MARKET SHARE

Technology shares have had quite a rally over the past few months following large declines through the winter. All three types of information technology service firms we track ? traditional commercial, e-business commercial and government ? had their stocks hit their 2001 lows in the first week of April. Since then, shares of the traditional IT service firms have climbed an average of 37 percent, the e-business group is up 59 percent, and the government integrators are up 49 percent. Will these stocks continue to climb through the summer? In my opinion, that would be difficult, given the continued tough IT spending environment. None of the commercial IT service companies I speak with are indicating demand is picking up significantly. Some sectors are showing life, while others continue to decline.Even many of the private commercial IT service firms I speak with that had strong business as recently as February or March now are facing reduced demand, missed forecasts and, in many cases, layoffs. Accenture Ltd., formerly Andersen Consulting, recently announced a small work-force reduction of 1,400 of its 75,000 employees. Accenture is in registration for its initial public offering.There also have been more indications of weakening business in Europe, which is not a good sign for the larger integrators. Weakness in Europe likely will have a negative impact on these integrators, whose strong international growth has helped offset weaknesses in U.S. business. As a result of these factors, I believe many IT service firms will have to lower their earnings expectations for the year once again, though most rightfully will be bullish about prospects in 2002. Weakness among the quality IT service stocks over the next couple of months should offer investors a good buying opportunity. However, the major issue I am tracking on federal IT spending is the impact of the administration's change over the next year ? particularly on the defense side ? an issue that could derail the strong performance of the government IT firms. Although President Bush's victory does not seem to be having a positive or negative effect on federal IT companies' business this year, it could cause some disruptions next year following completion of his political appointments.As the new senior management teams of the agencies are assembled, program priorities will be determined, and they may or may not match the previous team's plans. No one is really sure how changes coming from the defense review will impact IT spending. However, as the United States emphasizes its competitive advantage in technology, instead of manpower, it should mean greater opportunities for defense-oriented IT service firms. Among the state-focused integrators, the economy is my biggest concern. With tax receipts coming in below budgeted levels over the past two quarters, states are looking to cut costs. The integrators I speak with have not yet seen the impact of cost cutting on their IT programs or future bidding opportunities. However, should the economy continue to soften, IT programs likely will be a source of funds for some states next year. As was the case on the commercial side, states spent heavily preparing for year 2000 issues, resulting in relatively little enterprise systems development activity in 1999 and 2000. Should programs be delayed because of the slowing economy now, we will likely see significant activity in a year or two.Certain state IT initiatives, particularly performance-based contracts, likely would not be impacted by budget shortfalls. In fact, these types of programs, which are usually a type of transaction or collection system such as tax or child support, could show stronger growth in a tough budget environment. While I believe the stocks of IT service firms will pull back because of concerns about near-term earnings over the next month or two, they likely will rebound in the fall as investors focus on 2002 earnings.