Is IT’s Spending Drought Over at Last?

When Cisco Systems chief executive John T Chambers told Wall Street analysts a month ago to look for revenue growth of 3% after three quarterly declines, he couched it in tortured, Alan Greenspan-like prose. “We are starting to see some very early signs that could be interpreted, with the appropriate caveats, as cautiously optimistic,” he said. 

Now, the limb Chambers was standing on looks a lot sturdier. According to the Commerce Department, second-quarter spending on information-processing gear rose 7.6% over the previous year, the fastest growth since late 2000. With the second half expected to remain strong, growth for the full year should be about 6%, according to Precursor Group, an investment-research firm. And next year could approach 9%.

Has the long-awaited tech rebound arrived at last? It certainly seems so. Corporate profits are up and CIOs report higher spending. Indeed, there appears to be a major psychological shift going on throughout the business world as signs of a strengthening economy abound and the stock market marches higher. Dell, IBM, Microsoft, and Intel all reported double-digit revenue gains in the second quarter and other tech companies expect similar jumps.

Don’t expect a return to the boom times, but there’s little doubt that a confluence of factors is driving a nascent recovery.

While consumer demand for PCs and digital cameras has been brisk for a long time, now corporate buyers are beginning to weigh in. Some companies are once again replacing aging PCs and other equipment with new, lower-priced models. Sales of $3,000 servers based on the free Linux operating software, for instance, grew 40% in the second quarter as corporate buyers continued to move away from Unix-based models that typically cost around $25,000. The overall server business grew in the quarter–for the first time in nearly two years. Chip sales are also on a roll, growing 10.5% in July, to $12.5 billion.

Even battered segments are showing signs of life. While phone companies’ budgets called for spending cuts of 16% in 2003, cheaper broadband offerings from SBC Communications and Verizon Communications have led to higher sales of Net-access gear. Sales are also up for wireless networks and “voice-over IP” phones that let companies cut phone bills by using the Web.

On September 3, for instance, Nortel Networks landed a $1 billion wireless contract with Verizon. And the Defense Department plans to spend $840 million in the next two years to build a high-speed network called GIG-BE. While mega-deals for corporate software have been rare, SAP recently signed a $35 million pact with soapmaker Dial Corp “ seem more optimistic,” says SAP America Inc. CEO William R McDermott.

For now, much of the spending seems to be coming from smaller companies, according to execs at Cisco, Dell, and SAP.

Why is the little guy spending? Smaller companies, which typically move faster than larger ones, are in strong enough shape now to take advantage of newer, lower-cost technologies for the first time in years. Lamps Plus in Chatsworth, Calif., for example, is putting e-commerce kiosks in each of its 44 stores and has hiked its tech spending 200%, to $2 million, over the past two years.

Given the budding upturn, will all the cautious talk from high-tech’s CEOs end soon? Maybe not. They’ve been burned before, as Cisco’s Chambers knows all too well. “There are strong incentives to wait before you take your foot off the brake, much less put it on the gas pedal,” he says. That’s one reason why this tech recovery, while welcome, isn’t likely to break any speed records. 

By Peter Burrows in San Mateo, Calif., with Steve Hamm in New York, and bureau reports
in BusinessWeek. Copyright 2003 by The McGraw-Hill Companies, Inc