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Despite Gloom, Confidence Remains

March 06, 2008


CIO.com
By Marc Ferranti

Despite disturbing reports about consumer spending and lower margins on key technology products, IT industry insiders continue to have faith in longer-term prospects for bellwether companies like Intel, Apple and Cisco.

Market research firm ChangeWave on Wednesday reported that in its latest consumer survey, 39 percent of those polled said they'll spend less over the next 90 days than they did a year ago. That's five points less than in January and the worst result of any of the company's surveys since 2002. ChangeWave also reported that only 19 percent of those polled said they would spend more on consumer electronics over the next three months, compared to 33 percent of those who said they would spend less. That's the weakest forecast for consumer electronics that ChangeWave has ever recorded.

Intel kicked off the week on Monday warning that softening NAND flash memory prices would lower its gross margin for the first quarter. It is forecasting a margin of 54 percent, plus or minus a point, compared with prior estimates of 56 percent, plus or minus two points. Profit margins are a measure of the difference between what a product costs a manufacturer and what it can be sold for. NAND flash memory is used in mobile devices.

Brokerage R.W. Baird said that oversupplies of NAND flash memory would probably continue throughout the year, thus affecting Intel's margins for a while. But brokerage Citigroup, noting that NAND prices will affect margins for several quarters, said that prices in this type of flash memory are probably bottoming out, and more importantly, the overall picture for PC sales this year is surprisingly solid and could make up for the poor flash memory outlook.

"PC demand remains surprisingly intact, despite underlying macro concerns," according to Glen Yeung, who wrote a research report while on a trip to Asia this week. On the trip, he talked to various component makers. "Inventories remain lean in both finished PC and components."

Intel shares lost only $0.01 on the day of the company's NAND flash memory report, and gained back $0.20 the next day.

Apple's share price dipped early in the week after brokerages issued reports that brought up the possibility that weak consumer spending could have an impact on iPhone and iPod sales, and that the 3G iPhone could be delayed beyond the third quarter as carriers test it. Banc of America Securities and RBC Capital Markets both lowered share price forecasts on the company.

Some analysts shrugged off the concerns, however. "Will a slower economy have an impact on iPhone sales? It may," wrote analyst Jeff Kagan in an e-mail report. "But at this point I don't see a major drop in sales. We have to remember the cell phone business is changing. Ten years ago if the economy tightened we might not buy that cool cell phone. That was because ten years ago the cell phone marketplace was not a necessity."

While Apple shares lost $3.29, to close at $121.73 on Monday, they gained back much of that loss over the next few days. On Thursday, Apple rolled out the developers SDK for the iPhone and started to position the device as a serious competitor to Research In Motion's BlackBerry.

Several reports brightened the telecom sector this week. Market research firm Ovum on Tuesday said that although fourth-quarter 2007 fixed-line telecom revenue was largely flat or down among large service providers, their capital expenditures increased by 12.4 percent compared to the fourth quarter of 2006, a vote of confidence in the sector and a good sign for network equipment makers.

Also on Tuesday, at a Morgan Stanley Technology Conference, Cisco CEO John Chambers said, "I'm more comfortable with 12 percent to 17 percent long-term growth than I was a month or two ago.'' Chambers also reported that he expects Cisco to be aggressive about acquisitions.

Then on Wednesday, AT&T (T) announced that an "explosive surge" in data and multimedia network traffic has sparked a company plan to spend US$1 billion next year to expand IP (Internet Protocol) networks for enterprises. The plan includes adding to undersea fiber-optic cable capacity to Asia and new MPLS (Multi Protocol Label Switching) routers in Europe, Asia and the U.S. AT&T shares on Wednesday gained $0.58, to close at $35.45.

Even casual investors understand that a collapse in housing prices and subsequent losses for credit institutions have sparked fears of a full-blown recession in the U.S. In this climate, reports about the economy have caused stock markets to whipsaw up and down this year, taking technology-vendor share prices with them on a roller-coaster ride. This week was no exception, as Nasdaq Composite Index gains early in the week were wiped out on Thursday.

InfoWorld.com