Computer Industry Players Hanging Tough

Several manufacturers' quarterly earnings reports provide a ray of hope.

The leading players in the beleaguered computer industry are bracing for at least several more months of hard times but at the same time are hoping for a recovery in the second half.

In earnings reports this month, a few high-profile computer companies, such as Intel Corp. and Compaq Computer Corp., reported stronger-than-expected sales during their latest quarter, fueling some optimism about the year ahead.

Just the same, company executives and industry analysts remain cautious and worry that 2002 could hold as much heartache as 2001. IBM Chief Financial Officer John Joyce reflected the industrys general uneasiness earlier this month when he begged off offering specific guidance for the year.

"[This year] is going to be another demanding year and a tough one to forecast," Joyce said during a conference call with analysts Jan. 17. "Strategists and security analysts are quite undecided about what to expect of earnings growth for the market as a whole and for the technology sector in particular."

Indeed, a struggling global economy will likely dampen computer sales again this year, said Roger Kay, an analyst for International Data Corp., in Framingham, Mass. "The macroeconomic situation worldwide is still pretty bad, and in some areas, it appears to be worsening," Kay said.

IDCs PC sales forecast for the year reflects Kays somber outlook: The research company predicts PC system sales will decline about 4 percent this year. That projection will come as unwelcome news for the computer industry, which just suffered through one of its most difficult years on record.

Sun Microsystems Inc. underscored the dramatic changes in fortune that swept the industry. After enjoying several years of record growth and profits, the Palo Alto, Calif., companys earnings last year fell along with its sales.

This month, Sun reported its third consecutive quarterly loss and projected that it will post another loss at the end of this quarter. Overall, the software developer and maker of Unix-based workstations and servers reported that it lost $431 million in its second fiscal quarter that ended Dec. 30. The hefty loss is a far cry from the $423 million profit it posted a year earlier.

"Were doing the best that we can in a difficult environment," Michael Lehman, Suns CFO, told market analysts. Sun is projecting a return to profitability this summer, due in large part to an anticipated strengthening in the U.S. economy and IT spending.

In their earnings reports, Compaq, Intel and Advanced Micro Devices Inc. echoed Suns cautious optimism for a stronger second half. For its part, Compaq posted a net income of $92 million, a dramatic turnaround from the previous quarter, when it reported a $499 million loss. While the Houston-based computer maker, which has agreed to be acquired by Hewlett-Packard Co., expects its sales to again dip during the first half, company Chairman and CEO Michael Capellas said he saw indications that sales will rebound later this year. "We did see some strengthening in the IT market in [the fourth quarter], and pent-up demand should drive a stronger recovery in the second half," Capellas said.

Chip maker Intel, of Santa Clara, Calif., ended a disappointing 2001 with stronger-than-expected earnings in the fourth quarter, posting a profit of $998 million, or 15 cents a share, significantly higher than the 11 cents per share projected by Wall Street analysts. However, Intels income still plunged 77 percent from the year before.

Looking ahead to the first quarter, Intel CFO Andy Bryant predicted revenue would be flat to slightly down as "economic indicators remain weak" but said sales should strengthen in the second half, based mostly on a traditional seasonal pattern, rather than any economic signs. "We are ready for a turn in the economy ... but we cant predict when that will happen," Bryant said.

Of the industrys leading players, IBM, of Armonk, N.Y., recorded one of the best performances, pulling in $7.7 billion in profit for the fourth quarter, a slight drop from the $8.1 billion in income the year before.

Thanks to IBMs extensive reach as a hardware, software and services vendor, many in the industry look to the company to offer the clearest guidance about the industrys outlook. But IBMs Joyce, instead, offered a simple assessment of the basic challenge that could stymie computer makers efforts to boost sales. "In this tough environment," Joyce said, "customers continue to be very cautious with their IT spending."