A March rally on the markets brought shares in tech companies back into positive territory for the year after hitting seven-year lows, and Research In Motion got the quarterly earnings season off to a strong start, but IT sales for the year look bleaker than ever as Gartner and Forrester both slashed forecasts this week in the face of a prolonged recession.
The Nasdaq, which includes a broad swath of technology companies, gained 11 percent in March, bringing the exchange higher than its 2008 close. Some market analysts believe that the Nasdaq's seven-year low of 1268 on March 9 was the bottom of the market for tech shares, as well as for the broader stock indices.
The Nasdaq closed the quarter at 1538, and continued to climb for several more days. It closed Thursday at 1610, up by 51 points or 3.29 percent on news that changes in "mark-to-market" rules for bank accounting may help stabilize the financial system, while leaders of the G20 leading economies announced an additional trillion dollars to support the International Monetary Fund and fuel trade. The U.S. accounting rule changes give banks, which have been slammed with huge write-downs, more leeway on how to price assets.
Against this backdrop, however, IT spending looks worse than ever, as market analysts now expect the recession to dampen business and consumer spending for most of the year.
Globally, IT spending will decline 3.8 percent from 2008, Gartner said Tuesday in an update for its 2009 forecast. Worldwide IT spending is expected to hit about US$3.2 trillion, down from $3.3 trillion spent in 2008. This is worse than the global spending decline in 2001, according to Gartner. Like most other market analysis firms, Gartner sees hardware as being hardest hit, expecting an approximately 15 percent drop in spending, to $324.3 billion.
However, at least one analyst says things are better for IT than during the dot-com bust, if you take the long view.
While Forrester Research this week said U.S. IT spending will drop by 3.1 percent this year, much worse than its previous forecast of a 1.6 percent increase, company analyst Andrew Bartels said that there is a lot of pent-up demand that will cause a surge in spending once the financial system stabilizes and the recession eases.
U.S. IT spending will decline to about $537 billion from $554 billion last year, Bartels said. But overall IT is in better shape than it was at the beginning of the decade, he argues. "Back then, there was in fact an IT bubble, now there is a housing bubble," he noted. A primary reason why IT spending is declining, he noted, is the failure of the financial system. Companies are hoarding cash, holding back capital expenditures -- including spending on IT -- until the banking system stabilizes and credit markets ease up, he noted.
2001 saw the conclusion of a cycle of tech investment that began in the '90s and ended in "two or three years of throwing money at technology," Bartels said. In 2001, U.S. IT spending dropped 6 percent, and in 2002, the bottom of the market value for IT companies in the dot-com bust, spending declined 11 percent.
Next year, instead, Forrester sees IT spending swinging upward again, as companies continue spending on a whole new cycle of tech products. These acquisitions were interrupted by the recession. "Companies want to invest in Saas, cloud computing ... there are lots of important, critical new technologies that companies want to start buying," Bartels noted.
Meanwhile, despite the credit market disarray, mergers and acquisitions may start to heat up as vendors look to scoop up bargains as the industry consolidates. This week, Silicon Graphics, a one-time highflier in the compute-intensive application market, filed for bankruptcy protection for a second time and said it will sell its assets to Rackable Systems for the shockingly low price of $25 million.
And according to reports in The New York Times and Wall Street Journal, IBM and Sun Microsystems are about to sign a deal. IBM will buy Sun for about $9.50 per share, down from an earlier reported price of $10 to $11. The lower price reflects an IBM commitment to the deal even if it comes under heavy regulatory scrutiny, the newspapers reported. The two companies together would have more than 40 percent of server market share. IBM closed Thursday at $100.82, up $3.21, while Sun closed at $8.21, up $0.21.
With the financial report season about to get under way, investors and users will get a glimpse of how the IT vendors see the next quarter or so working out, though visibility to the end of the year is bound to be murky under current economic conditions.
BlackBerry maker Research In Motion got the season off to a bright start, however, reporting Thursday that it earned $518.3 million, or $0.90 per share, for the quarter ending in February, up 26 percent from a year earlier. Analysts polled by Thomson Reuters had forecast a profit of $0.84 per share. The company said its sales jumped 84 percent, to $3.46 billion. RIM's sales estimate of between $3.3 billion and $3.5 billion for the quarter also edged out forecasts.