Enterprise Applications Battlefield Mid-Year Scoreboard

Enterprise Applications Battlefield Mid-Year Scoreboard
P.J. Jakovljevic - August 26, 2002

Event Summary

The 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.

This is a four-part note covering large and small ERP vendors, scoring their progress during these unsettled times.

Part One discusses recent financial results of:

• Microsoft Corporation
  
  
• IBM Corporation
  
  
• Siebel Systems
  
  
• i2 Technologies
  
  
• SAP AG
  
  
• PeopleSoft

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.

Microsoft Corporation

At 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.

Microsoft 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 30, 2000.

Enter 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.

IBM Corporation

To 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.

The 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.

In 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.

Therefore, 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.

Still, 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.

Prior 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).

Siebel Systems

In 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.

With 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 Besieged By The CRM Throne Aspirants, King Siebel Delivers "The Magic No.7").

i2 Technologies

In 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.

SAP

Although 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%.

SAP 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.

PeopleSoft

Considering 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.

This 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.