A panel of tech CEOs was asked last week to identify the
biggest surprise of the past year.
"The macroeconomic instability," Michael Dell said.
Dell 's (
) founder and CEO said he didn't expect the global economy would
stay in a funk for this long. He made his comment atVMware 's (
) annual gathering of tech professionals in San Francisco.
The tech industry has often weathered previous times of
economic weakness in a much better position than other industry
sectors. That's because companies would maintain spending on
innovative products that promised to boost revenue or save money.
This time it's different.
In second-quarter conference calls over the last few weeks,
tech CEOs frequently have mentioned the tough economy as a reason
to remain cautious on their outlooks. This time their customers
have been more hesitant about tech spending -- delaying product
upgrades or big projects.
Among those hit are computer hardware and peripheral makers,
which supply PCs, printers, copiers and related equipment to
businesses and consumers.
On Aug. 21, Dell posted Q2 sales that missed expectations, and
its projections for Q3 also fell short. Dell shares slid 5% the
A day after that, research firm IDC cut its forecast for PC
unit shipments this year to less than 1% growth from last year.
It cited global economic weakness and a cautious upgrade
But amid all these troubles, at least one company in the
computer sector has been flying like a rocket. That company
Apple's heavy influence on the industry group is the main
reason for its high ranking among IBD's 197 groups.
Computer-Hardware/Peripherals ranked No. 32 as of Friday's IBD,
after standing at No. 18 about six weeks ago.
While Apple fell 4% on July 25 after posting
lower-than-expected quarterly earnings, since then it's gained
"When Apple is included, everything looks good," said Andrew
Bartels, an analyst at Forrester Research. "Without Apple, things
are not so good."
The Apple Effect
It's not completely gloom and doom for the rest, though. Tech
), part of IBD's networking equipment industry group, recently
signaled that while growth is stalling, things are not falling
When Cisco reported quarterly results last month, CEO John
Chambers referred to "stabilization in our business" and
"confidence going forward." That was a marked shift from the
previous quarter, when he said tech spending was "hesitant."
Whatever the case, Apple is the locomotive that shows no sign
of stalling. To follow up on the iPhone, which provided 46% of
its revenue last quarter, Apple once again changed an industry
with the iPad, unveiled in 2010.
Global tablet sales rose 34% in 2012's second quarter from the
first quarter, reaching 25 million units. That's according to
IDC. Apple accounted for 68% of unit shipments.
As is often the case, though, what's good for Apple isn't good
for its competitors. When tablet computers first came on the
scene, it wasn't quite clear what the impact would be. Would they
be a novelty platform for consumers to play games, watch video
and send messages?
The answer was yes, and then some. The iPad has become a
popular business tool -- a snappy portable that enterprises use
in creative ways.
Restaurants have used them as interactive menus. Bartenders
have used them to control a variety of TV sets in a sports bar.GM
) Cadillac brand is giving an iPad to buyers of its new XTS
sports sedan. As tablets are used in different ways, the result
is less need for PCs.
"The transition from desktops to laptops to tablets and
smartphones is cannibalizing older markets," Bartels said.
"Companies and consumers are asking if they need a computer when
a tablet will do fine."
Straining To Transition
The problem for Dell,Hewlett-Packard (HPQ) and others is they
don't have a successful tablet offering.
"It's been a challenge for many companies," Bartels said.
"They need to transition."
HP is among those trying to change older ways. CEO Meg Whitman
has initiated a number of major restructuring programs. And
printer manufacturerLexmark International (LXK) on Aug. 28
announced it will cut 1,700 jobs as part of a restructuring plan,
sending its shares up 14% that day.
For the providers of computers and peripherals, the ground is
shifting and it's time to react, if they haven't already.
"There is this whole move to mobile devices in the post-PC
area and it's accelerating," said Brian White, an analyst at
Topeka Capital Markets.
"If you have a big exposure to the PC market and you'd don't
have a portfolio of products for the emerging mobile market,
that's a challenge."
More Delays, Slow Gains
The guidance for the third quarter given by the S&P 500's
tech firms isn't encouraging.
It "is emblematic of the uncertainty seen throughout the
economy as a whole," Thomson Reuters said in a recent analysis.
"Companies in various sectors have been citing the European
sovereign debt crisis, the fiscal cliff in the U.S., and unknown
future growth in China as reasons to delay investment and hiring
The analysis also said that, with the technology sector in the
middle of a transition and a weak economy, "it remains to be seen
if the projections for improving growth in the fourth quarter and
into 2013 will come to fruition or whether delayed resolution of
these issues will extend the uncertainty and continue to cause
companies and consumers to delay spending."
There are some bright lights on the horizon.
The transition to mobile has ignited a frenzy of new
applications that could spur additional sales. This includes the
tablet revolution and the recent emergence of slim, ultra-light
and power-packed portable computers known as ultrabooks,
whichIntel (INTC) is aggressively promoting. This month,Microsoft
(MSFT) is expected to launch its latest operating system, Windows
8, which might spur a new round of PC buying.
In addition, there's the continual shift toward cloud
computing, which represents a cost-effective way for businesses
to expand their computing usage.
The challenge in all this, though, is these new technologies
are in a transition phase -- meaning businesses have not yet
given them a full and hearty embrace.
"We still think cloud computing will drive a new cycle of
growth," Forrester's Bartels said, "but the most recent data is
not supporting that thesis."
For now, though, Bartels is projecting the computer-equipment
category will ramp up to 8.4% sales growth in 2013, after showing
growth of 4.5% this year.
Bill Whyman, tech industry analyst at International Strategy
& Investment, said U.S. tech production and manufacturing
capacity use moved up in July, and revised June data show
Still, he wrote that ISI expects "slow gains." Microsoft,
Intel, HP and Dell are struggling with the tech transition under
way. But he also thinks the second half of this year will be
better than the first half.