Strategy

Corporate America, Save This Recovery

Commitments to big-ticket items are an implicit vote of economic confidence by top corporate executives.
Stephen TaubOctober 6, 2004

This is what the economy has been waiting for…sort of.

In the past week, at least three software companies — Siebel Systems Inc., PeopleSoft Inc., and VeriSign Inc. — announced stronger-than-expected third-quarter results.

Those announcements have strong implications for the overall economy, which lately has shown signs that the recovery has run out of steam. To keep that engine going for the long haul, Corporate America must be spending on big-ticket items like software, hardware, plants, and equipment. It also must step up hiring, which in turn increases the number of consumers with money in their pockets.

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Trouble is, companies hadn’t been spending and hiring much ever since the dotcom bubble burst at the turn of the millennium — there was just too much capacity out there. And in the wake of the September 11 attacks, many companies have been reluctant to make longer-term commitments without assurance that their business would not suffer another dramatic interruption.

So commitments to enterprise software packages are an implicit vote of economic confidence by top corporate executives. Indeed, a big reason that PeopleSoft raised its third-quarter forecast was because more customers than expected spent more money than expected on each sale.

In its announcement, PeopleSoft said it recorded 34 transactions with license revenue exceeding $1 million — including one transaction that exceeded $10 million — compared with 23 million-plus transactions in the second quarter. The company added that the average selling price to new customers was $454,000, up from $346,000 the previous quarter.

“Winning new customers, increasing average selling price and strong performance in North America and Europe were the cornerstones of our quarter,” said co-president Phil Wilmington, in a statement. Compile enough sales by enough companies and you might also have the cornerstones of a growing economy.

Not all tech companies are working with the same building blocks, however. Chip makers Intel Corp. and Advanced Micro Devices Inc. recently reported weak sales of their flash memory components, used in cell phones, digital cameras, and other devices.

Another sign that the economy is still a little shaky is the sober reality that layoffs, rather than large hires, are still the norm. On Tuesday, executive placement firm Challenger, Gray and Christmas reported that the number of announced job cuts rose to an eight-month high in September.

We still have a ways to go before declaring this economy in full recovery mode.