Mobile Shift Slams Tech's Old Guard
April 20 2016 - 8:13PM
Dow Jones News
By Don Clark
EMC Corp. on Wednesday became the third old-guard tech company
in three days to report disappointing results stemming from the
industry's rapid shift to new ways of computing.
The data-storage company issued quarterly results that
underscored a slowdown in spending by companies that install and
operate their own computing hardware, as technology spending shifts
from corporate data centers to off-premise cloud services and from
PCs to mobile devices.
Quarterly reports from International Business Machines Corp. and
Intel Corp. pointed to similar issues, weighed down by mature
businesses that have been shrinking for years.
Companies are tightly controlling traditional
information-technology investments from desktop computers to server
systems, industry executives say, as they consider shifts to newer
technology and services that could help reduce their operating
costs.
"The IT spending environment continues to be challenging, and
it's having a meaningful impact across enterprise tech," said Denis
Cashman, EMC's chief financial officer, during a conference call
with analysts Wednesday.
Responses to the pressure have been dramatic. Intel on Tuesday
announced plans to cut 12,000 jobs, or 11% of its workforce, to
accelerate a plan to reduce its reliance on selling chips to the
shrinking PC business. EMC agreed last year to be acquired by Dell
Inc. for a deal then valued at $67 billion, the biggest acquisition
ever in the tech sector. Rather than become bigger, Hewlett-Packard
Co. opted in November to split in two.
All the companies have added products and services that exploit
recent technology changes, and they cited the success of those
offerings in earnings reports this week. But so far those business
aren't large enough to significantly change their financial
picture.
IBM, for example, on Monday said first-quarter revenue from its
cloud-computing businesses was up 34% over the year-earlier period.
But total revenue nevertheless declined 4.6% and profit fell
13.5%.
EMC, which built its business around systems that store data on
spinning disks, has managed to also become the largest vendor of
new-wave systems that use flash memory chips instead. But total
storage-product sales declined 10% in the first quarter, while
total corporate revenue slid 2.5%.
IBM and EMC "have very large, profitable legacy businesses, and
demand is moving away from them," said Toni Sacconaghi, an analyst
at Sanford C. Bernstein. "That is the fundamental challenge."
Intel, whose chips serve as calculating engines in most
computers, has benefited as vendors of cloud-computing services
such as Amazon.com Inc., Microsoft Corp. and Google Inc. have
continued to bulk up on servers and other data center gear. The
chip maker on Tuesday said its data center business grew 9% in the
first period, largely because of cloud-related demand, while server
purchases by other enterprises remain weak.
Intel for years has struggled to build a big business in
supplying chips for smartphones, outflanked by numerous competitors
making chips based on designs licensed from ARM Holdings PLC.
So, for now, chips for PCs remain Intel's biggest business --
one hurt by a shift in spending to mobile devices and by companies
and consumers taking longer to upgrade their computers. The
company's executives said they expect the PC market to decline at
high single-digit percentage rates in 2016, compared with their
prior forecast of a mid-single digit decline and some higher
estimates by analysts.
Brian Krzanich, Intel's chief executive, estimated that 40% of
Intel's revenue and 60% of its operating profit already come from
areas other than the PC market. The job cuts are designed partly to
free up money to invest further in chips for cloud-related
businesses, chips for devices associated with a trend called the
Internet of Things, and flash memory chips and related
products.
"It's time to make this transition and push the company over,"
Mr. Krzanich said in a conference call Tuesday.
Intel's quarterly results, which included a 7% revenue jump
caused mainly by an acquisition, contrasted sharply with some
competitors that have better exploited the smartphone craze. ARM
Holdings on Wednesday said first-quarter revenue rose 22%.
Qualcomm Inc., a smartphone chip specialist that uses ARM
designs along with its own wireless technology, on Wednesday
reported results that were more of a mixed bag.
The San Diego-based company said fiscal second-quarter profit
rose 11%, but revenue declined 19%. Qualcomm also said it
successfully settled a patent licensing dispute with LG Electronics
Inc.
Write to Don Clark at don.clark@wsj.com
(END) Dow Jones Newswires
April 20, 2016 19:58 ET (23:58 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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