PC makers, analysts dispute slowdown reports

The dispute over the health of the PC industry rocked stocks this week after U.S. Bancorp Piper Jaffray analyst Ashok Kumar downgraded Intel, citing a major slowdown in computer sales.

Kumar predicted sequential PC growth for the third quarter would be about "half (Wall) Street's expectations of 12 percent. You have PC companies ramping up their capacity at the same time growth rates are slowing down, so you get significant overshoot (and subsequently) price wars," he said.

But three large PC manufacturers contacted by CNET News.com disagreed with these projections, noting that sales had picked up after the seasonally slow second quarter before an expected surge in the fourth quarter.

"He's way overreacting," said a representative of one PC maker who asked not to be identified.

Dell Computer spokesman T.R. Reid said the company's revenue growth from the second to the third quarter historically has been in the 10 percent to 13 percent range. "We're expecting the lower part of that range and are on track for 30 percent growth for the year."

In terms of unit shipments, Dell expects PC shipment growth for the year "in the upper teens, just like it has been for several years," he added.

Third-quarter PC shipment projections released today by International Data Corp. also do not sync with Kumar's dismal projections.

The market researcher forecasts worldwide PC growth of 10.1 percent sequentially and 18.5 percent year over year in the third quarter. Asia-Pacific will post the strongest growth, about 35 percent from a year earlier. IDC predicts 13.4 percent sequential PC growth in the United States and 10.6 percent year over year. Europe, though, will see more modest growth, 7.5 percent over the second quarter but 14.5 percent stronger than the United States year over year.

IDC was one of the first research firms to question Kumar's findings.

Morgan Stanley Dean Witter analyst Gillian Munson wrote in a research note: "There is no new data to support either the bullish or bearish case. This market sentiment is very typical for this time of year."

Munson said she expects PC growth to be good, "but wouldn't categorize it as great," and she is sticking to her prediction of 15 percent to 17 percent year-over-year PC unit growth.

Still, her forecast is less optimistic than IDC's. She expects 9 percent sequential growth in the third quarter and 15 percent in December.

Kumar pegged Europe correctly, according to IDC, predicting single-digit growth there. But IDC put third-quarter PC growth in Asia-Pacific and the United States well ahead of Kumar's forecast.

Another measure of declining sales is inventory building up in wholesaler warehouses and on store shelves.

Dealer and retail "inventory levels are the same or below what they were this time last year," ARS analyst Matt Sargent said.

Hard to predict
IDC analyst Roger Kay warned that forecasting PC demand is increasingly difficult because of the changing nature of the business. Historically, sales of commercial PCs, which tend to be more regular and often known well in advance of final orders, have accounted for the bulk of orders.

But consumer PC sales passed commercial for the first time during the fourth quarter of 1999 in the United States and Japan, according to IDC.

"With more than half the business in the United States, Japan and other areas based in transactional business, to predict that kind of slowdown in demand is kind of foolhardy unless there is some obvious reason," Kay said.

Kay acknowledged that second-quarter demand was slower than expected but consistent with seasonal slowdowns from previous years. He also noted that it is too easy to compare the second half of 2000 with the same period last year, when Internet rebates fueled abnormally high sales.

"In the third quarter, demand seems to be pretty good so far," Kay said. "Transactional customers are beginning to come in around now, and this business should pick up through the end of the year."

In a research note on Gateway issued yesterday, Salomon Smith Barney analyst Richard Gardner found other reasons to question Kumar's analysis.

"We believe that our competitor's misinterpretation is based on standard guidance regarding the seasonally back-end loaded nature of the quarter--35 to 40 percent of sales occur in September," he wrote.

Regarding Gateway specifically, Gardner said that "according to Gateway management, sales in every segment are tracking to expectations two months into the quarter, and the company has not canceled a single Intel processor order during the past month."

Gateway is considered a good measure of growth because the company's product mix--60 percent consumer and 40 percent commercial--most closely resembles the overall U.S. PC market.

Gartner analyst Charles Smulders said he is lowering his PC growth estimates for the year because of the slower-than-expected second quarter. But he does not expect a shocking slowdown in the second half.

"We are alarmed by saturation in both corporate and consumer markets and how this will affect future growth," he said. This could lead to slower growth in 2001, he said.

The Windows factor
Other factors spurring Kumar's prediction of slower-than-anticipated demand are signs that Microsoft's release of bug fixes--or the service pack--for Windows 2000 has not sparked an anticipated boost in commercial PC sales.

Many analysts, among them Gartner and IDC, cautioned corporations about moving to Windows 2000 before Service Pack 1's availability.

But Kay said much of the Windows 2000 adoption is focused on servers, where companies are coming up to speed on ActiveDirectory--Microsoft's service for managing PCs, user accounts and other network assets.

"That means you have to rip out...Unix, and a lot of companies aren't ready to do that given their reliance on other architectures," he said. "Once they get Windows 2000 server worked out, which more or less commits them to the desktop version, most will then move large chunks of their organizations to Windows 2001."

Neither IDC nor Gateway is forecasting widespread adoption of Windows 2000 on the desktop this year, even factoring in Service Pack 1. Gartner predicts only about 15 percent of Windows 95, 98 or NT desktops will be moved to Windows 2000 this year, jumping to almost 50 percent in 2001.

The effects of Kumar's report were widespread, with Gateway and Intel shares dropping nearly 7 percent and Dell Computer more than 5 percent. The PC makers had largely recovered by today, however. Memory-maker Micron took an 11 percent hit yesterday over concerns a PC slowdown would drive down memory prices.

Major memory makers today scoffed at the PC sales slowdown report, saying demand was greater than expected for their products.