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Thursday, July 20, 2006

Widely Traded 48 Hour Clock: Is The PC Era Ending?


The PC will clearly be with us forever. Or, maybe longer. But, recent reports from public companies are starting to indicate that it may no longer be much of a growth business and that the margins for companies in the industry will never return to the levels that hit two or three years ago.

Obviously, the x86 chip business has fallen apart. The price wars between Intel and Advance Micro Devices are not likely to end. Intel's CFO said that the company will not meet its annual sales target of $37.6 billion. Revenue in the just announced quarter was about $1 billion below the same quarter last year. And, perhaps the most disturbing issue is that margins are falling with revenue. Gross margin in the most recent Q was 52.1%. A year ago it was 56.4%.

Intel's stock is now at $17.50. It was at nearly $28 last August. That means that nearly $70 billion in market cap has disappeared over that period.

AMD is the same story in a smaller package. The company trades just above $21. Its 52-week high was nearly $43. That means that the company's market cap is down $10 billion. In the quarter ending December 25, 2005, AMD revenue was $1.838 billion. In the quarter ending March 26, 2006, the revenue number fell to $1.332 billion. And, the company has warned on the quarter it is about to announce.

With both Intel and AMD, the single largest issue is price cutting.

The next group of companies up the food chain are the PC manufacturers and distributors. The story at Dell is no better than it is at the chip companies. Dell trades at $22. Its high for the 12-month period is almost $42. That is over $45 billion in market cap lost. Analysts have been cutting their revenue forecasts for Dell's second quarter to the $14 million range. In the first quarter revenue was up only 6%.

Overall PC shipments worldwide were up 9.7% according to IDC. In the US, the number was 6.7% for the second quarter. But, the profitability of the industry continues to fall, and unit sales are not terribly robust for US-based companies. Even Apple's desktop sales fell in the most recently reported quarter when compared the the previous Q.

Even Hewlett-Packard has not been immune from the slowdown. A look at the company's most recent 10Q shows that desktop revenue was flat for the six months ending April 30 compared to the same period a year earlier.

Microsoft's malaise are also related to the slowdown in the PC market. Although it has made a number of new initiatives in the game console, IPTV, online content, and cellphone markets, the bulk of the company's revenue and almost all of its operating profits come from sales of its OS and Windows Offcer and server products. The company's Vista product may be late, but one question Wall Street has to be asking is whether there will be robust demand for a completely upgraded operating system. If people and enterprises want to save money on their computing costs, they may simply elect not to upgrade right away.

Doubts about Microsoft, the most PC-centric software company in the world, have taken the stock from a 52-week high of $28.38 to the current $22 range. That is a drop of nearly $65 million in market cap.

The idea that consumers will use devices smaller that PCs for information and entertainment began to have validity two or three years ago. Obviously the iPod has driven the entertainment side of this equation. But, with Motorola selling over 50 million handsets in its most recently reported quarter. Nokia's profits rose 43% in Q2. Nokia devices sales hit 78.4 million units in the quarter, up 29% over the period a year ago.

Google announced recently that it would start installing its service on Motorola phones. Most cell service now offer web browsing, e-mail, and even video. Most of these are functions that were PC-centric just a few years ago. In certain markets like China, cell phones are used heavily for communications like text chat that used to be done exclusively on PCs through instant messaging applications.

The winners in this game are likely to be the primary component suppliers for the smaller devices, companies including Texas Instruments, which has positioned itself at the crossroads of the move to the little screen.

The PC clearly is not going the way of the dodo, but its place as the central device for for information, writing, and entertainment may have matured to the point where it can no longer be considered a growth industry in the full sense of that phrase.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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