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The Honolulu Advertiser
Posted on: Monday, August 20, 2001

Tech firms struggle with cuts

USA Today

Technology firms may talk a big game when it comes to cutting costs, but in many cases, it may be little more than lip service.

Wireless high-speed Internet provider ricochet has filed for bankruptcy. Many tech firms have struggled to cut costs.

Associated Press

Most of the nation's top tech firms haven't or can't cut their costs fast enough to keep up with the drop in revenue in the sluggish economy.

In fact, 32 of 51 of the nation's top tech companies, based on market value, haven't slashed costs — including materials, salaries and overhead — as quickly as revenue has vanished, according to an analysis of just-released quarterly earnings data by USA Today and Zacks Investment Research.

And 24 of those 32 firms saw revenue fall at least a percentage point faster than costs.

This imbalance suggests haunting ramifications because it shows tech companies have been tentatively cutting costs up to now, possibly anticipating a speedy recovery.

To be fair, spending doesn't always increase as fast as revenue in good times, and companies can have good reason for avoiding draconian cuts as long as they can.

But so far, companies haven't shown any signs they will stop reducing

their spending on tech products. If demand doesn't recover soon, tech companies could be forced to make deeper and more painful costs cuts, says Mitch Zacks, director of research of Zacks Investment Research. He says the next round won't be nearly as orderly.

Where did cost-cutting fall short?

  • Tellabs, maker of networking gear, took a chain saw to costs, trimming them 23 percent. But revenue dropped even more, by 34 percent.
  • Micron Technology, a memory-chip maker, whacked costs 13 percent. But revenue slid 23 percent.
  • Nortel Networks has been aggressive in slashing its work force, but cut costs by only 6 percent. Revenue fell four times as much, dropping 25 percent.
  • Qualcomm, the wireless technology firm, trimmed its costs by 1 percent — but revenue declined at 10 times that rate.

Some companies, still saddled with overhead from the heady days, can't get costs down at all. JDS Uniphase, a maker of optical-networking parts, saw its costs rise 42 percent while revenue fell 35 percent.

The tech industry's unprecedented slowdown is the biggest culprit for the widening gap between revenue and costs.

For most tech firms, revenue dropped so quickly, it was difficult to cut costs fast enough, says Jim Paulsen, chief investment officer at Wells Capital Management.

Besides, managements at most of the firms have never had to deal with a slowdown, especially one of this magnitude.

"It's a culture that was geared up to expect more growth (of 60 percent per year), and it just shut off," he says. Even tech firms that were very aggressive cutting costs are coming up short, he says.

But making things worse, tech firms, like their customers, went on an equipment-buying binge in 1999 and 2000, Paulsen says. Many piled on large amounts of costly "fixed" long-term investments, such as assembly plants and computers.

Those costs cannot be cut without selling equipment at huge losses. Manufacturing companies face a similar problem during down cycles.

But tech companies face even wilder swings in demand than do traditional manufacturers; they didn't have enough time or foresight to curb expansion.

And now, tech companies have "less flexibility to cut even if they wanted to," Paulsen says.

Consider Intel, which must invest heavily in fixed assets, such as chipmaking plants. Although its revenue fell 5 percent in the most recent quarter, it was only able to cut costs by less than 1 percent.

It would be shortsighted to viciously slash costs at the first sign of a slowdown, says Marc Gerstein, research chief of Multex.com.

If the economy were to rebound, firms would surely yearn for top employees or factories that they had shed too hastily

And it's still too early to grade many tech firms' cost-cutting programs, he says. It could take several quarters until the cost benefits fully show up in financial statements, he says.