One of the favorite activities of leading IT analyst firms is to research and prognosticate on IT spending. Lately, the topic has been, "Has the industry bottomed out, or are more dark days ahead?"
Let's take a look at what they've been saying.
Aberdeen: Recovery in IT spending
Aberdeen Group tracks the financial performance of the 20 largest publicly traded IT vendors. In its Q2 2003 analysis, it found that:
- Sequential quarterly revenues increased 3.6 percent over Q1 2002.
- Year-over-year quarterly revenues increased a nominal 6.1 percent.
According to Aberdeen, "The market has not seen such a positive revenue performance since Q1 2001. Year-over-year revenues have steadily gained ground since Q3 2001." It also provided a glimpse of the revenue leaders and losers:
- IBM: up 10.1 percent
- Dell: up 15.6 percent
- Microsoft: up 11.2 percent
- Sun Microsystems: down 12.8 percent
- Siebel Systems: down 17.8 percent
As a group however, it reported that profits rose an impressive 36.5 percent.
Aberdeen also speculates that "long-term IT spending will increase at an annual rate of between four and six percent."
Aberdeen identifies the application software market as the poorest-performing segment, with a Q2 2003 revenue increase of 1 percent. (This growth compares with a 1.1 percent growth in the previous quarter, so the hard times are not over for these vendors.) Its research also found a 4.8 percent increase in service revenues from these vendors coupled with an 8.3 percent drop in application license revenues. As a group, software licenses accounted for only 23.7 percent of total revenues. According to Aberdeen, this decline is due in part to three major factors:
- Businesses have reduced spending on application packages during the recent IT contraction. Software suppliers "plugged the revenue gap" by pushing professional services.
- There has been a shift toward purchasing hosted applications on a subscription basis. This subscription-based revenue is usually counted as service revenue rather than license revenue.
- The total installed base of application software is still increasing (albeit slowly) and the installed base continues to purchase maintenance contracts and services.
All in all, Aberdeen sees the recovery continuing at a modest pace, but doesn't expect a return to the double-digit growth that the industry enjoyed in happier times.
Culpepper and Associates
Culpepper does a quarterly review of the financial filings of more than 290 companies. From a review of its second quarter filings, Culpepper found that:
- For the fourth consecutive quarter, the software sector posted improved results, and all four of its "high tech" sectors (software, IT service, hardware, semiconductor) show signs that "the bottom is behind us."
- All four sectors are growing revenue and generating cash. Only semiconductors have negative net income.
- IT services companies "lead the pack, growing revenues by 3.6 percent over Q1 and producing a respectable 11.8 percent cash income."
Based on these statistics and "many positive signs now in the economy," Culpepper believes that "the improved Q2 results are only a hint of the far better times ahead."
Gartner's Technology Demand Index
According to Gartner, there are "early signs that IT spending will strengthen in the second half of 2003 and that provides the necessary first steps for a turnaround in IT spending for 2004."
Gartner conducted its weekly survey of its 20,000-member panel of IT decision makers from small, midsize, and large businesses and found that "U.S. businesses spent below their budgeted levels." However, the good news is that they spent 95.1 percent of their budgets, on average—way up from an 80-percent spending level in March and April, and the index has remained above 90 percent for three consecutive months. According to Gartner, this indicates that "IT demand is slowly returning to budgeted spending levels."
However, Gartner cautions that "the underlying data still reflects a conservative market that is focused on cost control." But in conclusion, Gartner states that, "Based on the trends we see, we are optimistic that IT spending will return to or exceed budgeted levels in the fourth quarter of this year."
AMR Research: Reason for optimism
AMR Research surveyed 500 mid-tier and enterprise-size companies to get a perspective on IT spending and company IT budgets. It found that the IT budget averages 3 percent of a company's total revenue. It further broke it down by a number of market segments and found that the services industries spend an average of 5 percent of their revenue, while manufacturers budget only 2.4 percent of their revenue for IT.
AMR found perhaps one of the best reasons for optimism in the IT community: "Companies foresee increasing their budget 2 percent in 2004." It attributes this positive outlook to two factors: The corporate profit pictures continue to improve and needed spending for IT has been put off for a few years.
Other noteworthy results from the survey focused on what areas IT organizations are targeting for next year:
- Taking back control of hidden technology spending that still continues at the business-unit level
- A shift away from the trend of spending more on maintaining existing technology vs. investing in new technology
- A review of options that take advantage of lower-cost alternatives such as offshore outsourcing and additional managed services
IDC: Pent-up demand for infrastructure
IDC also surveyed 500 end-user organizations and its findings were very much in line with the other analyst firms: a mixture of good news with words of caution.
The good news from IDC's report is that it sees that "North American companies are recording the first gradual increases in overall IT spending since the end of 2000." However, it warns that, "this growth remains heavily dependent on economic confidence and is inhibited by a persistent atmosphere of caution and hesitancy."
IDC reports that its survey also sees an increased focus on infrastructure upgrades.
Note: To read the complete text of these and dozens of other views on IT spending, visit the Analyst Views site.