Hardware Could Hurt in a U.S. Downturn

As comments from tech bellwether Cisco Systems spur recession fears this week, companies focused on computers and consumer gadgets are seen to be among those most vulnerable to a downturn.

Analysts say business software makers are better placed to ride out a U.S. recession as they help companies to work more efficiently, but prospects are dimmer for computer hardware manufacturers such as Dell and Hewlett-Packard, as well as microchip companies Intel and Advanced Micro Devices.

“If there’s a downturn, not all sectors will be affected equally,” said analyst Stephen Minton of market researcher IDC. “The first round of cuts would affect the PCs and the devices and the software that goes directly onto those PCs and devices.”

Corporate tech executives “want to protect their data center projects,” he added.

Cisco CEO John Chambers said on Wednesday that companies were increasingly worried about the economy. “It’s the most cautious I’ve seen CEOs in the U.S. and Europe in many years,” he said after issuing a disappointing revenue outlook.

Nucleus Research analyst Rebecca Wettemann, who helps executives figure out how tech investments can boost or hurt profits, said companies anxious to control spending were willing to use hardware, such as Cisco’s routers, until it breaks.

“They are saying, ‘If I can’t find a direct relationship between the infrastructure and the value it is delivering, then I am hesitant to invest,'” Wettemann said.

Data storage makers EMC, HP and Sun Microsystems are also vulnerable because of excess capacity among many corporations, Yankee Group analyst Zeus Kerravala said. HP and Sun also sell servers and software.

“Hardware is becoming increasingly commoditized,” said Kim Caughey, a senior analyst and portfolio manager at Fort Pitt Capital Group, which oversees about $1.2 billion for clients.

“If you are going to invest money in a downturn, you will want to invest in productivity,” Caughey said. “The thing that is not a commodity and is boosting productivity the most would be process and services.”

Software, mobile phones

“In some cases, a breed of computer program known as virtualization software can boost the efficiency of existing equipment. VMware, for example, sells products that allow one server computer to do the work of 10 or more machines. Citrix Systems offers similar products.

“Analysts also cite business-management software makers SAP and Oracle among the better bets. They sell programs that companies need to run more efficiently, cut costs and comply with regulations. About half their revenue comes from service maintenance contracts that generate high margins.

“Software makers that host their products at their own data centers and deliver it to customers via Web browsers may also perform well, as initial costs are minimal, analysts said. Two examples are Salesforce.com and NetSuite.

“Besides computer hardware, discretionary consumer electronics are also forecast to hurt from a recession.

“Citigroup is forecasting 10 percent growth in handset unit shipments to 1.26 billion this year. But in the worst-case scenario of a consumer-led economic slowdown hurting replacement sales and subscriber growth, it said shipments instead could fall 5 percent.

“”No [handset] vendor is immune from a recession — we believe that all players would see deteriorating fundamentals and stock price declines,” Citigroup’s global telecommunications team warned in a research report on Thursday. “However, companies with the highest North American exposure are likely to suffer most.”

“Research firm Gartner has been telling companies for months that they should have a second tech budget in place in case there is a U.S. recession.

“In a Feb. 1 report, Gartner analyst Ken McGee said he was sticking with his forecast for tech spending to rise 3.3 percent this year, but with a caveat: “We know this current view could prove to be incorrect within days or even hours as a galaxy of issues and facts are uncovered and disseminated.”

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