News Column

Investors Brace for Weak Tech Earnings

July 16, 2012

Brandon Bailey

Tech Earnings

Tech investors are bracing for a wave of weak earnings reports this month, thanks to a shaky global economy and a continued slowdown in demand for personal computers, corporate data center gear and even software.

Several chipmakers and component suppliers have already signaled that their spring quarter financials were worse than expected. Analysts say that's a worrisome sign as a host of other tech companies -- including Silicon Valley's Intel (INTC), Google (GOOG), Apple (AAPL) and Facebook, as well as IBM and Microsoft -- prepare to announce quarterly results this month.

"Weakness is broad and is spreading in tech land," Ambrish Srivastava, a financial analyst at BMO Capital Markets, warned in a report on recent negative indicators from chipmakers who supply components for PCs, servers and other computing hardware.

Along with changing consumer habits and the ongoing turmoil over European debt and austerity measures, analysts say slower spending in China and even uncertainty over

the U.S. presidential election have put a damper on sales for a number of tech companies in recent months. And while it may be too early to assess the impact, any slowing is worrisome for the Bay Area because the tech industry has been a major force in the region's recovery from the recent recession.

Results may be mixed: No one's predicting a bad report from Apple, despite speculation that iPhone sales may be leveling off as consumers wait for the next version to be released. Analysts say Google is enjoying continued strength in online ad sales, although they're watching to see if profits are affected by its newly acquired Motorola hardware business.

But among other Internet companies, Facebook has previously warned that its revenue growth slowed somewhat in the second quarter. Yahoo (YHOO) has struggled with CEO turnover and other issues. And eBay's (EBAY) PayPal payments business may be vulnerable to a weakening euro, according to Macquarie Equities analyst Ben Schachter.

In the commercial tech sector, where companies like Hewlett-Packard (HPQ), IBM and Dell compete for million-dollar contracts to supply PCs, servers, data storage equipment and software, analysts say cautious corporate and government buyers are holding off on signing those deals. As Deutsche Bank's Chris Whitmore put it, "our industry conversations point to deal slippage."

Consumers are also holding back on buying new PCs, according to market research firms IDC and Gartner, which found global shipments of personal computers fell slightly in the second quarter of this year, while U.S. shipments dropped significantly.

HP and Dell won't report earnings until August, but Needham investment analyst Richard Kugele said the impact is already clear.

"We believe that the PC industry is in the midst of a perfect storm," he wrote in a note to clients, blaming both the sluggish world economy and the growing appeal of smartphones and tablets, which many consumers are buying instead of PCs.

PC-makers and suppliers like Intel have bet heavily on new "ultrabooks" -- thin, sleek laptops that resemble Apple's high-end MacBooks -- but the new models have not yet seen wide consumer adoption, according to Gartner's Mikako Kitagawa.

As another indication that sales of PCs and bigger computer systems have weakened, analysts point to recent announcements by companies that sell hardware used to manufacture those computers.

Advanced Micro Devices, which makes computer chips, and Applied Materials, which sells chip-making equipment, both gave early warnings last week that their sales will be lower than expected. Seagate Technologies, which makes hard drives, issued a similar warning this month.

AMD in particular blamed lower consumer demand for PCs and overall economic weakness in Europe and China. "It appears the industry is heading into another downturn," Needham investment analyst Edwin Mok warned in a recent report on chip stocks.

Other analysts said they will be watching closely for signs of weakness when Intel reports its earnings Tuesday -- although Intel, the world's leading chipmaker, often manages to surprise industry doomsayers.

Commercial software makers are also running into economic "headwinds," according to Jefferies analyst Ross MacMillan, who reported that Europe's financial crisis may hurt overseas sales by Silicon Valley companies including VMware, Informatica and Symantec. Informatica, which reports earnings next week, has already said its quarterly revenue was below expectations.

Despite the gloomy outlook, analysts say conditions aren't as bad as they were three years ago, after the 2008 financial meltdown. And one large software-maker, Germany's SAP, bucked the trend last week by announcing record second-quarter sales -- up 18 percent from a year ago -- in advance of its formal earnings report July 24.

Since SAP sells to big companies around the world, the news prompted "a sigh of relief" from investors who are nervous about the global economy, according to FBR Capital Markets analyst Daniel Ives.

Contact Brandon Bailey at 408-920-5022. Follow him at Twitter.com/brandonbailey.

Coming UP

Here are some of the tech companies scheduled to report earnings in coming weeks: Tuesday: Intel, Yahoo Wednesday: eBay, IBM Thursday: Google, AMD, SanDisk, Microsoft July 23: VMware July 24: Apple, Netflix, Juniper Networks, EMC July 25: Symantec, Zynga July 26: Facebook, Informatica



Source: (c)2012 the San Jose Mercury News. Distributed by MCT Information Services


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