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.
Next page: ‘Stop, we don’t want it’
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‘Stop, we don’t want it’
Stephen Baker, vice president of research with NPD Group, said things actually started to go bad in August. “In October, retailers told manufacturers ‘stop we don’t want it’,” he told InternetNews.com. “So as that cascaded through the month of October, the retailers stopped more and more orders and that pushes inventory back into the supply chain.”
One reason nVidia was hit so hard is because its quarters are off by a month. Whereas most companies ended their quarter at the end of September, nVidia’s ended in October. September and even October were good for a while, which is why Intel and AMD’s drops weren’t so precipitous.
But then in late October, “it went off a cliff,” as Hara put it. So nVidia’s fourth quarter of November/December 2008 and January 2009 were all during the worst of the situation, where distributors let product bleed out and stopped their orders.
Distributors Ingram Micro, Tech Data and Arrow were not available for comment.
Signs of a comeback?
Hara said only now are distributors approaching a one-to-one ratio of selling out and restocking. nVidia’s guidance for the first quarter is that it will be flat to slightly up from the same quarter last year, indicating that product is once again rolling.
There’s at lease some evidence of that from the government. The Commerce Department on Thursday reported January sales inched up one percent over the prior month, reversing six months of consecutive declines.
While the trucks are starting to roll for suppliers, the ripple effect back through the food chain continues. When chip makers stopped selling parts, they stopped placing orders. Taiwan chip manufacturers like TSMC are taking it on the chin now, reducing capacity and cutting back on work by 20 to 30 percent or more, according to DigiTimes, a Taipei-based tech publication.
Most recently, DigiTimes reported
that notebook shipments in February are expected to rise about 9.7 percent over January.
Hara has been through contractions before. He was with nVidia during the Dot-Bomb implosion earlier this decade. But the speed at which things fell apart last year was what shocked him. Instead of the industry going along blithely for several months like it did in 2000-2001 before reality finally sank in, everything stopped dead almost immediately in 2008.
“It was almost day by day, things were getting worse,” he said.
“Whatever you saw one week was different the next. I’ve never seen things change that fast before. It was alarming. I think reality set in and it cascaded.”
Bring on Windows 7
Sales have slowed but haven’t exactly taken off yet, not with one percent growth in one month after a year of contraction. One thing that might get things moving is Microsoft’s release of Windows 7. The company continues to maintain a Q1 2010 release date, but with the beta in very good shape and the company openly discussing a release candidate, the June
2009 ship date seems more and more likely.
What could possibly happen, then, is that Microsoft would be in the rare spot of spurring sales not because the new operating system requires new hardware to run it, but because people actually want to get a Windows 7 machine. Hara thinks it might prove a boon for all hardware vendors, if he is any example. He has three aging Windows XP machines that need replacing.
“It’s going to give people a reason to look,” he said. “Using myself, the timing works out well for me. If you were holding off and didn’t want to go to Vista, this could be the reason to make the change. I believe there are a lot of people on the fence in the same position as me, looking for a reason to upgrade. If people take that as the opportunity to refresh their hardware, then that will be good for everyone.”