Downturn puts software, Net firms to the test

By Ross Kerber, Globe Staff, 5/21/2002

Biggest technology cos. All the charts

any of Massachusetts's largest technology companies suffered losses and sales declines last year amid an order slowdown that tested every player in the software and Internet sectors.

While many companies showed resilience, their difficulties touched the thousands of technology workers laid off throughout the state. Bad news came across the board, from onetime Internet highfliers such as Terra Lycos and CMGI Inc. to data-storage company EMC Corp. of Hopkinton.

CMGI revenue fell 26 percent last year to $956 million as the Andover company pared back operations. EMC announced layoffs of about 5,500 employees last year, or more than 20 percent of its work force, and it saw shares decline sharply. EMC blamed an order slowdown and stiff price competition, factors that affected almost every other software and hardware maker in the state even before Sept. 11.

Boston-based semiconductor equipment maker Teradyne Inc. lost $202 million in 2001, compared to a profit of $454 million in 2000, as orders dried up. At Keane Inc., a provider of business software and services, sales fell to $779 million in 2001 from $872 million in 2000, and net income fell proportionately.

"It's been a very difficult period," said Ron Sege, a former Lycos executive who is now chief executive of Ellacoya Networks in Nashua, a provider of Internet services to broadband carriers. Sege believes the worst is over, in part, because Internet usage continues to increase.

But many companies won't be around to reap the rewards of surviving. Last July, Cambridge Technology Partners was acquired by Novell Inc. for roughly $245 million in stock. Last month, Web designer Viant Corp. of Boston was snapped up by Chicago rival Divine for about $96 million.

Others switched their strategy, hoping to find more profitable business models. Earlier this year, for instance, StorageNetworks Inc. of Waltham wrote off $114 million it had invested in data-storage equipment for other companies and said it would switch its focus to selling software.

One sector that held its own was made up of defense-related technology providers. They benefited mainly from a rise in military spending late last year, as investors bet that companies such as Dynamics Research of Andover could expect more contracts. Chief executive James Regan says that's his goal, both through acquisitions and by adding to the security-software and logistics contracts it already holds.

Other companies that sell to military and government customers, such as Parametric Technology Corp. of Needham, said those sales helped offset weak orders from others.

Fear and uncertainty didn't benefit every player, however. Some computer-related security providers still struggled, such as RSA Security Inc. of Bedford. It posted a loss of $2.5 million last year, after several years of big profits, and saw shares fall.

The good news for the technology sector is that the damage wasn't worse. Figures released in November by the Massachusetts Software & Internet Council, from a survey taken over the summer, found 3,272 software and Internet firms in the state, down just slightly from the 3,310 the council found a year earlier. These companies employed 159,193 workers, down 3 percent from the year-earlier figure of 164,007. Total Internet-related employment rose to 37,095 from 35,119.

Joyce Plotkin, the council's president, said the trends have probably continued since the survey was taken. But she added that managers she speaks with don't expect to see a recovery of technology orders until 2003.

Ross Kerber can be reached at kerber@globe.com.