Can Apple, Gilead and the Hot Techs Keep Growing?
In tough times, technology industry leaders are showing how it’s possible to thrive—and winning slots in BW’s annual Tech Hot Growth ranking
Amid the roiling waters of the stock market and economy, which have tossed tech investors around for weeks, Apple Chief Executive Steve Jobs made a special guest appearance on Apple’s fourth-quarter earnings call Oct. 21 to try to calm things down.
Profits soared on knockout iPhone numbers and strong Mac and iPod sales. But Jobs wanted to make a point broader than any one quarter’s results: Apple planned to seize the opportunity of these difficult times to bolt ahead of the competition. He pointed out that Apple (AAPL) has nearly $25 billion in the bank. The economy could present “some extraordinary opportunities for companies that have the cash to take advantage of them,” Jobs said. “We may get buffeted by the waves a bit, but we’ll be fine—and stronger than ever when the waters calm in the future.”
These are difficult times for all companies. But some are figuring out how to thrive amid the turmoil. BusinessWeek’s annual Tech Hot Growth ranking shows the sector’s top 75 performers over the past year. Some have done well because they help their customers cut costs—witness IBM (IBM), Accenture (ACN), and software maker VMware (VMW). Others made the cut because they help customers generate more revenue in good times or bad. Google (GOOG), for example, reported a surprisingly strong quarter on Oct. 16, because companies that get sales from online advertising kept on spending. It also doesn’t hurt to sell to the government, whose buying tends to be somewhat insulated from the broader economy. That factor propelled infrared technology supplier Flir Systems (FLIR) and defense suppliers Mantech International (MANT), Harris (HRS), and SAIC (SAI) into prime spots on this year’s scoreboard.
Gilead Sciences at No. 1
The ranking is based on a number of metrics. Revenue growth counts the most, although total revenues, shareholder return, and return on equity all factor in, too. The ranking is based on the most recent four quarters available, as of Oct. 15.
Gilead Sciences (GILD), the top-performing company on the list, booked big gains in profits and return on equity through sales of its drugs to treat AIDS, hypertension, hepatitis B, and other diseases. It has capitalized on the success of its most recently approved HIV drug, Atripla, and its 2006 acquisition of pharmaceutical company Raylo Chemicals.
At the fastest-growing information technology companies, it’s clear you need to take a different attitude in downturns than in normal times. You must focus on why you’re going to stand out from your competition and why your customers will need you more than they need your rivals. You have to think aggressively—as Jobs is doing—rather than defensively, in retreat. “Selling more of the same doesn’t work,” says John S. Chen, CEO of Sybase (SY), which provides database software used widely on Wall Street and which ranked No. 34 on this year’s list. Because Sybase customers Bear Stearns, Lehman Brothers, and Merrill Lynch (MER) have disappeared, Chen is concentrating on helping the finance industry’s consolidators, including Barclays (BCS) and Bank of America (BAC), find new ways to reduce operating costs. “I’m desperately creating a lot more new functionality,” he says.
So far, so good. On Oct. 21, Sybase reported that third-quarter sales rose 11% to $284 million, and profits rose 2%. Sybase’s profits were up more than 77% during the 12 months ended in June, according to BusinessWeek’s analysis.
Stock Woes For All
Tech companies are scrambling for advantage in these lean times. Intel (INTC) is one of several catering to budget-minded shoppers. The chipmaker is ramping up production of processors for a new class of small portable notebooks that cost as little as $300 to $400. Oracle (ORCL) has spent $34 billion on 50 acquisitions over the last 44 months and plans to shop for additional bargain buys in order to generate recurring product-support revenues, which roll in during good times and bad. And in the past five weeks, Microsoft, Hewlett-Packard, and Oracle have announced plans to buy back billions of dollars of their own shares.
Still, it’s been a rocky road for the stocks of even the best-performing companies. The average share-price return for the 75 companies on the scoreboard was -37%, and the top 10 on the list generated an average return of -22%. Dell (DELL), which posted big gains in profitability and return on equity by cutting costs and revamping its products and distribution strategy, has warned of a tougher environment ahead. And investors worry that the down economy may erode prices for such premium brands as Apple and Salesforce.com (CRM).
“We’ll be prudent,” says Robbie Bach, president of Microsoft’s $8 billion Entertainment & Devices Division, which makes the company’s Xbox game console and Zune music player. Microsoft hopes consumers buy more Xboxes as they resort to stay-at-home entertainment instead of going out. But Bach doesn’t think consumers’ holiday spending will accelerate until after the Presidential election. “At this time of year, we’re talking to our retail partners every day
Many Plan Stock Buybacks
Microsoft also intends to deploy more of its $20.7 billion in cash to buy back stock and generate hoped-for shareholder returns in the wake of its failed takeover attempt of Yahoo! (YHOO) this year. On Sept. 22, Microsoft announced it plans to buy back up to $40 billion in stock, raise its dividend (to 13¢ per share, from 11¢), and sell at least $2 billion in commercial paper. In fiscal 2008, Microsoft spent $12.4 billion on buybacks.
Microsoft isn’t the only company using cash to buy back shares. Oracle’s board on Oct. 20 authorized repurchase of an additional $8 billion of its stock, raising the amount available for repurchase to $9.3 billion. CEO Larry Ellison told shareholders in September that Oracle would continue to be an opportunistic buyer of software companies; now that the stock market turmoil has taken a bite out of companies’ values, Oracle needs to decide whether its $13 billion in cash—some of which is allocated for tax considerations—is best used for acquisitions or buybacks.
And Hewlett-Packard (HPQ), another top performer on the BusinessWeek scoreboard, announced on Sept. 22 an $8 billion stock buyback on top of an $8 billion buyback program its board had already approved last November.
Salesforce.com is emphasizing the pay-as-you-go nature of its customer management software, which sales departments access over the Web and can pay for on a quarterly or annual basis—instead of having to sign multiyear contracts. This is appealing when cash is tight for many companies, and Salesforce is altering its marketing to emphasize the point, says Bruce Francis, vice-president for corporate strategy. “This model is well tuned to the kind of times we’re in,” he says. “It’s very much a back-to-basics pitch for us.”
Tech Spending in a Downturn?
IBM, whose return on equity ratio of 40.3% was seventh-best on the list, has used long-term contracts for mainframes, IT services, and software as a cushion against cautious technology spending by customers. About half of overall revenues come from previously signed contracts each quarter, according to Jesse Greene, IBM’s vice-president for financial management. And the company has reduced inventory levels and kept a rein on capital spending, he adds. Big Blue reported on Oct. 16 that third-quarter net income rose 20%, to $2.8 billion, on $25.3 billion in sales.
In the PC market, hard-drive maker Western Digital (WDC) finished second on the Hot Growth scoreboard, powered by a 48% rise in sales and a 54% increase in profits over the past year. The company has used acquisitions to bolster its technical capabilities, and has capitalized on expanding markets for laptop-computer hard drives and external drives for PCs, where users’ large collections of digital photos, music, and video have fed demand, CEO John F. Coyne said in an e-mail.
A key test for high-tech companies will be whether their longstanding argument that IT can help hard-pressed customers operate more efficiently still holds water. Sequoia Capital, in a presentation to its portfolio companies in October, warned that tech spending tends to go up or down with economic cycles, despite vendors’ talk of companies investing in IT to boost efficiency in lean times.
Intel, whose profits have grown 18% over the past year, according to BusinessWeek’s analysis, has strongly espoused the theory. The chipmaker heartened investors on Oct. 14, when it issued an upbeat forecast for the remainder of the year after reporting third-quarter earnings. Intel’s sales could hold up during the downturn because the company supplies “the tools for productivity”—chips for PCs and servers that can help businesses lower their long-term costs by increasing productivity, says Kevin Sellers, a vice-president for investor relations at Intel. But “that could get dampened a bit if the economy turns ugly, and we’re not immune to that,” he adds.
Cautious PC Sales Outlook
Intel is counting on sales of its new Atom processor, designed for inexpensive “netbooks,” which feature small screens and keyboards and are intended to appeal to budget-conscious buyers who just want to read e-mail and surf the Web. The chips are about 10% less profitable than the Core 2 Duo processors Intel supplies for top-end laptops, but they carry higher margins than the Celeron chips that go into the inexpensive laptops the netbooks could replace. “We have a chance at weathering the storm better than others,” says Sellers.
Yet Wall Street remains cautious about Intel’s prospects. Goldman Sachs (GS) on Oct. 20 lowered its rating for Intel shares to neutral on concern that its margins could be squeezed. Pacific Crest Securities said in an Oct. 15 report that PC sales growth would slow by half in 2009 and that weak IT spending by companies could hurt top Intel customer Dell in the profitable server market.
Citigroup (C) analyst Glen Yeung forecast in an Oct. 15 report that slower-than-normal PC sales growth and falling prices for computers and their chips could affect Intel’s profit margins in the fourth quarter—and cause margins to fall further in the first half of 2009. “With much uncertainty about near-term demand,” Intel shares are unlikely to break out of their current range, he said. The next few months could help determine how the debate gets settled.
From businessweek
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