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January 22, 2009

Economy Batters Tech Companies

Michael Feldman

While much of the U.S. was experiencing presidential inauguration euphoria this week, most of the economic news was dismal. In particular, a lot of the big tech companies were announcing bleak quarterly financial results amid plans to scale back their operations.

On Wednesday, chip giant Intel Corp. announced it would be laying off 5,000 to 6,000 workers, while halting production at two silicon wafer facilities in the US and closing three facilities in Asia. This came on top of last week’s news that the company’s earning dropped 90 percent in the fourth quarter of 2008.

The ones affected include two assembly test facilities in Penang, Malaysia, and one in Cavite, Philippines, as well as Fab 20 in Hillsboro, Ore., and the D2 facility in Santa Clara, Calif. Ars Technica’s Jon Stokes writes that the fab shutdowns are the really big news since these facilities represent such a big investment by the company:

A semiconductor fab is a very expensive, often highly leveraged asset that represents an enormous up-front cost, and hence an enormous gamble that the fab will stay busy enough for long enough to both pay itself off and turn a profit. That asset is also completely illiquid — there is no “used fab market” that you can unload it onto if it’s not working out for you. So if the fab doesn’t stay full, then you lose money.

According to Intel, its newer fabs that are churning out 45nm chips will remain operational and the ramp-up to 32nm production won’t be affected.

Meanwhile the incredibly shrinking AMD is in for another round of reductions, announcing plans to shed 1,100 jobs and cutting salaries on 9 percent of its workforce. Even AMD CEO Dirk Meyer’s salary will get chopped by 20 percent, and all VP salaries will get a 15 percent haircut. This round of reductions is just the latest for the chipmaker. In 2008, the company let go over 2,000 workers. All told, since the beginning of last year, the company has announced workforce reductions of 20 percent. The doesn’t include the workers lost in the spinoff of its foundry business and the recent sale of its handheld graphics division to Qualcomm.

Following this grim news, on Thursday AMD announced financial results for Q4 2008, reporting a net loss of $1.4 billion. For the entire year, AMD was over $3 billion in the red. It was the company’s 9th straight quarterly loss, and 33 percent lower than the same period in 2007.

Reflecting the sad state of its chip partners, Microsoft announced it had laid off 1,400 workers on Thursday with plans to let go an additional 3,600 over the next 18 months. This represents the company’s first large-scale layoff in its history. The news drove Microsoft’s stock down to just over $17 per share, its lowest price since 1997.

The declining fortunes of Intel, AMD and Microsoft are mostly a result of the plummeting demand for PCs, but the server space is only a little better. The fact that these companies are critical to the high performance computing ecosystem may be cause for concern, but in the short term, at least, lower demand for components should drive prices down and lower system costs for the HPC customer with an intact budget. Specifically, there are signs that a price war is brewing between Intel and AMD over their quad-core offerings.

HPC system vendors are generally in a holding pattern right now, waiting for the 2009 customer orders to arrive. As Tabor Research GM Addison Snell wrote last week, HPC demand is generally healthy, but because of the economic uncertainty, budgets are being locked down:

The money is there, and it will be spent, eventually. The unfortunate (for HPC vendors) side effect is that although the budgets are there, we see ample evidence that sales cycles are lengthening. Many new capital acquisitions must now undergo additional levels of assessment, review, or signature authority, to prove their worth.

Snell goes on to say: “2009 could therefore see a total decrease in HPC spending, not because users’ budgets are contracting, but mostly due to purchases being placed on hold for a time before they are finally approved.” But he expects sale cycles will shorten once the economy turns around.

This assessment is reflected in IDC’s latest revised assessment for the HPC server market. In an email sent out this week to their HPC distribution list, the analyst firm is now predicting “a decline in 2008, followed by an additional modest decline in 2009, then a return to growth in 2010 to 2012, resulting in an overall CAGR from 2007 to 2012 of 3.1% in revenues and 2.7% in HPC systems sold.” Because of the uncertainty in the market, IDC plans to update the forecast quarterly until “things settle down.”

At this point, it’s anybody’s guess when that will occur. But for 2009, it looks like the challenge will be how to survive in uncertain times.