Every quarter, the long-awaited pick-up in IT spending seems to elude technology companies by yet another quarter or two.
But finally, the Commerce Department's gross domestic product measurements released this week may offer some hope that companies are starting to open their wallets -- albeit very frugally -- and spend on technology.
According to the Commerce Department report released Thursday, equipment and software spending increased at an annual rate of 6.5% in the third quarter. It's the second quarter in a row that such spending has shown growth since the third quarter of 2000. And it's a higher jump than the 3.3% annual increase in equipment and software reported in the second quarter.
The question is, when will such increases start showing up in the financial results of technology companies?
Lehman Brothers hardware analyst Dan Niles said they already are. In a note Friday, Niles pointed out that
stated its short-term consulting business in the Americas grew for the first time year-over-year in five quarters, while IT distributor
reported revenue in the Americas grew for the first time last quarter after suffering declines since the third quarter of 2000.
And while a slew of software vendors such as
continue to report year-over-year revenue drops, the largest of them all --
-- came in strong with year-over-year growth, Niles pointed out. However, Microsoft, which Niles does not cover, was unique in reporting 26% revenue growth year over year in part because it benefited from a change in the way it requires customers buy software.
"IBM by itself next year will make more than
and Microsoft combined in revenue," Niles pointed out. "You have to go ahead and scale this stuff; I could care less what 10 small guys tell you." Niles has an overweight rating on IBM and his firm has done investment banking with the company.
Niles, who acknowledges that his view is contrarian, said he wasn't surprised by the GDP numbers, which also showed 9% year-over-year growth in business investment. That follows 1% year-over-year growth in the second quarter, the first quarter of growth since the first quarter of 2001.
Software spending grew 2% quarter over quarter and 4% year over year, while computer and peripheral equipment spending grew 10% quarter over quarter and 34% year over year, according to the report.
That compares with a 10-year average quarter-over-quarter increase in software spending of 3% and a 10-year average year-over-year increase in software spending of 13%, according to Niles. The 10-year average increase in quarter-over-quarter spending on computers and peripherals is 6%, while the 10-year average increase in year-over-year spending is 31%.
"The recovery in the U.S. may not be great but it is occurring," Niles concluded in his note Friday. He is expecting growth in IT spending of 1% to 2% next year.
To bolster his case, Niles cited other recently released statistics. He noted that earlier in the week, the U.S. Department of Commerce Bureau of the Census' NAICS (North American Industry Classification System) durable goods data showed that new orders for computers and electronics increased in September -- 5% year-over-year -- for the third consecutive month.
"There's more and more data points coming out every day that say, 'You know, it's not that bad,'" Niles said in an interview Thursday. "We already hit bottom."
But other analysts were more cautious about drawing conclusions from the GDP numbers.
In the software sector, the GDP numbers are only loosely correlated to real license revenue, Morgan Stanley software analyst Chuck Phillips wrote in an email Thursday. "They include labor related to software," wrote Phillips, who regularly polls IT executives on spending trends. "Nonetheless, it's directionally a positive data point," Phillips added of the GDP report.
Goldman Sachs hardware analyst Laura Conigliaro was even more apprehensive of the GDP numbers. "I don't want to disrespect the numbers as they're coming out," she said Friday. "It's just they're different from and very much at odds with what we've been seeing from the actual data" from companies.
"It really has made us skeptical about how much we want to base our conclusions on this government data," she added.
Conigliaro said she couldn't identify a reason for the difference between the government and company numbers.
Conigliaro acknowledged that, like Niles said, giving more weight to larger companies makes sense. Still, "if you look at IBM's revenue numbers, they've been impressive relative to others, but they haven't been growing," she said. She has IBM on her recommended list and Goldman has not done banking business with the company.
"We certainly feel like we've reached a bottom," Conigliaro acknowledged. But "we've reached a bottom and we're bumping along the bottom, and that's where we are."