Airlines, Tech Firms Warn On Sequester

Investor's Business Daily

Evidence is growing that federal spending cuts are starting to ripple into the U.S. economy.

F5 Networks (FFIV) dived 19% Friday after it cut forecasts for the current quarter, saying government sales were "down significantly" from a year ago due to budget cuts known as sequester.

Earlier in the week, Delta Air Lines (DAL) and US Airways (LCC) reported weak March bookings, blaming the automatic spending cuts.

Under a 2011 budget agreement, defense and other discretionary spending authority was cut by $85 billion, starting March 1.

"The cuts may be just starting to hit the economy," wrote Ed Yardeni, in his weekly recap report Friday. "This sequester is expected to total $1.2 trillion over the next decade.

With earnings season set to get under way, investors will be looking for any other signs that budget cuts are affecting the top or bottom line.

An Early Oracle?Early evidence of sequester cuts in the tech business emerged when Oracle (ORCL) reported quarterly results on March 21 that missed forecasts. Oracle largely blamed an expanded sales force that needed more training, but it did reference the sequester in a conference call with analysts.

"It didn't help that the sequester deadline was on the last day of our quarter," Safra Catz, Oracle CFO, said in the call. She says some deals Oracle had expected to close did not. That was also the case with F5, a provider of technology for data centers and cloud computing.

"We believe the slowdown in orders was not caused by competitive losses but by customers who were reluctant to sign off on purchase orders toward the end of the year," said F5 CEO John McAdam in a conference call with analysts late Thursday.

Several other networkers sold off on the stock market Friday, including Cisco (CSCO) and Juniper Networks (JNPR).

The federal government accounts for 9% of spending on information technology, with state and local governments accounting for a similar percentage.

Weakness in federal spending also surfaced with Red Hat (RHT) on March 27 when the business software provider reported weaker-than-expected revenue. CFO Charlie Peters, in an earnings conference call, referenced "lingering uncertainty about federal spending.

Asked about federal spending by an analyst, he said, "I suspect every other software company has already experienced the same thing. There is no doubt in my mind that the federal budget discussions that have been going on for some time has slowed down buying decisions.

Overall IT Impact DebatedCiting the sequester, Forrester Research has reduced its 2013 forecast for U.S. information technology spending to 6.2% growth from a previous estimate of 7.2%.

Forrester analyst Andrew Bartels estimates the sequester will cut about $10 billion in U.S. IT spending, for a total of $829 billion, excluding telecom.

"We think the impact will be most pronounced for hardware vendors," he said. "It's also possible some contracts will be delayed as federal agencies try to figure out what the impact of the cuts will mean. There's a lot we don't know.

Research firm Gartner estimates IT spending, globally, will rise 4.1% this year to $3.8 trillion, which includes telecom services. That's unchanged from three months earlier. Gartner also kept its U.S. IT forecast at $1.1 trillion.

"The sequester in many ways is a continuation of the same old bad news related to economies," said John Lovelock, Gartner research vice president. "We have seen some indications of discretionary budgets being cut but not large-scale IT projects.

Air America GroundedU.S government spending on air travel might have dropped up to 30% in the past month, JPMorgan said in a Friday report.

Delta, on April 2, and US Air a day later, both reported that revenue per available seat mile rose 2% in March, half of what they initially forecast. Both cited fewer federal purchases of last-minute, full-fare tickets.

Delta shares tumbled nearly 13% for the week. US Air fell 7%.

Other carriers also sold off on sequester concerns. A new bird flu outbreak in China may have contributed to the selling.

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