Revenue growth among the Network World 200 - the 200 largest U.S. public network firms - is up 10%, but profits are in the dumps as firms blend in assets to prepare for convergence.
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 homogenization cycle of the network age.
Whether or not you believe in convergence, the fact is, the industry is reshaping itself to brace for change. 1998 will be remembered as the year that many industry segments began to blend, epitomized by Nortel Networks' acquisition of Bay Networks. That deal blurred the line between vendors 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 U.S.-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, major 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 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 just acquired a 10% 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 (the recent deal between Comcast and MediaOne, which might soon become an AT&T takevover attempt) 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 NW200 as a whole was only up 10%, a few tenths of a percentage point above revenue growth in 1997. While not outstanding, that is an amazing 6% more than last year's revenue growth of the Fortune 500.
Like the Fortune 500, though, profits for the group were down 2%, compared with NW200 profit growth of 8.5% from 1996 to 1997 (overall profits for the Fortune 500 were down 1.8% last year, excluding a one-time gain by Ford Motor).
A quick look at the NW200 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% to $31.2 billion, but it also resulted in a loss of $2.7 billion for the year. With the acquisition of Bay, Nortel's revenue jumped 14% to $17.6 billion, but the company finished the year with a loss of $537 million.
[Get more details on Compaq and Nortel finances]
Other red blotches that dragged the NW200 profit column down can be attributed to heavy investment. Long-haul carrier Qwest, for example, saw revenue jump 222% to $2.2 billion, but the company is spending so heavily it posted a loss of $844 million for the year.
[Get more details on Qwest finances]
In fact, it may come as a surprise that 79 of the NW200 companies posted losses in 1998. Surprising because these are, after all, the 200 largest public U.S. companies in the market. Roughly 70% of the companies reporting losses, however, are in the second 100 - smaller firms that are still trying to make their mark.
[Get the details: Call up the loser list]
More ominous than profit dips is slipping revenue. A quarter of the NW200 - some 51 companies - saw revenue decline in 1998. Twenty-one of these companies are in the top 100, with the bulk being below the fold. 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. One-third of the NW200 saw sales climb at rates up to 20%, while one-fifth grew at 21% to 50%. Another fifth saw revenue grow more than 51%.
Fastest growing of all was Exodus Communications, a Web hosting start-up that saw sales explode 325% last year under the direction of Ellen Hancock, a 29-year IBM veteran. At IBM, Hancock rose to senior vice president of the Networking Hardware and Software divisions.
[Get more details on Exodus finances]
Accompanying Exodus on the list of the 15 fastest growing companies are six other Internet companies. But new world telecom players are also well represented. Second to Exodus is WinStar Communications, which is building an international broadband network. And WinStar is accompanied by telecom upstarts E.spire Communications, Qwest and McLeodUSA.
Get more details on WinStar, E.spire and McLeodUSA finances]
E.spire was the fastest growing NW200 company last year. In fact, five companies - Yahoo, Intermedia, Excite, E.spire and FVC.com - were on this list last year. That's pretty impressive because it means these companies grew at least 100% two years in a row.
Of course, at the other end of the spectrum are those companies experiencing the greatest revenue declines. The company heading that list is ON Technology, whose revenue was down 52% from 1997.
The numbers for ON Technology, which makes desktop management tools and the popular Meeting Maker cross-platform calendaring product, look better after adjusting for product lines that were sold off or discontinued last year. Then the company only shows a revenue dip of 9%.
[Get more details on ON finances]
The list of struggling companies is new for the NW200 this year, as is our decision to focus strictly on public companies. We gave up on private firms because they are loath to share their numbers, and, when they do, we have no means to verify the data.
Also different this year is the decision to add three new types of information to the main NW200 chart: profit margins; the amount of money companies have in cash and short-term investments; and the amount of revenue generated per employee. All three 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 horde - $13.9 billion - that is nearly equivalent to what it had in sales last year - $14.5 billion.
[Get more details on Microsoft finances]
[Also see "The Billion Dollar Club" for more on cash-rich vendors]
Sector by sector
While the industry blending makes it harder to do a sector-by-sector analysis of 1998 developments - is Nortel a carrier supplier or an enterprise player now? - things are not so finely pureed as to render such an exercise meaningless. So take a look at:
- Enterprise infrastructure
- Carriers
- Software
Company by company
We take a look at some of the leaders in specific categories:
- Most profitable: CheckPoint Software
- Fastest growth in employees: Qwest
- Fastest growing: Exodus and WinStar
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