5 Tech Firms That Are Hurting Badly

By Chris Marasco - October 22, 2012 | Tickers: HPQ, IBM, ORCL | 0 Comments

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PC giants and chip makers are facing increased headwinds as the market takes a sour outlook.  In September, Intel (NASDAQ: INTC) warned about negative results – and executives were right on the money.

Economic Headwinds

Five factors have created dire straits for PC and chip makers.

1. Weak macroeconomic conditions, including slowing sales in fast-growing regions
2. “Softness” in sales of PCs
3. Thinner demand from emerging markets
4. Increased pricing competition in some types of computer chips
5. Consumers buying tablets instead of PCs

With demand slacking, new markets roiling, and competition rising, the hardware industry is taking a shellacking.

Troubled Companies

Intel correctly forecast its earnings problems.  In Q3, Intel booked a 14% drop in profit, partly the result of $500 million in charges “for excess production capacity as it expects demand for its chips in the fourth quarter to come in lower than originally expected.”

As a result of slowing demand, Intel expects its gross profit margin to shrink in the fourth quarter, further hampering profits.

Intel is not alone in its struggle.  IBM (NYSE: IBM), Advanced Micro Devices (NYSE: AMD), Oracle's (NASDAQ: ORCL) Sun Micro Systems, and Hewlett-Packard (NYSE: HPQ) are also facing unfavorable market conditions.

Big Blue’s revenue dropped last quarter, a negative sign for the hardware and IT services industries.  In each of its major segments, IBM reported revenue declines, including a prominent double-digit percentage fall in its hardware sales unit. 

IBM’s emerging market bets have helped curtail losses – until now.  IBM’s sales in its growth markets like the BRIC nations shrunk 1%, but were booked at a 4% gain due to currency conversion.

Like IBM, AMD and Oracle’s Sun Micro Systems are also facing hard times.  Both firms face the prospect of slowing PC sales, which mean fewer chips sold.  Contributing to this problem is a Christmas season that will likely see large sales of high-end iPads and lower-end Kindles and Nexus 7’s in lieu of traditional PCs. 

AMD shares fell to the low $2 range as AMD failed to deliver strong earnings and as it announced layoffs – totaling up to 15% of its workforce – and dire market conditions.  Like AMD, Sun Microsystems also faces poor market demand.

For Oracle, the implications are clear: If Sun Microsystems is hit by the sour market, Oracle’s larger-than-life 27.5% profit margin will trimmed.

Finally, PC-maker H-P is flailing.  Weighed by net debt of $20 billion and a -4.5% profit margin, H-P CEO Meg Whitman hardly has the resources to mount a turnaround.  The company’s struggles have led to a 45% drop in the stock YTD, as investors flee a slowing company in a slowing market.  H-P’s operating margin of 7.5% is noteworthy, but it indicates that the company is weighed down by large debt payments.

Not an Easy Fix

The tough hardware and PC markets will continue to hamper growth, as consumers buy fewer PCs in favor of tablets, and as growth in emerging markets slows.  To keep profits strong, these tech giants must make changes to their business models and investments. 

First, tech giants must move to higher-margin businesses.  This can include more expensive products, or service-oriented businesses.  Second, the companies must continue to invest in high-growth areas, so that they can reap the benefits of that growth when markets turn around.  Finally, they must trim hiring – or spur firing – in order to keep their margins stable.

Overcoming a rough spot in the market is hard. But companies willing to tweak their product mix and keep costs low can reap rewards during the boom times, and decrease the pain in the bad times.

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