Hardware vendors to report earnings amid recovery buzz

While the market looks healthier, analysts advised caution

Semiconductor share prices surged today as investors looked ahead to earnings releases over the next two weeks from vendors. However, analysts cautioned that though the market looks healthier, there's no hard evidence of a long-awaited recovery in hardware technology spending.

The results from hardware vendors Intel Corp., Advanced Micro Devices Inc., IBM, Apple Computer Inc. and Gateway Inc. will show, at least to some degree, whether IT spending is on the rise. The dominant PC vendors, Dell Computer Corp. and Hewlett-Packard Co., report earnings on a different schedule than most companies and won't post their quarterly results until August.

"We're seeing very faint signs of a recovery," said Ben Lynch, an analyst at Deutsche Bank Securities Inc. in New York. Some component vendors and resellers have reported that sales are picking up in the corporate sector, he said. But Lynch doesn't expect Intel to say anything during its earnings conference call tomorrow that would indicate a broader recovery.

An unscientific survey of resellers by Thomas Wiesel Partners LLC this quarter showed an increase in the number of companies that expect spending to increase during the second half of the year, said Eric Gomberg, an analyst at Thomas Wiesel in New York. Those resellers don't expect a return to the growth patterns of five years ago, but about two-thirds of respondents foresee an uptick in technology spending in 2003, double the number who felt that way last quarter, he said.

The primary fuel for today's rally was an upgrade of Intel's stock by Merrill Lynch & Co. analyst Joe Osha, based in San Francisco. In an e-mailed research note, Osha upgraded Intel's stock from Neutral to Buy, based on better expectations for gross margins and increased popularity of notebook PCs.

The company will benefit from the notebook trend because of its successful launch of its Pentium M processor, which commands a higher price than other mobile chips, Osha wrote.

Analysts surveyed by Thomson Financial/First Call expect Intel to report earnings per share of 13 cents and revenue of $6.7 billion. Intel said in June that it expects second-quarter revenue of $6.6 billion to $6.8 billion.

AMD doesn't have as strong a position in notebooks and is looking to the server market for growth in the second half of the year. The company introduced its Opteron processor in April and is hoping that business customers will want that chip's ability to run both 32- and 64-bit applications at competitive performance levels.

However, the Sunnyvale, Calif., company's second-quarter results will probably be disappointing. AMD warned investors in June that it would fall $100 million short of the $715 million it had previously expected in second-quarter revenue, blaming a slow PC and cell phone market in China as a result of the outbreak there of severe acute respiratory syndrome (SARS).

Analysts polled by Thomson Financial/First Call now expect AMD to lose 54 cents per share on revenue of $614 million.

Since the Opteron launch was unlikely to have any real effect on second-quarter revenue, the shortfall shows how sensitive AMD is to market fluctuations in China, Lynch said. China makes up about 10% of the worldwide PC market, and any weakness there is bound to have an impact on the semiconductor industry, he said.

Intel has also noted that SARS could have an effect on its business, but analysts expect any impact to be minimal due to Intel's size. Analysts in Asia-Pacific have predicted a 6% decline in second-quarter PC sales in China, as well as a decrease in sales of cell phones that use flash memory from both Intel and AMD. But PC sales in China are expected to recover in the third quarter, according to IDC Asia-Pacific.

Apple and Gateway will also report earnings over the coming weeks as the two PC companies struggle to stay within sight of market-share leaders Dell and HP. Both companies have looked to other products and markets in order to increase revenue.

Apple released a new version of its popular iPod portable music player along with the launch of its iTunes online music store in April. Gateway has embarked on a dual-headed strategy to become more competitive among business customers with new servers and storage products and to raise its profile among consumer electronics customers.

Copyright © 2003 IDG Communications, Inc.

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