No Touchdowns for Tech Bellwethers

IBM and Intel reported mixed first-quarter results, underscoring worries about weak U.S. demand and tough competition. But there was good news, too

by Arik Hesseldahl

First-quarter results from some big tech bellwethers including Intel and IBM reinforced concerns that this may not be a banner year for the computing industry. The culprits include a slowdown in spending in the U.S. and price battles among component makers.

IBM (IBM), the world's largest provider of computer services, pointed to softness in the U.S., offset by growth in Europe and Asia. Sales to the region that includes Europe gained 13%, to $7.6 billion, while Asia gained 10%, to $4.5 billion. Sales in the Americas, meantime, rose a scant 1%, to $9.1 billion. "The demand in Asia/Pacific and Europe outpaced that in the U.S. by a wide margin," said Bob Djurdjevic, an analyst at Annex Research, in a research note. "Emerging markets of China, India, Brazil, and Russia continue to be the growth engine that's accounting for an increasing share of the company's overall revenue rise."

Narrower Vista

Djurdjevic also pointed to weakness in IBM's global services division, which saw sales pick up 8%, but had signed service contracts down 2% year-on-year. "The biggest part of IBM is back to its old malaise," he said. "The declines in new signings means that this unit is losing more business than it's winning." Other areas, such as software, performed better. Software sales rose 9%, to $4.3 billion. Overall, IBM's profit picked up 8%, to $1.84 billion, on sales of $22 billion.

Meanwhile hard-drive maker Seagate (STX) painted a dour picture, saying it expects full-year profit of 92¢ to 96¢ a share, vs. an average analyst forecast of $1.57 a share. March quarter earnings of 39¢ a share were down substantially from 56¢ a year earlier. Chief Executive Bill Watkins said he was "disappointed" with the results and said the company "clearly miscalculated the market." The company earlier in the month prepared investors for the shortfall, citing a price war for its disc drives. Seagate stock tumbled nearly 6% in after-hours trading, to $20.84.

Another tech titan beset by price pressure is chipmaker Intel (INTC), which has been locked in a market share tug-of-war with AMD (AMD) (see BusinessWeek.com, 1/9/06, "Inside Intel"). And while prices on components have been under pressure, companies have been slow to move unsold inventory left over from the fourth quarter. What's more, a much hoped-for upgrade of PCs spurred by the release of Microsoft's (MSFT) new Windows Vista operating system has turned in underwhelming results so far.

Chips Ahoy

Still, the flurry of results gave reason for optimism in some areas. Intel appears to have held its own against AMD, reporting a 19% increase in per-share profit—although a one-time tax benefit added 5¢ a share to earnings. The company also raised its gross profit margin forecast for 2007 to 48% plus or minus 2 percentage points. And Intel expects higher research and development spending, which at $5.6 billion for the year will be higher, by $200 million, than previously expected.

The company is using that budget to develop chips it hopes will put it far ahead of rivals (see BusinessWeek.com, 2/12/07, "Intel Builds the Fastest Chip Ever"). Intel stock finished regular trading up 29¢, or more than 1%, closing at $20.98, and then added 47¢ after hours.

Market research firm iSuppli said that notebook sales were strong, amounting to nearly 20 million units worldwide in the quarter, vs. fewer than 18 million units in the year-ago quarter. Additionally, Intel has gained some of the market share previously lost to AMD, iSuppli says, mainly on the strength of its dual-core chips.

Server Support

Meantime, storage company EMC (EMC) is benefiting from recent acquisitions. The company said sales rose 17%, to $2.98 billion. One big acquisition, VMware, saw its sales jump 95% year-on-year. VMware specializes in virtualization software that lets companies run multiple computing software systems—Windows, Linux, or other systems—on a single computer system. These "virtual" systems are expected to boost efficiency of data centers in the coming years.

Even as EMC enjoys rising demand for the emerging technology, other companies specializing in servers—the computers that run Web sites and corporate networks—could suffer. As fewer servers are needed, overall demand may drop, in turn crimping the need for the high-end chips that run them.

Intel CEO Paul Otellini sounded a bullish note on server demand during his company's earnings call: "We believe that less than 5% of the servers that need to be deployed are operating in the market today," he said. "We still see significant growth in servers, despite virtualization."

Hesseldahl is a reporter for BusinessWeek.com.