Analysts say third-quarter results are likely to be dragged down by the global economic crisis
High tech, an industry that once seemed shielded from the U.S. financial crisis, has grown increasingly vulnerable. Evidence will begin arriving of just how much impact the meltdown has had on some of the nation's biggest tech companies when they release results for the third quarter and issue outlooks for the make-or-break yearend period.
The Nasdaq stock market has tumbled, and analysts have slashed growth and share-price forecasts for a range of tech bellwethers, from chipmakers to consumer electronics giants to vendors of telecommunications gear, as customers tighten their belts and slash spending plans. Companies reporting in the coming days and weeks include Intel (INTC), eBay (EBAY), Apple (AAPL), and Google (GOOG).
Falling demand for computers and the chips needed to run them is likely to show up in results released by Intel, the world's largest semiconductor maker, which reports on Oct. 14. Analysts expect Intel to report a 34¢ per-share profit on sales of $10.27 billion, but they'll be on the lookout for any signal that they should reduce fourth-quarter projections for profit of 40¢ per share on sales of $10.87 billion. Intel rival Advanced Micro Devices (AMD) reports on Oct. 16; analysts see it posting third-quarter sales of $1.4 billion and a loss of 40¢ a share. They expect a 25¢-per-share loss on sales of $1.6 billion for the fourth quarter.
A Lower-Cost Apple Laptop?
On Oct. 9 market researcher iSuppli trimmed its forecast for 2008 worldwide semiconductor revenue growth by a half-percentage point, to $280 billion. "We had already begun to see signs of problems among chip companies before the credit crisis hit," says iSuppli analyst Dale Ford. Gartner (IT) said sales of semiconductor capital equipment, the gear chipmakers use in their factories, will decline more than 25% this year and continue to slide in 2009.
The first big computer maker to release figures for the September quarter is Apple (AAPL), which reports on Oct. 21. There's growing concern that Apple may be experiencing a slowdown (BusinessWeek.com, 09/24/08) in Mac sales. "Cracks may be starting to form in its PC business, where the firm has enjoyed growth driven by the iPod and iPhone halo effect, and by broad-based share gains," wrote FBR Research analyst Craig Berger in a research note issued on Oct. 8. Berger estimates that Apple has cut its orders by 17%. The company is expected to report sales of $8.07 billion and per-share profit of $1.11. For the December period, Apple is expected to record $10.83 billion in sales and a $1.70 per-share profit.
Apple is also set to take the wraps off a new line of notebooks on Oct. 14. Piper Jaffray analyst Gene Munster says he expects Apple to reveal, among other things, a notebook that sells for $899 to $999, less than the company's other computers. A lower-priced notebook would help explain a drop in gross margins that the company warned about (BusinessWeek.com 07/22/08) when it last reported earnings in July.
Weak Back-to-School Season
Concern over PC demand surfaced on Oct. 1 when memory chipmaker Micron Technology (MU) unveiled a larger-than-expected loss and said it expects growth in PC demand to be flat to up slightly in the current quarter. PC demand usually rises 10% to 15% in the holiday season. "Disposable income will almost surely decline during the coming year, causing persistently high consumer PC unit growth rates to decelerate sharply," Citigroup (C) analyst Richard Gardner wrote in an Oct. 7 research note. "Our modeling suggests just 5-10% sustainable growth even if we assume that every U.S. individual between the ages of 10-65 has his or her own PC within 5-10 years." Gardner cut estimates on Dell (DELL), Hewlett-Packard (HPQ), IBM (IBM), and Sun Microsystems (JAVA) through 2010.
Signs of a slowdown in PCs and consumer electronics in general were already beginning to show by Labor Day, says NPD Group researcher Stephen Baker. "The back-to-school season wasn't great, and we've seen sales weaken since then," he says.
Big companies are also cutting back on IT spending. Citigroup's Gardner says PC shipments in markets like the U.S. and Western Europe track closely with hiring, so as U.S. employers shed jobs at the fastest rate in five years—159,000 in September—tech vendors will come under more pressure. The worst-hit is likely to be Dell, Gardner says. The Round Rock (Tex.) company relies on big corporations for about 70% of its business. Dell doesn't report until Nov. 20, but when it last reported, on Aug. 28, it warned of "continued conservatism" in info tech spending in the U.S., adding that the problem had extended to Europe and Asia. Analyst are expecting a 36-¢-per-share profit on revenue of $16.8 billion.
Not every corner of techdom is bleak. On Oct. 8, IBM (IBM) reported earnings of $2.05 per share, beating expectations by 4 cents. It also gave a healthy outlook saying it expects to earn $8.75 per share for the full year, a 22% improvement over last year. Financial service companies, among the hardest hit by the financial malaise, account for about one-third of IBM's sales, fueling concern the company's results would be affected.
The full impact of the financial crisis on IT spending is unlikely to be felt until next year, Peter Sondergaard, global head of research at Gartner (IT), said at an Oct. 13 conference in Orlando, Fla. Cuts in IT spending can lag economic trends by at least two quarters, Sondergaard said. And because IT is integrated with so many parts of business, and many companies are still tied down to multi-year contracts, the industry will still grow by at least 2.3% to $3.5 trillion in 2009, he predicted.
Telecom gear makers are also showing signs of slowdown, RBC Capital Markets analyst Mark Sue wrote in an Oct. 9 research report. Cisco's third-quarter revenue will increase 6%, Sue estimates—below the consensus estimate of 8.5%. And while markets outside the U.S. have boosted Cisco's results before, Sue doesn't see it happening this time. "Cisco is not immune and the waning optimism of financial firms may have spilled over to multiple enterprises," Sue wrote. "Though emerging markets have historically propped up the softness in North America, we're of the view that things are deteriorating overseas." Analysts expect Cisco to report a 39¢ profit on sales of $10.32 billion when it reports earnings on Nov. 5.
Lowered expectations are hitting Internet companies, too. Sanford C. Bernstein Research slashed its price target on search giant Google from $660 a share to $560 and reduced its target for Yahoo! (YHOO) to $21 from $24. Google Google reports on Oct. 16 and is expected to post a $4.80 per-share profit on revenue of $4.06 billion. Yahoo Yahoo reports earnings on Oct. 21.
On Oct. 10, Viacom (VIA) cut its quarterly per-share earnings forecast by 2¢, to 53¢ per share, citing a "rapid softening of the economy" and uncertainty in forecasting advertising growth, possibly signaling a softening in online advertising.
Web retailers are getting downgraded, too. Scott Devitt at Stifel Nicolaus lowered Amazon (AMZN), reducing his price target from $99 to $76 and his fiscal year earnings per share estimate from $1.47 to $1.42. Aside from slackening sales, he says Amazon will also get hit by the recent declines in the value of the euro, since Amazon does nearly half its business outside the U.S. Devitt also cut estimates on eBay, reducing his target price to $22 from $25 and fiscal 2008 earnings per share to $1.72 from $1.76.