Pent-up demand boosts spending

After years of red ink, technology hardware is showing signs of recovery.

A new report by Emeryville-based information technology researcher Techtel Corp. says server sales improved in the first quarter of 2003, while sales of personal computers are still sluggish.

“The good news is that the IT sector managed to get through a challenging quarter intact,” says Michael Kelly, CEO of Techtel.

According to Techtel’s research index, the first quarter of 2003 showed an 11 percent increase in spending on servers and other high-end IT hardware for the first time since the end of 2001.

Techtel’s numbers for desktop personal computers are not as encouraging, showing a 9 percent fall in sales from last year.

“After 9/11, we saw a shift to low-end categories as companies moved IT spending to low-risk … categories such as PCs and notebooks. This is the first quarter [since then] where the more expensive stuff is being purchased,” Kelly says. “While this does not yet establish a trend, it does suggest that underlying economic improvements are beginning to shore up IT investment.”

The Techtel report is at odds with a recent Goldman Sachs survey of the 100 largest IT buyers worldwide, which suggests IT spending should fall 3.2 percent in 2003.

New York-based Goldman analyst Rick Sherlund says the recent projection is a drop from a February report, which predicted IT spending growth of 1 percent this year.

He says most large IT buyers have given up on an economic recovery for the second half of 2003.

Techtel agrees that IT spending at larger companies will remain under pressure, saying much of the growth is coming from smaller companies with fewer than 250 employees, where 25 percent say they plan to increase IT spending this year because of pent-up demand.

Warren Mootrey, a director of marketing at Santa Clara-based Sun Microsystems Inc., the No. 4 server maker worldwide, says the trend goes beyond just small business.

Instead of buying big box servers with multiple functions, companies are leaning towards horizontal clusters of servers, which are smaller and cheaper.

“IT spending is picking up not so much with smaller company demand, but with horizontal computing in general. A lot of companies view it as buying lower-cost [server] boxes,” Mootrey says.

He says companies are basically looking to get more bang for their bucks.

San Francisco-based antispam startup Brightmail Inc., which employs slightly more than 100 workers, agrees things have changed.

“Three years ago what you saw were negative inventory levels from the hardware makers so, as a result, we had to pay list price or sometimes a premium for hardware in order to secure the products we needed,” says Brightmail CFO Mike Irwin.

But the dot-com bust and a number of high-tech bankruptcies change the hardware climate.

“That hardware shortage turned into the current glut and now you have a lot of second-hand equipment on the market so prices have dropped significantly,” Irwin says.

Brightmail also avoids another practice common to the dot-com boom — signing an exclusive contract with a hardware provider.

“We maintain relationships with multiple vendors. That way we can keep everyone honest,” Irwin says.

Companies also are making fewer speculative purchases.

“We so overbought our hardware in 1999 and 2000 and ended up with way more than we needed,” says Manjal Shah, CEO of online auction software seller Andale Inc. of Mountain View which employs 140 workers.

“For the past few years, we’ve been able to hold our breath, so to speak, in terms of buying more hardware. But especially in the past six months, we’ve really used up all of that extra capacity and then some and finally now have started a really aggressive buying program to replace a lot of the old equipment.”

Peripherals are also needing to be replaced. A Hewlett-Packard Co. spokesman noted that the Palo Alto hardware maker continues to see strong sales of printers.

But PC sales are another story. Andale agrees with Techtel’s assessment of PC sales.

“We’ve found very little pressure to upgrade the desktop PCs and the reason being, most of our employees, even the engineers, just use their PCs to log in to the central server anyway,” Shah says.

He says replacing the older IT hardware, which was wearing out from age and use, brought some unexpected benefits.

“What we could have bought for $10 million four years ago, we can now upgrade that with newer systems that have more capacity and that are faster for like 2 to 3 million dollars or less. We can grow the business at a lower cost,” he says.

Techtel’s Kelly says in the current IT market, buyers are much more savvy.

“The sins of the past — ‘solutions’ that didn’t solve the problem, investments that never paid off and promises never fulfilled — are extensive and remain unresolved for large areas of the sector. The IT industry will need to regain trust and deliver real solutions,” he says.