Tech Spending Is Back. And It May Even LastBy
After a somber 2009, the titans of technology are roaring back to life. Microsoft (MSFT), Dell (DELL), Oracle (ORCL), Adobe Systems (ADBE), and other major companies have all reported strong earnings or given robust sales guidance in recent weeks, buoying prospects for an industry that struggled through the recession. "The business trends are positive," SAP (SAP) Co-Chief Executive Officer Bill McDermott told Bloomberg News on June 23. "Our crystal ball looks good."
Technology is a cyclical business: Hardware and software upgrades are one of the first places companies cut costs. That means tech spending can snap back strongly when the economy improves. After falling by 4.2 percent in 2009, global tech spending is set to rise by 3.8 percent, to $1.5 trillion, this year, according to market researcher IDC.
Microsoft is a clear winner. The company has sold 150 million copies of Windows 7 since its debut in October, making it the fastest-selling operating system in the company's history. That success is the result of a surge in worldwide personal computer shipments—which are on track to rise 22 percent this year, says research firm Gartner (IT)—and the fact that many buyers bypassed Windows Vista. Adobe, another software giant, has also had success with its recently introduced Creative Suite 5 software for graphic designers.
The bulk of the industry's growth this year will come not from software but from equipment sales, as companies that had put off purchases invest in the latest servers, computers, networking gear, and storage systems. Hardware sales are expected to see a 6.4 percent gain, according to IDC, while spending on software and technology services will grow by just 3 percent and 1.5 percent, respectively.
A big beneficiary of the hunger for hardware: Dell, the world's third-largest PC maker. It said on June 23 it expects revenue to rise as much as 19 percent—that would bring it to $62.9 billion—compared with a 13.4 percent drop in 2009. Things are looking brighter for Oracle, too, which credits, in part, its $7.3 billion acquisition of server manufacturer Sun Microsystems for a strong fourth quarter ended May 31.
According to a spring survey by KPMG, tech executives also are excited by newer, high-growth areas such as mobile computing, software delivered over the Web, and applications that can smartly analyze reams of data. Cisco Systems (CSCO) on June 29 introduced a tablet computer for business called Cius that's capable of video conferencing. SAP's $5.8 billion acquisition of Sybase (SY), expected to close in July, will let it deliver back-office and sales applications more readily on smartphones and tablets. Analysts expect SAP's sales to rise 7 percent, to €11.4 billion ($14 billion), this year after declining 8 percent last year. IBM (IBM) says that in the last four years it has spent more than $11 billion on 19 acquisitions in data analysis as customers look to glean insights from ever larger amounts of data.
It's not all good news for tech companies. Corporate belts in Europe remain tighter because of concerns over sovereign debt. And the euro's 19percent-plus fall against the U.S. dollar since Dec.3 is weighing on some U.S. tech companies, as profits earned in Europe translate into fewer dollars. "Everybody's got to raise prices in Europe," Dell CFO Brian Gladden said during a reception at the company's analyst meeting in Austin, Tex., last week.
Tech giants might be able to make up for European weakness with sales in emerging markets such as China, India, Brazil, and Russia, which are expected to account for 11 percent of global technology spending this year, up from 8 percent in 2009, according to IDC. Dell is on track to book nearly $5 billion in sales in China in 2010, making it the company's second-biggest market after the U.S., says Stephen J. Felice, Dell's president for consumer and small and medium business. Sixty percent of tech executives surveyed by KPMG said they expect China to contribute more than any other country to their revenue growth over the next year. Says KPMG's global tech sector leader, Gary Matuszak: "A lot of the growth now is being fueled by what's happening in Asia."
The bottom line: If Asia keeps growing and corporate customers stay enthusiastic about mobile products, Big Tech's turnaround may have legs.