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SG Cowen: Even Better IT Year is Dawning

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Investment banks are in love with technology again, fueled in part by the
continued rally in the tech-heavy Nasdaq index, which is up by over 50
percent in the past 24 months, thanks in part to a solid outlook in the
semi-conductor sector.

SG Cowen is the latest technology investment research concern to adjust
its expectations on IT spending and fortunes for 2004, writing in its IT
outlook for 2004 that the recovery is gaining momentum, helped by an improving
economy and continued interest in compelling technologies such as wireless
LANs .

“To be clear, the overall pace of IT spending growth is likely to remain
modest — in the low-to-mid-single digits — and we remain cautious about
the long-term growth outlook for the industry. But the combination of
modestly higher revenue growth and tighter cost structures should drive
healthy margin expansion and earnings growth for the leading vendors,” the
investment bank said in its just-published “Tech Road Map” for 2004.

Give much rebound credit to the consumer market too, it noted, where
lower interest rates and tax cuts have fueled strong spending on categories
such as PCs, DVD players and home theater devices.

But the corporate recovery that essentially began in 2003 with slightly
improved revenues, for example, is showing signs of picking up in 2004,
albeit at a healthy pace.

The research report’s survey of North American IT users shows weighted
average IT spending budgets rising 3.9 percent in 2004, compared with 2.2
percent in 2003, “indicating clear acceleration this year.”

Overall, SG Cowen said IT spending is expected to improve by 9 percent in
2004, compared to an improvement of 3 percent in 2003. Driving most of the
gains will be upgrades and expanding existing capacity, although signs of a
pick up in new projects are starting to appear, the report said.

However, while business momentum in the technology sector has clearly
strengthened in the traditional corporate IT market, spending budgets
remain tight but are showing signs of improving much faster than thought in
2004, the report said. That means all the major vendors, such as IBM , Microsoft , Cisco and Oracle , are expected to be the main beneficiaries of the uptick.

It noted that homeland security requirements and an IT staffing crisis
would help drive federal IT spending. Offshore vendors are also well positioned to continue building market share “across all sectors in IT services. This trend will have a detrimental long-term impact on sector pricing,” the report said.

Another key area in the report’s survey was in PC replacement cycles,
which, after edging up slightly in 2003, showed even more improvement for
2004 “with a growing mix of sites planning to replace over 35 percent of
their PCs and a modest uptick in the average percent of PCs planned to be

Look for 2004 to be another building year for Radio Frequency ID tags
, with some growth mostly in the retail sector, led by
Wal-Mart , it continued. “The most immediate beneficiaries will be the tag and reader manufacturers and supply chain software vendors. Once RFID
becomes more prevalent around 2006, IT services will benefit from
implementation and reengineering projects.”

Other pockets of opportunity that SG Cowen noted are continued strength
of wireless LANs and handset-embedded digital camera technology.

Potential potholes in the outlook’s road include security risks, such as
the problems the Chinese government has raised over weak security safeguards
with wireless LAN’s. Speaking of Asia, “the Asian countries, particularly
China and India, are becoming stronger competitors to the U.S.,” the report

“Originally focused on the low ends of the electronics supply chain, this
competition is moving into higher-value areas like R&D, software development
and IT services.”

The report comes on the heels of the Semiconductor Industry Association’s
global sales report, which showed a 4.5
percent rise from October to November alone to $16.13 billion.

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