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By
John Dix
After growing by $100 billion in 1999 and by another $100 billion in 2000, sales for the Network World 200 last year receded for the first time ever, sliding 2% to $890 billion. And that's the good news. The bad news is the 200 companies - the largest public players in the North American network business - amassed $65 billion in losses in 2001, a staggering $135 billion swing from the $70 billion in profits the group mustered in 2000. This shouldn't come as too much of a surprise. Nortel alone contributed $27 billion in losses last year. And it had a lot of company. Some 138 of the NW200 ended 2001 in the red.
With sales down and profits in the tank, the stock market naturally wasn't kind, either. The market capitalization of the NW200 was $2 trillion when we captured the data March 22. That's down 26% from $2.7 trillion in 2000 and down a whopping 60% from the halcyon days of 1999 when the NW200 topped $5 trillion.
Then comes Dell. No one apparently told Dell that things were going from bad to worse. The company drove sales up 26% to $32 billion, a gain that vaulted Dell five rungs up the NW200 ladder, landing it ninth on the list. Dell also squeezed more than $2 billion of profit out of the year, albeit at a steep cost: In two major layoffs, it eliminated nearly 5,700 people, or about 10% of its workforce.
Hewlett-Packard, much in the news of late, saw sales slide 7% to $45 billion and profit tumble 86% to $408 million, a mere 1% return. That meager profit wouldn't quite offset the $785 million loss Compaq incurred as it was posting sales of $34 billion, down 26% from the previous year. Add it up in anticipation of what the merged HP/Compaq might look like and you get a $79 billion company with $377 million in losses. Obviously the situation is more complicated than that, but it does show the gargantuan task facing the companies. That $377 million loss is close to the $408 million in profit HP generated in 2001. So together the companies have to recover that, then find that $2 billion in efficiency gains they have been hanging the whole deal on, all while contending with declining market share in key segments. After all, you don't integrate two product lines and expect to realize the sum of the market share. You have to contend with product and customer overlap. If you execute perfectly and don't leave yourself too exposed to competition during this time, you're lucky if two plus two ends up equaling three. Dell, IBM and Sun are licking their lips.
While it has been interesting to watch that unfold, the story of the year had to be the twisting fortunes of the once-mighty troika of Cisco, Lucent and Nortel. Go back four years and Cisco was less than half the size of Nortel and about a quarter the size of Lucent (see chart). Back then, Cisco's business was different from Lucent's and Nortel's, its path divergent. But in the ensuing years, Nortel bought Bay Networks, Lucent acquired Ascend Communications, Cisco waded into the optical world, and the carriers started shifting to packet infrastructure. Their paths came together.
For now, Cisco has the advantage (see chart). It finished the year with revenue up 18% to $22 billion, climbing from No. 17 on the list to 15. Meanwhile, Lucent's sales dropped 26%, bringing it down from No. 9 on the NW200 to 17, and Nortel's sales plummeted 37%, pushing it from 11 to 20. While a triumph for Cisco, the company doesn't have too much to crow about given it posted a billion-dollar loss for the year. However, even that was something of a feat compared to Nortel's and Lucent's performances. As noted, Nortel finished the year with an astonishing $27 billion loss on sales of $17.5 billion. And Lucent posted a $16 billion loss on sales of $21 billion. The two companies accounted for 77% of the $65 billion collective loss the NW200 posted. 
In this age of creative reporting practices, many of which are now under Securities and Exchange Commission scrutiny, it is interesting to note that while Cisco lost $1 billion for the year, it reported pro forma net income of $3 billion. It has long advocated use of pro forma numbers to indicate performance because they strip out special one-time charges associated with things such as restructuring costs, stock options and acquisition charges. But pro forma analysis played better when Cisco was doing an acquisition a minute. It is, after all, hard to acquire 23 companies — as Cisco did in 2000 — and have your books accurately reflect business health. But last year Cisco acquired only two companies, so touting pro forma numbers rings a little hollow, especially in light of the Enron debacle. As a result of Enron, it will be interesting to see if the industry as a whole starts to back away from things such as pro forma analysis and the reporting of EBITDA (earnings before interest, taxes, depreciation and amortization) numbers. Write-offs that pro forma analysis typically gloss over are those for "goodwill," the premium paid when acquiring a company for more than the value of its assets. U.S. companies used to be able to spread goodwill charges over 40 years, but rules that went into effect Jan. 1 require U.S. companies to report goodwill changes every year.
That's going to lead to some outsized write-offs this year, as companies atone for acquisition sins made at the height of the Internet frenzy. Alfred King, vice chairman of Valuation Research, estimates such write-offs will reach $1 trillion. As an example of how far reaching this is, consider reports indicating that AT&T has $25 billion worth of goodwill on its books while Qwest Communications has $34 billion. Some companies seem to be tidying up already. Akamai Technologies, 134th on the NW200 with revenue of $163 million, posted a whopping $2.4 billion loss last year. That loss includes goodwill charges for the acquisitions of Network24 and InterVU in 2000. Agere Systems, 35th on the list with revenue of $4 billion, reported a $4.6 billion loss last year. It attributed $2.7 billion of that to "impairment of goodwill and acquired intangibles primarily associated with the acquisition of Ortel Corporation in April 2000." This blood-bath-in-waiting aside, are you looking for signs of how the networked world will fare in 2002? Here's one indicator: In January, the Nasdaq-100, an index representing the strongest companies on that exchange, dropped 3Com, Ariba, Inktomi, Level 3 Communications, Novell and Palm. But invariably the industry turns to Cisco as its bellwether. Cisco's second quarter, ended Jan. 26, shows sales up 8% from the previous quarter to $4.8 billion, and a profit of $660 million compared to a net loss of $268 million in that first quarter. While that seems promising, it is the only piece of good news. When you compare the second quarter with the same quarter last year, you see sales are down 28% and profits are off 24%. Worse yet, adding up the results for the first six months shows revenue down 30% and profits 77% lower than they were in the same period last year. Things may be getting better, but we have a long way to go before we can declare the industry healed. Related links Vendor news Layoff news Lawsuit
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But 2001 wasn't all gloom and doom. Sixty-two companies
managed to generate profits, and a respectable 10% average return at that.
Companies weathering the storm well include IBM, Oracle, Sun and local phone
giants SBC Communications and Verizon.
Microsoft only climbed one rung, with sales up 10% to $25
billion. Apparently, the anticipated whipsaw effect of the soft PC market
and the legal imbroglio didn't amount to much distraction. The company
just quietly did what it always does, generate a mountain of profit. No. 13
on the list, Microsoft ranks fourth in total profit at $7.3 billion. This
places Microsoft with the biggest NW200 companies, the IBMs and SBCs, which
generate two to three times the revenue that Microsoft does. 
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