Network Appliance Inc Chief Information Officer Scott Klimke knows first-hand why clients of the computer-data storage equipment maker plan to spend less next year.
His company's sales are forecast to fall 20 percent in the fiscal year ending in April as customers, which include Lucent Technologies Inc and Motorola Inc, scale back spending and become more selective about their computer and software purchases.
As Network Appliance's own sales shrink, Klimke said he's also had to juggle his priorities and shelve some projects.
This year, stalled profit growth and declining corporate spending translated into slack sales at once high-flying companies such as Network Appliance, Microsoft Corp, Sun Microsystems Inc and Dell Computer Corp. Now, investors are looking at a year-end pop in semiconductor sales as an indicator that the economy may rebound soon and signal better times next year.
"It's going to be slow and gradual," said Mike Cohen, whose Alpha Analytics Digital Future Fund owns technology stocks including Microsoft and Atmel Corp. "All we're looking for is the first signs of light at the end of the tunnel. That is enough right now."
Optimism for a recovery has sent the NASDAQ Composite Index up 32 percent since Oct. 1. While analysts and executives caution that there may be little change in technology spending next year, some investors said any growth or sign of stability would be enough to continue the rally.
Spending on technology products will increase just 1.5 percent next year, after a 2.5 percent rise this year, according to a survey by Gartner Inc and SoundView Technology Group Inc.
Merrill Lynch & Co technology strategist Steve Milunovich says spending next year may drop 5 percent, less than his forecast for a 10-percent decline this year.
"Those things will come back, but for the short term, they've been put aside," Network Appliance's Klimke said.
The semiconductor industry will record its worst decline in history this year. After a year of falling revenue, Intel Corp, Advanced Micro Devices Inc and chipmakers whose wares go in personal computers have ratcheted up fourth-quarter forecasts, saying that holiday PC sales have been better than expected.
National Semiconductor Corp this month said its so-called turns business, or orders requested for delivery in the same quarter, increased in the quarter ended in November. Chip inventories at electronics firms, distributors and chipmakers dropped to an estimated US$12.5 billion this month from US$36.3 billion in January, according to VLSI Research Inc.
"Inventories are falling, liquidity is increasing and capital investments in electronics gear made for Y2K are growing stale," VLSI President Dan Hutcheson wrote in a note to clients last week. "The economy is well primed for an upturn." First-quarter chip sales typically drop from the fourth quarter, and analysts don't expect the US economy to rebound until months later. Banc of America Capital Management economist Lynn Reaser said last week that she expects the economy to reach a low at the end of first quarter and then start a recovery led by consumer spending in the spring.
Intel's sales will fall in the first quarter from a year earlier, then are forecast to start growing in the June period, according to an analyst poll by Thomson Financial/First Call.
While total corporate spending may not change much, companies like Klimke's Network Appliance will shift their focus, spending more on security and backing up data. Software and computer vendors may also reap the benefits of increased federal-government spending on defense in the wake of terrorist attacks of Sept. 11.
State governments, like many corporations, aren't planning to spend more. They'll report the smallest revenue gain this year since 1990 and budgets are shrinking as increased firings and fewer stock options led to a drop in tax dollars.
Colorado's budget surplus, for example, will fall to US$16 million next year from US$927 million this year. When money is tight, funding for PCs and software gets hurt disproportionately, state officials said.
"It's a lot harder to cut health insurance for children than PCs for state workers," said Phil Windley, Utah's chief information officer. While Utah's budget will take a 4 percent to 5 percent hit, the state's technology spending will drop 8 percent to 9 percent, he said.
Spending on less expensive projects, such as software, will come back earlier than big-ticket products like servers and communications gear, said Alan Loewenstein, co-manager of the US$1 billion John Hancock Global Technology Fund. His picks include data-storage software maker Veritas Software Corp and Siebel Systems Inc, whose programs let companies manage customer service and sales.
Businesses may gradually start replacing their PCs with newer models based on Microsoft's Windows XP operating system, investors said. Dell Computer Chief Executive Michael Dell last month said he expects a surge in PC buying in the middle of next year because most corporations haven't upgraded since before the year 2000 date change.
Dell estimated that there are 70 million PCs that are more than four years old, and executives including Intel Chief Financial Officer Andy Bryant have plans to buy new PCs for workers next year.
"When sales do pick up, there's going to be pent-up demand, and they'll actually pick up a little more than people anticipate," said David Katz, chief investment officer at Matrix Asset Advisors Inc, which manages US$750 million in assets.
In the end, businesses will conclude that they have to invest even if the recession lingers, in order to stay ahead of rivals and win sales, shareholders said. "It reaches a point where someone realizes they can get a competitive advantage by spending," Cohen said. "That forces their competitors to resume that arms race."
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