Warning to investors: major UStechnology companies could miss estimates
for fourth-quarter earnings as "fiscal cliff" worries likely led some
corporate clients to tighten their belts last month and refrain from
spending all of their 2012 IT budgets.
Tech companies usually
enjoy a spike in orders in December as corporations use money left over
in their budgets to buy goods on their wish lists - information
technology products that are nice to have, rather than essential.
But
the so-called year-end budget flush was not as deep in 2012 as in
typical years, according to tech analysts and other experts citing
conversations with corporate technology buyers and sales sources. They
said companies held back onIT purchases in December in part because of
Washington's protracted negotiations to avoid the fiscal cliff, which is
a package of automatic tax hikes and spending cuts that could have
pushed the already soft US economy into recession.
It took until
late on January 1 for House Republican lawmakers led by John Boehner to
agree to a bill to avert the cliff, which President Barack Obama signed
into law the next day.
"CIOs and CFOs were not making
investments," said Andrew Bartels, an analyst with Forrester Research
who advises corporate technology buyers. "If Boehner and Obama had been
able to strike a deal by around Dec. 15, we would have had
end-of-quarter investments."
Analysts say they expect tech
spending to remain subdued through at least the first quarter, as
businesses wait to see if Congress can resolve another looming fiscal
fight, this time over the debt ceiling and federal spending cuts.
Wall
Street has already significantly lowered expectations for the tech
sector, which has been underperforming the overall market.
The
Street now expects tech companies in the S&P 500 to report a 1.0 per
cent drop in fourth-quarter earnings, against an average 2.8 per cent
rise for companies in the full S&P 500. Three months ago, analysts
were expecting tech sector earnings to rise 9.4 per cent in the fourth
quarter, according to Thomson Reuters I/B/E/S.
First-quarter
tech profit growth estimates have also been lowered to 2.6 per cent,
from 9 per cent three months ago, according to Thomson Reuters I/B/E/S.
Greg
Harrison, a corporate earnings research analyst with Thomson Reuters,
said he expects analysts will cut their predictions further after tech
companies report fourth-quarter results.
Intel will report its
quarterly earnings on January 17, the first of a group of big tech
companies reliant on enterprise spending. Intel will be followed by IBM,
Microsoft and EMC later in January. Cisco Systems, Dell
and Hewlett-Packard close their quarterly books in about a month.
Mark
Luschini, chief investment strategist at Janney Montgomery Scott, which
manages about $54 billion, said he generally expects fourth-quarter
tech results to disappoint, but has yet to determine by how much.
He
expects the sluggish performance to continue into the first quarter,
then improve in the second half of the year, assuming Democrats and
Republicans reach a deal on the debt ceiling and spending cuts.
"So far we only have one piece," he said of the fiscal cliff deal.
Use it or lose it
Even
if Washington politicians eventually resolve their differences over
fiscal issues, that is not expected to fully restore losses already
caused to tech spending, experts said.
Technology projects that
were axed at the end of last year will not likely be resumed any time
soon because annual tech budgets are allocated on a "use it or lose it"
basis, according to experts who advise companies on technology
investments.
Technology projects that were axed at the end of
last year will not likely be resumed any time soon because annual tech
budgets are allocated on a "use it or lose it" basis, according to
experts who advise companies on technology investments.
"These
budgets are based on how the business is doing at the time. All of these
are postponable decisions," said Howard Anderson, a senior lecturer at
the MIT Sloan School of Management and frequent adviser to chief
investment officers at Fortune 500 companies.
Analysts said that
makers of hardware, from computers to networking gear, likely missed
out on the year-end budget flush because businesses can postpone
upgrades for years by buying new software that is compatible with older
equipment.
They said they expect some companies to have
postponed the purchase of new PCs in the fourth quarter, which could hit
the results of Windows and Office maker Microsoft, along with PC makers
Dell and HP, as well as chipmakers Intel and Advanced Micro Devices
Inc.
Nucleus Research analyst Rebecca Wettemann said some
businesses likely delayed buying new PCs to avoid having to upgrade
to Windows 8, which was introduced late last year.
"A new
operating system causes huge disruptions for businesses," she said. "Who
wants to take that on in the face of all the other uncertainty?"
Microsoft, Dell, HP and Intel declined to comment. AMD did not return requests for comment.
Beyond
concerns about the US economy, corporate IT buyers are also worried
about the potential for further weakness in Europe and Asia.
Last
Thursday, Forrester cut its closely watched forecast for 2013 global IT
sales, citing the fiscal cliff debacle as one reason. Forrester now
expects global IT sales to rise 3.3 per cent to $2.2 trillion this year,
down from its previous forecast for 4.3 per cent growth.
Virtual storage
Analysts
say the weak economy may boost adoption of recently introduced data
storage technologies that allow companies to put more data on the
equipment they already own, reducing the need for them to buy more
hardware.
Some companies have already paid for that technology,
but have yet to implement it because staff are not yet comfortable using
it, said analyst Cindy Shaw of investment research firm Discern.
Shaw
said that executives at those companies are likely to tell their IT
staff to implement that technology to get full use out of existing
equipment before they can buy more.
Storage equipment makers
NetApp and EMC, along with hard drive makers Western Digital and Seagate
Technology are likely to suffer the most from more use of the new
technologies, which include storage virtualization. NetApp and Western
Digital declined to comment. EMC and Seagate could not be reached for
comment.
Defenders of the tech industry say the fallout from the
fiscal cliff is already factored into share prices. The S&P 500
Information Technology Index has climbed 1.6 per cent over the past
month, below the 4.0 per cent increase in the broader S&P 500
Index.
Some technology companies appear poised to outperform the pack.
Oracle Corp
said on Dec. 18 that it expects software sales growth to stay strong in
2013 despite fears about the fiscal crisis. The company's earnings beat
Wall Street forecasts in its most recent quarter as strong software
sales offset a sharp drop in hardware revenue.
Analysts said
that IBM, whose quarter ended December 31, may have fared better than
other big technology companies, because it is has a large amount of
recurring revenue from its services and software divisions.
"Oracle
and IBM both have super strong sales teams that can bring home what
they need to year after year," said Kim Forrest, senior analyst of Fort
Pitt Capital.