Posted by : Anonymous on Dec 25, 2003 - 07:32 AM General

In chatting with customers, Jeff Rodek, chief executive of software publisher Hyperion (HYSL), is noticing signs that the information-technology spending freeze of the past three years is starting to thaw. But until he sees revenues pick up at his business, which produces software for tracking management performance, Rodek won't go out on a limb and say 2004 will be the year U.S. companies finally start to increase their spending on technology.
At least now, though, instead of dribbling out money to ensure that aging computer systems don't collapse, corporations are starting to talk about bigger technology purchases, with a view to boosting efficiency, and they hope, profits. That's the reading of Rodek, who is based in Silicon Valley, where the IT downturn has hit particularly hard. "Companies appear to want to invest in IT to get back on a growth curve," Rodek says. "I think 2004 could be a better year."

THREE-YEAR ITCH. The latest projections are mixed on how strong a recovery to expect. Economy.com in West Chester, Pa., forecasts a 16% increase in IT equipment and software spending, to $532 billion next year. If that materializes, 2004 would top the previous peak in 2000, when Corporate America spent $468 billion on tech gear and services. By contrast, a Morgan Stanley survey of 225 chief information officers (CIOs) from among the nation's top 1,000 companies projects a more subdued 5% hike in corporate IT budgets for 2004, vs. what's expected to be a slight uptick in 2003 over 2002's decline.

After at least a year or two of false starts -- 2003 was supposed to be a comeback year -- why are prognosticators bullish about 2004? For one thing, many U.S. corporations are running on computers and software that are starting to get a little crusty, at least by tech standards.

Their normal economic life is around three years, according to Economy.com. And at many companies, the last big tech investments were made at least that long ago, in reaction to the Internet boom plus the perceived need to protect networks against feared Y2K bugs, says Thomas Smith, director of IT research at Standard & Poor's. "You could call this a refreshment cycle or a replacement cycle," Smith says. "Companies are finally saying 'Maybe it's time for some new stuff.'"

TAX INCENTIVES. Moreover, businesses feel they have some cash to play with for a change. For 2003, corporate profits for the companies in the S&P 500-stock index probably rose about 17%, vs. the piddling 0.1% increase in 2002, predicts earnings researcher Thomson/First Call. "Businesses are flush," says Mark Zandi, Economy.com's chief economist. "The returns on holding cash are very low, so they need to do something with it," he adds.

And if the job market ever comes back, new hires will need phones and workstations.




Also expected to spur an IT spending rebound are accelerated depreciation schedules, which make it more attractive to invest in tech sooner than later, experts say. As part of the recent federal stimulus package, tax laws now allow big businesses to write off half the cost of an IT investment instead of expensing it over a longer period. (The same laws let small businesses write off expenses up to $100,000 in tech investments annually, vs. only $25,000 previously). But the clock is ticking on these incentives, which are set to expire at the end of 2004, says Zandi, who calls them "a powerful impetus to spend before they end."

One sign that the long-awaited spending rebound has started came on Dec. 15, when Oracle (ORCL) announced that fiscal second-quarter profits rose 15%, as revenues increased 8% on stronger demand for its business software. Oracle's results followed similarly cheery news from software kingpin Microsoft (MSFT) and network-gear maker Cisco (CSCO). "Oracle was the most positive I've heard them in some time," says Jonathan Rudy, an S&P software analyst in New York.

ACROSS-THE-BOARD SPENDING. Whatever comes to pass, a Gartner/SoundView survey of CIOs and other tech execs at some 615 U.S. companies suggests that IT spending increases will continue to be much more focused than at the start of the decade. Back then, corporations splurged on massive "enterprise systems" designed to harmonize corporate databases or better manage relations with customers. These monstrous projects frequently had budgets in the seven figures and took years to implement -- if they ever worked.

These days, controlled spending and strict return on investment standards are the catchwords, the survey found. Says Hyperion's Rodek: "In this next buying wave, I think companies will want to spend on something that can be installed quickly" -- and that generates value quickly.

Expected to lead the spending surge are small and midsize businesses, according to the Morgan Stanley. Indeed, America's largest corporations remain skittish about pulling the trigger on IT spending, says Arnie Berman, technology strategist at SoundView in Old Greenwich, Conn. His survey, which analyzes IT spending plans on a dollar-weighted basis that gives more sway to big companies, even sees a possibility that tech capital outlays could fall about 0.7% in 2004.

"The spending behavior of very large corporations represents the principal risk to a recovery in technology capital spending in 2004," writes Berman in a recent report. But in the same survey, he notes that the "typical" company plans to increase tech spending by 4.1% next year.

TOP PRIORITY. Forecasters now believe that most major industries will increase their tech spending. One exception, though, is likely to be the troubled telecom sector, which is still coping with a glut of capacity for voice and data traffic, says Shing Yin, managing director at RHK Consulting in South San Francisco. Phone-service providers built enough new infrastructure a few years ago to handle 1,000% annual growth in Internet traffic, yet that usage has been rising at only about 80% a year, Yin says.

The good news is that spending on networking gear by telecoms such as AT&T (T), MCI, Sprint (FON), and Verizon (VZ), among others, may drop only 2% in 2004, vs. double-digit declines in each of the past few years. "We don't see a need to add capacity, but companies are focusing on equipment that enables new services," Yin says. Virtual private networks -- secure networks that use the Internet to connect widely scattered users or sites -- are among the new services being rolled out.

According to CIOs polled by Morgan Stanley, however, the top spending priorities in 2004 will be network security, application servers, storage area networks, storage hardware, and enterprise resource planning software. Tech execs seem focused mainly on finding better ways to store and send information -- and better ways to protect it.

"LINUX IS A NO-BRAINER." The Blaster worm of 2003 that ate its way into corporate networks is dead. But "computer worms and viruses will continue to evolve and become much more complicated" says S&P's Rudy. This is bad for corporations, but it's a potential boost to Internet security outfits such as Symantec (SYMC) in Cupertino, Calif., and Network Associates (NET) in Santa Clara, Calif., says S&P's Rudy. The analyst, who doesn't have any ties to the companies he covers, rates them both accumulate.

Investing adviser Peter Cohan, a management consultant and author of investing book e-Stocks, says Check Point Software (CHKP) in Redwood City, Calif., and NetScreen (NSCN) of Sunnyvale, Calif., are likely to benefit too.

As companies seek ways to cut costs, they may invest in technology that capitalizes on the open-source Linux operating system, which tends to be cheaper than proprietary systems such as Microsoft's Windows. "Anything associated with Linux is a no-brainer," Soundview's Berman says. Companies that could profit from the Linux push include Oracle, Mercury Interactive (MERQ) in Sunnyvale, Calif., Red Hat (RHAT) in Raleigh, N.C., Novell (NOVL) in Provo, Utah, and Citrix (CTXS) it Fort Lauderdale.

MORE STORAGE NEEDED. Yet Microsoft won't be left out in the cold. Because it has a finger in so many pies, including applications and operating systems for handheld devices and PCs (which it dominates), the Colossus of Redmond is expected to be one of the prime beneficiaries of higher IT spending. "Really the only growth I've seen in servers has been Windows and Linux," says S&P's Rudy, who rates Microsoft a buy. He also gives a buy rating to Sybase (SY) in Dublin, Calif., because "it's at the forefront of software for mobile devices."

In storage, Berman sees potential gains for Dell (DELL) in Round Rock, Tex., and for Cisco, as demand for storage capacity grows. Also hot next year could be so-called business intelligence software, which managements need to monitor what's going on inside their operations in a post-Sarbanes-Oxley world. Makers of software that helps analyze and report on corporate data include California-based Business Objects (BOBJ) and Ottawa-based Cognos (COGN). Says Berman: "Not knowing what the business looks like with only 48 hours left in the quarter no longer flies."

Although companies may spend more generously on tech in 2004, in one area they'll remain decidedly miserly: staffing. CIOs told Morgan Stanley in the bank's survey that they expect tech department headcounts to be flat or even down in 2004 vs. 2003. Nearly 30% say they plan to outsource IT services to offshore contractors. Companies that are well-positioned in "offshoring" are Cognizant (CTSH) in Teaneck, N.J., Wipro (WIT) in Bangalore, India, and Satyam (SAY) in Hyderabad, India. Notes Cohan: "This is perhaps the biggest trend in technology."

EXPORTING JOBS. Which brings up an important point. Economy.com's Zandi says the benefits of an IT spending recovery in the U.S. won't necessarily all flow to U.S. companies. "They may lose market share to global competitors," Zandi warns. "And a lot of the U.S.-based tech companies may get greater revenues but may continue to send production and jobs offshore."

Moreover, Zandi says, any tech spending rebound may lose steam faster than in the past. Although he predicts that overall IT outlays in 2005 will be higher than in 2004, the growth rate will slow, he predicts, as 2004's special tax benefits for tech investments expire. The message to revenue-hungry U.S. tech companies -- and their investors -- may be this: Enjoy it while it lasts.

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