Economic crisis grips global tech sector

As talk of recession becomes a reality, software giant SAP released its preliminary third quarter financial results showing that the technology sector is experiencing its own reality check.

The British Chambers of Commerce said today that Britain had already entered a recession, advising the government to cut business taxes and the Bank of England to cut interest rates.

Manufacturing output has fallen sharply since July, according to the Office of National Statistics, and the Royal Bank of Scotland experienced a 35 per cent plunge in share value today. Lloyds TSB, HBOS and Barclays also experienced significant tumbles.

Until recently, the technology sector had seemed relatively safe in comparison to other industries even amid fears of a recession.

But a 10 per cent drop in Oracle's share price, and SAP's revising its earlier third-quarter projections, show that the sector is feeling the pinch.

"Throughout the third quarter we felt quite positive about our ability to meet our expectations," said SAP co-chief executive Henning Kagermann.

"Unfortunately, SAP was not immune from the economic and financial crisis that enveloped the markets in the second half of September, causing us to report numbers below our expectations."

Earlier this year analyst firm Gartner released research showing that European IT budgets were continuing to grow despite economic concerns.

But early warnings that the tech sector would be hit by the downturn came from Sun Microsystems in its quarterly report released at the beginning of August, noting how a "slowing performance in the US" would be likely to affect its growth.

Sun felt this impact shortly after, when its stock dropped around 15 per cent in September.

"The market developments of the past several weeks have been dramatic and worrying to many businesses," Kagermann explained. "These concerns triggered a very sudden and unexpected drop in business activity at the end of the quarter. "

Ovum analyst David Mitchell noted the wider impact of the SAP announcement. "Companies such as Oracle took a hit, and the overall Nasdaq composite was dragged down by over four per cent," he said.

But this was just the start, according to Mitchell. "Many other companies have reported a softening of market demand and each will have its 15 minutes of fame when it either posts revenue figures that do not meet expectations or pre-warns of those results," he said.

J P Morgan analysts suggested that the SAP announcement only proved their earlier fears that the enterprise resource planning market is susceptible to slowdown.

"The big worry, in our view, was management's indirect admission of very low visibility in the software business," the analysts said in a statement.

Mitchell noted that it was not until the last weeks of September that the slowdown in deals was recognised.

"Losing a deal to 'no deal' rather than to a competitor was commonplace," he said. "The suddenness of the stall should not surprise anyone that is familiar with the way the software market works."

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