IT Vendors Putting Their $44 Billion Where Their R&D Is

December 28

I did something a little crazy over the holidays:  I read through the latest couple of 10-Ks and/or annual reports from the last few years from roughly the twenty largest IT vendors in the world.  I did this in search of R&D spending – was it still happening, who was doing it.

I came up with a list that includes 16 large vendors that disclose R&D expense in their respective “Statements of Operations.”  In order by 2008 fiscal revenue, largest-to-smallest, the list includes HP, IBM, Dell, Microsoft, Cisco, Intel, Apple, Oracle, Google, EMC, SAP, Seagate, Symantec, AMD, CA and NetApp.  I also looked into Accenture, CSC, Asustek, Lenovo and Sun and a few others but for a variety of reasons, such as the lack of disclosure of R&D expenses, I decided not to include them in the analysis mix.

In fiscal 2008 those 16 very large IT vendors reported nearly $556 billion in revenues.  They spent over $44 billion in R&D, so spending on R&D at a rate of 8% of revenues.  Pre-tax income for those vendors was $100 billion.  We can’t say that “therefore they spent 44% of pre-tax income on R&D” because R&D expense is accounted for before pre-tax income is calculated.  In addition, one could not say that “If the vendors spent $0 on R&D they would have earned $144 billion in pre-tax income” because it is virtually impossible to reasonably calculate the impact of R&D investment on pre-tax income in the scope of a single fiscal year – though I bet IT vendor CEOs wish it were easy to calculate a trustworthy number.

We all know 2009 was an economic debacle, so I am looking forward to making a comparison of R&D spending for fiscal 2009 versus fiscal 2008 for these 16 very large IT vendors.  So far nine of the 16 vendors have reported 2009 fiscal full-year financials, and of those nine 4 increased R&D spending, 5 decreased R&D spending.

Also of interest is that some of the vendors most associated with “being innovative” like Apple and Google do not actually spend, on a percentage basis, a particularly high amount on R&D.   Google does spend more than the 8% average of the 16 vendors, spending 12.8% of R&D expense to revenue in 2008, but in fiscal 2008 Microsoft, Cisco, Intel, SAP, Symantec, AMD and NetApp spent more on a percentage basis than Google.  Apple, perhaps shockingly, spent only 3.6% of revenue on R&D, but given their investments in retail stores the way the numbers work out is really not that shocking.  Still, only HP and Dell had lower rates of R&D spending in fiscal 2008 on a percentage basis than Apple in 2008.

Many have bemoaned the idea that Sun’s R&D brilliance and commitment will set beneath the Oracle portfolio of acquisitions.  Perhaps this is true, but Oracle did spend 12.2% on R&D in 2008, and 11.9% on R&D in 2009, roughly 4% above the index 8% rate.  CA likewise counts as a bit a of surprise – CA also spends nearly 12% on R&D.  When CA comes up with compelling concepts like “Mainframe 2.0” there is proof that R&D has made a comeback in Islandia.

Who cares?  I guess the point is this:  $44 billion isn’t chicken feed.  Definitionally not all of this is R&D is research, not PhD driven, and not all of it is patch fixes either.  We can assume some kind of normal curve, with the bulk of R&D spending around upcoming product releases (with often a blush of patches soon thereafter), but some important but relative minority of spending on research or big ideas, and a roughly even amount on plugging holes found further into production.

But given the relative lack of VC spending on IT compared to a decade ago, the established vendors, those that have survived or thrived during a decade of massive consolidation, have assumed the primary reins of IT innovation.

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