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.’
