Duncan Martell
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.
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.
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.
"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.
"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.
'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.
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.