US downturn to hit hardware more than software

( Reuters ) - With fears of a U.S. recession bearing down on technology companies, the sector's safest bets appear to be in business software, while makers of computers and consumer gadgets look vulnerable.

John Chambers, chief executive of tech bellwether Cisco Systems Inc, said on Wednesday that CEOs in the United States and Europe were being more cautious than he has seen in many years.

"If there's a downturn, not all sectors will be affected equally," said Stephen Minton of market researcher IDC. "The first round of cuts would affect the PCs and the devices and the software that goes directly onto those PCs and devices."

Analysts say business software makers look better placed to ride out a recession as they help boost companies' efficiency, but prospects are dimmer for hardware manufacturers like Dell Inc and Hewlett-Packard Co and chip makers Intel Corp and Advanced Micro Devices Inc.

Nucleus Research analyst Rebecca Wettemann, who helps executives figure out how tech investments can boost or hurt profits, said cost-conscious companies are now willing to use hardware, such as Cisco routers, until it breaks.

"They are saying: 'If I can't find a direct relationship between the infrastructure and the value it is delivering, then I am hesitant to invest,'" Wettemann said.

Tech research firm Gartner forecasts global spending on business software to grow 8.2 percent this year to $191 billion, which is more than twice as fast as estimated hardware sales growth of 3.4 percent to $394 billion.

AMR Research Senior Vice President Jim Shepherd said he now expects overall corporate technology spending to rise just 2 percent this year, compared with his firm's October forecast of 4 percent growth, based on conversations with tech executives.

Data storage equipment makers EMC Corp, HP and Sun Microsystems Inc are vulnerable because of excess capacity among many corporations, said Yankee Group analyst Zeus Kerravala. HP and Sun also sell servers and software.

"Hardware is becoming increasingly commoditized," said Kim Caughey, a senior analyst and portfolio manager at Fort Pitt Capital Group, which oversees about $1.2 billion for clients.

"If you are going to invest money in a downturn, you will want to invest in productivity," Caughey said. "The thing that is not a commodity and is boosting productivity the most would be process (software) and services."

In some cases, a breed of computer program known as virtualization software can boost the efficiency of existing equipment. VMware Inc, for example, sells products that allow one server computer to do the work of 10 or more machines. Citrix Systems Inc offers similar products.

The S& P 1500 Computers & Peripherals Index has lost 19 percent so far this year, while the S& P 1500 Software Index has fared slightly better, down 17 percent.

Analysts cite business management software makers SAP and Oracle Corp among the better bets. They sell programs that companies use to boost productivity, cut costs and comply with regulations. About half their revenue comes from high-profit-margin service maintenance contracts.

Software makers who host products at their own data centers and deliver it to customers via Web browsers may also perform well, as initial costs are minimal, analysts said. Two examples are Inc and NetSuite Inc N.N.

Besides computer hardware, some consumer electronics are also forecast to hurt from a recession.

Citigroup is forecasting 10 percent growth in cell phone handset unit shipments to 1.26 billion this year. In the worst-case scenario of a consumer-led economic slowdown, it said shipments instead could fall 5 percent.

"No (handset) vendor is immune from a recession - we believe that all players would see deteriorating fundamentals and stock price declines," a Citigroup research report warned on Thursday. "However, companies with the highest North American exposure are likely to suffer most."

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