Sun Developer Journal

Fitch Ratings' 2010 outlook for information technology (IT) sectors is stable based on expectations that global IT spending will resume growth equivalent to or exceeding worldwide GDP. In a special outlook report issued today, Fitch says improved market demand, especially for enterprise hardware and particularly for the second half of the year, will drive company expectations for 2010 and should further stabilize technology operating and credit profiles.

"A gradually improving economy should result in sequentially better demand patterns for technology companies in 2010," said Nick Nilarp, Managing Director at Fitch. "There is considerable pent-up enterprise demand for hardware purchases, primarily servers and storage, which have been postponed the last two years during the global economic downturn. This has led to an aging infrastructure that is increasingly expensive to maintain." Nilarp cautions that the U.S. consumer remains a wildcard and the risk of a double-dip recession remains and could arrest any market improvement.

Fitch says ratings strengths for the industry include strong financial flexibility via high cash balances and consistent free cash flow supported by relatively stable cash conversion cycles. Also, solid unit demand expectations for personal computers (PCs), mobile handsets, and servers could result in higher-than-expected revenue if pricing pressures are moderate. The consistency and rational behavior of the supply chain served the industry well during challenging economic and industry conditions in 2009, and Fitch expects similar behavior will continue to benefit the IT industry in 2010. Opportunities for better-than-expected performance could occur from a continuation of global economic stimulus packages, strong performance of developing economies, and increased IT spending relating to healthcare.

Key Themes to Fitch's IT Outlook:

--The worldwide IT spending environment will grow 3%-4% in 2010, led by hardware. Fitch expects the IT services industry to grow 3%-5% in 2010 while the semiconductor industry will experience a rebound in revenue growth at low- to mid-single digits;

--PC and mobile handset unit growth is expected to be in the high-single digits and mid-single digits, respectively, for 2010; Fitch believes the release of Windows 7 will positively affect PC demand from consumers in the fourth quarter of 2009, small and medium business in the first half of 2010 and large enterprise in late 2010 into early 2011; the PC mix will likely continue to be skewed towards consumers, potentially resulting in minimal to negative PC revenue growth in 2010 based on the recent declines in PC average selling prices;

--Operating profitability is expected to improve as cost reduction initiatives result in positive operating leverage upon the resumption of top line growth.

Key Concerns to Fitch's IT Outlook:

--Fitch believes the biggest threat to IT spending in 2010 is the fragile economy, particularly in Europe and the weak recovery in the U.S., and the resultant impact on the consumer and business confidence. While there is limited visibility for worldwide demand, Fitch believes macroeconomic trends (Fitch 2010 GDP forecasts: 1.8% U.S., 0.5% Euro Area, 6.5% BRIC) could continue to pressure companies that lack product depth and geographic revenue diversity.

--Limited demand visibility;

--Existence of excess manufacturing capacity and the negative effects this could possibly have on pricing;

--Event risk of acquisitions (less so for shareholder friendly actions) and the resultant possible increase in debt levels due to cash location challenges;

Key Credit Considerations:

--Technology industry cash levels of $300 billion (approximately half is located overseas) may be pressured in 2010 driven by top-line growth and resultant working capital usage;

--Total industry debt from current and new issuers may increase in 2010, surpassing the 2009 debt level of more than $220 billion. New debt issuance will be driven by cash location, acquisitions, and refinancings as the industry has approximately $15 billion of debt maturing in 2010.

--Fitch continues to believe the maturing technology industry will experience solid acquisition activity from strategic buyers, particularly for the software and IT Services sectors, and potentially, though less likely, the EMS and distributor sectors.

The full report titled 'Segmenting Technology Risk: Growth in IT Spending Supports Stable Rating Outlook for Tech Industry' is available on Fitch's web site at 'www.fitchratings.com'.

A list of Fitch-rated issuers in the U.S. technology sector and their current Issuer Default Ratings (IDRs) follows:

--Accenture Ltd. ('A+'; Outlook Stable);

--Advanced Micro Devices, Inc. ('B-'; Outlook Positive);

--Affiliated Computer Services, Inc. ('BB'; Rating Watch Positive);

--Agilent Technologies Inc. ('BBB'; Outlook Stable);

--Anixter Inc. ('BB+'; Outlook Stable);

--Anixter International Inc. ('BB+'; Outlook Stable);

--Arrow Electronics, Inc. ('BBB-'; Outlook Stable);

--Avnet, Inc. ('BBB-'; Outlook Stable);

--Broadridge Financial Solutions ('BBB'; Rating Watch Positive);

--CA Inc. ('BBB'; Outlook Stable);

--Celestica Inc. ('BB-'; Outlook Stable);

--Computer Sciences Corp. ('BBB+'; Outlook Stable);

--Convergys Corp. ('BBB-'; Outlook Negative);

--Corning Incorporated ('BBB+'; Outlook Stable);

--Dell Inc. ('A'; Outlook Stable);

--Eastman Kodak Company ('B-'; Outlook Stable);

--eBay, Inc. ('A'; Outlook Stable);

--First Data Corp. ('B'; Outlook Stable);

--FIS Inc. ('BB+'; Outlook Positive);

--Metavante Technologies Inc. ('BB+'; Outlook Positive);

--Flextronics International Ltd. ('BB+'; Outlook Stable);

--Freescale Semiconductor, Inc. ('CCC');

--Hewlett-Packard Company ('A+'; Outlook Stable);

--H&R Block Inc. ('BBB'; Outlook Stable);

--Block Financial Corp. ('BBB'; Outlook Stable);

--Ingram Micro Inc. ('BBB-'; Outlook Stable);

--International Business Machines Corp. ('A+'; Outlook Stable);

--International Rectifier Corp. ('BB'; Outlook Negative);

--Jabil Circuit, Inc. ('BB+'; Outlook Positive);

--KLA-Tencor Corp. ('BBB'; Outlook Negative);

--Microsoft Corp. ('AA+'; Outlook Stable);

--Moneygram International Inc. ('B+'; Outlook Negative);

--Moneygram Payment Systems Worldwide, Inc. ('B+'; Outlook Negative);

--Motorola, Inc. ('BBB-'; Outlook Negative);

--Nokia Corporation ('A'; Outlook Negative);

--Oracle Corp. ('A'; Outlook Stable);

--Pitney Bowes Inc. ('A-'; Outlook Stable);

--Sanmina-SCI Corp. ('B'; Outlook Stable);

--Seagate Technology ('BB'; Outlook Stable);

--SunGard Data Systems Inc. ('B'; Outlook Negative);

--Sun Microsystems, Inc. ('BBB-'; Rating Watch Evolving);

--Tech Data Corporation ('BB+'; Outlook Stable);

--Telefonaktiebolaget LM Ericsson ('BBB+'; Outlook Stable);

--Texas Instruments Incorporated ('A+'; Outlook Stable);

--The Western Union Company ('A-'; Outlook Stable);

--Tyco Electronics Ltd. ('BBB'; Outlook Negative);

--Unisys Corp. ('B'; Outlook Negative);

--Xerox Corporation ('BBB'; Outlook Negative).

Additional information is available at www.fitchratings.com.

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