Global slowdown erodes profits at technology firms

Global economic concern leads to spending curbs on technology and personal computers, depressing the incomes of Intel and IBM

PUBLISHED : Thursday, 18 October, 2012, 12:00am
UPDATED : Thursday, 18 October, 2012, 4:47am


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The global economic slowdown is prompting companies to curtail technology spending and pushing consumers to favour mobile devices such as Apple's iPhone over personal computers, eroding profitability at Intel and trimming sales for International Business Machines.

Intel, the largest chipmaker, forecast fourth-quarter gross margins that missed analysts' estimates, while IBM, the biggest computer-services provider, reported third-quarter revenue that fell short of projections.

IBM customers, hurt by anaemic demand in home markets, put off software purchases and computer-maintenance contracts. Budget-strapped consumers are shunning personal computers to buy cheaper handheld devices such as the iPhone, while businesses are shying away from servers that run networks, sapping demand for Intel chips.

The reports bode ill for Microsoft, the No 1 software firm.

"It's not looking good out there," Alex Gauna, an analyst at JMP Securities, said.

Intel's profit is being crimped by expenses to slow factory output and fight rising inventories.

Corporate customers were showing "caution" in placing orders and consumers in developed markets were curtailing purchases of personal computers, chief financial officer Stacy Smith said.

Gross margin, the only profit yardstick Intel forecasts, would be about 57 per cent, Intel said. That is less than the 61.4 per cent average estimate.

"Intel's outlook confirms fears that the PC slowdown is likely to continue," Bill Kreher, an analyst at Edward Jones & Co, said. "The gross margin is well below our view."

As customers curbed orders, inventory rose to US$5.32 billion, from US$4.9 billion in the previous quarter, Intel said.

"The question is how long will it take for them to burn off inventory," Patrick Wang, an analyst at Evercore Partners, said.

Intel's announcement kicks off two weeks of earnings reports from the largest US technology firms. Because its chips power 80 per cent of the world's personal computers, investors view the numbers as a broad indicator of demand for desktop, server and laptop computers.

The personal computer market will contract 1.2 per cent to 348.7 million units this year, according to IHS iSuppli.

Consumers in China, who mainly buy laptops, had joined their counterparts in the US and western Europe in holding off on computer purchases, Intel chief executive Paul Otellini said.

That, combined with corporate demand that was "relatively flat," meant the personal computer market was growing at less than half its normal pace at this time of year, he said.

IBM said revenue fell 5.4 per cent to US$24.7 billion, against average analyst estimate of US$25.4 billion.