Financial Mixed Bag

Ariba Inc. reported strong revenue and subscription growth for its third quarter but an unexpected loss while Dell Inc. announced flat second quarter revenues and a cut in the full year outlook. Meanwhile, Cisco Systems Inc. closed out a shaky fiscal 2011 with a decent fourth quarter.

Focal Points:

• Ariba swung to a loss of $11.9 million in its third quarter on revenues of $121.9 million. The internet software and services company had net income of $4.3 million in the year earlier quarter. The loss occurred even though overall revenues rose 30.7 percent from the year earlier quarter and subscription software – i.e., software as a service (SaaS) – revenues jumped 74 percent year-over-year to $76.4 million. Ariba's loss in the latest quarter follows profits in the previous three quarters. The company attributed the non-GAAP loss to non-reoccurring charges. The company's CEO stated the continued growth and strong quarterly revenue results shows organizations of all sizes are leveraging the vendor's cloud-based solutions to discover, connect and collaborate more efficiently and effectively with their trading partners.
• Dell announced its second-quarter fiscal-year 2012 financial results, which did not meet expectations. Revenues for the quarter were $15.7 billion, up only one percent over last year's quarter, with enterprise solutions and services revenue increasing four percent year-over-year to $4.6 billion. Net GAAP operating income was 7.3 percent of revenues, while non-GAAP operating income was 8.5% of revenues, up more than 50 percent year over year. Servers and networking revenue increased nine percent year-over-year while services revenues grew six percent and Dell-owned storage technology grew 15 percent. The company cut its year revenue growth outlook to the one- to five-percent range from a prior estimate of five- to nine-percent. However, the company also said that because of a "shift to Dell intellectual property and higher-valued products," it now sees operating income growth increasing five percent to 17 to 23 percent.
• Cisco reported fourth quarter earnings of $1.2 billion on revenues of $11.2 billion, which were up 3.3 percent from a year ago. Overall, Cisco's fourth quarter earnings were down 36 percent from a year ago. While Cisco's customer markets grew 11 percent in the quarter overall, the segments varied significantly. The enterprise, commercial and service provider markets expanded 15, 16 and 19 percent, respectively, whereas the consumer market shrank by 41 percent. Additionally, security revenues collapsed by 21 percent from the previous year's quarter while data center and wireless revenues leapt 32 and 33 percent, respectively. For fiscal year 2011 Cisco stated it had revenues of $42.3 billion with a net income on a GAAP basis of $6.5 billion, down 16.4 percent from the prior year. CEO John Chambers claimed the company made significant progress on its comprehensive action plan to position the company for our next stage of growth and profitability. In other associated news, VCE – the company owned jointly by Cisco, EMC Corp., and VMware Inc. – reported $132 million of accumulated losses. According to EMC's 10-Q SEC filing, its losses in VCE for the June quarter of this year were $46.6 million, with $41.9 million in the preceding March quarter. EMC owns 58 percent of the joint venture.

Experton Group believes Ariba, Cisco and Dell are in the midst of transforming their organizations, and while they will remain key players in their spaces, they are no longer bellwether indicators of how the IT sectors are performing. The strong growth of the Ariba SaaS solution delivery model shows that a well-constructed SaaS offering that can be quickly implemented at reasonable costs can gain broad acceptance in the marketplace. However, the company is finding that it had to change its operations model and spend more monies on R&D and sales. It costs more for a SaaS vendor to deliver its services than a traditional software company, as fewer costs are thrust upon the user. And for all the cloud hype, sales do not come easy to cloud computing firms.

Cisco claims it has refocused its vision and getting back on track. However, the transition process still has a ways to go. The company remains under pricing pressures on its traditional product lines but is making great strides in some of its new markets. The VCE venture is a strategic one for Cisco and EMC and is providing thought leadership to the industry, which is not going unnoticed by users. Experton Group expects it to pay off handsomely for the partners. Dell is in the midst of changing its business model, with a far greater focus upon the commercial markets and away from consumers. The timing is good but the company will need to devote more time and resource into relationship management and not rely solely on price to win business.

IT executives that view these firms as strategic partners need to understand their new visions and roadmaps to ensure that their new paths are compatible with the enterprises' directions. Additionally, IT executives should validate the vendor(s) can still provide the types of key products and services required in a timely manner at reasonable cost.