Ususally I warn information technology (IT) and enterprise software investors to read the fine print in Note 10 on page 100 of the 10-K. That's not the issue with the Gartner press release on 2010 IT spending growth dated April 12 that is getting such wide play on the blogosphere this week.
The headline reads "... Worldwide IT Spending to Grow 5.3% in 2010."
Whether you run right out and invest in HP, IBM, Microsoft (MSFT), Oracle (ORCL)and SAP based on that stat depends on what you mean by IT. And what you mean by growth.
I can't blame Gartner, just the headline writers and the bloggers. In the press release itself, the facts are all laid out in clear English in about 10 paragraphs. For example:
- IT, by the Gartner methodology, includes personal cell phone purchases. I think it even includes your home phone and cable bill.
- 80-90% of the spending is on ongoing, probably already purchased IT services, not IT stuff. The Gartner press release makes it clear that 70% is on services; the rest you have to "impute" from knowing what is counted in software spending.
- The projected 5.3% growth is almost totally driven by a weakening dollar. Activity in Europe in declining and North American spending on all this is flat.
- IT is now just an index for overall economic activity. All bets are off if--as I believe--we double dip. Or as some are predicting--perhaps fittingly--get a "W" recession.
I don't fault the Gartner methodology and definition of IT either. Gartner anticipates the increasing conflation of personal and enterprise computing, the most important trend of the 2010-2019 decade. That trend means nothing but good things for Microsoft and HP and probably--the jury's still out--for Google (GOOG). It also reflects the long time importance in IT and enterprise software of services, which is why IBM spent the last decade exiting the IT business.
And there is one little gem that may make it worth your while to subscribe to Gartner to find out more. Kathryn Hale, research vice president at Gartner, says:
"In the face of... ongoing strong pressure to renegotiate contracts, and in the absence of equivalent pressure from stockholders, we believe vendors will generally choose to maintain margins over revenue growth."
I am not sure why stockholders will be concerned with maintaining margins but I'm not sure how you do that if you renegotiate contracts.
-- Dennis Byron
(No financial interest in the companies mentioned except for the $12 a year I pay Microsoft for Office.)