Canadian ICT firms among select few prospering in tough times

As economic woes fill the front pages of the business and mainstream press, little attention has been paid to those information and communications technology (ICT) organizations that are bucking the trend. How are they doing it? Eight years after the last air came out of the deflated tech bubble, ICT firms have been hit hard yet again. Adobe Systems, AT&T, Ciena Corp, Cisco Systems, Level 3 Communications, Microsoft Corp, Motorola, Nokia, Nortel Networks, Seagate, Sun Microsystems – this is a partial list of ICT companies that are getting pummeled. Yet success stories include IBM, SAS Institute Inc., and Canada’s Calian Technologies Ltd. In the case of technology services firm Calian, for the first quarter ended December 31, 2008 the company had revenues of $55.1 million, an increase of 20% from the same quarter of the previous year. Net earnings were $3.3 million, compared to $2.2 million. To top it off the company declared a quarterly dividend of $0.15 per share – all while having to account for Nortel’s filing for creditor protection, which resulted in a substantial write-off. Calian’s chief executive officer and president Ray Basler says that the solid results were helped by two non-recurring high margin contracts, but also due to the fact that the company’s manufacturing group “continues to grow, and unprecedented staff utilization levels have bolstered the bottom line results.” Given the example of Calian’s focus on worker utilization, it’s no surprise that another winner is privately held business intelligence firm SAS Institute. In 2008 SAS Canada recorded 11% growth in new software sales, with total revenue up by 9% to $101 million. CEO Jim Goodnight attributes the growth to two things: the stability that a private firm provides, and the fact that SAS technology helps companies run their businesses more efficiently in tough times. “This growth is a direct result of being a stable privately held company,” says Goodnight, “which allows us to invest in long-term relationships with employees and customers.” He adds that “In tough times, companies focus on optimizing their businesses.” Expect consolidation in outsourcing, security IBM has a similar story. The company had a robust fourth quarter profit, and was even optimistic in its forecast for its 2009 software and service business. The recession’s pressure on core operating expenses means that IT and business outsourcing is getting a lift – IBM had a 20% increase in outsourcing related work in its last quarter. Result: at press time the company was rumoured to be in takeover talks with Sun Microsystems. However, IBM is making cuts; it’s just being low-key. The New York Times has reported that IBM is avoiding reporting by spreading around its job cuts. Six weeks after the company reported a 12% increase in net income it has stealthily unloaded about 4,600 North American jobs. What’s happening? Sadly, when J. Randall MacDonald, IBM’s senior vice president for human resources, says that the cuts are “business as usual for us,” what he means is that the shift continues to offshore labour. As it is, workers in North America account for only about 30% of IBM’s global workforce. This seems to fit with what the law firm Morrison & Foerster concluded in its annual review of global sourcing trends: the recession will result in some tough bargaining, with many companies “looking to drive further value and cost improvements on existing deals, often via re-negotiation, service levels and other key terms.” So, it’s a buyer’s market when it comes to ICT services, but perhaps not for very long. As activity slows down within the once highly-profitable financial services sector, and scrutiny increases due to scandals such as that at Indian outsourcer and ICT firm Satyam, there will likely be a flight to quality and, consequently, market consolidation – as per the IBM interest in Sun. “Cisco and Microsoft are sitting on billions in cash,” Neil MacDonald, vice president and Gartner Fellow for Gartner Research, tells Telemanagement. “And valuations are extremely attractive – I expect further consolidation.” MacDonald sees this as being particularly relevant in the security market.“The little vendors are having a harder time out there selling net new security products,” says MacDonald. “They’ll be looking to be acquired – we are already seeing evidence of that.” MacDonald says that Gartner was seeing a lot of activity toward the end of 2008 in the traditional spending areas such as desktop anti-virus and protection suites, as well as perimeter security, with the real concern having been data loss prevention. “It’s the new security projects – things like adding network access control capabilities – that might be put on hold,” he says, adding that upgrades and migrations could be delayed. As it stands, line items for security are diminishing as hubs, routers, and server and operating system infrastructure are being sold with security baked in. As security vendors look to pick up capabilities in areas where they may be lacking, enterprises are also likely to consolidate vendors so that they only have to deal with one company for areas such as firewall and host intrusion prevention. Managed services a bright spot for telecom “Mobile operators had a pretty good 2008; most are trimming, but are confident,” says Jake Saunders, a vice president of forecasting at ABI Research. There is, however, an impact. “ARPUs are also trimming,” he adds, “and we expect them to slide further.” That said, by and large Saunders thinks that there will still be good cash flow for the carriers in Canada, and that as a result they will not experience a substantial credit crunch.“They’ll gear up for recovery,” he says. “It will start in 2010, and build in 2011.” ABI also thinks that managed services for mobile networks will show resilience. The global market reached US$19 billion in 2008, with ABI believing that this represents only a small part of the potential addressable market. Canadian and the US carriers risk missing out on this opportunity, and could find themselves undercut by European providers. In fact, ABI senior analyst Nadine Manjaro calls telecom operator overheads in North America ‘astronomical’, explaining that while North America accounts for less than 10% of the world’s mobile subscribers, it has the world’s highest operating expense tally. Yet as operators cut staff they may have little choice – in the US Sprint is shifting up to 10,000 employees to managed services. AT&T is hesitant, despite recent cuts of 12,000 employees, as is Verizon – yet eventually they’ll have to face the music. In Canada the pressure to shift to managed mobile services is less intense: Telus Corp, Bell Canada, and Rogers Communications are in decent financial shape and are not feeling the immediate, layoff-driven resource-constraints that could throw them into the arms of a managed services provider. A big company like Bell could also do it themselves: on the enterprise front Bell is already offering its own VoIP managed service to its Cisco- and Nortel-based customers. “Historically the Canadian carriers do ok during a slowdown,” says Lawrence Surtees, vice president and principal analyst, communications research for IDC Canada, adding that growth rates may slow, but negative growth is unlikely. But that won’t stop firms like Ericsson, which currently leads worldwide in network-related managed services, and the likes of Nokia Siemens, Alcatel-Lucent, and IBM from pushing managed ICT services for mobile operators. IBM in particular stands to benefit from the larger outsourcing trend. Meanwhile, ABI expects that radio access network equipment expenditures will contract by 6% in 2009, with total infrastructure spending at about $49 billion in 2009. ABI’s Saunders identifies two underlying trends determining the course of this market: first, deployment cycles for 2G and 3G coverage are rapidly approaching maturity in the industrialized world, including Canada; and second, there is fierce competition between the incumbents (Nokia-Siemens Networks, Ericsson, Alcatel-Lucent, Motorola) and the “price-competitive and increasingly innovative Chinese vendors Huawei and ZTE.” May the best niche win In those areas where ICT is not commoditized, the challenge is going to be to win the high demand, yet limited, niche markets that are driven by strict regulatory requirements. An additional boost will come from capital injections for infrastructure. And which areas are these? The best picks are healthcare, ‘eco’ or regulated energy – in which spending is tagged to specific projects – and infrastructure. “Healthcare needs dispatch, GPS, and of course compliance is big – the technology has to ensure regulatory compliance,” says Jeff Lowe, vice president, marketing communications, Telus Business Solutions, in conversation with Telemanagement. “In healthcare another area that is trending quite high is workload preparedness, remote worker access, and how to ensure safety and productivity.” In Canada big investments in healthcare will result in more activity in overall infrastructure. UK-firm Carillion Plc, for example, is set to build and finance a $258.5 million expansion of the Royal Victoria Hospital in Barrie, Ont. Carillion built the New William Osler Hospital and the Royal Ottawa Hospital, and is also working on the Sault Area Hospital. But not all organizations can expect to dip into such a lucrative sector. In fact, Info-Tech Research Group has told Telemanagement that more than half of the organizations it tracks have specific cost reduction targets. It’s becoming a common story: budgets and staff are being frozen, and opex targets are tight. If companies and organizations don’t have to spend money, then they won’t – but healthcare isn’t the only area that is driven by regulatory concerns. Toronto-headquartered wireless communication company Active Control Technology has evolved from a focus on remote control garage openers – a saturated, commodity-based market – to Wi-Fi mesh networks in coal mines. As a result of some deadly mining accidents, the state of West Virginia came up with strict regulations for wireless communication, and Active Control saw an opportunity. “Based on that legislation we created a new technology called ActiveMine,” Steve Barrett, the company’s chief executive officer, tells Telemanagement. “The tricky part is to make Wi-Fi work in a mine. But when you look at these mines, the tunnels are at perpendiculars and cross-cuts. We saw that and said, ‘Gee, that looks a lot like a mesh network’. The key for Active Control, whose ActiveMine wireless communication and tracking system now has federal Mine Safety and Health Administration (MSHA) approval in the United States, was to ensure availability and low latency. “There is automatic re-routing if the signal node is knocked out,” says Barrett. “Battery back-up keeps the network up, and with low latency we can do streaming data voice and video.” It looks like a good market: the US will be investing in clean coal, the Chinese coal mining industry is in serious need of an upgrade, and present radio communication systems are reliant on old walkie-talkie technology. Meanwhile, hi-tech competitor Level 3 Communications looks like it will be another casualty of the downturn as it nears default on its US$1.867 billion in debt.

Canadian ICT firms among select few prospering in tough times

News | 03/29/2009 8:50 pm EDT

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