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PC makers see mixed results

Earnings for PC manufacturers are expected to be a mixed bag, as overseas economic conditions, stuffed channels, and lower price models take their toll.

Earnings for PC manufacturers are expected to be a mixed bag, as overseas economic conditions, stuffed channels, and lower price models take a toll on some companies.

On a whole, the sector seems to be improving over last year's results. Even troubled companies such as Apple (AAPL) and AST Research (ASTA), are expected to post smaller losses. Although the worldwide the market is expected to grow 15 percent over the second quarter last year, computer makers will face a number of challenges to maintain that kind of growth.

The first problem is Europe. Although, in the United States PC demand is healthy, in Germany and France economic growth is stagnant and business are not looking to spend. That could hurt companies that generate a lot of business overseas.

"This doesn't mean that no one is buying PCs," said Kevin Hause, an analyst with International Data Corporation, but businesses are more likely to buy or upgrade to cheaper computers or buy from companies that offer a competitive price in an effort to save money. IDC expects 9 percent growth in Western Europe over the second quarter last year.

The need to conserve on spending, however, is helping direct marketers, such as Dell Computer (DELL) and Gateway 2000 (GTW). Those companies have fewer costs and can be more price competitive, said Hause.

Last quarter, Gateway saw strong sales. European shipments increased 41 percent, while shipments in the Asia/Pacific region were up 155 percent. International sales represent 18 percent of the company's revenue and Intel's processor with MMX made up nearly one-third of total global shipments.

Another company that will see greater profits this quarter is IBM (IBM), which offered generous rebates to distributors to take inventory off its hands. Analysts are expecting IBM to later this month report profits of $1.42 a share, up from $1.26 recorded a year ago, according to First Call.

IBM gave distributors and large computer dealers--who buy directly from Big Blue--up to 6 percent in soft dollar rebates to boost quarter-end sales. To qualify, distributors had to take shipment of large number of computers and then resell them to other parties.

"They definitely made an attempt in this quarter to throw money at the channel to excite some sales," said one distribution executive about the IBM incentives. "It was pretty rich. It made us work overtime."

But this could hurt IBM later in the year, analysts said. Next quarter IBM could ship fewer products thanks to softer demand from its channel partners.

The lower price tags on this quarter's PCs could also impact some companies.

Matt Sargent, an analyst at market researcher Computer Intelligence, said that a good portion of sales came from lower-priced computers. "The No. 2 selling chip in the dealer channel for May was the 133-MHZ Pentium," he said. Cheaper computers often are based on the older model chips.

Dropping prices combined with more features will increase pressure on gross margins and earnings. "You are going to get weak comparison earnings?We're starting to see downward pressure on gross margins," said Ashok Kumar, an analyst with Southcoast Capital.

PC makers earnings reporting dates
Fiscal quarter Analyst estimate
Reporting date
Q2 $1.48 (actual) July 10
Dell Computer
Q2 $1.07 mid-August
Gateway 2000
Q2 36 cents July 24
Q3 29 cents July 22
Hewlett Packard
Q3 68 cents August 15
Q2 $1.42 July 21
Apple Computer
Q2 (54 cents) July 16
AST Research
Q2 ($1.81) N/A
Digital Equiptment
Q4 73 cents July 24
Source: First Call