News and Analysis to 22^nd July 2004

Independent solution providers?

Microsoft is extending its reseller channel to include the high-end service providers. Cap Gemini will develop vertical industry solutions based on Microsoft’s .Net architecture. This follows a similar deal with Accenture to attack the e-government marketplace. There was a time when these high-end service providers delivered systems in line with client requirements, which typically determined the most appropriate technologies to deploy. The market appears to be gravitating towards ‘lycra’ solutions.

Microsoft divvies up

Now that Microsoft can see beyond the fog of lawyers fending off legal attacks from all corners, it has decided that it can reduce its legal bill reserves for other purposes. One option would be to buy the rest of the IT market, but that might draw too much negative attention. So it has decided to redistribute $75bn cash via increased dividend payments and buying back its own shares. Unsurprisingly despite Microsoft’s impressive 82% earnings surge in its latest quarter, this payout has resulted in a negative correction to forecast fiscal year earnings.

IBM – saved by hardware

Big Blue delivered in its second quarter with revenues up 7% and net earnings up 16.6%. Sales were disappointing; the results were largely underpinned by effective cost reduction initiatives. Across the business hardware is doing best, which doesn’t augur well for the software and services industry. It would be a shame if IBM had to retrain its high value/high cost PWC Consulting personnel as mainframe operators.

EDS – Entering Dire Straits?

Troubled outsourcer EDS took a big knock when credit ratings agency Moody’s downgraded it to junk status. This will effectively worsen EDS’s financial health as it will trigger negative clauses in respect of its supplier contacts and will increase its cost of debt. Moody’s attributes this to the fact that EDS, whilst making a recovery, is progressing too slowly. It needs to win higher margin business and extract greater profit from its existing contracts in order to create sufficient free cash flow, which has a direct link to credit status. This should get the vultures to assume the hover position.

Apple’s iProfit

Good news at Apple; revenues up 30% in the third quarter. A major source of growth was Apple’s music business. More specifically its iPod music player and its iTunes music supply business. Apple appears to be returning to a golden era. What next, corporate servers that double up as Wurlitzers?

CIO – go spend (management) crazy

According to a survey carried out by PA Consulting Group, CIOs have turned into CFO lackeys by overly focusing on controlling IT spend. There appears to be a general weakness in focusing on new projects that deliver real business value. Poor business cases were cited as the cause of the problem. Also almost half of the CIOs questioned use preferred suppliers, even though they were procuring commodity items, which perhaps suggests that CIOs have some way to go in controlling IT spend effectively. Its not easy being a CIO, particularly when the board expects a ‘modal change’ at the slightest indication of a change in market conditions.

SAP bucks trend

German enterprise software vendor SAP looks set to buck the gloomy trend in the software market by predicting revenue growth of 15% in its second quarter. Sadly the same could not be said of PeopleSoft, Siebel, Computer Associates, Veritas and BMC.