Strong US vendor revenues and profits helped push the Forrester/ITAA US Tech Sector Index up 2.6 points in Q4 2005 to a four-and-a-half-year high. The second quarterly Index from Forrester Research, Inc. (Nasdaq: FORR) and the Information Technology Association of America (ITAA) found that the majority of 11 indicators were up in the past quarter. However, the gain was tempered by a sustained decline of venture capital funding and a downturn in CIO confidence.

“The forward-looking components of the Index, including CIO confidence, have proved to be a good gauge of the tech economy,” said Andrew Bartels, vice president, Forrester Research. “CIOs’ positive outlook in Q3 led to an increase in IT investment and resulting gains in vendor revenues and profits, which drove the Q4 rise in the Index. We’re seeing CIO confidence moderating from the extremes of high optimism and high pessimism, with the average CIO feeling less optimistic than in Q3 but not yet pessimistic. If the demand indices continue to prove accurate, 2006 will look a lot like 2005 — a dip in the index in the first quarter, followed by steady growth over the balance of the year.”

“The Index reveals the outlook for business investment is improving across computers, software, and other information-processing equipment,” said Robert B. Laurence, president of ITAA. “We are tremendously encouraged to see these gains, which we interpret as a vote of confidence in the IT value equation. As IT budgets expand and companies increase budgets for new initiatives, demand for IT workers will also increase. The gains in IT employment in Q4 brought the total closer to a pre-recession high. We see the trend continuing throughout the year.”

Q4 2005 Results

The Index is based on 11 measures of IT demand, IT supply, and the strength of US-based vendor financials and technology prices. All indices are weighed evenly in the overall index score, using a 2002 quarterly average of 100 points as the baseline. In Q4, the Index rose 2.6 points above the third quarter to 123.3, building on the gains in Q3 and erasing the drop experienced during the first quarter of 2005. Highlights of the indices’ performance include:

Supply Indices Fall As Venture Capital Investment Continues To Dry Up

The indices measuring the overall health of IT service and product supply in the US dropped 1.8 points for the quarter. For the first time since early 2003, VC investment has declined in consecutive quarters, with Q4 2005 VC funding dropping more than $350 million compared with Q3. Moderate gains in US IT industry employment and in technology imports were not enough to offset the shortfall in VC funding.

Demand Indices Recede Slightly

Just as in Q3, CIO confidence played a large role in this component of the Index, which measures demand for IT hardware, software, and services from the US. While CIO confidence in future spending and business conditions fell 13.8 points, gains in the other indices prevented the overall demand score from falling more than 1.0 points.

  • US technology exports grew, reaching their highest levels since mid-2001.
  • Global vendor revenues from customers in the US showed growth for the third consecutive quarter.
  • Forrester’s outlook for business investment in IT grew as expectations for Q1 2006 IT spending came in well above reported Q4 spending.

Revenues And Profits Bolster The Firm Strength Indices

The US IT firms’ strength indices grew almost across the board in Q4, rising 9.6 points. Again this quarter, vendor profits grew at a faster pace than vendor revenues, with vendors able to turn moderate gains in revenue into strong gains in profit. Although revenues grew, the prices of technology products as measured by the US Bureau of Economic Analysis continued to fall, which they have done steadily during 2005.

The complete analysis and more information about the methodology behind the Index can be found in the research “Forrester/ITAA US Tech Sector Index: Q4 2005” and “Forrester/ITAA US Tech Sector Index: Methodology,” respectively. Both reports and the quarterly Index graphic are available at and

About ITAA

The Information Technology Association of America (ITAA) provides global public policy, business networking, and national leadership to promote the continued rapid growth of the IT industry. ITAA consists of over 325 corporate members throughout the US, and a global network of 70 countries’ IT associations. The Association plays the leading role in issues of IT industry concern including information security, taxes and finance policy, digital intellectual property protection, telecommunications competition, workforce and education, immigration, online privacy and consumer protection, government IT procurement, human resources and e-commerce policy. ITAA members range from the smallest IT start-ups to industry leaders in the Internet, software, IT services, ASP, digital content, systems integration, telecommunications, and enterprise solution fields. For more information visit