Fears of spending slowdown spook the IT sector

Concerns about a spending slowdown continue to make IT investors nervous.

The tech-heavy Nasdaq Composite Index closed Thursday at 2601.06, down from the 2700 level two months ago.

The faltering U.S. housing sector, widespread mortgage payment failures, and related worries about the credit market have depressed share prices since the middle of the third quarter. IT companies, although not hit as hard as businesses in other sectors, have not been immune to the turmoil. A tightening of credit is often expected to dampen business and consumer spending.

So Alcatel-Lucent's Thursday warning about the quarter and the rest of the year struck a nerve, several weeks in advance of quarterly results. The company said it expects to break even on an operating basis in the quarter, and cut its 2007 revenue forecast. It said revenue for the year would be flat or slightly up, at constant exchange rates. Previously, it said that revenue would be up about 5 percent for the year.

It was the third time this year the company cut its projections. Its share price dropped $0.88 to close at $9.16 Thursday.

Alcatel-Lucent's announcement hinted at what many market observers have been fearing: slowing purchases by North American customers.

"Alcatel-Lucent is now seeing a change in capital spending with those (North American) customers in 2007, compared to what it had anticipated," the company said.

The company said it still expects ongoing cost savings in the wake of the merger of Alcatel and Lucent, but that did not quiet concerns about the overall market.

"Merging may have made sense, but it does not change the marketplace. Demand is demand and that does not change because of mergers," said telecom analyst Jeff Kagan in an e-mail report.

A slowdown in demand would make competition in the tough telecom market even more fierce.

Earlier this week Alcatel-Lucent rival LM Ericsson said it was gaining market share in Europe and Asia. Ericsson shares rose $0.36 Thursday to close at $36.59. Ericsson's claims notwithstanding, U.S. and European vendors are getting hit with increasing competition from Chinese vendors such as Huawei Technologies and ZTE, which are steadily expanding their product portfolios.

Not all tech-sector news this week was grim, however.

The notebook market continues to experience explosive growth, according to a report released earlier this week by market research company DisplaySearch. The nine biggest notebook companies saw double-digit growth during the second quarter, while the market, measured by units shipped, grew by more than 24 percent, DisplaySearch said. Although those figures were generated before the third-quarter turmoil, the firm raised its estimate from 97.5 million notebooks shipping in 2007 to 103 million.

The true impact of economic turmoil on IT will not be clear until the end of the year. For now, IT investors will try to read the tea leaves, in the form of quarterly results that will start to trickle in next over the next few weeks.