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DECEMBER 23, 2003
By Eric Wahlgren Is Tech Spending Ready to Rise Again? [Page 2 of 2] TOP PRIORITY. Forecasters now believe that most major industries will increase their tech spending. One exception, though, is likely to be the troubled telecom sector, which is still coping with a glut of capacity for voice and data traffic, says Shing Yin, managing director at RHK Consulting in South San Francisco. Phone-service providers built enough new infrastructure a few years ago to handle 1,000% annual growth in Internet traffic, yet that usage has been rising at only about 80% a year, Yin says. The good news is that spending on networking gear by telecoms such as AT&T (T ), MCI, Sprint (FON ), and Verizon (VZ ), among others, may drop only 2% in 2004, vs. double-digit declines in each of the past few years. "We don't see a need to add capacity, but companies are focusing on equipment that enables new services," Yin says. Virtual private networks -- secure networks that use the Internet to connect widely scattered users or sites -- are among the new services being rolled out. According to CIOs polled by Morgan Stanley, however, the top spending priorities in 2004 will be network security, application servers, storage area networks, storage hardware, and enterprise resource planning software. Tech execs seem focused mainly on finding better ways to store and send information -- and better ways to protect it. "LINUX IS A NO-BRAINER." The Blaster worm of 2003 that ate its way into corporate networks is dead. But "computer worms and viruses will continue to evolve and become much more complicated" says S&P's Rudy. This is bad for corporations, but it's a potential boost to Internet security outfits such as Symantec (SYMC ) in Cupertino, Calif., and Network Associates (NET ) in Santa Clara, Calif., says S&P's Rudy. The analyst, who doesn't have any ties to the companies he covers, rates them both accumulate. Investing adviser Peter Cohan, a management consultant and author of investing book e-Stocks, says Check Point Software (CHKP ) in Redwood City, Calif., and NetScreen (NSCN ) of Sunnyvale, Calif., are likely to benefit too. As companies seek ways to cut costs, they may invest in technology that capitalizes on the open-source Linux operating system, which tends to be cheaper than proprietary systems such as Microsoft's Windows. "Anything associated with Linux is a no-brainer," Soundview's Berman says. Companies that could profit from the Linux push include Oracle, Mercury Interactive (MERQ ) in Sunnyvale, Calif., Red Hat (RHAT ) in Raleigh, N.C., Novell (NOVL ) in Provo, Utah, and Citrix (CTXS ) it Fort Lauderdale. MORE STORAGE NEEDED. Yet Microsoft won't be left out in the cold. Because it has a finger in so many pies, including applications and operating systems for handheld devices and PCs (which it dominates), the Colossus of Redmond is expected to be one of the prime beneficiaries of higher IT spending. "Really the only growth I've seen in servers has been Windows and Linux," says S&P's Rudy, who rates Microsoft a buy. He also gives a buy rating to Sybase (SY ) in Dublin, Calif., because "it's at the forefront of software for mobile devices." In storage, Berman sees potential gains for Dell (DELL ) in Round Rock, Tex., and for Cisco, as demand for storage capacity grows. Also hot next year could be so-called business intelligence software, which managements need to monitor what's going on inside their operations in a post-Sarbanes-Oxley world. Makers of software that helps analyze and report on corporate data include California-based Business Objects (BOBJ ) and Ottawa-based Cognos (COGN ). Says Berman: "Not knowing what the business looks like with only 48 hours left in the quarter no longer flies." Although companies may spend more generously on tech in 2004, in one area they'll remain decidedly miserly: staffing. CIOs told Morgan Stanley in the bank's survey that they expect tech department headcounts to be flat or even down in 2004 vs. 2003. Nearly 30% say they plan to outsource IT services to offshore contractors. Companies that are well-positioned in "offshoring" are Cognizant (CTSH ) in Teaneck, N.J., Wipro (WIT ) in Bangalore, India, and Satyam (SAY ) in Hyderabad, India. Notes Cohan: "This is perhaps the biggest trend in technology." EXPORTING JOBS. Which brings up an important point. Economy.com's Zandi says the benefits of an IT spending recovery in the U.S. won't necessarily all flow to U.S. companies. "They may lose market share to global competitors," Zandi warns. "And a lot of the U.S.-based tech companies may get greater revenues but may continue to send production and jobs offshore." Moreover, Zandi says, any tech spending rebound may lose steam faster than in the past. Although he predicts that overall IT outlays in 2005 will be higher than in 2004, the growth rate will slow, he predicts, as 2004's special tax benefits for tech investments expire. The message to revenue-hungry U.S. tech companies -- and their investors -- may be this: Enjoy it while it lasts.
 Wahlgren covers the markets in New York
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