As with so many companies in the information technology field, Y2K has proven to be both a blessing and a curse for IT Staffing Ltd. and CEO Declan French.
French, who took his fledgling consulting firm public last summer, deliberately steered away from Y2K projects last year. Not only were they lousy, tedious work, French reasoned, but fixing someone else’s problems would do little to advance the careers of his consultants.
That proved to be a costly miscalculation.
“It really got us good,” French recalled. “For the past two or three quarters, most of our clients put most of their new projects on the shelf. They were told by their boards to freeze everything once they had their main systems Y2K compliant.
“We wound up having to pull all kinds of people off projects and put them on the bench.”
Other suppliers found themselves in similar predicaments as large companies went into “lockdown” mode in late 1999. Sales among hardware manufacturers, software developers and systems integrators slowed as customers forestalled purchases that might upset the delicate balance of their computer systems.
But behind all those darkened computer screens lurks a silver lining. Now that Y2K has come and gone, industry watchers expect the floodgates will open to make room for computer purchases that were “crowded out” by Y2K fixes. At the height of the problem, analysts estimate companies deferred more than $50 billion worth of IT purchases, and that means 2000 could be a tremendous year for the computer industry.
IT Staffing could very well be a case in point. French expects his company’s profits will triple in 2000 as sales jump 81 percent to reach the $68 million mark. This “absolutely banner year” will be fueled through a combination of internal growth, acquisitions and Y2K.
“The bad news is (Y2K) hurt us,” he explained. “The good news is we’ve got some exciting projects to look forward to. Y2K has highlighted the need for more systems work, which is great for us.”
Of course, not everyone agrees that Y2K has victimized the sector. Technology analyst Art Russell said that Y2K is a “convenient excuse” for companies whose expectations have come up short.
He maintains computer demand has been “pretty strong” throughout 1999 and he looks for an uptick in January sales. That surge will have tandem drivers: corporate spending and consumer dollars.
“There’s been an explosion of demand on the consumer side as everyone races to the Internet,” said Russell, who works at Edward Jones in St. Louis. “Even potentially delayed (corporate) purchases have been offset by incredibly strong sales of personal computers.”
Both sides of the equation should get a boost this winter as Microsoft Corp. unveils its much ballyhooed Windows 2000. Russell said that computer users will need new, faster hardware to take advantage of all the bells and whistles.
Companies like Dell Computer Corp. and Gateway, Inc. are among the best-positioned hardware manufacturers to capitalize on this situation, Russell said. He rates Dell a buy and Gateway a strong buy–and Y2K isn’t the primary reason.
Dell, which has been Nasdaq’s single best-performing stock for the past three years, is increasing its presence in the consumer area and boosting its international sales. Russell said the company is also expanding from manufacturing, sales and marketing into storage and other business services, moves that Russell sees as corporate opportunities.
Russell applauds Gateway’s pioneering spirit, which has allowed it to tap successfully into the consumer side of the market. It’s deceptively simple: Rather than selling a computer to a customer, sell that customer a bundle that could include Internet access, scanner, printer, software–even financing.
Gateway projected these “beyond-the-box” sales would account for 10 percent of its total profits by the end of 1999 and Russell said the were “north of 15 percent.”
“These companies are well positioned, but the valuations of these stocks are another story,” Russell said. “The key for investors is to take a look at your portfolio and if you’re overweighted in technology in general, you might consider locking in your profits and reallocating to areas where there’s still value.”
If hardware manufacturers expect a phenomenal year, their software counterparts aren’t far behind. Technology strategist Andrew Barrett said stocks from this sector “got killed” as Y2K forced companies to spend money to upgrade their hardware, leaving software purchases for another time.
“That lasted until September or October, and by that point most everybody had fixed their Y2K problems,” said Barrett, a vice president with Salomon Smith Barney, Inc. in New York. “All this spending on software that’s been put off for the past two or three years? That’s what’s going on now.”
He explained that software sales in 1999 amounted to $135.3 billion. Barrett expects that number will climb nearly 30 percent this year to reach $177.2 billion and another 14 percent on top of that in 2001 to reach $201.4 billion.
Barrett’s bullish on Oracle Corp., rating it a strong buy. He’s impressed with the products offered by the software giant as well as the market share it’s captured. Oracle’s shift to e-commerce and Internet solutions software might cause a “little bit of a pause” in the first quarter, but that doesn’t much faze him.
“They’ve got one of the best product pipelines that we’ve seen this company exhibit,” he said.
He sees German software giant SAP AG. in slightly weaker tones, rating the company an “outperform.”
“They’ve been lackluster to this point,” he said. “We’re not convinced that SAP is going to have the product pipeline that’s robust enough to really take advantage of this e-commerce boom.”
Peoplesoft, Inc. got caught by Y2K problems, compounded by a weak product pipeline and a management team unable to deal with these issues, according to Barrett. He rates the company as a hold, calling Peoplesoft a turnaround story that needs to start displaying positive results.
Of the three primary categories of IT providers, only systems integrators like MicroAge Inc. and Inacom Corp. face soft prospects in this new year. Analysts like Michael Whitney of Advest Inc. in Boston think both these companies need to decide whether they want to resell computers or provide services, then do it.
He rates both companies a market “perform,” noting that Microage needs to decide whether it wants to be a distributor or a systems integrator, then sell the portion of the business it doesn’t want. Microage recently lost about 25 percent of its revenues when it didn’t make the cut as one of Compaq’s four domestic distributors.
“They need to focus on building their service capabilities,” Whitney said. “From a revenue standpoint, it’s really very simple: They get 30 to 40 percent gross margins on their services as opposed to 4 to 9 percent on their hardware. The mixed model isn’t working anymore.”
Inacom is going through a massive restructuring that will divide sales between their product and services divisions. Whitney called this a “risky move” that could alienate customers who suddenly have not one but two points of contact.
Whitney recommends that both Microage and Inacom get their service businesses ready to address market demand.
“I think (either) one of these stocks could easily double,” he said. “The question is execution on their part. They’re in transition in 2000, and it’s a painful transition.”
