My love affair with Capita continues unabated.
Results for the full year to 31st Dec 08 show the usual ‘Boring’ consistency that we have learnt to expect. See Capita FY PBT up 19% on strong outsourcing demand. The 22% increase in EPS represents the latest in an unbroken record of EPS growth stretching back to their IPO in 1989 (and probably beyond). Only one other quoted UK SITS company – Sage – has such an unblemished record and therefore a coveted Holway ‘Boring Award’. An incredible achievement. Other headlines show revenues up 19% to break £2b (£2.07b) for the first time with PBT up 19% at £238.4m.
On top of that the outlook looks equally rosy with “record contract wins” eg Resolution (£580m/12 yrs) and Prudential (£722m/15 yrs). Indeed today they also announced a £87m/8 yr contract with British Islamic Insurance Holdings. Capita’s forward order book is so strong and long that, as Pindar told me some time ago, the best way he could find of boosting profitability for the next few years was to stop selling! (Which, of course, he would never do)
Even our concerns about a lack of offshore capability has been partially addressed as the Pru contract has doubled Capita’s Mumbai headcount to c2500.
As I said earlier this week (see Is it a Bear?) , BPO is one of those sectors that does even better in times of economic woe. Capita, in my view, is the ultimate “safe haven in troubled times”. Of course, I’m not the first to realise that. Capita’s stock price already has that premium built in. Even so, Capita is the ‘best’ performer in the Holway Tech Portfolio this year – purely because it hasn’t fallen like the rest! Anyway, my friend Paul Pindar hates me calling Capita a ‘tech stock’ – probably rightly given what is happening in the wider tech world right now.
Also note that Martin Bolland has joined as a NED. Martin was with Alchemy for ten years to Dec 07. Many (like me) expected him to take over from Jon Moulton and his resignation was therefore something of a' surprise'. Martin is highly regarded and should make a major contribution to Capita’s ‘deal-making’ capabilities.
Friday, 29 February 2008
Capita continues on its 'Boring' way
Who will buy the SI bit of T-Systems?
DT’s CFO Karl-Gerhard Eick said yesterday that they were “days or weeks” away from selecting a partner for the SI bit of T-Systems. Earlier this month “a person close to the negotiations told Reuters T-Systems was still in talks over the future of its systems integration unit, with three companies left in the running. The companies are US software development services provider Cognizant, India's Tata Consultancy and Canadian IT company CGI, the person said”.
In today’s Morning Briefing, George O’Connor from Panmure Gordon said “In the mix the SI division T-systems reported revenue down 6.9% to €11,987m with a loss of €323m, admittedly a 61.3% improvement on 2006. According to IDC analysts Rene Obermann’s strategy about building network centric ICT paraphrases BT’s slogan and success formula, but T-systems is not as far down that road as BT. Obermann mentioned that a partner will be announced in a few weeks.
Is Logica CEO Andy Green being radical enough – the forthcoming turnaround plan looks to making the existing bits work better – but we feel that scale to compete effectively across Europe is also a big issue. We appreciate the difficulties in restructuring a German business, but given his success at BT is there an opportunity here for Logica CEO Andy Green to pull a rabbit out of hat?"
Other rumours have linked EDS with T-Systems – which , to me, would be a much better solution to all the candidates listed above.
Read Cornelia Wels-Maug, from Ovum, take on this - T-Systems put to the acid test.
Thursday, 28 February 2008
UK executives slowest to recognise social networking opportunities
A report released today and previewed in the FT – Executives resist new medium – has shown that UK businesses had encountered far more resistance from their boards to invest in social networking. The UK was behind the US, Canada and (rather surprisingly) France. UK companies were at the “learning stage” whereas US companies had moved to the “experimentation” stage.
This is hot on the heels of news from Nielsen Ratings that Facebook users fell by 5% between Dec 07 and Jan 08.
I must admit that this finding fits with the reaction I get from the vast majority of UK executives I meet – particularly those over 40. They basically “don’t get it”. Indeed, I can’t recall another topic which has such a marked “generation gap”. It is extremely short-sighted for all the reasons I’ve banged on about for almost two years now. See some of my earlier posts like Business implications of Social Networking , The corporate side of Facebook or Facebook and the Social Networking phenomenon.
Garden starts to bloom for Steve Vaughan at Communisis
I share a passion for gardening with Steve Vaughan. Indeed we have both opened our Surrey gardens for the National Gardens Scheme. But my friendship with Steve started when he took on Synstar (the old Granada Computer Services). He turned a “bit of a basket case” into a highly valued IT services company and tripled the share price in the process when it was bought by HP in early 2005. Continuing the ‘basket case’ theme, in Mar 06, Vaughan was headhunted by Kevin Lomax to head up Misys’ Banking operations. It all went spectacularly wrong with Vaughan leaving after just three weeks quoting “material differences”. Not that difficult with Lomax, I have found! It was Vaughan, not Lomax, who came out of this episode with his credibility intact.
Vaughan then, in late 2006, joined print/direct mail company Communisis – which if not another ‘basket case’ had “overpromised and underdelivered” for many years. Being the good gardener that Vaughan is, he didn’t promise an instant makeover. Instead he pruned and replanted – I’m sure he spread some manure at various points too!
The first shoots of the turnaround came yesterday when PBT of £7.9m for the 12 months ended 31 December 2007 compared with a loss of £19.4m in 2006. Revenue rose to £290.6m from £260.6m whilst net debt has fallen from £44.9m to £26.3m.
There have been many eager to write off print services in today’s internet age. Just because the market contracts does not mean that individual companies cannot prosper. Indeed, as suppliers disappear those that are left can pick up extra workloads the revenues from which often go straight to the bottom line. Much of the hardware used has been written off long ago.
But, at the end of the day, companies, just like gardens, bloom not because of soil conditions or the weather but because of the experience and dedication of those that tend them.
Apple reaffirms 10m iPhone sales target for 2008
Apple shares rose 3.7% in after hours trading yesterday, building on a 3.2% rise during the day, when their CFO reaffirmed the 10m iPhone sold by end 2008. This is quite contrary to many other reports and blogs which have suggested it will fall well short – maybe only 7.5m sold. This has been fuelled by reports that Apple has scaled back on component orders – but, of course, this could just as easily be because of specification changes. On March 6th Apple will announce new business-friendly/Blackberry-type features for the iPhone as well as opening up the iPhone to outside developers.
Unlike last year when Apple was the BEST performer in the Holway Portfolio (up 130% - although I did sell half my holding at the point it had doubled) – this year it is the worst (down 38%). Apple, and its iPhone in particular, is a pretty good barometer of the likely health of the consumer tech market (particularly in the US) and is always referenced in my Beer Syndrome discussions. See Beer Syndrome Part 3 for the latest instalment.
Wednesday, 27 February 2008
Survivor Bias
In a speech yesterday Jon Moulton of Alchemy criticised the data used in research recently published by BVCA. As Patrick Hosking in The Times Business Commentary explained – A Blunt Message from Moulton – the figures had shown Survivor Bias. IE Consulting, who produced the research, had claimed to show that, in the last five years, P/E backed companies had increased staff by 8% pa compared to 0.4% pa for FTSE100 companies. Moulton said those figures were ‘very dodgy’ as they didn’t include all the P/E backed companies that had failed. If they had been included, Moulton reckoned “the number should be more like zero”.
Let me tell Jon that similar dodgy practices are one of the reasons why so many tech research houses produce statistics, and forecasts, that are often far too optimistic.
Let me list a few of the more obvious mantraps:
- information is presented in ‘units’ where as markets are measured in ‘revenues’. Anyone looking at the PC charts right now might believe that we are still in a fast growing market. But as anyone can work out, if PC unit volumes are rising at 10% pa but prices falling by 20% per unit…it’s not quite so good!
Determining historic market growth is often calculated by the detailed examination of the performance of the companies operating in that area. So many just look at the results of the Big Boys which distort statistics. At Holway, in the 1990s, our figures were based on the performance of getting on for 2000 companies. But, however you do it, you have to take care of the following:
- companies always headline “continuing revenues” and researchers often use that as their base. So, just as Moulton suggests, Survivor Bias inflates the overall figures. Indeed, although we at Holway always took the companies that ceased trading into account (consistently, by the way, 20%+ of the 1000+ companies we tracked!) I am not aware that any other researcher did that
- the less knowledgeable researchers often use the headline revenue figures – even though these are almost always inflated by acquisitions
- then we come to the ‘constant currency’ debate. Almost all the major researchers are US-owned and (as we know) Americans believe there is only one global currency – the dollar. Remember that $1 = £1 in 1985. So the UK market has doubled in dollar terms on currency flucations alone in the past 20 years.
All the mantraps I’ve listed above inflate growth. Maybe that’s why I/we were always accused of being ‘too gloomy’ whereas, in fact, we were just being ‘more accurate’.
Logica Share Price and EPS
What is so interesting about the chart is that EPS (5.4p) is now back to where it was in 1996. Interestingly the share price then (144p) was some 40% higher than it is today. This was because the 'expectation' was for growth - particularly as the Y2K and dot.com 'excitement' were just about to hit. Logica's share price stormed ahead after that. Indeed, they hit £24 (109p today) at their height in 2000.
So if you were a long term shareholder, or even a long term backer of Martin Read, you might be feeling a bit aggrieved!
Indeed, to use a headline I have used several times before, if this is a chart of the "Martin Read Years", we wonder what the chart of the "Andy Green Years" will be? Let's hope an improvement!
Logica returns
Before I get on to the FY07 results announced today, Id like to welcome the return of Logica – in my view the very BEST name ever given to a company in our sector. From today the CMG suffix is finally dropped.
This was also Andy Green’s first outing to present Logica’s results for 2007. He only joined seven weeks ago so has no responsibility for the poor results which had been widely trailed.
Revenue of £3073m represented a 3% organic growth. The UK performance was, if anything, worse than I expected with a 7.8% decline in revenues to £662.5m and a 61% fall in operating profits (to £30.5m). The only regions to show any operating profit increase at all were the Nordics and Germany (where a profit was made as opposed to a loss in FY06) So overall operating margins slipped from 7.6% to 6.8%. The enormity of this shortfall is apparent when compared to a near 10% group operating margin achieved just a few years ago. It was Martin Read’s 10% margin goal – and his obvious failure to achieve/maintain it – “whot done for him” in the end.
Trying not to dwell just on the bad bits, I’ll point out that Logica’s UK Public Sector (56% of Logica’s UK revenues) showed growth of 14% in H2. But even here, the fact that UK Public sector was over half of UK revenues gives cause for concern. Public Sector is only c30% of the UK IT services market; so Logica is already over exposed to a sector which is itself subject to lower growth rates. Logica’s high growth in that sector just underlines how poorly it has done in the UK Commercial Sector – and that was in 2007 before any effects of the economic downturn were felt. For example, Logica’s UK revenue from Financial Services fell 29%, Telecoms & Media was down 34% and Industry, Distribution & Transport down 35%.
Outlook?
Green says “Our outlook for 2008 is set against an uncertain market environment. Although we have seen a few incidences of slower spending, market activity levels generally appear resilient”.
So what to do?
It would have been totally wrong if Green had announced significant strategic changes so soon. Let’s give the guy the normal 100 Days which just about equates to Green’s commitment to “communicate the outcome of the strategic review by the beginning of May”.
If I was Green, these are the bits I would concentrate on;
- increasing the offshore delivery capability. Logica trails its main competitors in this (see my Indian Headcount post earlier this month) It’s not too late. Continental Europe (unlike US and UK) is still hesitant on the use of such resources. Whether they can build it fast enough organically is another matter. An Indian acquisition would be my preferred route, but would Logica’s beleaguered shareholders stomach that? Indeed, given the aversion of many in Continental Europe to Indian offshoring, maybe there are more acceptable places to achieve the same objectives?
- being a EUROPEAN IT services player. Trying to be ‘global’ is an ambition too far. That means the main emphasis is how they get decent momentum in Germany and even a presence in Italy and other European regions. The US should be seem as a European sales and support centre.
- what they are really good at. Currently Logica has still has too many fingers in too many pies.
- deciding if BPO is part of the Logica offering and, if so, really GO4IT. You can’t do BPO half-heartedly (as they seem to have done with Edinfor in Portugal)
- getting a grip on staff morale. Logica’s staff attrition last year was 16%. They cannot afford to loose too many more of their most experienced managers.
- remembering that he has inherited a fine UK company with a reputation and pedigree that most would die for. Play to those strengths!
As I have said far too many times, being ‘mid-sized’ is getting increasingly uncomfortable. But Logica is too big and too general to be ‘niche’. Ultimately I believe that Logica will be bought. But Green’s job is to restructure the company and boost shareholder value so that he gets hero status when that sale occurs in a few years time.
If it feels like a Bear. If it growls and bites like a Bear..Is it a Bear?
Sorry to recycle my headlines, but the “Downturn Question” is one that predominates all the industry conversation I have had recently.
In the last 5 days I've had 1-2-1 meetings with the CEOs of who run companies or divisions responsible, in total, for a significant part of the European IT services market. I could summarise every one of those conversations as follows.
“Richard, everybody tells me the economy is in for a bad time. Everything I sense would lead me to batten down the hatches – even start a downsizing programme. But, honestly, although we monitor it carefully I can find very little evidence in my own company of our customers cutting back their spend with us because of this”.
So, what is happening?
1 – The sub-sectors of the IT market now behave differently
There are many sub-sectors in the IT market and they are behaving differently. In most other IT booms (and busts) the sectors performed relatively in tandem as in “a rising tide lifts all ships”. But that is one paradigm which certainly doesn’t apply anymore.
Hardware – PCs in particular – is decoupled and already experiencing really tough times. In revenue terms in the US and Europe we might well already be in recession/decline.
New licence Software sales tend to behave in a similar manner to Hardware – they are similarly in for a tough time. (There are, as always, exceptions to this as I’m sure readers from Autonomy will be quick to point out to me!)
Existing software upgrades, however, can actually benefit from a downturn. The vast majority (around 90%) of the software market relates to product installed at least a year back. Indeed over 60% of software was installed over 5 years ago. So companies with high support revenues, established bases and ‘legacy’ systems can actually do well (ie see increases in business) in this climate as companies put off decisions on any change in software vendor.
IT Services covers everything from front end business consultancy (vulnerable), new systems design & development (another area at risk; except for projects with short payback periods) through application management (real ‘steady as she goes’ area whatever the weather) to ITO and BPO. These latter areas can also do well in a down turn as companies look to cut costs by outsourcing and/or screw their existing supplier for a better deal (particularly at renewal time) As in the conversation related at the start of this piece, the IT Services companies with high BPO/ITO/AM and other long contract/recurring revenues, have seen little or no effects of the downturn. Indeed Capita, for example, is one of those companies which might do even better in the current climate. Yesterday Xchanging announced its maiden results (see below) citing the current economic downturn as a reason why BPO in 2008 would be “an exciting place to be”.
2 – The geographies serviced by the IT market behave differently. But are they really now ‘decoupled’ from the US?
There are many geographies and, again, they are behaving differently – at the moment at least.
On the Best to Worst scales right now you would go from
- BRICs (Best)
- Middle East (still pretty strong)
- Continential Europe (obviously variations by country)
- UK
- US (Worst)
That’s why companies like HP and IBM (who both make upwards of 60% of their revenues outside the US) have not only reported pretty good results but have touted their global presence in their outlook statements. Oracle, Sun and Intel all get more than half their revenues from outside the US. Conversely, Cisco, Dell, Microsoft, Google, Apple and Yahoo all get the majority of their revenues from the US. In the case of Yahoo c70% from the US. This global exposure pretty much maps the confidence of their outlook statements – ie the more global they are the more confident they are! This seems to apply for the European players too. Against all the odds Atos Origin and Steria this week put out quite confident statements (neither has any real exposure in the US). Capgemini (which does) was more ‘cautious’ – although, to be fair, Capgemini also note that it could find no evidence of any downturn in its main European markets..
But will this ‘decoupling’ from the US last?
I have my doubts. For my 40 working years I have lived with the adage “When the US gets a cold, we get pneumonia”. I am pretty certain that will apply to the UK this time too. I think the effects on the rest of Europe will be less dramatic. The real question is what will happen in the BRICs? This is untested territory. In the last IT recessions, BRICs basically didn’t matter in market size terms. Now they do! Indeed, many companies are looking to the BRICs as ‘buck-the-tend’ markets to overcome the woes at home. I must admit to having serious doubts about the wisdom of this. But I have no previous experience to rely on so I’m going to wait a bit before making any judgement.
3 – “It’s the consumer, stupid”
I’ve made the point many, many times in the last few years that it has been the consumer not the enterprise that has driven tech spend. It’s easy to identify Apple or Nintendo with consumer tech, less obvious but none the less true to identify Cisco, Microsoft and Intel with consumer tech. Where more people would have problems is linking Accenture, EDS, Oracle and IBM to consumer tech. Even if the consumer tech link is not obvious, the consumer link is. These companies earn most of their revenues from customers who serve consumers – even Governments have to rely on consumers to earn the money to pay the taxes. So Friday’s news John Lewis shocks retailing with worst sales fall for year sent shock waves, not just through the rest of the retail sector – pushing shares in Next, M&S, Sainsbury’s etc all down significantly - but must ultimately have an effect on every part of the IT industry.
For how that might play out for these companies, GOTO 1 above and reread.
Hazards on the high-tech road ahead
For another view on the Hazards on the high-tech road ahead read Saturaday 23rd Feb 08’s FT.
FT to launch Social networking for TMT Executives
According to a report in StrategyEye yesterday – Financial Times to launch executive social network – the FT network is “an online forum for executives to develop and maintain contacts with other industry members”. It will cost £2200 per annum which will include free entry to one FT Global Conference. The selling point is that it will be ‘exclusive’.
I have to admit to grave doubts about this. The FT and the WSJ have both run into problems with their subscription services to their newspaper and its archives. Both have gradually been reverting to ‘free’ services. Will they face any better prospects in social networking?
Although I do subscribe to there being a market requirement for ‘niche’ social networking sites, the “exclusivity” should not –cannot – be gained by price alone. Indeed the price the FT is suggesting will mean that the vast majority of the people I would like to see as part of an ‘exclusive’ TMT network wouldn’t be there. The people who would join (because their company would pay) would be the marketing, analyst relationship and PR types. As these are the people that have paid Holway for two decades, I really mustn’t bite the hand that has fed me, but interfacing with this part of the TMT world is hardly what an exclusive TMT social network is all about.
Tuesday, 26 February 2008
When will they ever learn?
Last week Netstore announced that it was undertaking a review into possible past accounting discrepancies. It also put a ‘For Sale’ notice up. See Netstore invites bidders for March slowdown CRN 25th Feb 08.
As ever the ‘discrepancies’ relate to revenue recognisition and the associated cost allocation. I really don’t know how many times this lesson has to be learned in our industry. It almost put Oracle out of business in the early 1990s and there have been countless examples since. Having sat on many boards in the last 20 years I am still amazed at how much ‘discretion’ there is on the subject. Also how complicit auditors can be when faced with a CEO who wants to treat it in a particular way. (I commisioned the cartoon below for an article I wrote in early 1999 - see nothing changes!) It has certainly made my life as an analyst, comparing Company A with Company B, difficult. The problem survives in a big way even today with, for example, different companies treating their ‘investment’ in the NHS IT project in different ways and some software companies expensing software development and others capitalising it.
Anyway, much to the chagrin of Netstore shareholders, it looks like one obvious buyer – Computacenter – has ruled itself out of the running. In his typical blunt style CRN reports “Mike Norris, chief executive of Computacenter, one of several firms linked with Netstore in the national press, said: “I can categorically say we are not interested in Netstore and never will be.””
When will they ever learn? - Cartoon
The 'Arthur' in the cartoon was a reference to Arthur Andersen...remember?
Monday, 25 February 2008
Xchanging, and BPO, benefit from slowdown
Pretty stellar maiden results from BPO player Xchanging today. Indeed Xchanging says it will benefit from possible recession. 19% revenue growth last year and CEO David Andrews seems pretty happy with another 20% in the current year. Read my (ex) Ovum Holway colleague Samad Masood’s review Strong maiden performance from Xchanging.
BPO really is one of those markets which actually does better in a slowdown. As Xchanging concentrates on the financial services marketplace that is doubly true. Anyone who has studied Capita over the last two decades will know that.this is true for them too – they are a good place for comoanies to turn to educe costa and risks during a downturn. By amalgamating workloads, the BPO players can both make savings for the customer and profits for themselves. Win Win.
The ‘trick’ is of course to win enough work to allow that workload consolidation to happen How many aspiring BPO players win the first big BPO contract and then nothing more of any size This seems to be Logica’s problem with Edinfor in Portugal. BTW - The FT today reports that Logica is pushing for control of Portugal IT offshoot by buying the 40% of Edinfor it currently doesn't own. Last week Logica lost Edinfor's CEO Raul Mascarenhas after just 8 months in the job. He has left to join Deloitte. See Logica bosses on the not so merry-go-round from The Sunday Times 24th Feb 08.
Stop Press - EDP has just (9.30am 26th Feb 08) announced that it is exercising its put option on 40% of Edinfor requiring Logica to buy the stake for Euro55m in a deal expected to be concluded in March.
We wait to hear more at Logica's results announcement this Wednesday.
Capgemini aspirations in the US and India
Good article Capgemini to target expansion through acquisitions in the FT on 25th Feb 08. CEO Paul Hermelin plans “small acquisitions in the Us to bolster its consulting business”. On the other hands he seems to learnt a hard lesson from the acquisition of E&Y’s consulting business in 2000 where he rather understates the wisdom of the purchase as “not the right acquisition at the right time” or in my words “completely the wrong acquisition at the wrong time at a ludicrously high price where the integration of the completely differing cultures was botched”.
Interestingly Hermilin declares his target of having more than 50% of staff in India by 2010. that equates to 45,000 out of the 84,000 headcount by then. An 8000 headcount increase is planned to 28,000 by end of 2008.. Hermelin reckons any economic slowdown will accelerate that move as customers look to even steeper cost cuts in their IT budgets.
“I think there is a world market for maybe five computers”
Quote attributed to Thomas J Watson President of IBM in 1943 (It is reckoned to be one of more famous ‘misquotes’ though. For more information see Click here)
I been writing about SaaS or Utility computing or Cloud computing or whatever the latest name goes by, since 1995. Indeed even readers who only got into the Holway’s HotView habit in the last year must be pretty familiar with the theme by now.
Yet another article on the subject Microsoft predicts the rise of the datacentre in the FT on 25th Feb, caught my eye. This time it is Microsoft saying that it will build a giant datacentre of incredible power. We already know that Amazon, Google, Intel and IBM are in various stages of planning/building such datacentres.
It all reminded me of one of the quotes that is often used to demonstrate the fallacy of making predictions. In 1943, Thomas J Watson, President of IBM, supposedly said “I think there is a world market for maybe five computers”. Ha, ha, ha – how we all laughed. Even though the prediction was actually true for about ten years after it was made! Almost every forecaster would settle for a ten year limit on the testing of their forecasts!. Of course, by the 1980s and the advent of the PC, such a statement looked plain daft.
But now you could have a really serious debate about whether, in say the next ten years, such a prediction might indeed be true. If Cloud computing really did take off we might, in theory, need just one mega computer/datacentre. Clearly competition and security issues would mean that one monopoly would not be allowed. So five seems a reasonable number!
You could then go on to muse whose will they be? Of course, that’s why the current Microsoft/Google tussle is so important. Microsoft has almost everything to lose if Watson’s prediction eventually comes true and they are not a player – having chosen instead to protect their desktop software cash cow.
Unfortunately I think it might well be Countries who control and/or “Sovereign Wealth Funds” who own these datacentres. Maybe the big global battlefield of the next 25 years will be fought on this issue.
The issue reminds me of my mixed emotions over the NHS medical records database. The logic for this is overwhelming but I am scared stiff that 800,000 NHS staff can access my medical records. Indeed, given our poodle-like relationship with the US, I could see them accessing it too. So after the usual 2 hour queue at US immigration in 2012 you could get “Why did you not declare that you went to your doctor with a drug problem in 1975?”.
That’s why the logic of Cloud computing, the ultimate Holway Martini Moment and the achievement my MobiTop, excites and scares me all at the same time.
Quotes
Sometimes the true wonder, the true value of the internet just comes out and hits you. I was Googling to find the precise wording of the Thomas J Watson (Ch of IBM) quote I used above. Found it on Wikipedia (together with a lot of evidence that Watson never ever used the words in his most famous quote)
But I also landed on http://www.brainyquote.com/ . What a fantastic site! It lists another 20 of Thomas J Watson’s quotes. I really do commend you to read them as every one is a winner.
My favourite, because it is so true in all my experience of meeting both “big people” and even more who think they are ‘Big’, is:
"Really big people are, above everything else, courteous, considerate and generous - not just to some people in some circumstances - but to everyone all the time".
I’d like to appear in a Book of Quotations someday. Above my desk is a copy of the very first personal profile of Holway to appear in Computing back in 1985. Its headline is:
“If you can’t make a mistake, you can’t make a decision”.
Which I still wouldn’t mind on my tombstone. It's similar to another Thomas J Watson quote:
“The way to succeed is to double your error rate”.
If you do nothing else today, read Thomas J Watson’s quotes!
Thursday, 21 February 2008
Facebook suffers first monthly user decline in UK
Is Facebook finally losing its glow? asks The Times as Facebook records its first ever decline (down 5%) in users between Dec 07 and Jan 08. Mind you they still have 8.5m users and are therefore 3.5m ahead of second placed MySpace (which also declined 5%).
The majority of my friends will no doubt shout "I told you so" at me. I think that is a bit premature. Moving from Dec to Jan is a funny time of year anyway - I'd wait for a month or so to see the real trends.
On the other hand, people I know get bored with Facebook for a number of reasons:
- they stop getting new friends
- they get fed up with the apps and ads
- they get fed up the puerility of it all (I mean, I really don't want to know that "X has thrown a rat at Y")
- they (particularly me) get fed up with the Twitterers
- they find that they don’t live happily alongside other Facebook ‘friends’. As in “Why should I belong to a social network that my Boss/Grandma/ex-boyfriend/Teacher/son/grandson belongs to?” (Actually I find Facebook appealing BECAUSE of the wide range of ages and backgrounds of my ‘friends’ – maybe they don’t feel the same way!)
Of course, the moment you stop checking in once a day, the value of Facebook not only declines for you – but for your friends too. So it’s a spiral.
If the appeal of Facebook is declining, one of the reasons is that Mark Zuckerberg both didn’t answer and, much more importantly, didn't take any action as a result of my Open Letter to Mark Zuckerberg last year. In it I asked him to set up different access scenarios for different types of ‘friends’. So that those I classed as ‘business’ could only see my business bits, ‘friends’ only the friends' bits and ‘family’ could only see the family bits and so on. That would allow my daughter to do/say what she liked with her friends; safe in the knowledge that I would never find out.
It seemed a pretty simple amendment to me. Maybe I should send him another letter?
Anyone got his email address because he doesn’t reply to Facebook messages!
Don't be cruel
I think HotViews readers are developing a cruel streak. Today I was sent the following link to a piece of Forrester research which was published on 31st Jan 08. It said with confidence that Microsoft wouldn't make any big acquisitions in 2008 as "its size, visibility to antitrust bodies and strategy ruled out big deals".
On 1st Feb 08 Microsoft announced its $44.6b bid for Yahoo.
I think I'd better take care though as this is the second time in as many weeks I have criticised Forrester for getting their forecasts wrong. I better be careful for the sole reason that someone might start to look at some of my (or even Ovum's) forecasts and compare them to the actuality. As I'm certainly not "without sin", I better be careful who I throw my stones at.
Forrester Research
January 31, 2008
Microsoft Will Make Small Acquisitions
Its Size, Visibility To Antitrust Bodies, And Strategy Rule Out Big Deals
This is the fifth document in "Software Market Consolidation Trends" series.by R "Ray" Wang, Andrew Bartels with Sharyn C. Leaver, Heidi Lo
EXECUTIVE SUMMARY
Among the four large software vendors, Microsoft has been the least active in making significant acquisitions of midsize or large vendors, and we don't expect that to change. While Microsoft has bought many small software vendors over the years, it has made only five acquisitions of software firms with revenues greater than $150 million — with only one in the past four years. Strategically, Microsoft has focused on being a platform vendor that an ecosystem of independent software vendors (ISVs) can use to create their own software products. Microsoft's size and its scrutiny by antitrust authorities in Europe and the US also limit its ability to make large acquisitions. However, we expect Microsoft to make some acquisitions to fill in gaps in its evolving Dynamics enterprise application product.
Pay rates plunge for IT project managers
Thanks to George O'Connor for alerting me to a piece in ContractorUK entitled Pay rates plunge for IT project managers. As I know that a majority of HotViews readers are involved in IT project management in some way or other, the article talks of a "a looming price war in a sector of the IT jobs market which is now "oversupplied". This had led to "senior freelance IT project managers cutting their rates by 35%". This was apparently all due to "less-qualified ex-permanent IT staff starting 2008 as freelancers". They quoted much lower rates than older, more experienced freelancers causing the "price war". The article seemed to be well researched and based on 500 interviews - which is significant in any research project.
Assuming this to be the case, it is cause for significant concern.
- it would indicate that quite a few IT staff were 'let go' at the end of 2007.
- they hit the freelance market in January, just as the IT spending squeeze started to bite.
- as I have said for two decades now, I believe the freelance/ITSA market is a 'barometer' of the SITS market. It has usually given an early warning of woes (or better times!) to come. Ie a glut of freelance IT project managers prepared to work for 35% less TODAY will equate to great problems for the IT consultancies like LogicaCMG TOMORROW. However back in January the CEOs of the leading ITSA's told me that their businesses were holding up well and that my ITSA barometer theories didn't apply anymore. I always get concerned when people tell me that the lessons of history don't apply as we are now in a new paradigm!
The other interesting angle on this is that it was only a month ago that HM Govt announced plans to fast track IT Project Management post graduate training in the UK. See Climbing the IT ladder with the bottom rungs missing. I know this might sound cynical but I remember the awful Patricia Hewett (when Head of the DTI) addressing an Intellect Conference in early 2000 telling everybody to go out and recruit/train new IT staff to meet the demands of the industry over the next few years. This was immediately followed by the biggest slump in demand the sector has ever seen.
Computacenter - I give up!
Sorry, and thanks to all those who emailed me, but the Computacenter story still didn't appear correctly in the email version yesterday. I've discovered that Feedburner doesn't like certain characters like 'less than' signs. There clearly were some benefits in having IT and editorial departments afterall!
Anyway, I'm not going to try again. If you want to see the proper story of the failed 2005/2006 Computacenter MBO, see Sadler quits Computacenter on the website.
Wednesday, 20 February 2008
TV wars?
Two pretty important and, in many ways linked, pieces of news surfaced yesterday concerning how we are likely to be entertained in the future. Firstly, Sony and Blu-ray emerged as the victor in the 'War of the HD Formats' against HD-DVD. This is excellent news for consumers who really couldn't give a tinker's cuss for which format was used – they just wanted to avoid buying the wrong kit (as many did with Betamax, Philip’s optical discs, 8 track etc in years gone by) The Holway household can now finally use its giant HD plasma screen for the purpose it was intended.
As an aside, my friends tell me that it was the pornography industry in the US that finally put the pressure on for a decision to be made. I’m told that more pornographic DVDs are produced than for all other genres put together. It is also, I understand, one of the few industries that has stayed on shore in the US. Pornography in HD? Well, “whatever turns you on" I guess!
But the other news release that caught my eye was from Ashley Highfield, BBC Director Future Media (who very kindly addressed a recent meeting of the Prince’s Trust Technology Leadership Group which I Chair) See BBC viewers switching to watch online in today’s FT. An amazing 500,000 programmes are now being viewed per day via the BBC’s iPlayer with 17m programmes being downloaded or watched since the launch just 6 weeks ago. For those of you who haven’t experienced it yet, I commend you to do so. It is remarkably easy and fast to install and use. Just like the BBC Radio Player revolutionised my listening habits, I feel that BBC iPlayer will do the same for my TV watching. It is particularly good at time shifting – like I rarely manage to watch BBC Business Briefing at 6.00am…but now find I can watch it on my PC when I want or, indeed, even download it to my iPod to watch on the train into London.
But of course, the iPlayer output is far from HD! So are Blu-ray and the iPlayer (or any other ‘Video on Demand’ service in competition? Absolutely not! In our household they will live happily alongside one another.
Blogs and Bloggers
I managed to get a mention in the Top 100 Analyst Blogs published by Technobabble. They very generously make the point that Holway’s HotViews would have been ranked higher if the latest stats had been used. And some! – we tripled our readership in the first six weeks of 2008.
I’ve reported on the increasing importance of blogs/bloggers before. If you are a vendor, ignore them at your peril! It is interesting to note that most of the news flow about the Microsoft/Yahoo/News Corp/AOL saga is now driven by bloggers. They are the ones who break the stories that you then read day-by-day on the newswires and newspapers.
So what really interests me is how the ‘old-established’ analyst firms have adapted (or not) to blogs. I’d like to think that I was the one responsible for getting Ovum into the “daily news drug addiction” business with Hotnews and EuroView. (Actually I don’t just ‘think’ I was, I was!) But, now I've left, I increasingly wonder if their heart is still in it! Forrester ‘gets it’ but IDC, PAC and Gartner (for example) haven’t established any regular dialogue with their customers or potential market. They risk losing both their influence, and ultimately their customers, if they don’t ‘wake up’ to the challenge.
MacBook Air or Thinkpad X300
I gave you my immediate views on the MacBook Air after watching Steve Job’s annual performance at MacWorld in January. It just oozes ‘style’ but I feel the substance is greatly lacking. I really want to replace my Panasonic Toughbook which has given me such sterling service for the last five years but is now…well, the best word is ‘slow’. But I insist on a laptop that weighs no more than 3lbs (my Toughbook is 2.9lb)
So I am mighty interested in the launch of the Thinkpad X300 from Lenovo due for 26th Feb 08. Read Businessweek 25th Feb 08 Building the Perfect Laptop. It’s actually lighter than the MacBook Air but also has a built in DVD drive, an Ethernet connection, removable battery and three USB ports – all of which the Air does NOT have. Of course it only runs XP or Vista (only you know whether this an advantage or disadvantage!) Only real downside is that it is scheduled to cost $2,700 compared with $1,800 for the Air. But if you were the type of user able to consider the Air in the first place, this is hardly likely to put you off.
HP and Computacenter - again
Readers should note HP's results last night - which were pretty good! See HP shrugs off slowdown fears in today's FT. Mark Hurd (HP's Ch and CEO) noted “a little bit more caution in the consumer segment”. But it was interesting to see the new emphasis that companies are now putting on their global - ie non-US - activities. Hurd reckoned that "broad geographic reach" meant HP was well positioned to weather any slowdown in the US. “Sixty per cent of our revenue is outside the US, I think that’s probably an asset.”
As George O'Connor comments today, this bodes well for Computacenter. "HP is the mainstay of Computacenter's PC sales as we estimate that HP PCs account for c£416m out of 2007E PC sales of £1,005.3m."
Sorry, but the last - and most important - bit of my post on Computacenter was omitted from the email version yesterday. It dealt with the end 2005 MBO attempt which failed at a significantly higher price than their shares stand today. I reproduce it again below.
I note that Ron Sadler quit the Chairman’s role at Computacenter yesterday “with immediate effect”. I’m sure I don’t need to tell you why but clearly he’ll be spending much of his time in Newcastle from now on. Perhaps he should join the board of Sage instead?
George O’Connor from Panmure Gordon said that the departure was ”good news” in his morning note. “Hopefully a new chairman with relevant sector expertise can drive the transition in Computercenter and inspire the CEO to be bolder in his aspirations. Mr Sandler moved too slowly, in our view”.
I’d certainly concur with that view. Computacenter has been one of those companies which says it knows what to do but just can never do it! For nearly a decade now we have been told that “PC distribution” is a dying trade and that Computacenter has to move up the value chain. But they seem to have great difficulty doing it. Reviewing what my (ex) colleague at Ovum, Kate Hanaghan, has written about Computacenter for that last few years, the headlines all seem to contain words like “tough”, “disappointing”, “poor growth in IT services” etc. The Digica acquisition, which took them further into managed services (a good move), has, at their own admission, not met their expectations. Indeed CEO Mike Norris said in their IMS a few weeks ago that Computacenter hadn’t had “a stellar year”. The only problem with that is that 2007 was a pretty good year for the market – certainly that will be how it will be observed after people review 2008! Norris says he hasn’t seen any effects of the downturn…yet.
Computacenter are now a member of the growing 50% Club – ie their shares are now less than 50% than their 2007 high. You may remember that Norris and the founders of Computacenter planned an MBO back at the end of 2005. The MBO price was rumoured to be 250p when the share price was 214p. Shareholders didn’t much like that.
Today, Computercenter trades at 162p…
Tuesday, 19 February 2008
Sadler quits Computacenter
I note that Ron Sadler quit the Chairman’s role at Computacenter yesterday “with immediate effect”. I’m sure I don’t need to tell you why but clearly he’ll be spending much of his time in Newcastle from now on. Perhaps he should join the board of Sage instead?
George O’Connor from Panmure Gordon said that the departure was ”good news” in his morning note. “Hopefully a new chairman with relevant sector expertise can drive the transition in Computercenter and inspire the CEO to be bolder in his aspirations. Mr Sandler moved too slowly, in our view”.
I’d certainly concur with that view. Computacenter has been one of those companies which says it knows what to do but just can never do it! For nearly a decade now we have been told that “PC distribution” is a dying trade and that Computacenter has to move up the value chain. But they seem to have great difficulty doing it. Reviewing what my (ex) colleague at Ovum, Kate Hanaghan, has written about Computacenter for that last few years, the headlines all seem to contain words like “tough”, “disappointing”, “poor growth in IT services” etc. The Digica acquisition, which took them further into managed services (a good move), has, at their own admission, not met their expectations. Indeed CEO Mike Norris said in their IMS a few weeks ago that Computacenter hadn’t had “a stellar year”. The only problem with that is that 2007 was a pretty good year for the market – certainly that will be how it will be observed after people review 2008! Norris says he hasn’t seen any effects of the downturn…yet.
Computacenter are now a member of the growing 50% Club – ie their shares are now less than 50% than their 2007 high. You may remember that Norris and the founders of Computacenter planned an MBO back at the end of 2005. The MBO price was rumoured to be 250p when the share price was 214p. Shareholders didn’t much like that.
Today, Computercenter trades at 162p…
Beer Syndrome Part Three
The Times on 18th Feb 08 reckoned that many Americans will use their c$600 rebate cheque in June/July, designed by Bush to kickstart the economy out of recession, to go buy consumer electronics with Apple’s iPod top of the list. Read In time of need, Apple’’s new icon, a nation turns its lonely eyes to you. Even though I top-sliced last Nov, I still hold Apple shares (although now they have cost be nothing). So that would be a welcome counter to my other bombed out investments!
Will it happen like that? It would certainly play well with my Beer Syndrome theories. But, as I’ve said before, the Beer Syndrome only works in mild recessions. Anything deeper and consumers will have to use the funds to pay for essentials – like stopping your home being repossessed or buying your groceries if you have lost your job..
STEMming the tide
Over the years there are quite a few subjects that have got me ‘het up’. One that has bugged me for many years is how we get youngsters interested in the STEM subjects (Science, Technology, Engineering and Maths) For a typical expression of my views see The Daily Telegraph - Richard Holway the IT veteran gets het up about education.
As I said in the article, almost all of the people who made it big in tech had a STEM subject background. That applies today with Facebook and Google, yesterday with Microsoft and Oracle and back in the really old days of tech with IBM. In every case the founders of these companies had a STEM subject background.
Here in the UK the number of students applying to university to study a STEM subject has halved since 2000. Last year it was just 24,000 (compared to 300,000 in China and 450,000 in India) Even then, amazingly, over 20% of students (and 29% of post graduates) studying STEM subjects at UK Universities are from abroad. One of the suggestions that the working party I sat on made to HM Govt was that there should be some financial incentives for students to take such degree course. And I would therefore be absolutely delighted if the reports in the Sunday Times 17th Feb 08 (see second article in link to John Waples AGENDA column A degree of sense) , that Gordon Brown is considering dropping tuition fees for such subjects, turns out to be true.
However, this is a bit too late in the process. We need to get youngsters interested in STEM subjects soon after they leave the womb.
Indeed, it is worth noting that many of the tech leaders either didn’t go to university at all or left without a degree! Mark Zuckerberg (Facebook) only completed two years of his computer sciences degree at Harvard. (Indeed, for those remotely interested, Holway has been interested in science from a very early age. My favourite toy when I was three was my Meccano set. I took Maths, Physics and Chemistry at A level but didn’t get high enough grades to get into University. Only about 5% of youngsters went to University in 1965 – compared to over 40% today. I understand that the grades I did get would translate into straight As today and guarantee me a place! Anyway, joining the computing industry on 1st Jan 1966 did my ‘career’ far, far more good than any BSc)
Since 2002, there has been a 15% fall in the numbers taking maths at A-level in England, while those taking physics fell 14% and computer sciences 47%.
What we need to do is change the perception of technology in young people. We need to show that it’s technology that can and does ‘change the world’. That a career in technology can be more exciting and rewarding even than one in media or sport. This is not an idle boast – it really is true! Tell me any industry where you could build something worth $15b, that put you on the front cover of every newspaper, was used by over 60m young people worldwide everyday, all by the time you turned 23? Mark Zuckerberg at Facebook did it. I mean, how cool is that?Perhaps it’s the media that can help here. I really can’t think of any character on the TV currently who portrays tech in an attractive light. (On Coronation Street the only two people that have ever been seen with a laptop were Richard Hilman (mass murderer) and Ken Barlow (70 year old ex-teacher). I don’t think a computer has ever been seen on Eastenders) The only comedy series about tech is the IT Crowd where all the IT characters are made out to be right nerds.
For all their shortcomings, Dragon’s Den and The Apprentice have increased interest in business issues – we need something that does the same for tech. The very future survival of the tech industry in the UK depends on it.
Friday, 15 February 2008
Indian headcount
Capgemini and Atos Origin's results, and George O'Connor's comments relating to LogicaCMG (see below) have brought up the offshore issue again.
Anthony Miller (now from Arete Research, but previously from the 'Holway' team!) put up a very interesting chart (see below) at the Regent Conference last week. I hope Anthony will not mind me sharing it with you. (Anthony is in India at the moment so I wasn't able to check)
You will see that IBM not only has the highest Indian headcount but also is growing that headcount faster than any other player. But around 50% of IBM's Indian headcount relates to its software and hardware operations - rather than IT services.
The leader in IT services offshoring is clearly Accenture by a country mile. Interestly, Accenture have got to that position by organic growth whereas the next four in the rankings have all utilised M&A to some extent. CSC bought Covansys, Capgemini bought Kanbay, Steria (which had pretty minimal offshore presence before) bought the UK's Xansa and EDS bought Mphasis.
Anthony's chart really does show how exposed LogicaCMG is. If there is one message to Andy Green it just must be that he has to boost LogicaCMG's offshore delivery QUICKLY. Competing with any of these major players is going to be increasingly difficult without it.
But how? The obvious answer would be "Buy something". But, even if you find the right candidate at the right price (remember most Indian players have much higher valuation metrics than their western buyers) that's not an easy a ride either. Anthony pointed out that revenue growth at Kanbay had halved after it was acquired by Capgemini with margins diving and staff attrition soaring. EDS fared a bit better but still runs Mphasis as a separate brand. Even the organic route is not problem free. Although Xansa was the out-and-out UK winner in the offshoring stakes, it did very little for shareholders over many years in the process - apart from finally getting them a pretty high priced bid from Steria.
Mind you, it is interesting to note that BT Global Services (from whence Andy came) isn't even on Anthony's chart!
But the problems are not all one-way. The Indian players are themselves finding it difficult to ramp up their onshore consultancy activities. Anthony concluded that "It is easier for onshore vendors to ramp up offshore delivery than for offshore vendors to ramp up consultants".
So there is still hope!
LogicaCMG - the eurozone read-across
I thought you might be interested in George O'Connor, from Panmure Gordon, take on the Capgemini and Atos Origin results. George was making the comments in anticiptation of LogicaCMG's results due on 28th Feb 08.
The euro zone read-across
(Reproduced with permission but with the Forecast/Buy/Sell bits omitted)
Not in rude health but not a hospital case either is how we summarise the IT services market in the wake of resu lts from Atos today and Capgemini yesterday.
Atos Origin Group revenue up +8.5% year-on-year, organic growth at +4.3% with the operating margin at 4.6% of revenue, book to bill ratio of 1 06%, and net debt reduction to €338m. Atos has its first proposed dividend ever at €0.40 per share. Managed Operations was the best divisional performer an 8.7% operating margin, up from 8.5% last year. Guidance for 2008 is organic revenue growth of +4%.
Capgemini Capgemini grew revenue by 13% with notable performances in Nordics (up 22.3%), Southern Europe (up 14.1%) and France (up 8.6%). Outsourcing grew 7.8% but the margin was a slim 4.7%. Staff are 83,500 including 20k at offshore centres in India, Morocco, China. Poland and Latin America. Cap is not seeing any slowdown and sees margins growing. Revenue guidance for 2008 is a slim 2–5%.
Offshorers strengthen Watch the offshore pack, more than near-shore competitors we caution LogicaCMG. We note the industry analysts Pierre Audoin Consultants conclude that the top five Indian IT service companies (TCS, Infosys, Wipro, HCL and Satyam) could double their UK software and IT services market share by 2011 from under 3% to 7%. The analysts claim that in addition to offering low prices, offshore companies are winning on quality and depth of their offerings. Indian vendors experienced a 40% market share growth, with 2007 being the first time that offshorers matched the share of the big five European providers.
Market dynamics The latest TPI index showed a strong increase in total contract value and annualised contract value in Q4 after an otherwise sluggish 2007. Momentum in Q4 was partly driven by the highest level of total contract value awarded since Q1 2006. Annualised contract value for the global commercial outsourcing market in 2007 grew by c7%. For the first time EMEA overtook the Americas in outsourcing activity as EMEA accounted for over half of all global BPO. In addition the effect of buyers moving to larger composite suppliers and industry consolidation is becoming evident as there was a 12% decline the number of service providers winning at least one of the 487 contracts.
Valuation LogicaCMG shares are trading on a P/E of 1 0.2x, EV/Sales of 0.7, EV/EBITDA of 8.1. The dividend yield is an attractive 5.6%.
Diary date LogicaCMG finals due on 28 February
Thursday, 14 February 2008
Size really does matter
What makes one company relatively 'worth' more than another? I guess that is one of the questions I have been asked most often in my life as an analyst.
THE most important valuation metric is the company's potential organic growth rate. Even historic performance is less important in comparison. You could have doubled in size in the last year but if the perception is that you have run out of growth, your valuation will be severely damaged. Perhaps the record of Google's valuation compared with Microsoft is the classic example of this. At one point only five years ago Google was worth several hundreds times its revenues whereas Microsoft has seemed stuck at 4-5x revenues for years. Even now Google is worth 10x next year's forecast revenues.
Of course, what effects your potential growth most is the market segment you address and what you offer to it. 'Commodity' players like PC dealers or ITSAs have lower valuation metrics compared to, say, software products companies owning their own IPR.
After organic growth, it seems that size really does matter. The chart below from M&A specialists Regent (where I serve as a NED) analyses European tech. acquisitions in 2007. Whether you choose P/E or PSR as your choosen metric, the analysis really does show that size matters! The chart shows that a company with revenues of less than $1m might be valued with a PSR of around 0.5 whereas a company with revenues >$1b might be worth upto 3.5x revenues. In other words almost seven times more! Pretty similar metrics applies to P/Es.
A word of warning though. You should look at these statistics with some care. They cover all types of company. There tend to be more 'commodity' companies at the smaller end. An analysis of valuations of companies of the same type would also show increase by size; but the difference would not be quite so pronounced.
One obvious conclusion from this is that, in a static market, it really could pay you to 'bulk up'. You really can boost shareholder value by substantially increasing your size.
Mind you that doesn't change Holway's views about the consolidators. Consolidation is fine when companies stick to their core competences. But even here companies have to contend with the dreaded 'Acquisition Indigestion'. It also rarely works where companies move into new areas and geographies just for the sake of 'bulking up'.
Capgemini joins the 'cautious outlook' brigade...and receives yet more Indian takeaway rumours
I won't try to summarise Capgemini's results for the year to 31st Dec 07 because my ex Ovum Holway colleague Kate Hanaghan did it so well in her Capgemini margin up, but growth predictions cautious post. 9% historic organic growth is very good. In the light of the market forecasts, so is the outlook of '2-5%' growth for 2008. Indeed, given the entirely predictable slowdown at HMRC, if they do make 5% Capgemini will have performed very well. But Paul Hermilin (Capgemini's CEO) acknowledged that “It is not inconceivable that the difficulties of the banking sector will end up spreading to the whole economy and reach our own disciplines.” See 'Building a Global Powerhouse' for Businessweek interview with Paul Hermilin
The Times also revealed that Capgemini holds takeover talks with India's Reliance Communications. Yet again I doubt the credence of this story as it comes hot on the heels of a similar ones in the last few months relating to Capgemini and Wipro and Capgemini and Infosys. As then, I still find it very difficult to seriously contemplete any Indian company wanting to take over a basically French IT Services player. If someone can explain why they would want to do this, please tell me!
Paul Hermilin obviously agrees telling Businessweek "There's a journalist in India, from the Economic Times, who loves this kind of story. It's the third time he has written about us talking with an Indian company. I don't know why he has a Capgemini obsession. The thing is, Reliance closed a major alliance with Accenture. So if there's one Indian company that would never even talk to us, it's Reliance. The guy is not aware."
Anyway, it all helped Capgemini shares which ended the day around 10% higher at Euro37.6.
Make do and mend
I was reminded of that several times over the last few days:
- An article entitled American companies are falling behind in technology in the FT on 13th Feb 08, by Bob Suh (Accenture’s ‘Chief Technology Strategist’) made the interesting point that only 32% of US execs said that wanted to be early (IT) adopters compared with 70% in China and 41% in Europe. Suh was making the point that early adoption of technology had been the main reason for US productivity gains in the last 30 years but that the US now risked losing that position. Suh made the analogy with heart surgery 30 years ago. “Taking no action, with a 100% chance of gradual death, is more palatable than having a procedure that has a 66% chance of sudden death”.
At the moment the economic outlook is so unclear that I believe that many CEOs will put off the risks (let alone the expense) of installing new systems and “Make do and mend”.
- At the Regent Conference last week, I reminded the audience that c90% of all SITS spend goes on running, maintaining and upgrading IT systems put in one or more years ago. Unless the company goes broke, this expenditure is a necessity not an option. Companies (and there are many, many of them) that concentrate their efforts on this part of the market will at least have an assured and predictable future – albeit rather ‘unexciting’.
- On Tuesday, Micro Focus issued a very upbeat statement saying that revenues were set to beat expectations. As I reported at the time, I met the then new CEO Stephen Kelly down in Newbury on his appointment in 2006. We had a typically ‘Holway’ conversation when I ‘advised’ Kelly to stick to his legacy (Cobol) roots and forget about all those previous plans to move into brand new areas. There was good logic here. There will always be a need to maintain and upgrade those legacy systems so why not exploit a captive market? Kelly took this to heart and I claim all the credit for him now being able to tell the FT – Micro Focus lifts full-year forecast - “We’re hopeful that we have a good defensive story. If economic conditions did worsen, it would play into our strength”. In other words “Make do and Mend” would be very good for old Coboler Micro Focus.
- They are not the only ones. Any company with strong legacy roots should weather the storm well. For example, accounting product suppliers with a good predictable support revenue stream. Customers are less likely to move to a new model anytime soon. The BPO and ITO players should also do well but need to watch the cost base. Renegotiated contracts will likely be at a lower price.
Beer Syndrome Part Two
Last Oct I wrote a piece entitled The Beer Syndrome which argued that if there was a mild turndown in consumer spend and confidence, people would more likely stay at home, drink beer and play with their gadgets. I also argued that gadgets like the iPod were at the feelgood/retail therapy level and might do well in such an environment.
However, I tempered this by saying that it only applied in a “mild turndown”; making the point that, if there was a steep fall into recession, these rules would not apply. As I rather cruelly quipped this only applied if you had a home to go home to – difficult if it had been repossessed.
It now looks as if some of the worst fears for that downturn might be realised. Consumer (not enterprise) spend has kept our industry going over the last few years. If that is coming to a crashing halt, it will have serious repercussions. We have already this week seen evidence of that from DSG in the UK. Perhaps the best bellweather of consumer tech – Apple – is also not doing so well judged by its share price. See Businessweek Apple shares rolling downhill After hitting $200 at the end of 2007, last night Apple closed at $129 – down 36% YTD
Forecasts lowered
My Buyer Beware the forecasters earlier this week got a great deal of feedback – all agreeing with me I might add!
Interesting to note that IDC has now joined with Forrester in reducing their forecasts for IT growth in 2008. See Reuters Forrester, IDC cut tech outlook on recession risks. I’m not sure if IDC are also forecasting the return to double digit growth in 2009/2010. I sincerely hope not. Perhaps someone can tell me?
Yahoo in discussion with News Corp?
StrategyEye and other news sources are reporting the ‘rumour’ that News Corp is in discussion with Yahoo.
I gave you the benefit of my own views on Microsoft’s bid for Yahoo last week. To reread Click here. At the time I was deeply sceptical about the wisdom of the bid and, basically, didn’t think it would work even if it was consummated.
A further week of consideration and reading the acres of media reports on the deals only makes me feel that my initial reactions were spot on. Indeed, I’d now go one step further…
I have NEVER as an analyst taken the foolhardy step of forecasting the demise of Microsoft even though there were many times when a case could be made that they were going seriously off track. But Microsoft always bounced back – usually by in-house adaptation buoyed by relatively small strategic acquisitions. But buying Yahoo for $44b is well outside any previous Microsoft comfort zone. Culture clashes are always the reason for tech M&A failing. There seems to be huge opportunity for such culture clashes in this get together. Tie that with Microsoft’s need to cut $1b of costs and the many, many areas of overlap which will need surgery and you get a great recipe for major failure.
Could Microsoft weather a failure of the magnitude of of Time Warner/AOL?
Possibly.
But there is a scenario whereby a Microsoft/Yahoo merger goes so badly wrong that both beasts are mortally wounded in the process.
Saturday, 9 February 2008
All the ducts in a row
Hutchinson, who of course also own the mobile operator 3, bought Geo in 2003 and put it together with operations from Thames Water and Lattice. Geo owns thousands of miles of fibre optic cables laid along side gas mains and through the sewerage system. It supplies its services to the likes of Carphone Warehouse and Tiscali.
On the surface this deal, which has attracted little press comment, might appear a bit run-of-the-mill. We all remember the enormous investment companies made in laying fibre optic cables in the 1990s which then lay under-utilised for years.
The main 'problems' in the past were that;
- broadband at 1,2,4 even 8mb could easily and cheaply be fed along the copper cables we all had coming into our homes.
- nobody could think of any practical reason why homes would need more bandwidth
- homes that couldn't get broadband (or fast speed connections), because they were too far from the exchange. were deemed uneconomical and left out of the broadband party.
But the last year or so has seen a revolution brewing
- suddenly 8mb is really not good enough. If you want HDTV - or even decent on-demand normal TV services - streamed into your home you need 100mb
- contention issues plague even those with a broadband link. After 6.00pm in my own home, after all the kids in neighbouring homes are back from school, my broadband slows to the point where it is often impossible even to view Youtube
- all the exciting new applications are data-rich; soaking up more and more bandwidth
- WiMax promises to overcome the last mile link into our homes; by-passing the need to go copper (or BT) at any point.
So suddenly Geo, with its thousands of miles of fibre optic cables and its expertise in laying cables alongside any of the current utility services, becomes an exciting prospect. Demand (ie huge requirement for data rich applications) meets technology (ie WiMAX) meets existing utility (ie fibre optic cables in the sewers). All the ducks/ducts in a row!
Geo will be a 'wholesale' operator - building the network but leaving the retail offerings to others like Carphone Warehouse, 3UK and Tiscali.
Friday, 8 February 2008
BT disappoints - shares slump
As readers ought to know, I have been a member of BT Global Services UK Advisory Board for some years. For that reason I've steered clear of writing too much about BT. My (ex) colleague, Mike Cansfield at Ovum knows BT really well and wrote this review of BT's Q3 results - What a difference a year makes or you can read the FT's BT misses revenue targets.
What I can report is that BT has formed - indeed still forms - a part of Holway's Tech Portfolio. So it hurts me to report that reaction to BT's results put the share price into freefall - falling 12.5% this week alone and off nearly 30% from last year's high.
Mind you it's been another disappointing week all round for stocks with NASDAQ down another 4.5% (13.1% YTD), FTSE100 down another 4.1% (10.4% YTD) and the FTSE SCS Index down 3.3% (7.4% YTD). Both big and small compnaies were affected. Indeed, it is sad to report that the AIM Index fell below 1000 - the point at which it started all those years ago in 1995. As I read the outlook announcements from the companies in our sector - both EDS and CSC in the last week - they all warn of more difficult times ahead.
With this much pessimism around, you really can't expect things to get any better anytime soon. So batten down the hatches, prepare for the worst and hope it's not quite as bad as that.
Granger leaves NHS
I've known Richard since pretty much the start of his tenure as Director General of the NPfIT in 2002 and have written about the project on many occasions. Whether undertaking an IT project of this size and complexity, with the original budget or timescale, was wise is pretty suspect. That was Blair's decision - not Granger's. I've also criticised some of the early decisions - like not getting the support of the medical professional from the start, not including EMIS in the GP systems that could be used etc. However, I have consistently backed the passion and dedication that Richard has given to his task. I've also witnessed at first hand what a toll this has taken on Richard. He has paid a very heavy price. I'll let others pick apart the project but I'll continue to back Richard's part in it. He stood up to some of the most powerful figures and global companies. He was determined that those companies would stick to their contracts and not hold us, the tax payers, to ransom - as they have done on plenty of other occasions. He made a lot of enemies along the way.
I'd like him to think he still has some fair-minded friends in the industry too. Indeed, I know he has. (Indeed, some like Patrick O'Connell from BT, aired their praise for departed head of cfh in e-health insider.) I am sure they will join with me and wish Richard every good fortune for the future. He deserves some.
Thursday, 7 February 2008
"Buyer Beware" the forecasters
As quite a few readers may know, I was at the Regent Conference last week. I appeared on the panel at the end of the day and was grilled by Jeremy Paxman. I think this is my 11th appearance at a Regent Conference and my 7th encounter with Paxman. I'm even starting to enjoy it now! Ian Spence gives his own views on the conference on Megatrends from the Regent Conference. I will make reference to several of the presentations in the next few weeks.
I guess the presentation that bugged me most was from Brad Holmes, VP at Forrester, and his prediction that US IT spend would be back to double digit growth in 2009 and 2010 after slipping from 6.2% in 2007 to 2.8% in 2008. In itself, the 2.8% growth in 2008 is half what Forrester was forecasting just a few months ago. (Read Apprehesion grips leading tech players in Friday's FT for a good/disturbing view of the woes hitting even the major tech companies in 2008) I very publically challenged both Brad, and anyone else in the audience, to a bet that double digit IT growth would NOT occur in 2009/10. Nobody was prepared to take my bet.
I did an internet search on Forrester's US IT predictions and it seems that Forrester has been highly consistent....they seem to make habit of predicting a return to double-digit growth in one or two years time. EG in 2002 it was is "double-digit growth will resume in 2003". The actuality was 3%. They then predicted it would resume in 2004. That didn't come to pass either. It is also worth looking at the forecasts they made in the late 1990s for growth in the early years of the new millenium.
But, in that regard, I'm not just picking on Forrester. I could include IDC, Gartner etal. I know this only too well because I seemed to be in open warfare with these firms when I turned 'bearish' in 1998 with my Y2K Lockdown forecasts for 1999, in 1999 for my "The headache will not go away with the Alka Selzers on 1st Jan 00" and again in 2002 with my "IT's all over?" speech and paper.
For the record, since the late 1990s, I have believed that IT growth in US and the "Western World" will NEVER return to double-digit growth. (The only exception would be if we have such a steep recession, such a steep decline in IT spend, that there was then a year or two of 'catch-up') I could list all the reasons for this but, bluntly, I've repeated them so often that you must be getting bored with them by now.
On Friday, I drove down the M4, passing the empty office blocks of Oracle Park - empty since the bursting of the dot.com bubble. It reminded me of the damage that can be caused by inaccurate forecasts. I remember visiting many companies in 1999/2000 where the main concern seemed to be "where can we house all the new people we will need in 2001". Office blocks were built and long term leases were signed. Some of these companies went broke as a consequence and others have long-term liabilities on their books. Despite better times in the last few years, many of the office blocks are still unoccupied.
I assume that companies who buy research do so because they intend to make investment decisions based upon it. But I doubt you could sue for money lost due to an inaccurate market forecast. So Buyer Beware would be good advice.
Monday, 4 February 2008
No surprises from Sage
The following is an extract (with permission) from George O'Connor of Panmure Gordon morning note on Sage (with all the forecast and Buy/Sell bits omitted)
There are no surprises either way in Sage’s Q1 IMS – which is not a surprise. Sage reiterated its confidence in the full-year outlook.
IMS highlights
Trading for the period was consistent with expectations outlined at final results. Revenue growth across the territories is described as being “good” in the UK, Mainland Europe is “good”, with Rest of World experiencing “strong growth”. In North America growth is “modest”, while at the Healthcare division Sage expects to see improved revenue growth in the medium term. The search for a new North America CEO is “progressing well”. Cash flow remains strong, and net debt stood at £505m at the end of December 2007. Sage made two acquisitions: KCS, in UK HR & Payroll for £20m; and a majority stake in XRT, treasury and cash management in Europe, for an EV of £43m.
US – the chink in the armour
Sage’s performance has been mixed, despite having a 2.8m customer base. Sage expects to appoint a new North America CEO in H1 2008. There has been concentration on the insipid 1% revenue growth in Sage Healthcare last year but guidance is for 3% revenue growth in 2008E – the IMS suggests that this has yet to be achieved. Meanwhile Verus (payment solutions) goes from strength to strength, racking up 1 4% revenue growth and 42% EBITA margins last year, and from the trade press we learn that it has been integrated with Peachtree – a move that, in our view, should strengthen growth. We gained some insight into Sage’s channel ecosystem as it announced its US Chairman’s Club members – a club for the top new business performers. Despite the anatomy of the US business, 45% of revenue is classic Sage applications, 31% Healthcare, 1 5% industry specific and 9% Versus, of the 17 members there are six construction industry specialists (Accordant, Alliance Solutions, C I S, MIS Group, The Strategies Group and United Solutions). Given the poor economics in that sector, we feel that membership should be a better reflection of the overall business mix and a task of the new US CEO is to build up the rest of the channel ecosystem.
Why do we like Sage?
Sage has a defensible business model with c71% of revenue from services that are in the main based on recurring maintenance revenue. This is a very well established business with a global customer base of over 5.5m. The robust business model has strong cash conversion. Sage is a ‘safety first’ option.
Holway view?
For those readers who emailed saying that Holway's HotViews should be exclusively Holway's Views, can I just add that I couldn't have written the last paragraph better myself. Except I'd have added the word 'Boring' in there somewhere - the accolade of all accolades, of course!
Saturday, 2 February 2008
Personal Outsourcing - Google v Microsoft+Yahoo?
By the time you read this on Monday morning you will be positively sick of reading about Microsoft's $44.6b bid for Yahoo. All the articles have focussed on search; pointing out how Microsoft (and indeed Yahoo) lag behind Google and how this is a 'catch-up' move for Microsoft. Then the articles talk about advertising revenues with the same conclusion. Bluntly, I think that this misses the main point.
In Microsoft spends big to catch Google in the Telegraph on Saturday, my friend David Mitchell from Ovum got closer to my view:
But for David Mitchell, senior vice-president of IT Research at Ovum, there is another reason for Mr Ballmer's swoop - to protect Microsoft Office's dominance.
Within a few years, Mr Mitchell predicts Google's nascent word processing and spreadsheet applications - hosted on its own servers - could be good enough to challenge Office.
"Rather than spend a few hundred bucks on Microsoft Office, businesses could get Google applications either for a small fee or for free via an advertising-supported model.
"Yahoo!'s subscriber base is bigger than MSN's, giving Microsoft a distribution channel plus online engineering capability to improve its own Office Live offerings [a direct rival to Google's], to stop what could be the long-term undermining of a profitable revenue stream by Google."
But even this doesn't go far enough.
There is a major revolution going on in computing. I've written about it so many times that readers must be bored by now. I have been trying hard to find a term that embraces SaaS, Web 2.0, social networking, my "Martini Moment meets my MobiTop" etc. On Friday, I went to lunch with Guy Hains who runs CSC in EMEA. Being one of the biggest outsourcing companies in the world, he neatly encapsulated all of these things in the term Personal Outsourcing. (I haven't heard that term applied to IT before and I'm sure I will use it again. Might even, in time, claim it as my own!!!)
The winners in the upcoming revolution are the companies that control Personal Outsourcing. Currently, Google seems the most likely front runner in Personal Outsourcing, with its investment in data centres, Google Apps and even in bidding for mobile spectrum. If that turns into ownership of that space (just as Google 'owns' search) Microsoft's business model is adversely affected. Gates and Balmer know that only too well. Maybe they think that winning Yahoo will enable them to be one of the main players in that space. It's probably too late to build it all from scratch.
Will it work?
Dislodging Google in search is going to be a major problem; akin to dislodging the Apple iPod in MP3s. Combining the #2 amd #3 in search does not make you #1 - something that HP found out to their cost when they acquired Compaq.
Yahoo is a real mishmash of businesses. I use Yahoo Finance every day but I've never used anything else. Whereas I know what Google might do in Personal Outsourcing, I'm less sure what Yahoo brings to that party.
On top of that, I've spent decades saying that BIG acquisitions in our sector basically don't work. This is rather neatly illustrated by almost every newspaper saying that the previous biggest acquisition in the sector was Time Warner and AOL - and look what a disaster that was! But it gets worse. The more the companies rely on people (rather than products or assets) the higher still the chance of failure. The more differences there are in 'people culture' the chances of failure rise still further.
This is a fight for the long term survival of Microsoft. Microsoft has owned our desktops for over 20 years. The fight now is "Who will own Personal Outsourcing?". I have great doubts that Microsoft buying Yahoo will help them much in that all-important battle.
Footnote - Re my post last week - 2008 The Year to be Boring? - I'd like to remove my reference to Microsoft. If they succeed in winning Yahoo, they will have become far to 'risky' for such an accolade!
Lies, damned lies and statistics
A year back, whilst preparing a speech as Chairman of the Prince's Trust Technology Leadership group, I was surprised to read Government ministers claiming an increase in the number of 16-24 year olds in employment in the UK whereas the figures I intended to use showed a 15% increase in the number of 16-24 year olds who were not in employment, training or education. But both statistics turned out to be true - in part because of the number of jobs going to young people from eastern Europe.
On Saturday, I was reading the Tempus column in The Times - Computer language still goes over the market's head . It is really good and got better when I saw my name mentioned in the following paragraph
"Even if the turbocharged Autonomy is excluded, the sector's average forecast earnings growth this year is still a heady 16 per cent. Given historic sales growth in recent years of about 12 per cent, that assumption would appear to be far too optimistic — especially given predictions from the likes of IDC and Forrester that industry revenues will rise by between 3 per cent and 5 per cent in 2008. Holway, the respected UK IT report, is even less bullish and expects no growth at all. On that basis, it would be prudent to assume that consensus earnings forecasts are too high and that the investors should be braced for profit warnings."
Nick Hasell, the writer of Tempus, gives the impression that all these statistics are contradictory. Actually they are probably all true!
Firstly, you can get high earnings growth even when revenues are static or falling. You just cut costs. "Historic sales growth" in the SCS sector as a whole hasn't been in double figures since the late 1990s. But if you average the top line sales growth of the FTSE350 SCS companies, you would indeed find double figure revenue growth last year. That's because companies include acquisitions (and a lot of other things like overseas revenues, currency fluctations etc) in their top line figures. Hence the reported top line revenue growth is always higher than the market growth.
Then we get to IDC and Forrester forecasting 3-5% growth. Firstly, these are themselves very recently downward-revised forecasts. But they include inflation. Holway's "no growth at all" was "in real terms". With UK RPI now around 4%, you can see that (for once) Holway, IDC and Forrester are all pretty much forecasting the same growth.
So, we ALL agree. No UK SCS growth in real terms in 2008 but you can still boost earnings either by choosing a sector with above average growth or cutting costs (or both).
Footnote - Funny, in the article above, how I'm still a 'brand/product' not a 'person'.
