....Michael Gallant, spokesman for Hopkinton, Massachusetts-based EMC, told Reuters that the economy had not been improving before the attack, which destroyed New York City's World Trade Center and damaged the Pentagon outside Washington, D.C.
"During the quarter the economy showed no improvement," he said. The economy has caused our ability to forecast to be quite cloudy."
It looks like EMC decided to join the first wave of preannoucements.
Historically, August has always been the weakest sales month for most technology companies. That seasonality combined with the WTC bombings practically insure that most technology companies will either miss their numbers and/or continue to provide no visibility for the next 6-12 months.
During the last 11 years, EMC has repeatedly use its rapid product development cycles to drive market share gains to offset the seasonality of its business and economic downturns. It's continuing inability to do so can be attributed in varying measures to the highly synchronous nature of this particular global downturn (starting from the US) and the more intense price competition. Stephen Roach of MSDW also provides some very useful context:
Global: The Next Leg of the IT Downturn
Stephen Roach (New York)
Morgan Stanley Dean Witter
August 1, 2001
There’s no dark secret to the abrupt about-face in the US economy over the past year. It has been dominated by a stunning reversal in business capital spending, especially for information technology (IT). But this technology is, of course, different. IT is widely viewed as the sustenance of a New Economy that is revolutionizing America and, eventually, the world. As such, most believe that the United States can’t do without it -- that it’s only a matter of time before the once powerful IT growth machine starts humming again. How close at hand is that magical moment?
I suspect the answer lies in the deep recesses of a most unusual capital spending cycle. There can be no mistaking the IT-led down-phase of this cycle. Over the past four quarters, current-dollar outlays for business fixed investment have declined 2%. Shrinking IT budgets -- which currently account for 47% of all business equipment spending and 34% of total business outlays on plant and equipment -- explain this entire drop and then some. The year-over-year IT comparison went to -6.5% in 2Q01-- a dramatic reversal of the +16.6% surge over the prior four quarters. Significantly, the year-over-year decline understates the full force of the IT-led downturn. On a sequential basis, current-dollar IT outlays fell at a 22.6% annual rate in 2Q01. As steep as this decline appears to be, there’s every reason to suspect that it’s only the beginning. The capital spending share of nominal GDP still stood at 12.4% in 2Q01; while that’s down 0.8 percentage point from the cycle peak of 13.2% in 3Q00 (downwardly revised from 13.9%), it is still well in excess of the post-1970 norm of 11.6%. Moreover, history suggests that capital spending overshoots are usually followed by undershoots; for that reason, alone, there’s probably a good deal more to come on the downside of the current capital spending cycle.
(Note: In this essay, all capital spending and IT data are expressed in current dollars. This avoids the rather dubious "hedonic" adjustments that form the basis of the deflation exercise into constant-dollar, or real, outlays. By using the current-dollar variant of IT, I am focusing on actual dollars spent -- not a statistical construct of quality-adjusted computing power.)
But there’s another more important reason to look for further weakness in the IT cycle. Thus far, the bulk of the consolidation has been concentrated in business spending on hardware. Since peaking in 4Q00, business spending on computers, telecommunications equipment and other IT hardware has plunged at a 31% annual rate. By contrast, business software outlays have declined at just a 5% annual rate over the same two-quarter interval. As a result, the software share of current-dollar IT budgets ballooned to 43.6% in 2Q01 -- an increase of nearly four percentage points in the past two quarters, alone. While the software share of total IT spending moved up especially sharply in early 2001, this merely continues a trend that has been under way for years; indeed, this share stood at a pre-bubble low of just 31.1% in 2Q95. Over the six years ending in 2Q01, software outlays accounted for fully 60% of the total growth in business IT spending. Make no mistake about it, the recently ended IT boom was more about software than hardware.
I suspect that the software cycle will now follow the hardware cycle to the downside. I base that conclusion on what I believe is a fairly rational relationship between software and the hardware that it is supposed to run. Over the 1990-97 interval, for every dollar spent on computers and peripheral equipment, another $1.40 was spent on enterprise software; it was lower in some years and higher in others, but the relationship held in a relatively tight range. However, over the 1998-2000 period, the software outlay per dollar of hardware rose to $1.70. This appears to reflect the explosive growth of B2B and, to a lesser extent, B2C. However by 2Q01, US businesses were spending $2.09 on software for every dollar of computer hardware -- an unprecedented misalignment between these two major pieces of the corporate IT budget well in excess of that realized at the height of the e-commerce frenzy. Recent history demonstrates that software cycles normally follow hardware with a lag. That was the case in the early 1990s and again in the middle of the decade. And I have every reason to suspect that it will be the case over the next year. The only difference is that when the downside of the software cycle hits this time around, it will come off a much higher base as a share of total IT than it did in the past. As a result, the macro consequences of a software downturn are likely to be considerably greater this time around.
But there’s probably a much deeper meaning to all this. The IT downturn strikes at the heart of America’s fabled New Economy: It challenges the great productivity saga. Dick Berner hinted at this in a recent piece describing the government’s annual revisions to the GDP accounts (see his 30 July Forum dispatch, "Corporate History Rewritten, Darkly"). To the extent that the resurgence of productivity growth in the latter half of the 1990s was a by-product of a powerful wave of IT-led capital deepening -- a substitution of capital for labor -- a downturn in such spending would be expected to crimp productivity growth. That’s exactly what the latest numbers have shown, with productivity falling at a 1.2% annual rate in 1Q01 (latest available estimate). In addition, the just-unveiled statistical revisions point to a significant downward revision of the productivity windfall in recent years -- probably knocking at least 0.5 percentage point off the previously published trend over the past couple of years (data to be released on 7 August). Little wonder the corporate earnings carnage has been so severe. The productivity dividend of the New Economy has turned out to be a good deal smaller than it was initially thought to be.
Which takes us to the age-old question: Is the IT productivity payback temporary or sustained? The capital deepening thesis argues in favor of the former. During a period of surging investment in new technologies, the math of economic growth virtually guarantees a pickup in the productivity trend. Output is boosted temporarily by surging tech spending; if that spending happens to be labor-saving -- precisely the case insofar as the measured data on labor input suggest -- then a productivity dividend is virtually automatic. (Note: That of course, raises the labor input measurement critique, a point I have addressed ad nauseam; see my 11 July Forum dispatch, "Measuring Work Time.") But once the investment surge runs its course, mean-reversion takes over on the productivity front. It literally takes a New Paradigm to repudiate this math. Maybe that day will come, but I suspect it’s still way down the road.
The hype of the Information Age has, of course, led many to draw a more upbeat conclusion. But in my humble opinion, this new era is still very much a combination of hype and substance. The substance rests largely on the world’s new connectivity and processing capabilities. These breakthroughs are truly extraordinary and could well lead to revolutionary changes in the economic organization of communities, companies, and nation-states, although we are in the very early stages of such a transformation. But the hype is also unmistakable. Ten years later, I’m still waiting for my first clean video conference call, a cell phone conversation that doesn’t get disconnected, and a remote computing experience that is painless and time-efficient. Yes, we’re getting there. But for all the hyper-speed of the Information Age, the progress is coming at a snail’s pace. And it’s progress with a fully loaded cost bill that blows the mind -- to say nothing of the profit margins of a vast corporate user community.
This IT downturn will probably go down in history as a critical juncture on the road to the New Economy. And if I’m right, it’s far from over. Painful as it is, the purging of IT excesses also offers a time for reflection --
an opportunity to relearn the art of rational decision making. Only then can lasting value be extracted from new technologies. All of that was missing during the bubble. Until it popped. As I said, there’s probably a deeper meaning to all this.
morganstanley.com
To understand the ongoing ripple effects of this 'macro software downturn' -- which is already evident in the results of practically every software company -- this comparative overview from IBM is useful in scoping out the genuine opportunities that are going to present themselves during the change in the tax seasons. I also suspect IBM and the other industry research houses are not done revising these numbers so continued diligence is required lest one joins the ranks of those who just bought whatever was going up in the last bull market and continue to sell whatever is going down in this bear market.
GLOBAL IT MARKET
1/2001 6/2001 Revision
HARDWARE $ 474B $ 402B -15.2%
SOFTWARE* 195B $ 210B + 7.7%
SERVICES 790B $ 708B -10.4%
GLOBAL IT $1.46T $1.31T -10.3%
*SOFTWARE BREAKDOWN
Operating Systems $ 12B $ 13B + 8.3%
Middleware $ 77B $ 82B + 6.5%
Applications $ 107B $ 115B + 7.5%
GLOBAL SOFTWARE $ 195B $ 210B + 7.7%
Source: IBM, IDC and other external consultants (6/01) |
