U.S. Downturn to Hit Tech Hardware More than Software

BOSTON/SAN FRANCISCO (Reuters) – As comments from tech bellwetherCisco Systems Inc spur recession fears this week, companies focused oncomputers and consumer gadgets are seen to be among those mostvulnerable to a downturn.

Analysts say business software makers are better placed to ride outa U.S. recession as they help companies to work more efficiently, butprospects are dimmer for computer hardware manufacturers like Dell andHewlett-Packard, as well as microchip companies Intel and AdvancedMicro Devices.

"If there’s a downturn, not all sectors will be affected equally,"said analyst Stephen Minton of market researcher IDC. "The first roundof cuts would affect the PCs and the devices and the software that goesdirectly onto those PCs and devices."

Corporate tech executives "want to protect their data center projects," he added.

Cisco Chief Executive John Chambers said on Wednesday that companieswere increasingly worried about the economy. "It’s the most cautiousI’ve seen CEOs in the U.S. and Europe in many years," he said afterissuing a disappointing revenue outlook.

Nucleus Research analyst Rebecca Wettemann, who helps executivesfigure out how tech investments can boost or hurt profits, saidcompanies anxious to control spending were willing to use hardware,such as Cisco’s routers, until it breaks.

"They are saying: ‘If I can’t find a direct relationship between theinfrastructure and the value it is delivering, then I am hesitant toinvest,’" Wettemann said.

Data storage makers EMC, HP and Sun Microsystems are also vulnerablebecause of excess capacity among many corporations, said Yankee Groupanalyst Zeus Kerravala. HP and Sun also sell servers and software.

"Hardware is becoming increasingly commoditized," said Kim Caughey,a senior analyst and portfolio manager at Fort Pitt Capital Group,which oversees about $1.2 billion for clients.

"If you are going to invest money in a downturn, you will want toinvest in productivity," Caughey said. "The thing that is not acommodity and is boosting productivity the most would be process andservices."

SOFTWARE, CELL PHONES

In some cases, a breed of computer program known as virtualizationsoftware can boost the efficiency of existing equipment. VMware, forexample, sells products that allow one server computer to do the workof 10 or more machines. Citrix Systems offers similar products.

Analysts also cite business management software makers SAP andOracle among the better bets. They sell programs that companies need torun more efficiently, cut costs and comply with regulations. About halftheir revenue comes from service maintenance contracts that generatehigh margins.

Software makers that host their products at their own data centersand deliver it to customers via Web browsers may also perform well, asinitial costs are minimal, analysts said. Two examples areSalesforce.com and NetSuite.

Besides computer hardware, discretionary consumer electronics are also forecast to hurt from a recession.

Citigroup is forecasting 10 percent growth in handset unit shipmentsto 1.26 billion this year. But in the worst-case scenario of aconsumer-led economic slowdown hurting replacement sales and subscribergrowth, it said shipments instead could fall 5 percent.

"No (handset) vendor is immune from a recession — we believe thatall players would see deteriorating fundamentals and stock pricedeclines," Citigroup’s global telecommunications team warned in aresearch report on Thursday. "However, companies with the highest NorthAmerican exposure are likely to suffer most."

Research firm Gartner has been telling companies for months thatthey should have a second tech budget in place in case there is a U.S.recession.

In a February 1 report, Gartner analyst Ken McGee said he wassticking with his forecast for tech spending to rise 3.3 percent thisyear, but with a caveat: "We know this current view could prove to beincorrect within days or even hours as a galaxy of issues and facts areuncovered and disseminated."

(Editing by Lisa Von Ahn)

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