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DECEMBER 23, 2003
By Eric Wahlgren Is Tech Spending Ready to Rise Again? While investors bet on a healthy rise in 2004, analysts warn that the spendthrift ways of the dot-com boom won't be repeated In chatting with customers, Jeff Rodek, chief executive of software publisher Hyperion (HYSL ), is noticing signs that the information-technology spending freeze of the past three years is starting to thaw. But until he sees revenues pick up at his business, which produces software for tracking management performance, Rodek won't go out on a limb and say 2004 will be the year U.S. companies finally start to increase their spending on technology. At least now, though, instead of dribbling out money to ensure that aging computer systems don't collapse, corporations are starting to talk about bigger technology purchases, with a view to boosting efficiency, and they hope, profits. That's the reading of Rodek, who is based in Silicon Valley, where the IT downturn has hit particularly hard. "Companies appear to want to invest in IT to get back on a growth curve," Rodek says. "I think 2004 could be a better year." THREE-YEAR ITCH. The latest projections are mixed on how strong a recovery to expect. Economy.com in West Chester, Pa., forecasts a 16% increase in IT equipment and software spending, to $532 billion next year. If that materializes, 2004 would top the previous peak in 2000, when Corporate America spent $468 billion on tech gear and services. By contrast, a Morgan Stanley survey of 225 chief information officers (CIOs) from among the nation's top 1,000 companies projects a more subdued 5% hike in corporate IT budgets for 2004, vs. what's expected to be a slight uptick in 2003 over 2002's decline. After at least a year or two of false starts -- 2003 was supposed to be a comeback year -- why are prognosticators bullish about 2004? For one thing, many U.S. corporations are running on computers and software that are starting to get a little crusty, at least by tech standards. Their normal economic life is around three years, according to Economy.com. And at many companies, the last big tech investments were made at least that long ago, in reaction to the Internet boom plus the perceived need to protect networks against feared Y2K bugs, says Thomas Smith, director of IT research at Standard & Poor's. "You could call this a refreshment cycle or a replacement cycle," Smith says. "Companies are finally saying 'Maybe it's time for some new stuff.'" TAX INCENTIVES. Moreover, businesses feel they have some cash to play with for a change. For 2003, corporate profits for the companies in the S&P 500-stock index probably rose about 17%, vs. the piddling 0.1% increase in 2002, predicts earnings researcher Thomson/First Call. "Businesses are flush," says Mark Zandi, Economy.com's chief economist. "The returns on holding cash are very low, so they need to do something with it," he adds. And if the job market ever comes back, new hires will need phones and workstations. Also expected to spur an IT spending rebound are accelerated depreciation schedules, which make it more attractive to invest in tech sooner than later, experts say. As part of the recent federal stimulus package, tax laws now allow big businesses to write off half the cost of an IT investment instead of expensing it over a longer period. (The same laws let small businesses write off expenses up to $100,000 in tech investments annually, vs. only $25,000 previously). But the clock is ticking on these incentives, which are set to expire at the end of 2004, says Zandi, who calls them "a powerful impetus to spend before they end." One sign that the long-awaited spending rebound has started came on Dec. 15, when Oracle (ORCL ) announced that fiscal second-quarter profits rose 15%, as revenues increased 8% on stronger demand for its business software. Oracle's results followed similarly cheery news from software kingpin Microsoft (MSFT ) and network-gear maker Cisco (CSCO ). "Oracle was the most positive I've heard them in some time," says Jonathan Rudy, an S&P software analyst in New York. ACROSS-THE-BOARD SPENDING. Whatever comes to pass, a Gartner/SoundView survey of CIOs and other tech execs at some 615 U.S. companies suggests that IT spending increases will continue to be much more focused than at the start of the decade. Back then, corporations splurged on massive "enterprise systems" designed to harmonize corporate databases or better manage relations with customers. These monstrous projects frequently had budgets in the seven figures and took years to implement -- if they ever worked. These days, controlled spending and strict return on investment standards are the catchwords, the survey found. Says Hyperion's Rodek: "In this next buying wave, I think companies will want to spend on something that can be installed quickly" -- and that generates value quickly. Expected to lead the spending surge are small and midsize businesses, according to the Morgan Stanley. Indeed, America's largest corporations remain skittish about pulling the trigger on IT spending, says Arnie Berman, technology strategist at SoundView in Old Greenwich, Conn. His survey, which analyzes IT spending plans on a dollar-weighted basis that gives more sway to big companies, even sees a possibility that tech capital outlays could fall about 0.7% in 2004. "The spending behavior of very large corporations represents the principal risk to a recovery in technology capital spending in 2004," writes Berman in a recent report. But in the same survey, he notes that the "typical" company plans to increase tech spending by 4.1% next year.
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