October 18, 2002 4:00 AM PDT

PC companies expect little holiday cheer

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While reporting their third-quarter earnings, major PC companies have been shedding some light on how the all-important fourth quarter will shape up--and the outlook is dim.

A series of reports this week and last has reinforced expectations of a ho-hum holiday season, typically the most robust period of the year. Although the reasons vary--the weak economy, lack of compelling reasons to upgrade and fears of war--the bottom line is that there may be little to cheer about. Consider these tidings:

•  Apple Computer said sales are likely to be roughly flat with last quarter's. "Looking forward, we do not expect our industry to pick up anytime soon," Apple CEO Steve Jobs said in a statement accompanying Apple's earnings.

•  Chipmaker Intel said fourth-quarter revenue would be flat to up by six percent.

•  Advanced Micro Devices, a rival chipmaker, said its sales will likely grow in the fourth quarter, but that's due in part to the larger-than-expected slide in the third quarter.

•  Computing and services giant IBM expects earnings to grow at about 12 percent from the third quarter to the fourth, compared with a historical rate of 12 percent to 18 percent.

•  Motorola, which makes products used in wireless and other electronic devices, cut its earnings outlook for the fourth quarter to 10 cents per share from 14 cents. It blamed slowing demand in several of its businesses, including broadband, infrastructure and semiconductors.

•  Gateway Chief Financial Officer Rod Sherwood said the company expects sales to grow "some" in the fourth quarter compared with the third quarter because of gains in market share and some seasonal improvement from holiday shopping.

Overall, sales in the fourth quarter will likely climb 7 percent to 11 percent compared with the third quarter, said Todd Kort, an analyst with research firm Gartner. Over the past five years, the growth rate has been closer to 16 percent.

PC sales peaked in 2000, with about 133 million desktops, notebooks and Intel-based servers sold, according to research firm Gartner. In 2001, sales slipped about 4.6 percent, and forecasts call for a flat year in 2002.

"Going into Christmas this year, nobody has any expectations," NPD Techworld analyst Steve Baker said in an interview last week. "The best expectations are that (it) will look like last year. The worst case is that (sales) will be significantly lower. The reality is that it's likely to be somewhere in the middle."

Sluggish sales are largely attributed to the weak economy. Corporations and consumers appear to be keeping a tight rein on spending because of fears over further job cuts and a potential war with Iraq.

Meanwhile, sales to Asia, which had been propping up revenue for over a year for several companies, began to falter in the second quarter, some companies have said. An upgrade cycle in Corporate America, anticipated since 2001, has yet to materialize.

PC companies also have not come up with a compelling reason for consumers to upgrade, said Toni Duboise, an analyst at market research firm ARS. Microsoft this year will release the portable Tablet PC and its Media Center PC, which puts the PC at the center of the living room. But neither will account for significant sales this year.

"We don't have the big draw," Duboise said. "There is nothing to excite a consumer onslaught," she said. "A continued DVD interest may be an indicator that Sony will fair well with its DVD-clad product line. But, as they say, the proof is in the pudding...I still do not see a compelling new toy to entice the mainstream IT market."

Additionally, buyers are becoming more budget conscious. Intel stated that consumers have shifted toward more budget processors for the past two quarters in its last two conference calls.

The news, however, is not universally bleak. Dell and Sony continue to do well despite the soft conditions. And consumers with extra cash can land some decent machines at good prices.

Dell regained designation as the world's leading PC maker during the third quarter. It lost the distinction to the combined HP-Compaq in the second quarter. As evidence of its continued push to reach out to consumers, the direct-sales company said Thursday it will add 50 new Dell Direct Store kiosks over the next several weeks. Dell started the program in July with 21 of the mini-stores staffed by Dell employees in seven markets.

Sony has grown rapidly in the consumer market and recently released a series of machines with DVD recorders and software to ease the recording process.

The malaise means consumers buying PCs will get a lot for their money. PC makers such as Gateway, Emachines and Hewlett-Packard have been slashing prices and adding rebates for several weeks.

Similarly, Microsoft has begun to bundle free games with Xbox to make it more attractive.

But bargain hunters alone won't save the year, analysts said. The missing link is a catalyst such as a new operating system or other significant reason to turn window shoppers into buyers--as happened last year.

"The combination of Windows XP and the value of the machines--that is what saved Christmas last year," Duboise said.

 

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