Tech’s Recovery Still Far Off

Despite high hopes that the beleaguered tech economy would climb out of recession this year, quarterly results from industry bellwethers this week indicate that the long-awaited recovery is still only a dream.

IBM Corp. reported its steepest drop in earnings in nearly a decade, blaming corporate customers that held back on technology spending. Data storage company EMC Corp. posted its third consecutive quarterly loss after being forced to slash prices in the face of weakening demand.

Cell phone giant Nokia said it expected to sell 20 million fewer handsets this year than it previously anticipated. Even soft- ware behemoth Microsoft Corp. warned that it would miss profit targets for fiscal 2003.

“We’ve heard from most of the major companies now, and they all say the same thing--no pickup in [information technology] spending,” said Fred Hickey, editor of the High Tech Strategist, a newsletter based in Nashua, N.H. “Companies that had been very positive in January about hitting a bottom are now turning around and saying there’s no pickup. Some are saying they might not see it until 2003.”

The biggest factor is that companies are acting cautiously and postponing investments for major projects such as new systems for supply chain management or overhauls of the computers that run human resources departments, said Mark Specker, managing director of SoundView Technologies Group.

After their budgets have been completed at the beginning of the year, information technology managers at large corporations typically begin talking to software vendors such as Oracle Corp., SAP, Siebel Systems Inc. and Veritas Software Corp. about the projects they plan to implement.

“They get the first whiff of what projects are going to be hot, when they’re going to be implemented and how big spending is going to be,” Specker said.

But after making their plans, technology managers this year discovered that the higher-ups who control the purse strings were unwilling to pay for the projects to go forward. Suddenly, deals that looked so certain had vaporized, and the software vendors were the first to break the news to Wall Street, Specker said.

“They’re the canaries in the coal mine,” he said. “They were singing reasonably cheerily until about the beginning of March. Then the fumes got them and they fell dead.”

The next victims are hardware manufacturers, such as IBM and Sun Microsystems Inc., which typically see demand spike in June. Instead, network equipment maker Sun said Thursday that it would cut 1,000 jobs during the next six to nine months after posting a slim fiscal third-quarter loss.

Chip companies also are suffering. Although Advanced Micro Devices Inc. reported strong microprocessor sales and a smaller-than-expected quarterly loss Wednesday, the company expects unit sales to fall 5% to 10% next quarter compared with the same period last year.

Industry leader Intel Corp. expressed optimism about the next three months after announcing a decline in first-quarter earnings Tuesday. But analysts are skeptical that demand for PCs will be as strong as Intel expects.

Massive overcapacity in the telecom sector only compounds the problem, since providers forced to slash prices can’t afford to invest in their networks.

“Just this week alone we had massive capital spending cuts from their already depressed levels at SBC, BellSouth, Qwest, Nextel and Sprint, among others,” Hickey said.

The stream of disappointing earnings reports also was due in part to the expectations of Wall Street, said Jon Ekoniak, senior analyst with US Bancorp Piper Jaffray in Menlo Park.

Uncertainty about the war on terrorism and the shaky recovery increased demand for solid performers, with analysts setting a high bar for usually reliable firms such as Microsoft and IBM.

“With the tough quarter, it was very challenging for them to meet their estimates or, if they did, to keep up the same sort of optimism going forward,” Ekoniak said.

Surprisingly, the stocks of several bellwether companies rose at the end of the week, suggesting that shareholders believe stock prices have been punished enough.

The one bright spot is consumer-related technology, which is showing some strength as American households try to spend their way out of recession.

Brisk demand for Apple Computer Co.’s new flat-panel iMac helped the company beat analysts’ estimates for first-quarter earnings.

Consumer-oriented companies benefited from the holiday shopping season, which allowed them to clear inventories, said Mike Murphy, editor of the California Technology Stock Letter in Half Moon Bay. At the same time, many products are so new that their numbers have nowhere to go but up.

“A lot of new products are out there--everything from digital cameras to CD burners to DVD players--and those technologies are still early enough in their growth curves that the recession won’t hurt them,” Murphy said.

But those sales are not enough to pull the rest of tech out of its two-year slump.

“If you’re a DVD seller, you’re doing great,” Hickey said. “The problem is that’s a tiny, tiny amount of what we consider to be the tech industry. It’s driven by computers, telecom and wireless.”