – divestiture, sale or management change – is rising,” he noted. And that may be just what it takes to bring Sun out of the doldrums.

Profit squeeze

Application maker SAP’s numbers were less problematic, but still challenged the viewpoint that IT vendors are impervious to recession.

Although the company’s third quarter revenues were up 14%, from 2.4 billion a year ago to 2.8 billion, profits taken were under pressure. The company’s net profit fell 5% from 408 million in the same quarter of last year to 388 million.

The company said that it would downgrade future profitability forecasts blaming, of course, the ‘uncertain economic situation’.

More telling than SAP’s numbers, perhaps, was an internal memo outlining its own cost-cutting measures, which contained the following revealing instruction: “We will review all planned investments in IT equipment, hardware, software, facilities and company cars, as well as internal IT projects. Do not order any new equipment at this time.”

The fact that even SAP is responding to economic uncertainty with an IT spending freeze, surely a tactic it would be reluctant to recommend to customers, reveals that there is more damage to the IT sector on its way.

Fighting the tide

Some companies, meanwhile, including some that are seen as ‘bellwethers’ of the industry, don’t seem to have recession anxiety. IBM, for example, reported a 20% growth in net profits and a 5% revenue rise in its third quarter to $25.3 billion, up 5% from the previous year’s quarter, just slightly below analysts’ expected figure. The strengthening of the dollar against foreign currencies during the past three months was seen to have adversely impacted the dollar value of IBM’s international takings.

In a call with analysts following the publication of its results, IBM CFO Mark Loughridge explained why he believed it had so far avoided the worst of the credit crunch. For one, he said, only 7% of the company’s revenues were derived from the US financial services industry. Furthermore, of the 20 major institutions most adversely affect by the credit crunch (Lehman Brothers, Northern Rock, etc) only seven were IBM customers, he said.

So IBM has been fortunate to remain relatively unscathed from the past three months’ financial disasters. But it will need to stay lucky if it is to perform just as well while the financial malaise spreads into other industries and geographies.

Microsoft is another company whose performance is seen as a lead indicator for the software industry’s health. And it is remaining strong in the face of adversity.

The company reported second quarter revenues of $15.1 billion, up 9% from the same quarter of last year. The strong performers among its divisions were its Server and Tools division, where the release of new versions of its Windows Server and SQL Server products drove sales up 18% to $3.4 billion, and the Business Division, home of Office and the Dynamics range of applications, where sales grew by 20% to $4.9 billion – a staggering $3.3 billion of which was profit. Microsoft’s overall profits were $4.4 billion.

Although the company acknowledged troubles ahead by downgrading expectations, it also argued that its breadth of offerings put it in a good position to withstand what it predicts will be a ‘mild to deep’ recession.

“Microsoft is uniquely positioned to help our customers save money through supplier consolidation,” said COO Mike Turner.

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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