RealTime IT News

What Caused the Tech Sales Crash?

Earnings season for the past month has been more painful than a root canal with no Novocain. On earnings calls, one hardware supplier after another recounted sales going off a cliff and were reluctant to give any forward guidance because they didn't know when things would improve.

The problem was these sales plunges did not always jive with the dip in sales. Yes, this was a disappointing Christmas at retail. NPD Research shows Christmas sales were off by eight percent compared to 2007.

Eight percent? Intel (NASDAQ: INTC), AMD and nVidia would be thrilled with an eight percent drop compared with what the big three chipmakers endured. Intel saw sales fall by 25 percent. AMD (NYSE: AMD) was off by 33 percent and nVidia (NASDAQ: NVDA) took a 60 percent dive.

Even more curious is why the suppliers of much more expensive IT technology that sells for tens if not hundreds of thousands of dollars seemed to be avoiding catastrophe that befell providers of $50 to $200 chips. Sun Microsystems (NASDAQ: JAVA), a company considered to be in far more trouble than nVidia when it comes to growth and landing new customers, only fell by 10 percent. IBM was only off by six percent. HP (NYSE: HPQ) reports quarterly earnings this week and Dell (NASDAQ: DELL) reports on February 26.

Where's the disconnect?

So while IT spending slowed down as expected along with the economy late in 2008, it did not come to a screeching halt like it did in the consumer space. But something there doesn't compute. How did an eight percent drop in Christmas sales cost nVidia 60 percent of sales? "There's no way demand fell off that much," noted Mike Hara, vice president of investor relations at nVidia. "There had to be a disconnect somewhere."

That disconnect, he said, was with mass market distributors. They simply stopped taking orders. Distributors and sub-assemblers, or contract manufacturers, operate on a very low margin basis. Product has to go out as quickly as it comes in, Hara said.

These distributors carry a certain line of credit, but if inventory backs up because consumers stop buying, then the distributor is stuck with product and may need to get more credit to extend their hold on the product. One of the hallmarks of this economic crisis has been a lack of credit, so distributors, fearing they couldn't get credit, stopped taking new inventory.

"Everybody threw their hands up and said stop," said Hara. "They had zero visibility into retail and were feeling exposed because of their positions and said we aren't going to take the risk. They decided to pare [inventory] back to almost hand to mouth."

The result was nVidia going from 70 days of inventory to 145. Intel went from $3.39 billion in the third quarter of 2008 to $3.74 billion in Q4 and a write-down in inventories. AMD wrote down $227 million in inventory.

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