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IT bosses still bullish

Technology stocks have taken a nasty hit. Hilary Clarke reports
GORDON CRAWFORD, chief executive of the information technology company London Bridge, picked a bad day to announce his company's interim results. It was last Tuesday, the day of the stock market plunge.

While most shares fell, his company received one of the heftiest punches of all. London Bridge shares fell 26 per cent despite having that day announced a three-fold rise in interim profits. "The two events [results and share price crash] were totally unconnected," he says. "It was just one of those things."

Software stocks all took a hammering that day. Analysts agree that as premium stocks, they (like their US counterparts) fell further and fastest when the market slumped.

"We have been saying for some time that software stocks were looking overvalued and were due for a correction," said Anthony Miller, analyst with computer services consultants Richard Holway.

The consensus is that last week's events were just a blip.Logica and Sema are next week bringing down the curtain on a stunning IT reporting season for sector with what are expected to be more robust profit increases. IT share prices will be further buoyed by the FTSE's decision last week to re-classify IT stocks from next January.

Even so, while IT stocks have been among the stock market stars this year, analysts are beginning to wonder if the sector, which grew 21 per cent in 1997, can continue its stunning performance into the next century.

Until now, fixing the millennium bug and preparing for monetary union on 1 January next year has helped buffer the industry from the slowing economy. But will that be enough to help the software industry ride the recession unscathed?

Mr Crawford has to admit that for London Bridge, the recession is probably good news. His company specialises in software that helps utilities collect debt from people who have not paid their bills.

David Clayton, analyst at Credit Suisse First Boston, believes "there will be lots of redundancies again", as in the last recession, although not as badly.. "In the late 1980s a lot of IT spending was discretionary as companies tried to gain a competitive edge. Technological advancements and an increase in dependence on electronic transactions by companies means that there are now certain systems you have to have," he said. Even so, a proportion of IT spending is still discretionary. "When your earnings start to slow, IT is an area you cut back on," said Mr Clayton.

Many companies have put new IT projects on hold while they deal with the millennium bug. However, if the recession kicks in around that time, "they may decide if you can manage for two years without it, then you start to wonder did you need it anyway."

Company executives are more bullish. Martin Reed, chief executive of Logica, says that most of his company's business is in utilities, banking and telecoms, all driven by deregulation, globalisation and the personalisation of services. "Ours is the industry of the future. Even the recent spate of mergers is good news for us. Every time two companies come together they will have to think about their IT systems fast," said Mr Reed.

He believes that even if there is a deep recession, "IT will take over an increasing proportion of economic activity."

John Tilley, managing director of the Anglo-French Sema Group, is equally unperturbed by the economic outlook. "We deploy business systems that make companies far more efficient, helping them to reduce costs and make them more effective in lean times," he said. The company "has so much work on we chose not to take advantage of a short-term boom which after 2000 would go away."

Paul Walker is the chief executive of the Sage Group, one of the top five IT companies in Britain. Via a network of dealers, Sage develops, distributes and supports branded PC accounting software. Ninety per cent of the company's 1.2 million customers are small businesses with less than 100 employees.

"The confidence among our dealers is fairly buoyant. Small businesses see technology as making them more efficient."

He said it was large corporate clients that would be more prone to cutting back on their IT budgets in a slump.

"In the last recession we noticed people were keen to make sure IT systems were lean and efficient in meeting their needs," he said.