Hopeful signs for IT
Technology investors grasped at upbeat announcements from three giants: Microsoft increased its prediction of revenue for the fourth fiscal quarter by 4.8 percent, boosting technology stocks. Motorola said it expects its mobile phone business will be profitable in the second half of the year, and its overall corporate sales to rise for the rest of the year. Cisco Systems announced its first acquisition in seven months.
Yahoo! added to the optimism by reporting second-quarter earnings better than the company's estimates. On the news, the Nasdaq rose 6.2 percent through midday trading on Friday.
Healthy rates of spending for the rest of the year are expected in some technology sectors.
Software will weather the economic downturn better than hardware, said Kevin White, senior analyst of IDC's Global IT Economic unit. Operating system sales should be up 8.5 percent for the year and 15 percent in 2002, he said. Sales of application packages are expected to rise 13.6 percent for this year.
Total IT spending is expected to grow between 6 percent and 7 percent, down from last year's 11 percent growth, White said. "Companies are delaying investments, rather than canceling them," he added.
For the second half of the year, profit margins and earnings should be helped by softening energy prices, according to a recent report by Lehman Brothers Holdings analysts Jeffrey Applegate and Charles Reinhard. Aggressive interest rate cuts by the Federal Reserve Board should lead to economic upticks in the third quarter and even more improvement in the fourth quarter, Argus Research said. A new report on consumer expectations was expected to show an increase from June levels.
The upbeat news comes amid a series of earnings disappointments from hardware and software companies, and executives' wariness to even guess what the rest of this year will be like. The dot-com fizzle and the implosion of the telecommunications services and equipment market have been followed by weakening sales in Europe, corporate delays in spending until at least the fall and a need to assimilate what has been purchased already.
"What is left of it is just sort of a throwaway," said Greg Vogel, a Bank of America Securities analyst, when asked to estimate what IT spending will be like in the second half of 2001. Business invested heavily in Internet technology over the previous two years, but the investment has not yet produced the cost savings or revolutionized business as much as they expected, he added.
Many businesses are still absorbing the effects of their recent spending binge on technology.
Business investment in IT technology grew from 10 percent in 1990 to almost 50 percent of all business capital spending in 2000, Vogel said.
"You are talking about trillions of dollars. How do you sustain that? Companies still have to buy buildings and chairs and desks," he said.
In 1999 and 2000, businesses spent $135 billion more on IT than the 20-year trends indicated would be spent, said Charles Phillips, an analyst of Morgan Stanley Dean Witter & Co.
John Loose, president and CEO of Corning, echoed several other executives by refusing to predict last week what business will be like in the third quarter, let alone the fourth quarter or next year. Announcing 1,000 job cuts, Loose said that he did not expect the telecommunications sector to pick up for another 12 to 18 months - six months after the general economy.