'Things are tough out there' for technology companies

Consolidation could take off

By Byron Acohido and Michelle Kessler USA TODAY

 

Hewlett-Packard shares soared 14% Tuesday, leading a tech sector rally, after the No. 1 PC maker announced better-than-expected earnings six days early.

But technology analysts warned that the industry still might be slipping into its worst downturn since the dot-com bust of 2001. "Things are tough out there," says equity analyst Brent Bracelin at Pacific Crest Securities.

HP reported revenue of $33.6 billion in the quarter ended Oct. 31, a 19% increase from a year ago. But much of the gain came from its recent acquisition of consulting giant Electronic Data Systems. Growth of existing businesses was closer to 5%.

In the current fiscal year, HP expects revenue of $127.5 billion to $130 billion, a healthy gain. Most of the gain is from EDS, Bracelin says. The numbers imply that HP's core business — PCs, printers and other computer hardware and software — will decline 5% to 7% next year, he says.

But it could be worse. HP's worldwide reach, broad product line and ability to gain market share make it better able to weather the storm than some, says tech analyst Stephen Baker at researcher NPD. More troubling signs are everywhere.

Cisco, Intel and Sun are among big tech suppliers who have trimmed revenue and earnings projections in anticipation of major cuts in corporate spending on tech infrastructure.

What's more, Circuit City's bankruptcy filing and cautionary guidance by Best Buy signal that the holiday shopping season could be brutal for makers of high-tech gadgetry aimed at the consumer market, says Charles King, principal analyst at Pund-IT Research.

How bad could it get? Nowhere near as bad as 2001, three major tech research firms say.

Gartner and IDC both recently projected worst-case scenarios of slightly less than 3% growth rate in global tech spending for 2009, down from earlier estimates of about 6% growth.

ISI is more bearish. "My view is that tech cannot fight the downward tug of economic gravity," says Bill Whyman, head of ISI's tech strategy research group. He predicts 2009 change in global tech spending in the "midsingle-digit negative." Historical evidence shows that growth in business and consumer tech spending always goes negative in recessions, he says.

"Computer hardware spending falls the most but is the first to bounce back," Whyman says. "Software spending is the most stable, and communication equipment spending often lags the recovery."

But some troubled companies may be unable to weather a downturn, says IDC tech analyst Richard Shim. Although unit sales of many tech products are expected to remain steady, prices are expected to plummet — especially for some consumer goods. "The guys who are weak are going to get nailed," he says. "There is nothing on the horizon that they can use as a lifesaver."

A wave of tech consolidation may be the result, Shim says. HP's EDS acquisition may be an early sign. So might Microsoft's attempt to buy search giant Yahoo earlier this year. Yahoo CEO Jerry Yang, who was widely criticized for not closing the Microsoft deal, said Monday that he plans to relinquish his post. (He will remain with the company he co-founded in a supporting role.)

To stoke the most stable part of the tech market, Microsoft last week borrowed a page from the beleaguered auto industry. The software giant is offering 0% financing for its "enterprise resource planning" and "customer relationship management" business systems.

"We are working closely with our customers to proactively enable them to preserve their capital resources," says Kirill Tatarinov, vice president of Microsoft Business Solutions.

Microsoft is very likely to find more than a few takers, says Rebecca Wettemann, vice president of research at Nucleus Research.

That's because businesses are hunkering down and looking for low-cost, flexible business systems that can help them boost customer loyalty. "Now is when I most want to keep my customers, because it's much harder to get new ones," Wettemann says.

Hosted business applications — think Salesforce.com and NetSuite — should do well, as should business analytics systems that model customer behavior, Wettemann says.

Virtualization programs that boost the usability of computer servers should do well, King says. And demand for data storage systems should remain firm. "Even in hard times, companies will continue to create, store and archive information," he says.

Another recession-resistant tech segment: video games. The U.S. market grew 18% in October, compared with the year before, and appears to be on track for a record year, according to NPD Group. Video games "are like comfort food," Wettemann says.

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