2003 Looks Like an Awful Year for High Tech

Intel, Microsoft, IBM, Apple and others just released their reports. Some made money, but no one in Israel is going to contest how bad next year will be

The CEOs in Israeli subsidiaries of the world's biggest technology companies are having a hard time addressing the market uncertainty. Continuing recession, elections, war in Iraq - all add to an endless shuffling of plans, forecasts and projections.

"It's incredible to see the destructive impact of uncertainty on the market," says the CEO of IBM Israel, Meir Nissensohn. "It is important to all of us to deliver on expectations, but how can you plan even a few months ahead in a market like this?"

Other chief executives echo Nissensohn's opinion. Aryeh Skop, CEO of Microsoft Israel says the market of small and mid-size organizations is collapsing, while others report shrinking volume and clients who prefer to hang on to their cash.

Last Friday, Nasdaq plummeted 5 percent, eliminating most of the profits earned on paper since January 1. The sharp decline was linked to the quarterly reports issued by the large technology companies since last Tuesday.

First was Intel, which reported net profits of $1 billion, but lowered its forecast of first quarter revenues and announced it would spending on both R&D and buying equipment for its production facilities in 2003 - saving $1.2 billion.

AMD, which is Intel's biggest competitor, just reported a $854 million loss in the fourth quarter, compared to a $15 million loss in the same quarter in 2001.

The day after Intel, Apple announced a net loss of $8 million and forecasted similar revenue and profit levels in the next two quarters. Sun Microsystems reported a hefty loss of $2.28 billion, of which $2.13 billion is attributed to write-offs due to the loss of value of companies purchased by Sun in the past, and the cost of the company's recent reorganization.

Gates' way

IBM report profits of $1.02 billion, which are largely derived from increased sale of services, although these profits continue to erode, and are about 56 percent lower in comparison with profits in the same quarter the previous year.

Microsoft is in better shape. The company reported windfall profits in its second financial quarter of $2.55 billion, and income of $8.54 billion. Nevertheless, although the company announced a dividend and a stock split for the first time in its history, it also lowered its income forecasts for the financial year 2003, which ends this October.

"That's how they do it in the United States," explains Skop. "If you say you're going to have an excellent year and in the end show lackluster results, you'll be bombarded with class-action suits. Microsoft always downgrades expectations by two levels." Nevertheless, he says, there is no reason for optimism, in Israel either. "All of the surveys indicate that the organizations will not spend any more money on computerization, and the growth engines of recent years - communications and Internet - are far from reviving their good old days."

Skop says the situation is especially bad for small and mid-sized organizations, which are suffering from bankruptcies and a lack of bank credit. "In the large organizations market, we are actually growing, since our bids for servers are lower than those of the competitors," he says. In his estimate, as opposed to previous years in which Microsoft Israel grew at a rate of 30-40 percent annually, in 2003 the company will grow by only 7-8 percent.

IBM's Nissensohn feels that although uncertainty is evident in every economy around the world, the situation is much worse in Israel. "We have war on the horizon, elections after which the government will have 100 days of grace, and with all these other things going on, the most optimistic forecasts refer to 0 percent growth in the per capita GDP," he says.

IBM Israel's objective, he says, is to try to expand even in the harsh market conditions, by expanding its share of the market at the expense of its rivals. "The only way of doing business now is to keep your finger on the pulse all the time, while at the same time doing what you can to expand the organization, uncompromisingly," he says.

Certain uncertainty

A similar approach is taken by Boaz Yehuda, CEO of Sun Israel, who says it is hard to predict what will happen, with all the uncertainty in the Israeli market. "We decided that the only certainty in the market is uncertainty," he says.

Like Nissensohn, he also speaks of expanding at the expense of his competitors. "Over the past few months, we have mapped out the Israeli market and made the decision to enter the market of small and mid-sized organizations, via products such as the Star Office software package in Hebrew." Sun Israel hopes to gnaw away at Microsoft, the hitherto unassailable leader in office software.

Although executives at global Oracle were sounding optimistic as they reported the financial statements last month, Moshe Horev, CEO of Oracle Israel does not see any signs for joy. Oracle Israel's projections for 2003 are based on the 2002 results. "Visibility is limited, mainly because of the fog of war with Iraq, but for at least the next two quarters we do not see any significant change from 2002," he says.

Arie Offner, the general manager of Computer Associates Israel, tries to see the half-full glass as the company prepares to release its third financial quarter results on Thursday. "The areas in which we do business are high priority for our clients, which minimizes the damage to us," he says.

Nevertheless, salespeople at CA Israel have to work harder for the same level of income: "We now have three times as many transactions, which yield the same income level we were accustomed to having in previous quarters. Customers are more cautious, are unwilling to spend large amounts of money at one time."

He emphasizes that CA Israel continues to speak of growth, and has declined to present the parent company in California with projections of a more dire nature. "We know we will have to work much harder to achieve the same results," he says.

Ehud Graf, CEO of HP Israel, has left his forecast of growth intact - between 3 to 6 percent in 2003. "The global companies are looking at the world and are in a bad mood," he says. "All of the indicators show the economic situation in the world will not improve in 2003. However, at the local level, things are a little different."

When the merger of HP Israel and Compaq Israel is complete, the company plans to dominate the market segments of their competitors. "I assess that the computerization market will shrink in 2003 by 15 percent. If we want to grow, it will have to come at the expense of the competitors."