In-Depth

Networking, ERP: IT is Spending Again

Two down-on-their-luck technology sectors have been buoyed by economic recovery; other segments aren't quite so lucky

• By Stephen Swoyer
• 05/18/2004

Take networking giant Cisco Systems Inc., which those of us with memories that stretch back to 2001 will recall once wrote-off billions of unsold inventory. For the third quarter of Cisco’s 2004 fiscal year, however, the company grew its revenues by 21.7 percent from the year-ago quarter—its third straight quarter of growth (see http://www.tcpmag.com/news/article.asp?EditorialsID=546).

“This is the first major growth adjusted for normal seasonality we’ve seen in the U.S. enterprise and commercial markets we’ve seen in a very long time,” said Cisco President and CEO John Chambers during a conference call with analysts.

Similarly, Cisco competitor Juniper Networks Inc. also posted strong Q1 2004 results, reporting a near-30 percent rise in revenues from the year-ago quarter.

So does the burgeoning economic recovery have legs? Cisco seems to think so—although Chambers tempered his general optimism about the recovery with “healthy paranoia.” “CEOs are beginning to be more optimistic not just about the economy, but also about their own industries and companies. As expected and hoped for, we are beginning to see them loosen their own purse strings on spending,” he said. “[We] could see a return to cautious spending if [global] events were to deteriorate, although based on what we see at the present time, we do not view this as a likely scenario.”

Last month, German ERP giant SAP AG announced strong earnings, including a five percent year-over-year increase from Q1 2003. SAP was particularly strong in the U.S. market. More encouraging still, said SAP officials, was the fact that the company notched its first quarterly growth in new license revenue in nearly three years.

ERP Growing, Too

Next to networking, ERP was one of the sectors hit hardest by the economic downturn, yet the recent financial performance of SAP and its competitors has been somewhat encouraging. In its Q3 results for fiscal year 2004, for example, Oracle Corp. notched eight percent year-over-year revenue growth. CRM giant Siebel Systems posted Q1 2004 net earnings that were 600 percent greater than the year-ago quarter, although revenues actually dipped by one percent during the same period. Even PeopleSoft, under siege from Oracle, posted Q1 2004 revenue and profits that were encouraging, if just shy of the expectations of analysts. In fact, PeopleSoft’s first quarter revenues were buoyed by a 62 percent increase in new license revenue.

The turnaround in the ERP space isn’t quite as pronounced as that in the networking sector, but officials from SAP provided encouraging guidance. “What we see globally speaking is generally an improving IT spending capability in companies,” said Leo Apotheker, president of global field operations with SAP, in a press conference held last week at SAP’s Sapphire user conference in New Orleans. “A year ago, people were focused on one thing and one thing only, which was to reduce costs on very tight budgets. There seems to be a trend towards more available IT budgets, more available funding for capital investment in order to improve companies’ operations.”

Elsewhere, many IT bellwethers posted mixed results. IBM Corp., for example, last month reported Q1 2004 earnings that not only were in-line with the expectations of analysts, but which also demonstrated solid growth across its hardware, software and services groups. Big Blue’s first-quarter revenues rose by 11 percent over Q1 2003, while earnings were up by 18 percent year-over-year. Microsoft Corp. had a decidedly mixed quarter, with an almost 15 percent increase in revenues but a near-60 percent decline in earnings. Similarly, troubled Unix giant Sun Microsystems Inc. posted a five percent year-over-year decline in its Q3 revenues for fiscal year 2004, and recorded a net loss of $760 million for Q3, compared to a $4 million profit in the year-ago quarter.

Computing giant Hewlett-Packard Co. (HP) will announce its Q2 2004 earnings next week. At least one major financial firm, Prudential Equity Group, says HP’s earnings may come in below expectations.

Although the ERP sector may just be getting back on its feet, and the general IT marketplace is still a mixed bag, networking vendors seem positively bullish on the prospects for sustained recovery. Cisco’s Chambers said his company will once again increase its employee headcount, after years of sequential layoffs. “For the first time in three years, you saw us add 200 incremental head count this quarter, and while we will be very selective in the placement of new resources into new growth areas, we have made the decision to add approximately 1,000 people in the remainder of this calendar year, primarily to our engineering and sales ranks,” he asserted, noting that the majority of these positions will be in the U.S. “We realize that there is some business risk in this aggressive approach, but we think the risk-reward factors favor these long term investments.” Chambers stressed, however, that Cisco’s productivity goals of $700,000 in revenue per employee remain in force.