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Technology Stocks : PSFT - Fiscal 1998 - Discussion for the next year -- Ignore unavailable to you. Want to Upgrade?

To: Mario who wrote (3188)	10/22/1998 10:37:00 PM
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This could provide some insight to the uncertainty surrounding Enterprise Apps companies.......interesting read Economic Impact on IT Spending, Year 2000 Impacts, and Nuclear Winter 12:31pm EDT 22-Oct-98 SoundView Financial Group (Russ Crabs) Economic Impact on IT Spending, Year 2000 Impacts, and Nuclear Winter At this year's Gartner Group Symposium Conference we had multiple survey efforts underway to test the water on a number of hot industry issues. In addition to our annual comprehensive IT spending survey we also conducted surveys at a simultaneous conference that Gartner Group holds exclusively for senior IT executives and, in conjunction with Gartner Group, polled Symposium attendees on the phenomenon that Gartner has termed "Nuclear Winter", the freezing of systems to ensure a smooth transition into 2000. We will be presenting our comprehensive survey results at the Annual SoundView Technology Outlook Conference in Boca Raton on November 2-4. Today we are looking at the results of some of the other surveys to address the concerns about what impact a weakening economic outlook and Year 2000 efforts are likely to have on IT spending in 1999. Economic Impact on IT Spending We surveyed 100 CIO's at Gartner Groups ITEP conference held in conjunction with Symposium. To gauge their reaction to a worsening economic outlook worldwide we asked what they were contemplating as they put together their IT spending plans for 1999. 1) What impact has the economic and financial market turmoil had on your organization's IT spending plans? Pct. of Responses No impact 57 Small reductions in impacted geographic area 5 Significant reductions in impacted geographic area 1 Small general reductions in anticipation of spreading economic weakness 13 Significant reductions in anticipation of spreading economic weakness 5 General growth in demand for IT has offset any economic concerns 12 We are accelerating spending to cut costs/improve productivity 8 * With more than half the respondents seeing no change to their spending outlook due to economic concerns and another 20% seeing increases in spending due to general demand or productivity reasons, we do not view the economic outlook having a significant negative impact on IT spending at this point in time. While the economic picture could certainly weaken, these respondents are in the midst of their 1999 budget cycles and this likely provides a good snapshot of current planned spending. * Year 2000 Impact on 1999 IT Spending Plans Concerns are mounting about what impact Year 2000 efforts will have on 1999 IT spending as information is largely unavailable on how much this contributed to 1998 industry revenues and what the contribution will be to 1999. We asked a series of question across a number of surveyed groups on these issues. While Gartner Group has suggested that as much as 40% of IT budgets were dedicated to Year 2000 efforts the respondents that we polled indicated it is much less than that. 2) What percentage of your total IT expenditures will be committed to Year 2000 issues in 1998 and 1999?: 1998 1999 Average 17% 15% * While there was a broad range of responses, the average contribution to IT spending from Y2K is expected decline only modestly from 1998 to 1999. Looking at individual product areas and the specific impact on spending levels in 1998 and 1999 indicates that different product areas will be impacted differently. 3) What impact have your Year 2000 efforts had on spending in the following areas in 1998 compared to 1997? Sharply More More Same Less Sharply Less Spending Index* Packaged Ent. Apps. 24% 26% 39% 6% 4% 40 Mainframe Computing 11% 33% 47% 7% 3% 34 Mainframe Storage 4% 46% 42% 3% 4% 43 Personal Computers 11% 44% 44% 2% 0% 53 Outside Service Providers13% 41% 43% 2% 2% 50 The spending index is the percentage of "Sharply More" and "More" responses minus the "Less" and "Sharply Less" responses. 4) What impact will your Year 2000 efforts have on spending in the following areas in 1999 compared to 1998? Sharply More More Same Less Sharply Less Spending Index Packaged Ent. Apps. 5% 21% 49% 20% 4% 2 Mainframe Computing 7% 15% 60% 16% 2% 4 Mainframe Storage 5% 22% 69% 1% 2% 24 Personal Computers 10% 34% 46% 9% 0% 35 Outside Service Providers 3% 29% 53% 14% 1% 17 We can draw the following conclusions from these tables: * Year 2000 has been a positive influence on IT spending in 1998 and will continue to be in 1999, but less so than in 1998. This applies to all product areas addressed in this survey. If we look at the year-to-year spending index (% or those spending more minus those spending less) packaged applications, mainframe computing capacity, and outside service providers show the largest decline in Year 2000 spending benefit in 1999 versus 1998. Alternatively, mainframe storage and personal computers still show a substantial positive spending benefit in 1999. * We believe that Year 2000 efforts will continue to be a substantial contributor to IT spending growth in 1999. We would also believe that this benefit will be more pronounced in early 1999 than later in the year which brings us to the next discussion on what users are doing late in 1999 to address system stability as cutover to 2000. The Nuclear Winter Looks More Like a Laser Guided Missile Gartner Group has coined the term "Nuclear Winter" to describe a period late in 1999 in which IT shops catastrophically shut down all purchasing and installation of new infrastructure to focus only on ensuring system functionality in 2000. We conducted another survey of Symposium attendees and were able to gather 250 responses to questions dealing with the specifics of their actions. What we found in these results was less catastrophic than "nuclear", but certainly a trend to reflect in our outlook on the industry. Rather than being a widespread industry phenomena, freezes on activity are only going to occur in certain organizations and be much more impactful on some product areas than others (hence the more focused laser guided missile analogy). 5) What actions are organizations taking in 1999 to ensure a safe transition into 2000? * One-third of the respondents are planning some type of spending freeze during the year * One-half of the respondents are not planning any type of spending freeze * One-fifth of the respondents have not yet made a decision on any 1999 actions 6) When will these freezes occur? * Less than 10% will occur in 1H99 * 10% to 20% will occur in 3Q99 * 20% to 40% will occur in 4Q99 7) What product areas will be impacted by the freezes and in what timeframe? (percentage of respondents indicating freeze) 1Q99 2Q99 3Q99 4Q99 1Q00 Mainframe Systems 10% 12% 23% 35% 16% System Software 12% 21% 29% 38% 22% Application Software 12% 15% 27% 27% 21% NT Servers 5% 10% 16% 27% 12% Unix Servers 7% 9% 10% 26% 14% PC 4% 5% 10% 19% 10% Storage 4% 7% 12% 19% 12% Looking at these numbers it is seen that product areas like mainframe systems, system software and application software are likely to get hurt earliest in the year and harder later in the year than other product areas. PC's and storage appear to be impacted to a much lesser extent thoughout the year. From a more qualitative sense we asked respondents to describe the actions they were taking in 1999 to address a smooth 2000 transition. Approximately half specifically mentioned freezing internal application development projects or purchased applications, some of these starting early in the year. Approximately 20% specifically mentioned accelerating desktop system and software upgrades early in 1999. Last week we talked about the need to replace BIOS software to address Year 2000 issues and the significant percentage of the installed base exposed to this. This survey provides some good evidence supporting this trend. When asked how organizations are implementing these "freezes" over half responded that they were accelerating capacity installations and software migrations into early 1999. A lesser number indicated that they would defer projects outside the "freeze" period. The indication is that this is not spending that goes away but is either accelerated ahead in 1999 or deferred out to 2000. Summary We expect a continued positive impact of Year 2000 spending on total IT spending levels in 1999, but the impact of freezes in the latter half of the year will create abnormal spending patterns in the year. We are taking a top-down cut at our revenue growth expectations for a number of product categories. The results of these actions are: 1) Overall, our outlook for 1999 revenue and EPS growth is modestly lowered. 2) Our outlook for 2H99 growth is more significantly reduced with some revenue being pulled forward in the year. 3) Sectors dependent on mainframe capacity and the applications sector are the two most impacted sectors. We are substantially lowering estimates on these companies in 2H99 and lowering selected ratings. 4) Some business will be pulled ahead in 1999 as customers accelerate actions before freezing activity levels. In particular, we believe that PC and system software upgrade activity will accelerate over the next 6-9 months. We are raising some estimates for companies due to this pull ahead effect. 5) We expect that the fourth quarter of 1998 and early 1999 results should exhibit the healthy combination of accelerated Y2K efforts and limited macroeconomic impacts. 6) The uncertainty of 2H99 demand raises valuation concerns in all technology sectors. Quantitatively, the changes we are making to various sectors look like this: Sector 1998 1Q99 2Q99 3Q99 4Q99 1999 Systems Old 7% 11% 14% 9% 10% 11% New 7% 13% 15% 5% 6% 9% System Software Old 25% 22% 22% 21% 22% 22% New 25% 22% 22% 16% 16% 19% Applications Old 57% 39% 29% 38% 35% 35% New 57% 32% 19% 22% 12% 16% PC's Old 34% 61% 60% 30% 15% 37% New 34% 68% 69% 24% 11% 37%