IT Spending Recovering Despite Big Blues

With IBM’s 2002 first-quarter results officially in the record books, the
hi-tech industry has once again turned its attention to rosier prospects on the horizon.

The Armonk, N.Y.-based technology giant Wednesday reported profits were cut
by nearly one-third from year-ago levels to $1.19 billion, or 68 cents a
share, on revenue of $18.6 billion. Revenue fell 12 percent due to “the
continued weak global business environment.”

The results weren’t too surprising given the fact that only last week the
venerable computer company dropped a bombshell. For the first time in 10 years, IBM warned that earnings would fall short of expectations.

At that time, the company said particularly hard hit had been its Technology
group (microelectronics, storage, networking) and the hardware side of its
business. But while most of the weakness was attributed to the hardware side
of the business, IBM conceded that sales were hit by an “across-the-board”
weakness in tech spending, which meant the once-highly dependable IBM Global
Services practice also was affected. That has left a sour taste in the
mouths of investors for anything tech-related.

Assuming that IBM’s broad revenue base (which runs the gamut from
software to hardware right on down to the components in the machines) still
provides a glimpse of the hi-tech landscape, the outlook for the industry is now a bit clearer than it was at this point last year.

“While no one can predict the timing of a recovery, we remain optimistic
that business conditions will improve later this year,” said Samuel J.
Palmisano, IBM president and chief executive officer, in his first quarter
at the helm.

Most of that improvement will continue to be attributable to the Global Services side of the business. On a conference call with investors, IBM’s Chief Financial Officer John Joyce said services revenue “could grow by double digits by the end of the year.” While the unit’s revenue grew only by 1 percent in Q1 to $8.2 billion, signings indicated a pick-up in future business. Meanwhile, business conditions at the Software and Financing arms were relatively flat.

But Global Services contrasts sharply with the Technology group, which shrank in revenue by 37 percent to $1.3 billion, due mainly to weakness in MicroElectronics and OEM Storage.

Despite that somewhat opaque outlook, though industry research firms like
IDC and Gartner still firmly believe IT spending in both the U.S. and
worldwide will rise when the final tallies on 2002 are done.

While U.S. hardware spending is projected to decline further by 8 percent
in 2002 (following a drop in 2001), software spending is expected to recover to
show growth of 9 percent in the U.S. this year, according to IDC’s Worldwide
Black Book research study released Wednesday.

“Many customers are taking a wait-and-see approach before increasing
their IT budgets. Our end-user surveys conducted during Q1, however,
indicate strong drivers for IT spending increases in the second half of this
year. We remain bullish on the medium and long-term outlook,” said Stephen
Minton, program director of IDC Worldwide IT Markets & Strategies.

In the U.S., IDC estimates total IT spending growth this year will be 4 percent, before
reaching 9 percent in 2003. The firm also sees a 5 percent increase in total
worldwide IT spending this year, increasing to 10 percent growth in 2003 as
most market segments return to previous growth levels.

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