War Jitters Delay Spending

Just when you thought the business environment couldn't get any worse for the IT industry -- and the storage sector along with it -- it apparently is. The most recent stumbling block, according to Wall Street analysts, is that customers are delaying purchases in light of the uncertainty over a U.S.-led invasion of Iraq.

RBC Capital Markets last month interviewed 32 storage and SAN-focused integrators and distributors about growth expectations for the first calendar quarter of 2003 and found that the looming war is freezing spending in many cases.

"The need is there, the budget is there -- but customers are not signing off on deals just yet," says RBC analyst Steve Denegri.

In a note to investors this week, the firm writes that the March quarter will be "abnormally back-end loaded." On the bright side, "vendors are responding to a number of requests for quotes, suggesting pipelines are growing." But on the downside, RBC says, "customers are, in a number of cases, hesitant to make purchasing decisions given the uncertain geopolitical climate."

But working out just how much of an impact this uncertainty will have on the overall quarter is difficult to tell."I wouldn't be surprised to see many companies coming up a bit shorter than hoped coming out of Q4 and possibly missing estimates altogether," says Dan Renouard, analyst at Robert W. Baird & Co. Inc. "But how much is related to war worries and how much to a generally weak economy -- exacerbated by $40 per barrel of oil -- is anyone's guess."

Shebly Seyrafi, enterprise storage and hardware analyst at A.G. Edwards & Sons, says his channel checks indicate spending in February was subdued. "A good chunk of these guys clearly think war is impacting spending, but some don't. It's not a uniform response," he says.

If the U.S. does goes to war, Seyrafi believes, the impact on the market will be similar to the spending drop that happened post-9/11, although not as extreme. "We may not get that steep a dive, but it could present a nice buying opportunity for storage stocks once the uncertainty lifts."

Fears about a war with Iraq aren't the only thing weighing heavily on the storage sector this quarter. New product launches, such as EMC Corp.'s (NYSE: EMC) Symmetrix DMX, might not be taking off as fast as anticipated. "When normal business isn't panning out -- in EMC's case, customers aren't writing big checks -- it would be overly optimistic to expect a quick lift in the quarter for the DMX," Seyrafi says. "The sales cycle will be longer, and with the war threat, customers are reluctant to embrace first-generation technology." (See EMC's DMX a Slow Starter?.)

Of course, if you are from the glass-is-half-full school, you could always look at the prospects for the full year, which are more promising. Thomas Weisel Partners interviewed 30 distributors, resellers, and systems integrators recently, and found an overwhelming agreement on positive storage spending prospects. Virtually all respondents the firm interviewed felt the same or more optimistic about 12-month prospects for storage spending than they did only three months ago, strongly supporting the view of pent-up demand in the storage industry.About half of those interviewed by Weisel felt better about spending prospects, compared with only 3 percent who feel worse than three months ago. This data point, coupled with the sequential increase in channel pipelines, bodes well for acceleration in sales during 2003, the firm concludes.

These days, however, IT budgets are increasingly being viewed as guidelines -- not commitments -- with a bias toward the downside. So it's hard to tell what will happen.

As always, the host bus adapter (HBA) market appears to be faring particularly well. Weisel says its sources indicate Emulex Corp. (NYSE: ELX) saw strength in January, due to Hewlett-Packard Co.'s (NYSE: HPQ) fiscal year-end, along with good demand in Europe. And QLogic Corp. (Nasdaq: QLGC) also appears to be doing well, due to some additional share gains with Dell Computer Corp. (Nasdaq: DELL), EMC, and new IBM Corp. (NYSE: IBM) BladeCenter shipments (see QLogic FC Ships in IBM Blades).

Backup software company Legato Systems Inc. (Nasdaq: LGTO) sounds as if it might be in the clear, too, despite war worries by customers. According to a Reuters report, Legato CFO Andrew Brown assured investors at a Deutsche Bank Securities conference this week that the looming war with Iraq has not been felt at Legato.

War worries or not, when the battle cry rings out, let's hope it doesn't last long.Jo Maitland, Senior Editor, Byte and Switch