Trouble Still Lies Ahead for Tech Sector

Yes, it sure is nice to see stock prices flashing green. But despite the market’s historic two-day move, there are still reasons to worry about what happens to technology shares over the next several quarters.

There are several negative factors at work here. Start with currency: One of the more eye-opening aspects of Oracle’s (ORCL) well-received earnings report last night was the company’s comment that revenues in its fiscal third quarter ending October will see a serious drag from currency factors. Oracle expects a 10 percentage point swing on a year over year basis: currency boosted revenue by 7 points in the year ago quarter, but will cut revenue growth by 3 percentage points this year, assuming exchange rates stay about where they are now.

Bill Whyman, of Washington-based research firm International Strategy & Investment, noted in a research note today that companies in the third quarter are likely to start to talk about constant-currency numbers, rather than simply reported numbers. And in fact, Oracle did just that last night on its post-earnings conference call with the Street. You will notice not many companies talk about constant currency numbers when FX is providing a boost to earnings, as opposed to a drag. Whyman contends this approach won’t work; the redirection approach doesn’t avoid the fact that revenue growth will slow in coming quarters due to currency unless the recent trend again reverses.

Whyman also notes that tech demand outside the U.S. is likely to be a source of incremental weakness in coming months. He notes that investment spending and tech production in 10 global markets which represent two-thirds of non-U.S. tech demand has weakened since the start of the year. He says that will lead to slower tech revenue growth in the second half. (The countries he’s looking at include Japan, Germany, the U.K., France, Canada, China, Taiwan, South Korea, Brazil and India.)

And not least, Whyman notes that the turmoil in the financial sector also likely will result in weaker spending in the second half.

Avi Cohen, managing partner of Avian Securities, a Boston-based research firm focused on the tech sector, this morning also attempted to inject a sobering note into the discussion on second half financial results.

“Over the last few days we have made a host of calls to almost all of our coverage companies and there is one common and worrisome response worth highlighting,” he writes. “It was very disturbing to hear CEOs and CFOs expound over their limited exposure to financial companies and specifically [Lehman] and AIG as if one had to do business with those specific firms in order to be hurt by this current crisis.”

Cohen says tech execs “should recognize that these dislocations impact everyone and begin planning for its effects immediately rather then waiting for it to shows up on their doorsteps.” He notes that every bank and every Wall Street firm will need to reduce and consolidate spending. And that will cause firms that sells goods to those companies to do the same - that includes VARs, OEMs, system integrators and a host of other concerns.

Cohen says the losers will be the companies where managements keep saying they have no exposure. He notes that the financial sector accounts for about 15% of tech spending. And he adds that it is important to remember that “reverberations from the events of the last week will actually result in lower spending over the next 6 months to a year across the board both on the consumer side and the enterprise side and we still need to recognize this in the mist of this relief rally.”

Comments

[TanToday:]

Wow, amazing....

Currency fluctuations affect TECH firms!! Who wudda thunk?

Come on, there is zIp new in that, and when was that NOT the case.

A whole lotta no news, spun into breaking wind.

NEXT!

2008 Sep 19 05:55 PM

[Shiv139:]

What are the cyclical opportunities for out-performance? When will the out-performance from secular growth sectors re-commence?

This article looks at out-performance opportunities at a sector level. The aim is to identify where we are in the economic cycle and use history as a guide to seek out the coming sectors of out performance, within the present economic cycle.

The article also applies the sector rotation rationale applicable to an economic cycle to a multi-economic-cycle level; the aim being to identify the secular (16 year; roughly 3 economic cycles) trends. The intent is to identify sectors which are in secular bull formations and which will lead during the next cyclical bull.

Sam Stovall's vision on sectors is used in identifying the typical flow through sectors during the course of an economic cycle.

The conclusions are - out-performance opportunities are in financials & IT. Secular sector to lead the next cyclical bull will continue being Energy after a cyclical correction.

2008 Sep 20 10:03 AM