July 14, 2003
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The computer industry appears to be splitting amid signs of recovery, with the strongest companies poised to reap the earliest rewards at the expense of weaker rivals.
By Ina Fried
That fact of life is expected to show itself in the coming weeks as the majority of tech companies report quarterly earnings and offer their view on the current business. Although many analysts and executives say there are signs that tech spending is slowly improving, the benefits are being spread unequally.
"I think things are getting a little bit better," Oracle CEO Larry Ellison told analysts last week, but he added that the economy was only improving "for companies that people believe will be around in the future. If people don't think you'll be around, you won't be."
Having pulled through three tough lean years, technology survivors may face yet another difficult hurdle even as dollars begin trickling back into the market. While renewed spending is a welcome sign for the industry, the first wave of investment could give strong companies a golden opportunity to take market share from weaker competitors.
On the hardware side, Dell has continued to gain market share, with Hewlett-Packard trying to stay close through aggressive price drops fueled by its ongoing cost-cutting initiatives. The result is a prolonged buyer's market with prices continuing to drop to new lows. Others, such as Gateway, seem to be having a tough time keeping up. The pressure is likely to intensify with market growth limited. Last month, IDC shaved its growth forecasts for this year and next.
Although Dell and HP are fighting it out with various PC sales promotions, investors won't be hearing from those two companies, which both are in the middle of their quarters. Gateway, which is on the traditional calendar schedule, is slated to report results next week. The company is once again in the midst of shifting strategies, this time increasing its focus on consumer electronics such as flat-screen televisions and digital theater systems while also revamping its retail stores. Analysts expect the company to report a loss of 27¢ per share, in line with its most recent forecast.
A similar divide is emerging on the processor side, where Intel has been gaining market share at the expense of rival Advanced Micro Devices.
AMD has already warned of a wider-than-expected loss for the second quarter, with analysts predicting a loss of 54¢ per share, according to First Call. AMD has not turned a profit since the second quarter of 2001.
Intel, meanwhile, is seen posting earnings of 13¢ per share when it reports on Tuesday. In June, the chipmaker reiterated its financial outlook, saying it expects sales of between $6.6B and $6.8B. At the time, Intel CFO Andy Bryant said that PC processor sales were at the high end of normal seasonal patterns, although demand for communications and wireless chips was soft.
Microsoft, which makes money from each PC regardless of which company sells it or whose chip is inside, is seen posting another quarter of solid profits, with analysts pegging earnings at 24¢ per share. Analysts will be listening closely to Thursday's conference call both for an update on the PC market as well as to see if the company decides to share its massive cash horde with shareholders, either through an increased dividend or through a cash payout.
The company also may offer more details on its plans to switch from giving stock options to employees to awarding actual shares. With the move, Microsoft has said it will start expensing the cost of both options and stock grants and will also restate earnings for the past two years. However, the estimated cost of options will remain a footnote in this quarterly report, as Microsoft doesn't plan to offer restated figures until it posts its next quarterly results in October.
Apple, which offers the main alternative to Microsoft's Windows operating system for desktop PCs, is seen posting earnings of 3¢ per share. The company's shares have been trading at 52-week highs lately, following Apple's introduction of its iTunes Music Store as well as the announcement of the PowerMac G5, which is seen as a potential boost to slumping sales of high-end machines for the Mac maker.
Earnings from IBM and Sun Microsystems should give an indication of higher-level IT infrastructure spending. IBM reports on Wednesday, with analysts expecting earnings of 98¢ per share. Sun, meanwhile is expected to report a slim 2-cent-per-share profit when it gives its report next week. Also, EMC, which recently announced plans to buy Legato Systems, reports results on Wednesday morning and is expected to have earnings of 3¢ per share, according to First Call.
One factor that could help many of the companies is a slumping dollar, which should boost the impact of international sales. In a July 8 report, Goldman Sachs analyst Laura Conigliaro said that the dollar's slide during the first half of the year has helped companies such as EMC, IBM, Hewlett-Packard and Sun Microsystems.
"If not for the incremental dollar weakness during the course of the March quarter, most of our major companies would have missed consensus revenue estimates," Conigliaro wrote in a July 8 report.
However, there are signs that the dollar is stabilizing or even gaining, which could put pressure on companies to moderate their outlooks for the current quarter. Also, some analysts warn that Europe appears particularly weak during what is always a sluggish time.
"While European business is always slow in the summer, our latest checks continue to indicate that the tone of business is worse and IT spending on the continent is expected to decline in 2004," Conigliaro said.
Oracle's executive in charge of sales for Europe, the Middle East and Africa echoed that sentiment last week. "The economy is tough," said Executive Vice President Sergio Giacoletto. "You have to take market share from competitors to grow."
Meanwhile, Conigliaro said things in the United States are flat or improving, with Japan also stabilizing after a period of weakness. The rest of Asia is also seen improving to more normal levels following an ease in the SARS outbreak.
In starting his coverage of technology hardware, Prudential analyst Steven Fortuna predicted that the hardware industry is poised to do better than the market as a whole. He cautioned, though, that tech spending will be closely tied to improvements in corporate spending. Despite that fact that many companies overspent on technology in the 1990s, Fortuna said that further productivity benefits from technology can support spending of one and a half or two times overall economic growth.
"We anticipate a modest recovery in IT demand beginning in the first half of 2004," Fortuna said.
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