US tech giants face uncertain future


August 22, 2013

Outsiders often think of Silicon Valley as a constantly changing landscape, a place where fortunes rise and fall with the next great idea. Now some of the technology industry's biggest names are finding out that once you fall behind, it is pretty hard to catch up.

August 22, 2013

Outsiders often think of Silicon Valley as a constantly changing landscape, a place where fortunes rise and fall with the next great idea. Now some of the technology industry's biggest names are finding out that once you fall behind, it is pretty hard to catch up.

Hewlett-Packard announced several significant personnel changes, along with sharply lower revenue and narrower operating profit margins. It was the latest in a string of disappointing earnings news from big technology companies that has some asking if the industry, after at least five years of growth, is finally slowing down.

"We're doing a turnaround in not the greatest economic environment," said Meg Whitman, HP's chief executive, in an interview. "Everyone is trying to position themselves for the new style of information technology. The fittest will survive."

But the bad earnings news from older, big tech companies does not — so far — appear to be spreading to more youthful internet companies like Google or, which provide their software as a service over the internet.

HP's news, for example, comes on the heels of surprising plans announced last week to cut about 5% of the work force at the network computing company Cisco Systems and continuing issues at giant tech companies like Oracle, Intel and even Microsoft.

If there is a common thread among these older outfits, long considered bellwethers for their industry, it is that they are all struggling to adapt to a computing world where people use the internet on mobile devices like smartphones and tablets. Likewise, the information they retrieve is stored in a cloud of network computers that are used by many companies at the same time.

In some cases, they are big makers of things like personal computers, which people are not buying as quickly as they once did. In other cases, they are making costly corporate computing equipment like routers, which direct traffic on internet networks. Those routers are still in demand, but they don't typically attract the prices they once did.

"All the traditional enterprises are in a pickle," said Krish Ramakrishnan, a former general manager at Cisco who now runs Blue Jeans Network, a cloud-based videoconferencing service. "They want to have cloud businesses, but each of their divisions will have to transform differently."

For HP, a leader in personal computers, printers and computer servers, as well as data storage and networking, sales were down in almost every business. Total revenue was $27.2 billion, down 8% from a year earlier. Net earnings were $1.4 billion and, excluding special charges, were about 15% below their year-ago level. HP stock, which fell 1.8% in regular trading, dropped 6% more in after-hours trading.

Whitman also announced several executive changes, replacing the head of products and sales for business, and consolidating marketing and communications. Earlier this year she also replaced the head of her PC division.

"Revenue growth across the company has been very weak," said Toni Sacconaghi, an analyst with Sanford C Bernstein. He noted that HP now had one of the worst share valuations among all major American companies, which he said "appears to reflect a permanently declining business."

If it is any consolation, Whitman has plenty of company. Michael Dell, the chief executive of the computer maker Dell, is fighting to take his company private, a move that will almost certainly mean layoffs as the company moves away from selling personal computers, a once-good business that has gone bad thanks to the shift to tablet computing devices.

And at Cisco, sales are still strong, but John Chambers, the company's chief executive, signaled trouble ahead with his job cuts, which he said were necessary because of economic "uncertainty."

While there is no doubt there are broader economic issues affecting big-ticket tech sales — particularly in Asia, where Cisco's sales were off 3% from the same quarter last year — analysts believe Chambers' economic discussion fails to address the technology changes with which Cisco is trying to cope. In recent years, the company has faced a series of cheaper competitors, many of which rely more on software and off-the-shelf components, as compared with Cisco's custom-made equipment.

"They have to generate revenue from what they have always done, while they invest in a future that's very different, and change around their organization," said Mr. Ramakrishnan. "They have to move from selling mostly hardware, to selling software, while all the sharks are feeding off them."

That Intel is challenged in this new, more mobile environment is perhaps even more remarkable. Intel, after all, is often cited as one of the rare tech companies that saw a major change coming — in this case, it was wide adoption of PCs more than two decades ago — and adapted its business to take advantage. But those same executives acknowledged they have not moved quickly enough to build chips for mobile devices, and now they are working hard to catch up.

As these big companies try to adapt, they are even picking on each other. Cisco's gross margins were 70% in 2003, but are now 59%, in part because HP entered the market for internet routers. HP's computer server business has been pressed by Cisco's entry into the market. Dell has offered customers steep discounts on personal computers, Whitman has said, which hurt her PC business.

Just a few years ago, an alliance of Microsoft's Windows operating system and Intel chips dominated PCs, counting HP and Dell as important customers. Last year, Microsoft entered the hardware business with its Surface tablet, which came in versions using chips from both Intel and other companies. While sales have been poor, Microsoft is continuing to push the product. HP, for its part, has announced tablets and laptops using Google's operating system.

On a very personal level for employees of these companies, it's an odd time. Many, particularly early employees, were there when their innovations and more-affordable products displaced the last generation of big tech companies. Now they're on the downside of that cycle.

"Every emotion imaginable plays out," said Patrick Gelsinger, who worked at Intel for 30 years and is now the chief executive of VMware, a company that makes software used in cloud computing.

"Some folks are hoping to retire and their 401(k) is big enough," Mr. Gelsinger said. "Some are disheartened because they couldn't figure out how to adapt. Some are still putting their heads down."

Courtesy: NY Times