Comment: Partying like it’s 1999


28 Apr 2004

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No one likes to be reminded of being wrong, especially those of us who remember the halcyon days of 1999 — excessive exuberance tinged with gung-ho business tactics and the feeling that almost anyone could cash in on the tech boom. People felt they could do anything; they were 10-foot tall and bulletproof.

I distinctly remember a First Tuesday event circa 99/2000 where freshly minted Esat founder Denis O’Brien addressed the faithful crowd in a Dublin nightclub. Standing behind around 1,000 people and barely able to hear what the man was saying, I cynically noted that the rapt attention he received was reminiscent of Jesus’ Sermon on the Mount, segued into a Monty Python skit where you could imagine people whispering to each other — “Did he say the geeks shall inherit the earth?”

That was over five years ago and the gloom into which the industry since plunged is far from over, so don’t be fooled by what more cautious industry observers term a “mini-bubble” driven by returns to profitability by household IT names and healthy demand for IT systems and devices.

A casual watcher of the industry could not be blamed for thinking health has actually returned to the industry. In recent weeks Intel reported an 89pc boost in profits, which it attributed to a recovery in IT spending. Consumer giant Philips returned to profitability for the first time in years with a €550m net profit on the back of strong sales growth. Web portal giant Yahoo! reported more than double net profits of €101m for the first quarter. Analysts view Yahoo!’s results as a sign that a recovery in the traditional online and web-search advertising industry has taken place. Others are also boasting profitability – IBM, Apple, Xerox and NTL to name but a few.

However, reading between the lines most, but not all, of these earnings are being bolstered not by revenue growth but by cost-cutting and exchange rate fluctuations. This is the real pulse of the health of IT industry right now. You have been warned.

In the US, home to much of the original exuberance that drove the tech boom, a lot of the current optimism is being driven by company earnings reports as well as what industry watcher Richard Holway of Ovum terms “Windows of IPO-ppunity [initial public offerings].” In a recent briefing note on the mini-bubble, Holway said: “Three months ago we started to warn of another mini-bubble. Since then I have returned to the theme on many occasions as we reported on the near 20 tech IPOs throughout Europe in Q1. I warned that the Window of IPO-ppunity was likely to close by the second half. If you are going to IPO or sell your company — best do it now!”

He continued: “Future earnings growth will have to come from top-line growth. And we, at Ovum, just don’t buy any return to significant growth in IT spend. The markets tend to look no more than one or two quarters ahead. So, what is likely to happen to earnings in the US post the presidential elections or in Germany as hopes of recovery fade or in the UK post the 2005 elections as reductions in public sector spending hit, haven’t yet hit the markets.”

Holway’s comments should be taken and filed away for the next year as well as cautious remarks by Hewlett-Packard’s CEO Carly Fiorina when the company reported a 30pc increase Q2 earning in February. She warned that IT spending growth this year would be “steady, not explosive”.

Other cracks in the pavement can be seen through legal disputes that loom around software giants such as Computer Associates (CA) as well as telecom players Nokia and Nortel. Senior finance executives at CA have pleaded guilty to inflating revenues in 1998 and 1999. Following an SEC investigation, Nortel has had to restate earnings in 2000, 2001 and 2002 as well as the first two quarters of 2003. And investors are suing Nokia over previous sales estimates where it said phone sales would be up 3pc to 7pc this year. Instead it warned that phone sales would be down 2pc this year.

Despite the flimsy grounds upon which many IT giants are claiming profitability, there are some areas worth watching if you feel like taking a punt on a company or two.

A mini-boom in the software sector reminiscent of the millennium bug is being driven by the dreaded Sarbanes-Oxley financial regulations, which have a June deadline. A host of start-ups as well as older companies such as Oracle, Interwoven and PeopleSoft are chasing this business. Another trend in the software sector that is helping pave the way for “Windows of IPO-ppunity” is the long-awaited arrival of pay-as-you-go software services such as those provided by Salesforce.com and Siebel.

The final arrival of broadband in most markets has made such services a more tangible reality. And, thanks to a midsummer outbreak of computer viruses, spending on security software by consumers and businesses grew 9.6pc to US$5.6bn in 2003. This year spending on security is forecast to grow 10.2pc with players such as Symantec predicted to do very well this year.

Don’t be fooled by earnings that are bolstered by restructuring and cost cutting. Unless firms are making firm revenues, where will the profits come from when the restructuring is complete?

By John Kennedy