Clouds loom for IT

The holiday season is bringing momentary relief to weary IT investors, but forecasts of flat sales or absolute declines for semiconductors, mobile devices and online commerce mean that it will be a while before the clouds lift from the tech sector.

The Nasdaq, home to many IT companies, closed Wednesday at 1532, up by 67 points, or 4.6 per cent.

Market observers said investors took advantage of low prices of tech company shares to snap up what they hope will be bargains. The U.S. markets will be closed on Thursday and have an abbreviated trading day Friday.

Several high-profile tech vendors had a good day on the market Wednesday. Top advancers on the Nasdaq included Cisco Systems, which rose 5.2 per cent to US$16.23. A day earlier, the company said it would close plants over the holiday period to save money, leading to a broad tech-sector sell-off as concerns about faltering demand weighed on investors. Shares of Apple climbed nearly four per cent to $94.35.

Up until Wednesday, however, the Nasdaq Composite Index stood at about half the level it was at in November last year, and historical perspective shows that it will take time before confidence is restored to the tech sector. The Nasdaq reached it highest point ever, 5048, in the first quarter of 2000, and slid for more than two years before hitting the 1110 level in the trough of the dot-com bust in the third quarter of 2002.

Market observers point out that the slump earlier this decade was marked by actual declines in IT spending, rather than merely a slowdown in growth. As bad as the economy is, many industry analysts have not forecast an absolute, across-the-board drop in spending — yet.

For example, this week IDC analyst Gard Little said in a research report that “services spending will not contract as it did in the previous economic downturn, however the effects of the current economic crisis will reduce spending growth in the services market across the entire forecast period.”

But industry analysts are cutting forecasts to reflect declines in certain sectors.

“We expect sales in 2009 to show a low single-digit growth contraction” from 2008 levels, said Gartner analyst Carolina Milanesi in a report on mobile-phone sales this week. A slump in mobile upgrades could have wide impact on IT, since mobile device usage has been a big driver for growth in tech overall.

Online commerce, another sector that helps bolster technology, is apparently floundering.

This week, comScore forecast U.S. online retail spending to be essentially flat during the last two months of the year — the important holiday sales season — compared with 2007. U.S. online retail spending rose nine per cent through October, but spending so far this month dropped four per cent.

Reflecting a worsening macro environment, Citigroup this week cut its forecast for the semiconductor sector. Citigroup now forecasts 2009 revenue and earnings per share to decline by 9.5 per cent and 12.8 per cent, respectively. “Our cuts reflect poor end demand, inventory reductions and an absence of credit in the supply chain that conspired to make October particularly difficult for chipmakers,” wrote analyst Glen Yeung. Citigroup cut estimates for nine chip makers including AMD, Nvidia and Qualcomm.

Unemployment and tight credit, a result of the housing market crisis and subsequent collapse of the Wall Street investment banks, has curbed consumer and business spending across all sectors of the economy, including tech.

An updated report on the U.S. economy in the third quarter, released this week by the Commerce Department, showed gross domestic product shrank at a 0.5 per cent annual rate. That was worse than the 0.3 per cent rate of decline first reported a month ago.

There were some signs of hope this week.

SAP co-CEO Leo Apotheker, when pressed last Friday at a New York conference about how the business climate has been, declined to provide specific guidance but allowed that “things haven’t gotten worse” than last month. SAP caused a stir in the financial community when it scrapped its 2009 financial forecast a few weeks ago.

HP Monday said that revenue for its fourth fiscal quarter, ended Oct. 31, including gains from its acquisition of EDS, rose 19 per cent to $33.6 billion, and that excluding special, one-time charges, earnings grew 13 per cent to $2.6 billion.

Even this good news comes with caveats. Eliminating the effect of foreign exchange rates and excluding EDS from the results, a comparison to last year would have HP sales increasing by only about two per cent. And Apotheker’s vague comment may simply mean that things couldn’t have gotten much worse.

Despite these glimmers of good news, things will have to get better before relief can last longer than a holiday weekend.

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Jim Love, Chief Content Officer, IT World Canada

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