This article is somewhat related to the last post. BTW, note the last paragraph of post #877 (regarding acquisition).
Year 2000 bug draining
revenues
By Mike Ricciuti
January 8, 1998, 12:00 p.m. PT
What was supposed to be a profit bonanza for
technology companies is instead turning into a major
revenue drain.
The Year 2000 problem, also known as the
millennium bug, threatens to derail the revenues of
technology providers in the coming year, company
executives and Wall Street analysts warn. Big
corporations are diverting crucial budget resources to
hire additional personnel needed to fix the problem,
leaving fewer dollars available for new technology
purchases.
Wall Street analysts say the first effects of a Year
2000-related revenue slowdown are just now being
felt--and it will get only worse throughout 1998.
"Of all the factors in the marketplace, Year 2000
issues are much more real than investors realize.
They are treating this as a non-issue, and it really is
an issue," said Bob Austrian, an analyst with
NationsBanc Montgomery Securities.
Just last week, database software maker Sybase
(SYBS), in announcing an expected fourth-quarter
loss, attributed at least part of the shortfall to
increased spending by information systems managers
to eradicate the millennium bug.
The company said in a statement that results could
range from a loss of as much as 7 cents per share to
a profit of as much as 2 cents a share. Analysts
were expecting the database maker to post profits of
12 cents a share, according to First Call.
"The Year 2000 issue has caused enterprise
customers to spend a significant amount of time and
money on fixing the problem," said Mitchell
Kertzman, CEO of Sybase. "Sybase, Oracle,
Netscape.a lot of companies are being hit by this."
That means fewer dollars for new development. And
that, in turn, means bad news for Sybase and other
makers of infrastructure software, which includes
database servers, middleware, and some
development tools.
Indeed, Oracle (ORCL), the database market leader
and the world's second-largest software maker,
pointed out in a recent Securities and Exchange
Commission filing that Year 2000 spending could
interrupt future revenue growth.
Oracle reported earnings per share of 19 cents for
its second quarter, ended last November. That's a
far cry from Wall Street estimates of 23 cents per
share. Database server sales grew a lackluster 3
percent. More alarmingly, application software sales
were up only 7 percent, compared to 96 percent
growth in the same quarter one year ago.
The same is true for networking equipment giant
Cisco Systems (CSCO), which, in an SEC filing last
month, stated that management "is concerned that
many enterprises will be devoting a substantial
portion of their information systems spending to
resolving this upcoming Year 2000 problem. This
may result in spending being diverted from
networking solutions over the next three years."
Cisco said it also has to provide Year 2000 fixes for
its own products, potentially increasing Cisco's
operating costs.
Even profit machine Microsoft (MSFT) is unsure
what effect Year 2000 spending will have on its
bottom line, and the software giant is keeping earning
estimates on the conservative side, just in case.
"People will marginally buy less software in the
run-up to the year 2000 because they want to make
sure what they have works, and works well," said
Craig Fiebig, product manager for Microsoft's
BackOffice server software. "Microsoft is thinking
[about the problem], but I don't know that we have a
formal model. However, as we do three-year
outlooks, we don't know what will happen, so we
have kept earnings estimates conservative."
But wait a minute. Wasn't fixing Year 2000 bugs
supposed to be a revenue bonanza for software and
networking companies? As it turns out, the answer is
both yes and no.
Austrian explains that the Year 2000 problem, which
stems from the inability of computer software to
recognize the year 2000 in date fields, is a
double-edged sword for technology companies.
The panic to make business applications able to
recognize 21st century dates has driven sales of new
business software, as large corporations opt to
replace aging mainframe systems instead of fixing
them. "In the mid-1990s, a lot of the large
applications vendors have enjoyed extra demand for
their software due to Y2K replacements," Austrian
said.
Those companies include SAP, PeopleSoft, and
Baan. Just yesterday, SAP said it will report a 60
percent revenue gain for 1997.
But the Year 2000 profit balloon is ready to burst,
Austrian said, as most installations of new systems to
fix Year 2000 problems are already under way. "We
see a slowing in demand for enterprise applications
no later than the first part of 1998, with the greatest
slowdown toward the middle of the year," he said.
"It's like people replacing tires. If they know that
winter 1998 will be bad, they'll replace their tires
now. But they won't come back for tires next year,"
Austrian said.
And for companies like Sybase and Oracle, Year
2000 spending diversions only spell trouble. "The
Year 2000 has been great for SAP and PeopleSoft.
But it's been a negative for us," Sybase's Kertzman
said.
The Y2K problem is contributing to an overall
revenue slowdown for database software vendors,
said Melissa Eisenstat, an analyst with CIBC
Oppenheimer. "Y2K is definitely one reason. And
increasing attention is being turned to the application
area. So companies are keep their existing database
software and are buying new applications."
Results of a corporate buying spending study
released this week by Merrill Lynch indicate that
Year 2000 spending is on the rise, with additional
investment in personnel at the top of many lists.
The survey of 50 chief information officers indicates
that Year 2000 spending, as a percentage of overall
budgets, will rise from 7 percent last year to 12
percent in 1998. CIOs also mention Year 2000
compliance as their most important issue by a wide
margin, according to the survey.
But the Merrill Lynch report goes on to mention that
chief information officers frequently complain that it
is difficult to find good people to address Year 2000
problems. Consequently, a good part of the planned
budget increases cited by CIOs will go toward
staffing, where in previous years the dollars went
toward new hardware and software, according to
the report. |
