- We are revising our 2020 global information technology (IT) spending to negative 3% year over year, up from our previous forecast of a 4% decline.
- First-half 2020 global IT spending held up better than we had expected because of work-from-home-related spending and an accelerated move to the cloud, but second-half 2020 spending will be weaker than expected as enterprise customers pull back amid a slow economic recovery.
- The software segment has performed the best, despite growing less than we previously forecast, because it remains mission critical within enterprises.
- Hardware sales will decline the most, but they will still perform better than expected, and semiconductor sales will grow this year in large part because of the memory market.
- Digital transformations, accelerated by the pandemic, require significant investments over the longer term, and as a result, we expect the rate of increase in IT spending to exceed global GDP over the next decade.
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.
|S&P Global Ratings' Global IT Spending Forecast (%)|
|Actual (2019)||Previous forecast (April 2020)||New forecast (September 2020)|
|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)|
|Global IT spending||1.5||(4.0)||(3.0)|
|Mobile telecommications equipment||4.0||(1.0)||0.0|
|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.
This report does not constitute a rating action.
|Primary Credit Analyst:||Andrew Chang, San Francisco (1) 415-371-5043;|
|Secondary Contacts:||David T Tsui, CFA, CPA, San Francisco (1) 415-371-5063;|
|Geoffrey Wilson, San Francisco + 1 (415) 371 5061;|
|Christian Frank, San Francisco + 1 (415) 371 5069;|
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