Intel Warning: Larger Tech Decline Foreshadowed?

Wed Jul 14, 3:29 PM ET Add Technology - NewsFactor to My Yahoo!


Erika Morphy, www.newsfactor.com

If forecasts and earnings warnings are anything to go by, the tech industry is not looking very healthy these days.



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Some 20 or so software and tech companies have given notice that quarterly results may be weaker than expected, are weaker than expected, or likely will be weaker down the road. Thus far, the market has heard from Compuware, Fair Isaac, Siebel (Nasdaq: SEBL - news), Veritas (Nasdaq: VRTS - news), Sybase (NYSE: SY - news) and PeopleSoft (Nasdaq: PSFT - news) (although PeopleSoft's claims that Oracle's (Nasdaq: ORCL - news) pursuit of it has dampened sales does have some validity).


The latest broadside comes from Intel. Its Q2 profits have jumped by 96 percent, but it also forecast lower profit margins and a rise in inventories. This raises the question: Has the tech recovery peaked?


The Bad News


There is plenty of evidence to suggest that is so. The Philadelphia Semiconductor Index has fallen 11 percent this year. Another bad sign: Shortly before Intel announced its Q2 results, Merrill Lynch (NYSE: MER - news) downgraded the chip sector.


Smith Barney, for its part, pointedly noticed that the common theme running through the slew of announcements is that the size of the license-revenue misses has been extraordinary. Deals that did close were smaller in size, while purchasing approval cycles lengthened.


To be sure, Intel's inventory problems may be due to transitory factors, namely its recent transition to Grantsdale, its latest chip development. And Intel did register significant profits, after all -- thanks to stronger-than-expected demand for the flash memory chips used in cellular phones.


"Intel continued to post strong year-over-year results in the second quarter as our microprocessor business followed seasonal trends, and our communications business grew nicely, led by flash memory," said Intel CEO Craig R. Barrett.


Economic Malaise?


However, there does appear to be a downward trend in corporate I.T. purchasing. A number of factors are at play: rising interest rates, for example, and spiraling energy costs. Also, for the tech sector in particular, Sarbanes-Oxley is proving to be a drag on software purchases that are not focused on compliance issues.


Other analysts point to an economic recovery that still has not found its sea legs. "More fundamentally, I would say, the economy is not doing as well as the government would like us to believe," Denis Pombriant, managing principal of Beagle Research group tells NewsFactor. He cites as one example the recent jobs report, which was less than half of what analysts were predicting.


"There is still a lot of hesitancy in the economy and that is being reflected in software and hardware sales," Pombriant noted.
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