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PC industry feeling queasy

As expected, Micron reports a drop in sales and profits. But is it a temporary blip or a sign of long-term trouble for PC makers?

As expected, Micron Electronics reported a drop in sales and profits for its most recent quarter, a result underlining general unease that PC industry sales for the first part of the year won't be as strong as expected.

A variety of factors--including price competition, the usual seasonal slowdown, overheated expectations, and the odd circumstances of the Pentium III release--are depressing PC revenues in the quarter, although manufacturers are still selling more PCs than in the past.

"The units are, roughly speaking, normal," said Roger Kay, PC analyst at International Data Corporation, who said that revenues nonetheless will be slower than expected.

"The seasonal decline was the biggest factor. And the declining ASPs [average selling prices] are real?The ASP decline could be a long-term bad news story for the industry."

Direct PC maker Micron is an example. In its second fiscal quarter, which ended in February, revenues came to $373.6 million, a 7 percent drop from revenues of $403.5 million in the first fiscal quarter of 1999, and nearly 25 percent off of revenues of $494.8 million for the same quarter the year before. Last year's figure also contained a $156.2 million gain from the sale of a subsidiary.

Net income, meanwhile, came to $6.5 million, or 7 cents per share, excluding estimated costs for the consolidation and closure of certain Japanese operations. Net income last quarter came to $11.7 million, or $0.12 per diluted share. Last year, earnings were nearly quadruple.

During the second quarter of 1998, when it was just kicking off a comeback program, Micron reported net income of $24.8 million, or $0.26 per diluted share, on net sales of $494.8 million.

Micron's problems have largely been attributed to pricing pressures: Lower PC prices have eaten into sales. At the same time, the company earlier said it expected to be impacted by the release of the Pentium III late in Micron's second fiscal quarter. After news of the upcoming Pentium III began to leak out in January, Micron customers, who tend to be performance buyers, were expected to delay purchases, Micron CEO Joel Kocher said earlier.

Among other announcements yesterday, distributor CHS Electronics said it would lay off 600 workers, about 10 percent of its workforce, because of a disapointing fourth quarter. The company reported earnings of $13 million, or 23 cents a share, when analysts were expecting earnings of $23.8 million, or 45 cents a share.

CHS also said it would restate earnings from the past three quarters. Auditors determined that the company did not properly account for rebates.

While few analysts see the sky falling, a number of Wall Street observers have raised concerns that different companies are expected to report lower than expected sales for the first part of the year due to pricing pressures, especially when compared to the rosy forecasts from late last year. One analyst downgraded IBM today while another speculated that Compaq's numbers would be down.

"Everyone had very inflated expectations. People went into the quarter stating that PC sales would be flat or seasonal [i.e. slower]. It is going to be seasonal," said Dan Niles, PC analyst for BancBoston Robertson Stephens.

Pricing remains the chief culprit. Unit sales of PCs will likely grow 12 to 13 percent over the same quarter the year before. Revenues, however, are declining. Niles, in fact, lowered his estimates for IBM for the first quarter from $1.42 in earnings per share to $1.37. "PC units look good, but profitability seems to be an issue given eroding ASPs," he said.

For the long term, Dell could also face problems because its current ASPs are $2,300, higher than the rest of the industry.

Intel's Pentium III launch didn't help either, said Niles and Kay. Both stated that the release of the processor late in the quarter slowed down sales. "The people who waited weren't the ones looking for more power. They were the people looking for the bargains," said Kay.

"The security ID threw a wrinkle into it," added Niles, alluding to a Pentium III feature that is intended to promote secure e-commerce, but has raised the hackles of privacy groups.

"It was a challenging quarter for Micron Electronics; however, we continued to make progress executing our direct model fundamentals and we began accelerating our business transformation," said Micron's Kocher in a prepared statement.

Donaldson, Lufkin & Jeanrette analyst Kevin McCarthy, meanwhile, said today that Compaq needs a final sales surge in March to meet expectations. Earlier this quarter, Compaq admitted that sales to small and medium-sized business were slower than expected.

Bloomberg contributed to this report.