business

Europe's Top Tech Performers

Telecom dominates the lineup of Old World companies in this year's BusinessWeek IT 100. Software and consulting make an appearance

Europe is no slouch when it comes to top-performing technology companies. This year's BusinessWeek IT 100 features 17 companies based in greater Europe, including Russia and Turkey (see BusinessWeek.com, "The Info Tech 100"). Not only that, three of the top 10 hail from the Old World: Spanish telecom giant Telefónica, its wireless affiliate Telefónica Moviles, and the king of mobile phones, Finland's Nokia. While some corners of Europe still suffer from sluggish economic growth or restrictive business rules, being a Europe-based tech company is clearly no impediment to global success.

The annual IT 100 report ranks companies based on revenues, sales growth, profitability, and share performance. Europeans are represented near the top on all four criteria—Telefónica (TEF) and Nokia (NOK), for instance, are the sixth and seventh largest companies, respectively, among the IT 100, while Britain's BT Group (BT) was the third most profitable. But to be included in the top 100, companies have to perform well on all metrics. Those that saw falling revenues, shrinking profitability, or stock declines fell off the list.

Undoubtedly, the strongest tech category in Europe is telecommunications. Of the 17 European companies on the IT 100 (see BusinessWeek.com, 6/23/06, "The Infotech 100 Companies"), 10 are fixed-line and/or mobile-phone service providers. When you add businesses that supply the telecom sector—Nokia, of course, plus Swedish network equipment maker LM Ericsson (ERICY), and Anglo-Israeli telecom software maker Amdocs (DOX)—it's nearly a clean sweep.

NEW GENERATION.

 Europe's biggest global tech success story is undoubtedly Nokia, which ranks No. 9 on the 2006 IT 100 and booked revenues over the last year of nearly $44 billion. With more than one-third of the global handset market—and market share greater than 50% in some countries—Nokia enjoys enormous economies of scale that let it claim the highest profit margins in the business despite average selling prices lower than most of its rivals.

Nokia's Nordic counterpart and rival Ericsson is equally dominant in providing the sophisticated equipment that powers mobile networks around the world. The Stockholm company, ranked No. 47 on this year's IT 100, was devastated by the tech-and-telecom downturn. But it has since bounced back on the strength of continued expansion of mobile systems in emerging economies and the changeover to third-generation (3G) networks in Europe and elsewhere. With sales of $21 billion, up 15%, Ericsson is on a roll.

PERIPHERAL VISION.

 But Europe also plays home to a few stars in other fields. Enterprise software maker SAP (SAP), based in Walldorf, Germany, is the world leader in programs for automating business operations. Though it trails archrival Oracle (ORCL) in revenues, its superior return on equity and share performance earned SAP the No. 39 ranking on the IT 100 this year, vs. No 51 for Oracle.

Switzerland's Logitech (LOGI) is another recurring top performer. Ranked No. 91 this year, Logitech has parlayed its early success as the PC industry's leading mouse-maker into a diverse portfolio of peripherals and accessories, from webcams to game controllers. In a business beset by commoditization and fierce competition from Asian rivals, Logitech has stayed ahead of the pack through innovative design and strong branding.

Two other non-telecom companies also made the top ranks from Europe. Paris-based consulting and IT services giant Cap Gemini joined the list at No. 72 after years in the wilderness. Hit hard by the bursting of the tech bubble in 2001, just as it was digesting the acquisition of Ernst & Young's consulting business, Cap Gemini endured three years of restructuring and a change of CEO before getting back on its feet. It's now a leading advocate of so-called "rightshoring"—a delicate balancing of local, nearshore, and offshore outsourcing.

IT'S TELECOM'S PARTY.

  It's a totally different story for Xyratex, a little-known British supplier of enterprise data storage technology. Spun out from IBM (IBM) in 1994, Xyratex (XRTX) is small and fast-growing, with a 51% increase in revenues over the last 12 months, to $728 million, and impressive return on equity of nearly 23%. That financial performance led to shareholder returns of nearly 49%—and earned Xyratex the No. 60 position on the IT 100.

Still, aside from these few examples, the real action in Europe centers around telecom. These aren't just state-owned monopolies raking in rich profits from trapped consumers. All the European telecom service providers in the IT 100—including Telefónica, BT, Norway's Telenor (TELN), and Denmark's TDC—are publicly-traded companies that face significant domestic and international competition.

Rather than relying on local lock-in, the best have thrived by rolling out cutting-edge services, such as BT's big push into broadband, or by extending their footprints overseas.

EMERGING DEMAND.

 No European operator has been more aggressive in that department recently than Telefonica. At first, it went after telecom properties in the Spanish-speaking world, especially South America, where it battles with Carlos Slim's América Móvil (ranked No. 1 on the IT 100 for the second year in a row). But in 2005, CEO Carlos Alierta upped the ante, snatching the Czech Republic's Cesky Telecom away from expected buyer Swisscom, and then shelling out $31 billion for British wireless company O2 (the former mobile unit of BT) in one of the largest acquisitions of the year.

Other telecoms on the IT 100 enjoy a different kind of opportunity. No. 43-ranked Turkcell (TKC) is on a roll thanks to booming demand in its home market of Turkey and expansion into underserved Central Asia neighbors such as Georgia, Kazakhstan, and Azerbaijan.

Emerging market demand is also the driver for sizzling results from Russia's Vimplecom (VIP) and Mobile Telesystems (MBT), ranked 49 and 50, respectively, on this year's list. Vimpelcom, for instance, saw a 52% surge in subscribers in the last year, while Mobile Telesystems—the No. 1 wireless player in Russia—extended its coverage in Eastern Europe, the Balkans, and Central Asia.

There's more to European technology than telecom, but voice and data communication are clearly the Old World's greatest contribution to the global tech landscape. For Europe's top tech players, telecom is very good business, indeed.

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