Wall Street hopes Intel, AMD still singing
Miners used to use canaries to detect if dangerous gases were collecting in mines. Tech industry watchers use the chip industry to see if a storm is coming.
If you want to gauge the tech winds, follow Intel.
At least, that's the theory employed by economists trying to forecast the performance of the high-tech industry in uncertain times over the last two decades. The world's largest chipmaker is thought to be an early-warning sign of things to come; trouble ahead if Intel's in red.
We already know that the two companies were disappointed in their performance during the quarter. Back in March, Intel had already made the decision that plummeting flash memory prices would dent its earnings for the quarter. AMD waited a little longer, but declared the first quarter was poor in almost every sector of its business, and announced plans to lay off 10 percent of its work force.
On Tuesday, Intel executives will hold a conference call with financial analysts to discuss its quarter, and AMD will follow on Thursday. While AMD's problems are largely of its own making, Intel's results will be closely scrutinized to see if the flash problems are the extent of Intel's troubles, or if there's evidence of a wider industry slowdown in PC and server purchases amid a sour economic climate.
The flash memory market's troubles have been well-documented, and appear to stem from the double-whammy of a reduction in demand just as capacity expanded. Apple is thought by iSuppli to be at least part of the reason behind the flash memory industry's woes, as the industry is now expecting Apple to spend about $200 million less on flash this year than it had anticipated going into the year.
But the flash market is used to boom-and-bust cycles that don't necessarily point to rough waters ahead for the tech economy at large. Intel's core business, on the other hand, is just that kind of indicator.
At late as the 1980s, miners used canaries as early-warning detection systems for the presence of carbon monoxide and methane gases in mines. If the canary stopped singing, it was time to leave.
The tech industry has long seen Intel's performance in that vein. In 2001, as the dot-com bubble was collapsing, Intel was one of the first major tech companies to report slowing sales and declining profits.
"2001 was a terrible year for our industry," former Intel CEO, and now chairman, Craig Barrett said in a press release announcing Intel's fourth-quarter 2001 results. The larger effects of that slowdown in 2001 carried well over into 2002 for other companies.
The American Electronics Association put out a hopeful press release in October 2002, announcing that 113,000 high-tech jobs were lost in the first half of 2002 but "cautiously optimistic" that the worst was over. But around the same time in 2003, the AEA reported that a whopping 540,000 tech jobs were lost in all of 2002, meaning the decline dramatically accelerated in the second half of 2002.
Last time, the downturn was caused by a sharp decline in technology spending by corporations. This time, the technology market has shifted toward consumers, who are the ones making everyone nervous this year.
The question is whether the national credit crunch, combined with soaring energy and food prices, will force consumers to put a lid on their wallets this year. Few analysts seem to expect the disaster that was 2001 and 2002 this time around, but then again, few financial analysts make money from predicting doom-and-gloom around the corner.
Intel is expected to record about $9.6 billion in revenue for its first quarter, which is a little less than what Wall Street had been expecting prior to its January earnings conference call. That would still be a 9 percent gain on last year's first-quarter revenue total, which isn't the kind of growth that makes Wall Street giddy but isn't a disaster either. Profits, on the other hand, are expected to dip 6 percent compared to last year on the flash problems.
AMD is still trying to get back on its feet. It reported weakness "across all business segments" earlier this month as it worked to get its Barcelona and Phenom processors out this quarter. Dell backed away from AMD's chips on its consumer Web site section, suggesting that AMD might have lost market share as it scrambled to fix its chips.
In addition to the Barcelona and Phenom snafu, AMD has been much more exposed to a declining desktop PC market than Intel, which might account for some of the weakness as that category continues to decline. But AMD is gearing up to launch its first notebook chip specifically designed for that type of computer, and now that Barcelona and Phenom are available, things might be looking up for AMD if it can stabilize its revenue with the new processors and cut costs with the departing employees.
There are plenty of historical reasons to be wary about Intel and AMD's results as it pertains to the tech industry, and all eyes will be on chips this week. It doesn't appear that the wheels are falling off just yet, but when the world is running down, you make the best of what's still around.