Wall Street Beat: Software to drive IT growth

Intel and SAP results and various forecasts issued this week suggest that while 2010 was a recovery year for just about all sectors of IT, enterprise software and accompanying services will be the main drivers for technology revenue growth over the next few years.

Though hardware had a good 2010 overall, recent figures show PC market growth slowed in the fourth quarter. Meanwhile, as corporations come to grips with an exploding amount of data they need to analyze, the software sector is expected to boom.

Intel Thursday reported record quarterly results for the fourth quarter, but there is a storm brewing in the PC market on which the chip giant's good fortune depends.

Intel reported 48 percent year-over-year growth in net income, to US$3.4 billion, and an 8 percent uptick in revenue, to $11.5 billion. The results beat estimates by analysts polled by Thomson Reuters.

The company was sanguine about the current quarter as well, forecasting revenue of $11.1 billion to $11.9 billion, above analyst forecasts of $10.74 billion.

"The economy is forecast to improve," noted Intel CEO Paul Otellini in a conference call. Industry trends and analyst forecasts, however, indicate that the PC market is in a period of upheaval, as consumers and corporate professionals alike turn to tablets and mobile devices for their computing, Internet access and communication needs.

Global PC shipments were slower than expected during the fourth quarter of 2010, slammed by competition from tablets and cautious consumer spending, both Gartner and IDC said this week. Worldwide PC shipments totaled 93.5 million units in the fourth quarter of 2010, a 3.1 percent year-on-year increase, according to preliminary estimates by Gartner. The estimate was below Gartner's prior forecast of 4.8 percent growth.

On its part, IDC said PC shipments were 92.1 million units during the fourth quarter, growing by only 2.7 percent, and down from its original projection of 5.5 percent growth.

However, for the year, worldwide PC shipments totaled 350.9 million units in 2010, a 13.8 percent increase from 2009, according to Gartner.

"For all 2010, the results indicate the PC market recovered from the recession, as it returned to double-digit growth, compared to low single-digit growth in 2009," said Mikako Kitagawa, principal analyst at Gartner, in a statement announcing the company's estimates. "However, the PC market will face challenges going forward with more intensified competition among consumer spending."

In the face of increasing competition from mobile devices, Intel was optimistic. "In 2011, you will also see Atom in a wide array of tablets running three different operating systems," Otellini said on the conference call.

But even the mighty Intel may have an uphill battle, because ARM is entrenched in the mobile device market. One of the biggest news stories last week at the Consumer Electronics Show in Las Vegas was Microsoft's announcement that the next version of Windows would run on ARM chips. The world's biggest software company will not abandon Intel, but the move marks a turning point in the industry -- an acknowledgment that the post-PC era has arrived.

The real driver of growth over the next few years will be software and services designed to help businesses move a good part of their computing infrastructure to the cloud and to analyze the huge volume of data coming from all sorts of devices.

"Data has been exploding," said Michael Qualley, senior vice president of Systems Solutions and Technology Products at Forsythe Technology, a technology consulting and systems integration company. "It used to double every four years; now it is doubling every two years."

IS professionals, in the wake of the recession, are starting to be asked by company executives to invest in technology that will transform business processes and drive revenue -- rather than being told to simply keep costs down and maintain current technology infrastructure, Qualley said.

New systems management tools are needed to deal with virtualized computing environments that comprise both on-premise and cloud-based computing infrastructure, and business analytics need to be put in place to deal with real-time data analysis.

Enterprise software vendors that can offer these types of capabilities are poised for growth. "But you have to dig a little deeper beneath the revenue figures to see what's really driving growth," Qualley said. "Is a company growing from acquisition, or from what they have to offer .... in business analytics?"

That's the question for SAP, which on Thursday reported preliminary results for the fourth quarter, in which the ERP (enterprise resource planning) vendor experienced a 2 percent year-over-year increase in revenue to €4.04 billion (US$5.3 billion). SAP did not break out the portion of those results that was due to its acquisition of Sybase. Details will be forthcoming later this month. As the largest independent ERP-focused company in IT, SAP is a bellwether for enterprise IT spending.

Most market researchers agree that software will be a big driver of IT growth. Forrester last week issued a forecast saying that computer equipment spending will increase 7.4 percent while software spending will increase 7.1 percent, but the software figure is more impressive because it comes on top of a bigger base.

In 2010, computer equipment spending amounted to $337 billion while software spending totaled $402 billion. The big growth in software will come in 2012, Forrester said, when it expects software purchases to rise 11.5 percent, compared to an 8.3 percent increase in computer equipment spending.

Businesses are just now starting to sketch out plans for computing environments that will allow them, for example, to detect via GPS technology when a mobile phone-carrying customer is passing by a specific retail store, analyze data in real time, and push out a sale offer, according to Forsythe's Qualley. "They'll be able to tell that this person made a purchase a few months earlier and send out a related offer," he noted. This futuristic scenario won't start to be realized for a few years, he cautioned -- but that's when automated business process software and real-time analytics will really start to take off.

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