Wall Street Beat: IT Faces Global Decline for 2009

With market observers further slashing forecasts this week, Nortel Networks declaring bankruptcy and a range of vendors including Intel, Nvidia, and Motorola issuing dour financial reports or cutting staff, it appears all but certain that the IT sector faces a global decline this year.

Up to now, most industry insiders believed that while the macroeconomy would suppress consumer and corporate spending and curb revenue growth for IT vendors, it would not lead to an absolute, overall decline in spending on technology. The thinking was that in the wake of the dot-com bust many businesses trimmed their IT budgets, and considering how important tech has become to mission-critical systems, there was not much more room to cut.

But as the macroeconomy continues to slide, the conventional wisdom is changing. In a research note entitled "Rose Colored Glasses Come Off," issued early this week, Citi Investment Research said a survey of 200 CIOs it conducted from mid-November to mid-December showed that the U.S. executives on average expect a 2.7 percent contraction in IT budgets, while the Europeans expect budgets to shrink by 1.9 percent.

A larger, global CIO survey, released by Gartner Thursday, reported that going into 2009, corporate IT spending budgets are essentially flat. The poll of 1,527 CIOs found a total planned increase of 0.16 percent in global budgets for 2009 -- flat across enterprises in North America and Europe, with slight increases in Latin America and a slight decrease in Asia/Pacific.

Meanwhile, overall worldwide consumer and business spending on IT products and services as measured in dollars will drop by 3 percent in 2009 to US$1.66 trillion, according to a Forrester Research study released Tuesday.

Though the recession is the main reason for the decline, part of the drop is the result of the dollar strengthening against the euro. As measured in euros, IT spending will experience a slight rise, Forrester said.

But no matter how it is measured, the IT market is due for an annus horribilis in the face of an eroding economy. The bad macroeconomic news continued Thursday when the Labor Department announced that initial claims for unemployment insurance benefits increased by 54,000 to 524,000, after seasonal adjustments, in the week that ended Saturday.

The worsening economic climate pushed Nortel Networks to file for Chapter 11 in U.S. bankruptcy court Wednesday. The company said it is looking for protection from creditors while it undertakes "a comprehensive business and financial restructuring."

Most market observers do not expect Nortel to go under completely, however.

"I think Nortel will try to shrink, and re-configure themselves again, like they did several years ago, " said telecom analyst Jeff Kagan in an e-mail comment. To succeed, Nortel will have to provide blended services combining voice, data, video and Internet, he said.

Intel, one of the major bellwethers for components and hardware, a sector that has long been expected to take the brunt of the recession, Thursday reported fourth-quarter net income of $234 million, compared with a profit of $2.27 billion for the year-earlier period. Revenue was $8.2 billion, down 23 percent from the year earlier. The results were expected, since the company had issued two earnings warnings in the past two months.

Other chip makers are hurting as well. Nvidia said this week it expects to report fourth-quarter revenue that is 40 percent to 50 percent lower than the nearly $900 million it posted in the third quarter, due to weak demand. That compares to analysts' consensus estimates of $805.5 million for the fourth quarter, according to Thomson Financial.

Meanwhile, Motorola plans to lay off another 4,000 employees, it said Wednesday in an announcement that included a cut in its earnings forecast. The layoffs will come in addition to the 3,000 layoffs announced during last quarter. The handset and networking company also said that it expects to report revenue in the range of $7 billion to $7.2 billion, below the consensus estimate by analysts of $7.5 billion.

Despite the continuing bad news, so far no one has predicted spending declines like the 15 percent to 20 percent drop seen after the dot-com bubble burst. But if earnings reports next week from Google, Microsoft, AMD and Apple are worse than expected, the conventional wisdom may change once again.

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