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Microsoft joins Intel facing China slowdown

Microsoft and Intel are likely to face lacklustre sales growth

  • Bloomberg
  • Published: 16:44 July 16, 2012
  • Gulf News

Chairman and CEO of Microsoft Steven Ballmer (second from left) with other senior officials
  • Image Credit: Bloomberg
  • Chairman and CEO of Microsoft Steven Ballmer (second from left) with other senior officials from the company in Taipei, Taiwan. Microsoft will report quarterly earnings this week. As consumers choose tablet computers and smartphones over PCs, Microsoft is expected to report weak sales growth.

San Francisco: Intel Corp and Microsoft Corp, whose products run at least 80 per cent of the world’s personal computers, are set to report lacklustre sales growth as China’s slowing economy exacerbates stalling demand for PCs.

Intel, the largest maker of microprocessors, and Microsoft, the No 1 software company, will report quarterly earnings this week. Analysts project both will say sales rose 5 per cent or less from a year earlier, as consumers choose tablet computers and smartphones over PCs or hold off on purchases altogether.

Growth is slackening in China, the world’s largest PC market since last year. That’s fuelling concern that electronics makers can’t count on Asia to counterbalance diminished demand in recession-ravaged Europe or in the US, where a recovery is taking hold at a slower-than-predicted pace. With Intel and Microsoft yet to gain market share in tablets against Apple Inc, the PC industry may struggle to grow at all this year, according to research by Robert W. Baird & Co.

“The current picture is lousy,” said Pat Becker Jr, a fund manager at Portland, Oregon-based Becker Capital Management Inc, which owns Intel and Microsoft shares. “It’s Europe, it’s the chain reaction into the emerging markets.

There have already been hints that China is affecting growth in the PC industry. Last week, Intel rival Advanced Micro Devices Inc disclosed that revenue unexpectedly slumped 11 per cent in the second quarter. AMD, Intel’s only remaining competitor in PC processors, blamed weakness in China and Europe for a revenue decline that contrasted with its previous estimate for growth of as much as 6 per cent.

China growth

Applied Materials Inc, Intel’s largest supplier, cut its annual targets last week, citing delayed orders for its chipmaking equipment because of weaker end-market demand for semiconductors in the same regions.

China recorded its weakest expansion in three years in the second quarter when its economy advanced 7.6 per cent from a year earlier, a government report in Beijing showed on July 13.

In April, Santa Clara, California-based Intel predicted sales of $13.6 billion (Dh49.9 billion), plus or minus $500 million, for the second quarter. Analysts on average project sales will rise about 4 per cent to match the midpoint of the company’s forecast, with per-share profit estimated to be 52 cents a share, according to data compiled by Bloomberg. Gross margin, the only measure of profitability that Intel forecasts, was expected to be about 62 per cent, the company said.

Intel will post earnings tomorrow after 4pm New York time, kicking off two weeks of financial reports by the largest US technology companies. Redmond, Washington-based Microsoft will follow on July 19 after the market closes.

‘Very poor’

While AMD’s revenue disappointment may have been caused in part by market-share losses to Intel and Nvidia Corp in graphics chips, the magnitude of the miss shows just how quickly PC demand has dropped, said Mike Burton, an analyst at Northland Securities Inc.

‘’It’s indicative of a very poor environment for PCs,” said Burton, who has a market perform rating on Intel shares. “It’s not just AMD.”

Global PC shipments stalled in the second quarter, declining 0.1 per cent to 87.5 million units, according to a July 11 report from industry researcher Gartner Inc. The firm cited an uneven economic recovery in the US, slower spending in China and Europe, and the encroachment of Apple’s iPad and other tablets. Gartner predicts the PC market will grow just 2.7 per cent this year.

Intel’s forecast

Added evidence that Europe’s economic woes are crimping technology sales came on July 12, when printer maker Lexmark International Inc said that revenue declined about 12 per cent in the June period, citing Europe. That’s greater the 7 pe rcent to 9 per cent drop the company had forecast in April.

Intel may be forced to abandon its prediction for PC shipment growth at a percentage in the high single digits this year, Burton said. The chipmaker, whose outlook on the market has remained higher than forecasters such as Gartner, has said that its dominance gives it a more precise view of what’s going on in developing nations, which are seeing an explosion in demand as consumers there become able to afford computers for the first time.

Chris Caso, an analyst at Susquehanna International Group, said Intel is more likely to stick to projecting better market conditions that analysts estimate in an effort to convince its customers to keep ordering.

IPad effect

“Intel realises that their view of the market influences the market because they are the market,” said Caso. “They’re trying to convince customers, investors and eventually the consumer that they’re right.”

In an attempt to fire up demand for laptops and take on tablets, Intel last year began touting what it calls Ultrabooks, slim-line notebook PCs that resemble Apple’s MacBook Air. The chipmaker set the specifications for the devices which are made by a range of PC makers including Dell Inc. and Samsung Electronics Co.

Weak computer demand from consumers switching to tablets such as the iPad has been a drag on Microsoft’s results for the past 18 months. Sales in the Windows group have missed analysts’ estimates in four of the six quarters through March as customers shifted to tablets from lower-cost laptops running Windows. Other consumers have been put off by a lackluster economic recovery in the US and concerns about the debt crisis in Europe.

Analysts project Microsoft’s net income in the fiscal fourth quarter, which ended in June, fell to 62 cents a share, the average estimate compiled by Bloomberg.

Demand lull

Those predictions don’t take into account a $6.2 billion writedown the company has already announced in its online division, which will mean Microsoft will post a net loss for the quarter.

Sales will rise 4.7 per cent to $18.2 billion in the period, analysts estimate.

“The first thing hurting the PC business is macroeconomic,” said Becker. “The second thing is Apple and the vacuum it’s created, and the third is probably some people waiting for the new product from Microsoft. You’ve got the lull between product cycles.”

The company’s newest version of its flagship operating system, Windows 8, goes on sale at the end of October on machines including PCs and tablets. The software was designed to combat Apple’s lead in the tablet market, and Microsoft has upped the ante by offering its own tablet hardware, called Surface. Chief Executive Officer Steve Ballmer told partners at a conference last week the company is aiming to sell millions of the devices in the coming year.

Future focus

Becker, along with Kim Caughey Forrest, an analyst at Fort Pitt Capital Group Inc, which manages $1.2 billion in assets, including Microsoft shares, said Microsoft may be insulated from the slowdown in PC demand by some of its other businesses, including the Xbox video-game console and server software, and by the fact that the company books a lot of revenue from multiyear contracts that are recognized over the term of the agreement. That means a chunk of the company’s sales each quarter are secured before the period even starts.

The outlook for Windows in the near term, however, is less rosy, and Microsoft will probably encourage investors to focus on the future, Caughey said.

“The subtitle for this quarter’s earnings will be, ‘Look over here,’” said Caughey. “This quarter is, well, whatever, but look over here.”

 

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