Hardware market remains steady

Despite a slew of recent earnings warnings from their software counterparts, the IT hardware industry should improve upon last...

Despite a slew of recent earnings warnings from their software counterparts, the IT hardware industry should improve upon last year's second quarter amid the usual seasonal slowdown, according to analysts.

Next week Intel, Advanced Micro Devices, Apple and IBM will report quarterly earnings. Sun Microsystems and Gateway will post their latest financial data in two weeks. Dell and Hewlett-Packard are on different financial cycles from the rest of the industry, and will not report earnings for another month.

In terms of revenue, Intel and AMD are expected to show normal seasonal downturns, but healthy increases compared to last year's second quarter.

Consumers typically take a break from buying PCs in the second quarter, and shipments are expected to plunge about 18% from the first quarter of this year to the second quarter, said Roger Kay, vice-president of client computing for IDC.

However, the second quarter is generally strong for enterprise hardware purchasing. Government and educational customers tend to lift commercial shipments in the second quarter, Kay said.

That purchasing lift did not extend to the software industry this quarter, raising questions about the overall health of corporate spending. Enterprise software companies such as PeopleSoft, Siebel Systems and BMC Software all warned this week that second quarter revenues will miss earlier targets.

Commercial PC customers are in the middle of a long-delayed PC upgrade cycle, and these customers represent about 60% of all PC purchases in any given quarter, Kay said.

The continued strength in corporate sales should keep the overall PC numbers close to normal seasonal patterns from the first quarter to the second quarter, and US shipments should increase about 11.6% compared to last year's second quarter, he said.

There have been reports of weakness in certain PC sectors, mainly among hard drive supplier. Maxtor warned of a higher-than-expected loss in the second quarter after getting caught with an oversupply of hard drives, but that weakness should be confined to the hard-drive suppliers and probably will not expand to PC suppliers, he said.

In fact, that oversupply should help keep PC prices down for IT managers in the upcoming months, Kay said. Memory and display prices are also starting to ease after a brief increase, he said.

Overall semiconductor revenue followed the normal patterns in the first half of the year, said Joe Osha, senior analyst with Merrill Lynch. The month of June was a little weaker than usual, but it should not be enough to affect most semiconductor companies, he said.

A report by Lehman Brothers Holdings said it still expected Intel to record about $8.1bn (£4.4bn) in revenue in the second quarter. In June, Intel said it expected to post between $8bn and $8.2bn in revenue in the second quarter.

However, Lehman said it is cutting its estimates for Intel's third-quarter results on expectations that PC demand might be less than anticipated at the start of the second half of the year. The delay of Intel's Grantsdale chipset launch might have helped to push sales of new PCs farther out into the third quarter, Lehman said.

AMD's Opteron processor continues to account for the company's improving revenue picture, Osha said. But flatter prices for NOR flash memory should help keep its overall earnings in line with previous expectations.

NOR flash memory is used in mobile phones and embedded devices to store data without a constant supply of power. It is starting to become more attractive to smart phone designers as the price comes down. Flash memory is the largest segment of AMD's revenue, and the company is therefore more exposed to pricing changes in that market than Intel.

Strong iPod sales should lift Apple to another strong quarter, said Steven Milunovich, global technology strategist at Merrill.

Any future impact felt from the recent suspension of iMac orders should be offset by the introduction of the iPod Mini in Europe and the launch of HP's iPod product line in the third quarter, he said.

The second-quarter picture appears rosier for Sun for the first time in a while, based on strong sales of the Sun Fire V1280 and E2900 midrange servers, Milunovich said.

Merrill raised its estimates for Sun's second-quarter revenue, but still expects the company to post a loss and still does not recommend the stock as a long-term investment, he said.

IBM's Microelectronics division should return to profitability in the second quarter, as the company makes good on its promises to fix the yield problems that plagued the introduction of the 90-nanometer PowerPC 970FX earlier this year, Milunovich said. Merrill expects the company to meet expectations for the quarter.

Tom Krazit writes for IDG News Service

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