Finding the floor in the tech downturn
Published: 17 Oct 2002 15:50 BST
It's been a critical couple of weeks for IT market watchers, with a wealth of quarterly results from blue chip companies and analysts trying to interpret events. The question everyone wants an answer to is: where's the floor? From city trading floors to the boardrooms of all information technology companies, finding the floor of the recession is the key question. It tells us when the key psychological moment has been reached when the business mood can start to improve.
Intel's lacklustre results this week suggest that the fourth quarter (normally a growth one, with Xmas and new school terms providing a boost in PC sales) will be at best flat, with Merrill Lynch (last week) predicting a 3 percent fall in PC sales this year. Chip sales are suffering from slow or negative growth in PCs and the continuing malaise in telecoms. If Merrill is correct, you may take the view that a 3 percent dip is not that awful considering the economic background, but any lingering positive interpretation is crushed by Intel chief executive Craig Barrett's comment: "The industry is experiencing one of its worst downturns ever."
Aside from Intel, this week's other company earnings were generally seen as positive -- causing a wider rally on Wall Street and London. Microsoft boosted Nasdaq with a 26% rise in sales and a doubling of net profits in the quarter to September.
IBM's results beat market expectations with its critically important cash generator, the IT services division, registering $9bn of new contracts. The company says the time is right to get back on the acquisitions trail, which characterises a generally positive outlook from Big Blue. In a similarly optimistic move, Microsoft has recently stepped up recruitment. Europe's largest software company, SAP, also achieved better than expected results, increased market share, and saw its share price lift strongly this week. Taken together -- IBM's services division performance and SAP's improvement provides much needed relief for the enterprise IT software and services sectors.
Further clues for floor searchers will come next week when the networking giant Cisco gives its quarterly results. Analysts have been speculating that Cisco would advise the market of slightly lower than expected revenues -- but there has been no guidance from chief executive John Chambers that this is the case. If Cisco can follow IBM in hitting its numbers than the arch optimists will say that we have found a floor.
There is some anecdotal evidence from an unexpected quarter that we may already be standing on the floor -- with some day traders claiming to have made a killing on the bounce in share prices of e-com sites such as Lastminute and Amazon. E-commerce sites appear to be rising, Phoenix-like from the flames of the dot-com collapse with a 42 percent growth in UK sales in the past 12 months according to government figures.
This week's earnings, however, of themselves, do not provide enough evidence to suggest we have hit terra firma. They provide reasons to believe it may be found in 2003, but there is also plenty to sustain the pessimists -- many of whom have already written off next year as another tough one, adding that we shouldn't expect the gloom to lift until 2004. Sun, for example, have confirmed that it will cut a further 11% its work force in a bid to reduce operating costs.
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