By Graeme Burton
All of a sudden Groupe Bull – the French computer systems giant that elevated the habit of living off government hand-outs and still losing money, into an art form – is a ‘strong buy’. Four years under the stewardship of Jean-Marie Descarpentries has put the company back on the growth curve (albeit modestly), back in the black, and out of the reach of meddling government hands. After showing revenue growth of 4.8% to FF15,800m ($2,680m) over the first nine months of 1997, analysts now expect the company to report a doubling of net income this year from FF376m ($63.84m) to FF674m ($114.m). Philippe Gendreau at merchant bank ABN Amro is just one of a number of financial analysts that are impressed with the company’s turnaround. I consider the company to be on the right track. I think Bull’s turnaround was well implemented, its strategy is good and it’s performing well, he says. Indeed, Gendreau confirms he is looking forward to a doubling of net profit for 1997. Looking further forward, SBC Warburg is similarly positive. Over the next three years analysts at Warburg expect a tripling of net profit and annual revenue growth averaging about 8% a year.
Cash cow
Warburg estimates that net profit will hit FF1,030m ($174.9m) in 1999 on revenues of FF31,020m ($5,260m). That kind of upswing is in sharp contrast with Bull’s performance in the first half of the decade. In the five years from the beginning of 1990 to the end of 1994 the company lost a total of FF22,100m ($3,750m) while it struggled to restructure, hampered by the high cost of making redundancies in mainland Europe. Much of the credit for that turnaround lies with Jean-Marie Descarpentries who handed over the chairmanship to Guy de Panafieu in September of this year. The question is can de Panafieu now carry on where Descarpentries left off? One thing that is troubling some observers is that Panafieu comes not from another computer supplier, but from the water industry. Nevertheless, he is renowned as a financial whiz-kid – expertise which the company needs. Despite the improvements, Bull still has some weaknesses that need to be addressed. It remains hooked on the cash cow of mainframe upgrades and related maintenance, although revenues from this area have dropped from 55% of the total business in 1993 to 32% in 1996. In 1997, ABN Amro estimates that mainframe sales will account for only 16% of total revenues but a sizeable 42% of operating profits. But Bull’s whole attitude to hardware has changed in recent years. It has long-abandoned its proprietary systems tradition and now – at all levels – either co-develops or distributes other vendors’ hardware. For example, Bull’s recently-launched range of Microsoft Windows NT servers are basically re-badged NEC designs, while its PowerPC-based Sagister, Escala and Estrella Unix server ranges are based on technology provided by IBM under a technology agreement which was renewed in the summer. The company does, however, together with its long-time close partner NEC, do a lot of its own mainframe development work. The
company sells systems based on both its own CMOS technologies and SGS-Thomson’s Jupiter processor. Bull’s relationship with Japanese giant NEC has become an increasingly important factor. Following the rolling-privatization of the company, NEC now owns 17.7% of Bull along with Motorola and France Telecom. The influence of this triumvirate of companies is recognized by their representation on Bull’s strategy committee where all major issues in the company are decided. France Telecom, NEC and Motorola have a clear and important role in the definition of the strategy of Bull, admits Bull’s chief operating officer Alain Couder. The French government also retains a 17.4% stake. With hardware development at the company somewhat marginalized – research and development costs were cut by 44% between 1993 and 1996 – Bull has inevitably placed the emphasis on services – systems integration, maintenance and facilities management – instead. However, although it is certainly winning business in this sector any profitability is coming from the maintenance portion of services which makes up 44% of total services revenues and which is largely mainframe derived. In short the combination of mainframe and maintenance revenues accounts for approximately 80% of the company’s operating profits. The mainframe business provides a healthy operating margin of 12%; maintenance is even more profitable with an operating margin of 13%. Against that backdrop Bull likes to point to some of its more positive niches. It is the fourth largest vendor of smartcards and the third largest supplier of smartcard reader terminals in the world – the result of government intervention in the 1980s. Analyst Gendreau forecasts fast, but not explosive, growth for the smartcard business and believes Bull will need to develop US partnerships if it is to gain acceptance as a supplier in the US market when smartcards finally take-off there. Bull has bigger hopes still for its ISM/OpenMaster network management software which it claims offers better security management than leading competitors including Cabletron, Sun Microsystems, Hewlett-Packard and Tivoli.
$100m barrier
Bull’s claims are backed up by a host of research groups including the Meta Group, the Yankee Group and Decisys and the company has a more impressive list of big US partners for ISM/OpenMaster than it does for any other technology in the group. These partners include BMC Software, Cisco, Compaq, SAP and Tandem. As a result, Bull claims more than 18,000 licensees for the ISM suite – and 200,000 for the security subset of ISM – and an annual growth rate of between 60% and 70% for the product. In terms of revenue, ISM is expected to break past the $100m barrier before the end of the year. Yet, however profitable network management software is at the moment in the industry it cannot replace the profitability of the declining mainframe-derived business. But analysts do expect services to steadily improve in profitability as the investments the company is making in the area start to pay off. At the moment they are just putting the structures in place in the services business, says Gendreau.
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This article originally appeared in Computer Business Review.
