High Tech Comes Inching Back

But big corporate customers aren't opening their wallets yet

Is the tech wreck over? Evidence of a technology-sector recovery from the worst downturn in history is starting to trickle in. On Feb. 27, Federal Reserve Chairman Alan Greenspan told Congress that expenditures on computers hit double-digit gains in the final quarter of 2001. Durable goods orders jumped in January. And James C. Morgan, chief executive of Applied Materials Inc. (AMAT ), says the bellwether semiconductor equipment industry is finally beginning to show signs of life as factories begin to churn out more chips for everything from PCs to cellular phones to Internet routers. "The industry is beginning to make progress," Morgan says.

Slowly, that is. According to the durable goods report from the Commerce Dept., orders picked up for computer chips, PCs, and communications equipment--the first time all three sectors have seen upticks since November 2000. In January, orders for computer gear rose 4.8%, semiconductors jumped 14.2%, and communications picked up 4.9%. "Obviously, we're seeing a quicker rebound than expected in telecom and tech," says David A. Wyss, senior economist at Standard & Poor's Corp. "The leading edge is consumer computer purchases." Prices for superfast PCs have fallen below $1,000 on average, prompting consumers to buy, says Wyss. And some of the heavy-duty computers that many corporations bought in 1998-99 in anticipation of a Y2K disaster are starting to feel rickety and need replacing. Also contributing to the uptick is one-time replacements of depleted inventories and purchases of new equipment--although analysts point out that those orders could quickly evaporate if the economy doesn't pick up.

The biggest surprise is the order improvement in the beleaguered communications-gear sector. "It's positive, but it's still too early to call a bottom [in telecom]," says James Glen, a telecom economist at researcher Economy.com Inc. He says a turnaround in telecom will be under way when the ratio of communications gear orders to shipments--the so-called book-to-bill ratio--rises above 1. That ratio was only 0.97 in January, indicating the market is still weak. But it's up from 0.91 in December and 0.95 in November. "If all goes well with the economy, we'll see an upturn in telecom spending at the end of this year," Glen says.

That would be good news for the economy. Telecom has been a big driver of growth for the tech sector and the overall economy. During 2000, telecom accounted for 12% of all business spending on equipment and software, according to the Commerce Dept. Sun Microsystems Inc. (SUNW ), for example, derived 36% of its revenue from telecom in fiscal 2000, according to Sanford C. Bernstein & Co.

Nevertheless, tech execs aren't ready to celebrate. Craig R. Barrett, chief executive officer of chipmaker Intel Corp. (INTC ), said on Feb. 25 at the company's U.S. developers conference, that he's not counting on tech to be out of its sickbed for some time. Barrett's cautious view no doubt reflects the fact that many tech CEOs were burned by their overly optimistic sales projections when the downturn began. They're also worried because corporate customers have yet to open their wallets wide. Corporate customers account for 84% of U.S. technology purchases and "enterprise spending has not picked up," says Steven Milunovich, chief technology strategist at Merrill Lynch & Co.

Even successful Dell Computer Corp. (DELL ) is subdued. Despite its market share gains, CEO Michael S. Dell believes a slow recovery in PC demand is on tap. So the company is undertaking a new round of cost reductions, which could include consolidating call centers and factories. "I don't expect the economy is going to come roaring back in one quarter," says Dell.

Still, after ruthlessly slashing jobs and excess inventory, semiconductor companies, PC and server makers are hoping for better days. Many are replacing depleted inventories and switching to new manufacturing technologies. Companies such as Sun, Sony (SNE ), and IBM (IBM ) are rolling out new products this year to entice corporate buyers. High-powered, low-cost chips for notebook PCs, handhelds, and other wireless devices are high on the agenda, as is software that helps with revenue-management and supply-chain efficiency.

So what should investors think? The good news is that orders are up. The bad news is that any return to the olden days of exuberance are a ways off.

By Cliff Edwards in San Mateo, Calif., with Andrew Park in Dallas

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