September 28, 2000 6:20 PM PDT

Earnings warnings point to slowing PC growth

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Is the party over for the PC market? It's beginning to look like it.

Warnings from Intel, Apple Computer, contract manufacturer SCI Systems and others are underscoring an ugly reality for the technology industry: People aren't buying as many computers as the industry projected. Consumer demand has hit a plateau, while sales to corporations and educational institutions are not as strong as expected. Asia continues to see strong growth, but Europe has slowed.

"Demand has not picked up to the extent that some people expected," said Phil Rueppel, an analyst at Deutsche Banc Alex Brown. "There was expected to be a rebound in corporate spending, but that didn't happen.

"Sluggishness is an apt way to describe" the market, he added.

Added Dean McCarron, principal analyst at Mercury Research: "It is starting to look like back-to-school isn't smoking either...I don't think it is as sick as the financial markets think, but there is definitely some escalating cause for concern."

Apple today warned its revenue would total $1.85 billion and $1.9 billion for the quarter ending Sept. 30. Earnings per share will be 30 cents to 33 cents, Apple said, compared with analyst expectations of 45 cents per share.

Last week, Intel warned of weak demand in Europe, though most big-name PC makers said they were on track. But PC manufacturer SCI warned two weeks ago that weaker-than-expected sales would sap earnings.

PC sales are still growing, Rueppel, McCarron and others pointed out. The problem is that sales aren't growing as fast as the historical norm. For the past few years, shipments of PCs have increased 15 to 20 percent a year. Shipments this year were expected to grow by 15 to 17 percent, according to Morgan Stanley Dean Witter analyst Gillian Munson, close to most analysts' estimates.

So far, sales in the first half of the year were subpar, while third-quarter sales will likely be lighter than expected, said Roger Kay, an analyst at International Data Corp.

The fourth quarter usually shows a surge in PC buying, and most analysts expect that to happen again this year. But there is skepticism the late surge will be enough to erase the middling results of the first nine months of the year. Kay further speculated that economic queasiness could curb holiday PC spending.

Jason Wells, an analyst at Wit SoundView, said Apple's difficulties aren't unique to the company and will hurt sales at other consumer-related PC companies such as Gateway. "I don't think it is an issue of (Apple's) execution," Wells said. "I think it is a macroeconomic issue."

But not all agreed. Because Apple's customer base is different from the rest of the desktop and laptop market, Apple's ills don't necessarily reflect the fate of the industry overall, said IDC analyst Anne Bui. "Apple is not a bellwether for how the industry is doing," Bui said.

And in a Sept. 22 report, Munson pointed to Apple-specific problems such as the transition to several new products. "This many new products means that execution will be quite tricky, as Apple has to balance inventory levels of old products with the ramp-up of new products," she said. In addition, PowerMac sales, including the Cube, were slower than expected, she said.

Even with Apple's dramatic stock drop in after-hours trading today, some analysts are unlikely to come to Apple's defense. Though the company said it will lower growth forecasts for the coming year, it refused to provide analysts with any further details. "That's pissing people off," said one analyst.

Wells said Apple management repeated its earlier guidance when he met with them Aug. 31. At the time, Wells concurred with Apple's outlook, assuming a strong new product lineup would see the company through even in the face of overall weaker consumer demand.

"In hindsight, really what happens is when consumers put their wallet in their back pocket, it's staying there," he said.

The problems this quarter don't bode well for the next. Typically, there is a surge of buying in the fourth quarter, but events are conspiring against a happy ending to the year.

"The fourth quarter is up for grabs at this point," said Kay. "There is certainly a lot of nervousness about fuel supplies. If by the beginning of the fourth quarter people are feeling kind of bad, we could revise the (demand estimates) downward."

"People are still buying PCs. It's just not growing as people expected," Rueppel added.

The slowdown stems from a variety of factors. In the consumer market, computer companies have failed to come up with a compelling reason to buy a PC. The sub-$1,000 PC and an expanding Internet brought consumers to stores in record numbers in 1997, while 1999 saw strong growth with "free" PC deals.

World economics also have not favored the technology industry. While Asian PC sales came roaring back, economic uneasiness in Europe has stunted that market. A slowdown in European sales prompted Intel to warn last week that revenue will only grow by 3 to 5 percent in the third quarter over revenue of $8.3 billion in the second quarter, less than the company expected. Most analysts expected the chipmaker's revenue to grow by 12 percent sequentially.

"The rising price of fuel and the (dropping) euro have definitely affected people's ability to spend," said Charles Boucher, an analyst with Bear Stearns.

The slowdown in corporate buying has been attributed to a lack of interest in Windows 2000 as well as a technology hangover from Y2K spending. Interestingly, the consumer market was actually bigger than the corporate market during some months in the United States this year, according to Kay, which is an anomaly.

News.com's Ian Fried contributed to this report.

 

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