Grappling to emerge from its 2001 bankruptcy, Imperial Sugar, a Sugar Land (Tex.)-based purveyor of sweeteners, had kept a lid on tech spending. Layoffs and plant closings reduced the company's need for telecom, computer, and other tech gear. But those savings also allowed Imperial to pump more capital back into the business. So now, with demand for its products expected to pick up in the next few months, Imperial execs are looking anew at technology that can enhance productivity and position the company for a recovery.
As a result, Chief Information Officer George Muller's tech budget has nearly doubled this year. His mission for 2003: a multimillion-dollar upgrade of Imperial's PeopleSoft Inc. business software, which lets the company keep better track of customer data and helps it control its supply chain. Further out, Muller plans to upgrade Imperial's servers. "We have to invest to get us to the next level," he says. "I see things picking up."
Could it be true? Is the long-awaited tech recovery here at last? Not if you're expecting the sizzling growth of years past. Indeed, market researcher IDC expects global tech spending to rise a miserly 2.3%, to $871 billion this year. That's thin gruel compared with the industry's historical 9% annual growth. But it's a welcome change from the 6.2% contraction of the last two years combined. Few tech execs are willing to project sales for the second half, but even the most cautious acknowledge that, at the very least, a bottom has been reached. "You don't want to jinx anything," says Seagate Technology Holdings CEO Stephen J. Luczo. "But people are feeling better. They're just not talking about it yet."
Wall Street sure is. In the past few weeks, investors have bid up the stock prices of such bellwether tech companies as IBM, Intel, and Dell. Why? Mostly, it's that first-quarter earnings and revenues at these companies have matched and even beaten expectations. As a result, the Merrill Lynch 100 Technology Index has risen 11% since Jan. 1, vs. a 5% rise for the Standard & Poor's 500-stock index. Of course, not all of the valuations are deserved. Net stocks are looking especially frothy. And cost-cutting continues to drive earnings at some tech companies. But the likes of IBM, EMC, and Cisco Systems have pared down to the point where they are well-positioned to earn profits in a slow economy. At the same time, they're finally reporting modestly higher demand for their products and services.
Where is the demand coming from? After years of cost-cutting, companies are starting to feel sufficiently flush to restore their tech budgets. Meanwhile, a number of affordable new productivity-enhancing applications are catching on -- from wireless computing to servers using cheap Linux software. "If a killer app came along, we'd find the dollars to buy that," says Catherine S. Brune, senior vice-president and chief technology officer at Allstate Corp., which is spending 3% more on tech this year than last.
Don't expect companies to invest with abandon. The watchword these days is "spend to save" -- say, by replacing expensive older servers with networks of smaller, more cost-effective ones. "We're focused to see if there's value in the systems we buy -- and hold our people accountable for business results," Brune says.
Such hard-nosed buying partly explains why the tech industry isn't firing on all cylinders. There are other problems, too. Telecom is still burdened by overcapacity, while the networking industry has years to go to recover from its binge spending during the '90s boom. Even in sectors that are doing relatively better, suppliers have little pricing power, so revenues continue to disappoint in chips, PCs, storage, and servers. The four major contract manufacturers -- Flextronics International, Celestica, Sanmina-SCI, and Solectron -- aren't predicting any significant uptick in revenues.
Tech execs are understandably gun-shy about expressing optimism. Software execs predicted a rebound in the first quarter of 2001 only to see their hopes dashed. No wonder Intel Corp. CFO Andy Bryant remains wary. "Does it feel like a recovery?" he asks. "No, but it feels modestly better."
The revival will be slow, uneven, and possibly halting. Still, Laura C. Conigliaro, a managing director at Goldman, Sachs & Co., says traditional corporate spending patterns are reappearing: modest growth in the second quarter, flat growth in the summer, and a bigger uptick in the fourth quarter.
That, other analysts say, should set the stage for a solid rebound next year. IDC sees tech spending surging 6% in 2004 as consumers continue to buy digital cameras, DVD players, and cell phones, and as companies are forced to replace aging PCs and servers.
Already, companies are dusting off projects that have been put on hold for the past few years. FWMurphy, a Tulsa (Okla.) maker of manufacturing gear, is hiking its tech budget by 75% in 2003. By doing so, it is laying the groundwork for new software for e-commerce projects down the road. Says Mitch Myers, vice-president for operations: "We finally had to do it."
Much of the pent-up demand is going into productivity enhancement. A new generation of wireless laptops, for example, is expected to gradually displace desktop PCs in the workplace. Consultant Cap Gemini Ernst & Young is outfitting its 8,500 North American employees with Wi-Fi-enabled laptops that boost productivity by giving workers access to data even when they're outside the office. "This is one of those things that will be [ubiquitous], just like a browser," says Vice-President and Chief Technology Officer John Parkinson.
Another prime example is the "blade" PC, which is smaller and uses less energy than a conventional PC. Last month, Morgan Stanley ordered 2,000 of them from Austin (Tex.) startup ClearCube Technology Inc. Morgan Stanley expects to cut 30% off its costs for PC usage, including the $800 it pays each time it has to move an employee's PC from one location to another. The priority, says project manager Adam Taubman, is to "reduce operating costs. Everything else is gravy."
That also explains the growing demand for the latest servers. Companies are starting to snap up both high-end models, such as Hewlett-Packard Co.'s Superdome, or cheaper Linux-based servers from Dell -- both of which are less expensive to run than older models. Redwood City (Calif.)-based gamemaker Electronic Arts Inc. plans to boost tech spending 10% this year, much of it for new Intel-based servers running Linux. Why? They get more computing power at less cost.
The big question mark is PCs. So far, there's scant evidence that corporations, already in year four of what used to be a three-year replacement cycle, will buy enough new models based on Microsoft Corp.'s Windows XP to lift the industry out of its doldrums. "The replacement cycle just hasn't materialized," says Rod Keller, executive vice-president for Toshiba Computer Systems Group. "Companies are still buying on an as-needed basis." Still, Goldman Sachs predicts that global PC shipments will rise 6.5% this year -- up from a two-point drop in 2002.
Even a modest tech revival could be good for profits. Because tech companies have so zealously squeezed costs, even a small bump in revenues should translate into a big jump in earnings. Consider EMC Corp., the Hopkinton (Mass.) maker of data storage equipment. Thanks to cost-cutting, EMC's breakeven point is now $1.25 billion, down from $1.7 billion in mid-2001. So, while first-quarter revenues climbed just 6%, to $1.4 billion, earnings surged to $35 million, up from a $97 million loss a year ago. Many tech companies are in a similar position.
It's not just the big tech companies that are seeing new life. Startups are again attracting interest from major corporations. One is Caspian Networks Inc., which sells networking gear and last year raised $120 million in venture capital. CEO Bill Krause thinks that after years of making do, companies are ready to spend. "People assume everything is bleak and bleary," says Krause. "But I think a renaissance is about to occur." If so, it's because companies know that, at some point, the economy is going to recover -- and when it does, they need to be armed and ready. By Jim Kerstetter and Peter Burrows, with Ben Elgin, in San Mateo, Calif., Andrew Park in Dallas, Roger O. Crockett in Chicago, and bureau reports