Cisco

Executives aren't putting the brakes on IT spending, yet

Technology executives indicated this week that the recent stock market volatility could impact tech spending. But, they also noted that customers are better off than in 2008.

While this week's stock market volatility and dismal economic data threatens information technology spending, executives are taking a wait-and-see approach with their outlooks. These executives also note that there are key differences between the market meltdowns in 2008 vs. 2011.

In 2008, technology spending essentially shut down in a hurry. In 2011, few executives see IT spending hitting the brakes quickly. Some projects will be completed and hiring will go on -- assuming things don't become materially worse. Technology executives, speaking on earnings conference calls and various investor presentations, say the economic uncertainty may ultimately put the kibosh on spending, which closely tracks U.S. gross domestic product (GDP). For now, the outlooks from technology companies are cautious, but Armageddon isn't around the corner.

Next week, a bevy of technology companies -- Dell, HP, NetApp, Intuit, and Salesforce.com -- all report earnings, and the economy will be front and center.

Qualcomm CFO William Keitel said this week that it helps to take a longer view of economic conditions. It's also worth noting that Qualcomm is in a nice position given its chips power smartphones, which are likely to see growing demand even in a downturn.

Speaking at the Oppenheimer & Co. Technology and Communications conference, Keitel said:

Maybe in times like we've got right now, it's maybe a little more difficult to step back and have a balanced view of the world. But if you try and do that today, you've still got to say that the Asia-Pacific region is going quite strong. Latin America is going strong. Japan's doing a bit better. The Middle East-Africa is going strong. Eastern Europe, coming off of a small base, is going quite strong.

So I sense a lot of emotions running these last several trading days. We're going to monitor it closely. I think, as you know, there's a pretty good correlation between GDP growth and consumer electronics. That correlation decreases a bit, but it's still there with total wireless devices. And Qualcomm has been bucking that trend because 3G has been growing as the base, as a percentage of wireless devices.

I think that trend's going to continue. More and more consumers are wanting more data capability worldwide, and that's best had on a 3G base and with a smartphone. So I think that's the more likely trend.

But having said that, like everybody else, we'll be monitoring the situation closely, and we recognize the link between GDP and our business.

Meanwhile, Keitel noted that Qualcomm's customers are also in a better spot today compared to 2008. "The balance sheets of consumers and certainly the non-financial corporate side is stronger today than it was back in 2008 and 2009. So I don't know how much of a buffer that might be," he said.

Keitel's comments about monitoring the economy and markets closely was echoed by other executives. In many respects, technology executives this week were all singing from the same hymnal.

Cisco CEO John Chambers also made similar comments following the company's fourth quarter earnings. He noted that the outlook is cautious due to market uncertainty. Nevertheless, Cisco's outlook was in line with Wall Street's diminished expectations. Cisco had its execution issues, but it's possible the company spotted a downturn before rivals.

Chambers said that Cisco's recent restructuring moves will give it an edge as competitors such as Juniper also wrestle with a slower economy.

We believe the changes we implemented, well ahead of our peers, will now be a competitive advantage for us as we go forward in this uncertain macro environment. During periods of uncertainty, customers value companies with a strong balance sheet, existing strong relationships with these customers, and one that can continue to help them with their innovation.

However, Cisco will still thrive or stumble based on the economy. "Cisco will always be affected by major economic changes, capital spending patterns and new and existing competitors," said Chambers.

The catch is that all these executives are closely monitoring the economy because IT spending tracks GDP. "While Cisco is heading in the right direction and making solid progress toward digging itself out of a hole, we are worried that the hole just got deeper, given the growing macroeconomic uncertainty and financial market gyrations," said William Blair analyst Jason Ader.

On the positive side of the equation, some companies noted they aren't seeing any material slowdown yet and don't necessarily expect one.

Pete Ritcher, CFO of AT&T's mobility and consumer markets unit, said that the company believes it is a "GDP-plus sort of growth play." Ritcher was speaking at the Oppenheimer conference.

"The industry that we're in will be affected by the economy, but we believe that products and services that we provide are items that really helped facilitate what's going on in the economy, and that ought to have an ability to grow at even a faster rate," he said.

Verizon CFO Fran Shammo also was upbeat at the Oppenheimer conference. "We actually don't see any impact to the consumer segment during this. In the enterprise, not seen an economic impact," said Shammo. "What we are seeing is corporations want to spend money on solutions that cut their costs. Again where we are seeing the economic impact is in the small business arena."

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This was originally published on ZDNet.
3 comments
reisen55
reisen55

If you read the job cut notices at IBM ALLIANCE - the not quite there yet union for IBM workers, layoffs continue to run at Big Blue, always adding jobs in India and other countries. Executives continue to spend, just cutting it when it comes to American salaries and benefits in favor of BRIC country wages without benefits. USB Bank pays their Bangalore workers a whopping $2 an hour, which is FAR below minimum wage here, so you get IT talent on the same economic line and WOW do those bottom line savings in salary AND INCREASING SHAREHOLDER VALUE just add up. They may be buying stuff, but they are not spending on talent.

HypnoToad72
HypnoToad72

All the corporatist orwellian has a knack of diluting words. Talent is innate. Skill is learned. Every call center person from India I've ever spoken to read off a script and innately knew NOTHING of the hardware or operating system they claimed to know. So, in effect, it's neither 'talent' or 'skill'. A relative told me that a law firm he uses is bringing back call center jobs. He didn't understand why I was so unhappy (let's see, lower wages than before offshoring, fewer benefit, more hours, more stress, more scapegoating... yeah, that's a real joy. And even though the same relative didn't like the idea of my earning a Bachelor's degree, guess which degree the job requires? **MASSIVE FACEPALM** ) Incidentally, with luck, after graduation, I'll be able to find real work. Oh, I know operating systems and hardware like the back of my hand, but companies want to dumb everything down (right down to the Accounting field, search on the web for "global accounting 2014" on that) because real skill and real talent, unless it's a banker that knows how to successfully pickpocket, is too costly. After all, why have a teller when you don't pay wages to an ATM and the ATM will demand a fee? (of course, the ATM can't spend what it 'earns' but nobody's going to mention that apparently unimportant aspect to the economy as well...) Also, for all the talk in politics of "lazy workers", we work. Hard. And don't get much in the way of pay. Why do shareholders, whose job is to throw in some money and get CEOs to whittle down the wages and quality controls to call 'profit' to make their purported value go up (as the real ways to generate profit are long gone, us spending)? If all they do is sit there and hope value goes up, that isn't work. Nobody values labor, talent, or skill nowadays. Just the stock market. What a joke.

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