HP Guidance Helps, But Survey Foresees Less Tech Spending

InvestorsBusinessDaily.com
By Brian Deagon

Hewlett-Packard (HPQ) pumped oxygen to the tech industry Tuesday when it raised 2008 guidance and posted better-than-expected fiscal first-quarter results, but a new report says a slowdown in tech spending is picking up steam.

Analysts are listening closely to what the tech titans are saying to decipher just how severe the current U.S. economic slowdown might be. Tech stocks began sliding in early November on concerns of a drop in capital spending for information technology.

HP's positive outlook is far from universal. Earlier this month, Cisco Systems (CSCO) said orders fell in January after a solid December, and its sales outlook for this quarter fell below analyst views.

"Everyone is trying to figure out whether this is just a slowdown in the first half or whether it will go on into the end of year or even into 2009," said Bill Whyman, tech analyst at International Strategy and Investment.

Some analysts, like HP, come down on the positive side.

"There is a worsening of conditions, but I don't think it will be as bad as some analysts are making it out to be," said Ashwani Kaul, an analyst at Reuters Estimates. "A lot of corporations have been conservative about their outlook, but I think we'll see upside surprises.



"A lot of these companies make money overseas where we've not seen a slowdown. A lot of demand for tech products is still out there."

HP's recent results support the view that overseas markets might prop up U.S. tech firms. HP said revenue from the Asia-Pacific region rose 22% last quarter vs. the year-earlier quarter, compared with 15% for Europe and 8% for the Americas. Nearly 70% of HP's sales come from outside the United States.

Few See Spending Rising

But a survey released Wednesday suggests a U.S. tech spending slowdown might be worse than some expect. ChangeWave Research said its latest survey on corporate tech spending, taken last week, "confirms U.S. business spending has already entered into a recession."

Of 2,013 respondents involved with IT spending, 23% said their company's IT spending will decrease in the second quarter. That's up 3 percentage points from its previous survey, taken in November. Only 15% said spending will increase, nine percentage points down from the previous survey.

"It's become a lot clearer a pullback is under way," said Tobin Smith, founder and editor of ChangeWave Investing. "These are textbook recession numbers."

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The ChangeWave findings coincide with IT spending studies by Forrester Research and IDC. This month, both research firms lowered their tech spending outlooks, citing worsening economic indicators. IDC dropped its U.S. tech spending growth forecast to 4% from 6%. Forrester cut its outlook to 2.8% from 4.6%. Both figures are lower than average. In a healthy market, tech spending is 10% or better, analysts say.

"While there is still debate over the severity and length of a U.S. economic slowdown, we do know that the IT market will not escape unscathed from any significant downturn," Stephen Minton, IDC's vice president of global IT markets, said in a statement.

Analysts, though, say some strong overseas tech markets could lessen the blow for U.S. tech companies. IDC projects global tech spending will rise 5% to $1.38 trillion. That's down from its earlier projection of 6%, but the latest projection is weighed down by the small U.S. forecast.

Fourth Quarter Was Strong

The downward revisions follow what had been generally positive views for IT spending. And many U.S. tech companies reported better-than-expected revenue and earnings growth in the fourth quarter. More than half of tech firms that have reported results for quarters ending in December or January have had better-than-expected sales, while 80% beat views on earnings, according to Reuters

"The fourth quarter was not only good, it was surprisingly good," Whyman said. "At the start of the year, the consensus expectations for revenue growth for tech was 10%, with no sign of a slowdown. But that no longer can be true."

Whyman says the consensus estimate for 2008 sales growth among U.S. tech companies has since fallen to 9%, and his own outlook is for 7% revenue growth.

U.S. consumers also are spending less. U.S. same-store retail sales in January rose just 0.2%, according to research firm Retail Metrics. Best Buy, (BBY) the nation's largest consumer electronics retailer, on Friday cut its earnings outlook for its fiscal fourth quarter ending March 1. It also said it expects revenue to fall below its earlier target, citing weak traffic in January.

"I don't think we'll get a strong recovery in the second half," Whyman said. "I expect more negative surprises and companies lowering guidance."

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