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Wall Street Beat: Hardware Taking Brunt of Recession

Job cuts at AT&T and Adobe Systems and lower expectations for bellwethers like Google and Microsoft this week make it is clear that the now-official U.S. recession is hitting all sectors of IT, though so far it looks like hardware and components will get the worst of it.

AMD Thursday issued one of the latest harbingers of bad news, announcing that it now expects revenue, excluding process technology licensing, to decline by 25 percent from US$1.59 billion in the third quarter.

On Wednesday, brokerage Robert W. Baird lowered its quarterly earnings forecast for Intel by $0.02 per share to $1.08 and slashed its 2009 forecast from $0.85 to $0.56 per share. Analyst Tristan Gerra cited, among other issues, weakness in the notebook market, which has been a driver for growth in the hardware market.

"Our checks indicate notebook demand trends have further deteriorated since Intel reduced its 4Q guidance," Gerra said in a research note.

Intel three weeks ago cut its own fourth-quarter targets, one of the biggest indications yet of what is shaping up to be a bad year for PCs, as demand slumps and manufacturers cut prices. IDC Wednesday said worldwide 2009 PC unit shipment growth will be 3.8 percent, with the value of shipments declining by 5.3 percent. IDC's forecast earlier this year called for 13.7 percent unit growth and a 4.5 percent increase in PC revenue. U.S. shipments will decline by almost 3 percent next year, with low single-digit growth in the next three years, IDC said

In the server realm, Gartner on Monday said that while the worldwide market for servers hit 2.3 million units during the third quarter of 2008, up 4.4 percent from a year earlier, revenue fell by 5.4 percent to $12.7 billion.

The recession is also hitting other hardware components and mobile devices. On Tuesday, iSuppli estimated total shipments of mobile phones would decline 5.6 percent next year. The company this week also said global shipments of hard disk drives will be flat or decline in the fourth quarter of 2008.

Research In Motion, the most successful PDA maker for the corporate market, Wednesday gave preliminary results for its fiscal third quarter that call for revenue of $2.75 billion to $2.78 billion, down from its earlier forecast of $2.95 billion to $3.10 billion. RIM cited macro economic woes and changes in ship dates for products. The BlackBerry Storm touchscreen device was finally released late last month.

The slowdown is global. Netherlands-based Philips Electronics, which makes a range of consumer electronics goods, Thursday said that due to a sharp drop in demand, it would revise earnings goals and quicken the pace of restructuring. The company no longer forecasts a doubling of earnings for 2010, and will take new restructuring charges of $139.8 million.

Citing "continuing weakness in global economic conditions," Taiwan Semiconductor Manufacturing Co. (TSMC) cut its fourth quarter sales guidance Monday. The contract chip maker forecasts fourth quarter sales to reach between NT$63 billion and NT$65 billion (US$1.89 billion to US$1.95 billion), down from its previous forecast of NT$69 billion to NT$71 billion.

For several months, ever since Wall Street investment banks started to collapse, IT market analysts have expected hardware to take the brunt of the cutbacks that tech buyers are making, since PC upgrades typically are the first thing to be postponed in tough times. But the bad news was not limited to hardware this week.

AT&T, facing a decline in residential landlines, said Thursday it will cut about 12,000 jobs, or 4 percent of its workforce. Adobe Wednesday announced that it will lay off approximately 600 employees, or about 8 percent of its workforce. The company said preliminary results for the fiscal fourth quarter show revenue of between $912 million and $915 million, below the $925 million to $955 million it had predicted.

Investment analysts slashed numbers on a variety of companies this week. Bank of America lowered its share price target for Google to $500 from $650 based on search business trends that show a slowdown in both usage and monetization.

Morgan Stanley cut share price target on Microsoft to $26.50, based on an analysis that business has deteriorated since the company last gave guidance in October.

Kicking off the week, the National Bureau of Economic Research (NBER) said Monday that the U.S. economy has been in a recession since December 2007. Many analysts say as a rule of thumb that a recession occurs when the gross domestic product declines for two consecutive quarters. However, the NBER uses a range of measures, including employment, which has declined since January.

Now, many economists believe the slowdown will last for at least two more quarters. In IT, hardware may be taking the brunt of the recession so far, but as the crisis continues other sectors of the tech industry are getting hit hard as well.

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