Tech Outlook 2009: IT Optimism Shunts Aside Convertible-Debt Doubts - InformationWeek

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11/19/2008
02:28 PM
Alexander Wolfe
Alexander Wolfe
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Tech Outlook 2009: IT Optimism Shunts Aside Convertible-Debt Doubts

If that headline doesn't grab you, I don't know what will. And it should, because, depressing as the past few weeks have been, it's hard to tell whether the economic glass is empty or half-full. On the plus side, in a new report, Swiss securities giant UBS predicts tech sales could be down as little as 6% in 2009, and a rebound could begin as early as late Q1. At the same time, the BreakingViews financial site warns that a bunc

If that headline doesn't grab you, I don't know what will. And it should, because, depressing as the past few weeks have been, it's hard to tell whether the economic glass is empty or half-full. On the plus side, in a new report, Swiss securities giant UBS predicts tech sales could be down as little as 6% in 2009, and a rebound could begin as early as late Q1. At the same time, the BreakingViews financial site warns that a bunch of tech companies are going to have difficulties refinancing their debt. My assessment of the two competing data points finds that, in the IT sector anyway, there's cause for optimism. Read on for my argument.On the broadest level, my hopes for the computing community have been leavened lately by the adage that a downturn is precisely the time to implement the business efficiencies you can get by, say, installing new servers. This isn't just theoretical: AMD has released a killer new generation of its quad-core Opteron server chip, called Shanghai, which boosts performance while cutting power consumption. I was at an event on Monday where HP showed off its latest Shanghai-based ProLiant servers, and I venture to say you'd be hard pressed to find a CIO who doesn't covet the kind of verifiable benchmarks these boxes can deliver running mission-critical apps from SAP, Oracle, and others.

OK, so that's the wish -- that looming economic angst is pushed aside by sensible business moves, like spending for upgrades which'll put one's business in a good position when it's time to exit the downturn. (This is something of a tautology: if things weren't bad, you wouldn't need to convince yourself they're bad enough that you still need to spend. But no matter.)

This view, though, may not be that far off the mark, if you look at the sober but realistic market assessment just issued by UBS. The venerable securities firm this week is hosting in New York City its Global Technology and Services Conference, which is where its latest economic projections came to light in a report handed out at the event.

The big bullet-point news is that UBS says global tech sales could be down as little as 6% in 2009, year-over-year, as compared with 2008. (In the same breath, UBS notes that tech sales could decline as much as 11% if emerging markets continue to slow.) But wait, there's more cause for optimism. Writes UBS: "Historical data suggests data suggests tech could begin to rebound in late 1Q09/early 2Q09." Even better is the fact that UBS's global GDP (gross domestic product) analysis suggests sales growth of 5% to 7% in 2010!

So how do I get the positive spin I'm putting on the UBS forecast to jibe with the far more dire implications of Robert Cyran's BreakingViews column on convertible debt? (The article, in edited form, is also posted on The New York Times, where it carries the dual byline of Robert Cyran and Jeff Segal, and the headline "Convertible Debt is Hanging Heavy.")

First, let's look at Cyran's thesis:

"US technology companies have issued gobs of convertible debt in recent years. These securities are starting to come due, putting the companies in a bind. Eleven tech outfits have converts maturing in the next 16 months, and their stocks are trading below the conversion prices. That means they'll probably have to pay the debt off or refinance it. But the former would drain precious cash, while the latter is absurdly expensive."

I won't go into a detailed explanation of convertible debt, and not only because you'll immediately click away. (If you want to read the most accessible explanation I could find, oriented toward entrepreneurs, check out Asheesh Advani's 2006 piece, Startup Financing: Raising Money Using Convertible Debt.) It's because the specifics aren't necessary to understand Cyran's implications. Which is that these companies are going to be in for a tough time, because the cost of raising money to fund further innovation will be prohibitive. (Notice, too, that we're going on the assumption, which may or may not be true, that they don't need those bucks to fund ongoing operations.)

Here's the problem with conflating Cyran's column into a wholesale indictment of the tech sector. Cyran says there are 11 companies so burdened by these looming debt difficulties, yet he only mentions five of them: Micron, Anadigics, Rambus, Kulicke & Soffa, and Mindspeed Technologies. (Which are the other six?)

Still, his roster gives us the answer I think we need to slide his assessment aside UBS's, and the result is good news for us IT-sector types. Follow me here. With the exception of Kulicke & Soffa, all of the companies Cyran mentions are chipmakers. For its part, Kulicke & Soffa is one step further up the food chain from those chip vendors -- it sells semiconductor manufacturing equipment to chipmakers.

The point is, none of these firms sell computing hardware or software directly to computer users. Therein lies the good news for those of us tilted more toward the user side of the computer industry. Namely, it's commonly acknowledged that, when the computer industry catches a cold -- as it will even if UBS's most optimistic assessment is correct -- the semiconductor industry catches the flu.

Sadly, I've witnessed this effect a few times up close during the nine great years I spent at Electronic Engineering Times. So Cyran is calling out an alarm on convertible debt in the semiconductor sector. UBS, too, notes that chipmakers are going to be hit hardest in the current crisis. As it writes in its report: "Fundamentals and stock performance have held up better in software and services during prior downturns, while deteriorating more rapidly for semis and [semiconductor manufacturing] equipment."

In summary, both Cyran and UBS appear in agreement that tougher times are in the offing for chipmakers. While I take no joy in that assessment, I do take a quantum of solace from UBS's far more upbeat overall tech projections.

P.S. It's been pointed out to me that perhaps I shouldn't be so giddy about UBS's prediction of a 6% tech-sales decline in 2009, especially given that fact that Gartner in October still predicted an increase of 2.3%. Also, IDC on Nov. 12 predicted 2.6% growth in worldwide IT spending next year. Re the former, I'd say that the economic landscape has changed. And the IDC numbers seem to be of a piece with the observation above that the IT sector looks better than the tech landscape as a whole.

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