Report: IT Spending Growth Expectations Lower for Second Half

Report: IT Spending Growth Expectations Lower for Second Half

IT hardware spending will likely show low single-digit growth for the second half of 2008, lower than original estimates, in the wake of weak corporate earnings and other indicators.

That's according to a report from Bernstein Research Senior Analyst A.M. Sacconaghi Jr., who said while the current consensus expectation is for 7.5 percent IT spending growth in the second half of the year, revisions are likely to push that number down to from 4 to 5 percent for the year.

"We remain cautious on IT spending, particularly in light of weak corporate earnings, which have historically been a leading indicator, by two to three quarters, of corporate IT spending…" Sacconaghi said in the report. "Moreover, our most recent CIO survey, conducted in May, also revealed incrementally more caution around IT spending for the remainder of this year, relative to their sentiment three months earlier."

An IT spending slowdown will hit IT hardware companies especially hard, according to Sacconaghi, because the fourth quarter is typically a strong one for them.

Among the sectors that have been hurt by recent economic events are financial services, which accounts for 23 percent of IT spending, and telecommunications, which accounts for 11 percent of total IT spending, according to the report, and these sectors include customers that purchase some of the largest, highest-margin tech hardware.

Vendors with a strong international presence and recurring revenue streams will be the most insulated from the effects of the current market conditions, according to the report, which singled out IBM, Hewlett-Packard and Lexmark as strong defense positions for investors.

However, Sacconaghi pointed out that IBM has the most financial services firms as customers, with nearly 30 percent of its total revenues from that source.

"However, we believe that a large portion of this revenue is recurring—related to outsourcing, hardware maintenance and/or mainframe software—which suggests a more limited impact should financial services companies pull back on IT spending," Sacconaghi said.

Overall, Dell, HP, Lexmark and Apple are less exposed to financial services than enterprise-focused hardware vendors such as IBM, Sun and EMC.

Consumer spending marks another weak area that has gotten worse as 2008 has progressed, and without economic stimulus checks to boost things in the second half, it is unlikely to get better.

"We note that Apple has the highest exposure to the consumer within our coverage, with more than 80 percent of its total revenues derived from this segment," Sacconaghi said in the report. Other companies with some consumer exposure include Dell, HP and Lexmark.