Economic malaise hits IT industry

Some disappointing earnings and a shortage of IPOs are two signs that the struggling economy is taking a toll on the technology sector.

Enterprise software giant SAP says customer concern about stock markets caused "a very sudden and unexpected drop in business activity," resulting in lower-than-expected earnings. CRM vendor RightNow Technologies says it lost money in operating expenses in September, essentially because customers are taking longer to pay their bills.

IPOs, meanwhile, are scarcer than they have been in 30 years. That's bad news for the tech industry, which typically does more IPOs than any other sector.

Customers are less likely to buy new products in a bad economy, of course. The question is how long the current malaise will last. (Watch a slideshow of what we could buy with $700 billion.)

"It's not clear to me whether or not we’ve hit the bottom of the trough yet," says Pund-IT analyst Charles King of the ongoing stock market plunges. "The further it goes down from here, the longer it will take to recover."

Some financial analysts have cut their earnings forecasts for companies such as IBM, HP, Dell, Sun and EMC, according to a Dow Jones report.  

IBM, though, Wednesday reported a 20% increase in net income for its third quarter and says its profit outlook for the full year remains on track. Also reporting good news is NetScout, a network performance management vendor. The company says its earnings remain on track because of strong sales in the wireless and government markets.

The storage market has performed relatively well despite the tough economy, as it’s difficult to put off storage purchases when data volumes are greatly expanding, King notes. (Compare storage products.) Virtualization also should continue doing well because it saves customers money by allowing them to run more applications on fewer servers, he adds.

But King says companies such as SAP and Sun could continue to suffer because they rely heavily on customers in the financial and banking industries, the failures of which are driving the current economic crisis.

"There's so much uncertainty in the financial and banking industries, I would expect purchases there to slow dramatically," King says.

SAP announced on Oct. 6 that its third-quarter revenue will be around $2.6 billion, more than last year but less than expected. Things did not take a turn for the worse until near the end of the quarter, says SAP co-CEO Henning Kagermann. SAP stock dropped more than 15% after the company announced its updated revenue expectations.

"We executed well during most of the third quarter," he says. "That predictability disappeared once the financial crisis accelerated dramatically. ... It has had a strong impact on our ability to sign contracts. Many customers expressed the need to focus on shorter-term concerns and put planned IT investments on hold for now."

SAP is not alone in this predicament, according to David Mitchell of the Ovum research firm. For many IT companies, "deals were either cancelled or deferred [the last two weeks of September] because of the current market climate," Mitchell writes. "Losing a deal to a 'no deal' rather than to a competitor was commonplace."