Economic Woes May Slow Storage Spending

While quarterly earnings came in strong for many vendors, the future doesn't look bright for spending on storage or IT overall

October 29, 2008

5 Min Read
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Earnings reported by storage vendors in recent days were something of a mixed bag. But none were optimistic about the near-term future. And a wave of research reports and surveys indicate that things are going to get worse before they get better.

The tone was set by industry bellwether EMC Corp. (NYSE: EMC), which reported total revenue for its third quarter of $3.7 billion, up 13 percent from a year ago and in line with the low end of Wall Street expectations. Third-quarter net fell 17 percent to $411.3 million; a year earlier it posted net income of $492.9 million, due in part to selling off a small stake in its VMware unit.

Despite the economic slowdown, EMC chairman and chief executive Joe Tucci said in a statement that "EMC delivered its 21st consecutive quarter of double-digit revenue growth and solid double-digit profit growth." But he cautioned in a conference call with investors that growth in IT spending would be "modest" as some large customers, including Wall Street banks and financial services companies, were scaling back on purchases or delaying deployment plans.

The storage industry leader reduced its forecast for the fourth quarter, anticipating revenue of around $4 billion. Sales of Symmetrix systems were flat, company executives said, while sales of Clariion systems increased.

The problems with the economy and the wild swings in the stock market have hurt consumer and business confidence, prompting a pull back in spending at all levels, some surveys suggest. For large storage vendors, the financial struggles experienced by Wall Street firms -- some of the best customers for sophisticated storage systems -- are bound to result in slowing sales. Other markets are unlikely to pick up the slack.More than a third of local governments plan to spend less on IT over the next two years, according to a survey of 162 local government CIOs by Public Technology Institute and Input , a research firm that tracks government spending. The CIOs said their top tech priorities for the next 12 months to 18 months were public safety interoperability, E-government services, and deploying more interactive and collaborative tools for engaging the public.

The news isn't all bad. A survey of 1,058 IT decision makers conducted for the CDW Corp. IT Monitor shows that 51 percent believe IT budgets will increase in the next six months, a single percentage point increase from six months ago. However, 11 percent think budgets will decline, up three percentage points from six months ago.

Getting more specific, the CDW survey found that 86 percent of large companies (1,000-plus employees) planned to buy new hardware in the next six months, and 92 percent planned to buy new software in that time frame. Around 80 percent of mid-sized companies (100-999 employees) expected to buy hardware in the next six months, and 84 percent planned to buy software. Smaller companies (1-99 employees) are holding on to their money, with only 36 percent expecting to buy new hardware in the next six months and only 47 percent expecting to buy software.

The real impact of the economic problems shows up in IT staffing: only 4 percent of small businesses, 23 percent of mid-sized businesses, and 39 percent of large businesses plan IT staffing increases in the next six months.

The economy is challenging businesses at all levels and in a variety of ways, and it is showing up in the default rates on loans for buying technology, The Wall Street Journal reported earlier this week. The Equipment Leasing and Financing Association, a trade group of 700 lenders, said 0.86 percent of equipment loans in September were written off as losses, up from 0.48 percent a year ago. In response, lenders are doing away with no money down and zero interest loans, The Journal reported.Tougher terms for loans to buy tech products have caused some IT departments to scale back or delay purchase plans, and vendors have responded by cranking up their own financing operations. IBM Corp. (NYSE: IBM), Oracle Corp. (Nasdaq: ORCL), and Cisco Systems Inc. (Nasdaq: CSCO) are lending more of their own money to help customers continue to buy systems.

Still, there are some optimists. George Colony, founder and head of Forrester Research Inc. , argued in a blog post that this downturn in the tech market will be different from the severe recession in technology that we saw between 2001 and 2003. His main points are that technology is so pervasive in all parts of business that companies can't cut back much, and that hot new technologies like virtualization and mobile computing, Green IT, and other trends will help companies recover from the slowdown and crawl out of the recession.

But there seems to be general agreement that the next few quarter will be rough for tech vendors, even for those that help businesses save. Another contributing factor in storage is that many customers made storage purchases earlier in the year in anticipation of budget cutbacks. That has produced low storage utilization rates in large companies (not seen since 2003), which is likely to result in "a significant decrease in storage spending for Q4," according to research firm TheInfoPro Inc. (TIP) .

Large companies were "stealing from Peter to pay Paul," TIP's managing director of storage research Robert Stevenson told Byte and Switch. "Instead of spending 40 percent of their budget at the end of the year, they bought more in the first half. It looks like they're going to be spending 10 percent to 15 percent of their budget at the end of the year. As a result, the fourth quarter looks difficult in terms of storage spending."

The mid-market also faces a slowdown, but on a different scale, Stevenson said. "At mid-sized companies, the storage budget isn't as much of an entitlement and they will cut the budget if they have to," he said. "They may only have a 25 percent increase instead of a 40 percent increase in storage spending."After interviewing IT decision makers at 250 firms, including 140 at Fortune 1,000 enterprises and more than 100 mid-sized companies in the U.S. and Europe, TIP concluded: "Storage decision-makers, anticipating future risk, accelerated infrastructure upgrades to ensure they could both retain budget levels and operate in a lower-budget environment in the future." As a result, storage spending in the near term is expected to slow.

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