The health of the broad, complex businesses of the industry’s largest vendors is often difficult to gauge. But there are clear signs in their recent financial filings that some are considerably better prepared than others to take advantage of the IT sector’s ride out of recession.

On the surface, Hewlett-Packard (HP) seems to be making good headway. In its third quarter ending 31 July 2003, the company was lauded for managing a return to profitability. And in the first set of truly comparable figures since its acquisition of rival Compaq a year ago, the company reported revenue up a solid 5% to $17.4 billion.

However, digging deeper into the activities of its business units reveals a less rosy picture.

Revenue growth from enterprise systems was flat and operating losses rose to $70 million, from $7 million in the preceding quarter. Strong growth in Windows and Linux based servers was offset by slow demand for its low-end Unix servers. And the server performance was particularly disappointing in Europe and Japan.

Meanwhile, the PC division, which had returned to profit in the second quarter for the first time in years, slipped back into the red, despite a 5% growth in revenue.

The company did display strength in IT services, with revenue growing 5%. That was fuelled by strong demand for managed services and customer support. But the overall services performance was dragged down by consulting and systems integration, as customers deferred or cancelled projects and took advantage of the apparent overcapacity in the market to erode fees.

Not for the first time in HP’s recent history, it was left to the company’s printing and imaging division to salvage its overall numbers. Revenue from printers and cartridges grew by 10% to $5.2 billion, while the unit’s operating profit of $739 million (a 14% operating margin) accounted for almost four-fifths of the company’s overall operating profit and the bulk of its $297 million net.

Eroded sales

That kind of captive revenue source would certainly be welcomed at HP’s arch-rival, Sun Microsystems. In its latest financial period to 30 June 2003, Sun reported a 13% fall in revenue to $2.98 billion. Of more concern to Sun customers will be the 20% fall in product sales over the period. That erosion has been a feature of Sun’s fiscal year, a fact underscored by full-year revenue figures dropping 8.5% to $11.43 billion.

That slippage had a direct impact on profitability, and resulted in Sun reporting a token net profit of $12 million in its fourth quarter, compared with $61 million in the year-ago period.

CEO Scott McNealy will need to become more aggressive with the company’s $3 billion cash pile if Sun is to avoid losing further ground. Despite making a few small acquisitions, mostly in the area of utility computing, the company still prefers to rely on its own R&D. In its 2003 financial year, even as sales tumbled, the company grew its R&D budget to $1.8 billion, spending an astonishing 24% of revenues.

Yet some of the radical changes designed to get the company back on a growth curve have not come from the R&D labs. A low-cost server line, based on Intel boards and the Linux or Sun’s own Solaris operating system, is designed to banish the traditional impression that Sun systems are pricey, and to give the company a lower customer acquisition point that matches that of Windows and Linux box sellers such as Dell and HP.

The company is also pushing into services with positive results. In its latest quarter, revenue from services grew 7% to $979 million.

Services platform

IBM has leveraged its strength in services throughout the industry recession to keep its overall performance looking relatively healthy.

In its second quarter to 30 June 2003, the systems and software giant reported revenues up 10% to $21.6 billion, a figure that was artificially boosted 7% by the strengthening of the euro against the dollar and by the addition of the PricewaterhouseCoopers consulting group to the revenue stream since the year-ago quarter.

Services, certainly, kept the numbers looking solid with revenues up 23% to $10.6 billion (or up 14% at constant currency rates). With revenue from maintenance contracts excluded, the IT services division’s performance looked even better, up 25% (17% at constant currency). And there is no fear of the flow of services business drying up. IBM signed $10.7 billion in services contacts during the quarter, adding to its stockpile of $112 billion in fees due in coming years largely from outsourcing deals.

The services business has been established as a platform for the sales of other IBM products, but even that failed to hide some significant problems within several key divisions.

The company’s computer hardware business had a 1% decrease in revenues to $6.6 billion (a 6% drop at constant currency), although certain lines still showed growth. The systems group, which sells IBM mainframes, servers and storage systems, reported a 10% rise in sales (3% at constant currency), although mainframe demand sank 7%. Elsewhere, PC sales slid 3% (8% at constant rates) to $2.7 billion.

Partially offsetting those declines was a rise in software revenues of 6% to $3.5 billion, led by strong demand for the DB2 database product and the WebSphere line of middleware products. However, there was a clear weak spot in software, the company’s Lotus groupware unit, which was hit by a 3% drop in sales.