Services firms surge ahead

Services and consulting firms expect to post rosy earnings for the fourth quarter, though several companies are restructuring and tackling temporary setbacks.

Kim Girard
Kim Girard
Kim Girard has written about business and technology for more than a decade, as an editor at CNET News.com, senior writer at Business 2.0 magazine and online writer at Red Herring. As a freelancer, she's written for publications including Fast Company, CIO and Berkeley's Haas School of Business. She also assisted Business Week's Peter Burrows with his 2003 book Backfire, which covered the travails of controversial Hewlett-Packard CEO Carly Fiorina. An avid cook, she's blogged about the joy of cheap wine and thinks about food most days in ways some find obsessive.
4 min read
As business software companies stumble, IT service companies are surging ahead.

Overall, services and consulting firms expect to post rosy earnings for the fourth quarter, though several companies, such as Cambridge Technology Partners, are restructuring and tackling temporary setbacks.

In the meantime, enterprise resource planning (ERP) software companies have been slammed by the Asian flu and a dampening of software demand as their customers become preoccupied with Year 2000 fixes, analysts said. For the coming year, analysts are predicting a continuing downturn in the ERP market as ERP leaders struggle with declining software revenue.

SAP this month posted worse-than-feared fourth-quarter results, slammed by disappointing sales in Japan. The ERP software giant, which provides software that helps companies manage manufacturing, financials, and human resources, said it expected its rise in pretax profit to be 15 percent, much lower than some estimates of 30 percent. The German software giant said its sales are also expected to drop to 20 to 25 percent growth this year.

In the meantime, the worldwide IT services market, worth about $300 billion, should grow 13 to 15 percent in 1999, with Web-based services booming fastest at 50 percent, according to Wayne Segal, an analyst at Credit Suisse First Boston.

"The Web-related work is accelerating in leaps and bounds," said Segal, who credits the services boom on the corporate rush to put business applications on the Internet, the IT talent shortage, Year 2000 projects, and the European monetary conversion.

Unlike the software business, IT services have also remained relatively unscathed by the Asian crisis, as most of their business is tapped in the North American market.

"Services companies are viewed as a bit of a safe haven," said Lehman Brothers analyst Karl Keirstead.

While some IT service market leaders saw their stock stumble in 1998, several companies are once again rallying.

Services and consulting giant Electronic Data Systems, for example, has seen its stock bounce back to its 52-week market high, though the company's earnings per share for the fourth quarter are expected to be down 10 cents from a year ago to 52 cents, according to First Call estimates.

CSC, is expected to post fourth-quarter earnings of 54 cents a share, 10 cents higher than the year before. And rival Keane is also expected to report earnings of 38 cents per share compared to 19 cents a year ago.

Despite project delays that led to disappointing earnings in the third quarter, Cambridge Technology Partners should report fourth-quarter earnings of 25 cents per share vs. 18 cents last year. And Sapient, a stock market darling which competes with companies such as USWeb/CKS and Cambridge Technology Partners, has watched the value of its shares soar 44 percent over the past year.

ERP, overall, is a different story. The market grew 35 percent last year to $15 billion, down from 47 percent growth in 1997, according to analysts.

According to Goldman Sachs, the window of opportunity for the big ERP vendors appears to be closing as companies divert their attention to year 2000 problems and IT strategy.

"It is now too late to implement and have large global ERP systems up and running in time for year 2000," a recent Goldman Sachs report states.

SAP's fourth-quarter earnings per share are expected to drop to 19 cents from 21 cents in the same quarter last year.

However, the company, which corners about 57 percent of the ERP market, says it expects its sales will grow at a faster pace after 1999 and would likely double over the next three years.

As software profits slip, large ERP vendors are increasingly depending on services. Yet by moving in that direction they must compete with giants including EDS, Andersen, and others.

Baan's earnings are expected to dive to 7 cents per-share for the fourth quarter, from 14 cents last year. PeopleSoft is expected to inch up to 17 cents from 16 cents a share in the fourth quarter last year, according to First Call estimates. Overall, J.D. Edwards is expected to fare better, as the company focuses on the midtier market, which is growing at a faster clip.

All five leading ERP vendors, except J.D. Edwards, have seen growth in license fee revenues drop over the past two years. Combined, license revenue growth slowed from 69 percent in 1997 to 23 percent in 1998. Complicating ERP companies' woes is the fact that some companies are turning to supply chain management systems built by vendors such as i2 Technology and Manugistics, instead of huge ERP projects, for the promise of faster payback.

Overall, "the ERP market will get worse before it gets better," Segal said.

Reuters contributed to this report