Meet the Street: Third-Quarter Tech-Spending Survey Results Surprise

Techtel of Emeryville, Calif., tracks market demand for information technology spending in 40 categories and nearly 100 companies. The firm has been conducting its demand growth study every quarter since 1984, and its data are used by the likes of Morgan Stanley and Merrill Lynch to gauge demand in the sector.

Michael Kelly Chairman and Chief Architect, Techtel

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TSC recently caught up with Michael Kelly, Techtel's chairman and chief architect, to discuss the results of its most recent survey, which included the period of the Sept. 11 terrorist attacks on the U.S.

As Kelly tells us, the results were somewhat surprising.

TSC: You guys basically do surveys of demand for technology spending. What do you guys look at in your reports?

Kelly: We have a quarterly report that goes out to buyers of technology. The technology buyers are both IT people and non-IT people who are also involved in the technology buying for corporations of all sizes. There are about 40 categories that we cover, and the index that we've got here is basically covering eight of the categories for enterprise level, and for general business level.

The four categories that are included in the enterprise level are mainframes, high-end servers, mid-range servers, low-end servers and high-end storage. In the general business it's PCs, notebooks, copiers and printers. Those go in to make up the quarterly demand tracking index that we have.

TSC: For the third quarter there were some interesting results. One is that overall, things have remained stable, despite the Sept. 11 attacks. What did you guys see along those lines?

Kelly: Well, that was very interesting to me [and] unexpected. We took our normal pulse of the demand market to find out from these buyers across the country, in exactly the same way we have done for 17 years every quarter, exactly what the levels of demand were.

We were really surprised to see that when you took this weighted index that we had developed, it basically came out as flat. It's like we had to kick the machine to make sure the needle wasn't stuck, but it wasn't. It actually turned out that way. It was very surprising.

TSC: Is there a possibility that some rise in the first part of the quarter was negated by a drop after Sept. 11 that makes the line look flat?

Kelly: There's no doubt that the fact that it was a partial quarter contributes to the fact that there were some of the effects that you are describing. However, we have both an actual purchase measure, which is what the demand is based on here, and we also have a forward-looking consideration measure, which is basically at the end of the quarter. The current consideration measures typically stayed the same or went up. They went up where purchases had actually gone down. That is an indication that basically, while people held off on purchases after the 11th, it still is in their backlog of considering purchases. They're still thinking about it.

TSC: Can you drill down into those results?

Kelly: Within the overall results, there had been some significant changes. The enterprise hardware demand basically plummeted for the quarter. In other words, the purchases that have been going on typically fell anywhere from 20% to 40% to 50%, just for the quarter.

The good part of it was that an awful lot of these purchases basically stayed in consideration, which is just a step back from actually making a purchase. Since we measure a complete range of five or six steps through the demand pipeline, we knew that it hadn't gone away. It was basically looking like deferred purchases.

TSC: Enterprise categories dropped back to levels of about six quarters ago, while general business categories started showing some recovery from their slump. What is the difference between enterprise and general business, and what does that switch signify in your view?

Kelly: With the enterprise level, we take four categories, which are the high-, medium-, and low-end servers, including mainframes at the high end, and high-end storage.

TSC: What companies would the enterprise level represent?

Kelly: EMC(EMC), IBM(IBM), Unisys(UIS), Hitachi, all the mainframe guys.

The general hardware is the PC's, notebooks, copiers and printers. That would represent companies such as Compaq(CPQ), Dell(DELL) and Toshiba for PCs and notebooks. It would also have Xerox(XRX) and a number of other copiers. The printers are obviously Lexmark(LXK), H-P(HWP), Canon(CAJ) and Epson.

TSC: And what did you find?

Kelly: Well, if you take a step back for a moment, the third quarter and fourth quarter of last year is when everything basically tanked in IT. IT spending went down about 14% overall in all categories, and since people were expecting it to go up, at that point, that was a big change.

But since then we've had three quarters of flat demand. Of course, what we expected this quarter, after Sept. 11, was to see some kind of further falling off. While it seem things are still getting worse, actual real demand out there is fairly flat. And overall, flat is OK.

TSC: So maybe there is a bit of silver lining out of the attacks. Things aren't quite getting better yet, but they don't seem to be getting worse, either.

Kelly: They didn't tank. If they did, they have recovered, very much like the stock market did.

TSC: What about for the quarters ahead?

Kelly: Consideration -- meaning what companies are thinking looking forward -- indicates that enterprise hardware is still going to have a hard fourth quarter and maybe even a hard first quarter [next year] before it starts [coming] back. But a lot of these purchases were deferred, not lost, and that is good news.

TSC: So the spring is starting to coil a little bit?

Kelly: That is a great way to put it.

TSC: Another result of the survey is that you say that outsourcing in the hardware area is doing very well in the Fortune 1000 market, which helps companies like IBM and EDS(EDS). What are some of the details behind that?

Kelly: Well, it wasn't just in the hardware section. The outsourcing is across the board. Companies are basically saying, let's go find somebody who can do this for us. And that is why they have had such growth in places like IBM Global Services, EDS and Compaq Professional Services and others.

TSC: You say also that Oracle(ORCL) and Siebel(SEBL) are starting to show some renewed brand attraction strengths. What are some of the particulars behind that part the survey?

Kelly: We noticed over the past few quarters that both of these companies have been having minor problems that have developed into more major problems in attracting new and repeat purchases for a lot of the categories that they were in. These things are finally appearing to turn around this quarter for both of these companies.