Rebound at last------->Supply no longer exceeds demand---->
Hold that thought John (about that hardware-asp-thing that is) and check this article out from San Jose Mercury News.
'...4) We are assuming that hardware sales (ASPs) will continue to head downward at a relentless pace....what if this pace slowed, or even flattened (or went upwards for a while)...this, too, for grow the revenue pie, and, obviously, lessen Dell's % of the overall market (given the growth rate I've implied)..
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Courtesy:Silicon Valley/SJMN
Posted at 4:16 p.m. PDT Saturday, May 1, 1999
Tech firms' profits rebound
BY JONATHAN RABINOVITZ
Mercury News Staff Writer
Just when the eight-year boom seemed to be losing momentum, Silicon Valley's largest companies have caught a second wind, reversing last year's decline in profits into a surprisingly strong showing early this year.
In the past two months, 102 of the 150 largest public companies in Silicon Valley have issued earnings statements, and their total profits increased 62 percent, exceeding the 10 percent gain reported by the nation's blue-chip companies, the Standard & Poor's 500.
Silicon Valley's improved profits were partly the result of increased demand as the Internet, cheaper computers and the rebounding Asian economies have fueled growing sales of chips, disk drives and other tech products. At the same time, the glut of semiconductors and hardware that existed last year has vanished, keeping prices from falling further.
The shift in the valley's fortune mirrors the national scene, where a sudden turnaround in corporate profits has caught many economists and market observers off guard.
Profits had dropped in 1998 for the corporate sector, and Silicon Valley companies were certainly not spared. A Mercury News analysis of the 150 largest companies in Silicon Valley showed a 7.8 percent decline in profits, the first drop since 1991.
But in March and April, company after company issued first-quarter earnings for 1999 with some of the strongest profit increases in recent years.
A review of the 420 companies in the S&P 500 that have filed reports for the latest quarter indicated a profits increase of about 10 percent from the same period in 1998, according to First Call, a market research company. That makes the past quarter the first time since the end of 1997 that profit growth exceeded the historical average gain of 7 percent.
''I'm surprised that we bounced back that quickly,'' said Charles R. Hill, First Call's research director. ''No matter how you slice it, it was a terrific quarter, and there's enough momentum that the next quarter should look better than this one.''
''Technology is leading the way,'' Hill added, noting that the tech portion of the S&P 500 had profits increase by 48 percent.
The Silicon Valley 150, which is dominated by technology companies, appears to have had an even greater rebound in the latest quarter, with total profits increasing to about $3.3 billion, from $2 billion last year.
Although Intel Corp. of Santa Clara, the list's most profitable company, saw its earnings decline in 1998, it reported a 57 percent increase in April. The disk drive sector was losing money a year ago, but profits in this last quarter rose 120 percent. And computer makers' earnings jumped 161 percent, though the valley's largest company, Hewlett-Packard Co. of Palo Alto, has yet to report its results for this quarter.
Of course, these numbers should be taken with a grain of salt as they do not exclude one-time charges that many companies took last year. Still, there's no question Silicon Valley companies are again making money hand over fist.
One reason: Supply no longer exceeds demand. The surplus inventory of chips, disks and other computer components, caused partly by the recession in Asia and partly by cyclical overproduction, has been sold off. At the same time, demand is again increasing as parts of Asia recover and Internet growth creates the need for more chips and more computers. Also, many companies retooled themselves during the downturn last year, improving their productivity and profit margins.
Take, for instance, Cypress Semiconductors of San Jose, which reported one of its best gains ever April 20, when it issued its first quarter 1999 results. The company went from losing about $96 million in the comparable 1998 quarter -- a period when the price of chips began to plummet -- to making about $9 million.
Some of that change is the result of a one-time charge of about $80 million that Cypress took last year when it closed a fab plant and an assembly plant. But even if one subtracts that, the company still saw a remarkable improvement.
''The pricing recession in semiconductors is over,'' said T.J. Rodgers, the company's chief executive, who predicted that the company is on its way to its biggest revenue year in company history.
Demand in the memory chip business is extremely cyclical, and Rodgers summed it up like this: ''The bad news is that when it's down, you get hit hard, but the good news is that when it's up, you mint money.''
The increase is partly the result of increased personal computer sales, but Rodgers noted that the Internet is an even bigger factor. ''A few years ago, when you looked at our ten biggest customers, it was computers, computers, computers,'' he said. ''Now, seven of our ten biggest customers are data communication customers.''
Silicon Valley's disk drive industry also is picking up steam, after suffering one of the worst profit declines of any sector in the region in 1998. The valley's disk drive industry actually made about $23 million in the last quarter, and although several of the companies continue to struggle, that is markedly better than the comparable 1998 quarter's loss of $113 million.
Too much inventory had accumulated, and it needed to work its way out of the supply system. At the same time, the industry has had to adjust to the new pressures of the computer industry and the growing use of Dell Computer's build-to-operate system. That means disk drive companies have to do more just-in-time deliveries.
''We had to change Maxtor to a build-to-operate model,'' Mike Cannon, chief executive of disk drive maker Maxtor, a company that went from a $10 million loss to a $17 million profit in its latest quarterly report. The company also has learned to ramp up designs more quickly.
Although such changes hurt the profit picture last year, they now are beginning to yield results.
The improved earnings statements can also be attributed to the traditional Silicon Valley corporate credo: Innovate or die. SGI of Mountain View, formerly known as Silicon Graphics, has done more than change its name in the last year. It has trimmed its product lines, shedding a unit that sold embedded chips, to focus more on creating new and more powerful Window NT work stations.
The new emphasis may be starting to pay off. At the end of the first quarter last year, the company had lost $153 million, though after excluding one-time charges it was down about $68 million. This quarter the loss had been whittled to about $40 million.
Of course, the continued profit growth of Silicon Valley is not assured. The Y2K problem has some companies, especially in software, projecting that the second half of this year could see substantially slower growth. In turn, Asia and Latin America could suffer setbacks that could change the picture.
And some economists argue that a powerful recovery abroad could actually worsen the U.S. picture, because it would mean a potential influx of imports as these countries expand production. Also, a reinvigorated world economy could lead to greater labor cost pressures and increased prices for commodities such as oil, thereby fueling inflation in the U.S. That could lead the Federal Reserve to raise interest rates, a move that often drives the stock market down.
Anirvan Banerji, co-director of the Economic Cycle Research Institute, a New York-based think tank, cautioned against overstating the importance of the recent profit growth statistics. Remember, he said, that profits fell so low last year that companies are competing against a low baseline.
At some point, if the past performance of free markets is any guide, there has to be a downturn. ''The fact that this expansion has lasted eight years is hardly reason to suggest that the business cycle is dead,'' he said, noting that it could be years before such a downturn.
Victor Zarnowitz, an economist who has studied business cycles for decades, said the U.S. economy had a brief downturn in September and October 1998, when the ripple effect from the Asian and Russian economic crises was felt, the stock market dropped and profits were weakening. There were signs of a potential recession, he said.
But the damage was cut short by the Federal Reserve's interest rate cuts. ''That helped it, no doubt about it,'' said Zarnowitz, research director at the Foundation for International Business and Economic Research, adding that not only did that fuel domestic consumer demand, but it also buoyed investors' confidence in the stock market.
If profits continue to improve, then a recession is less likely to occur and expansion will be strengthened, Zarnowitz said. That strengthens expectations of future expansion, which means the stock market goes even higher and stocks that seem overvalued now probably are not, he said.
''This expansion is in a very advanced stage,'' he said. ''If it goes on for a while and we remain unscathed, it's a little bit of a miracle.'' |
