Ill wind of recession blows through the valley

NET RESULTS:The economic slump is even affecting bellwether technology giants like Intel

WHEN I was out in California last autumn, Silicon Valley was still feeling pretty good about itself. I noted then that a number of local commentators felt the valley and its companies would weather what was seen as a downturn, even if the business environment got fairly turbulent. The general argument was that the valley and the technology industry were cushioned because even when the economy grows cold, companies still need ICTs for operations and to achieve the greater efficiencies demanded in a downturn.

Well, we all know now we are going through something a lot more severe than a mere “downturn” and few will be surprised to learn that the valley is having quite a hard time of it.

That news was confirmed this week as the Valley’s main tech-focused newspaper, the San Jose Mercury-News, released its annual survey of the top 150 companies in the valley, which it calls the SV 150 (read more here: http://tinyurl.com/d29nsa). The report always produces some fascinating broad brushstroke pictures of what’s happening at the very heart of the technology industry, as well as some interesting niche insights.

What won’t come as a surprise is that the economic slump started to hammer valley companies at the tail end of last year, with both sales and profits diving in the fourth quarter. And the tech giants – the so-called bellwether companies like Intel that are often immune to shallower dips in the economy – are having difficulties as well, although their first-quarter figures published this week were better than expected.

The report shows that big companies with large international operations have had a particularly tough time. In recent years, even when sales dropped off in the home US market, sales in Europe, South America, South Africa, India and China tended to continue to pump healthy profits. That has now changed.

Intel’s experience is amongst the worst. According to the report, 80 per cent of its revenue comes from foreign markets, and sales fell 20 per cent in those markets between the third and fourth quarters of 2008, leading to the lay-off of 5,000 employees and the planned closure of five facilities, announced in January.

Overall, it is the worst downturn since the dotcom crash for the valley. Profits in 2008 fell an extraordinary 52 per cent, and combined revenue for the SV 150 only grew 5 per cent for the year.

It’s small consolation – though perhaps a surprise – to learn that, for the technology sector at least, this isn’t as bad as 2001. But many analysts expect 2009 figures to be worse and don’t predict an upturn until the end of this year or 2010.

So who did best in 2008? The league tables ranking firms by biggest profits in absolute terms include: HP, Cisco Systems, Oracle, Intel, Apple, Google, Gilead Sciences, eBay, Franklin Resources and Adobe Systems.

But the table ranking firms according to biggest profit margins looks a bit different, with TV recorder box company TiVo in first place (with a massive 42 per cent profit margin).

Interestingly Apple, always famed for good margins on its products, doesn’t even appear in the top 10. Many of the companies that are there won’t be familiar to anyone but industry insiders – Linear Technology, Intuitive Surgical, Align Technology, anyone?

The biggest losses roll call is led by Symantic, AMD and SanDisk, followed by Sun Microsystems, Cadence Design and Electronic Arts.

Poor Palm limps in at ninth place in this top 10 on which no one wants to appear. You can check out all the top 10 lists here: http://tinyurl.com/ck8274 .

Of the various tech sectors, biomedical, networking and internet companies seem to be weathering the harsh climate best, while the chip sector struggles.

In hardware, some of the big companies like HP and Apple actually did fairly well in 2008. Smaller companies are taking a beating.

And in software, Oracle is having the last laugh at commentators who predicted its massive acquisition strategy would incapacitate the company. On the contrary, while many other companies in the sector grope their way through the recession, Oracle reported sales growth of 12 per cent – to $23.6 billion – in 2008, thanks to all those renewable licences. About half the companies in this sector in the SV 150 posted net losses. Ouch.

More recent data from the valley shows that life in 2009 certainly has not improved for the industry. Some 21 per cent of job losses in the region were in the tech sector in January and February and about two-thirds of potential financial losses announced in the first quarter would come from technology companies as well.

According to analysts Challenger, Gray and Christmas, tech jobs are disappearing at five times the rate of early 2008. But, for some perspective, the unemployment rate in the region for electrical engineers is still just 4.1 per cent, according to professional body, the IEEE, compared to 6.7 per cent following the dotcom crash.

And as one commentator notes, a downturn often has an eventual upside. Lay-offs are painful for everyone affected, but they also spawn start-ups and tomorrow’s high achiever companies and employers.

klillington@irishtimes.com

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