On Wall Street, bad news gets worse for IT

Intel has cut its guidance, Google's shares are down, and Sun is slashing its workforce

The financial news for IT firms just keeps getting worse, with bellwethers like Intel cutting revenue guidance and shares of highfliers like Google sinking to multiyear lows. Meanwhile, Sun is laying off up to 18% of its workforce, and market researchers at IDC and Citigroup have slashed their forecasts.

The conventional wisdom until now has been that since corporate IT budgets were slashed and stayed lean after the dot-com bust, there isn't much left to cut. That meant the tech sector might suffer a slowdown but not an actual decline. However, market watchers are starting to seriously hedge their bets, revising their official expectations and, in some cases, forecasting declines.

Before a Thursday afternoon rally, probably caused by traders seeing opportunities to snap up shares at historic lows, the tech-heavy Nasdaq closed Wednesday at 1,499, a new low for the year and a level not seen since the tail end of the dot-com bust five years ago. The new low point marked a stunning loss of confidence in the tech sector. Shares of Google Inc. sank below $300 for the first time in three years.

Sun Microsystems Inc.'s announcement Friday that it will cut up to 18% of its worldwide workforce to curb costs in the face of tough economic times put a cap on what was a tough week for tech. Sun plans to slash costs by about $700 million to $800 million annually and lay off 5,000 to 6,000 employees. In an effort to emphasize the company's considerable intellectual property in software -- and de-emphasize hardware -- the company is also reorganizing and plans to form two new business units and a new group within Sun's systems business.

Two weeks ago, Sun blamed the downturn in the financial sector for a $1.68 billion quarterly loss. The collapse of the U.S. investment banks has eliminated what was Sun's customer stronghold. Sun shares immediately started trading lower Friday morning.

Market analysts have continued to downgrade tech shares this week. Goldman Sachs downgraded Dell Inc. shares to Sell from Neutral, based on expected declines in margins and earnings. Dell remains highly dependent on sales of hardware, which is typically the first thing cut when IT budgets are trimmed.

Goldman initiated coverage of Palm Inc. with a Sell rating. It sees limited chance for a company turnaround, since increasing competition will likely drive market-share losses and the company's new software platform strategy remains unproven.

Credit Suisse cut its share price target for Apple Inc. to $120 from $135, to reflect a more conservative outlook for the personal computer industry.

One sign of tough conditions for hardware was Monday's announcement from electronics retailer Circuit City that it had filed for bankruptcy protection to try to turn around its bleak financial position.

The PC industry is under increasing scrutiny after Intel Corp. cut its fourth-quarter guidance Wednesday. The company now expects revenue for the current quarter of about $9 billion, down from its earlier forecast of $10.1 billion, citing "significantly weaker-than-expected demand in all geographies and market segments." That would amount to the worst fourth-quarter sales decline in the company's history.

Intel's announcement gave Asian markets a shock, leading to a broad sell-off in regional markets that included a 5.3% drop in Tokyo and a 5.2% decline in Hong Kong. The international scene darkened further with the announcement Thursday that the German economy shrank over the past three months. Earlier in the week, in Europe, mobile phone vendor Vodafone Group reported a 35% decline in half-year net income and cautioned that full-year sales would fall short of earlier expectations.

On the networking front, Nortel Networks Corp. on Monday reported a net loss of $3.4 billion for the third quarter and said it would slash 1,300 jobs.

Citigroup on Thursday reduced its U.S. and global PC unit shipment forecast from a decline of 3% and an increase of 5%, respectively, to a decline of 10% and a decline of 3%. "We still expect notebook shipments to grow 15% globally in 2009, thanks to netbooks, but we expect this to be offset by a 21% decline in desktop shipments," according to a note from Citigroup analyst Richard Gardner.

IDC now says that in 2009, global IT spending will increase 2.6%, down from its earlier forecast of 5.9%. In the U.S., IDC expects IT spending growth to be 0.9%, down drastically from its 4.2% growth forecast made in August.

Growth in the online sector is also expected to weaken dramatically. Citigroup issued a research note Wednesday saying that "the growth rate for online advertising is likely to slow materially in Q4 for the top four e-commerce companies (Amazon, eBay, Expedia and Priceline) from an average of 25% year-on-year growth in Q3 to 8% year-on-year growth in Q4. At some level, Google will be impacted."

This weekend, leaders of the world's biggest economies are gathering in Washington to grapple with a widening downturn that started in the financial sector. Even though the U.S. and European governments have pumped hundreds of billions of dollars of public money into financial institutions, credit markets are still tight and general confidence is lower than ever.

Some banks have declined to specify how they are using the public funds but appear to be hoarding the bailout money for acquisitions, instead of increasing lending. If the government officials can make banks use the funds they were given to start pumping money through credit markets, and bring some transparency to the bailout process, it might go a long way toward restoring confidence among the general business community. The collapse of credit markets, caused by the bursting of the U.S. real estate bubble, is the core reason for lowered expectations for IT.

Copyright © 2008 IDG Communications, Inc.

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