Monthly Research Update

Experton Group Weekly IT News

Tech Earnings Suffer; More Acquisitions

By: Cal Braunstein

BMC Software Inc. and Compuware Corp. reported double-digit declines in earnings while CA Inc. stated its earnings were flat. Meanwhile, Nortel Networks Inc. announced its revenues took a major hit and is dividing up its units into standalone businesses. In other news, Oracle Corp. is buying Virtual Iron Software Inc. and McAfee Inc. is purchasing SolidCore Systems Inc.

Focal Points:

• BMC reported a fourth quarter decline in profits even though it had a slight increase in revenues. For the quarter BMC saw revenues grow three percent from $466.9 million to $479.3 million. On a GAAP basis, earning dropped 14 percent to $83.3 million from $97 million. For the full year, the company saw an eight percent increase of revenues to $1.87 billion from $1.73 billion. But its earnings dropped 24 percent to $238.1 million from $313.6 million. Compuware posted fourth quarter earnings of $48.4 million, a 21 percent drop from the previous year's quarter of $61.2 million. The company's revenues tumbled 25 percent to $253.4 million from $338.9 million in the prior year. For the fiscal year revenues fell 11 percent to $1.09 billion from $1.23 billion the previous fiscal year while earnings grew 3.8 percent to $139.6 million from $134.4 million. CA's fourth quarter revenues fell five percent to $1.04 billion while its net income remained virtually unchanged at $72 million from the previous year's quarter. The company said subscription and maintenance revenue slipped four percent to $913 million, while professional services revenues fell 18 percent to $84 million. Software fees and other revenues rose almost 23 percent to $38 million. The company's revenues totaled $4.27 billion for the fiscal year, down slightly from $4.28 billion in the prior year, while its net earnings for the year rose 39 percent to $694 million from $500 million in fiscal 2008.
• Nortel reported its first quarter revenues plummeted 37 percent to $1.73 billion as compared to $2.76 billion in first quarter 2008. On a GAAP basis, the company reported a net loss of $507 million versus a net loss of $138 million in the first quarter of 2008. The company has been in bankruptcy proceedings since January. Nortel's CEO indicated that the firm has been dividing up its units into standalone operations in order to maximize value for its shareholders. While no decisions have been made on what path would be taken, prospective buyers that are evaluating Nortel's business units include Avaya Inc., Nokia, Siemens Enterprise Communications GmbH, Nokia Siemens Networks GmbH, Silver Lake Partners, and TPG Capital, according to various reports.
• Oracle announced it is purchasing the privately-held Virtual Iron Software, a Lowell, MA-based company that specializes in server virtualization management software. Financial terms were not disclosed Virtual Iron's software is based Linux and Xen opens source software. In other acquisition news, McAfee announced a definitive agreement to acquire privately owned SolidCore Systems for $33 million and a $14 million incentive package if certain business targets are met. The Cupertino, CA-based company provides solutions that help companies protect ATMs, cash registers and other point-of-sale systems used by retailers, along with multifunction printers and other specialized computer devices. SolidCore's products are used by more than 100 financial institutions and in more than 15,000 retail stores, McAfee said.

Experton Group believes outside of the bellwether technology companies software companies are struggling to hold their own. Nortel continues its decline on all fronts and it is likely to be acquired piecemeal. Oracle, meanwhile, maintains its appetite for acquisitions, even though it has yet to digest Sun Microsystems Inc. Experton Group does not believe 2009 will not be a strong turnaround year for the world's economies, which will put further pressure on the technology companies. IT executives that use Nortel equipment should be concerned about Nortel's survival but should expect the purchaser of a business unit to support the equipment through its useful life. However, transitioning from Nortel-designed hardware and software to the acquirer's solution set may result in functionality delays and loss. IT executives should use the current economic environment to restructure their software contracts to reflect more favorable terms, including flexibility of software usage amongst hardware platforms.