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Impact of Y2K 'Slowdown' Slight Many Tech Firms See Sales Rise as Year Nears End By Sri Ramakrishnan Washington Post Staff Writer Tuesday, November 9, 1999; Page E01
Just last month, International Business Machines Corp. knocked the breath out of Wall Street by projecting dismal sales for the next six months, saying many customers were delaying purchases until after they were sure the year 2000 problem wouldn't affect their computer networks.
Other companies, including Hewlett-Packard Co., Unisys Corp., Lexmark International Inc. and a few software application firms, echoed IBM's concern.
But as the year draws to an end, it appears that the predictions of a Y2K-related chill in fourth-quarter technology sales have been fueled by a little hot air.
Any spending slowdown has been confined to a few categories, including top-end servers and application software designed to run specific tasks, such as data acquisition.
The warnings from IBM and Hewlett-Packard are related not only to Y2K issues but also to problems specific to those companies, such as a shortage of certain components, say financial analysts. And many of the companies' competitors are reporting higher sales.
Sun Microsystems Inc., IBM's competitor in the server market, says its orders will grow 20 percent in the fourth quarter, to a backlog of $825 million. "Sun is doing [business with] a lot of dot-com companies, which are less concerned about Y2K than building market presence," said Gary Helmig, principal with SoundView Technology Group, a technology-industry research firm.
In the PC market, both Compaq Computer Corp. and Dell Computer Corp. shipped more units in the third quarter than they did in the same period last year.
Microsoft Corp.'s revenue rose 29 percent in the third quarter, to $5.38 billion, and the company's chief financial officer, Greg Maffei, said Y2K will have no significant impact in the last quarter. Chipmaker Intel Corp.'s revenue jumped 9 percent, to $7.3 billion, and chief executive Craig Barrett said he looked forward "to seasonally strong business in the fourth quarter."
"Sure, there is a slowdown, but it may not be as bad as some make it out to be," said Tom Oleson, research director at International Data Corp., an industry research firm based in Framingham, Mass.
IBM has said that the impact of Y2K on its hardware sales will be less than $2 billion. Some analysts feel even that figure could be a worst-case estimate. Although precise figures can't yet be calculated, various estimates put the total loss of revenue or deferred sales industry-wide because of Y2K at between $3 billion and $4 billion--about 1 percent of the annual $350 billion that will be spent on hardware, software and services in the United States in 1999.
Some question whether this can even be called a loss in revenue, since many companies apparently boosted their information technology budgets early in the year in anticipation of possible year-end difficulties. "It's like a balloon: You squeeze on one end and the other end inflates," said Lee Price, chief economist with the Commerce Department.
A survey conducted in September and October by the Gartner Group found that 12 percent of hardware and software buyers intend to freeze purchases. The products that will primarily be affected, it says, are application software, servers and network equipment.
More than a third of the companies surveyed by Gartner did not intend to change their investment plans, and an additional 21 percent were open to investing in certain equipment. The other 15 percent were unsure.
"Yes, there are companies that are going to be hit, but we don't see a large number of organizations freezing investment," said Dale Vecchio, research director at the Gartner Group.
Among those that have suffered are sellers of "enterprise resource planning" services such as Maryland-based RWD Technologies, which said revenue fell by 3.5 percent and earnings fell from $3.5 million to $20,000 in the third quarter because of the lock-down. RWD's bigger competitor, Baan Co., was affected, too, but the German rival SAP AG increased revenue in the quarter by 7 percent.
"The impact of Y2K varies depending on which business segment you cater to," said John B. Jones, an analyst at Salomon Smith Barney Inc.
Some observers expect any slowdown this fall to be cushioned by year-end discounts, with companies signing deals for purchases but accepting delivery only early next year. "It's the industry norm to boost sales in the last month through discounts and incentives," said Ulric Weil, senior technology analyst at Friedman, Billings, Ramsey Group Inc. and a former IBM executive.
PC sales are likely to be the least affected by any slowdown of spending, according to a Banc of America Securities survey. International Data predicts that U.S. sales of personal computers will be up by 23 percent this year and software sales will be up by 13 percent to 16 percent. And a survey by Salomon Smith Barney found only 4 percent of major companies planning to lock spending.
"The slowdown is an event and not a trend," said Jones of Salomon Smith Barney, "and it will be behind us in 60 days."
Less of a Worry
A survey of technology industry executives shows there was less concern about a major year 2000 problem in July than in April.
Do you expect to see a Y2K-related slowdown in IT spending.
NOTE: Survey based on about 47 responses in April and 51 in July from Fortune 500 chief information officers and senior-level management information systems executives.
SOURCE: Salomon Smith Barney
-- Ken Decker (firstname.lastname@example.org), November 09, 1999