Sunday, 6 January 2008

Outlook - from middle age to true maturity

I've held back from giving a 'Holway Outlook' statement for 2008 - largely because I've done it so many times on HotViews during 2007 that some readers may consider it rather repetitious. But many other analysts have produced theirs and I have been asked recently to add my opinion.

So let me summarise my views for those with short attention spans or poor memories:

1 - Current analyst forecasts for IT spend in the western world are too high. Even though the likes of IDC and Gartner have reduced their estimates recently by a few percentage points, at a consensus 5%, they still show real positive growth. As I have said before, I see no growth in real terms which implies a headline growth (incl. inflation) of 2-3%.

News and views supporting this downturn arrives daily (hourly). For latest see Xerox chief warns of companies cutting spending on IT projects from today's (7th Jan 07) Financial Times.

2 - Enterprise IT spend will be hard hit. Most analysts have not factored in the considerable downturn in financial services sector IT spend which has occurred only in the last quarter. This is on top of decreasing growth rates in public sector spend. I also see the IT downturn now affecting Retail and Distribution as the 'consumer credit crunch' bites.

3 - As ever, such downturn will not be 'across the board'. Some retailers, some financial services companies and some public sectors will show considerable differences in growth rates. It's those IT companies that align themselves with the winners that will themselves come out on top.

4 - Enterprise software has been one of the bright spots in the last couple of years. But now I see enterprise software spend being one of the sectors hit hardest as companies postpone/cancel new IT initiatives.

Guy Smith has some interesting views on this in the newsletter saying "Vendors in B2B market spaces, especially for enterprise solutions, may get hammered harder than a Russian dissident."

5 - IT services companies specialising on ITO and BPO tend to do relatively well in a downturn as companies attempt to cut IT costs by outsourcing. I see this happening again this time around. However, we now have the Indians to contend with. Offshoring has effectively put a lid on price increases - indeed has been a consistent deflationary dampener. In other words, I see the outsourcers with the best offshore capability being the winners.

6 - Commodity hardware is going to a painful place to be. I wouldn't like to a Dell right now.

7 - The key to overall IT growth will be consumer spend. This has held up very well of late and has been the main reason behind the tech resurgence of the last few years. Will a US recession put paid to this? If it does then even high-flyers like Apple and Google will be affected.

Again, today's Financial Times (7th Jan 07) in a page 1 article entitled Spectre of slowdown haunts Las Vegas tech fair states that the Consumer Electronics Association is already predicting a major growth rate slowdown from 11% to 6% in consumer tech spending this year.

8 - I see consumers looking to reduce their overall spend on tech - particularly on their mobile and broadband 'servicing' costs - leading to considerable price competition to attract the 'switchers'. This usually benefits the big players at the expense of the tier two (or lower) players. That's why Holway's 2008 Portfolio includes both BT and Vodafone.

9 - Tech stock indices will suffer in 2008. I see at least a 15% dip. But I expect this to be in the first half with indices finishing 2008 at or even higher than where they are now.

10 - I see M&A continuing apace. I see many PE firms slavering at the opportunity to pick up IT assets 'on the cheap' - particularly those with good recurring revenue streams and strong positive cashflow. I also see many cash rich 'trade buyers' just waiting for buying opportunities. Conversely the IPO market is dead and is unlikely to come back to any form of life in 2008.

Just like 2001/2002, 2008 is going to sort the 'men from the boys'. There will be blood on the carpet. Many of the weaker, smaller companies will not make it through. Conversely the 'Big Boys' with strong, mature management and strong balance sheets should do well as our industry continues its journey from middle age to true maturity.

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