Advertisment

In rough times, bigger is better in high-tech

author-image
CIOL Bureau
Updated On
New Update

Duncan Martell

Advertisment

SAN FRANCISCO: In tough economic times such as these, an old adage is again

proving to be true for high-technology: Bigger is better.

Two high-tech titans, networking giant Cisco Systems Inc. and No. 1 personal

computer maker Dell Computer Corp., both stood pat on financial guidance this

week. Not so with two smaller players, Advanced Micro Devices Inc., with about

20 per cent of the market for microprocessors, and Gateway Inc., the No. 4 PC

maker.

AMD on Friday warned of a third-quarter loss that will be double what

analysts expected, blaming a brutal price war with its far larger rival Intel

Corp., which is holding up well.

Advertisment

Gateway, too, is mired in a bitter price war begun by rival Dell, and it

blamed declining PC prices and the Sept. 11 attacks as well for a third-quarter

loss that will be almost four times wider than analysts had forecast.

The lesson? If you're big, a market-share leader and have lots of cash, it's

a whole lot easier to weather not only a recession in high-technology, but one

in the broader economy of the kind that most economists now see coming following

the attacks.

"All this plays to a lot of the bigger, more established firms that have

a multitude of products and services to mix and match to what the customer

needs," said Barry Jaruzelski, managing partner of management consulting

firm Booze Allen & Hamilton's global computers and electronics practice in

New York.

Advertisment

Stronger, better, faster



Dell, which earlier this year supplanted rival Compaq Computer Corp. as the No.
1 PC maker, ended its most recent quarter with $4.16 billion in cash. Cisco has

$6.91 billion in cash and short-term investments.

Intel, which analysts say is succeeding in wresting market share back from

AMD, has $9.34 billion. And Microsoft Corp. MSFT.O, the world's largest software

company and provider, is sitting on a whopping $31.6 billion in cash and

short-term investments.

Advertisment

"When you come into a time like this and you've got billions for

research and development and to ride through the cycle with, that's

helpful," said Henry Asher, president of the North Star Group, a N.Y.-based

investment advisor.

It's not just survival, either. In past down cycles, particularly in the

semiconductor and semiconductor-equipment industries, the largest companies with

the broadest product lines emerge from slumps stronger, better and faster than

they went in to a slowdown, analysts said.

That's true for Applied Materials Inc., the largest maker of the equipment

that makes semiconductors. Applied's gear spans 75 per cent of the entire

chip-making process, and its Chairman, Jim Morgan, has said repeatedly this year

that it will emerge from this slump with more market share than before, just as

it has in the past.

Advertisment

"The dominant just get more dominant," Jaruzelski said, speaking of

providers of capital equipment such as Applied.

Cisco's chief executive John Chambers, speaking at a Goldman Sachs conference

on Wednesday in New York, said he was "very comfortable with the consensus

estimates" of 2 cents a share in its fiscal first quarter.

Advertisment

'Surprised at how fast things rebounded'



Chambers added that customer orders were on track in June, July, August and
September. While Chambers said there was some fallout from the airplane attacks

on the United States, business has been good since then.

Dell said much the same thing the next day, when the computer maker stood by

its previous target for earnings of 15 cents to 16 cents a share on sales of

$7.2 billion to $7.6 billion for the third quarter ending Nov. 2. Analysts

expect earnings of 15 cents a share on sales of $7.27 billion.

"We were actually a little surprised by how fast things rebounded,"

Dell President Kevin Rollins said on a conference call to discuss its

mid-quarter update.

Advertisment

Of course, that it was a mid-quarter update helped, too. Both Cisco's and

Dell's quarters run through October, unlike AMD's and Gateways', so they have

some time to make up sales that were lost after the disruption caused by the

attacks.

AMD, stung by renewed competition from Intel and the slowing PC sales, warned

early on Friday that sales tumbled 22 per cent in its third quarter and that its

loss could be as high as $220 million including restructuring charges of as much

as $110 million.

"In the face of very aggressive competition, average-selling prices for

PC processors declined sharply, which resulted in substantially lower

revenues," AMD said in a statement. It was the second time in little more

than a month that AMD lowered expectations.

Bigger ships mean smoother sailing



Consumer-focused Gateway, too, is struggling from being a somewhat smaller fish
in a pond that itself is evaporating. Market research firm International Data

Corp. is predicting a 10 per cent decline in consumer PC sales this year.

Noting that the Sept. 11 attacks had a marked impact on demand in the

consumer segment, Gateway said on Thursday it now expects a third-quarter loss

of 14 cents to 17 cents a share, excluding charges, compared with the

4-cent-a-share loss expected by analysts surveyed by Thomson Financial/First

Call.

Already buffeted by a fierce price war undertaken by Dell, Gateway earlier

this year announced plans to slash 25 per cent of its work force while pulling

out of Europe. "The larger more diversified companies in general are in

better shape," said software analyst Bob Austrian at Banc of America

Securities.

Microsoft, boosted by sales of Windows 2000 and other corporate software, for

example, has forecast its first-quarter sales will rise 3.5 per cent to 7 per

cent from a year ago - not too shabby given the havoc in high-tech.

"Oracle, PeopleSoft, Siebel, Microsoft - these companies are just larger

ships," Austrian said.

(C) Reuters Limited 2001.

tech-news