Market Watch

All signs in January and February seemed to point to a modest rebound in commercial information technology spending for the first quarter of 2002. Then came March. With numerous software companies, including two of the biggest enterprise resource planning companies, PeopleSoft Inc. and Oracle Corp., preannouncing lower-than-expected results, it is obvious that the widely expected turn in IT spending will not occur in the first quarter. It will likely be more gradual than previously expected and will occur with improvement in the economy and corporate profits. Most of the companies are saying the same thing: Business looked good until the last week or two of March, when, for some reason, clients backed out of or delayed deals. Expectations from some companies' managers and investors about the pace of the rebound obviously jumped ahead of actual spending. While the software companies seemed to expect a quick rebound, we are not hearing that commercial IT services demand has been rebounding. Most of the companies indicate they believe demand in the IT services industry bottomed in the fourth quarter of 2001, or for some companies, in the first quarter of 2002, and that there should be sequential improvement in business through 2002. One indicator that commercial IT service business is improving was consulting leader Accenture's report that its preliminary fiscal second quarter 2002 (February) results were generally ahead of investors' expectations. However, revenue growth in the quarter was an anemic 1 percent, the lowest in 13 years for the company. In general, Accenture indicated that the IT services industry (particularly, more discretionary consulting) bottomed in its second fiscal quarter, though outsourcing demand has remained healthy for a while now. The company indicated that growth would likely turn up, but at a moderate pace for at least a couple of quarters. Significantly, Accenture's consulting backlog, which has been weak (though relatively stable) for the past several quarters, showed small but material increases in January and February.Accenture's observations support my overall view that commercial IT services have bottomed, and generally should show gradual sequential improvement through the rest of 2002, as the economy and clients' business prospects improve. While I continue to believe that a quick turn in demand for IT services is unlikely, I believe that business in the industry has stabilized and the outlook is improving.However, with no acceleration in demand in the first quarter 2002, reported revenue from the commercial companies could be a little shy of expectations. Still, I believe earnings per share generally will be on target for the commercial sector, as most of the companies have shown strong cost management over the past couple of quarters, and billing rates and employee utilization seem to be stable.I plan to discuss the federal integrators' earnings next month, but as of now there have been no preannouncements, and no changes in their positive outlooks. The most-asked question I hear in the federal space is: "Where is all the homeland security money?" Congress seems to be trying to ask the same question. Nonetheless, contracting activity appears to be high in the federal marketplace, with most expecting the increased defense and homeland security spending to translate into new contracts later this year.