Applications Battlefield Mid-Year Scoreboard
- August 26, 2002
market has recently witnessed a number of high-profile announcements of
stalwart vendors in the enterprise applications space. Given the contrasting
nature of these announcements, from impressive to disappointing financial
performances on one hand, and from new acquisitions and/or job openings
to massive layoffs on the other hand, it becomes painfully obvious that
the overall picture largely consists of many shades of grey.
is a four-part note covering large and small ERP vendors, scoring their
progress during these unsettled times.
One discusses recent financial results of:
Two will discuss the Market Impact on Microsoft. Part Three will discuss
the Market Impact on IBM. Part four will cover the other ERP vendors,
CRM, SCP and make User Recommendations.
the end of July, Microsoft Corporation (NASDAQ: MSFT), the largest
software company in the world, announced its bullish plans to increase
research and development spending by about $900 million, or 20%, in the
fiscal year ending June 30, 2003. The company believes the long-term outlook
for the technology industry is bright despite the current pervasive pessimistic
general feeling, and that the investments it will be committing in the
coming year should help fuel its future growth. The company will therefore
increase its employee base by 5,000 during the coming year, an almost
10% increase over its current work force of 50,500. While large job cuts
have been the main theme of the industry in recent years and particularly
months, Microsoft's announcement is the biggest hiring move since the
boom days of the late 1990s.
also expects its R&D spending in the year will increase to $5.2 billion,
making it 16% of the company's revenue. It spent $4.3 billion on R&D in
the fiscal year ended June 30, 2002, during which year R&D spending was
down about a 2% from the previous year. A $900 million increase would
consequently be the company's largest one-year jump in R&D spending, and
the biggest percentage increase since a 27% gain in the year ended June
Microsoft's recent annual financial results, and some might even see the
signs that the worst of the economic slump may be over. Microsoft's revenues
for Q4 2002 were $7.25 billion, 10% up from $6.58 billion in Q4 2001,
with profits reaching $1.53 billion compared with only $65 million a year
ago. That becomes even more impressive bearing in mind the huge profit
figure took account of an after tax charge of over $800 million associated
with bad investments in the telecommunications space. Microsoft remains
indeed in a great shape as the sales of the Windows XP operating
system and other desktop software remain strong, as reportedly the company
increased its sales from corporate customers despite the overall slowing
in IT spending.
curb any premature optimism, IBM Corporation (NYSE: IBM), the largest
IT company in the world, on the other hand, reported profits of only $56
million in the second quarter ended June 30 compared with $2 billion for
the same quarter last year. However this figure does include charges of
around $1.5 billion covering the disposal of its hard disk business to
Hitachi, reorganization of the chip manufacturing business, and
costs associated with thousands of redundant jobs eliminations. IBM also
spent $1.8 billion buying back its own stock.
revenues for the quarter were down to $20 billion from $20.8 billion last
year, with diminishing sales across the board, with geographies and even
flagship divisions apparently feeling the pinch of the sluggish economy.
It should be noted though that whilst sales of hardware products were
down 16% to $6.7 billion (with significant downfall across almost all
series of servers and storage devices), software related revenues continued
to grow generating $3.3 billion, up 8%. To that end, the WebSphere
e-business platform related revenue was up 17% sequentially, and middleware
revenue was also solid, up 11% year over year. WebSphere, part of revenues
stemming from the CrossWorlds' acquisitio, doubled year over year.
The DB2 database did well too, growing revenues by 11% including
the Informix acquisition.
a nutshell, integration technology and services remain IBM's strong suit
and reliable performers even in a depressed market. The IBM Global
Services (IGS) business was somewhat static though, as it recorded
its second consecutive declining quarter with revenues down 1% to $8.7
billion, although it is still far and away the largest component in IBM's
arsenal accounting for about 44% of revenues.
at the end of July, IBM (arguably unexpectedly) announced it was buying
PricewaterhouseCoopers Consulting (PwCC) for a mere $3.5
billion in cash and stock (far less compared to the $18 billion Hewlett-Packard
(HP) had offered in 2000) from PricewaterhouseCoopers Consulting
(PwC), the leading tax and audit firm. PWCC will be merged into
IBM Global Services Business Innovation Services (IGS BIS)
division, which provides consulting, integration, and implementation services,
resulting with an immense consulting and services organization with about
180,000 employees worldwide. The acquisition consequently makes IGS about
a 30% larger than EDS and nearly three times as big as Accenture,
its nearest competitors based on 2001 revenues.
after weeks of speculation and layoff notices, IBM announced on August
14 that it will axe ~15,600 jobs globally, or around 5% of its global
workforce. IBM reported cutting ~14,200 jobs, the majority of which fell
on the IGS unit, with some workers also laid off in its servers and software
businesses. A further batch of layoffs dismissed ~1,400 workers from the
company's Microelectronics division, which manufactures semiconductors.
The company blamed the cuts on "a recent decline in corporate spending
on technology services." By the end of September, when most of the redundancies
are expected to take effect, IBM's workforce will have declined from 320,000
to around 305,000.
to the acquisition, the prospect of a current IPO for PwCC, which was
also to be renamed to Monday due to the need to distinguish itself
from its former auditing parent (see Andersen/Enron
Affair Precipitates "Big Five" Divorces) was becoming increasingly
uncertain. The acquisition follows the called off acquisition by HP in
2000, and an expected 2002 revenue of $4.9 billion, down roughly 27% from
2001. Segments of PWCC that do not fit into BIS, such as application management
services and outsourcing, will be merged into appropriate parts of IGS
(i.e., ITS and Outsourcing).
addition to the two IT giants, it was interesting, to watch major enterprise
applications vendors' recent financial reports. Once considered invincible,
Siebel Systems (NASDAQ: SEBL), still undisputed customer relationship
management (CRM) market leader, recently showed signs of rude awakening,
as it posted dismal second quarter figures. Net profit was $29.8 million,
a drop of more than 60% from a year ago, whereas Siebel's revenues for
Q2 2002 were $405.6 million, a 15% drop from the $477 million booked in
Q1 2002, and down 26% compared to a year ago. It was the license revenues
that proved to be the real concern for the market however, dropping 30%
sequentially from $246 million to $170.1 million — a drop of 41% compared
to a year ago, making license revenues drop greater than that experienced
by either Oracle or SAP and more than the industry average.
all of these problems mounting, Siebel resorted to a headcount reduction
of about 1,100 staff, which should take the total number of Siebel employees
down from 7,100 to 6,000. A sort of comfort was the fact that 200 new
contracts happened during the second quarter, 51 of which were for more
than $1 million, which was a slight drop versus 53 in the previous quarter,
and only 3 of which were for more than $5 million value, down from 12
for the previous quarter.
In terms of customer activity, 60 customers are now live on Siebel 7,
while less than 20% customers out of 3,500 are in the process of upgrading,
which is far below the 90% figure that the company initially predicted
would happen during the first year of the Siebel 7 product launch (see
By The CRM Throne Aspirants, King Siebel Delivers "The Magic No.7").
an incomparably bleaker and longer predicament (see i2
Bleeds In Shark-Infested Waters) is another erstwhile high-flying
supply chain management (SCM) niche leader, i2 Technologies (NASDAQ:
ITWO), which posted total revenue of $119.6 million for Q2 2002, a significant
decrease of 29% from Q1 2002 and a sharp 52% decline from the $249.2 million
of a year ago. More ominously, license revenue took a sharp knock, dropping
a whopping 75% to $26.1 million in Q2 2002 from $105.8 million a year
ago. To rub more salt in the wound, only $10 million of it was due to
new license revenue, with the remaining $16 million being recurring revenue.
With an internecine competitive environment, i2 will consequently cut
30% of expenses, including a significant portion in head count (~1,400)
coming only 18 months after its first major layoff when a quarter of its
staff was sacked.
affected as well, the enterprise resource panning (ERP) market leaders
have been seemingly cushioning the blow for the time being. Cutting its
full-year sales forecast unexpectedly and posting the first net loss in
its memorable recent history of EUR 235 million last month, SAP AG,
(NYSE: SAP), the largest enterprise applications provider, has also shown
its vulnerability. Total revenue for 2Q 2002 was down 4%, to EUR 1.78
billion, while license revenue was down 23%, to approximately EUR 496
million, and operating income fell by 23% compared to Q2 2001. The Americas
region contributed the most to the top-line decline, with revenue down
12%, while the Europe, Middle East, and Africa (EMEA) region was up 1%,
and Asia/Pacific down 5%.
has also taken a non-cash write-down of more than $400 million of its
minority investments in technology companies, with approximately $312
million related to its 20% investment in long ailing Commerce One.
In response to the difficult market conditions, SAP is sharply curbing
costs by cutting marketing expenditures, reducing or eliminating contract
and third-party development expenses, realigning internal resources, and
freezing all hiring for the time being. However, unlike a vast majority
of other software companies, the company did not hint any across the board
staff percentage layoff. Also, at a time when many software vendors are
looking to their customer base to ride out the tough market conditions,
SAP has been successful with attracting new customers.
the recent disappointing earnings from its peers, PeopleSoft (NASDAQ:
PSFT), one of the leading business applications providers, has demonstrated
a relative strength with its Q2 2002 earnings. Although total revenue
and license revenue were down for the quarter, its operating income was
at least up 5% from the same quarter last year, while its average deal
size rose slightly contrasting the current market trend of prospects shying
off from mega deals of the past. Still, total revenue for Q2 2002 dropped
11% to $482.2 million compared to $544.5 million a year ago, while license
revenue declined 20% to $131.9 million. Like SAP, PeopleSoft currently
has no plans to reduce headcount.
concludes Part One of a four-part note scoring the ERP vendors in these
difficult times. Part Two will discuss the Market Impact on Microsoft.
Part Three will discuss the Market Impact on IBM. Part Four will cover
the other ERP vendors, CRM, SCP, and make User Recommendations.