No stopping Acer

(By Richard Holway 8.30am Thurs 12th Nov 09) I have played a little game recently, asking people who is the #1 suppler of PCs in the European market. Everyone answers either HP or Dell and are surprised when I tell them it's Acer – because they are King of the low cost Netbook.

This situation was maintained in Q3 according to Gartner. In Western Europe Acer had a 28.3% market share compared with HP’s 21.5% share. Overall, the number of PCs shifted was down slightly. As units get cheaper and cheaper, I expect the revenues earned declined quite significantly.

UK PC sales were down 2.3%. If you want another example of ‘Diversity of Performance” this is about the best. Acer sales were up a massive 35%. At the other end of the price scale, Apple was up 3.8%. Conversely Toshiba, Dell and HP slumped 26%, 15% and 10% respectively.

To repeat, Gartner figures are volume/unit based – by revenue it must have been even more awful.

BT Global Services on the right road?

(By Richard Holway 8.00am Thurs 12th Nov 09) BT’s results for Q2 were bad but not as bad as expected. At £5122m, revenues were down 3% or down 6% on an organic, constant currency basis.

Of course, it is BT Global Services which most interests us. Certainly, at the profits level there is cause for mild optimism. EBITDA of £95m was up 53% on Q1 although still down 10% on Q2 2008. However, an operating loss of £94m was reported. The revenue situation is complex. Down 3% at £2024m at the headline’ level, down 8% organically but ‘only’ down 5% if you adjust for the ‘major contract milestone’ payment made in Q2 2008. As you can see, even at the EBITDA level, profit margins are still <5%.

Order intake, at £1.4b, was the same as Q1. But orders are for lower values and BT reports continued delay in customer decision making due to “the current economic climate”. BT GS intends to focus on “higher quality new business” which “will lead to a lower order intake compared with the last FY”. That’s sounds like a good policy to me!

The informal feedback that we get certainly indicates a BT Global Services that has faced the abyss and has realised and reacted to its significant problems. There seems to be a mood of ‘we are on the right road’. Of course, the spectre of the NHS IT programme still looms as the deadline of all deadlines fast approaches.

BT Global Services, as we have reported on many occasions, is quite different in the UK than internationally. In the UK it is much more your standard IT services player. Outside the UK it is just a network management company for large enterprises. It faced even more problems in its international operations than in the UK. They have since sold off units in France in Germany.

My own view is that BT are clearing up parts of BT Global Services for a sale when valuations improve. They at least seem to be on the right road to achieve this.

Aveva finds new business hard to come by

(By Philip Carnelley, 12 Nov 09, 08:15) Aveva, the CAD/CAM software company, has reported that its half year revenues fell 7% to £69.9m, while PBT fell from 20% £29.2m to £23.3m. Still, a PBT margin of 33% is pretty good in the present climate. The drop in sales is not unexpected: as we reported back in May (Aveva shines – but storm clouds loom) a general funding squeeze in its core areas of oil, gas, power and marine is inhibiting its clients’ major capex projects. The biggest difficulties were in marine in Asia Pacific, and in North America. The company is increasingly reliant on recurring revenues – now 69% of the total. This is in part because of a drop in license fee sales, but also due to an increased number of customers adopting a rental purchase model - with lower payments in the first couple of years, likely paid from opex not capex, but higher over the longer term. Aveva restructured operations during the half and so profitability should rise going forward. Meanwhile the still-healthy margins helped a rise in net cash from £101m to £134m.

HP augments networking capability with 3Com

(By Philip Carnelley, 11 Nov 09, 22:00) HP has announced that it is to boost its networking capability by buying venerable network products provider 3Com, for $2.7b in cash – around 2x revenues and a 53% premium on its closing price yesterday. 3Com’s board has approved the deal.

Founded in 1979, 3Com has been almost synonymous with Ethernet products. Ethernet is the basis for most local/wide area networking today and was invented at Xerox Parc by a team including 3Com’s co-founder, Bob Metcalfe.

This is a direct response to Cisco. Cisco has been increasingly looking to move up the IT food chain, taking on increasing numbers of software applications, and setting up with EMC to sell data centre solutions (Cisco and EMC combine to form Acadia, take on HP and IBM). HP is now expanding in the other direction. This move also helps HP match IBM in yet another arena. As networking is – unlike other areas of IT – largely standards-compliant, then increased competition is likely to drive down margins through extended user choice.

In a linked move – to "facilitate communications with investors regarding today's announcement" – HP issued a trading update for its FY09. Q4 revenues were down 8% (5% at constant currency) to $30.8bn. Eps was however up 18% on the prior year. The one snippet of information in the release was that sales were boosted by significant growth in China. A full earnings release is scheduled for 23rd November.

More for a lot, lot less at Vodafone

(By Richard Holway 9.00am Wednesday 11th Nov 09) There are very few FTSE100 constituents that fall into the TMT category. Vodafone is one of them. Which is one reason why I have always taken a keen interest in their fortunes. The other is that I have been a long term shareholder ever since I got my first brick of a mobile phone back in the 1980s. For almost all that time, I have been used to uninterrupted revenue, profits and share price growth. Mobile was afterall the place to be.

Although Vodafone did indeed report revenue growth of 9% (to £21.8b) in the six months to 30th Sept 09, its excellent profits growth of 73% (to £5.75b) was fuelled by CEO Vittorio Colao’s £1b cost cutting programme last year.

The news that struck me most was Vodafone’s performance in India. If there was ever a growth market for mobile phones then the BRICs are it. Vodafone’s future probably lies in making it big there. But the price competition in India seems to be immense. Vodafone boosted customer numbers by 50% in India but its revenues were up just 20%. A price war between at least 12 competing suppliers is dragging down prices to levels unimaginable here. And with it margins.

The same trend applies in the UK and the rest of Vodafone’s established markets. The availability of the iPhone on Vodafone, O2 and Orange in 2010 will create price competition even at the premium end of the business. Also the huge increase in the use of mobile data services will put a strain on the network requiring additional investment.

So from almost every direction a case of More for a Lot, Lot Less.

Micro Focus integrations ahead of plan

(By Philip Carnelley, 11 Nov 09, 08:00) Micro Focus has issued a trading update on its first half results. It expects to report revenues of c$195m - a rise of 44%. Like-for-like growth would be around 5%. On a call this morning CFO Nick Bray said they weren’t overly excited about that 5% figure, but they are pleased with the performance of the new acquisitions. The revenue run rate from the Borland and Compuware businesses is 8-10% ahead of expectations and Micro Focus is making rather faster progress on cost reductions, improving EBITDA significantly: 30% anticipated rather than 15% as previously. On the call, Bray commented that the much-needed new product road map is now being unveiled to analysts so we are hoping for an update very soon. No word on the hunt for a new CEO.

The market really liked all this! MicroFocus shares currently up 19% at 406p. That's a 38% rise this YTD.

Adobe pinning its growth hopes on the Enterprise

(By Philip Carnelley, 10 Nov 09, 20:00) Last week we attended an analyst event addressing “Adobe in the Enterprise.” Adobe is, in a sense, one of the industry’s better-kept secrets. Despite the ubiquity of its pdf reader and Flash website software, few appreciate that it is one of the top dozen software vendors globally, with over $3b in revenue. Even fewer probably appreciate that around 30% of that is its "Enterprise" business. But sharp-eyed TechMarketView subscribers will have seen in our CompanyViews report earlier this year that we ranked Adobe the 11th biggest software supplier to the UK market, with an estimated £115m in software revenue. The proportion of Enterprise sales is lower in Europe than the US, but the UK is one of Adobe’s ‘tier 1’ countries, and we estimate "Enterprise" is north of 25%. However Adobe has struggled to maintain revenues of late and indeed they're down 18% in the first nine-months. Today, it announced layoffs of 680 jobs, around 9% of its workforce.

Adobe is anticipating that "enterprise business" will be the main source of revenue growth for the next couple of years. That said, its traditional desktop publishing business should receive a fillip next year when the new version of its Creative Suite is launched.

For Adobe "enterprise business" means automating business processes using a range of products. Its USP (this is our assessment, not Adobe’s) is that it has a holistic approach to process automation that can encompass fully-paper through to fully-electronic versions of the same process. It talks a lot about the ‘user-centric’ approach. For example, a pdf form can be filled in online; or it can be printed off, filled in manually, then scanned and reinserted into the process. We had an interesting presentation from the CIO of HMCS (Her Majesty’s Courts Service) who explained that – among many other considerations – young judges work prodominantly electronically, while elder ones never use technology newer than a fountain pen. Their needs must all be met.

Adobe is finding most traction for its approach in heavily regulated sectors, particularly government and banking. Key customers in the UK – in addition to HMCS – include HMRC and the FSA. Enterprise business is driven at least in part by its SI partners including majors like Accenture and Capgemini, and other resellers.

Despite the undoubted pressure on government spending, the drive to put government processes online both for better citizen engagement as well as greater internal efficiencies makes us think Adobe is right to look to its enterprise business for growth. One supportive statistic: Kumar Vora, VP and GM of Adobe’s ‘Livecycle’ product line (a large chunk of the Enterprise business) said that official US government estimates are that in 2005, its citizens spent ten times as much time filling in government forms (a mere 10 billion hours p.a.!) as they did in 1981.