Magazine article Talent Development

E-Finance: Corporate Knowledge Services Recovery Is Delayed

Magazine article Talent Development

E-Finance: Corporate Knowledge Services Recovery Is Delayed

Article excerpt

Recent channel checks and industry barometers (earnings, research studies, and so forth) indicate that the difficult environment has persisted and, in some cases, worsened. Based on our research, we're adjusting our estimate for the timing of a corporate spending recovery. Our revised corporate IT spending outlook for 2Q02 assumes a continuation of instability in the marketplace, with sequentially flat to declining corporate spending relative to 1Q02. For the remainder of corporate year 2002, we expect to see a flat 3Q and modest improvement in 4Q--versus prior expectations of a spending recovery in the back half of the year. We regard the first quarter of 2003 as a possible inflection point due to pent-up demand for software and services and the advent of new budget cycles. We expect 1QFY03 to be a positive year- over-year comparison for most software companies. That should entice investors, based on positive momentum going forward.

Currently, we don't see any catalyst for the software group throughout the summer or 3Q02. We expect negative economic and corporate news to continue to weigh on the stocks, limiting any upside.

Although we don't believe the industry's stock performance is poised to move upward, there are some catalysts to look for, including a corporate spending recovery mergers and acquisitions, and valuation metrics. Based on our due diligence, however, we believe an IT spending recovery before FY03 is unlikely. We don't expect corporate earnings to improve enough near term to increase IT budgets in the back half of the year. Investors may look to front run the recovery by buying stock at the end of 3Q02, but that could prove dangerous if the spending increase doesn't materialize.

We view M&As as a possible catalyst, but not until sellers lower valuation expectations. However, sellers--due to pride, ego, and invested capital--haven't adjusted valuation expectations downward to reflect the current market environment. Activity could pick up in late Q3 or Q4 as cash balances decline and reality sets in, pushing deals over the hump unless hampered by dilution, burn rates, and low stock prices. Valuation is the most likely catalyst for the group.

As analysts and investors shift their perspectives and valuation metrics to 2003, stocks in the group should look considerably more interesting on the basis of valuation due to the expected improvement built into current 2003 estimates. …

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