Valley economy may be turning
EARNINGS POINT TO SLOW GROWTH
By David A. Sylvester
Mercury News
Posted on Sat, Aug. 02, 2003
Somewhere out there, a tech recovery is in the works.
A slew of economic data this week, including financial results from two-thirds of the public companies in Silicon Valley, show it is real, but gradual.
``Difficult'' is how many analysts describe the upturn, as if describing a difficult child or a difficult experience.
Key financial reports from the second quarter show losses have turned into profits, mainly because of cost cutting, while sales are showing slight improvement. The biggest companies are faring best, with Intel turning the largest profit of any company by far. However, the majority of smaller companies continue to lose money and sales.
``Are we having a recovery?'' asks Keitaro Matsuda, senior economist at Union Bank of California. ``I'd say we are. Will it be an extremely strong one? I'd say, probably not.''
Nationally, spending on tech equipment is up sharply from the very low levels of a year ago. In the second quarter, sales for information-processing equipment rose 23 percent to $617.1 billion, according to the inflation-adjusted figures in the gross-domestic-product data released last week. The biggest surge came in computer and peripheral equipment, which rose 36 percent to $355.5 billion, while software sales rose a modest 2 percent.
`Back to normal'
Some see this as nothing more than a reprieve from the depression-like drop in tech spending since the peak three years ago. ``We're getting back to normal levels in spending,'' says Edward Leamer, director of the UCLA Anderson School's economic forecast.
Intel Chief Executive Craig Barrett said much the same thing last week, when he warned that information-technology spending won't rise much this year.
``I'm not sure IT spending is going to be down in '03, but it's certainly not going to be up a whole lot especially in the established economies,'' Barrett told a Morgan Stanley analyst.
Two-thirds -- or 233 -- of 340 local public companies reported their recent quarterly earnings over the past two weeks. Collectively, sales rose 2.4 percent from $34.5 billion to $35.3 billion. The group's net loss improved from $7.6 billion last year to a loss of $2.7 billion in this current quarter.
However, these figures are distorted by Solectron's $3.1 billion loss that included a $1.9 billion write-down. If figures for Solectron -- a contract manufacturer of electronic equipment -- are taken out, the group turned a profit of $1 billion, a major turnaround from the loss of $6.8 billion a year ago.
Then again, most of this profit came from chip maker Intel. Excluding Intel's $896 million profit and Solectron's loss, the remaining 232 companies in the group turned a paper-thin profit of $107 million on $24.6 billion in sales. That's a profit margin of less than a half a percentage point.
Some of the hallmarks of the bubble remain because Silicon Valley still is loaded with small, money-losing companies. Even during this recovery, a full 81 percent of the smaller half of the companies, those with sales under $21.4 million in the quarter, lost money.
Worse than that, while revenues for the largest 117 companies in the group grew nearly 3 percent, they fell 8 percent for the 116 smaller companies. These small companies lost $577.6 million, on $1 billion in sales for the quarter.
In other words, while the large companies, not counting Intel and Solectron, earned 43 cents on every $100 of products they sold, smaller companies lost $57.59 for every $100 they sold.
Chip demand rising
This may soon be history because there are signs of a turnaround in the important semiconductor sector. G. Dan Hutcheson, president of VLSI Research, says prices for the key dynamic random access memory (DRAM) chip are actually rising, showing greater demand. Chip factories with the most advanced technology are running very close to their maximum capacity, he says; it's the factories with ordinary technology that are stuck with a quarter of their capacity unused.
``I think there's an upturn going on and no one is talking about it,'' he says. ``Part of the reason no one is talking about it is they're struggling to make money. They've still got the brakes on because they're still bleeding.''
Among the chip-equipment companies he follows, half beat analysts' estimates for their earnings and half came in close to the estimates.
The same held true in other sectors. Of 10 companies reporting earnings over the last two weeks, eight matched analysts' estimates within 2 cents a share.
Tech stocks aren't reflecting any impending upturn because they rallied so strongly since March. ``What the economic reports are now showing, the market has been anticipating,'' says Dan Niles, technology analyst at Lehman Brothers. ``You need more good data to support where stock prices are now.''
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Business Data Manager Jack Davis contributed to this report.
Contact David A. Sylvester at dsylvester@mercurynews.com or (408) 920-5019.
