Intel’s Earnings Warning is an Ominous Sign for the Tech Sector

Tech stalwarts like Apple, Google, IBM, Intel, and Microsoft have been powering through the recession. If these companies falter, the U.S. is in trouble.

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Citing the weak global economy, Intel, the world’s largest microchip-maker, lowered its financial forecast for the rest of 2012. It’s an ominous sign for the technology sector, which is entering the heart of earnings season. Reporting second-quarter financial results, the closely-watched tech bellwether (INTC) revised its revenue growth projection downward to between 3% and 5% — below the previous forecast of “high single-digit growth.”

As policymakers seek to return America to healthy growth and employment, Intel’s lowered outlook is a clear reminder that the global economy — and Europe in particular — is placing a drag on the U.S. economy. Tech stalwarts like Apple, Google, IBM, Intel, and Microsoft have been powering through the recession. If these companies falter, the U.S. is in trouble.

“As we enter the third quarter, our growth will be slower than we anticipated due to a more challenging macroeconomic environment,” Intel CEO Paul Otellini said in a statement. Or, as Quentin Hardy of The New York Times put it: “The world’s largest semiconductor maker is getting pounded by poor consumer demand.”

Simply stated, the global economy isn’t growing fast enough. We’re starting to see the impact on U.S. corporate earnings. Intel is a key signal, not only for the tech industry, but also for the broader economy. Intel’s reduced forecast bodes ill for the entire tech supply chain and the broader U.S. and global economies. We need high-tech companies to be buying more microchips, not fewer.

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Meanwhile, struggling tech giant Yahoo reported in-line-to-positive earnings, which heightened chatter about the company’s blockbuster new hire: Google star Marissa Mayer. On a conference call with Wall Street analysts, Yahoo! CFO Tim Morse said he hadn’t even had the chance to discuss the company’s earnings forecast with his new boss.

On Monday, Yahoo appointed Mayer as CEO; she was not on the conference call. Mayer was Google’s 2oth employee and is a 37-year-old self-proclaimed “geek.” Several years ago, she informed a reporter that she was one billion seconds old (31.7 years). She’s now one of the most famous corporate executives in the world. On Monday, Mayer revealed to Fortune that she is pregnant with her first child, due on October 7.

“In the second quarter, non-GAAP earnings per share exceeded consensus and both display and search revenue ex-TAC showed modest growth,” Yahoo!’s chief financial officer Tim Morse, said in a statement. “We also moved aggressively with new strategic agreements with Alibaba and Facebook and announced several new partnerships including CNBC, Clear Channel and Spotify.”

Hardy, at The Times, sketches out a sampling of Mayer’s challenges:

Facebook commands 16.8 percent of the online display ad market in the United States and Google is at 16.5 percent, while Yahoo’s share has fallen to 9.1 percent — a drop from 2008, when Yahoo had 18.4 percent of the market and Facebook earned just 2.9 percent a share — according to eMarketer.

Yahoo has also lost its command of the overall online advertising market, where it held 15.7 percent share in 2009. Last year, Yahoo’s share fell to 9.5 percent and, according to eMarketer, its share will fall further to 7.4 percent this year, even as online advertising spending in the United States is expected to grow 23.3 percent, to $39.5 billion.

The downfall of Yahoo’s search business has been even worse. It turned over its search business to Microsoft and now holds 6.7 percent of the $15.36 billion search ad market last year. Google, meanwhile, continues its reign with 75.9 percent of all search ad revenues.

And Yahoo has yet to dip a toe in mobile advertising. Should it introduce new mobile products under Ms. Mayer, Yahoo will again face a market dominated by Google. According to eMarketer, Google held 51.7 percent of the $1.45 billion in total mobile advertising spending in the United States last year.

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5 comments
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geoffrobinson
geoffrobinson

Intel doesn't really have much going on with smartphones and tablets, which the latter are lowering PC sales. Intel has more specific problems than the tech sector as a whole.

Iatrix
Iatrix

I am still happily using my desktop PC from 2005 and my notebook from 2006, upgraded to Windows 7 and with some additional RAM.  I don't need a faster computer to surf the Web, do word processing, or play the games I bought several years ago and which are still good. If I bought a new computer, I would have a nightmare migrating my files, bookmarks, pictures, etc. as well as having to adjust to reinstall all my favorite software (and buy new copies for those that require online activation).

No way.  I'm set on computers until one develops a hardware problem, and then my first move will be to replace the hardware element that failed rather than buy a whole new integrated system.

PCs have reached a technological plateau, much like commercial jet aircraft. After the Boeing 707, all subsequent airliners have been minor modifications of the basic 707 design and the seats and flight times have stayed the same. Flying on a new jet in 2012 is not any meaningfully different than when I first flew on a United 727 in 1969 - except now I don't get a free in-flight meal and the inflation-adjusted cost is a lot cheaper now (in 1969 my parents paid $411 in 1969 money for a Chicago-LA roundtrip ticket (about $2,569 in today's dollars -  http://146.142.4.24/cgi-bin/cpicalc.pl?cost1=411amp;year1... that today costs as low as $230 in 2012 dollars).

PCs are simple commodities like telephones, clock radios, and watches. There is no pricing power and no need to upgrade unless your current model breaks.

Gary McCray
Gary McCray

In the last 10 years or so, every major corporation has been making a grab for the most capital they could get especially from us - the consumer.

Each persons piece of the American Pie is only so big and it is completely over subscribed. 

Job loss to Asia, under paid and under employed, huge credit card  debt, student loans, huge health and other service cost increases, the lender caused housing crash.

We don't have any money left.

Without the consumers able to consume, what will happen to all those poor companies.

zza371creek
zza371creek

The IT sector has been slowing down. HP and Sony also said they will start cutting people because of slow growth and low sales.  IBM has also been doing cost cutting more lately.   Layoffs this year are up for IT.  So a slow down is happening just depends on how slow it gets. 

Most of the mobile IT growth seems to also be slowing down as well. Which has been a major growth area for IT over the past few years.

So i do think the economy is starting to slow down again.  People buying less tech toys and companies around the world not buying as many IT services i would think more layoffs are to come.

John Luma
John Luma

Why is the sky always falling with the "news" disseminators? Yet the ominous news is rarely presented as hard fact that's happening now, it's declared as the ominous oncoming disaster. And here's yet another "IF" story. Well as telltale as the signs might be for the tech industry, you can say the same thing about the auto industry, airlines, medical manufacturing -- huge industries that are plunking right along RIGHT NOW but could falter if certain events take place. Industries have cycles of success and failure. Tell me something I don't know.