The Dog Days of August were a rough time for Wall Street techies. Signs of a technological slowdown seem to have spread inexorably to other corners of the tech world. Now, with the all-important fourth quarter approaching — the period when IT spending is typically strongest — a nail-biting end to the year is set.
As winter began, there was still reason to hope that the effects of high inflation and economic instability would be limited. PC sales fell as consumer confidence slumped. There has been a slowdown in some corners of the digital advertising market, with Apple’s privacy changes hitting companies that depend on collecting personal data from iPhone users. They include Snap, which responded last week by cutting 20 percent of its workforce.
As August wore on, however, cracks began to appear in the demand picture. This is not lost on investors. A strong tech rally on Wall Street ran out of steam in the middle of the month, with companies in the IT world taking some big hits.
Take the software sector. After taking a beating since last November, software stocks staged a brief recovery in early August, rising 25 percent from their lows. But they have since given up most of the gains and the Bessemer Emerging Cloud Index of software companies is down 56 percent from last year’s high.
With several IT companies wrapping up their fiscal quarters in July and reporting results over the past two weeks, the picture is not uniform, but signs of weakness are widespread.
On the positive side, networking company Cisco Systems and data storage company NetApp both reported no signs of customer pullbacks. Some software companies continue to buy big new contracts, riding strong global demand as businesses digitize more of their operations and manage data floods. Data warehousing company Snowflake maintained its red-hot growth, while HR software firm Workday shrugged off worries from a quarter-year rally.
But other companies have noticed clear evidence that demand is weakening, and in some cases have cut their financial forecasts for the rest of the year. In the chip sector, surprisingly sharp inventory adjustments at some of the leading chip companies, including Nvidia and Micron. While the inventory restocking was the main factor, several companies said the erosion in end-use demand for chip-based products extended beyond the consumer PC and smartphone markets.
In the past two weeks, several software and hardware companies have provided further evidence that large IT buyers are becoming more cautious. Software company Salesforce surprisingly cut its revenue guidance in July after noting that customers were becoming “more deliberate” about their purchases. Meanwhile, hardware maker Dell said customers are taking longer to sign new server purchases and deal sizes are shrinking, both common signs of IT spending cuts.
As is common in such times, lengthening sales cycles have been responsible for much of the slowdown. When faced with greater business uncertainty, customers take longer to decide before signing new technology purchases and seek reviews by senior managers.
Optimistically, this would delay rather than completely eliminate spending. But even if tech companies want to believe that all purchases of their products are necessary, some deeply regulated deals are bound to end as customers become more vulnerable.
For now, there are still reasons to hope that the results will be limited, at least this year. Increasing capital spending by large cloud companies is still acting as a powerful engine in the IT world.
Also, after the supply constraints of the past two years, there is still a lot of pent-up demand that will take time to fulfill. Hewlett Packard Enterprise said last week that order backlog has doubled from last year and server orders are five times the normal level. Tight supplies also pushed up prices. Although HPE reported a sharp drop in unit sales, average price increases more than made up for the shortage.
But as demand in various end markets of the tech industry begins to wane, such sales cushions may provide brief relief.
Richard.waters@ft.com
