Tech vendors reap gains from IT spending, digital transformation surge

Digital transformation along with a macroeconomic tailwind are giving tech vendors a nice boost. CEOs such as Salesforce's Marc Benioff say the spending cycle is stronger than he's seen previously.

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Spending on information technology appears to be surging as multiple factors such as economic growth, a healthy consumer, tax cuts and deregulation begin to add up. Tech CEOs also say that digital transformation efforts are fueling their growth.

In the latest batch of technology earnings, CEOs from major IT players have all been saying the same thing. IT spending is robust and digital transformation, Internet of things, analytics, cloud computing and artificial intelligence and machine learning are driving growth. U.S. Gross Domestic Product growth was 4.2 percent in the second quarter, up from 2.2 percent in the first, according to the Bureau of Economic Analysis.

Salesforce co-CEO Marc Benioff laid out the IT spending environment on the company's second quarter conference call.

I've never seen such a robust spending environment. I've never seen CEOs spend so aggressively. They benefited really dramatically from these tax cuts and also from the deregulation focus, especially in the United States. And it doesn't matter if it's an American or European, or an Asian CEO. I have had experiences with all of them recently, and I can tell you that, across the board, I don't know a CEO who's not aggressively spending at a level that I have not seen them spend at before. And probably the No. 1 thing that they're spending on is their own digital transformations. They're really positioning their companies for the future.

Now IT spending was expected to be strong this year. In April, Gartner projected 2018 IT spending growth of 6.2 percent from a year ago. The annual growth rate was the highest Gartner has forecast since 2007. IDC in June said spending on IT and telecommunications will grow 3.7 percent in 2018, down from 2017's 4.2 percent clip. IDC cited concerns about tariffs, trade wars and a weakening economy.

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Through the end of August though, CEOs say IT spending is holding up and growing. Cisco CEO Chuck Robbins noted that digital transformation efforts are also driving demand from customers. "I think we're operating in what I would call, it's been a very consistent global economic scenario," said Robbins.

Robbins had his share of caveats--a strengthening U.S. dollar, tariffs and economic strain in emerging countries--but was upbeat overall.

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Hewlett Packard Enterprise CFO Tim Stonesifer said on the company's third quarter earnings call that "from a macro perspective, IT spending continues to be healthy with robust customer demand."

"The market remains competitive, but pricing remains rational and we continue to pass through commodities costs," added Stonesifer.

VMware CEO Pat Gelsinger largely credited VMware's position in the hybrid cloud market for a strong quarter, but noted there is an economic tailwind. "Our execution is good and the market for technology is strong," he said.

And now for those nagging questions

Tech CEOs almost across the board are optimistic about this IT spending cycle. And if you buy into the idea that digital transformation will be a permanent thing maybe you can argue for an IT spending super cycle.

Indeed, cloud computing vendors--AWS, Microsoft Azure and Google Cloud Platform--may see an extended year run of growth. However, there are a few nagging questions:

  • Not all of this digital transformation spending is going to deliver returns. CEOs are all about digital transformation, but Forrester recently noted that there is enterprise confusion about digitizing and what it means for those companies.
  • Is this as good as the economy gets? Surely, tax cuts gave corporations more money to spend. That buzz could wear off and deliver harder growth comparisons. IT spending may be a place where companies cut back.
  • Tariffs and trade wars. Most tech companies have component costs either directly or indirectly and inflation will be passed through to them. Ultimately, higher tariff costs will be passed to consumers.
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