Nine of the Rethink 50 reported this month, and just three of the majors Dell, Hewlett-Packard and Oracle--all of which traditionally report later than the bulk of the top 50. Of the nine, eight are profitable for the immediate past quarter, with Brocade the fly in the ointment. One of dram, Novell, had reversed a loss from last year.
The stock markets, rocked as they were by the atrocity in Spain and looking for guidance just about anywhere, treated Oracle's results as a steadying influence. As Oracle's numbers came out the tech stocks rallied. Even so, this group is down collectively in stock market value by just over 4% in value from this time last month.
There are few surprises among the results. We have an aggregate growth of 13% in revenues between all of the nine, with Computer Sciences and NetApps neck and neck at around 30% revenue growth over this time last year, while Software AG is the only company shrinking in this group. In fact, Software AG has shrunk more than the 2% our figures show, because last year's figures have been restated to show discontinued or sold businesses. But even after all that toing and froing and change of emphasis, Software AG managed a very minor net income.
Dell's numbers are perhaps not as spectacular as its recent past figures and Hewlett-Packard is still grappling with the biggest merger in IT history, but we don't propose to examine these two too closely here. Oracle continues with slow growth and colossal margins, which accounts for its valuation of six times revenues. Poor Hewlett-Packard still looks massively undervalued, but we said that last quarter and not much has changed since.
The companies that stand out as needing a closer examination are the two storage players, Brocade and NetApps, along with the return to form of Computer Sciences (CSC).
CSC has gone back to its roots, targeting US federal business, and much of its growth came from that market this quarter. But its figures weren't all good news, and it warned that analysts were perhaps expecting a little too much for its last quarter.
STRATEGIC MOVES
CSC's revenue from US federal government activities was up over 84%, but this is really about the extremely smart acquisition it completed in March 2003 of DynCorp, a government contractor, without which its figures would look miserably poor.
Department of Defense spending with CSC was $940.1 to compared to $464.6m the previous year, while civil governmental departments spent $516.2m up from $325m the previous year. CSC got extra business from the Department of Defense Intelligence Information Systems and from the US Navy's Naval Sea Command.
The CSC federal pipeline of opportunities over the next 26 months stands at $33bn the company said, mostly military with about $23bn scheduled to be awarded during the company's fiscal 2005.
The other driver has been more and more outsourcing business in the commercial sector and the company landed a total of $6bn of contracts during the third quarter, its highest ever. However commercial business was only up 8%, which at constant currency would have been just 1%.
The two big contracts among these were the $342m, 10-year outsourcing agreement with Maybank, Malaysia's largest banking group, and the $700m business process outsourcing agreement with Swiss Re Life & Health, one of the world's largest life and health reinsurers.
Government business plus outsourcing made up 80% of CSC revenue, and CSC reckons it will grow 20% to 23% next quarter.
The company is close to finalizing a deal with the retailing giant Sears, Roebuck for a long term IT infrastructure support deal that could be worth $200m a year for up to 10 years. CSC is bidding to support Sears' desktops, servers, web site infrastructure, voice and data networks, and decision support systems. It is expected to be closed in the second quarter (see Masterclass feature on page 6 for further information).
LEADING THE FIELD
NetApps, on the other hand, is in a business that everyone expects to grow--storage. But storage is clearly not just one business. NetApps is arguably the leader in NAS (network attached storage), providing systems that are huge file servers to any number of machines on a network--as opposed to the SAN (storage area network) sector that is driving most sales in this industry. SAN is about breaking data right down into blocks, not entire files and, when properly implemented, it is a far more efficient way of sharing storage across multiple servers and sharing files across multiple disk subsystems.
NAS fliers, on the other hand, are comparatively cheap and far easier to install and manage. The storage has its own operating environment and doesn't need to be delivered through a server, as it has its own file system. The big drawback with NAS is that if you have large files being sent all over your network, you need excessively wide bandwidth.
EMC lays claim to market leadership in NAS because it offers NAS diskless head ends that connect to preconfigured SANs. So when some file level serving is done from the SAN in an EMC system, it counts as NAS business, in fact, NetApps is really the big cheese if you count only pure NAS systems.
Oddly enough though, the big slick efficient SANs that are meant to dominate the high end of the enterprise still leave plenty of room for NetApps NAS products (it has more recently begun to offer SANs too). It is the category of devices that cost over $100,000 that drives both the NetApps and the EMC NAS business and they are given by analysts groups a roughly equal market share at the top end of the NAS market.
Overall in storage both Gartner and IDC are talking about the "recovery" coming in the external disk drive market, stating that the fourth quarter showed the strongest gain in external disk system sales since the economic downturn began, up just 8% in revenue terms, which gives you something to measure the NetApps performance against.
The analyst groups are also cautiously predicting another 8% increase in storage in the coming year, having seen false dawns in storage markets before.
NetApps though recorded a quarter at $297.3m, up 30% and looking at the graph of its figures you can hardly see that there has been any kind of IT spending freeze on.
In the third quarter NetApps also launched itself into the grid market by buying Spinnaker Networks, a start-up supplying high end NAS boxes featuring a global or cluster file system. It paid $300m for a company that has only a few million dollars in revenues.
GAMBLING ON GRID
It's a bit of a gamble that grid will take off and that the companies that use it will still need to control their storage with a global file system. Spinnaker's NAS devices can serve data simultaneously to multiple servers but are managed as a single device. The Spinnaker file system is going to be built into NetApp's existing OnTap operating system by the end of next year and the company says the new product line will allow it to target customers who use large scale Linux farms for performance sensitive applications, in verticals like energy, hi-tech, entertainment and government. NetApps says it has supported Linux for years, and has relationships with Red Hat and SuSE. It also joined the Open Source Development Labs, a global consortium dedicated to accelerating the adoption of Linux during the quarter.
Network Appliance also announced this quarter the FAS980 and FAS980c, the newest members of the NetApp FAS900 platform, and unveiled the NetApp NearStore R200 storage system and SnapVault system for back-up, compliance, reference, archive, and 'secondary' data needs.
Sales for the quarter were helped by new product introductions, increased software subscriptions and a higher average selling price on new products. The company also sold a lot of Worm (write once read many) devices for compliance. Sarbanes Oxley and other rulings mean that certain financial data must be kept for long specified periods of time, in a format that cannot be changed, hence the Worm sales.
The company touted new deals this quarter at AutoNation, Bibliotheque Nationale de France, HDFC Standard Life, Interval International, Kimberly-Clark, Oracle, Telefonica de Argentina, Volvo, Cisco, Dassault Systemes, and Nielsen.
STOP PRESS
Putting something of a dampener on the general air of recovery in the Top 50, as we went to press there was bad news looming on the services front, in contrast to CSC's strengths.
EDS disclosed more had tidings in an SEC filing, predicting a loss of up to $75m from a pension liability associated with a huge lost contract with the UK's Inland Revenue and hinting at trouble with another major deal. This follows a recent writedown of $560m as a result of problems with EDS' major arrangement with the US Navy.
