Looks like this article will get some run tomorrow...Merril projects no 2nd half increase in IT spending:
interactive.wsj.com
July 16, 2001
Heard on the Street
Leaner Budgets Bode Ill
For 2nd-Half Tech Rally
By KEN BROWN
Staff Reporter of THE WALL STREET JOURNAL
Calls for a second-half rebound for tech stocks are sounding increasingly like prayers -- and they don't look like they will be answered this year.
Executives who oversee computers and other tech gear at the biggest corporations have no plans to boost spending in the second half of the year and say they don't expect a return to their old spending ways anytime soon, new surveys show. When they do buy something, these executives -- who often have a chief financial officer breathing down their neck to cut costs -- want to see a quick payoff from their investments. That means big-ticket, long-term projects -- the kind that mean hefty profits for tech companies -- are out, and small deals are in.
None of this bodes well for tech stocks that remain pricey, in part because investors have been banking on a powerful rebound that would get earnings soaring again after months of dismal news, including recent announcements from firms as diverse at personal-computer maker Compaq Computer, storage company EMC and chip maker Advanced Micro Devices.
According to a Merrill Lynch survey of 50 U.S. and 15 European chief information officers and chief technology officers, 72% said their technology spending won't increase in the second half compared with the first half of this year, saying their companies' chief financial officers are pressing them to keep spending down. Only 18% of those surveyed said they would increase their tech spending in the second half.
"The fact that fewer than 20% say they are going to loosen up spending suggests you are not going to get this bulge in end-of-the-year spending," says Merrill's technology strategist Steven Milunovich.
The survey also points to slowing spending in Europe, which had been holding up better than the U.S. until recently.
"In some ways, we should have been surveying CFOs rather than CIOs," Mr. Milunovich says.
Other surveys paint a similarly ugly picture. Morgan Stanley's most recent poll of 225 tech buyers said that 50% are bowing to requests by senior executives to cut or slow tech spending and focus on smaller deals. That figure is up from 33% in March and 40% in April.
And economists at Goldman Sachs are estimating that overall tech spending fell at a 24% annual rate in the second quarter from a year earlier after an annualized 19% decline in the first quarter. Those declines come after technology spending grew at a 25% annual rate in 1999 and the beginning of 2000. This may be as bad as it gets, though. A growing number of investors and analysts now believe that the worst of the spending declines are over. "That's the good news," says Bill Dudley, head of U.S. economic research at Goldman.
But for those investors betting on a powerful rebound, he says, "the bad news is we do not expect a rapid recovery. Where we were, we never belonged there."
Mr. Dudley says that if you compare the economy's technology capital stock, meaning the sum total of all the computers, Internet routers, servers and other tech gear in the entire economy, to the size of the overall economy, that ratio remains far above its long-term trend. Tech spending will have to remain low for the foreseeable future for that ratio to return to normal. "The idea in the marketplace that you had to have a sharp recovery because you had a sharp decline is not borne out by the empirical evidence," he says.
While it isn't a surprise that corporate tech spending is down, the depth of the slowdown remains unappreciated by many investors. Digging a little deeper into the numbers reveals some important changes in the spending patterns themselves.
The Corporate Executive Board, a Washington-based research group that counts hundreds of major corporations as members, runs a 400-member group known as the Working Council for Chief Information Officers. Vikram Capoor, the council's managing director, says that growth in the technology budgets of its members has halved to about 6% this year, with most of the spending going toward nuts-and-bolts operations and maintenance, rather than new initiatives.
He adds that chief information officers are generally concentrating on making their existing operations more efficient and spending money only on small projects with quick payoffs. "It's a housecleaning year, it is a year of simplification," Mr. Capoor says. "To the extent they spend money, it will also be to save money."
And, to save money, companies are pressuring their vendors to cut costs, particularly for voice and data communications, which make up about 17% of technology budgets. "This is straight out going to your vendors and saying, 'We want your prices to be lower,' " Mr. Capoor says.
Companies are also searching out wasteful spending, particularly on software, seeking out instances where they have bought too many licenses for products. "You will see a lot of software companies get hurt as companies realize they bought three enterprise licenses," Mr. Capoor adds.
On the spending side, companies want immediate payoffs from their spending. "For CIOs, what they care about now is, 'Will I get benefits from this in the next 90 days?' " Mr. Capoor says. That means firms are buying products that will help them control costs, such as procurement software from companies like Ariba and software from companies such as Peregrine Systems that helps manage and track corporate assets.
Indeed, one of Peregrine's sales pitches is its product pays for itself very quickly, says Allan House, a software analyst at Federated Investors, which owns Peregrine shares. "Their value proposition is fantastic," Mr. House says.
Many top executives, who are having more trouble than usual seeing into the future, are asking for help from their technology teams, Mr. Capoor says. That has led to increasing interest in products from companies whose software helps businesses analyze data, names such as Business Objects and Cognos.
One thing companies are not buying, according to the surveys, is personal computers. Some investors had been hopeful that the industry was due for an upgrade cycle next year as the millions of the PCs bought in preparation for Y2K turned three years old, the normal life span of a PC. But that doesn't appear to be the case this time out.
This also calls into question the outlook for Microsoft, which helped to juice the tech market last week when it said revenue for the current quarter would be slightly higher than expected. Despite healthy sales of its higher-priced Windows 2000 software, Microsoft can still be hurt by weak PC sales.
Given the grim outlook, many tech investors are focusing on the areas where there has already been some good news, such as new contracts, accelerating revenue or positive earnings revisions by analysts. "About 15% of tech companies have turned the corner, which may sound like a low number, but three months back nobody had turned the corner," says Dennis McKechnie, who manages Pimco's Innovation fund. He says that 15% includes local-area-networking companies such as Extreme Networks and Foundry Networks and some parts of the storage sector, including Brocade Communications Systems and QLogic. "In simple terms, you're looking for evidence that things are not getting worse, that the damage is leveling out," Mr. McKechnie says. |
