Tech bouncing back

Technology companies are starting to reap the benefits of an upswing in the replacement cycle, which was put on hold when SA went into its first recession in several years, say analysts.

SA's economy grew 0.9% in the third quarter of last year, the first quarter of growth since the fourth quarter of 2008, when SA started going into a recession. The economy contracted by 7.4% in the first quarter of the year, and 2.8% in the second quarter, after the first decline in growth in a decade in the fourth quarter of 2008.

The global economic crisis resulted in local companies holding back on upgrading hardware, preferring to hang onto machines for longer. However, the tide seems to be turning, with two companies in the sector expecting to report good earnings growth later this month.

Mustek, which is home to brands such as Mecer and Brother, expects headline earnings per share to be up by more than half for the six months to December. Similarly, rival computer distributor Pinnacle Technology Holdings says fully-diluted headline earnings per share should improve by between 33.7% and 41.8 %.

Absa Investments analyst Chris Gilmour says these early indicators show the cycle is turning for hardware companies, and could continue to move upwards for the next two to three years.

He says that when the economy went into a downturn, many people cut back on hardware spend. “Hardware is one of the easiest things to cut back on.”

However, says Gilmour, spending can only be frozen for so long before it starts impacting on productivity because of the downturn. In addition, as systems become outdated, there is a lack of support and the IT environment becomes unsafe. “Eventually you have to replace.”

Gilmour expects technology companies to reap the benefits of the upswing for some time as companies are becoming more confident now that the economy has moved into a growth phase.

However, the South African Chamber of Commerce and Industry's Business Confidence Index for December shows the market was uncertain of what the future would hold. The index retracted by 0.6 points in December after a claw back of 1.9 points in November.

“The consequences of the recession still pervade the local economy and international economic developments have failed to be reassuring,” commented the chamber.

Frost & Sullivan ICT industry analyst Spiwe Chireka says companies cannot indefinitely hold off on replacing outdated hardware.

She explains that Frost & Sullivan had expected to see spending start returning to the market about now, as the company had anticipated that refreshments would start happening 12 to 18 months after the height of the economic crisis at the end of 2008.

In addition, vendors have released new technology into the market, Chireka adds.

However, the return to growth is off a low base and 2010 will not be all plain sailing for IT companies. Irnest Kaplan, MD of Kaplan Equity Analysts, previously cautioned that 2010 would continue to be a difficult year for the ICT industry.

“It's safe to say that it will be very tough in the first half of next year,” said Kaplan. He was hopeful the economy will start improving in the second half of the year.