Fumbling For Fortunes

Do a spot poll on CEOs of Fortune 500 companies and they
will unanimously rate 1997-98 as the year that called for all their wit and skills to turn
it into a good one. As, all of them found, to their dismay, the old ways of increasing
revenues and profits by raising prices completely ineffective. Such was the intensity of
the competition that they couldn’t offset inflation either. The ones who succeeded in such
an environment were those who managed to push sales by introducing new products and
finding ways and means to reduce manufacturing costs. Case in point is Merck, the
pharmaceutical giant, which saw both revenues and profits jump by 19.2 percent and 18.9
percent respectively.

Fortune 500 Rankings For IT Companies

Company Revenue ($m) Profits ($m) Rank 1997 Rank 1996
IBM 78508 6093 6 6
Hewlett-Packard 42895 3119 14 16
Motorola 29794 1180 29 24
Intel 25070 6945 38 43
Compaq 24584 1855 42 60
Xerox 18166 1452 72 51
DEC 13047 141 118 78
Dell 12327 944 125 190
Microsoft 11358 3454 137 172
Texas Instruments 10562 1805 148 117
Seagate 8940 658 174 175
Sun 8598 944 184 203
Apple 7081 1045 223 150
Unisys 6636 -854 244 226
Cisco 6440 1049 253 332
Gateway 2000 6294 110 262 284
Oracle 5684 821 280 320
Quantum 5319 149 293
First Data 5235 357 299 289
Applied 4074 498 364 328
Computer Associates 4040 366 369 388
Silicon Graphics 3663 79 399 460
3Com 3147 374 455 941
EMC 2938 539 477 550
Lexmark 2494 149 532 532
Bay Networks 2093 -285 603 600
Iomega 1740 115 698 859
America Online 1685 -499 714 929
Data General 1533 56 762 812
Cabletron 1407 222 812 942
Wang 1315 70 847 931
LSI 1290 159 862 895
Analog Devices 1243 178 886 865
Integraph 1124 -70 958 927

 Unfortunately, though, this trend is not an
across-the-board experience. Several companies faced tough times, watching revenues drop
dramatically even as volumes increased. Analysts saw this as ripple effect of the Asian
crisis. This is expected to worsen further in 1998, with the margins getting affected even
more severely. This was more than adequately demonstrated in the semiconductor business.
For example, world DRAM chip makers saw volumes jump 21 percent last year even as revenues
fell by an equal amount, according to In-Stat, an industry research group. The US
memory-chip maker Micron Technology saw prices for its memory chips drop 75 percent in
1997 while unit sales rose, thereby pushing Micron’s profits down 44 percent.

Even Intel the world’s dominant microprocessor maker,
experienced the pinch of falling prices. To begin with, its revenue and profit growth of
20.3 percent and 34.7 percent over last year was well below its 1996 growth rates. In
fact, according to a Merrill Lynch analyst, the average selling price of an Intel chip,
for the first time, fell 16 percent. For Intel, which is used to annual growth last year
has been an eye opener. Its fourth-quarter revenues were flat, despite a 20 percent
increase in shipments. Worse, its shares rose by a meager 7.4 percent when all other tech
stocks rose by an average 17 percent.

As mentioned earlier, companies have had to become creative
in their ways to grow and yet be consistently profitable. Amidst the chaos, we have seen
IT companies post modest to good growth, ranging from a low of 3 percent (IBM) to a high
of 57 percent (Dell Computer). The joker in the pack turned out to be Compaq ($ 24,584 m)
with a growth of 36 percent over the previous year. Thanks mainly to its acquisition of
Tandem. The acquisition of DEC last year will only further boost its turnover.

Highest Return On Revenue

Company Profits/Revenue Percent
Microsoft 30.4
Intel 27.7
Texas Instruments 17.1
Cisco 16.3
Oracle 14.5

Compaq chose the merger route to grow in size. What
is debatable is whether it will lead to better bottomline. In fact, its profit has taken a
knocking-though when compared to others’, it still is very healthy at 41 percent. Its
profit in 1996 was a good 66.4 percent over the previous year. But it is not surprising,
nor is it a freak case. As, all companies without exception have shown profits which are
below last year’s, again reflecting the fact that last year has taken a toll on many
companies’ bottomlines.

All the same, the profits are much higher than the revenue
growth itself. IBM is a good example. Its revenues rose only by 3 percent, but its profits
went up by 12 percent over the previous year. The same applies to Intel (3:35), Microsoft
(31:57), and Dell Computer (59:82). Oracle is the only exception here. Its profit and
revenue kept apace at 36 and 35 respectively. But what is interesting is that Oracle
managed to keep the 36 percent growth in profits as in 1996 even though it grew by only 35
percent last year. In 1996, the 36 percent growth in profit came after doubling its
growth-92.4 percent.

Highest Profits

Company Profits ($m) Percent Change
Intel 6,945 34.7
IBM 6,093 12.2
Microsoft 3,454 57.4
HP 3,119 20.6
Compaq 1,885 41.3
Texas Instruments 1,805 2,765.1

Once again, last year there was no presence of IT
companies from the Top 50 in the category of those who made the biggest increase in
profits. In 1996, Gateway 2000 (now Gateway) and Sun Microsystems led the pack with
respect to increase in profits with 91.9 percent each. However, last year, both were
pipped to the post by Dell Computer with 82 percent profit increase (which is slightly
lower than its 90 percent the previous year).

This also proves the unpredictability of the industry.
Ironically, the information technology industry is one industry where the sun is a long
way from setting. Yet, the industry is driven by new technologies-a double-edged sword.
All it takes is a good technology to come along for its predecessor to become history. We
have instances like Netscape and Hotmail-companies which came out of nowhere and became
successes in a short span of time-scattered on the landscape of this industry.

Biggest Increase In Profits

Company Profits ($m) Percent Change
Texas Instruments 2,765.1 1,805
Seagate 208.6 658
3Com 110.3 374

Biggest Increase In Profits

Company Profits ($m) Percent Change
Texas Instruments 2,765.1 1,805
Seagate 208.6 658
3Com 110.3 374
Dell Computer 82.2 944
Dell Computer 82.2 944

Of course, what we don’t see are the innumerable
companies with bright ideas either being swallowed by the biggies or getting killed. We
have seen this happening all too often in this industry. Projections and estimates have
been known to be junked soon after they are made. Part of the problem is competition.
There are no level playing fields. There is nothing to stop a Microsoft or any other large
company from entering a new segment that was pioneered by another start-up company. So,
what we are seeing is a competitive economy where the strong get stronger and the weak get
weaker by the day and perishing subsequently.

Of course, we have seen the likes of IBM and General Motors
go through a trough, and there are many who predict the same will happen to Microsoft and
Intel, and now, Compaq-what with its buying spree covering the entire gamut of solution
offering, from consumer end to the enterprise end. After a free run, Intel is facing
problems, both in sustaining the growth and seeking out newer markets.

Highest Return On Assets
Company Profits/Revenue Percent
Intel 24.0
Microsoft 24.0
Dell 22.1
Cisco 19.2
Oracle 17.8
Texas Instruments 16.6
3Com 16.5
Sun Microsystems 16.2
Compaq 12.7

Be that as it may, companies in information
technology are leading the others with respect to return on revenue, return on assets,
highest profits, and so on. For instance, Microsoft leads the pack, followed by Intel, of
companies with the highest return on revenues at 30.4 and 27.7 percent respectively. The
good news is that in the new world paradigm of Internet, companies will be forced more and
more into adopting IT. In such a scenario, IT companies can only gain. And, without doubt,
those companies which work smart instead of working hard are likely to be the winners.

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