Some Earnings are Sparkling

There really are bright spots in the sea of Q1 revenue drains and losses.

Amid the swirl of bankruptcies, massive layoffs and earnings warnings that are whipping around their competitors, some technology services firms reported favorable Q1 earnings last week.

IBMs Global Services division, for example, showed a 12 percent increase in revenue from a year ago, to $8.5 billion. The gain was 18 percent, after converting foreign currency sales into dollars. Accounting for 40 percent of the companys total revenue, the division also signed a record $10.2 billion in new services contracts during the quarter and ended the quarter with a backlog of about $87 billion.

Services Play "Times like these play to our strength as a diversified, services-led company," said IBM CEO Lou Gerstner in a prepared statement. The company reported Q1 revenue of $21 billion, up 9 percent from a year ago, and net income of $1.75 billion, compared with $1.51 billion in the year-ago quarter.

IBM ended the quarter with $3.9 billion in cash and an optimistic outlook going forward. It reaffirmed analysts consensus forecasts for $4.87 EPS for the full year, compared with $4.44 last year, and iterated expectations for high single-digit revenue growth. The company also expects to add staff to Global Services, which increased by 19,000 employees last year.

Outsourcing and e-sourcing services, which contribute about 40 percent of Global Services revenue, saw revenue rise 16 percent in the quarter, boosted by a 160 percent growth in Web-hosting services. Integrated Technology Services, which includes product-support services and maintenance and accounts for about one-third of Global Services revenue, grew 29 percent. And Business Innovation Services, which includes e-business offerings, rose 26 percent.

Meanwhile, Microsoft reported a 14 percent increase in revenue to $6.5 billion, and a 3 percent increase in profit to $2.45 billion in its Q3 fiscal quarter. But Sun Microsystems did not keep up. It posted a 73 percent decline in net income to $136 million. Its revenue rose just 2 percent to $4.1 billion.

Good Quarter Among service providers, Cognizant Technology Solutions, a software development and integration firm, was a stellar performer. At $43.4 million, its Q1 revenue was up 60 percent from a year ago and almost 5 percent from the previous quarter, marking the 18th consecutive quarter of growth.

Net income at Cognizant jumped to $5.6 million, or 28 cents per diluted share, up 61 percent from a year ago and 3 percent from the previous quarter

Company executives attributed the gains in large part to its low-priced offshore model based in India.

"As large enterprises seek realizable ROI on their technology spending, they are more frequently exploring offshore solutions," says Kumar Mahadeva, chairman and CEO.

That client focus on cost containment led to a stronger demand for Cognizants application-management services, which contributed about 50 percent to Q1 revenue and could grow to 60 percent before the end of the year, says CFO Gordon Coburn. Application-development services, which include more pricier e-service applications, accounted for 44 percent of Q1 revenue.

The Freeze Ciber, another consulting firm, reported more sobering, though not terrible, Q1 earnings. Revenues of $145.9 million were up slightly from Q4, but down 12 percent from a year ago. Net income, at $1.6 million, was down more than 50 percent from a year earlier and off 44 percent from the previous quarter.

"We have several large clients in freeze mode and are delaying starts on projects that we both know will occur," says Mac Slingerland, president and CEO. He explains that the current slowdown for services is not due to an excess supply of consultants, but a drop in demand. "There is not enough business for everyone."

Cibers results were dragged down by a decline in revenue in its DigiTerra division, which provides packaged software-implementation services and which spent money to develop its brand during the quarter.

Looking ahead, Slingerland is confident the freeze will thaw and that competition will decline through consolidation and bankruptcies, leaving the stronger firms standing.

Also, Ciber is on the acquisition hunt to acquire parts of existing consulting companies that are looking for buyers or even a whole company, says Slingerland.