Monthly Research Update

Experton Group Weekly IT News

Trouble Brews, Vendors Mostly Optimistic

By: Adam Braunstein

Cisco Systems, Inc. reported a 7.3 percent increase in revenues, though net income remained relatively flat at $2.2 billion for the quarter. Elsewhere, Sprint Nextel Corp. continued to see sales and subscribers drop while posting a net loss of $326 million for the quarter. Lastly, IBM Corp. CEO Sam Palmisano acknowledged the economic market difficulties in a speech made last week, but offered a path to improvement fueled by public infrastructure investments.

Focal Points:

• Cisco posted revenues of $10.3 billion for the quarter, up from $9.6 billion in the same quarter last year. Net income remained approximately the same, due in part to the sliding manner in which income manifested itself over the past three months. Earnings started off strong in August and slid each month, as the U.S. economic downturn spread to Western Europe, developing markets, and Asia, according to the firm's CEO John Chambers. U.S. orders were down eight percent on average and enterprise sales were down an average of 11 percent worldwide. Chambers further stated that the company expects revenue to decline in the range of five to 10 percent during next quarter, and has instituted a hiring freeze and reduction in travel, events, and marketing expenditures to pull $1 billion out its spending. The company is still investing heavily in new markets so as to be poised for growth when IT investments reinvigorate and still feels that 12 percent to 17 percent long term growth rates are achievable.
• Times are not quite as rosy for beleaguered third-place wireless carrier, Sprint. Quarterly revenue slid to $8.8 billion from the $10 billion it posted in the same quarter last year. A net loss of $326 million was far below the company's expectations for modest earnings, compared with a net income of $64 million during the same quarter in 2007. The company lost another 1.3 million wireless subscribers this quarter with a total churn of approximately 3.5 million for the year thus far. Sprint's larger competitors have fared well recently despite the down economy, due in part to new smartphone devices. Sprint acknowledges this fact and expects to introduce several new devices over the next quarter, though CEO Dan Hesse states that fourth quarter results are not likely to offer significant improvements. The company did point to improvements in customer service, the launch of its fourth-generation (4G) WiMAX network in Baltimore, and the Federal Communications Commission's (FCC) approval of its intended merger with Clearwire Corp.
• In a speech given last Thursday, IBM CEO Palmisano decreed that a technology-led economic recovery plan wherein private firms focused on public infrastructure improvements could help the U.S. position itself for economic recovery. The speech suggested that enhancements should be made in the areas of food distribution, health care, traffic management, utility grid improvements, and water conservation. Similar to economic recoveries enabled through infrastructure investments after the Great Depression and World War II, infrastructure investments would focus on instrumented improvements enabled by interconnecting grids with added self-tuning intelligence. These smart infrastructure projects could cut down on efficiency losses in the power grid – which reportedly loses 67 percent of its energy due to inefficient generation and transmission – and reducing downtime and carbon emissions from poorly planned and executed transportation schemes. Palmisano suggested that a wide variety of IT vendors should contribute to this investment, and that the U.S. would end up better able to serve existing and new markets as a result.

Experton Group believes the economic downturn has and will continue to negatively affect IT vendors as enterprises delay infrastructure investments until uncertainties have begun to subside. This presents excellent opportunities for IT executives to pressure vendors for lower pricing and free/highly discounted services. While capital expenditures are largely frozen as corporations wait for signs of better times to manifest themselves, IT executives should still be spending in areas that present opportunities for improved cost of ownership and new business generation potential.

Close attention should be paid for return on investment (ROI) calculations, and IT executives should work to ensure that ongoing investments are self-funding and present opportunities to gain competitive advantage over the short and long term.

Like Cisco, a majority of corporations are freezing non-essential spending as a means of cash preservation, and IT executives should expect these cost containment exercises to continue at least until the second or third quarter of next year. IT executives should work with financial and line of business (LOB) executives to ensure that spending slowdowns do not constrain corporations' future abilities to compete effectively in their respective market places, and should use the economic downturn as an opportunity to leverage cash preservation funding mechanisms and more rigorous ROI and total cost of ownership (TCO) capabilities to ensure maximized payback from expenditures.