NW100: Mixing it up

Revenue growth among the Network 100 -- the 100 largest US-based network companies operating in Australia -- is up 10 per cent, but profits are in the dumps as companies blend in assets to prepare for convergence.

John Dix reports

Recipe for change: Stir in a pinch of excitement about cells and packets. Invert industry and shake vigorously to break down layering that has set in. Put aside and let natural blending occur. Despite best efforts, some flotsam may result; skim off and discard.

Welcome to the great homogenisation cycle of the network age.

Whether or not you believe in convergence, the fact is, the industry is reshaping itself to brace for change.

Last year will be remembered as the year that many industry segments began to blend, epitomised by Nortel Networks' acquisition of Bay Networks.

That deal blurred the line between companies that sell to enterprise business accounts and those that sell to carriers.

But that was only one of many deals that are making it hard to tell a LAN player from a WAN supplier, a voice provider from a data carrier, a PC maker from a systems house.

Boundaries are blurring all around us.

Besides the Nortel-Bay deal, in infrastructure big overseas telecom players scooped up US-based data vendors, and enterprise suppliers scrambled to become carrier equipment providers.

In computers the landscape changed dramatically when Compaq purchased Digital, merging the biggest PC player with the biggest minicomputer maker.

Now more than ever a system is just a server. How much power do you need?

In telecommunications, leading long haulers continued to break into local markets, the most notable events of 1998 being AT&T's acquisitions of competitive local exchange carrier (CLEC) Teleport Communications and cable TV provider TeleCommunications Inc (TCI).

The local telcos in the US are itching to fight back and merging like crazy -- witness the SBC Communications-Ameritech deal -- to build mass as they wait for the regulatory green light to offer long distance. (Gearing up for that, BellSouth has acquired a 10 per cent share in Qwest.)And, of course, all the carriers, computer makers and infrastructure suppliers are chanting the convergence mantra.

Indeed, convergence mania is driving everything from cable TV mergers to AT&T decision-making (the telecom giant says 1999 will be the last year it installs any circuit switches).

IP, in particular, is viewed as the great emulsifier capable of breaking down boundaries between things such as LANs and WANs, voice and data.

But for all of last year's excitement about convergence and the resultant deal-making, revenue for the NW100 as a whole was only up 10 per cent, a few tenths of a percentage point above revenue growth in 1997.

While not outstanding, that is an amazing 6 per cent more than last year's revenue growth of the Fortune 500.

Like the Fortune 500, though, profits for the group were down 2 per cent, compared with NW100 profit growth of 8.5 per cent from 1996 to 1997 (overall profits for the Fortune 500 were down 1.8 per cent last year, excluding a one-time gain by Ford Motor). A quick look at the NW100 chart explains away the profit plunge: many companies took tremendous charges against earnings as the result of acquisition costs.

Compaq's takeover of Digital, for example, helped push Compaq's revenue up 27 per cent to $US31.2 billion, but it also resulted in a loss of $US2.7 billion for the year. With the acquisition of Bay, Nortel's revenue jumped 14 per cent to $US17.6 billion, but the company finished the year with a loss of $US537 million.

Other red blotches that dragged the NW100 profit column down can be attributed to heavy investment.

In fact, it may come as a surprise that so many of the NW100 companies posted losses in 1998. Surprising because these are, after all, the largest public US companies in the market. More ominous than profit dips is slipping revenue. About a fifth of the NW100 saw revenue decline in 1998.

Theories for the softness range from the Internet reordering market priorities to the year 2000 bug delaying capital expenditures.

For all of that, there is more good news than bad on the revenue front. Some 40 per cent of the NW100 saw sales climb at rates better than 20 per cent.

Fastest growing of all was Yahoo at 189 per cent.

At the other end of the spectrum are those companies experiencing the greatest revenue declines.

The company heading that list is Centigram, whose revenue was down 28 per cent from 1997.

The NW100 is focusing strictly on public companies. We gave up on private companies because they are loath to share their numbers, and when they do we have no means of verifying the data.

The inclusion of the NW100 chart, with profit margins and the amount of revenue generated per employee, makes informative reading. Both items can be of help in determining a company's health.

Regarding cash and short-term investments, it is interesting to note that Microsoft is sitting on a bundle -- $US13.9 billion -- that is nearly equivalent to what it had in sales last year -- $US14.5 billion.

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