Intel, IBM Earnings Spook Wall Street, Stoke Tech Sector Fears

Lackluster earnings reports from Intel and IBM underscore global economic weakness and highlight sluggish demand for PCs and enterprise technology.

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Technology bellwethers Intel and IBM delivered lackluster earnings reports Tuesday, sending shares of each company down more than 3% in after-hours trading. The results, which garnered tepid reviews from Wall Street analysts, represent a disappointing start to the technology earnings season, and could foreshadow further downbeat reports from other tech titans. The main problem is the lackluster global economy and weak demand, both by consumers for electronics, and by businesses for new technology infrastructure. Taken together, the two tech titans’ reports underscore macroeconomic weakness from the U.S. to Europe to Asia.

Analysts were particularly disappointed by Intel’s fourth-quarter revenue forecast of $13.6 billion, which came in below Wall Street expectations $13.7 billion. Third-quarter sales for the chip-giant were $13.46 billion, down from $14.23 billion one year ago. “Our third-quarter results reflected a continuing tough economic environment,” Paul Otellini, Intel’s president and CEO, said in a statement. Last month, Intel reduced its third-quarter earnings forecast, so investors had been bracing for bad news. Thanks in part to lowered expectations, Intel was able to top analyst sales forecasts, but its results were dispiriting nonetheless.

Amid a lackluster global economy, the global personal computer market is expected to decrease this year by 1.2% to 348.7 million units, according to IHS iSuppli data cited by Bloomberg, in the first such decline since 2001. That’s bad news for the world’s largest microchip-maker, which is sitting on an excess supply of unsold chips. On a conference call with analysts, Otellini said that PC sales for the upcoming quarter will grow at about half the rate the company would have expected reflecting typical seasonality.

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“Intel’s outlook confirms fears that the PC slowdown is likely to continue,” Bill Kreher, an analyst at Edward Jones & Co, told Bloomberg. Intel is also suffering from the structural shift toward mobile devices, because the company has a very small market-share in the chips that power smart phones. Intel said revenue in its PC Client Group — its most important business unit — declined 8% compared to last year, to $8.6 billion. Intel shares fell 3.27% in after-hours trading.

“The problem is demand,” Ken Dulaney, vice president at tech research firm Gartner, told The New York Times. “People are buying other things with their disposable income for electronics, like tablets, televisions, smartphones, e-readers and gaming devices. Intel is trying to take its technology to these consumers, but this is a transition period.”

Intel is investing heavily in chips for a tablet-like device called the Ultrabook, but so far the product hasn’t taken off with consumers as well as the company had been hoping. Intel is also looking forward to the launch of Microsoft’s new operating system, Windows 8, which is designed for both PCs and tablets. But it’s too early to predict what impact that will have on Intel’s business. Windows 8 launches on Oct. 26.

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IBM, meanwhile, reported third-quarter sales of $24.7 billion, below Wall Street expectations of $25.4 billion, on weakening performance across its business segments, including the company’s core services and software areas. Hardware sales fell 13% to $3.9 billion. Net income was flat at $3.8 billion. IBM attributed its weak sales to the sluggish North American economy. On a conference call with Wall Street analysts, IBM CFO Mark Loughridge said that although the quarter started off well, “we saw a falloff in our growth rates in the third month of the quarter.” IBM shares fell 3.41% in after-hours trading, but they’re still up over 13% so far this year.

“It’s disappointing with a pretty big miss on the top line,” Brian Marshall, an analyst at ISI, told Reuters. “Pretty much every business unit or segment was down year over year across the board, in particular systems and technology.” On the bright side, IBM’s gross profit margin increased by 0.9%, which CEO Ginni Rometty highlighted in a statement. “In the third quarter, we continued to drive margin, profit and earnings growth through our focus on higher-value businesses, strategic growth initiatives and productivity,” she said.

Intel and IBM are the first of several major tech companies that will be reporting earnings over the next few weeks, and their performance casts a cloud over the entire sector. Intel’s weak sales are particularly worrisome, because the company’s chips power 80% of the world’s personal computers. This Thursday, search giant Google will deliver its results. Yahoo reports next Monday, followed by Facebook on Tuesday and Apple next Thursday.

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