Rising U.S. Dollar Impacts IT Spending Growth Rates

Rapid changes in currency rates require a deeper look at revenue numbers to assess the health of the IT industry.

The recent rapid rise in the value of the U.S. dollar against most currencies, has put a currency shock into the global IT market. The eurozone IT market has been especially impacted by a 15% rise in the dollar versus the euro since December 1, 2014.  As impressive as the shift in the dollar/euro exchange rate has been, it’s not so much the magnitude of the change that matters as it is the speed.

Similar increases in the value of the dollar versus the euro have happened in the past, but IT markets can normally accommodate these changes as they usually play out over two to three years. This recent change has happened in four months.

Normal pricing practices do not hold in this short a time period, and many providers have been caught off guard, as displayed in their quarterly results: Oracle reported a 4% decline in revenue due to currency, Apple similarly reported a 4% decline due to currency, and Intel expects first quarter revenue to be down almost $1 billion.

Overall, European economies are continuing to recover reasonably well. Gartner does not expect any downward revisions to enterprise IT budgets in 2015, and thanks to the decline in oil prices, we anticipate European consumers will boost their spending on IT products. Even so, Gartner forecasts 2015 European IT spending to decline 4.9%, when measured in U.S. dollars. This is not a crash, even if it looks like one; when evaluated in constant currency, 2015 European IT spending is forecast to grow 1.9%. Such are the illusions that large swings in the value of the dollar versus other currencies can create.

This illusion, however, only masks a bigger issue that has real implications for U.S. multinationals operating in Europe — namely that the rise in the dollar has effectively taxed European revenues and reduced the dollars earned from European operations. Even if those revenues aren’t repatriated, they must still must be reported in dollar-valued financial statements. When they are reported, they will appear as a reduction in revenues and profits from European operations; we can look forward to many earning calls relying on constant currency reporting to highlight growth in Europe and mask profit revenue problems at home.

Unfortunately, no U.S. multinationals operating in Europe can simply raise European local prices enough to cover the expected reduction in revenues and profits. They are not alone in the market, and there are local providers that may not have to raise prices to maintain profit margins. In some cases, such as telecom providers, there is legislation that will keep providers from raising prices.

For most, there are enough regular market forces which will inhibit their ability to raise prices.

Protecting U.S. dollar profits will require a nuanced and multifaceted approach involving pricing, partnering and product management.

I’ll be discussing the latest outlook for the IT industry during the complimentary Gartner webinar, “IT Spending Forecast, 1Q15 Update: Falling Oil and Rising Dollars” on April 14 at 11 a.m. EDT. Additional information on our IT spending forecast is also available on the Gartner Worldwide IT Spending Forecast Special Report page.

Mr. Lovelock is chief forecaster at Gartner, and he leads the global quarterly IT spending forecast.

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