Business Tech

The chip recovery is under way, with quarterly sales forecast to increase year-over-year for the first time in 2009, according to a report from market researcher iSuppli on Tuesday.

Revenue from chip sales is expected to rise by 10.6 percent in the fourth quarter compared to the same period in 2008. This would mark the first time this year that revenue has risen compared to the same period a year earlier, according to Dale Ford, senior vice president, market intelligence, for iSuppli.

"The seeds of the current recovery were sown in the second quarter," said Ford. At that time, manufacturers began to report positive book-to-bill ratios, indicating future revenue growth. This was followed by more sequential revenue growth in the third quarter, according to Ford.

Semiconductor inventories returned to more normal levels in the third quarter after chip suppliers shed stockpiles, he added.

Earlier this month, chip giant Intel said third-quarter revenue was down only 8 percent year-over-year, an improvement over the 15 percent and 26 percent year over year declines in the second and first quarters respectively. Intel also indicated that it expects future growth. "We're finished with the cutting phase of our efficiency effort and now in the growth phase of that efficiency effort," said Intel's chief financial officer Stacy Smith at that time.

Overall, it's been a tough year, however. Global semiconductor revenue is set to contract by 16.5 percent in 2009, following a 5.4 percent decrease in 2008.

And iSuppli has added a good dose of caution to its report. Though sequential quarterly increases in revenue will continue into 2010, sales growth will not be sufficient to lift semiconductor revenue back to pre-recessionary levels until the 2011-2012 time frame, according to Ford.

And there are troubling indicators such as the climbing U.S. unemployment rate, which reached 9.7 percent in August and is projected to exceed 10 percent at its peak, which will continue to constrain consumer spending, Ford said.

Updated at 3:10 p.m. PDT: adding comments from CEO Paul Otellini and CFO Stacy Smith.

Intel's third-quarter revenue jumped $1.4 billion over the second quarter, though year-to-year revenue and profit comparisons were down.

The world's largest chipmaker is struggling to lead the PC industry out of a brutal downturn that saw demand collapse earlier in the year.

Revenue came in at $9.4 billion, beating Wall Street expectations, which hovered at just more than $9 billion. Revenue, however, was down from the $10.2 billion reported in the year-earlier period.

On a year over year basis, revenue for the third quarter was down 8 percent, Intel said in a statement, adding that this was an improvement over the 15 percent and 26 percent year over year declines in the second and first quarters respectively.

Intel shares were up more than 5 percent after hours, trading as high as $21.45 form a regular closing price of $20.49.

"Overall (corporate) enterprise remains weak," said CEO Paul Otellini in the company's earnings conference call.

Profits were $1.9 billion, or 33 cents per share, down from the third quarter of last year, when Intel posted a profit of $2.0 billion, or 35 cents a share. But the 33 cents beat analyst forecasts, which were 28 cents per share.

The chipmaker's gross margin for the quarter, a crucial earnings indicator, was 57.6 percent, higher than the company was projecting.

Looking ahead, Intel expects revenue to hit $10.1 billion, "plus or minus $400 million," in the fourth quarter, and gross margin to improve to 62 percent, plus or minus 3 percentage points.

Intel also said the average selling price for microprocessors was slightly down sequentially.

Inventories were also down $315 million sequentially. Intel chief financial officer Stacy Smith said inventories were a little lower than Intel would like and that Intel intends to increase inventories in the fourth quarter.

Updated at 2:30 p.m. PDT: adding statements from Dell.

Intel and Dell are indicating that PC demand may be increasing but it's not clear how sustained or strong this trend is.

The news Friday that Intel raised guidance is not a surprise, according to Ashok Kumar, an analyst at investment bank Collins Stewart. "It's in line with seasonal trends and reflects strong back-to-school build in the PC food chain," he said.

Kumar added, however, that the strength of actual sales to end users of PCs won't be known until later. "The ramifications for Intel is that they'll continue to see benefits from supply chain rebuilds but where the rubber meets the road is the actual back-to-school sell-through."

Broadpoint AmTech analyst Doug Freedman also cautioned that though PC "build rates are accelerating" and "inventory replenishment" is taking place, "inventory replenishment means that there is no inventory so they have no choice but to build," Freedman said.

But he added that Intel's guidance "affirms the thesis that PC recovery is under way. Consumer now, Enterprise next." Recovery is initially driven by consumer PC demand and then by corporations, usually one to two quarters later, according to Freedman.

Both Freedman and Kumar stated emphatically that the Windows 7 launch, at this point at least, is not having as big an impact on build rates as previously expected.

Related to Windows 7 is the expectation that latent demand will kick in for replacing old PCs at companies--an expectation that Intel and Dell have cited in earnings-related discussions. But don't expect blockbuster replacement numbers, according to Kumar. "Yes, you have an aging installed base but we don't expect anything more than 20 or 25 percent to come up for replacement," said Kumar.

Adding to the uncertainty are Dell's second-quarter results, which were not that encouraging, according to Kumar. "Most of the revenue stream came from the public sector. Enterprise and consumer remains weak," he said, referring to Dell's profit, which was down 23 percent, and stimulus-package funds that flow to the public sector.

And Dell made this cautious statement on Thursday: "In the third quarter, the company expects seasonal demand improvements from the Consumer and U.S. federal government businesses...Dell believes a refresh cycle in commercial accounts is more likely to occur in 2010...(but) the company continues to see pressure in the form of component costs and areas of aggressive pricing in the near term, and continues to take actions to offset these items."

"The problem for the industry at large is that ASPs (average selling prices) are dropping like a rock," said Kumar. And on a macro level "employment is still weak and consumer discretionary spending is under pressure," according to Kumar.

This was originally posted at ZDNet's Between the Lines.

Intel on Friday raised its guidance for third-quarter revenue, citing stronger-than-expected demand for microprocessors and chipsets.

Revenue is now expected to be $8.8 billion to $9.2 billion, compared to the previous guidance of $8.1 billion to $8.9 billion. Analysts had been expecting $8.55 billion in revenue. The company also said it expects gross margins to be in the upper half of the previous range of 51 percent to 55 percent.

The news comes on the heels of Dell's better-than-expected earnings report Thursday. The company said there were signs of stabilization in the quarter and that it expected "seasonal demand improvements" but still pointed to 2010 before it sees a refresh cycle from the enterprise.

Shares of Intel were on the rise, up more than 5 percent in early trading.

The company is scheduled to report its third-quarter results on Oct. 13.

SAP on Wednesday reported a 4 percent gain in earnings for the second quarter despite lower sales.

For the quarter ended June 30, the business software giant netted 423 million euros ($600 million) compared with 408 million euros for 2008's second quarter. The company attributed the gain to cost cuts and to stronger growth in its profit margin, the net difference between sales and earnings.

"Despite the challenging economic conditions, the strength of our business model combined with a strong cost discipline has proven itself once again by enabling us to report another quarter of strong operating margin growth," said SAP Chief Financial Officer Werner Brandt.

Hurt by the global downturn, overall revenue dropped 10 percent to 2.6 billion euros from 2.9 billion euros a year ago. Software sales were hit especially hard, falling 40 percent to 543 million euros from 898 million euros in the year-ago quarter. SAP noted that 2008's second quarter was prior to the current economic recession.

(Credit: SAP)

Though the company didn't offer sales and earnings estimates for the full year, it did boost its forecast for operating margin for 2009. Excluding nonrecurring expenses, SAP now expects its annual operating margin to range from 25.5 percent to 27 percent, up from its earlier estimate of 24.5 percent to 25.5 percent, which it provided in its first-quarter report.

As part of its cost-cutting efforts, SAP announced earlier this year that it would slice about 3,000 jobs globally by the end of 2009.

The company has also been trying to expand its reach through acquisitions. In May, SAP picked up carbon management firm Clear Standards. Last week, it announced it would acquire SAF AG, a provider of global forecasting software for the retail market.

On the back of Intel's better-than-expected financials, an iSuppli analyst said Monday that chip inventories will recover, driving up sales in the second half of the year.

Following positive financial guidance from Intel and other chipmakers, global semiconductor revenue will increase by a sharp 10.4 percent in the third quarter and by 4.9 percent in the fourth quarter, according to Carlo Ciriello, a financial analyst for iSuppli.

This expected recovery comes on the heels of four consecutive quarters of chip inventory declines, which took their sharpest dive in the first quarter of this year, plunging by 15.1 percent. iSuppli forecasts that second-half inventories will increase modestly by 5.1 percent in the third quarter and 1 percent in the fourth.

"Falling demand in the first half of 2009 prompted a swift inventory correction among chip suppliers," said Ciriello, in a statement. "Companies dialed down (factory) utilization levels and cleared swaths of inventory by reducing Average Selling Prices (ASPs) in anticipation of continued depressed demand," he added, describing how the sluggish market conditions in the first half should set the stage for an inventory correction in the second half.

FBR Capital Markets analyst Craig Berger said in a research note Monday that because Intel's forecasts were much better than investors anticipated three months ago, he expects global demand to recover as "the world gets back to normal." Berger's comments appeared in the Wall Street Journal on Monday.

Oracle announced on Tuesday lower fourth-quarter sales and earnings but was encouraged as results beat expectations.

For the fourth quarter of its fiscal year, which ended May 31, the database giant earned $1.9 billion, or 38 cents a share, versus $2 billion, or 39 cents, a year earlier. Sales fell 5 percent to $6.9 billion, compared with $7.2 billion a year ago. However, Wall Street had been predicting revenue of only $6.47 billion.

Oracle noted in its report that results were hurt by the lower value of foreign currencies versus the U.S. dollar. Without that impact, fourth-quarter income would have grown 9 percent to 42 cents a share.

The company was also pleased with its non-GAAP results, which discount certain nonrecurring costs.

"We executed substantially better than we expected on both the top and bottom line for the quarter," Oracle CFO Jeff Epstein said in a statement. "We grew Q4 non-GAAP operating margins by a faster than expected 240 basis points to over 51 percent. That helped us generate $7.7 billion in free cash flow for fiscal 2009."

For the full year, earnings per share rose 3 percent over the previous year to $1.09, while total net income inched up 1 percent to $5.5 billion. Revenue in 2009 hit $23 billion versus $22 billion for the preceding year.

"Adjusted for the substantial movement in the U.S. dollar exchange rate this fiscal year, which is beyond our control, we grew non-GAAP earnings per share by 19 percent for the year," Oracle President Safra Catz said in a statement. "That's an amazing achievement given what's been happening in the global economy over the past twelve months."

Results were boosted by heavy use of Oracle's business applications over those of archrival SAP, according to Oracle.

The quarter was a momentous one for Oracle, which in April announced its intended buyout of Sun Microsystems, due to be voted on by shareholders July 16.

This was originally posted at ZDNet's Between the Lines

SAP's first-quarter software revenue--an indicator of maintenance and services health--skidded 33 percent due to a "difficult operating environment" and a tough year-ago comparison. Meanwhile, SAP altered its maintenance pricing plans to allay customer concerns.

SAP on Wednesday reported first-quarter net income of 204 million euros, down from 242 million euros a year ago. Revenue was 2.39 billion euros, down from 2.46 billion euros a year ago. SAP managed to hold software and software-related service revenue flat at 1.74 billion euros in the first quarter compared to a year ago. The enterprise software company's first-quarter results a year ago were pumped up by the acquisition of Business Objects.

The results were worse than expected. A Dow Jones Newswire poll forecast SAP profits of 261 million euros on revenue of 2.55 billion euros. By region, SAP saw U.S. revenue fall 13 percent with Japan declining 16 percent. Europe, Middle East and Africa declined 3 percent.

Here's a look at the key SAP charts:

In a statement, co-CEO Leo Apotheker said the company will "maintain tight cost controls" and take "further steps to reduce expenses" by focusing on third-party costs and capital expenditures. SAP had announced plans to cut its workforce to 48,500 by the end of the year and as of March 31 the company had 49,916 employees. In the first quarter, SAP took a charge of 160 million euros to cover 2,200 job cuts.

As for the outlook, SAP isn't providing software and software-related service revenue projections. It does expect to maintain operating margins in the range of 24.5 percent to 25.5 percent.

What's unclear is how much SAP's software revenue slide is attributed to the economy versus pushback from customers annoyed with maintenance fees. In a separate statement, SAP said it reached an agreement with a federation of user groups to benchmark process improvement, business continuity, protection of investment, and total cost of operations and modify maintenance pricing. At first glance, it looks like SAP has instituted a maintenance cap. Here's the passage in full:

In consideration of the current economic climate, SAP is extending by three years the four-step price increase program announced in July 2008 for customers that were migrated to SAP Enterprise Support at that time. Originally scheduled to run until 2012, the program will now conclude in 2015, coinciding with the recently introduced 7-2 maintenance strategy. Starting in 2010, the price of SAP Enterprise Support for existing customers will continue to increase based on individual contract terms but will not be higher than a yearly fixed upper cap. This translates to an increase average of no more than 3.1 percent per year from 2010 onwards. The price of SAP Enterprise Support will be capped at 22 percent through 2015. With this adjustment, SAP demonstrates a clear commitment and responsiveness to its customers and the challenging global economic conditions they must navigate today.

Dennis Howlett's analysis:

This should not be a surprise. Last year, I asked Apotheker whether the company was prepared to share the economic pain of its customers. At the time, I drew a blank stare. I'm convinced SAP had no choice but to take these steps as a way of mollifying a very unhappy and increasingly vocal customer group. Even so, it is good to see that SAP has finally bent to the inevitable and now has an opportunity to put this fiasco behind it.

Vinnie Mirchandani provides the following analysis:

Essentially it's back to negotiating with individual customers annual increases. The question is can customers justify even the 17 percent in this economy? And will the KPIs (key performance indicators) show that some customers may be averaging $25,000, $50,000 a support call given how mature their usage is and how little they tax support.

Indeed, this maintenance issue is becoming a big deal. That fact is not lost on Salesforce.com CEO Marc Benioff, who released a no-maintenance opus to the press on Tuesday. Rivals such as Salesforce.com are going to pound the maintenance cost drum. Here's the Benioff memo targeted at the likes of Oracle and SAP.

For ten years, we've been driven by a simple vision: The End of Software. Now it's time to take on a new challenge: The End of Maintenance.

Let me tell you about a customer that I met on our Cloudforce tour. This customer currently uses Siebel software to run her call center. She pays more than $15 million a year for the privilege of having to implement the updates that Siebel sends her. That does not include backup. Or disaster recovery. And of course, it does not guarantee that she will be using the latest technology. The maintenance agreement only assures her that her outdated software will continue to work. She is paying tolls on a road to nowhere.

We can help her, and many other customers, and deliver much more for a fraction of what they currently pay in maintenance. It's time to open up a new front in "The End of Software"- one that is long overdue.

It's time for The End of Maintenance.

Every year, companies spend billions on maintenance fees and get relatively little in return. Maintenance fees cover updates that are mostly patches and fixes, but they stop far short of the kind of innovation every that enterprise needs to survive. Companies pay to keep the past working and they end up doubling down on technology that can never keep up with their needs. The fees that companies pay have actually been rising, from something like 17% a few years ago to numbers more like 22% today. Every four or five years, companies are paying for their software all over again.

It's time to set these businesses free and make them successful in the Sales Cloud, Service Cloud and on our Force.com platform.

Our new mission begins at a critical time in the economy, when companies are questioning conventional wisdom as they never have before. That, of course, extends to their IT budgets as well. The CIO is in a tough spot right now. Corporate budgets are tightening. And our rivals in the legacy client-server world are using this opportunities to extract more money from their customers by raising maintenance fees. I call this phenomenon "the compression of IT" and it resonates with just about every CIO I speak with these days.

We have a better vision. We sell our customers a service and every customer is able to use the latest. Innovations are included. Upgrades are automatic and invisible. Customers' intellectual property of customizations and extensions is rigorously preserved, and carried forward without disruption.

The service gets better, not just less buggy. That's not what people are getting for all those fees that supposedly buy them "maintenance."

It's time to set these business people free: to give them the experience of being wildly successful in the Sales Cloud, the Service Cloud, and in their own unique applications that they can build on our Force.com platform. This is the time to do it, because this is when people need it: their IT budgets are tight, their business situations are critical, and their old-world software vendors are taking care of themselves instead of meeting the needs of their customers.

We've raised people's expectations for better alignment of business value with IT cost. We've earned our leadership position in enterprise cloud computing. It's time for us to set people free from paying more and more to get less and less. It's time for The End of Maintenance.

Aloha,

Marc

Best Buy's fourth quarter was better than anticipated even though profits were down from a year ago amid an economic downturn. The company also noted that the quarter ended stronger than it began, indicating that consumer spending stabilized. And the Circuit City liquidation certainly didn't hurt Best Buy's cause.

The company reported net income of $570 million, or $1.35 a share, on revenue of $14.7 billion. In the same quarter a year a year ago, Best Buy reported net income of $737 million, or $1.71 a share, on revenue of $13.4 billion. Excluding restructuring charges, Best Buy reported earnings of $1.61 a share, well ahead of Thomson Reuters estimates of $1.40.

Same store sales, however, fell 4.8 percent in the quarter, which ended Feb. 28. Best Buy had cut its outlook, revised it, and restructured to prepare for the downturn. The company said it cut its inventory more than it had expected and faced product shortages late in the quarter.

For fiscal 2009, Best Buy reported earnings of $2.39 a share, down from $3.12 a share in fiscal 2008. Fiscal 2009 revenue was $45 billion, up from 13 percent a year ago. For the year ahead, Best Buy projects earnings of $2.50 to $2.90 a share on revenue of $46.5 billion to $48.5 billion. The company also projects same store sales to be flat to down 5 percent for the year. Analysts were expecting earnings of $2.45 a share.

In a statement, Best Buy executives portrayed the year ahead as one focused on cost-cutting and a rocky economy. However, the company should benefit from the liquidation of Circuit City. A negative factor is likely to be increased competition from Wal-Mart, which is increasingly focused on electronics. Best Buy estimated that its market share improved to almost 22 percent.

Best Buy CFO Jim Muehlbauer said:

We expect consumer spending to remain challenging in fiscal 2010, and the complex mix of external factors that will influence their behavior makes forecasting the future increasingly difficult.

Best Buy's breakdown of sales showed a few interesting cross currents. For instance, consumer electronics sales fell 8.6 percent and entertainment software fell 11 percent. Home office equipment surged 8.1 percent in the fourth quarter and notebook PC sales showed small gains.

(Credit: Larry Dignan/ZDNet)