Is Tech Really a Victim of SARS?
Many companies are blaming the deadly virus for their less-than-anticipated results. Some analysts see it differently
First, it was the terrorists. Then the war in Iraq was blamed for revenue shortfalls, as chipmaker Microchip Technology (MCHP ) did in April. Now, the corporate world -- or at least, several of the big tech companies in it -- seems to have picked severe acute respiratory syndrome (SARS) as its excuse du jour. At the end of May, Novellus blamed the virus for slower-than-expected orders of its semiconductor equipment. On June 9, No. 2 cell-phone maker Motorola said the epidemic had contributed to lower sales.
And in its June 10 midquarter update, the world's largest cell-phone maker, Nokia (NOK ), cut its sales-growth estimate for the period to the lower range of a prior target, blaming the weak dollar -- and SARS. In an informal e-mail to customers on Nokia's preannouncement, Greg Gorbatenko, an analyst with Loop Capital Markets, suggested yet another possible reason: "Sammy Sosa's corked bat." The famed baseball hitter, with more than 500 home runs to his credit, caused a scandal by using what he says was a practice bat during a game on June 3.
Gorbatenko isn't the only one who's a little skeptical. SARS "is not the bubonic plague," points out Ken Delaney, an analyst with market consultancy Gartner. In the 14th century, the Black Death wiped out 25 million people, or a third of Europe's population, within five years. So far, SARS has made several thousand people ill and killed nearly 800 worldwide. Yet since the disease showed up last winter, many tech companies appear to have begun blaming it for problems that were really caused by poor product design, inept marketing, and overoptimistic forecasts, analysts say.
MARKETING FAILURE? Second-quarter sales growth at Nokia of 4%, rather than the 12% it had forecast, may primarily be due to its experimentation with new keypad designs, says Delaney. One phone, the Nokia 3650, available in the U.S. from AT&T Wireless (AWE ), features a round keypad with numbers distributed along the rim of the circle. Many users find it "weird," says Delaney and aren't buying the device. A company spokesperson says Nokia is responding to customer requests for a more convenient keypad. Nokia should report its earnings on July 17.
Or take Motorola (MOT ), which gets about one-third of its cell-phone revenues from Asia, according to Kevin Dede, an analyst with Merriman Curhan Ford. The U.S. electronics giant recently announced that it expects second-quarter sales in the range of $6 billion to $6.2 billion, vs. prior guidance of $6.4 billion to $6.6 billion. It cited SARS as one of the culprits. But many analysts believe Motorola simply isn't doing a good enough job of marketing its products in China, so local manufacturers -- about 20 of them -- are grabbing market share.
Motorola is also losing worldwide market share to cell-phone maker Samsung. The Korean company has a strong presence in Asia, and its high-end phones have proved popular worldwide, says Vivian Mamelak, an analyst with Natexis Bleichroeder. Partly as a result, Motorola's global market share eroded from 17.6% in 2002's first quarter to 14.7% in the first quarter of 2003, according to Gartner. Samsung gained 1.2 percentage points of market share over the same time. Motorola wouldn't comment for this story, but in its midquarter update said it hopes to start regaining share later this year.
SATURATION POINT. Many preannounced retreats in revenue also reflect overoptimistic demand forecasts. In the first quarter, mobile-phone makers increased their year-over-year shipments by about 17%, says David Wu, an analyst with Wedbush Morgan Securities. But demand worldwide rose by only single digits. On June 10, the world's largest maker of cell-phone chips, Texas Instruments (TXN ), cut its guidance for second-quarter revenue growth from 7% to 5%, blaming SARS -- and excess inventories. However, that the inventory increase might have occurred even without SARS.
The Chinese cell-phone market, which until recently was growing at 30% a year, appears to be approaching saturation. China's Information Industry Ministry believes that of the country's 1.3 billion people, only 290 million will sign up for wireless service by 2007. By the end of 2002, more than 200 million people had subscribed, about 70% of the anticipated total, says Mamelak. In the U.S., wireless penetration is below 60%. So even when SARS goes away, Asia's sky-high growth of prior years might not return.
It's not just the cell-phone industry that seems to be blaming SARS for rolling back blue-sky forecasts. In May, Peter Hanley, the president of semiconductor-equipment maker Novellus in San Jose, Calif., blamed restricted travel to Asia for its operational difficulties and slow bookings. But "that's like saying that if a Ford had a recall on tires, DuPont can't sell any more paint," says Len Jelinek, an analyst with chip consultancy iSuppli. "Give me a break." Novellus has likely overestimated demand for semiconductor gear, he says.
GENUINE CONCERN. This year, Jelinek expects the world's chipmakers to spend about $30.6 billion on equipment, vs. $30.1 billion last year. But much of that gear will be used because the market is flooded with high-quality second-hand gear. Last year, companies that were building chip factories in China bought 50% of their equipment on the secondary market. That's is closer to 75% this year, Jelinek estimates. Plus, demand from corporations for computers and other products remains lax -- resulting in fewer orders. Novellus declined to comment for this story.
That's not to discount the SARS effect completely. "If the same thing happened here, you wouldn't go to a shopping mall -- and that's what happened in China," says Merriman Curhan Ford's Dede. "People just stopped shopping." On the other hand, some electronics manufacturers have been asking their component suppliers to beef up their inventories in case of a new outbreak. Few disruptions have happened so far, though. And if the inventory buildup continues, "we could see a big crash in the fourth quarter," says Jelinek.
Still, most tech companies probably remain unaffected by the sickness. Intel, the world's largest chipmaker (INTC ), reports no material impact. "I don't see SARS affecting demand for things like microprocessors," says Shane Rau, an analyst with tech consultancy IDC. And on June 3, Irwin Jacobs, chairman of Qualcomm (QCOM ), which makes cell-phone chips, stood by his yearly forecast.
Bottom line: As scary as SARS is, it may be more an excuse than a reason for the slowdown at many tech companies.
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