Cross your fingers: 2003 actually looks positive: Cisco, Oracle, Intel, IBM, Microsoft all rebounding.
As Cisco Goes...
The world's largest maker of Internet equipment is rightly considered a bellwether for the industry as a whole. While the company's most recent earnings met expectations, Cisco predicted flat sales for the following quarter, which temporarily depressed its share price (and the market as a whole). However, in a surprising announcement in November, CEO John Chambers indicated that the company's backlog (orders that will be shipped within 90 days) was rising, a sign that many analysts feel is indicative of rising sales and thus, growth in tech spending.
Other reported comments from tech heavyweights Oracle and Motorola also seem to indicate that the tech sector is on the rise. At Oracle World, Jeff Henley, executive vice president and chief financial officer, said that he is predicting a technology turnaround over the next year, and expects growth in 2003 following two years of revenue-declines for the company. Motorola, whose stock hit an all-time low in 2002, indicated that it is standing by its earlier fourth-quarter forecasts, which sent its stock up in the hopes that the company has put the worst behind it.
Motorola's announcement helped to propel wireless company stocks but, more to the point, good news from Vodaphone, the world's largest mobile phone operator, is also good news for this key sector. The UK-based company reported a 67% gain in sales over the first half of 2002, a critical development for an industry that saw its first-ever decline in year-to-year sales last year.
As the world's largest chipmaker, Intel Corp. is clearly the bellwether for the PC market. While many analysts have cut (if only slightly) their 2002 earnings per share (EPS) estimates for the company, most believe that in 2003, the company's EPS numbers will rise significantly; most predict a rise of about 50% in 2003. In a November research report, the investment bank Bear Stems indicated that "the PC market is showing a weaker and later seasonal recovery than normal, but it is showing a seasonal pickup, nonetheless. Thus far, the end market hasn't cooperated, but we believe a strong PC-upgrade cycle is inevitable and should occur in 2003." The firm also indicated that it believes Intel is "capable of reaching its 1997 peak price/revenue multiple of about eight, which, when applied to our 2003 revenue estimate, gives us our 12-month target price of $35." At press time Intel's share price was about $18. (Although not all analysts are in agreement: Intel was recently given a rare "sell" rating by Merrill Lyn ch, which downgraded many semiconductor stocks.)
The PC Market
Will the PC market upgrade cycle ever rebound? This is the big question that few are able to answer with any certainty. Historically, the PC-upgrade cycle has been about three years. There's no question the traditional upgrade cycle has slowed: 2001 showed the first-ever year-to-year decline in PC sales. But if many companies put off new PC purchases since the recession began in 2000, this means that they are now holding hundreds of thousands (if not millions) of PCs that will soon be at least four years old (and many running Windows 2000 or 98 are closer to five years old).
While such aged machines are clearly still serviceable, they lack native support (at the OS, chip and application levels) for critical new technologies like USB 2.0, WiFi and Bluetooth, all of which are growing in popularity and importance. It is also likely (though as yet unannounced) that Microsoft will soon eliminate technical support for Windows 98, which in 2003 will be six years old. (Technical support for Windows 95 was eliminated in 2001.)
With both PC prices and interest rates at all-time lows, some observers expect a return to growth in sales next year-- though, admittedly, to a level far below the huge growth rates of the 1990s. Gartner numbers for 2003 predict PC growth will be about 7%, not a large rise but still an improvement. (Analysts at IDC, however, predict that PC sales will decline in 2003.) Though a 7% growth rate is respectable, it does indicate that the PC-upgrade cycle is no longer three years, which is not good news for PC and CPU OEMs.
And Speaking of Microsoft...
The software giant's biggest regulatory and legal hurdles seem to be behind it. Redmond reported strong earnings for most of 2002, though company officials indicated that sales may slow in the coming two quarters. However, Microsoft is fundamentally a very sound company with huge cash reserves and is expected to recover in 2003, according to many analysts. "Microsoft continues to grow in low double digits despite a very challenging economy, especially in the enterprise market," Standard & Poor's computer software equity analyst Jonathan Rudy said in a research report, "With a pristine balance sheet and a high quality of earnings, Standard & Poor's would buy the market leader at a notable discount to fair value of $64-$70."
Rudy added that the firm expects Microsoft's revenues to increase by approximately 15% in fiscal year 2003. "This represents a slight increase from our earlier estimates, as revenues were driven by larger than expected increases in Windows and Office XP license sales due to Microsoft's change in its licensing agreements. Standard & Poor's believes that revenues from Windows XP should continue to boost results, as consumers and companies continue to upgrade to this platform," Rudy said.
Dig Blue's Back
While overall sales for 2002 at IBM are expected to be off about 7%, most analysts expect the company to report earnings growth in 2003. According to First Call, a firm that tracks financial analyst predictions, IBM is expected to report earnings of $4.31 per share in 2003, up from an expected $3.91 per share in 2002. Analysts surveyed expect 2003 revenue of $87.02 billion, a jump from an expected $80.7 billion this year.
IBM recently announced a huge push into the mid-size business market and middle-ware, including new software, training services, and support. Big Blue's new chairman Sam Palmisano has also outlined the company's significant move into the "open enterprise" market, which Big Blue has dubbed "On-Demand." The $10 billion initiative will compete with Sun ONE and Microsoft .NET architectures, both of which promise cost savings and productivity gains through open standards (though how open remains unknown); better systems management; and more efficient use of developer tools and software.
While the wireless phone sector has shown some modest subscriber growth, the real news in wireless is less about customer numbers and more about new technology. A slew of developments this year, as well as several expected for next, make this market an important one to watch, and one that should contribute to overall tech growth.
WiFi has taken the networking world by storm, and though competition is fierce, this has its benefits: very low prices for wireless networking gear and solid customer growth. Microsoft entered the market in November with multiple products, although there are dozens of other companies with multifunction devices that surpass Redmond's offerings. Most promising, dual-radio WiFi devices just hitting the market provide a relatively smooth transition to 11Mbps from the slower 1.1Mbps of early 802.11b products. But, more important, in 2003 Intel will release its first mobile Pentium chip with WiFi support, code-named Banias. The long-awaited chip will, for the first time, give notebook OEMs the ability to provide portables with native wireless networking support.
Of course, there are still some annoying technical glitches in the wireless networking world. In particular, the swiss cheese-like WEP security standard, which most devices include but which is often turned off by default, has been much maligned and has now been surpassed by WPA (WiFi Protected Access), which will be part of the 802.lli standard expected later in 2003.
But, overall, the wireless networking market is robust, and will also be helped by two more new technologies coming in 2003: WiMedia and WirelessUSB. WiMedia is likely to adopt Ultra Wide-Band as its physical layer sometime next year and offer near-half gigabit speeds for home entertainment center networking (see the November issue for details, available at wwpi.com). Meanwhile, Cypress Semi-conductor has announced that it is sampling its WirelessUSB chipset, a 2.4GHz technology that supports up to seven devices per host running at USB speeds at a distance of up to 10 meters. The CY694X family will work with any operating system that supports USB and is targeted at the gaming and "human interface device" markets (joysticks, keyboards, mice, and so on). Production quantities are expected in the first quarter of the year, with pricing set at $3.92 in volume.
The Flash memory sector is the technology lynchpin for many markets, including cameras, cell phones and PDAs. AMD has announced--and will begin volume shipping in 2003--new Flash technology that will go head-to-head with offerings from Intel, the biggest Flash OEM in the world. According to the company, AMD's new MirrorBit architecture is the first Flash memory solution that stores 2 bits of data in physically distinct areas within a single memory cell. All MirrorBit devices are designed to deliver a minimum of 100,000 erase/program cycles and 20 years' data retention, AMD says. 64Mbit MirrorBit devices are currently in volume production. 16, 32, 128 and 256Mbit MirrorBit Flash devices are currently sampling and should be in volume production in the first quarter of 2003.
Optimists feel that 2003 might be a breakthrough year for Linux. While the Microsoft legal ruling will mean that OEMs are free to ship Linux without risk of Redmond pricing retaliation, a more important development came in late November, at Comdex. UnitedLinux, a consortium composed of Conectiva, SCO, SuSE Linux and Turbolinux, announced a unified Linux platform aimed at businesses. It will offer cross-vendor compatibility, as well as unified service and management capabilities, and will go head to head with market leader RedHat. There have been more than 15,000 downloads of the beta release of UnitedLinux since its release in late September. The new version will be available in English, Japanese, Simplified and Traditional Chinese, Korean, Portuguese, Spanish, Italian, German, French and Hungarian.
A recent report from AMR Research found that CIOs will not spend their entire 2002 IT budgets, and 2003 IT budgets will grow only .2%. Still, if consumer spending rises--and the economy continues to show signs of life--such predictions may prove happily erroneous.
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|Publication:||Computer Technology Review|
|Article Type:||Industry Overview|
|Date:||Dec 1, 2002|
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