|
|
Get Four
|  | APRIL 4, 2005
 SPECIAL REPORT Tech's Mostly Steady Outlook Overall, the industry in 2005 should repeat last year's modest growth. But some parts of it look a lot more promising than others When will the technology industry resume its boom? It's not likely to happen in 2005. As in 2004, Standard & Poor's Ratings Services expects the current year to be one of moderate growth in spending on tech products and services, rising at a rate in the mid-single digits. Growth likely will continue to be uneven, both between and within the various tech sectors. How are key groups likely to fare? Following several years of extremely strong growth, semiconductor revenues have slowed since the summer of 2004 and likely will be flat to modestly down in 2005. Telecommunications equipment likely will be modestly positive, continuing the stabilization that began last year, following the severe decline from the 2000 peak. BOLSTERED MEASURES. Unlike these two cyclical sectors, software and services should continue their steady, moderate growth. Technology shifts, like the early transition from circuit-based telephony to voice-over-Internet protocol (VoIP), from 200mm to 300mm semiconductor wafers, and to third-generation (3G) wireless standards, will create above-average growth opportunities in equipment manufacturing, handsets, flash memory, and logic chips. The general trend of stabilization to moderate sales growth should help bolster tech companies' financial measures. This was evident in the modestly positive credit trend in the first quarter of the year, as the number of companies whose ratings outlooks were upgraded to positive outstripped the number moved to negative by a wide margin. A balanced credit trend for the year also is anticipated, because a focus on cost reductions over the preceding three years is helping to offset pricing pressures across almost all sectors. Of course, not all tech companies are in the same financial shape. The stronger players have built up substantial excess liquidity during the recovery from the collapse of the tech bubble in 2000, and companies like Hewlett-Packard (HPQ ), IBM,(IBM ), Intel (INTC ), and Microsoft (MSFT ) have begun to return this cash to shareholders in the form of stepped-up share repurchases and increased or special dividends. Standard & Poor's credit ratings on those four companies were affirmed, despite the substantial size of the repurchases and dividends. WHAT'S AHEAD? Also, we expect consolidation in both the software and the services sectors to continue in 2005. The ratings impacts could vary -- Oracle's (ORCL ) $10 billion acquisition of PeopleSoft and its pending $700 million deal to buy Retek (RETK ) had no ratings impact, nor did IBM's recently announced $1.1 billion purchase of Ascential Software. SunGard (SDS ) already was on CreditWatch with negative implications because of a planned split-off of one of its units when reports of a possible $11 billion private equity deal surfaced. The deal would have a downside impact on SunGard'S investment-grade ratings if successful. What does S&P Ratings see ahead for key sectors within the technology group? Here's a sector-by-sector look (also see S&P's Tech Company Report Card, Pt. 1 for company-by-company outlook summaries). Computer manufacturers. Our outlook for U.S. computer hardware spending remains moderately optimistic. Unit volumes are expected to grow at double-digit rates, but highly competitive industry pricing conditions will dampen sales growth in dollar terms. Corporate spending on computer hardware should grow in the mid-single digits in 2005. Although demand for Intel- and Linux-based servers is expected to be stronger than overall spending growth, outlays for high-end systems -- especially for UNIX platforms -- are expected to be flat to slightly lower in 2005. The need for continued investment in e-commerce and Web-based technologies should continue to support a positive spending outlook over the intermediate term. But once again, highly competitive industry conditions will continue to pressure computer hardware profitability for most original equipment manufacturers (OEMs). Electronics distributors. Revenue trends for distributors of electronic components and computer products are expected to track growth in technology spending. Industry growth is expected to be in the 5% to 10% range, with rates at the upper end of the range for broad-line, global distributors participating in multiple sectors that benefit from a presence in higher-growth regions. While earnings continue to improve on a year-over-year basis in the components sector, it's hard to predict the timing and magnitude of the next industry downturn. As a result, the rating outlooks in the components sector remain negative, reflecting our view that these companies need to build additional financial cushions. Rating outlooks are stable in the computer products distribution sector, reflecting these outfits' consistent profitability and less leveraged financial profiles.
BW MALL
SPONSORED LINKS
Buy a link now! | | |
 Copyright 2005, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
