It looks like the economy in Q3 grew even faster than we initially thought, 8.2% annual rate versus 7.2%. It was not too long ago that the Department of Commerce released numbers showing 7.2% annualized GDP growth for Q3. If you take a closer look, "equipment and software" spending was at a 15.4% annualized rate. I obviously have concerns about the revised 8.2% GDP growth and certainly do not believe that is sustainable due to one-time factors like tax cuts and mortgage refinancings. While it is nice to see a 15.4% annualized growth rate in "equipment and spending" for Q3, let's not assume that this is the beginning of a huge ramp-up in IT Spending. To bolster my thinking, I like to look at a number of data points. For one, Goldman Sachs recently issued its October IT Spending Survey. Its latest survey calls for an increase of 2% spending for 2003 versus a December 2002 survey which forecasted a decline of 1.1% for 2003 spending. So it is nice to see that the trend reversed in terms of IT spending, and that it looks like there is a small rebound happening. That being said, the October 2003 survey forecasts spending growth of only 1.3% for 2004, down from an August 2003 spending survey forecast of 2.3% growth for 2004. That is a negative trend and does not promise earth-shattering returns to IT Spending in the bubble years. As Goldman Sachs mentions, hopefully there is just a lag in terms of how the economy performs and where each company is in its budgeting process. If this is the case, we shoud keep an eye out for data from future surveys.
Another data point that I look at is how the fund's 30+ portfolio companies are performing. We have a number of companies in the Enterprise IT space selling security, storage, network management, wireless, and other related software. Some companies are performing extraordinarily well and others are close to budget. The fact that most of my companies are close to budget is a far cry from 2001 and 2002, years plagued by numerous reforecasts of revenue and expense projections. In general, sales pipelines are building momentum giving better visibility for the next two quarters. While I cannot say that all of the fund's portfolio companies are growing like wildfire, in general the sentiment across the board is positive. As you can see, I am more in the Goldman camp of IT growth than what the GDP numbers reflect. The conclusion I draw is that even with 2% expected growth in IT Spending next year, as always, there will continue to be pockets of huge opportunity like security, business intelligence, and systems management allowing companies to protect their mission critical assets, report in real-time (or near real-time), and better manage the IT assets they already possess and do more with less. Call me a moderate optimist, if you will.