Saturday, April 26, 2014

High Tech State of the Union, By the Numbers - Part 1: The "Big Iron"

This is the first in a series of articles that focus on how the High Technology industry is performing financially. The Q1 2014 reporting cycle concluded just this past week, offering an opportune moment to gauge the current financial health of the industry and compare last quarter's numbers with the historical record. To that end, financial results have been collated from Q1 2008 to the present.

For the purposes of the series, I selected ten companies to represent the industry as a whole. These ten include enterprises that normally would be classified as systems houses, chip companies or software firms. All the corporations scrutinized in this series, however, blur the conventional lines between pure software or hardware enterprises. For instance: even though most rational observers would view Microsoft  as a software house, the company also derives handsome revenues from its XBox game console, which itself serves as a platform for expanding the company's software offerings. Firms such as IBM present an even more complex challenge in categorization, as the company's offerings include chip, board/blade and system hardware, software products and IT services.

This editorial series thus eschews the more conventional hardware/software codification and instead groups companies more by how they serve their markets: the three C's (computing, communications and consumer), mobile computing and the multivariate world of the internet. Each group will be defined and examined in turn, with on overarching analysis provided in the final installment.

The first grouping we will examine includes Cisco Systems, IBM and Hewlett Packard. Cisco's strength is in networking for the enterprise, where it has been the global leader for the last 15 years. IBM is the worldwide king of the datacenter, especially with Wall Street brokerages, commercial banks and insurance providers. HP dominates the PC printer market and is also a strong player in the consumer and enterprise PC markets (desktop and laptop.) Though IBM and HP compete in the IT Services segment, I view the primary businesses of all three companies as somewhat complementary. Together, they constitute my 'benchmark' for the health of the Enterprise marketplace worldwide thru its appetite for Information Technology - hence its designation as the "Big Iron" group.

A line chart of the financial history of the "Big Iron" group from Q1 2008 forward is provided below. I have also included the actual reported numbers (caveat emptor: publicly reported headline results are typically non-GAAP) for those who would enjoy the opportunity of pursuing their own lines of investigation for personal use. Data is in $B (USD.)
(Note: though Cisco and HP numbers were reported in the indicated calendar quarters, their fiscal quarter accounting differs in time period from the normal calendar.)

HP – Though initially demonstrating a decent recovery from the 2008-2009 downturn, HP performance after 2010 has been decidedly lackluster. There is significant dependence on consumer discretionary spending for both the printer and PC divisions, a factor which may go a long way in explaining the consistent downward trend over the last three years.

IBM – rather surprisingly, IBM’s revenue history exhibits a trait one would normally expect from consumer electronics companies: a positive ‘bump’ during the fourth quarter holiday season. Nevertheless, the last three years show the same downward trend visible in the HP financials. This is somewhat surprising, given that the growth in eCommerce, Big Data, mobile-driven internet traffic and cloud computing during that period should have served to energize the datacenter business, providing extra growth on top of IBM’s legacy presence in banking, insurance and brokerage markets – all sectors that have weathered the years since the 2008 downturn better than most other industry segments.

Cisco – the enterprise networking market received a welcome boost from the spectacular growth of mobile computing (smartphones and tablets) after the 2008-9 downturn. Mobile demand for internet services cascaded down thru the wireless backhaul into the wired world, pushing enterprises to upgrade their bandwidth support first to 10Gbps and, more recently, to 40G and 100G. Cisco’s growth, however, was peculiarly mild during that period. Moreover, the company’s revenues from Q313 onwards are clearly rolling over and are on a downward slope. This would lend support to the evidence that the tablet and smartphone markets are approaching saturation and preparing to plateau (more on that in subsequent installments to this series.)

In conclusion, it appears that the “Big Iron” system houses are beginning calendar year 2014 with tepid prospects. This year was expected/hoped to be a year of energetic recovery for the Technology industry as a whole, especially after these same expectations by and large fizzled out in 2013. As this trend of weakening financial results at the system level cascades down the technology food chain to hardware and software providers at the board and chip level, the prospects for the industry as a whole appear soft for 2014.

There are still three more groupings to be examined, though, each which tells its own story. The next installment will examine two firms that for many years in Silicon Valley were everyone’s favorite villains: the ‘Wintel duopoly.’


  1. Interesting and not too surprising. I think HP's best days are behind them - I just bought a laser printer and did not even consider HP (went with Brother) - the point is HP no longer stands out as the best value. IBM may benefit from the Electronic Medical Records mandate in the Affordable Care Act. Same for Cisco to some extent, although as you've stated they are more aligned with mobile for growth at this point. We'll have to see if there is anything to "wearable technology" as that may piggyback on mobile growth, although I must say I'm pretty skeptical about all that.

  2. Excellent analysis, I really enjoyed it. In regards to share price performance, one of the clear indicator of companies running out of ideas and therefore weakness in the company's potential for future growth, is how aggressively these firms are engaging in "financial engineering", i.e share repurchases (dumping profit dollars into the stock markets in hope of increasing their share prices.) Apple Inc. and the above firms have engaged in this futile attempt to increase their share prices.
    In additional, I think Cisco weakness in high growth network security space is clearly hurting them, the competition from smaller players like Palo Alto Networks, Check Point Software has eroded demand for their firewalls and other high margin product lines. Most important the nascent development of SDN (Software Defined Network) could further erode profitability. Cisco is in the middle of a two year transformation plan; code word for a massive outsourcing plan, to reduce it's labor costs. Again, innovation and competing aggressively is not on top of the C-suite To-Do list.
    IMO, HP, minus their consumer products, has a much better potential from all these three companies. To me IBM, simply put, is a government agency with majority of it's revenue coming from the public sector (Federal and state IT department), so their faith is more dependent on how well they engage in "rent seeking" and federal/state budget committees then market demand for hardware/software.


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