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Hardware makers see stronger sales this quarter

After a series of disappointing earnings announcements following PC component shortages and sales slowdowns, hardware executives now say that business is getting back on track.

After a series of disappointing earnings announcements following PC component shortages and sales slowdowns, hardware executives now say that business is getting back on track.

Still, analysts say that there are enough open-ended questions to make the forecast for PC demand unclear.

"My feeling is that we're in a trough between two waves," International Data Corp. analyst Roger Kay said.

Analysts and industry executives have lost sleep over the past few months wondering when corporate customers would get back to stores to buy new hardware. The slump followed a serious ramp-up in sales as businesses spent tons of money buying new computers to prepare for the so-called millennium bug.

Kay said that current lackluster sales follow frenzied purchasing before the new year but could precede new sales related to the widespread rollout of Microsoft's Windows 2000 operating system.

"January was the best start Intel has had in years," said Dan Niles, analyst with Robertson Stephens.

There are others signs that sales are picking up for the computer hardware industry as well, according to Niles. Micron Technology, which supplies memory components for PCs, said its inventory of chips is coming down, and for semiconductor companies in general, January and February sales results didn't show the kind of seasonal slowdown normally expected, he said.

"We've seen a pickup in sales (for PC companies) since the Windows 2000 launch, and there will be more momentum from that as the year progresses. That means the stocks will also perform better as the year goes on," Niles said.

Dell, Compaq, IBM, Hewlett-Packard and Gateway all started off the year by reporting earnings that were lower than originally anticipated, sparking concerns about the health of the overall PC market.

Another lingering uncertainty was how long corporate customers would wait to start buying in 2000, given that Windows 2000 didn't launch until Feb. 17--about halfway through the quarter for companies like Gateway and Compaq.

Now, PC makers appear to be getting over their New Year's hangover, if preliminary indications hold up.

"The Y2K impact, if there was one, was (basically backwards) from what people expected," Webb McKinney, vice president of Hewlett-Packard's PC organization, told CNET November and December were very strong, but January was slower than expected, noted McKinney, who recently spoke at a technology investment conference sponsored by Robertson Stephens.

"The early indication is that things are picking back up this month," he said.

Sales of Hewlett-Packard consumer PCs are rising faster than the industry average this quarter. The company is benefiting from the exit of Packard Bell and IBM from the retail channel, a company representative said.

John Todd Gateway financial chief John Todd recently said at the same investor conference that so far, this quarter is shaping up to be better than last. Yet that isn't necessarily a ringing endorsement, given that the company reported lower-than-expected earnings last quarter, citing a slowdown in sales from Year 2000 concerns and component shortages.

Regardless, Gateway maintains that the company is on track. Todd said that consumer PC sales were strong in January, but corporate sales were flat. Corporate PC sales improved in February, however, and consumer PC sales internationally have been strong, he said.

Analysts expect 16 percent growth in earnings for Gateway in the first quarter of 2000--about three times that of the industry average. The company should be able to meet those numbers, Todd maintained.

Preliminary signs seem to indicate a slight rebound in February sales from January's larger-than-usual seasonal slump.

At the same time, U.S. and worldwide growth is still not expected to match last year's numbers, according to research firm Dataquest. While last year the industry posted growth rates of around 21 percent, this year Dataquest is currently predicting unit growth of about 15 percent in the United States and 16.2 percent worldwide.

PC companies will need to come up with new reasons to get corporate customers to upgrade their PCs this year to maintain growth rates seen over the last three years.

"Products such as Compaq's iPaq and HP's eVectra will have to be low-cost, and have a low cost of (ownership)," Dataquest analyst Charles Smulders said. "That will persuade end users to upgrade in what is becoming a saturated market."

But is the market saturated? IDC predicts that 12.2 million computers will ship in the United States in the first quarter of 2000, compared with 9.9 million a year ago--a 23 percent jump. However, the forecasts were calculated three months ago; the company plans to release updated figures soon.

A large number of corporations spent a significant amount of money upgrading equipment last year in order to minimize any potential Y2K problems. For the first month and a half or so in 2000, Kay said there was a big lag in purchases as companies regrouped to map out their strategies for the introduction of Windows 2000 after it became available in mid-February.

Michael Capellas Now that Windows 2000 has finally been officially unveiled, PC purchases have been picking up. Also, Kay said that component shortages that afflicted the likes of Gateway at the end of last year have been easing.

Compaq chief executive Michael Capellas said last month that he expected a large portion of the company's sales for the first quarter of fiscal 2000 to come late in the quarter.

An IBM representative noted that Big Blue's sales also tend to be slanted towards the latter part of the quarter, so it is too early yet to tell how things are progressing.