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Tech: Back to Earth with a Thud

By Jim Kerstetter In the middle of the Sept. 3 tech wreck on Wall Street, chip giant Intel's (INTC) lowering of expectations for the current quarter had at least one upside: It would now be easier for other tech companies like 3Com (COMS), Cypress Semiconductor (CY), Integrated Device Technology (IDTI), and Altera (ALTR) to do the same.

Looks like this high-tech recovery really isn't what it was cracked up to be earlier in the year. What prompted the latest downdraft? After the market closed on Sept. 2, Intel announced in its regular mid-quarter update call with investors that third-quarter revenues will be in the range of $8.3 billion to $8.6 billion, about 5% lower than expected. The news sent tech stocks tumbling. Intel shares were down 7.3%, to $20.05 on Sept. 3, and the tech-heavy Nasdaq Composite index was off 1.6%, to 1,844.

WORSE TO COME? Intel's news was particularly troubling because Chief Financial Officer Andy Bryant attributed much of the shortfall to consumer sales, which had buoyed tech throughout its three-year downturn. Now the hope that the industry could hit double-digit growth is fading with summer.

The more pessimistic view that tech is still growing, but at a 3% to 5% clip, seems a lot more realistic, given the software industry's lousy returns in the second quarter, a troubling inventory buildup at computer networking giant Cisco Systems (CSCO), and Intel's disappointing news.

The question now: After Intel, will the other shoe drop with a new batch of downbeat earnings news?

"Intel is one of the most important barometers around," Richard Holway, principal consultant at technology-research firm Ovum wrote in a Sept. 3 report. "If mobile-phone manufacturers don't buy its flash memory cards this quarter, which they haven't been doing, then it's a fair bet that we'll have some [negative] surprises in that sector soon."

DIMINISHING EXPECTATIONS. In the closely studied employment report out Sept. 3, the one sector that showed a net loss of nonfarm jobs creations was in the telecom sector -- some 12,000 jobs were lost, while all other sectors showed net gains. That's hardly a good sign.

Indeed, with corporate spending already sluggish and consumers slowing, it looks like the tech industry is going into readjustment mode for a less-than-stellar recovery. Flash-memory products used in cell phones and digital cameras appear to be in oversupply among Asian manufacturers. In a Sept. 2 research report, analysts at Smith Barney, a division of Citigroup Global Markets, said recent visits with Samsung, Toshiba (TOSBF), and other Asian component makers indicated oversupply could reach 7% in the third quarter, 8% in the fourth, and hit 11% next year. That could lead to deep discounting in the coming months.

The same, of course, applies to microprocessors and PC sales. On Sept. 3, Banc of America Securities reduced its year-over-year growth forecast for PC unit sales from 10.7% to 10.4% for the current quarter, and by 0.3 percentage points for the fourth quarter. It dropped its 2005 forecast by 1.3 percentage points, to 9.5% Is the market still growing? Yes. But not nearly as much as most had hoped.

YULETIDE DEALS? Of course, not all companies will be equally damaged if conditions worsen. Just as software market leaders like SAP (SAP) and Symantec (SYMC) appeared to gain market share in the second quarter, analysts expect Dell's (DELL) hand to strengthen in PCs. Its market share could increase from 18.3% to 19.2% in 2005, according to Banc of America.

Investors may not find much good news in all this, but consumers have something to cheer about. They can likely expect lots of holiday-season discounting as suppliers try to work off their bulging inventories. That means it'll be happy holidays for tech buyers, as suppliers prepare to ring out yet another disappointing year. Kerstetter is a correspondent in BusinessWeek's Silicon Valley bureau

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