Intel, IBM See Sales Stall as Europe Crisis Crimps Orders

Intel Corp. (INTC) and International Business Machines Corp. (IBM), computer-industry bellwethers, posted the slowest sales growth in more than two years last quarter as the European slump weighed on orders.

IBM’s revenue climbed 0.3 percent to $24.7 billion in the period, while Intel sales rose 0.5 percent to $12.9 billion. That was the smallest increase for either company since the third quarter of 2009, when the U.S. economy was just emerging from recession. Even so, Intel predicted a pickup in sales for the current quarter.

The two technology giants are seeking growth in emerging markets while coping with a slowdown triggered by the European debt crisis. The personal-computer market, which contracted in the U.S. last year for the first time since 2001, also is hurting demand for Intel’s processors. IBM, meanwhile, is more focused on expanding earnings per share, rather than pursuing less-profitable orders.

“All else being equal, you’d rather see top-line growth,” said Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co. in New York. Still, he said, most investors are looking more closely at profit than sales. “IBM has conditioned investors to focus on EPS growth. That’s how it provides guidance.”

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An IBM Data Center.

Gross Margin

Intel also forecast narrower profit margins than analysts had anticipated, sending shares down the most in three months.

IBM’s shares fell 3.5 percent to $200.13 at the close in New York, its biggest one-day decline since Oct. 18. Intel declined 1.8 percent to $27.95.

Intel’s gross margin, or the percentage of sales remaining after deducting costs of production, will be about 62 percent in the second quarter, Intel said yesterday in its earnings report. Analysts had projected gross margin of 63.5 percent on average, according to data compiled by Bloomberg.

Intel’s costs are rising as it overhauls older plants and builds new ones. The company expects to recoup that investment when the factories reach full output, and Intel is sticking to its gross margin forecast of 64 percent for the year.

“The whole story of Intel in the past two years has basically been margins,” said Daniel Amir, an analyst at Lazard Capital Markets LLC in San Francisco. “For the first time, they’re kind of missing the margin target by more than a percent.”

‘Relatively Expensive’

Intel Chief Financial Officer Stacy Smith said demand from corporations and emerging markets remains relatively strong. The company’s costs are rising because it’s preparing three factories to run on the new 22-nanometer production process.

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Attendees look over Ultrabook computers at the Intel Corp. booth at the 2012 International Consumer Electronics Show (CES) in Las Vegas.

“As we start the ramp of those products, the first units that come out are relatively expensive,” Smith said. “Then they come rapidly down the cost curve over the course of this year.”

Still, the sluggishness in Europe -- triggered by concerns that countries such as Greece and Spain may default -- has taken a toll on sales. And the PC industry is still recovering from a disk-drive shortage.

“Consumer markets in mature markets, and the U.K. is part of that, is tough,” Graham Palmer, Intel’s director of the U.K. and Ireland, said in a Bloomberg Television interview.

Sales in the current period will be $13.6 billion, plus or minus $500 million, the Santa Clara, California-based company said. Analysts had estimated revenue of $13.43 billion, the average projection according to data compiled by Bloomberg. Sales were $13.03 billion a year earlier.

Recovery Coming?

“The revenue guidance is actually not bad -- it reflects a PC market recovery,” Amir said. “I think people expected it to be a little bit better.”

At IBM, the plan is to make up for slow growth by selling more-profitable software. Operating earnings will increase to at least $15 a share this year, IBM said yesterday, boosting its January forecast of at least $14.85.

The company’s net income advanced to $3.07 billion, or $2.61 a share, last quarter, from $2.86 billion, or $2.31, a year earlier. Excluding some items, earnings rose to $2.78 a share, topping the $2.65 projected by analysts.

Revenue from Europe, Middle East and Africa declined 2 percent to $7.6 billion, while sales in the Americas and Asia- Pacific region increased.

The effect on IBM’s revenue growth from Europe’s debt crisis may worry some investors, said Joseph Foresi, an analyst at Janney Montgomery Scott LLC in Boston.

The euro averaged $1.31 in the first quarter, down 4.2 percent from the year-earlier period as Europe’s financial woes continued. The drop means revenue from Europe, which combined with Middle East and Africa accounts for about a third of IBM’s sales, is worth less when converted to dollars.

Developing Economies

Chief Executive Officer Virginia “Ginni” Rometty, who took over in January, is seeking to expand in faster-growing economies. Revenue from growth markets, such as Brazil, India and China, increased 9 percent in the first quarter. Sales from the regions will make up at least 30 percent of revenue by 2015, the company has said, up from 22 percent in 2011.

Sales at IBM’s software unit rose 5.5 percent to $5.6 billion. Services revenue growth slowed to 0.7 percent from the fourth quarter’s 3 percent, while hardware sales declined 6.7 percent. IBM has set a goal of adding $20 billion in new revenue, in part by spending about $20 billion on acquisitions, from 2010 to 2015.

Chief Financial Officer Mark Loughridge reiterated that acquisition goal on a conference call yesterday. IBM spent $1.3 billion in the first quarter closing purchases of five companies, including DemandTec Inc., he said.

IBM also relies on cost cuts and stock buybacks to expand earnings per share, Bernstein’s Sacconaghi said. The question for shareholders: How long will that strategy will work?

“Investors sometimes question can you continue to grow EPS when your revenue growth is so much lower,” he said. “At some point, you’re going to run out of cost improvements.”

To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net; Beth Jinks in New York at bjinks1@bloomberg.net

To contact the editors responsible for this story: Peter Elstrom at pelstrom@bloomberg.net; Tom Giles at tgiles5@bloomberg.net

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