WILLIAM SHOPE is the Vice President and Senior Analyst at JP Morgan
TWST: What has gone on in this space from an operating point of view so far this year?
Mr. Shope: From an operating point of view, we’ve seen certain vendors doing quite a bit of restructuring or reaping the rewards from quite a bit of restructuring, and we’ve seen earnings improvement as a result. In addition, we’ve started to see evidence that IT spending is stabilizing in certain parts of the world, and that’s obviously a positive sign because that could be the precursor to some improvement.
TWST: What are the signs that things are stabilizing?
Mr. Shope: In the PC market we’ve started to see year-over-year growth rates accelerating for PC units. We’ve started to see an acceleration in the growth rates for low-end servers and the growth rates expand for enterprise hardware companies like EMC (EMC), for instance. All these signs are starting to point to spending at least stabilizing. But then again, we have to be careful because for certain companies, the growth they’ve posted, a lot of it has to do with currency movements. Companies like IBM (IBM) and Hewlett-Packard (HPQ) really haven’t had a lot of growth when you strip out the currency effects.
TWST: As you look out over the balance of this year and into next, what are you expecting in this space?
Mr. Shope: The key thing to focus on is that even if tech spending does begin to recover, certain segments are going to benefit far more than others. You may see certain segments and certain companies not participate in the early stages of a recovery at all. So I tend to think that when CFOs start to release dollars again for technology products, they are going to focus on the higher ROI types of investments such as networked storage and low-end servers transitioning from Unix servers to lower-end Linux or Windows servers. The reason is that CFOs, CIOs and large corporations are still very cautious, and if they see signs that the economy is recovering or that their own financial situation is recovering, they’re not going to run head first into an aggressive spending plan, particularly for technology; they’re going to go ahead and enter it quite slowly to make sure that any investments they make are high ROI and that these investments won’t hurt them if the economy suddenly reverses course and goes into, say, a double-dip recession.
TWST: What do you like about EMC?
Mr. Shope: EMC has gone through quite a tough period during the slowdown. The stock price has come down quite a bit from the lofty heights of the bubble. But EMC has really changed its business model to deal with the new environment in technology. They have a whole range of new products that are now just coming into the marketplace that really give them the technology leadership that they haven’t had for quite some time. Also, they have a very healthy cost structure, which they did not have during the bubble. But the momentum of the spending overwhelmed those problems.
So now they have a better cost structure, better technology, and I think that we’re really going to start to see the benefits of these changes that EMC has made in the next several quarters, particularly going into 2004, if we see IT spending improve.
