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Network industry financials show leader shakeup

Network industry financials show leader shakeup

The big corporate movers and shakers of the past year

The corporate bingo ball spit out some surprising numbers in 2006, with HP knocking off IBM for the top spot in terms of sales and with Dell stumbling and losing its PC crown to HP.

This year, Network World's annual analysis of financial results from network companies focused on 9 industry bellwethers -- compared with taking the pulse of the industry's 200 largest companies, as we used to do. As large as these dozen companies are and as mature as the industry is, the results show that change is the norm and constant reinvention is required to succeed.

Consider the computing sector. HP and IBM have made huge opposing bets in recent years, with HP amassing PC assets and IBM going the opposite direction, divesting its PC business and placing its chips on professional services.

HP: King of the hill

Last year HP became the largest computer company in terms of revenue, with sales increasing 6 percent to US$91.7 billion compared with IBM's year-end total of US$91.4 billion.

HP's Personal Systems Group alone generated US$29 billion in sales (32 percent of total revenue), which is about US$10 billion more than IBM's entire systems group. And that doesn't even take into account HP's revenue from larger systems.

HP has had particular success in 2006 with laptop sales, which grew 8.4 percent. According to IDC, HP's PC sales beat Dell's in the third and fourth quarters of 2006.

The company says it also did well in industry-standard servers, claiming a revenue increase of 6 percent while not providing the actual dollar amounts.

Corporate expenses, however, are still running high, the company states in its annual report, limiting profits to $6.2 billion, less than a 7 percent return. In response, HP says it has streamlined operations by removing three layers of management and is looking to optimize a number of areas, "from real estate to procurement to IT to supply chain."

To address the IT problems -- a bit embarrassing for a company hawking IT answers -- HP is consolidating 85 data centers worldwide to 12 centers built using standardized configurations of HP equipment.

The company's US$4.5 billion acquisition of Mercury Interactive last year -- the largest deal since the merger with Compaq -- should also help on the profit side. Although HP's software segment represents 1 percent of total revenue, the Mercury acquisition is central to HP's plan to position the company as the key supplier of tools to optimize IT operations (never mind that it hasn't done a good job of that internally).

IBM: Betting on service revenue

Software, of course, is one of IBM's key sources of profits. Software sales increased 8 percent last year to US$18.2 billion and generated 40 percent of IBM's pretax income, according to the company's annual report. That helped IBM deliver a whopping US$9.5 billion in total profits, 53 percent more than HP and second only to Microsoft in this analysis.

But sales for Big Blue were essentially flat in 2006 compared with 2005, increasing less than 1 percent to US$91.4 billion. That's because the '05 revenue numbers include four months of IBM's PC business, which the company divested in April of that year. If you delete the PC numbers from the '05 results IBM would have realized a 4 percent revenue gain in 2006.

That's nothing to sneeze at but not stellar growth either, and part of the blame lies squarely in the lap of IBM's vaunted service business.

Services account for 53 percent of revenue, and the segment has been troubled for a few years. IBM's services business grew 2 percent last year to US$48.3 billion, and its contribution to pretax income was 37 percent, less than the software segment even though services drives more than twice the revenue.

IBM acknowledges the issue, saying service contracts are trending toward "smaller deals of shorter duration, higher profitability and more industry-specific focus. While our transition to this model experienced some hiccups initially, we are making steady progress and saw solid growth in short-term signings in 2006."

In the fourth quarter alone the company signed nearly $18 billion in new service business, which the company says is "our largest since the second quarter of 2002."

Ironically, while the services sector has wobbled, IBM's systems business has been churning ahead, growing 5 percent last year to US$20 billion, largely on the back of strong mainframe sales and new gear, such as blades.

So, was IBM's bold bet worth it? In 2004 IBM generated US$5 billion-plus more in sales than it did in 2006, but US$2 billion less in profits. The jury shouldn't have a problem with that question.

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