Q2 IT Spending

This excerpt is from our complimentary Q2 2012 Software Industry Financial Report which can be downloaded here:  http://www.softwareequity.com/research_reports.aspx

SEG carefully monitors enterprise IT spending each quarter as a means of forecasting downstream public software company financial performance and software M&A deal volume. Simply put, we long ago determined that healthy IT spending drives public software companies to buy, not build, in response to growing market demand. To provide some perspective, we estimate every percentage increase/decrease in IT spending equates to approximately $5 billion.

Our readers will recall large enterprises cut back sharply on spending for software, hardware and IT services in 2009 during the economic downturn, when IT capital spending declined by more than 10%. The spending cut had an almost immediate and traumatic impact on public software company revenue and software M&A activity and valuations declined. In 2010 and 2011, enterprise customers loosened their purse strings and domestic IT capital spending grew 8% and 6%, respectively.

Reflecting the increased uncertainty in the global economy, analysts continue to forecast tepid worldwide IT spending forecasts for 2012. Goldman recently lowered its 2012 forecast of worldwide IT spending from 4% in January to 3%. Goldman attributed the reduction to lower GDP growth in advanced economies. Gartner also forecasts 3% growth in worldwide IT spending, up from their previous estimate of 2.5% in 1Q12.

When increasing its IT forecast, Gartner pointed to a stabilized outlook despite the Eurozone’s debt and banking crisis, a weak US recovery, and China’s GDP slowdown. Among Goldman, Gartner and IDC the consensus for domestic IT spending in 2012 is 3% (Figure 1).

Though IT spending will grow only modestly, some will fare better than most. Gartner forecasts enterprise spending on public cloud services will reach $109 billion in 2012, and grow to $207 billion by 2016.

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