If readers of this posting have had the opportunity to read our Q2-2013 Supply Chain Matters Quarterly Newsletter that published yesterday, you hopefully read our report: Global Supply Chain Activity in Q2 Reflects Downward Trends. In the report, we cited the current drag of manufacturing and supply chain activity across developing market regions including China as reflected in PMI and recent GDP performance.
Many manufacturers and retailers have grown dependent on China and other emerging market based revenues and profits to shore-up less than adequate results from Europe and U.S. geographic regions.
This week brings even more revelation. Major software and information technology related providers were also pinned toward emerging markets for boosting revenues and profits, and the bubble apparently burst in Q2.
High-tech firms Ericsson, Google, IBM, Intel, Microsoft and SAP all disappointed equity markets in their earnings reports or warnings this week.
Ericsson indicated that its telecom investments in China have declined to 4 percent from a previous 6 percent. Google disappointed on earnings citing a six percent erosion in average revenue-per-click. This follows a 4 percent decline in click revenue in Q1. Of more concern, Google’s operating expenses have increased by close to a billion dollars from a year earlier.
IBM posted its fifth consecutive quarterly revenue decline, again citing a slowing of growth in emerging markets, among other factors. A Wall Street Journal article reporting on IBM’s latest results cites a Goldman Sachs analyst as indicating that between 2010-2012, 61 percent of IBM’s gross profit and 80 percent of its revenue growth came from termed “growth markets.” While IBM’s services and software businesses report robust pipelines, hardware and technology outsourcing experienced revenue declines. The best performing business was IBM’s software group which grew 4 percent in revenues to $6.4 billion. Obviously, the strategy of multiple acquisitions of other software providers is bearing fruit. Rival IT and outsourcing services provider Accenture lowered in 2013 revenue expectations in June.
Intel, which not so very long ago was on a Wall Street roll in revenue and profit growth is dealing with the challenges of a declining PC market that fuels two-thirds of its revenue growth. Some of that decline in PC market growth stems from China and other emerging markets, where Lenovo has been the dominant provider. The company’s overall revenues declined 5 percent in the recent quarter. In a CNBC interview, the managing director of Intel Europe indicated that “China is a worry.” “Certainly emerging markets are not performing at the level we are expecting them to perform.” The company was previously hesitant to become a chip supplier for mobile devices because of lower margins and higher competition. Of late, it has been aggressively maneuvering to get more of its chips embedded in mobile devices. Supply Chain Matters has previously noted constant information leaks that indicate that Intel has been trying to position itself as a chip supplier to Apple. As a result of its latest financial results, Intel cut its capital equipment budget for manufacturing equipment by $1 billion.
Microsoft missed on revenue expectations by $800 million citing the same general downturn in the PC market. The company took a whopping $900 million charge for unsold inventory of its Surface tablets which is not a good sign for that product. There was an additional deferred $782 million charge related to Microsoft Office. Its Online Services Division continues to lose money albeit at a lower rate. Prior to the earnings announcement, Microsoft announced a sweeping corporate re-organization directed at “One strategy, One Microsoft” which appears to delude the former power of individual product groups.
SAP this week cut its 2013 revenue outlook by two percentage points, citing slowing growth in China. Rival Oracle reported its second decline in total revenues in June causing its shares to tumble amid fears of weakness in the company’s cloud-based offerings. The company also cited weakness in emerging markets in addition to other areas.
Thus, in just a one week period, we observe multiple data points indicating a declining bubble among high tech, IT and software providers. A period of robust growth fueled by opportunities in emerging markets is changing rather quickly, and competitive juices to land new deals are bound to become more aggressive. Microsoft may not be the only high profile teach player to initiate re-alignment and/or re-focus in the weeks to come.