Not long ago, technology companies could barely get chief information officers to return their calls. CIOs were too busy cutting bloated budgets to think about buying new hardware and software. Besides, there wasn't much out in techland to whet their appetites.
Now tech suppliers are expressing cautious optimism that corporate wallets are opening up again. A yearend surge in demand by businesses propelled U.S. spending on information technology up 12.3% last year, to $484.3 billion, the Commerce Dept. reported Jan. 28. That tops even the peak reached in 2000, at the height of the dot-com boom, and marks the first year of double-digit growth since those heady days. Across techdom, companies have been logging stronger-than-expected results, from bellwethers Microsoft (MSFT ) and IBM (IBM ) on down. "The technology sector is back in growth mode," says Caris & Co. analyst Mark Stahlman.
Will the recovery last? Most analysts agree that global tech spending will continue to grow in '05, although estimates range from 4% to 8% amid worries that intense competition and increasingly demanding customers could pressure revenues. Some areas will be lackluster: Revenues in the mature PC sector are expected to grow just 3.7%. Chipmakers could also face a tough year as their customers continue to work down inventories, blunting sales.
Still, after three years in which companies mostly bought gear to lower their costs, businesses are investing in innovations they believe will help them grow. "IT expense is not going to be coming down," says Robert P. DeRodes, CIO at Home Depot Inc. (HD ). This year he'll boost tech spending 9%, to $600 million, on gear that should increase sales volume by streamlining distribution and procurement. "We've got wind in our sails," he adds.
It helps that tech suppliers have revamped their products to satisfy customers demanding more bang for the buck. Inexpensive storage devices are letting companies load up on much-needed capacity without breaking the bank. With the savings, they're adding sophisticated software to manage those piles of data efficiently. Sales of No. 1 EMC Corp.'s (EMC ) three cheapest products leapt 46% in the fourth quarter, while storage-software leader Veritas logged 14% revenue growth. Meantime, pricey Unix servers acquired in the late 1990s are being replaced with nimbler, less-expensive machines running Microsoft Windows or open-source Linux. In 2005 sales of servers priced between $5,000 and $10,000 should grow 17%, the fastest server category, according to research firm Gartner Inc. (IT ).
A few killer apps have even emerged. Security software and handheld e-mail devices are becoming must-haves in the corporate world. And phone companies are scrambling to replace aging networks with Internet setups so they can offer video and data services. Scott Kriens, CEO of router maker Juniper Networks Inc. (JNPR ), which raised its earnings guidance for the first half of '05 from $860 million to about $890 million, says: "There's real money being spent -- and real money being made." That may be the best news of all.
By Andrew Park, with Brian Grow in Atlanta and Steve Hamm in New York