articles Ratings /ratings/en/research/articles/200921-2020-global-it-spending-outlook-improves-through-covid-19-disruption-11657581 content
Log in to other products

Login to Market Intelligence Platform

 /


Looking for more?

In This List
COMMENTS

2020 Global IT Spending Outlook Improves Through COVID-19 Disruption

COMMENTS

COVID-19 Impact: Key Takeaways From Our Articles

NEWS

SLIDES Published: Italian Corporates In The COVID-19 Era: First Steps On A Steep Recovery Path

COMMENTS

COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, International Public Finance, And Project Finance To Date

COMMENTS

Elevated EBITDA Addbacks Are A Continuing Trend


2020 Global IT Spending Outlook Improves Through COVID-19 Disruption

S&P Global Ratings took 54 negative rating actions in March and April 2020 because of COVID-19-related concerns. Since then, financial markets have stabilized and economies have gradually reopened. Work-from-home-related spending and an accelerated move to the cloud boosted first-half 2020 global IT spending above our expectations. The software segment, despite growing less than we had forecast, outperformed all other segments, in part because of its mission-critical nature. We expect enterprise customers will pull back on spending in second-half 2020, given the slow pace of economic recovery. We have revised our 2020 global information technology (IT) spending outlook.

Our 2020 IT Spending Outlook Has Improved

We now expect global IT spending to decline 3% this year, a modest improvement from our April 2020 forecast for a 4% decline. First-half 2020 IT spending exceeded our expectations, as work-from-home trends led to solid sales of PCs and related peripherals. Data center spending, especially by hyperscale cloud providers, jumped as enterprise customers accelerated their move to the cloud to create more flexible and resilient remote work environments. Semiconductor sales also exceeded expectations; supply chain issues were mostly resolved, and memory fundamentals improved during first-half 2020. Software segment business trends remained steady, led by large investment-grade issuers with high recurring revenues, though smaller issuers, mostly speculative-grade, that were still undergoing transitions to subscription from on-premise faced headwinds as some customers deferred long-term renewal decisions because of the macroeconomic uncertainty. We expect IT services, which make up nearly 40% of IT spending, to decline about 3% as most organizations prioritize their budgets and delay growth-oriented projects that have longer payback periods.

Table 1

S&P Global Ratings' Global IT Spending Forecast (%)
Actual (2019) Previous forecast (April 2020) New forecast (September 2020)
Macro
Global real GDP growth 2.9 (2.4) (3.7)
U.S. real GDP growth 2.3 (5.2) (5.0)
China real GDP growth 6.1 1.2 1.2
Eurozone real GDP growth 1.2 (7.3) (7.8)
Revenues
Global IT spending 1.5 (4.0) (3.0)
IT services 3.0 (3.0) (3.0)
Software 8.0 2.0 1.0
Semiconductors (13.0) (7.0) 1.0
Network equipment 2.0 (5.0) (5.0)
Mobile telecommications equipment 4.0 (1.0) 0.0
External storage 1.0 (9.0) (7.0)
Shipments
PC (1.0) (10.0) (4.0)
Smartphone (2.0) (9.0) (7.0)
Server (6.0) (5.0) 5.0
Printer N/A (12.0) (12.0)
IT--Information technology. e--Estimate. N/A--Not applicable. Source: S&P Global Ratings.

On the other hand, the second-half economic recovery we had previously expected will likely be more gradual as efforts to contain the pandemic continue. With the work-from-home tailwind largely behind us, we expect second-half IT spending to lag our prior expectations, with enterprise and commercial customers especially curtailing their spending amid a slow economic recovery. Nevertheless, modest improvement in overall global IT spending in 2020 reflects the better-than-expected first-half results.

We took 54 negative rating actions, mostly in the speculative-grade category, in March and April as a result of pandemic-related concerns. Since May, financial markets have stabilized, economies have gradually reopened, and our technology issuer rating actions have been more balanced. We could revise more rating outlooks to stable over the next six to nine months if the COVID-19 infection rates decline.

Hardware Segment Benefits From Work-From-Home Trends

We now expect 2020 hardware sales to be more resilient than we had previously anticipated. A slow second-half recovery, especially by enterprise customers will offset better-than-expected first half sales. Global PC shipments declined about 9% year over year during the first quarter as the first wave of COVID-19 cases hit Asia. Second-quarter shipments jumped 11% year over year, according to International Data Corp. (IDC), following some reopenings and as moves to work from home drove a surge of demand across enterprises and consumers. While the work-from-home benefit will dissipate through the third quarter, we now project PC sales will decline 4% in 2020, less than our April forecast of a 10% drop. Our forecast for smartphone shipments has also improved to negative 7% from negative 9% as China demand improves and 5G phone launches continue.

Investments in both public and private clouds remain a bright spot in an otherwise weak macroeconomic backdrop and shrinking IT budgets. IDC forecasts cloud-related IT infrastructure spending will grow in the double-digit percent area for both public and private clouds over next several years. Capital investments by hyperscale cloud providers should jump more than 20% in 2020. As a result, we forecast server shipments will grow near 5%, up from our previous expectation for a 5% decline. External storage sales will remain weak, but the decline will improve to 7% from 9%. Most of our rated issuers benefit only modestly from the improved outlook, though, because cloud providers mostly use hardware from original design manufacturers, which means it's cheaper and built for their precise specifications. We still expect Dell Technologies Inc. and Hewlett Packard Enterprise Co. storage and server revenues to decline during calendar 2020 as enterprise IT spending remains weak.

The Semiconductor Industry Should Grow In 2020

Given the modestly improved IT spending environment, steady recovery in China, and customers looking to mitigate potential supply chain concerns, we now expect global semiconductor revenues to increase 1% in 2020, up from our prior forecast for a 6% decline. First-half results were mixed: Analog and microcontroller sales were down (reflecting weak auto and industrial end markets), but logic and memory segments were resilient due to ongoing investments in data centers and hardware sales related to work-from-home practices, gaming, and 5G phones. World Semiconductor Trade Statistics reported that second-quarter semiconductor sales were up 5% year over year. While positive momentum has carried into the third quarter and we expect growth drivers such as 5G to accelerate, we do not expect this momentum to continue, given overall macroeconomic weakness and slowing spend among enterprise customers. Memory pricing should also revert to normal erosion after a strong first half.

In all, we expect memory sales to grow more than 10% while nonmemory sales decline about 3%. While we remain optimistic about industry growth expectations over the longer term, we maintain a cautious view over the near term, not just because of the coronavirus, but also because of U.S.-China trade tensions, which could inflict unforeseen shock to the industry. Additional export bans by the U.S. would pose more headwinds for the semiconductor and semiconductor equipment industries because China consumes about 25% of the global semiconductor production.

Software Is Resilient, But Not All Providers Benefit

The software industry continues to outperform other technology verticals, but we are adjusting our revenue growth slightly to 1%, down from our previous forecast of 2%. This is still well above our expectations for global GDP and IT spending growth because companies find their software consumption to be nondiscretionary business spending, and they prioritize digital transformation projects to spur automation and improve efficiency. Software providers that are viewed as mission critical (customer relationship management, enterprise resource management), focus on up-market, larger-scale enterprise customers (those in the Fortune 500), or are not overly exposed to industries hurt by the pandemic (retail, restaurant, lodging, and transportation) continue to see good performance. These customers tend to have sufficient liquidity resources and can implement pre-pandemic digital transformation strategies.

Investment-grade issuers such as Microsoft Corp. and born-in-the-cloud companies such as Salesforce.com Inc. and ServiceNow Inc. are generating remarkable growth as enterprises seeking digital transformations continue to migrate to the cloud. Software-as-a-service, which represents about one-third of the total software market, should continue to grow near the high-teen-percent area as it takes share from on-premise software.

At the same time, issuers in the early stages of transitioning to subscription models from on-premise face headwinds because some customers are deferring long-term renewal decisions until economic conditions improve. Major software implementations requiring upfront payments are also facing pushbacks as customers realign IT budgets to support remote work projects. Additionally, we don't expect many smaller companies will be willing to risk IT disruptions that could arise from a complex, large-scale implementation until the macroeconomic uncertainty lessens. As a result, smaller companies, especially privately held issuers in the 'B' rating category whose growth depends on replacing an incumbent, may face revenue declines.

IT Services Growth Will Be Elusive This Year

Business trends for IT service providers remain weak, and we expect IT services will decline about 3% overall in 2020. While digital transformation remains an important business initiative, most organizations are prioritizing their IT spending on those necessary items to keep their workforces engaged and productive, and they're opting to delay growth-oriented projects that have longer payback periods. The lack of visibility regarding a vaccine or an effective COVID-19 treatment will continue to pressure business volumes and discourage clients from committing to large and complex projects. Furthermore, industry verticals such as travel and leisure, transportation, energy, and retail will likely have a long recovery path. On the other hand, we believe the pandemic has forced IT service providers to learn and leverage the remote delivery of resources, as well as focus on optimizing resource utilization in search of higher margins when revenue growth is elusive. Those who are the most successful meeting their clients' needs now will be reap benefits as trusted technology partners when IT spending growth inevitably returns.

Our Rating Trajectory May Improve Over The Near Term

We took 54 negative rating actions (both downgrades and outlook changes), virtually all in the speculative-grade category, in March and April, as a result of pandemic-related concerns. Rating actions since May have been far fewer (chart 1) and more balanced as economies have gradually reopened and financial markets have stabilized. Although our visibility is limited amid the pandemic, we could revise rating outlooks to stable from negative over the next six to nine months if COVID-19 infection rates decline.

Over the longer term, we expect the pandemic to accelerate digital transformations among companies as they look to improve their business resilience and meet the changing demands of their workforces. This will require significant investments in both the public and private clouds, which are powered by software and artificial intelligence and enhanced by security. The technology industry may undergo bouts of heavy investments followed by periods of digestion, but we expect global IT spending growth to significantly outpace that of global GDP over the next decade.

Chart 1

image

This report does not constitute a rating action.

Primary Credit Analyst:Andrew Chang, San Francisco (1) 415-371-5043;
andrew.chang@spglobal.com
Secondary Contacts:David T Tsui, CFA, CPA, San Francisco (1) 415-371-5063;
david.tsui@spglobal.com
Geoffrey Wilson, San Francisco + 1 (415) 371 5061;
geoffrey.wilson@spglobal.com
Christian Frank, San Francisco + 1 (415) 371 5069;
christian.frank@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.