IT Vendors in Transition

Dell Inc. announced mixed financials for the first quarter of 2011, as Cisco Systems, Inc. surprised the market by taking third place in the blade server space. Meanwhile, Hewlett-Packard Co. (HP) beat its revenue and profit expectations for the second quarter of 2011, although it cut its full-year earnings forecast. Finally, Salesforce.com reported that it reached almost a $2 billion annual revenue run rate, as well as results for the Q1 of 2012.

Focal Points:

• Dell reported that total revenues for the quarter increased a mere one percent compared to the same period last year to just over $15 billion. Net income, however, grew significantly by 177 percent to $945 million, or 50 cents per share. According to the company, as the quarter progressed, consumer demand was weaker than expected. Spending from small and medium-sized businesses (SMBs), though, were the highest that Dell has seen in two years, growing seven percent. Dell's public sector customers spent $43.77 billion, down two percent year-over-year, while large enterprises spent $4.48 billion, up five percent. The company's consumer business took the biggest hit, with sales dropping seven percent to $3 billion. Overall, hardware product revenues were down less than one percent year-over-year to $12 billion, while services and software revenues were up six percent to $3 billion. Specifically, revenues from the server and networking business increased 11 percent over last year to $1.97 billion, while sales from storage products fell 13 percent to $481 million, said the company. The services unit reported a sales increase of five percent year-over-year to $2 billion, of which $703 million was from outsourcing engagements and $187 billion was from services projects, Dell added. Finally, Dell reported that sales from desktop PCs accounted for $3.3 billion in sales, down eight percent compared to the first quarter of 2010, but mobile PCs hit $4.72 billion, up three percent. Meanwhile, IDC reported Cisco's UCS servers bumped Dell x86 blades out of third place. IDC claims Cisco has 10.5 percent share of that market worldwide while Dell's share is 9.3 percent. HP and IBM Corp. have 54.2 percent and 26.8 percent respectively.  Cisco stated it now has 5,400 UCS customers and expects to continue gaining market share, especially in the United States.
• HP announced that net income for the second quarter of 2011 rose 4.7 percent to $2.3 billion, or $1.07 per share. HP also reported better-than-expected revenue, although the company cut its full-year earnings forecast as it reorganizes its services business. This overhaul amounts to $1 billion to $1.5 billion less revenue for fiscal 2011 than HP's latest revised forecast, and about $700 million of that will hit in the second half of the fiscal year. According to HP, total revenues for the quarter increased 2.5 percent year-over-year to $31.6 billion, of which services now account for 28 percent, nearly as much as the PC business. However, HP Services, which consists of Enterprise Services and Technology Services, only had a 1.5 percent revenue growth for the quarter amounting to $8.98 billion, said HP. As a result, HP announced that it will be moving the Technology Services business under the Enterprise Servers, Storage, and Networking business. Meanwhile, revenues from HP Software jumped 17 percent year-over-year to $764 million, and sales from support rose eight percent to slightly under half of total software sales. As for PCs, HP said that overall sales fell 5.4 percent to $9.42 billion, although earnings for the Personal Systems Group rose 14.5 percent to $533 million. HP also announced that it is still on track to launch the TouchPad this summer, which is based on software it purchased from Palm Inc. last year.
• Salesforce.com announced that revenues for the first quarter of 2012 increased 34 percent year-over-year to $504 million. Subscription and support revenues were $474 million, an increase of 35 percent compared to the same quarter last year, and professional services and other revenues were $31 million, an increase of 18 percent, said the company. Net income, however, fell 97 percent year-over-year to $530,000, or zero cents per share. This is compared to $17.7 million, or 13 cents per share. Salesforce.com also said that net paying customers rose approximately 5,400 during the quarter to finish at around 97,700. Moreover, as of Apr. 30, 2010, the company added 20,400 net paying customers, an increase of 26 percent year-over-year. Finally, the company announced that total cash, cash equivalents, and marketable securities finished the year at approx. $1.5 billion, a decrease of $379 million from the previous year.

Experton Group believes Dell is struggling to figure out its vision and market positioning – something it has been trying to do for four years now without success. CEO Michael Dell now believes the company will focus more on the commercial business side than on the consumer space, without exiting the latter. However, Experton Group expects the competition to increase in all of Dell's businesses, which will impact margins and sales, making the next few years tough sledding for the company. Similarly, HP is a company in transition, with services units that have yet to hit their stride, software revenues whose margins do not contribute enough, and management mired in reorganizations and shakeups. Do not count HP out but CEO Apotheker will have some rough patches ahead before the company regains momentum. IT executives can be sure Cisco will be pushing to take market share from both and reshape enterprises' data center architectures to map to its vision. Meanwhile, Salesforce.com stands out as the most successful cloud provider, with consistent quarter to quarter growth. Yet net income collapsed, as the company invests in expanding its sales efforts. Even cloud providers have to have feet on the ground to drive revenues, and unlike traditional software companies cloud service providers do not collect big upfront fees when a sale closes. IT executives should recognize that most key IT providers are in transition, trying to figure out the best way to compete and grow. Therefore, IT executives should sit down periodically with their strategic IT providers to understand the vendors' strategies and roadmaps and to ensure these dovetail with the corporate direction and plans.