(FROM THE WALL STREET JOURNAL 2/1/16)
By Don Clark, Daisuke Wakabayashi and Alistair Barr
Many multinationals have suffered from the impact of a strong
dollar, but few as severely as U.S. technology companies. There is
little sign the pain will ease soon.
Currency headwinds for more than a year have dogged the biggest
names in the sector -- including Apple Inc., Microsoft Corp. and
International Business Machines Corp. -- and once again loomed
large in the current quarterly earnings season. The problem, which
is increasingly defying traditional solutions, is also expected to
weigh down the numbers expected Monday from Google's parent
Alphabet Inc.
Silicon Valley is suffering disproportionately because of its
unusual success in hawking hardware, software and services abroad.
S&P Dow Jones Indices estimates that U.S. information
technology companies generated 59% of sales overseas in 2014, the
latest annual numbers available, compared with 48% for companies in
the broader S&P 500 index.
"I would expect the technology sector to continue to be the most
affected of any sector," said Howard Silverblatt, an S&P Dow
Jones analyst. "These companies have enormous presence abroad."
Currency headaches are becoming more pronounced as tech
companies run into economic weakness and other issues that are
slowing demand for their products.
Apple provided a striking example last week. The consumer
electronics company, which gets 66% of its revenue from outside the
U.S., said last week that the strong dollar had cost it nearly $5
billion in revenue in the quarter ended in December. Apple, if
currency moves were excluded, said it would have generated $80.8
billion in revenue in the most recent quarter versus its reported
$75.9 billion, knocking an 8% increase down to 2%.
Besides taking customary hedging actions to counter the dollar's
rise, the company said it had been forced to protect its profit
margins by raising prices on products like iPhones in Russia,
Brazil and Turkey and other countries.
Tim Cook, Apple's chief executive, said extreme measures were
necessary given the unprecedented scope of an issue that ordinarily
affects a few countries at once. This time, he said in an
interview, the dollar is "incredibly strong nearly everywhere."
Since September 2014, Apple estimated, the Russian ruble's value
has fallen more than 50% and the Brazilian real more than 40%,
while Canadian and Australian dollars, Mexican peso and Turkish
lira are all down by 20% or more. What was $100 in overseas revenue
for Apple in September 2014 translated to $85 in December 2015, the
company estimated.
"When the currencies move to that degree for that period of
time, it's meaningful to us," said Mr. Cook, who told analysts that
the combination of currency shifts and slowing economies has caused
a "melee in virtually every country in the world."
Other tech companies also blamed currency woes for suboptimal
results in their most recent quarter. Microsoft reported last week
that the strong dollar had reduced its revenue by about $1.9
billion in the period ended in December. IBM put the fourth-quarter
impact of currency translation at about $1.5 billion. Software
maker Oracle Corp. in December said exchange rates reduced revenue
by about $540 million in the quarter ended in November.
Most of these companies generate enough profit to counter
currency shifts, which hurt mainly when proceeds from goods sold in
foreign currencies were translated into dollars. But equally
serious repercussions can follow when the strong dollar makes it
more expensive to buy U.S. goods. In such cases, potential
purchasers may hold off buying or try to find alternatives,
analysts say.
Market researcher Gartner Inc. estimated that the U.S. dollar's
rise took $217 billion from global information technology spending
in 2015, a bigger effect than the 2009 financial crisis.
The latest shifts have created winners as well as losers.
Amazon.com Inc.'s cloud service, for example, uses dollars for
purposes like constructing data centers overseas, and it cited
financial benefits in its fourth quarter. Meanwhile, tech vendors
from other countries -- including the big German software vendor
SAP SE -- have seen a financial tailwind as they get higher-valued
dollars in exchange for their products.
But most U.S. companies are talking about the downside of the
dollar. More such commentary may come Monday from Alphabet, whose
flagship Google unit and other businesses derived about 53% of
revenue from abroad in the quarter ending in September. The company
estimated the negative impact of currency rates at $1.3 billion in
that period, following hits of $1.1 billion in both the first and
second quarters.
Ruth Porat, Alphabet's chief financial officer, mentioned
currency headwinds five times during the third quarter's conference
call with analysts. In the fourth-quarter results due out Monday,
analysts from Raymond James & Associates expect U.S. dollar
gains to trim revenue by about $900 million, excluding any hedging
benefits.
Compounding the problem is the increasing difficulty of making
effective hedging moves, which include forward contracts or options
to buy or sell foreign currencies. Companies in many cases have
failed to make hedging moves that match the magnitude of the
dollar's rise, or haven't hedged in enough of the currencies that
fell in relation to the U.S. currency.
"The techniques didn't work, because the drop was so fast and so
widespread," said John Lovelock, a Gartner analyst.
Alphabet, for example, said in October its hedging moves only
reduced negative currency impacts by $300 million in the third
quarter. IBM has run into the same issue. Martin Schroeter, IBM's
chief financial officer, estimated that currency translation would
hurt pretax profit in 2016 by $1.3 billion -- with nearly
three-quarters of that reduction coming from reduced gains from
hedging.
For the current quarter ending in March, Apple expects currency
issues to decrease revenue by 4%. The company, which didn't
quantify the impact of its hedging activity in the quarter ended in
December, said it plans to continue placing hedges to counter the
dollar's rise. It also hopes to get some money back from
suppliers.
Apple pays many of those foreign firms in U.S. currency, which
means they have benefited from the dollar's strength. The company
said it plans to take that factor into account as it tries to
negotiate new supply deals with more favorable terms.
Costs associated with forward currency contracts can go up based
on differences in interest rates among countries, while currency
option prices rise in proportion to pricing volatility, said
Wolfgang Koester, chief executive of FiREapps, a company that
provides currency-analysis services to companies. Despite the
complexities, Mr. Koester said Google and others have developed
sophisticated tools that should be up to the hedging task.
"It is very manageable, if you do it right," he said.
(END) Dow Jones Newswires
February 01, 2016 02:47 ET (07:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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