October 30, 2008, 9:34 PM — Financial reports from vendors including Motorola, Sun Microsystems, SAP and STMicroelectronics, along with economic and IT sector surveys, this week are confirming market watchers' fears that the U.S. is heading into recession, dragging the global tech industry down with it.
The U.S. Commerce Department on Thursday said that GDP (gross domestic output) in the third quarter fell at an annual rate of 0.3 percent. If the current quarter suffers another decline, the U.S. will officially be in recession. But whatever it's called, a slowdown in business and consumer spending is hitting the tech industry.
Worldwide semiconductor sales rose only 1.6 percent in September as growth slowed due to a 38 percent plunge in memory-product sales, according to a report from the Semiconductor Industry Association on Wednesday. Also on Wednesday, STMicroelectronics, the largest European chipmaker, announced a third-quarter loss of US$289 million, compared with a profit of $187 million last year.
For the tech sector, the worst survey this week was IDC's report on Thursday that global mobile-phone shipments in the third quarter were down by 0.4 percent from the second quarter, and up just 3.2 percent from the year earlier. Third-quarter handset shipments often increase by as much as 20 percent year over year, as manufacturers gear up for the holiday season.
"Handset vendors felt the pressures of the dismal economy in the third quarter of 2008, and as a result, shipments and revenues were down almost across the board," said IDC research analyst Ryan Reith in the report.
Against this backdrop, Motorola on Thursday said it skidded to a $397 million quarterly loss. The company said it would cut 3,000 jobs to curb expenses while a restructuring plan and a new platform strategy kick in. On a conference call, co-CEO Sanjay Jha said Motorola will dump the Symbian UIQ OS, develop mobile phones for Google's open-source Android platform, and also embrace Microsoft's Windows Mobile.
But analysts on the call questioned whether Motorola would be able to quickly differentiate its own offering on these platforms, especially since Motorola does not plan to come out with an Android phone until the holiday season next year. Its plan to split off the company's manufacturing arm, warmly embraced by analysts, has been postponed beyond next year. Company shares fell by $0.29 to close the day at $5.17.
Sun on Thursday said it suffered a quarterly loss of $1.68 billion due to a sales decline of 7 percent and a goodwill impairment charge of $1.45 billion.
Goodwill represents intangible assets such as a respected company name, customer relations and employee morale, which can render a company's total value to a third party greater than the worth of its concrete assets. Accounting rules require goodwill to be written down over time. Sun's goodwill impairment has been affected by the collapse of Wall Street -- a Sun customer stronghold. Wall Street, including investment banks, accounted for about 6 percent to 8 percent of all U.S. IT spending, according to IDC.
Sun shares fell by $0.01 to $5.28 in after-hours trading within an hour of the announcement.
In the software sector, SAP, the world's largest business applications vendor, on Tuesday reported a 5 percent quarterly decline in earnings, to €388 million (US$485 million). Though profit was down mainly because of charges related to its acquisition of Business Objects, the company pulled back its annual operating margin forecast to 28 percent, down from a prior estimate of 28.5 percent to 29 percent. The company said it will hit the new forecast only if it can increase software and service revenue. But the company also said the economic outlook was too uncertain to give a software sales forecast.
Amid the gloom there were some bright patches. Network-gear giant Alcatel-Lucent on Thursday reported a quarterly loss of €40 million, a much better result than its €345 million loss one year earlier. The smaller loss and growth in the company's enterprise and services business helped buoy company shares, which rose by $0.22 on the New York Stock Exchange Thursday to close at $2.53. The company's market capitalization -- the value of its share price multiplied by all outstanding shares -- has plunged to $6 billion from about $35 billion before the merger of Alcatel and Lucent in 2006.
Security software results this week were mixed. McAfee on Thursday said revenue rose 7 percent to $409.7 million, beating analyst estimates of $395 million. Symantec reported Wednesday that net income rose $50 million to $140 million. But company executives said that they see a consumer spending decline and anticipate a slow holiday quarter in retail. Despite the strong quarter, that was enough to cause investors to flee, and company shares dropped by $2.61 Thursday to close at $12.20.
Stock market indexes have experienced history-making ups and downs over the past month. Despite the overall poor tech results this week, though, the U.S. GDP report was not quite as bad as expected -- the drop of 0.3 percent was better than expectations of a 0.5 percent decline. As a result, the tech-heavy Nasdaq index rose Thursday by 41 points to close at 1698.
