Tech Earnings: The Highs and the Lows

On the eve of earnings season, companies in some sectors are warning that fourth-quarter results may miss the mark. Others are ready for their close-up

by Arik Hesseldahl and Catherine Holahan

Too bad Apple (AAPL) Chief Executive Steve Jobs can't spread a little of the buzz generated by the introduction of the sleek iPhone over the rest of techdom. That way, at least the earnings outlook for companies across all sectors of high tech might be more consistent—and positive, of course.

Instead, as technology companies head into earnings season the results will vary depending very much on the sector. For companies in the chip, mobile-phone, or personal computing businesses, for example, aggressive pricing is expected to take a heavy toll on earnings. But for tech companies that depend on consulting or Internet advertising for most of their revenue, the yearend results—and much of 2007—looks healthier.

For constant combatants Intel (INTC) and Advanced Micro Devices (AMD), the latest round of price wars over chips sold to the personal computer and server markets prompted AMD to issue a warning on Jan. 11 that its fourth-quarter earnings would suffer as average selling prices on chips were "significantly lower" than had been forecast. The warning caused investors to punish AMD stock ahead of its Jan. 23 earnings report and prompted a round of downgrades from analysts (see BusinessWeek.com, 1/12/07, "AMD Skids Amid Lower Forecast").

Waking "the Sleeping Giant"

The warning marked a significant turnaround in the fortunes of AMD, which started 2006 with a lot of momentum, having won considerable market share with chips that were widely seen as technically superior to those of Intel. With new business from Dell (DELL), which had previously used Intel as its sole supplier of microprocessors, AMD was seen as besting Intel throughout much of 2006.

But it wasn't long before Intel responded with a new round of chips that challenged AMD technically and with its long-favored weapon of choice: price cuts. "AMD took too much share from Intel too quickly and woke the sleeping giant," says Doug Freedman, an analyst with American Technology Research in San Francisco.

Intel, which reports earnings after the markets close on Jan. 16, isn't without its own set of challenges. CEO Paul Otellini has shaken things up at the chipmaker, rebranding Intel's flagship line of chips, spinning off the company's wireless chip division to Marvell Technology (MRVL) for $600 million, and laying off 10,000 workers for an estimated cost savings of $2 billion by the end of 2007. Eric Ross, an analyst at ThinkEquity Partners, expects Intel to report sales in the lower end of the range of its forecast for the quarter, which was $9.1 billion to $9.7 billion. "Mostly, the issue is that production really fell pretty hard in December," Ross says. He also says sales to big PC makers such Dell and Hewlett-Packard (HPQ) may have suffered while sales to other, smaller PC makers improved.