Tech Hot Growth 50
In recent years, with few exceptions, technology companies have appeared to be in a rut from which they couldn't extricate themselves. Still recovering from the bubble-bursting years of 2000 and 2001, longtime tech sector bellwethers such as Intel (INTC), Dell (DELL), IBM (IBM), and Microsoft (MSFT) all found their growth restrained by an economy in which tech spending has been growing at a much slower rate than in the past and selling prices are being relentlessly tamped downward. The growth in tech spending has dropped from the double-digit rates of the late 1990s to single-digit rates of 5% to 7%.
But there was faster growth to be found in the tech sector in 2006—hot, even heyday-like growth in certain places. You just had to know where to find it and how to grab it, as the 50 companies that made our ranking of the Tech Hot Growth firms show. Measured by sales growth, total return to shareholders, return on equity, and overall sales, the companies on the list make for an enlightening study of the new technology economy, circa 2006.
Innovation Scores Big
Apple Computer (AAPL), No. 2 on the Tech Hot Growth ranking, is the prime example of a company that has created its own opportunities. Its breakthrough innovation in digital music has made it an international icon and propelled sales up 39% over the past 12 months, to $19.3 billion. The company sold 39 million iPods in the 2006 fiscal year, as well as 5 million Macintosh computers.
Google (GOOG), meanwhile, has claimed billions in advertising dollars by devising the technology to put information from around the Web at anyone's disposal in a matter of seconds. Its growth has been nothing short of phenomenal. A mere eight years old, Google is approaching $10 billion in revenues, with growth over the past 12 months still at a torrid 77%. That helped it place No. 4 on BusinessWeek.com's ranking.
Gobbling for Growth
Most tech companies, even powerful ones, have had to fight much harder for growth. AT&T (T) and Oracle (ORCL), No. 3 and No. 8 respectively, have had to spend billions on acquisitions to keep boosting their top lines. AT&T has been buying its way through the troubled telecom companies, scooping up assets to gain the scale to compete against cable players such as Comcast (CMCSA) and Cablevision (CVC). The combination of AT&T and SBC Communications helped lift revenues 46%, to $60 billion over the past 12 months. The company is now seeking regulatory approval for an $86 billion acquisition of BellSouth (BLS).
Oracle, under the relentlessly aggressive Larry Ellison, has been on an acquisition tear. Having started 2004 with the $10 billion deal for PeopleSoft, Oracle started 2006 with the $5.85 billion deal to acquire Siebel. The acquisitions have continued at the rate of about one per month. So far, the company has spent $20 billion on 22 companies, half of them in 2006. Acquisitions in tech, and particularly software, have always been tricky. But so far, Ellison's bet appears to be paying off. Revenues are up 23% over the past 12 months, to $15.2 billion, and Oracle's stock has surged by 50%.
Of course, it's easier for companies to produce strong growth when they're small. And many of the companies on the Tech Hot Growth ranking are relative unknowns, working their way up in size and scope.
"The bigger the company, the harder it was to grow" says Andrew Bartels, a research analyst with Forrester Research (FORR) in Cambridge, Mass.
The Amkor Story
Growth, of course, is not a given. And these companies demonstrated a combination of innovation, specialization, and good old-fashioned financial responsibility. Consider the case of Amkor Technology (AMKR), a Chandler (Ariz.)-based semiconductor manufacturing services company that wound up at the top of the list.
Amkor's job is turning silicon wafers into finished chips, then testing them to make sure they work. It's a necessary but costly bit of silicon toil that companies such as Intel and IBM, among others, have for years seen fit to outsource to companies like Amkor, Tawian's ASE Test (ASTSF) and SiliconWare Precision Industries (SPIL). And Amkor's business, says analyst Bill Ong with American Technology Research in San Francisco, is an indicator of the wider semiconductor industry, and its success in the last year owes much to plain old financial discipline.
For years, Ong says, Amkor would plan its capital expenditures around chip demand forecasts from chipmakers. But in recent years, with chip demand becoming more difficult to predict reliably, its customers have been required to pay up front. It has also declined to compete on price. "If they're competing against someone else with a lower price, they will walk away from low profit-margin business," he says. That has helped the company turn a $137 million loss for its fiscal year 2005 into a $165 million profit for the 12 months ended Sept. 30. Meanwhile, sales surged 41%, to $2.7 billion.
Amkor was one of several companies that were affected by the surge in demand for memory chips that started in late 2005 and continued through the first half of 2006 before tapering off. Demand for NAND-type flash memory—the type of flash chip used primarily to store data—surged dramatically in 2005, around the same time that Apple launched its iPod nano music player, which uses NAND flash chips instead of a hard drive to store music.
Chips: Can't Have Just One
Companies jockeying for a share of Apple's business, including Micron Technology (MU), which formed a joint venture with Intel to build flash chips; Samsung; Hynix Toshiba (TOSBF); and others also saw an explosion of other consumer applications for flash chips (e.g., digital camera memory cards, smart phones, USB keychain storage drives) and converted old chip plants to build NAND and broke ground on new ones. Demand for NAND flash chips was red-hot through the first half of 2006, but cooled as manufacturing capacity caught up with demand in the second half of the year.
One flash chipmaker, SanDisk (SNDK), even challenged Apple with its own line of MP3 players and turned out to have the second most popular player in the U.S. behind the iPod. NAND chip revenues were forecast to grow by 17% this year, according to market research firm iSuppli, but growth began to slow as the year progressed. Still, as the market for NAND slowed down, demand for DRAM memory chips—the type used in PCs and servers—picked up in anticipation of PCs running Microsoft's latest operating system Windows Vista, due in early 2007.
This on-again off-again demand cycle gave chipmakers headaches, but sent positive ripple effects up and down the supply chain of the chip industry. That flurry of building and refitting led to an increase in demand at the companies building the equipment used to manufacture chips, including Lam Research (LRCX), Applied Materials ( Next Page
com/ticker/' rel='ticker'>AMAT), Teradyne (TER), and Kulicke & Soffa (KLIC), which all made the Tech Hot Growth ranking. And all those chips moving through the market? They were good news for electronics distributor Avnet (AVT), No. 39, which saw its revenues increase 25% over the past 12 months, to $14.6 billion.
The companies that make and sell the chips had a harder time. Graphics chip supplier Nvidia (NVDA) placed highest among dedicated chip companies at No. 14, with sales that grew 22% and profits that grew by 54%. Others included wireless chip suppliers Qualcomm (QCOM) and Texas Instruments (TXN). But the general outlook for chips is turning south heading into 2007. That huge buildup in the first half of 2006 has left a lot of unsold inventory going into 2007. Market analysts are saying that sales will be slow through the first half of the year before things begin to heat up again heading into 2008.
Beyond the Chip Wars
But the list wasn't all about chips. Consumers are clearly crazy about buying electronics. And whether they're buying them online or in person, they're using their credit and debit cards. And for every swipe of a magnetic striped card, there's a payment processor collecting a few pennies, nickels, or dimes as the case may be, millions of times a day. Three of these companies made the list: Alliance Data Systems (ADS), Heartland Payment Systems (HPY), and Verifone Holdings (PAY).
Biotechnology companies also grew nicely in 2006. Take Gilead Sciences (GILD), which saw sales grow 53%, to $2.7 billion, and had a major new drug for HIV treatments approved by the Food & Drug Administration, while Cephalon (CEPH), Genentech (DNA), Celgene (CELG), and ImClone Systems (IMCL) all made the list too. So did wireless service providers such as NII Holdings (NIHD), aka Nextel International, and Sprint Nextel (S).
Five years after the technology bubble burst, the industry is finding growth much harder to come by. These companies, however, make it clear that innovation, execution, and determination can go a long way toward making today feel like the sector's good old days.
Click here for a slide show of the top 10 companies.