Wall Street Beat: Hardware, Chip Sector Under Scrutiny

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HTC, Samsung and Micron earnings this week put the spotlight on hardware and components, which emerged from the recession with strong sales but face a slowdown in the last few months of the year.

With chip bellwethers Intel and Advanced Micro Devices set to announce quarterly results next week, scrutiny of the sector is sure to intensify. Both companies have cut sales forecasts, and analysts have trimmed expectations for hardware and chips for the last half of the year.

Micron Technology, which makes DRAM and NAND flash memory chips, said Thursday that for the three-month period ending in September, it generated record cash flow and profit of US$342 million on net sales of $2.5 billion, compared to a net loss of $100 million on net sales of $1.3 billion a year earlier.

"We reached several new company milestones in fiscal 2010, including generating the highest annual revenue, income and operating cash flows in Micron's history, said Chairman and CEO Steve Appleton in Micron's earnings statement. "We have emerged from the difficult economic conditions over the past few years as an industry leader with one of the strongest balance sheets and product portfolios in the business."

But there are signs that Micron's business is slowing down. The company's September quarter was down from the prior three-month period, in which the company announced net income of $939 million on net sales of $2.3 billion. Even subtracting the $488 million in gains from Micron's Numonyx acquisition, third quarter earnings beat the most recent quarter by $109 million.

Samsung Thursday said sales were on track to hit a record, but that profit may be flagging. The company, in its third fiscal quarter, is on track to hit 40 trillion Korean won (US$35.7 billion) in sales, edging out its prior revenue record of 39.25 trillion won in the 2009 fourth quarter.

But operating profit for its latest quarter will be about 4.8 trillion won (US$4.28 billion), down from 5.01 trillion won in the prior quarter. The company will issue final numbers for its latest quarter at the end of the month, but its profit estimate indicates that its products are under increasing price pressure.

Samsung earnings are scrutinized since it is the world's number two mobile phone maker, after Nokia, and a global sales leader in a wide range of consumer electronics and components including NAND flash memory chips.

HTC, reporting results Wednesday, outlined a more solidy upbeat quarter. The Taiwan-based company said sales of Android-based smartphones in the company's third quarter helped boost revenue by 124 percent over the same period last year. HTC said quarterly revenue hit NT$75.85 billion (US$2.46 billion), up from of NT$33.88 billion. Net income was NT$11.1 billion, nearly doubling the NT$5.7 billion generated one year earlier.

The company expects demand for its smartphone to remain strong in the fourth quarter, Chief Executive Peter Chou said.

HTC, which started to market mobile devices under its own name by making a big push with Windows-based devices, is set to debut phones for Windows Phones 7, due to be unveiled Monday.

The hardware and components sector helped lead tech out of the recession earlier this year. The tech recovery, in general, helped boost global markets to their peak for the year in April. Fears of a double dip recession, however, shook investor confidence and share prices declined until the U.S. Labor Day holiday at the beginning of September, even as IBM, Apple, Microsoft and Google racked up strong gains -- in some cases record sales and earnings.

But share prices on U.S. markets last month had their best September upswing in 70 years, with tech once again leading the way. IT companies are once again in positive territory for the year. On Thursday, for example, Nasdaq computer stocks closed up 3.42 percent, collectively, for the year.

Whether the September rally can be extended into the fourth quarter depends to a certain extent on earnings reports due out over the next month. With Intel reporting Tuesday and AMD Thursday, the chip market -- tied to the fate of the computer and consumer electronics sectors -- will come under especially intense scrutiny. Though chip sales have been strong, profits have come under pressure recently as demand has aggregate demand slows down.

Even if IT vendors report great results however, the fate of tech stocks may once again depend on macroeconomic news. For now, investors remain skittish -- the U.S. Department of Labor Friday morning reported that nonfarm payrolls fell by 95,000 in September, sending the tech-heavy Nasdaq down 6.44 points to 2377 in early morning trading.

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