Tech sector slips into a surprising slump

SAN FRANCISCO – In a surprising turn, the tech industry is in a slump even as the U.S. economy picks up steam.

The announcement last week that Silicon Valley giant Cisco Systems Inc., which sells networking and telecommunications equipment, plans to cut 4,000 jobs is the latest sign of a slowdown that has sucker-punched high-tech firms.

After a remarkable six-year boom set off by the introduction of the first iPhone in 2007, tech companies of all shapes and sizes are finding growth slowing, and even contracting in some cases.

Though there are still bright spots among companies that help manage data or provide cybersecurity, many of the industry's biggest companies — Microsoft, Google, IBM and Dell — are struggling to figure out the changes in the way businesses and consumers are buying and using technology.

There even have been signs that tech's dysfunction is having a wider effect. When Wal-Mart reported disappointing earnings last week, the company's executives pointed the finger at consumer electronics for a lack of exciting new products.

"Our performance was pressured by soft results in both electronics and media and gaming," said William Simon, a Wal-Mart president and executive vice president, on the company's earnings call with analysts.

It's not a bust — not yet at least. And it isn't as serious as the 2000 dot-com crash, when tech's fortunes quickly deteriorated. Indeed, on the ground in Silicon Valley, there is a bit of a disconnect because competition for hiring remains intense.

While observers fumble for explanations and many remain optimistic about tech's long-term outlook, the industry is wondering whether this slump is simply a pause or the new normal.

"What I've seen is that a lot of the tech heavyweights are having challenges," said Patrick Moorhead, principal analyst at Moor Insights and Strategy. "There's a fundamental shift in the marketplace that many people are grappling with. What we're seeing is a transitional period."

And tech finds itself in the unusual position of being a laggard in the economy's recovery.

"Technology remains a big drag on earnings growth," Zacks Investment Research analyst Sheraz Mian wrote in a recent report. "The sector's earnings picture is very poor."

Being labeled a "drag" is the ultimate insult for an industry that likes its growth fast and furious. But why has tech lost its mojo?

Mian chalks it up to the lackluster global economy. Tech firms are increasingly dependent on sales and profits abroad, where corporate spending remains weak. In the U.S., others have pointed to the faster-than-expected collapse of PC sales.

"That's having a ripple effect through a lot of sectors of technology," said Greg ­Harrison, a corporate earnings analyst at Thomson Reuters.

Companies continue to shift from buying their own hardware and software to renting computing power through cloud-based services in which files are kept at massive data centers in far-flung locations. These save money for buyers but generate less revenue for sellers.

Consumers, meanwhile, appear to be showing signs of fatigue after embracing so many new gadgets in recent years.

PC sales have been devastated by tablets. But now tablets are losing steam, with even Apple reporting a decline in iPad sales in the most recent quarter.

Whatever the reasons for the slowdown, the recent cycle of earnings reports this summer shows how widely the infection is spreading.

Some big technology companies, of course, have had years of trouble, such as BlackBerry, Nokia, Yahoo and Hewlett-Packard. And then there is the buyout saga of Dell, which seems stuck in the PC slow lane in a world speeding by with mobile devices.

But many others who faltered were surprising. In recent weeks, Oracle, Intel, Nvidia and IBM reported poor earnings, with the latter reportedly cutting up to 8,000 jobs.

This summer, earnings disappointed on the same day for Google and Microsoft, which took an ugly write-down of $900 million because of poor sales of its Surface tablet. Apple's growth slowed, though its earnings report sent its stock soaring in part because the news wasn't as bad as many had feared.

These earnings blues are not isolated. According to Zacks, profits in the tech sector in the first and second quarters declined 4.5 percent and 10.6 percent, respectively, from a year earlier.