Tech firms blame Europe for slow growth

Just as information technology executives were getting comfortable with lower but more stable US sales, they've begun to bemoan the tech sector's latest goblin: slowing growth in Europe and the rest of the world.
Written by Larry Dignan, Contributor
Just as information technology executives were getting comfortable with lower but more stable US sales, they've begun to bemoan the tech sector's latest goblin: slowing growth in Europe and the rest of the world.

Compaq Computer and telecommunications software maker Comverse Technology issued sales and earnings warnings, respectively. Compaq, like rivals EMC and Hewlett-Packard, has joined the parade of companies proclaiming that sales in Europe are slowing and the slowness is spreading to Asia and Latin America.

Wall Street is watching economies fall like dominoes. First, the US tech sector flopped. The latest batch of earnings is likely to highlight European weakness, analysts said. And don't be too surprised if there's an increasing amount of chatter about Asia, they added.

"It is now clear that the economic slowdown is spreading overseas, and we will therefore move more swiftly and go even deeper in our structural cost-reduction programs," said Compaq chief executive Michael Capellas. Compaq executives said business was notably weak in the United Kingdom, Germany and Switzerland.

"The capital spending recession and macroeconomic slowdown appears to have spread throughout the developed world, and conditions have continued to deteriorate," said Kobi Alexander, chief executive of Comverse Technology.

Get used to it. Wall Street analysts expect chief executives to echo those comments as tech companies report their second-quarter results. "The larger technology companies are all multinationals," said Ulric Weil, an analyst for Friedman Billings Ramsey. "Smaller companies may have limited exposure, but Europe and Asia will be a hot topic for large companies."

A Merrill Lynch IT survey released this week tells the tale. In the United States, current IT budgets are expected to grow a slight 5.5 percent, down from an original target of 9 percent. In Europe, IT budgets are expected to fall 1.7 percent, a big swing considering Merrill Lynch previously estimated that Europe's IT budgets would be up 13 percent. Merrill surveyed 50 chief information officers in the United States and 15 chief information officers in Europe.

"This appears to be a global IT recession; the question now is when the US will pick up," said Steven Milunovich, Merrill's tech strategist.

That US rebound may take awhile. Seventy-two percent of the chief information officers surveyed by Merrill Lynch indicated they didn't see IT spending increasing in the second half. Sixty-five percent of the respondents also doubted that PC spending growth would accelerate next year.

Chief information officers said stingy chief financial officers, who are looking to hold costs down as revenue dries up, were the primary reason for their pessimism. "Perhaps we should be interviewing CFOs rather than CIOs," Milunovich said.

Until there's something relatively upbeat to report about US IT spending, analysts reckon that Europe's economies will remain the headline issue on conference calls.

Analysts are expecting IBM--the most stable tech company during the current economic slowdown--to spend a lot of time talking about Europe.

On its April conference call, Big Blue executives noted that Europe was a trouble spot. Since those comments were made, Europe's economies have slumped even more. As a result, the value of the euro vs the dollar has continued to erode, Weil said. One euro is worth about 86 cents at Wednesday's exchange rate.

A weak euro makes IBM products more expensive to European customers and reflects the weaker economy across the Atlantic, Weil said. Meanwhile, IBM's revenue could take a hit since sales in Europe diminish when they are converted from euros to dollars, he said.

Indeed, Bernstein analyst Toni Sacconaghi trimmed his estimates for Big Blue largely because of worries about Europe. Sacconaghi cut his estimates, which were on the high end of Wall Street's range, but said he expects IBM to meet or beat First Call estimates calling for a profit of US$1.15 per share in the second quarter.

Nevertheless, Sacconaghi is predicting second-quarter revenue growth of 4.2 percent to US$22.6b, down from his previous estimate calling for growth of 6.4 percent. For fiscal 2001, Sacconaghi now expects IBM to report earnings of US$4.92 a share, compared with his previous estimate of US$5 a share.

Although Sacconaghi still has relatively lofty financial targets for IBM, the adjustments reflect poor exchange rates and weak hardware demand in Europe, he said. "The elephant is steady, but it is not immune to the economic climate," he said.

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