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Major analyst firms such as International Data Corp. and Gartner Inc. recently began sharing their second-half forecasts with their clients, although the formal estimates arent expected to be released for a week or two. On the enterprise hardware side of the industry, the outlook is mostly cautious but positive.
Analysts said theyre still operating under the assumption that the technology industry is still in the midst of a replacement cycle that began in 1999 and 2000, when Y2K spending peaked. They also advised not to worry about the potential for a slowing server market, as a shift to cheaper commodity servers has kept unit volume up, if not sales.
Macroeconomic forces will guide the PC market to growth of roughly 10 percent, year-on-year, with servers showing an average growth of about 8 percent.
For the first time in a year, IT directors have begun to actually spend the amount of money theyve been budgeted, according to Brian Smith, research director for IT Watch, a subscription service from Gartner, in San Jose, Calif. IT Watch polls around 100 CIOs per week and tabulates the results on both a monthly and quarterly basis. Throughout the past year, IT personnel have spent under their budgeted amount, primarily due to cost concerns, he said. The exception has been telecommunications expenditures, where carriers have deeply discounted voice and data services to attract customers.
“IT spending is at budgeted levels, although budgets arent going up,” Smith said. “Caution remains the norm, and thats what were forecasting for the rest of 2004.”
Hardware spending, on the other hand, is expected to be flat to down, with some exceptions. Gartners surveys have shown that one area of interest is Tablet PCs, although the relative dollars attached to the category make it “almost a non-issue,” Smith said.
For many, PC sales remain the lynchpin of the technology industry. During the second quarter, a total of 42.8 million PCs were shipped worldwide, 13.3 percent more than the same period in 2003, Gartner said. IDC, meanwhile, said PC shipments grew 15 percent over the same period, to 39.7 million units. The firms 2004 forecast calls for a 13.5 percent increase in PC sales; Merrill Lynchs Global Securities Research and Economics Group calls for a 13.3 percent increase in PC growth throughout the year, driven by the belief that corporate sales will outpace the consumer market.
Roger Kay, a PC analyst with IDC in Stamford, Conn., said he expects PC sales in the second half to be about even with the first half, or slightly lower. Compared with the second half of 2003, unit shipments could increase by slightly more than 9 percent, a slight dip compared with the previous year. The firms thesis is that the PC industry is in the middle of a recovery period, which began last year. As the recovery becomes more mature, shipment growth will flatten, he said.
“Weve been pretty close to being right for a number of quarters now,” Kay said. “We think we know the scenario, and were sticking to it.”
Kays counterpart at Gartner wouldnt commit to a unit forecast in advance of the firms public announcement of the second halfs expected performance, due in the next few weeks. However, “our forecast assumes a pretty healthy third and fourth quarter, although not as strong as last year,” said George Shiffler, a PC analyst at Gartner.
“I think almost everyone is pretty bullish,” said Toni Duboise, a PC analyst for Current Analysis in La Jolla, Calif. “We had a great last year … a great first quarter, and the second quarter doesnt look too bad.” The third quarter is usually “disappointing,” she said, but the market usually rebounds in time for the holiday season.
Next Page: Macroeconomic trends guiding sales.
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Although localized disturbances like the 1999 Taiwan earthquake or an Intel chipset glitch can send ripples down the supply chain, PC sales are generally guided by macroeconomic trends. In the third quarter of last year, the U.S. GDP grew by a whopping 8.2 percent, and 4 percent in the fourth quarter. The Institute for International Economics, a private nonprofit based in Washington, said in April that it predicts U.S. real GDP growth for 2004 to be between 4.0 percent and 4.5 percent.
Retail sales were down in June, but that month marked the fourth consecutive month of strong consumer confidence, Shiffler said, who characterized it as a “mixed bag” of economic data, including the continued weakness of the dollar against the euro and other currencies.
For his part, Federal Reserve Chairman Alan Greenspan testified to a U.S. House of Representatives budget subcommittee in February that “the most recent indicators suggest that the economy is off to a strong start in 2004, and prospects for sustaining the expansion in the period ahead are good.”
“Most of the indicators are still up; demand seems to be there,” IDCs Kay said. “In the supply chain theres too much inventory in some cases, and not enough in others, and then theres some mix problems. That generally says inventories are low, so that implies demand is still pretty good. The assumption here is that the economy is the most important driver within the PC market, and that the PC market is concurrent with the general economy.”
PC makers have not reported their second-quarter earnings yet, although the two main PC microprocessor suppliers have.
“What we see are modest signals from the IT community that they are going to increase spending, but they remain extremely focused on the value question,” said Hector Ruiz, president and CEO of Advanced Micro Devices Inc., in a conference call with analysts this month. Intel Corp. executives said they expect about an 11 percent jump in revenue heading into the third quarter, although they didnt address the IT spending issue directly.
Some analysts have begun regarding notebook PCs and desktops as two sides of the same coin, as corporations have begun phasing back on desktop purchases in favor of devices their workers can take on the road. Notebook PC growth could reach into the 20 percent range, although a more reasonable expectation would be about 14 percent, Gartners Shiffler said.
Next Page: Servers march to different beats.
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Servers, however, march to a variety of different beats. The heterogeneous server market is made up of a number of proprietary server architectures and operating systems as well as the more “standard” X86 architecture.
“What we think is going to happen is that the range will be a revenue growth on a worldwide basis of about 6-plus percent,” said Jeff Hewitt, a Gartner server analyst. “The best-case scenario that we could have is just over 10 percent. That would be pretty spectacular, and a pretty great thing, and I think that would be wonderful really—but if I look at the second half of the year right now were looking at between 4 and 12 percent year-on-year for each quarter.”
The impetus behind that growth is growing connectivity; for example, a corporation adding more wireless connections generally increases demand on a companys internal LAN and server infrastructure, Hewitt said. Likewise, the push to connect smart phones and PDAs to the Internet via 3G services means more servers are getting hit with requests for data. Finally, more enterprises are using compute-intensive applications to solve business problems: “I am aware of a disposable diaper company using fluid dynamics to improve their designs,” Hewitt deadpanned.
One interesting trend is the shift to X86-based servers from RISC machines, which will hurt revenue projections but not unit volume, Hewitt said. A more serious problem could be a CIOs decision to postpone the purchase of a RISC-based server as its cost might push him over budget, he said. Moreover, three top microprocessor architectures—the IBM POWER, the Sun UltraSparc and the Intel Itanium—are all undergoing shifts to the next-generation architecture, he said.
Purchasing a “commodity” X86 server brings with it cheaper infrastructure components, such as memory, analysts said. The combination of a lower purchase price and cheaper components might hurt purchases of back-iron hardware in the short term, eventually leading to a long-term decline, Hewitt said.
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