Our ranking of the top 100 information technology vendors finds they totaled $635.2 billion in revenue—an increase of almost 13% from the previous year—with overseas sales, green I.T. and an upturn in the tech cycle fueling sales.
The CIOZone 100: How They Ranked
By Robert Hertzberg
Shortly after doing its initial public offering last summer and flush with cash, Brazil's MRV Engenharia started installing a series of blade servers from Hewlett-Packard Co. MRV Engenharia, Brazil's biggest real-estate developer and home builder, wanted a data center that would make more efficient use of the environment and provide a better platform for its enterprise resource planning application.
The example of MRV Engenharia-a non-U.S. company turning to an emerging technology to keep down costs and address environmental issues-goes a long way toward explaining why 2007 was such a good year for U.S. technology companies. A wave of investment from emerging markets hoisted the U.S. technology industry to its best year since 2000. The weakening U.S. dollar also helped many big companies, adding a favorable currency impact to results that were already strong.
While the fastest growth came from the usual suspects—such as the search giant Google Inc. (2007 sales increase: 56%) and the software-as a-service pioneer Salesforce.com (51%)—big companies in general enjoyed success in 2007. In aggregate, revenue among the 100 biggest U.S. technology companies—what we're calling the CIOZone 100—advanced 13% to $635.2 billion from $560.9 billion. Aggregate net profit rose 25% to $77.6 billion from $62.3 billion, as the biggest companies found ways to increase their margins.
The things that drove enterprise use of technology in 2007 weren't necessarily new. Some of them revolved around the data center, that glassed-in room that companies have long used to run applications and process information. The sprawl within data centers has become a problem for many corporate technologists, who are getting sky-high energy bills and can't always count on their local utilities to provide them with the power to cool their server farms. The resulting push toward "Green IT" is "serving as a new market influence in some mature areas," says Gartner Inc. vice president Ken McGee.
No vendor is benefiting more from the overhaul of data centers than Hewlett-Packard, the No. 1 company in the CIOZone 100. HP's business of marketing "blades"-compressed processing and storage units that take up minimal space, can be added as needed and have built in cooling and power-conservation technologies-has been growing 60% to 80% per quarter, says Jim Ganthier, director of the company's blade systems business. Physical limitations are driving much of the demand: a New York-based financial services company started bringing in HP Blades last year because its data center was housed in an older building that simply couldn't handle the weight of new cables from traditional rack-mounted servers.
There are other ways of addressing the physical limitations of the data center, of course. One is through virtualization, which uses software to let underutilized servers handle additional tasks, such as housing a database or running a second application. Its virtualization software helped VMware (No. 33 on the CIOZone 100) to an 88% sales increase, the highest on our list, as the Palo Alto, Calif.-based company passed the $1 billion sales mark.
Software was a hugely profitable space to be in last year. Revenue at Microsoft (No. 4) jumped 26% to $57.9 billion, helped by Vista, the newest generation of its operating system, and a new version of Microsoft's Office suite. Microsoft excelled even more on the bottom line, with its net profit surging 42% to $17 billion-meaning the company captured a fifth of all profit in the U.S. technology industry.
Oracle, the next-biggest pure-play software company and No. 9 on the CIOZone 100, also had a good year, growing at nearly the same percentage rate as Microsoft and earning a profit of $4.8 billion. Oracle is benefiting from the growing interest in service-oriented architectures (SOA)—an approach to creating business applications that makes them cheaper and more flexible-on the part of its most sophisticated customers.
IBM, the No. 2 company on our list, also benefited from a strong performance in its software business. Its WebSphere family of products, which helps customers connect diverse applications and operating systems, grew 19.1% and should help the company surge past the $100 billion revenue mark this year.
Elsewhere in applications, growth came from software as a service. Salesforce.com (No. 44) added more than 10,000 new corporate customers during the year, many of them small businesses that like Salesforce's approach of turning customer relationship management software into a rentable Web application.
"It gets you going faster," says Robert Keefe, chief information officer of Mueller Water Products, a water pipe and fire-hydrant maker that is looking at some specialized software-as-a-service solutions to help it manage parts of its supply chain. Keefe, who is also the president of the Society for Information Management&38212;the national association of CIOs—brought in Salesforce.com at his last employer, Russell Corp., to see if it would help Russell in its main business of marketing Spalding basketballs. "It was a proving ground to see if the salespeople would use a piece of software like this," Keefe says. "They did."
Besides the increased buying on the part of foreign customers, the U.S. industry's strength in 2007 was also the result of something more fundamental: The end of a long period of tech digestion. Such periods are part of the regular cycle, and follow equally long periods of investment sparked by the introduction of major new technology platforms such as the PC circa 1980, network computing a decade or so later and the Internet a few years after that.
"What happens with tech digestion," says Forrester vice president Andrew Bartels, "is that a CEO and CFO are sitting together looking at their budgets and their financials, and all of a sudden one of them says, 'I'm not seeing the benefits from buying technology-are you? Let's stop buying technology for technology's sake.'"
Ordinarily, Bartels says, the end of a period of tech digestion would be followed by the return of a strong up cycle, driving technology vendors' revenue for several consecutive years. But the economic weakness in the United States has thrown 2008 into question.
While some companies, such as IBM, have already said their non-U.S. business will make 2008 another good year for them, other companies haven't expressed the same confidence. Last month, for instance, Cisco (No. 6) said it was in the midst of an order slowdown that might signal the arrival of a rough few months. Communications equipment vendors like Cisco are a special case because two of their main customer bases-telephone companies and cable companies-are having problems of their own. In any case, Bartels predicts, the most a U.S. recession would do is push some of the pent-up demand for technology into next year. "2009 looks like it's going to be very strong," Bartels says.
For many companies, there may be no interruption to the good times at all. The last recession-which started in 2001-included a slowdown in capital spending that was particularly hard on technology companies. The current slowdown, with its roots in the mortgage meltdown, is consumer-led, Gartner's McGee says. That may portend a hard few months for industries like cars and clothing, but it shouldn't have as big an impact on corporate technology, McGee says, adding: "We don't expect negative growth in IT" in 2008.
The CIOZone 100: How They Ranked
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