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November 3, 2008

Has the downturn hit the IT industry?

How are technology firms fairing as the crisis of confidence in the financial sector begins to ripple through the rest of the economy?

By Jason Stamper

Despite the fact that technology has the potential to massively boost the productivity of individuals and companies, it rarely gets away scot free when there is any kind of stock market or economic crisis. ‘It was over-hyped.’ ‘It wasn’t innovative enough.’ ‘They didn’t even consider that the Year 2000 wasn’t that far off when they programmed their mainframes.’

So it comes as little surprise that technology has been implicated in the downfall of Bradford & Bingley, since its poorly integrated systems meant that its bosses did not have visibility into the real financial state of the building society when they most needed to know.

Bradford & Bingley’s chiefs said they didn’t need to raise funds with a rights issue, then they said they did need a rights issue, then they said they had priced the rights issue too low, and ultimately they said even a rights issue wasn’t enough to plug the leaks (more on this story on the CBR editor’s blog at

Economic downturn

One thing is certain: the signs are not good for the broader economy right now. It’s getting harder and harder not to use ‘the r word’ – recession – because even the economists are saying that’s where we’re headed: The sharp decline in service sector activity in September leaves little doubt that the economy contracted in the third quarter and is on its way into recession, said Howard Archer, chief UK economist at Global Insight, last month (

But how are the technology companies themselves fairing against the backdrop of this latest economic crisis? Well if it’s a bellwether you are after, look no further than IBM. With a finger in almost every software, services and hardware pie, it’s not a bad reflection of how the technology sector as a whole is performing. The good news is that IBM did rather well overall in its third quarter, just announced.

Total revenues were up 5% to $25.3bn; services revenue was up 8% and software revenue was up 12%. Net income was up 20% to $2.8bn.

The area of some concern for IBM is its hardware operation, or what it calls its Systems and Technology group. Revenue there was down 10%. It’s not what you’d expect though: the mainframe is going great guns with revenue from the System z up 25%. Its System p Unix boxes were up 7%, too. But the admittedly very cyclical System i (formerly iSeries, and before that AS/400) business was down 82%, and System x servers (Windows or Linux boxes) were down 18%.

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Still, chairman, president and CEO Sam Palmisano was relatively upbeat: “Our results demonstrate that the combination of a steady base of recurring revenue and profits, a range of products and services that deliver value to clients worldwide, and a strong and flexible financial foundation give IBM a competitive edge in good times and tough times, he said. “We remain confident in our full-year 2008 outlook.”

SAP announced third quarter total sales up 14% to 2.7bn Euros. But net income was down 5% to 388m Euros.

Said SAP co-CEO Henning Kagermann, “The third quarter 2008 was SAP’s 19th consecutive quarter of double-digit growth in software and software-related service revenues at constant currencies. This was an achievement in a period where the global financial crisis had a significant impact on customer decisions towards quarter end.”

“Customers are continuing to spend on our products, but the economic and business environment is uncertain,” he said. “Our business model is flexible, and we are focusing on protecting our operating margins and earnings.”

Kagermann continued, “We are assessing business activity continuously, and we are balancing the need for greater efficiencies with steady advancements in our products, customer services and technologies, while addressing customers’ most critical business issues. This approach has worked well for customers and SAP throughout the up and down economic cycles of the past, and has contributed to SAP’s market leadership. We’ve been through uncertainty before, and have always emerged as a better, stronger and more efficient company.”

Tech sector holding steady?

Another bellwether, Oracle, had even better news when it announced its first quarter results in September. The erstwhile database vendor has been aggressively broadening into both applications and its Fusion Middleware in recent years, and the strategy seems still to be working. Total sales were up 18% to $5.3bn, and net income was up 28% to $1.1bn.

As for the UK, it seems the technology sector may actually be fairing slightly better than others in these tough times. Research by Ernst & Young last month found that the number of profit warnings from listed companies in the software & computer services sector in the UK has actually fallen despite the worsening economic climate.
In Q3 of 2008 a total of 7 warnings were issued by 5 companies in the sector, compared to 9 over the same period in 2007.

Other sectors are not fairing so well. Across all sectors in the UK, 111 profit warnings were issued in the third quarter, up almost a third on 2007. Neither size nor status has proven to be of much insurance against the current downturn, Ernst & Young said.

James Bennet, technology director at Ernst & Young, commented: “Q3 has been less challenging for software and IT services companies, mostly because they went into the downturn slightly earlier than other sectors. We would however express caution about the climate and the likely health of the technology sector in the coming two quarters, particularly with the dramatic downturn in the overall economy.”

For regular UK technology finance news visit CBR’s new UK Tech Finance Blog, at

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