Computer Firms Struggle With Economic, Product Shifts

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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 ( DELL ) 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 ( VMW ) 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 next day.

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 cycle.

But amid all these troubles, at least one company in the computer sector has been flying like a rocket. That company isApple ( AAPL ).

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 about 15%.

"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 bellwetherCisco ( CSCO ), part of IBD's networking equipment industry group, recently signaled that while growth is stalling, things are not falling apart.

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 's ( 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 decisions."

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 significant improvement.

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.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AAPL , CSCO , DELL , GM , VMW

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