Hardware firms appear more vulnerable than software providers, writes Karlin Lillington
HOW VULNERABLE is the technology sector in a whopper of a downturn?
It is, of course, as vulnerable as any other. Some sectors argue that people may buy more of whatever it is they sell in hard economic times, because technology generally tends to improve efficiencies.
The reality may be though that while some companies will do so, others will not have the budgets to invest further in order to save costs that likely will not pay back (the ever-crucial return on investment) within the short term. So they will hunker down, back to the cold economic winds, and wait.
Fitch Ratings this week issued a grumpy negative rating for the US tech sector this week for 2009. Fitch feels a reduction in global spending on IT will bite at the sector throughout the next year, with - unsurprisingly - IT companies, especially hardware companies, in the financial services area hardest hit.
Financial companies like banks account for 20 per cent of spending on IT, so if they are not buying, the knock-on effect can be significant for IT companies.
Fitch says semiconductors will suffer single-digit growth declines, while handsets and PCs will stay flat or experience a small decline.
IT services and software are the only stable segment that Fitch sees. While software and IT service companies can rely on a certain degree of steady income from licensing and maintenance contracts, hardware companies depend on occasional shopping sprees by their corporate customers, the type of activity that will be cancelled in a recession.
Overall, Fitch predicts declines of 2-3 per cent in the worldwide technology industry, linked to a decline in IT spending of the same amount.
Analyst IDC is looking at similar figures, expecting worldwide IT spend in 2009 to see a reduction to 2.6 per cent growth, down from its previous forecast of 5.9 per cent - but at least they are still talking growth.
Nonetheless, Fitch points out the industry still has a good balance sheet generally and substantial cash reserves - some $250 billion. That means liquidity is strong, which in turn means it will be a good time for acquisitions for large cash-rich companies in the right sectors.
Interestingly, an IDC analyst pointed out to the Associated Press that tech spending is actually better than in the previous downturn after September 11th, when the recession came on the tail of the bursting of the the dotcom bubble.
Analyst Forrester is saying the same - also pointing out that companies are now so strongly dependent on their technology investments that they cannot indefinitely postpone fresh spending in the area.
So, perhaps if you are a company in the right tech segment, have a lot of cash and are considering a few bargain buys, things aren't too bad.
Say, for example, that you are Google, which reported a 26 per cent rise in revenue for the last quarter. Even the search giant is wary, though. During an earnings conference call, Google chief Eric Schmidt noted: "When I talk to other CEOs in Europe and in America, it is clear that the economic situation is so fluid that we are all in uncharted territory."
However, the venture capitalists out in Silicon Valley were sounding almost chirpy during the week. Out at the Always On Venture summit, well-known Valley VC Tim Draper was noting that recessions provide opportunities for renewal and growth, and that many of the major tech company names - Microsoft, Fairchild Semiconductor (from which Intel was born), Hewlett Packard. Google, eBay - either were launched in or expanded during recessions.
(Apropos of absolutely nothing, Tim Draper lived across the road from me in the hills near Stanford when we were kids. The Draper house was considered the best to visit on Halloween because they gave giant Hershey chocolate bars out to the few neighbourhood children who hiked up the winding drive to their home. I guess the adult Tim does the VC funding equivalent for tech start-ups these days.)
Draper and others pointed out that they had a roster of young, energetic companies with revenues totalling over $100 million that they expected would help the economy resurface and drive the next boom.
Which companies may end up as the next big thing? Barrons magazine was mulling over that question this week. There aren't all that many obvious candidates, seemed to be the conclusion, at least amongst companies that might emerge in 2009.
Solar and green energy generally, biotech, web services, artificial intelligence and cloud computing are all hot and interesting areas for future growth, but 2009 will probably not be their year - too soon.
In the end, Barrons columnist Mark Veverka, who spoke with a group of entrepreneurial types out in Silicon Valley, settles on netbooks (ultra small laptops), maybe the wireless web and mobile advertising.
Mobile advertising! Boy, if that is all we have to look forward to, we are going to yawn our way through 2009.
Klillington@irishtimes.com
Blog: www.techno-culture.com
