Wall Street Beat: Downturn Continues to Slam IT Bellwethers

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Earnings season is winding down, but tech companies of all stripes including Cisco, Lenovo, AOL, Panasonic, Motorola, Hynix and Applied Materials continue to report fourth-quarter sales declines, curb forecasts and, in some cases, announce massive layoffs.

The common wisdom has been that vendors with global footprints and a diverse product line are in the best position to weather the worldwide economic storm, but even mighty Cisco, the dominant network equipment supplier that has a wider product portfolio than any company in that sector, reported a weak quarter and cut its forecast.

Cisco said Wednesday that revenue for the quarter ended Jan. 24 declined 7.5 percent from the year-earlier period to US$9.1 billion, as earnings plunged 27 percent to $1.5 billion. Now that most big vendors have reported earnings, a poor quarter was expected, so the biggest shock is that Cisco now expects revenue to decline by as much as 20 percent in the current quarter.

Executives tried to put a good face on the news.

"This downturn, in my opinion, is both the biggest challenge of our lifetime but also represents the biggest opportunity to transform our company as well as our economy through a series of bold steps," said CEO John Chambers on a conference call.

But not even market leaders can escape the downturn in demand, he acknowledged.

"We are not immune to the challenging economic environment," Chambers added.

Hardware vendors have been especially hard hit, which was expected since it is widely acknowledged that PC upgrades are among the first items to be cut from business budgets. Lenovo Wednesday reported a quarterly loss of $97 million on revenue that declined 20 percent from one year earlier, to $3.6 billion.

CEO William Amelio resigned, to be replaced by Lenovo Chairman Yang Yuanqing as the company refocuses on its China market in the face of sagging sales in Europe and the U.S., as well as Asia-Pacific outside of China.

The suffering hardware market is curbing demand for component and chip makers. Hynix Semiconductor announced Thursday its fifth quarterly loss in a row. The Korea-based DRAM maker said its loss deepened to 1.33 trillion Korean won (US$964.4 billion) from 462 billion won during the same period in 2007.

The slowing demand has a chain-reaction effect among suppliers for component makers. For example, chip manufacturing equipment company Applied Materials warned Monday that it expects revenue to fall 35 percent for the quarter ending Jan. 25, to about $1.33 billion.

Even formerly hot product categories like mobile communications devices are expected to suffer a slump this year -- not just a slowdown in growth, but an actual decline from 2008 levels. Motorola Tuesday reported a loss of $3.6 billion, on revenue that declined 26 percent from a year earlier. The biggest decline was for the unit that sells mobile phones.

On a conference call, Motorola officials said they think phones based on the Google-sponsored Android platform will be big sellers, but the company faces questions about whether they can truly differentiate their own Android phones to make a splash in the market, especially as consumers tighten their belts.

The deadly consumer spending climate is hurting consumer electronics giants. Japan's Panasonic on Wednesday reported a 20 percent decline in fourth-quarter sales, bringing a loss of ¥63.1 billion (US$686 million); forecast a yearly loss; and said it will cut 15,000 jobs by the end of March 2010.

Meanwhile, declines in business spending on ads have hit the online sector. Though Google has exceeded all expectations for online ad sales in a declining market -- the search giant two weeks ago reported sales for the quarter of $4.22 billion, an increase of 24 percent from the same period a year earlier -- other Web businesses are hitting a wall. AOL Wednesday said revenue fell 23 percent in the fourth quarter, to $968 million. After a $2.2 billion asset write-down, AOL had an operating loss of $1.9 billion.

Though tech-company share values have held their own this week -- perhaps because IT investors were braced for the worst -- the tech-heavy Nasdaq exchange declined 10 percent last month. In the past few days tech-vendor share prices have fared well despite the continuing bad news, but this may be due to high hopes for the Obama administration's bank bailout plan rather than to any perceived strengths for the IT sector specifically.

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