2008 IT Outlook: 'Less than Comforting'

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Why the concern then? For one, it could take a while for problems in the housing sector and credit markets to work their way onto companies' books. "No company is immune from global economic shifts," says Steve Mills, the senior vice-president in charge of IBM's $19 billion software group. "I'm struggling myself to calibrate what the implications are." Still, even amid summer market turmoil, IBM didn't see a letup in software volume, Mills says. The company is expected to report third-quarter earnings of $1.67 a share, a 24% increase from a year earlier. Analysts expect a 19% earnings increase for the fourth quarter.

Lots of Interest in Cost-Cutting

But as companies come to terms with debt losses, they may be tempted to curtail spending on new technology, especially in the financial, housing, and home improvement sectors. Consider Skanska USA Building (SKAB), a commercial builder working on projects including a new NFL stadium at New Jersey's Meadowlands sports complex.

Skanska IT director Allen Emerick says his 2008 budget likely won't change from this year's. The commercial builder hasn't seen a slowdown in construction, and it can stave off the effects of curtailed residential building for as long as a year because of the size and duration of existing projects, Emerick says. But a slower market in 2008 and an IT budget decrease in 2009 could be on the horizon. "Knowing the market may slow down next year, we may keep the budget the same and tackle some projects this year while we have the capital," he says.

Joshua Greenbaum, principal of Enterprise Applications Consulting, says there's "tremendous interest" inside IT departments to cut costs. Some CIOs are paring back in anticipation they'll have their budgets sliced. But others want to be able to show CEOs, CFOs, and their boards that they're cutting spending on maintaining older technology to make room for new projects. "I'm seeing a lot of interest in projects that can free up budget," Greenbaum says.

Chipmakers' Conservative Q4

For software companies, a pullback could translate to slower growth in sales of new licenses, a predictor of future revenue. UBS (UBS) analyst Heather Bellini said in an Oct. 5 report she expects SAP (SAP) and Oracle new license sales, measured on a sequential basis, to grow more slowly in the fourth quarter than they have in the past three years. Corporate demand for PCs could also be slowing. In a Sept. 27 report, Citigroup (C) analyst Richard Gardner forecast 11% growth in worldwide PC unit shipments in 2008, vs. 14% for 2007, and said Hewlett-Packard (HPQ) canceled some orders from its manufacturers for desktops and notebooks in August.

Citigroup analyst Glen Yeung said in an Oct. 8 research note he expects chipmakers including Intel and Advanced Micro Devices (AMD), which reports third-quarter earnings Oct. 18, to issue conservative guidance for the fourth quarter, given the uncertain economic outlook. Analysts expect Intel to earn 30¢ a share in the third quarter, an increase of 76%, on $9.61 billion in sales. In the fourth quarter, Wall Street is looking for earnings of 37¢ a share, an increase of 48%.

For now, investors may need to wait for more data. If anything goes seriously wrong with computer-industry results, curtailed spending in the financial-services sector could be an early warning. Financial companies buy about 13% of all U.S. technology products, according to ISI Group, and they tend to buy new technology earlier than companies in other sectors. During Oracle's Sept. 20 conference call, Co-President Charles Phillips said he anticipated layoffs in the sector but hadn't seen any cutbacks in IT budgets yet. As third-quarter results start coming in, Wall Street will be on the lookout for any indication that '08 won't be a banner year for tech.

Ricadela is a writer for BusinessWeek.com in Silicon Valley .