Will the U.S. Tech Industry Continue to Defy the Economic Downturn?

AT&T, Apple, Microsoft and others report strong demand, remain optimistic despite downward economy.

Can the U.S. tech industry continue to defy the overall economic downturn?

That's the multibillion-dollar question that analysts, academics and other IT industry watchers are asking -- and answering in a generally optimistic manner -- as strong financial results pile up from bellwether companies and other key indicators such as IT employment and capital investments in Internet start-ups remain solid.

In the past two weeks, eight of the top 20 IT vendors have reported better-than-expected earnings. These include Intel, IBM, Google, AT&T, Apple, EMC, EDS and Microsoft, which all beat Wall Street estimates of how they would fare in terms of revenue and profits during the first quarter.

So far, only Motorola has missed out on the U.S. tech industry boom, posting a 21% decline in first-quarter revenue as the company plans to split into two publicly traded firms. Motorola posted declining sales for 2007, too.

Leading IT companies say the weak economy hasn't dragged down their global sales of everything from chips, software and storage devices to cell phones and online ads. Indeed, the CEOs of all of these tech companies said they remain optimistic about the rest of 2008.

How the heavyweights are faring

Company FY07 Rev FY06 Rev % Change Q108 Results
AT&T $118.9B $63B Up:88.6% (IncludingBell South, Cingular acquisitions) $30.7B Up: 6.1% from Q107

Announced April 22, 2008

HP $104.3B $91.7B Up:13.8%

$28.5B Up: 13% from Q107Announced Feb. 19, 2008 (Q208 results due in May)

IBM $98.8B $91.4B Up: 8% $24.5B Up: 11% from Q107Announced April 16, 2008
Verizon $93.5B $88.2B Up: 6.1%

$23.8B Up: 5.5%from Q107

Announced April 28, 2008
Dell $61.1B $57.4B Up: 6.4% Due in May
Microsoft $51.1B $44.3B Up: 15.4%

$14.45B Up: 13.6% from Q307

Announced April 24, 2008
Time Warner $46.5B $43.7B Up: 6.4% Due April 30
Sprint Nextel $40.1B $41.0B Down: 2% Due May 12
Intel $38.3B $35.4B Up 8.3% $9.7B Up: 9% from Q107Announced April 15, 2008
Motorola $36.6B $42.8B Down: 14.5%

$7.45B Down: 21% from Q107

Announced April 24, 2008
Cisco $34.9B $28.5B Up: 22.5% Q308 due May 6(Q108 and Q208 total revenue Up: 16.6% to $19.4B)
Comcast $30.9B $24.97B Up: 23.7% Due May 1
Apple $24B $19.3B Up: 24.3% Q208 revenue Up: 42.8% to $7.51B

Announced April 23, 2008

EDS $22.1B $21.3B Up: 4%

$5.37B Up: 2.87% from Q107

Announced April 24, 2008
Oracle $18B $14.4B Up: 25% Q408 due in June(Q108, Q208 and Q308 total revenue $15.2B, Up: 24.8%)
Google $16.59B $10.6B Up: 56.5% $5.19B Up: 42% from Q107

Announced April 17, 2008

CSC $14.9B $14.6B Up: 2.1% Q408 due dateN/A (Q108, Q208 and Q308 total revenue $12B)
Sun $13.9B $13.1B Up: 6.2% Q308 due May 1(Q108 and Q208 total revenue Up: 1.17% to $6.8B)
Qwest $13.8B $13.9B Down: 1% Due May 6
EMC $13.2B $11.2B Up: 18.5%

$3.47B Up: 17% from Q107

Announced April 23, 2008

The IT industry has received other good news in recent weeks. Global PC shipments continued to rise during the first quarter. Venture capital investments in Internet-related start-ups were at the same level as they were a year ago. And other measures such as IT labor statistics, CIO spending and even IT trade-show attendance appear to be holding steady for the first quarter.

"Tech seems to be holding up, but it's really hard to generalize with so many of these companies because you're talking about company-specific issues," says Rick Hanna, an equity analyst with Morningstar who covers hardware vendors, including IBM, Apple, Dell and HP. "The longer a recession might continue, the more pressure it will put on tech. Right now, it's very solid."

Of course, all bets are off, experts say, if the economy sinks into a full-fledged recession, the housing crisis broadens or another natural disaster wreaks havoc. It's also possible that companies due to announce their latest financial results next week -- including Verizon, Comcast and Sun -- could put an end to the IT industry's winning streak.

"The IT industry is seeing surprisingly good results, and people are looking around and trying to explain it in terms of international markets and currency fluctuations," says J.P. Allen, associate professor of information technology at the University of San Francisco's School of Business and Management. "But if you look at these numbers, they are based on real revenue growth. It's the result of the great migration of business activity online."

"Tech is showing resilience for a couple of reasons," says Mark McDonald, group vice president and head of research for Gartner Executive Programs. "The nature of IT budgets has changed dramatically since 2001 and 2002. They are much more business based and business rationalized than in the past... IT is not the target-rich environment for cost-cutting that it was before.

Consumers, companies still buying

The U.S. economy has been headed south for six months, and Americanconsumers have been hit hard by the one-two punch of spiraling gasprices and plummeting housing values. But so far it appears thatcash-strapped consumers aren't cutting back on cell phones, textmessages or broadband services.

EvenPC sales continue to grow. IDC announced on April 16 that PCshipments rose 14.6% in the first quarter of 2008. While U.S. PC salesrose only 3.5%, sales in developing countries more than offset thatweakness, and demand remained strong for notebooks.

Analysts say that PC sales -- along with sales of cell phones, iPodsand other devices -- continue to rise in part because prices continueto fall.

"A consumer may not buy a house or a new car, but that doesn't seem[affected] when it comes to getting a new PDA," says Tracy Lefteroff,global managing partner for the venture capital practice atPricewaterhouseCoopers (PWC). "iPod sales have not been hit that hard.iPhones are still flying out of stores. I don't see that much change inconsumer buying habits."

Pradeep Chintagunta, the Robert Law Professor of Marketing at theUniversity of Chicago's Graduate School of Business, says consumerscontinue to buy wirelessdevices because most of them -- except the iPhone -- are subsidizedby service providers.

"The fact that cell phone devices in most cases are heavilysubsidized by service providers actually in some sense shields thisindustry from a big downturn right away because the service providerprovides the phones for almost free," he says.

Chintagunta doubts American consumers will cancel cell phonesubscriptions because of the economic downturn, but they might speed uptheir transition from landlines to wireless. He says consumers maydelay PC upgrades or buy fewer bells and whistles.

"A sustained economic downturn "will delay the replacement cycle ofPCs. There's no doubt about that," Chintagunta says. "People will bemore willing to buy a 1.6GHz machine versus upgrading to the 2.5 GHzmachine. That will certainly happen... But if manufacturers react byfurther lowering prices, it could be that shipments continue to be highbut profit margins for the manufacturers are declining."

Apple had record-breaking results based on strong sales of its Macbusiness, which grew 51% in units and 54% in revenues due to risingconsumer demand for the machine's unique look-and-feel.

"Apple is growing 3.5 times the market rate, which is not anindicator in general but a sign of Apple's strength," Hanna says.

Corporate IT buying isn't plummeting either. In fact, corporate ITbudgets worldwide will rise 3.3% in 2008, according to a survey of more than 1,000 CIOs that Gartner released in April.

Gartner's survey gauged the potential impact of macroeconomicconcerns on corporate IT budgets. Gartner found some softness in theU.S. market, where IT budgets are growing at a slightly lower rate thanlast year, but this softness is overshadowed by larger increases inAsia and Europe.

"Globally, IT budgets for 2008 remain stable. The growth rates areslowing in the U.S., while there is accelerating growth in Europe andAsia Pacific," McDonald explains.

In the United States, corporate IT budgets will grow 2.3% this year,instead of the 3.1% rise predicted by Gartner in the fall of 2007.

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