Monday, July 22, 2024

Research Firm: Tech Stalled Until Next Year

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SAN JOSE, Calif. — Quick turnaround for IT spending? Don’t bet on it.

The current downturn in IT spending is very different from the industry’s experience in 2001, and it will take a while for sales to find their feet again, according to market research firm Gartner.

The firm today hosted a strategy briefing here aimed at the semiconductor industry, since semiconductors are a leading indicator of the overall economy. If it’s an electronic product, it’s got a semiconductor in it somewhere, from an iPhone to a car, so the semiconductor industry will lead the way to recovery.

But that could be a while.

This economic downturn isn’t like 2001, when the tech sector was hit especially hard with the dot-com implosion on top of great overspending on the part of IT customers. While the nation was left reeling from the effects of the September 11 attacks on New York and Washington and some sectors suffered, like travel, the wider economy was relatively unaffected.

Today, it’s an across-the-board general slowdown in demand for products and services because of the economic uncertainty brought about by the financial market crisis, which has since spread to other areas. While it started with housing and banking and spread to the automotive sector, IT spending is not immune.

“2009 is a done deal. We’re not going to see any spending increases,” said Bryan Lewis, an analyst with Gartner. “We are cautiously optimistic for 2010, with expected growth of around 5 percent. We may see refresh cycles start to kick in but not until well into 2010.”

This echoes prior predictionsfrom other firms, that 2010 is the soonest period for recovery to begin.

Lessons from 2001

The one positive in all of the pain of the last few months is that the sector learned its lesson. In 2001, the industry kept producing product for months after consumers stopped buying, resulting in a massive inventory backlog that took years to clear.

This time, having learned from the past, the sector had better insight into a slow down in consumer buying and stopped production, resulting in only one quarter of inventory build-up.

As such, noted analyst Peter Middleton, the dip in sales was very brief and inventory build up was only for one or two quarters. “Revenues have bottomed and are now recovering. The supply chain is normalizing,” he told the audience of mostly executives from local chip firms.

During its most recent earnings call, Intel (NASDAQ: INTC) CEO Paul Otellini said that he was noticing an increase in demand toward the end of Q1, and was bold enough to predict a bottom. His counterpart at AMD (NYSE: AMD), Dirk Meyer, wasn’t as willingto predict a bottom, however.

But Middleton cautioned that Gartner is seeing “minimal evidence” that demand is inching back, “except in China where the 3G build-out is taking place.”

“The automotive and consumer sectors were the hardest hit in 2009 and given the employment situation, it will take some time for those sectors to recover,” he added.

Managing your money and assets

Bob Johnson, research vice president for semiconductors, took over the speech to discuss specific recovery tactics for the industry. The first problem, he noted, was gross margins literally disappeared in some sectors of the semiconductor business. In the memory sector, the margin was negative eight percent. “They were selling memory for less than it costs to make them and you can’t make it up in volume,” he said deadpan, but to laughter none the less.

To maintain viability, firms need to avoid debt, which should be obvious, keep gross margins above 35 percent, have enough cash to fund capital expenses and avoid leveraged buyouts.

“Debt has a habit of biting you hard in downturns, just when you don’t need it,” he stated. “Keep those margins above at least 35 percent. Intel likes margins of 45 to 55 percent. Anything above is reinvested or used to build cash.”

And don’t invest too much. If you build it, you have to maintain it and that can hurt: You can cut a lot of costs but you can’t cut depreciation.

“Overinvest in an upturn, you are stuck with them in the downturn, and you have to maintain them,” Johnson said.

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