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Will the IT Doldrums Drag On?

Aug 30, 2002
By

Brian Morrissey






As the summer slowly peters out this Labor Day weekend, the IT industry hopes that the fall will bring more than just a change to the leaves: an end to nearly two years of stagnant IT spending.

In 1999 and 2000, Giga Information Group tracked IT spending increasing by leaps and bounds, rising almost 20 percent in 1999 and 16 percent in 2000. Since then, however, the story has turned bleaker. After dipping by 6 percent last year, tech spending has remained flat this year.

U.S. government figures released at the end of July may have given the IT sector a glimmer of hope that the tech recession was abating. The Commerce Department reported that Corporate America was spending more year over year on IT equipment and services for the first time in 16 months. Forrester Research quickly followed up on the data with a report that North American firms will spend 2.3 percent more on IT in 2002.


But industry analysts now say the wait will continue a bit longer, because the days of dizzying, double-digit quarterly growth in IT spending are over and done with. The recovery in tech spending, which analysts had forecast for the second half of the year, will not come until 2003, as analysts revise their forecasts to account for a jittery economy that has led enterprises to delay big IT spending increases.

Hard Times For Hardware
The hardware sector has had little to cheer about lately. Thursday, Sun Microsystems said it expected its first quarter 2003 revenues would be 10 to 15 percent off fourth quarter 2002. Sun CFO Steve McGowan said he saw "no change in the IT environment."

That could spell further tough times for hardware companies in the months ahead. Earlier this week, Deutsche Bank analysts George Elling and Steven Grossblatt reported that demand in the PC sector was weak and showing few signs of an impending turnaround.

"A replacement in corporate IT spending remains key to catalyzing PC replacement demand," the wrote, "But our CIO and field surveys show limited visibility on an improved outlook."

HP, in the midst of consolidating its merger with Compaq, reported this week that a weak demand for IT was cutting into its results. Similarly, an Apple executive earlier this month said the company just hoped to reach breakeven in the third quarter, citing the poor economic environment.

A silver lining in these clouds is the performance turned in by Dell, which has shrugged off tighter IT budgets to position itself at the head of the class among PC makers. During the third quarter, Dell reported sales grew 11 percent compared to the same period in the previous year.

Meanwhile, the market for servers remains weak too. According to IDC, server sales dropped for the sixth straight quarter in the second quarter of the year. The researcher said the market would maintain flat growth for the rest of the year.

Services Slowdown
The area driving much of the skyrocketing growth in IT spending during 1999 and 2000 was in the services sector, as companies spent huge sums to tie together the disparate systems purchased during the technology boom of the late 1990s. According to Giga, spending on services in 1999 and 2000 scraped 20 percent growth each year.

While that growth rate was unsustainable, the demand for IT services slowed sharply, inching up a couple percentage points, but did not grind to a halt last year. This year, Giga forecasts it will remain flat. Earlier this week, Deutsche Bank Securities released a further gloomy report on the outlook for computer services and IT consulting in the second half of the year.

While cutting its stock ratings for services companies like KPMG and Keane, Deutsche Bank analysts William Zinsmeister and David Richman struck a pessimistic tone.

"We do not anticipate the current business environment improving over the next few months for most vendors," they wrote.

Even the leading services companies, such as IBM and EDS, have said growth will remain mostly elusive for the rest of the year. Last month, IBM reported that its global services revenue fell for the third straight quarter, while EDS has forecast revenue will only inch up in the third quarter compared to last year.

Gartner analyst Dennis Wayson said many people lose sight of the forest through the trees, since the services sector is still growing, albeit at a slower clip.

Despite EDS' announcement that said it was closing to winning a $1.5 billion deal to run the computer systems of Dutch bank ABN AMRO, a particular concern highlighted by the analysts was the continued absence of so-called "mega deals" of $500 million or more.

"A few deals could close by year-end but our sense is that most will get pushed out into the next budget year," Zinsmeister and Richman wrote.

But Wayson paints a more optimistic picture, saying companies are increasingly breaking projects into smaller chunks and for shorter periods of time. Overall, he said, IT services providers are developing long-term relationships with companies that will yield plenty of work.

"I think we're in a situation where the rules of engagement are changing, rather than the big deal is over," he said.

Taking the long view, Wayson said he remains optimistic about the IT services market, pointing to Gartner research that pegs IT services spending rising at 6 percent on a compounded annual basis from 2000 to 2005.

"This is still a very good market," he said. "Most industries would like to see their potential growth rates at 6 percent a year. I think we're at a bump in the road. Things are going to start to come back."


 

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