US fiscal cliff, How it will hurt IT companies

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.