Internet & Technology
Monday, February 9, 2004
Tech Leasing Firm Sees Real Recovery Ahead
Printer version
--------------------------------------------------------------------------------
E-mail this article
--------------------------------------------------------------------------------
Reprints and webprints
Tech Leasing Firm Sees Real Recovery Ahead
BY DOUG TSURUOKA
INVESTOR'S BUSINESS DAILY
Some folks still have their fingers crossed about a recovery in tech spending. Bill Zadrozny says they can relax a bit.
The rebound looks to be real, says the CEO of Siemens Financial Services Inc., an equipment finance and leasing firm.
Zadrozny heads a U.S. unit of Siemens AG (SI) that lets clients revamp their information technology systems by financing or leasing the latest equipment. The division offers everything from laptops and databases to the mainframes that run networks.
This gives Zadrozny's business a feel for the pulse of overall tech spending. His verdict: All signs point to a sustainable rebound in the corporate IT market.
His confidence is based on equipment financing and leasing since the fourth quarter of last year.
"All the building blocks are in place. So long as there's no shock to the system, we're in pretty good shape," Zadrozny said.
The big driver, besides an improving economy, is that clients have put off buying badly needed IT equipment the last two years. As the general economic recovery gains force, they're in a rush to upgrade existing systems.
Zadrozny spoke recently with IBD about the rebirth of tech spending.
IBD: Why are companies starting to spend on technology again?
Zadrozny: Their equipment is starting to get tired. What happened is they overinvested for the so-called Y2K problem in 1999 and then hung on to this stuff.
IBD: Can you give an example?
Zadrozny: Sure. In the late 1990s, companies would change applications on average every 24 to 27 months. Now they've been stretching their applications anywhere from 42 to 48 months. What I'm hearing is their equipment and applications are tired and need replacement.
Some people want to see if the recovery in tech spending is confirmed. But the activity level is definitely higher than it's been in the last two years.
IBD: What other evidence do you have of a recovery in tech spending?
Zadrozny: Our perspective's based on three factors. The first is stepped-up financing and leasing activities in IT by our clients. The second is conversations we've had with the IT vendors. These are people who deal in third-party business software and IT equipment sales. The third is information we get from our peers in the equipment financing and leasing business.
IBD: When did the turning point happen in tech spending?
Zadrozny: Starting in October of last year. We started to see increased activity in a lot of areas, and it continued through the fourth quarter. It was particularly noticeable in the desktop (PC) area. Spending on software also picked up — especially in the enterprise and relational areas. But this wasn't as much as desktops. There's still a little lag.
IBD: What tech industry sectors seem to be buying?
Zadrozny: We're seeing an increased funnel in the telecom area. Salespeople in telecom equipment are seeing twice the level of activity they saw last year. What's leading telecom area spending is voice over IP (Internet protocol). It's got customers in the door starting to place orders.
IBD: What signs should we watch for to confirm that a tech spending recovery is really under way?
Zadrozny: If we see a "positive" number for tech spending in the first quarter of 2004, we're well on our way. But the key is the first quarter of this year.
IBD: Why?
Zadrozny: There's been a decline in tech spending during the first quarter for the past two years. Spending in business equipment and software declined, for example, by 4% to 6% in the fourth quarter of 2001.
But if we continue to see an increase in tech spending for the first quarter of 2004, we'll know the recovery's real. If we go on to see a significant increase in the second quarter, confidence will really return to the market.
IBD: But how long will the recovery in tech spending last?
Zadrozny: We have to see first if this recovery is confirmed in the first quarter.
This will tell you where the trend's developing, with an emphasis on reinvestment in the second quarter.
IBD: Can you hazard a guess on how long a tech recovery will last?
Zadrozny: So long as there are no shocks that will dramatically affect consumer spending, we are going to see an up cycle for at least a couple of years. We'll see.
IBD: Will demand for tech leasing services decline as the economy heats up?
Zadrozny: No. If the economy heats up and more (productive) capacity is needed, clients will probably shorten the terms on their leases. They'll want to refresh the leases more frequently.
IBD: Can you give an example?
Zadrozny: Companies used to refresh the leases for the laptops they gave their salespeople every 24 to 27 months before the tech recession.
Right now, they're refreshing them every 37 months. So they'll be shortening these leases as the economy picks up.
IBD: Do you think interest rates will affect tech spending?
Zadrozny: I don't think interest rates will impact it.
Our customers' rates are so low, they are not an issue. Rates have been at historical lows for longer than a year, and that has not induced customers to invest in IT equipment.
What has induced them to invest is demand for their products coming back.
