IT faces tough start to 2009

Layoffs and other cost-cutting announcements from EMC, Lenovo, ON Semiconductor and Logitech, piling on earnings warnings from Intel and Time Warner, are putting a damper on the 2009 outlook for IT.

Intel Wednesday said it expects fourth-quarter revenue for fiscal 2008 of US$8.2 billion, down 23 percent compared to a year earlier, due to weaker demand. The cautionary announcement, ahead of its official results on Jan. 15, is the second such warning from the company. In November, Intel was one of the first major technology companies to say demand was slumping in the face of a global economic slowdown.

Asustek Computer on Thursday cut its own fourth-quarter shipment outlook, saying motherboard shipments likely fell 20 percent in the last calendar quarter of the year -- down from a previous estimate of a 10 percent decline.

Bad news from the hardware and components sector has been a given lately, since PC and handset sales are forecast to decline this year. But on Wednesday, Time Warner revised its financial guidance and said it expects to close its own fiscal year with a net loss, due to a multibillion-dollar asset write-down partly involving its AOL Internet unit. Its previous forecast, announced in early November, called for the company to earn between $1.04 and $1.07 per share.

Meanwhile, IT vendors from a variety of sectors announced cost-cutting moves. Lenovo said Thursday that it plans to lay off 2,500 workers and cut salaries, while taking a $150 million restructuring charge to streamline operations. The company hopes to save $300 million during its 2010 fiscal year doing so.

EMC said on Wednesday that it will lay off 2,400 people, about 7 percent of the Information Infrastructure business. In a spot of good news, the company was careful to say that the cuts will not affect its VMware virtualization subsidiary, which has helped it achieve an expected revenue of $4 billion in the fourth quarter, up 4 percent over a year ago.

ON Semiconductor announced late Wednesday a variety of cuts, including factory shutdowns for four to six weeks in the first half of the year and unpaid time off for some employees.

Logitech Tuesday said it will cut 15 percent of its 3,500 salaried workers as it expects weaker consumer demand for computer peripherals to continue.

One possible benefit for IT investors, however, is that all the bad news has already caused shares of at least some vendors to slump as far as they will.

2008 saw huge declines in share values in all economic sectors, and IT was no exception. All sorts of vendors have suffered. In 2008 share price declines included: AT&T, by 31 percent in value; Apple by 57 percent; Hewlett-Packard by 28 percent; Intel by 45 percent; IBM by 22 percent; Microsoft by 45 percent; Oracle by 22 percent; and Google by 49 percent.

The cautiously optimistic argument that can be made is that for some companies, a bad 2009 has already been priced into share values, and that further bad earnings news will not be cause for further share-price erosion.

Discussing the recent news in the chip sector, for example, Citigroup analyst Glen Yeung said in a research note Wednesday that "despite these negative surprises, and the likelihood that they will spark a moderate retrenchment in semiconductor stocks (after a 35 percent rally sine mid-November), we remain positive on the semiconductor side. Relative to other sectors inside and outside of technology, semiconductor EPS estimates had fallen hard and sooner, 'de-risking' investments in the sector."

However, the cost cuts and the earnings warnings are also a sign that vendors still do not have a clear view on when demand will pick up. This does not bode well for the longed-for U.S. and global recovery in demand for the second half of the year.

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