Corporate Tech Spending Slowdown Broadens To Internet
06 Mar 10:49
By Riva Richmond
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--A recession-wary corporate America is taking a break
from its information-technology binge.
It started slowly as the economy weakened and dot-coms began failing. Sales
of computers, routers and software slowed, causing a slump in demand for chips
and other components. Now, spending on the one technology sector that had
seemed sacrosanct - corporate Internet development - is under attack from
company budget-cutters.
"Everything is being scrutinized," says Joshua Feinman, chief economist at
Deutsche Asset Management. "That doesn't mean you abandon your commitment to
technology. But you're taking a more prudent, a more cautious approach."
Executives have plenty of reason for conservatism. The demise of Internet
hype has eased the urgency to digitize. Technology systems are in good shape
after lavish spending over the last decade.
IT spending is expected to rise less than 10% in 2001, down from about 30% in
mid-2000, Feinman says. "It's not shabby, but by the standards of recent years
it's puny."
Merrill Lynch analyst Steven Milunovich predicts only a 5% or 6% rise in
spending growth in 2001 in a new report on his survey of 70 U.S. and European
chief information officers. At a recent meeting, CIOs told Milunovich that
budget cuts were launched only recently after finance chiefs "lowered the
boom."
The quickness of companies' response to the first signs of weakness in the
economy caught the technology sector, investors and economists by surprise.
Companies postponed and canceled orders so fast that sales and profits of
technology companies plunged, erasing the past two years of gains in the
tech-heavy Nasdaq Composite Index.
Intel Corp. (INTC), a major chip maker, was one of the first to stumble.
Gateway Inc. (GTW), Apple Computer Inc. (AAPL) and other computer makers
followed. Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN) and Yahoo! Inc. (YHOO)
fell like dominoes.
Phones followed computers down. Capital spending cuts by phone companies
socked Cisco Systems Inc. (CSCO). Spending this year will be flat or down at
AT&T Corp. (T), SBC Communications Inc. (SBC) and WorldCom Inc. (WCOM). Startup
phone companies, once expected to be big spenders, have largely abandoned their
plans. BlueStone Capital Securities Inc., New York, estimates that U.S.
telecommunications carriers will spend 9% less this year than in 2000.
Wall Street, which had argued that corporate Internet spending wouldn't be
cut, was eating crow by year end.
Internet project cutbacks brought down more stocks: Inktomi Corp. (INKT),
Brocade Communications Systems Inc. (BRCD) and EMC Corp. (EMC) and others.
On Thursday, Oracle Corp. (ORCL), whose software runs Internet servers, fell
to delays in IT spending.
"It appears we have gone beyond IT project reprioritization and reached a
level of indiscriminate spending cuts," Brent Thill of Credit Suisse First
Boston cried with alarm in a research note after Oracle's warning. "We consider
all estimates for the software names we follow as speculative at this point."
Some companies had predicted a rebound in the second half of the year. Now
the prevailing attitude is typified by Sun Microsystems Inc. (SUNW), which
declined to provide a 2001 earnings forecast, saying it can only see a few feet
ahead in the fog.
Analysts are predicting another round of earnings-estimate reductions in the
tech sector. "We may see weakness through the first two quarters of the year,
if not the third quarter," says Michael Parekh, a Goldman Sachs analyst. He
thinks a recovery could start around the end of the year as the economy
improves.
Analysts are cutting their growth projections for Internet spending. Robert
Fagin of Bear Stearns had expected spending to rise 40%. Now he thinks the rate
could be significantly lower because sales at companies hefollows are
currently trending 20% to 50% lower than last quarter. "We're going to have to
wait for a reacceleration of the economy before we see reacceleration in
spending," he said.
Companies still want e-business efficiency gains, but they no longer worry
that dot-com rivals will take market share if they don't move fast, nor that
investors will punish them for being slow to build Internet systems.
Data Return Corp. (DRTN) and NaviSite Inc. (NAVI), two companies that run Web
sites for companies that want to outsource such work, say tightening IT budgets
are driving to them customers looking for ways to save money on equipment and
salaries.
"Cost savings was always part of our pitch, but it was fifth or sixth on our
list," says Jay Seaton, NaviSite's vice president of marketing. "It's one of
our core messages now."
-By Riva Richmond, Dow Jones Newswires; 201-938-5670;
riva.richmond@dowjones.com
(Reporters Johnathan Burns and Marcelo Prince contributed to this article.)
(END) DOW JONES NEWS 03-06-01
10:49 AM |
