FT'S LEX COLUMN
THE LEX COLUMN: US tech firms feel viral outbreak
The US tech industry response to the coronavirus crisis has moved beyond conference cancellations and a refusal to shake hands in meetings.
On Wednesday Microsoft joined Apple in declaring that disruption in China due to the viral outbreak would affect sales in the next quarter. Microsoft’s “More Personal Computing” segment will fall short of sales guidance of between $10.75bn and $11.15bn.
The world’s largest software maker may not look like an obvious victim of supply-chain problems but its personal computing business makes up more than a third of annual sales. Microsoft has had a boost from businesses upgrading to its new Windows 10 operating system as support for an older system came to an end. But further upgrades may be delayed as PC makers struggle with factory work stoppages in China.
HP, the second-largest PC maker, has already warned that it has been affected by factory shutdowns. The US tech industry’s reliance on manufacturing and consumers in China, the source of the outbreak, puts it in a difficult position. Both Apple and Microsoft say manufacturing facilities are reopening but neither has offered to update sales estimates.
Quarterly guidance is a questionable endeavour at the best of times. Companies tread a thin line between leaving themselves plenty of wiggle room and offering enough instruction to keep a lid on share price volatility. It is gradually falling out of favour. The proportion of S&P 500 companies issuing quarterly guidance dropped from 36% in 2010 to 28% in 2018, according to US non-profit research group The Conference Board. The group also found that providing guidance had no impact on corporate valuations.
Microsoft is buttressed with $134bn in cash and short-term investments. Sales in its fastest-growing cloud business, also responsible for about a third of revenues, should not be affected by the coronavirus outbreak. Plus it is still reaping the benefits of companies upgrading to Windows 10 after it stopped supporting an older operating system.
Yet there is no way to know whether temporary disruption might one day become a long-term drag on profits for the wider tech industry. For all the predictions that tech can rise to the challenge of a global pandemic by facilitating self-quarantine with online services, the real impact will be felt in the cross-border supply chains. /London, February 26
Financial Times 2020