Slow Q2 nothing unusual for most hardware firms

BOSTON – As the weather heats up in the Northern Hemisphere, revenue from IT hardware tends to cool off. Despite a slew of recent earnings warnings from their software counterparts, the IT hardware industry should improve upon last year’s second quarter amid the usual seasonal slowdown, according to analysts.

Next week Intel Corp., Advanced Micro Devices Inc. (AMD), Apple Inc., and IBM Corp. will report quarterly earnings. Sun Microsystems Inc. and Gateway Inc. will post their latest financial data in two weeks. Dell Inc. and Hewlett-Packard Co. (HP) are on different fiscal cycles from the rest of the industry, and won’t report earnings for another month.

In terms of revenue, Intel and AMD are expected to show normal seasonal downturns, but healthy increases compared to last year’s second quarter. Consumers typically take a break from buying PCs in the second quarter, and shipments are expected to plunge about 18 percent from the first quarter of this year to the second quarter, said Roger Kay, vice president of client computing for IDC in Framingham, Massachusetts.

However, the second quarter is generally strong for enterprise hardware purchasing. Government and educational customers tend to lift commercial shipments in the second quarter, Kay said.

That purchasing lift did not extend to the software industry this quarter, raising questions about the overall health of corporate spending. Enterprise software companies such as PeopleSoft Inc., Siebel Systems Inc., and BMC Software Inc. all warned this week that second quarter revenues will miss earlier targets.

Commercial PC customers are in the middle of a long-delayed PC upgrade cycle, and these customers represent about 60 percent of all PC purchases in any given quarter, Kay said. The continued strength in corporate sales should keep the overall PC numbers close to normal seasonal patterns from the first quarter to the second quarter, and U.S. shipments should increase about 11.6 percent compared to last year’s second quarter, he said.

There have been reports of weakness in certain PC sectors, mainly among hard drive vendors, Kay said. Maxtor Corp. warned of a wider-than-expected loss in the second quarter after getting caught with an oversupply of hard drives, but that weakness should be confined to the hard-drive vendors and probably won’t expand to PC vendors, he said.

In fact, that oversupply should help keep PC prices down for IT managers in the upcoming months, Kay said. Memory and display prices are also starting to ease after a brief increase, he said.

Overall semiconductor revenue followed the normal patterns in the first half of the year, said Joe Osha, senior analyst with Merrill Lynch & Co. Inc., on a conference call Thursday. The month of June was a little weaker than usual, but it shouldn’t be enough to affect most semiconductor companies, he said.

Lehman Brothers Holdings Inc. agreed, saying in a report released this week that it still expects Intel to record about $8.1 billion in revenue in the second quarter. In June, Intel said it expected to post between $8.0 billion and $8.2 billion in revenue in the second quarter.

However, Lehman said it is cutting its estimates for Intel’s third-quarter results on expectations that PC demand might be less than anticipated at the start of the second half of the year. The delay of Intel’s Grantsdale chipset launch might have helped to push sales of new PCs farther out into the third quarter, Lehman said.

AMD’s Opteron processor continues to account for the company’s improving revenue picture, Osha said. But flatter prices for NOR flash memory should help keep its overall earnings in line with previous expectations, he said.

NOR (Not Or) flash memory is used in cell phones and embedded devices to store data without a constant supply of power. It is starting to become more attractive to smart phone designers as the price comes down. Flash memory is the largest segment of AMD’s revenue, and the company is therefore more exposed to pricing changes in that market than Intel.

Strong iPod sales should lift Apple to another strong quarter, said Steven Milunovich, global technology strategist at Merrill. Any future impact felt from the recent suspension of iMac orders should be offset by the introduction of the iPod Mini in Europe and the launch of HP’s iPod product line in the third quarter, he said.

The second-quarter picture appears rosier for Sun for the first time in a while, based on strong sales of the Sun Fire V1280 and E2900 midrange servers, Milunovich said. Merrill raised its estimates for Sun’s second-quarter revenue, but still expects the company to post a loss and still does not recommend the stock as a long-term investment, he said.

IBM’s Microelectronics division should return to profitability in the second quarter, as the company makes good on its promises to fix the yield problems that plagued the introduction of the 90-nanometer PowerPC 970FX earlier this year, Milunovich said. Merrill expects the company to meet expectations for the quarter.