Finance's Troubles Infect Tech

As Wall Street's giants take massive writedowns, fears are growing about the impact on technology budgets

by Heather Green

How hard are the troubles in the finance sector going to hit tech? Since technology companies rely heavily on Wall Street, it's been a growing question as financial giants have taken one massive hit after another.

Now, the answer is starting to emerge. On Nov. 7, Cisco (CSCO) reported fiscal first-quarter earnings and CEO John Chambers disappointed investors with a softer-than-expected outlook for the rest of the year, in large part because of the financial sector. "In the U.S. and the enterprise [markets], we did see some softness," Chambers said. "The finance vertical was the one hardest hit."

Investors wasted no time in extrapolating Cisco's prediction of soft demand—in finance and beyond—to the rest of the sector. While the networking giant saw its shares plummet nearly 10%, to 29.63, the tech-heavy Nasdaq dropped more than 3% in midday trading before closing down 2%. Among the hardest hit were Oracle (ORCL), Research In Motion (RIMM), Apple (AAPL), IBM (IBM), Intel (INTC), Dell (DELL), and Network Appliance (NTAP).

A Matter of Proportion

If the trouble on Wall Street continues or worsens, the consequences for tech could be severe because financial-services companies are far and away the most ravenous consumers of tech in the U.S. As financial services continues to struggle in the wake of the subprime mortgage shock, raising more questions about future earnings and layoffs, the specter of an overall tech-spending crunch is beginning to loom. "We think that information-technology spending could slow down quite a bit in the next 12 months, based on what's happened in the last month," says Stephen Minton, vice-president for worldwide IT markets research at tech researcher IDC.

The reason? The sheer size of Wall Street's tech budgets. The financial-services industry accounts for 23% of all business spending on hardware, software, and tech services, or 18% of the $432 billion U.S. total once consumer buying is included. Over the years, banks and investment firms have come to represent an ever-increasing proportion of total tech demand, as they developed ever-more-complicated financial products and trading strategies that required faster computers, more number-crunching software, and more efficient networks.

Slow Tech Fallout

Not that it's a crisis for tech, at least not yet. Chambers is still predicting Cisco will boost sales 16% in the second fiscal quarter and long-term revenue growth will be between 12% and 17%. For the overall tech industry, IDC's Minton estimates that if financial companies do cut back their tech budgets, total IT spending would grow 3% or 4%, rather than the expected 5% to 6%.

Not all segments of tech would be affected equally. Hardware companies, such as PC makers, storage manufacturers, and mainframe sellers, including IBM, Dell, and Sun Microsystems (JAVA), would feel the biggest impact. Software companies that make business-intelligence and collaboration software, such as Oracle and SAP (SAP), would also be hit. Tech services, such as Accenture (ACN), Cognizant Technology Solutions (CTSH), and Electronic Data Systems (EDS), would probably see the least impact, since they usually help companies cut costs and work on five-year contracts.