Scaling up

Revenues climb for a second year at North America's largest network companies, and a record number of NW200 vendors are in the black.

If 2003 was the year the Network World 200 bounced back after the upheaval at the turn of the century, then 2004 was the test to see if the recovery was real.

It was.

North America's largest public network companies stumbled in 2001, took a nose dive in 2002, began a comeback in 2003 and last year grew stronger: Collective revenue for the NW200 was up 9%, and the group generated a respectable $63 billion in profits.

What's more, some 65% of the companies ended the year in the black, a historic high in the 11 years of the NW200. On average, only about half the companies on the list muster that feat in any given year (and in the bleak days of 2001, only 31% of the companies eked out a profit).

Another sign that the industry is back: Mergers and acquisition activity heated up. Billion-dollar-plus deals included Juniper's acquisition of security vendor NetScreen Technologies for $4 billion; Symantec's acquisition of storage management company Veritas Software for $13.5 billion; the $35 billion Sprint/Nextel merger; and IBM's sale of its PC business to Lenovo in China for $1.25 billion.

Smaller but significant deals included EMC's $625 million acquisition of VMware (completed in '04); Computer Associates' $430 million acquisition of identity management vendor Netegrity; Gateway's $200 million purchase of eMachines; and Symantec's $370 million acquisition of anti-spam vendor Brightmail .

Cisco is the perennial acquisition bellwether and the company was up to its old tricks, spending $824 million last year to land 12 companies, up from only four acquisitions in 2003. But that needs to be put in perspective: Cisco bought 23 companies in the halcyon days of 2000 for a whopping $12 billion.

The Network World 200

Ranked by revenue

In alphabetical order

Some of the vendor jockeying last year stemmed from seemingly diametrically opposed IT goals: On the one side buyers are striving to simplify operations through automation, make better use of resources and extend access to those resources to other organizations. On the other they are contending with stringent new security, accountability and compliance rules.

Buyers' headaches add up to opportunity for vendors, and many of the players spent the year scrambling to align themselves properly.

Core infrastructure

Any discussion about the health of the network industry has to start with Cisco (No. 12 on the NW200). The bursting of the bubble left the company treading water in terms of sales - down 15% in fiscal 2002 and flat in 2003 - but management squeezed out costs, ramping up profits to $1.9 billion and $3.6 billion, respectively.

It didn't back off its cost-cutting ways when sales picked up in fiscal 2004: When revenue climbed 17% to $22 billion, profits jumped 22% to reach $4.4 billion, a profit margin of 20%.

Cisco's '04 fiscal year ended in July though, so the NW200 uses trailing 12 month (TTM) data for a more current view. (All NW200 companies with fiscal years not ending in November, December or January are ranked using TTM.) When examined that way, Cisco's results are even more impressive: Revenue was up 19% to $23.6 billion compared with the same period in '03, and profits were up 43% to $5.4 billion, a profit margin of 23%.

A highlight for the company last year was the unveiling of the CRS-1 , a high-end backbone router that had been in development for more than two years. The 1.2T bit/sec CRS-1 is important to Cisco's efforts to combat upstarts that are trying to skim the cream of the lucrative top-end router business.

One of those upstarts has become more than a minor thorn in Cisco's side: Juniper , No. 55 on the list. And what a year this company had. Revenue jumped 90% to $1.3 billion, largely on the back of router sales. In the fourth quarter alone sales more than doubled to $430 million compared with the same period in '03.

Of that fourth-quarter revenue, $300 million was attributed to the company's core network business and $79 million to sales of security gear from newly acquired NetScreen. But it is that security portfolio that ultimately might help Juniper push deeper into core enterprise accounts (see story ).

Not cashing out

A mere five NW200 companies are hoarding more than $109 billion in cash. That’s a lot of hot dogs.

Can too much cash be bad? On the one hand, a whopping figure in a company’s cash and short-term investment column indicates strong financial health. On the other, cash hoarders often face criticism that they could be doing more with their stockpile, or that they should be more generous with their dividends. Still, what company wouldn’t want to suffer this dilemma?

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The network world is turning virtual, says Scott Kriens, Juniper CEO, in a company newsletter. "Network security is crucial as virtual networks become a critical foundation of global, extended businesses."

An NW200 staple missing from this year's list is Nortel , which delayed the filing of its annual report with the Securities and Exchange Commission and is in the process of restating its results for 2001, 2002 and 2003.

CEO Bill Owens, who took over the reins of the troubled company last May, is bullish about the fundamentals. "Nortel puts more into R&D on a per capita and per dollar of sales basis than any company in the industry, and we have the most diverse range of products in the industry," he said in an interview soon after he was hired. But he admitted that the enterprise "has not been the DNA of Nortel."

To help get the company back on track, Owens last month appointed Gary Daichendt as president and COO in charge of the carrier and enterprise businesses. Daichendt had been Cisco's executive vice president of worldwide operations.

Another long-struggling infrastructure stalwart is 3Com , which hasn't posted a profit since 2000 (or even a profitable quarter in the last 20).

No. 30 on the NW200 in 1999 with $5.7 billion in revenue, 3Com today is one-eighth that size, No. 77 on the list with sales of $669 million (TTM) and a loss of $189 million.

Sales in the last quarter of the calendar year (ending in November) were the most meager posted in two and a half years - $151 million. North America sales alone were down 29%, which CEO Bruce Claflin attributes to the decline of the 10/100M bit/sec Ethernet switching business, where competitors have started a pricing war.

To fight back 3Com is betting on:

  • Its partnership with China's Huawei Technologies, a joint venture that delivered its first fruits last year, the 8800, a modular switch with a terabit backplane. The Huawei-3Com venture is still ramping up and losing money in the process - some $7.5 million for 3Com in the first full year of operation - but revenue climbed to $261 million.

  • The $430 million acquisition of intrusion-prevention system (IPS) vendor TippingPoint Technologies, which was announced in late December. 3Com plans to take TippingPoint's products international and imbed the IPS technology into core infrastructure products.

In the meantime 3Com has to survive. And last month it announced it laid off 220 more people , 11% of its workforce.

One company giving 3Com trouble at the low-end of the market is Netgear, which grew 28% last year. In the process, it vaulted over high-end vendor Extreme Networks to land at No. 99 on the list with sales of $383 million and profits of $23 million.

SafeNet tops among

fast-growth companies

Security vendor moves from No. 3 on fastest-growing NW200 list in ’03 to No. 1 this year.

Security firm SafeNet has seen business boom over the last few years as organizations of all sizes recognize the importance of steeling their networks against intruders. The company, founded 22 years ago by two engineers from the U.S. government’s National Security Agency, had a particularly strong year in 2004, thanks in large part to its acquisition of Rainbow Technologies, which tripled the company’s revenue base, according to SafeNet CEO Tony Caputo.

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Netgear CEO Patrick Lo attributes part of that success to its line of unmanaged gigabit switches. In fact, the Dell'Oro Group says Netgear was the leading supplier of unmanaged Gigabit switch ports in 2004.

Safety in security

Of the other core network categories, one of the hottest last year was security. Almost all the pure-play security vendors fared well in the revenue category. Check Point shot up 19% to $515 million, RSA Security grew 18% to $308 million, and Internet Security Systems climbed 18% to reach $290 million.

One exception was McAfee, which saw revenue slide 3% to $911 million as the company rejiggered its product portfolio. McAfee, No. 68 on the NW200, sold off its Sniffer line in July (which resulted in a $179 million revenue reduction) and then in October acquired Foundstone , a supplier of vulnerability management products and services.

The big kahuna in security is Symantec , which has been on a tear, growing revenue 42% to $2.4 billion (TTM). Symantec (No. 41) completed six acquisitions last year, but of course the biggest news was the announcement in December that it was merging with storage management vendor Veritas.

Explaining the rationale for the merger, Veritas CTO Mark Bregman told a Goldman Sachs Technology Investment Symposium in February: "As we were helping customers . . . turn their IT infrastructure into a shared resource . . . and deliver IT as a service, one of the nagging questions that kept coming up was . . . 'What are you doing to protect us against malicious attacks?'

. . . We saw this [merger] as the best opportunity to accelerate our strategy."

Systems shuffle

In the world of systems the two biggest stories of late are the ouster of Carly Fiorina as HP CEO and Dell's continued march on the enterprise.

Perhaps lost in the whole Fiorina flap is that HP managed to grow a respectable 10% last year to $82 billion. What brought her down, of course, is the profit picture.

HP, No. 2 on the NW200, finished the year with $3.5 billion in profits, a relatively modest 4% profit margin. By means of comparison, No. 1 IBM made $8.4 billion on sales of $96 billion, a 9% return.

What's more, the bulk of HP's profits still come from the printer business, which critics cite as evidence that Fiorina's full-service, integrated IT vision wasn't delivering the goods.

But new CEO Mark Hurd, formerly the CEO of NCR, seems to believe in the integrated story, too. In his first press conference , Hurd implied he would rather improve HP's performance by focusing on operations rather than by selling off hunks of the storied firm.

Perhaps Hurd will look to Dell for pointers on how to run an efficient business. The company turned in yet another stellar performance last year, with revenue up 19% to $49 billion and profits up 15% to $3 billion.

Dell says that more than half of its revenue now comes from sources other than PCs, including servers, storage systems and printers. Regarding the latter, Dell says it sold 5.2 million printers last year and realized $1.3 billion in revenue.

It is cagier about server and storage numbers, and prefers to reference those figures as percentage gains. For example, it says server sales grew 25% last year and revenue from external storage systems was up 27%, while the underlying numbers might be relatively small.

Sun, No. 20 on the list, doesn't have heady growth numbers to crow about, but can take solace in the fact that the company has pulled out of the nose dive it has been in since the bubble burst. Revenue peaked in fiscal 2001 at $18 billion, then dropped 32% in '02 and another 8.5% in '03. In fiscal '04, revenue was down only 2% to $11 billion.

And when looked at on a trailing 12 month basis - the company's fiscal year ends in June - the picture is even brighter: Sales pulled up even with the same period in 2003. And while losses continue, they are growing smaller: $106 million over the last 12 months vs. $376 million for fiscal '04.

At the other end of the spectrum is IBM, the top dog of the NW200, which has largely insulated itself from the forces influencing the rest of the system players by focusing on services. IBM Global Services revenue was $46 billion last year, almost half of the company's total sales, and 48% more than hardware revenue of $31 billion.

How we did it

Revenue and profit data for companies whose fiscal years ended in November ’04, December ’04 or January ’05 came from 10K statements filed with the Securities and Exchange Commission or, in cases where those were unavailable, directly from the companies.

For companies with fiscal years ending in a month other than November, December or January, we gathered revenue and profit data from their last four quarters of financial reports, taken from 10K and 10Q statements filed with the SEC. In this way, we are comparing the financial results of the same calendar year for all companies, otherwise known as “trailing 12 months.”

Having achieved the strategic switch to services, CEO Sam Palmisano writes in the annual report that 2005 is the time for "small s and big E: less focus on strategic development, maximum push on execution."

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