Tech giants may face dollar daze

Tech giants may face dollar daze

Summary: Technology bellwethers with a big chunk of their businesses overseas have benefited from a weak dollar compared to other currencies, but the gravy train may be coming to a stop.A weak dollar has helped technology giants such as Google, Amazon, eBay, IBM, HP and others even as the U.

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Technology bellwethers with a big chunk of their businesses overseas have benefited from a weak dollar compared to other currencies, but the gravy train may be coming to a stop.

A weak dollar has helped technology giants such as Google, Amazon, eBay, IBM, HP and others even as the U.S. economy slows. Here's how it works: These companies with significant international operations collect revenue in other currencies such as the euro and then convert earnings into dollars. Voila. Your growth rate looks much better. Conversely, a weak dollar acts as a headwind for a company based abroad like SAP.

Here's a look at the dollar vs. the euro on a five-year chart via Yahoo Finance:

dollar4.png

That recent rally in the value of the U.S. dollar (that blip higher at the tail end of the chart above) may indicate that tech growth rates may be slowing. To wit:

  • In a research note on Monday, Bernstein Research analyst Jeffrey Lindsay raised rang the alarm for Internet companies with substantial multinational operations. Simply put, Google, Amazon and eBay may take a hit on currency fluctuations.

  • HP said on its third quarter conference call last week that revenue was up 10 percent from a year ago, but gained 5 percent excluding currency impact. HP CFO Catherine Lesjak noted that "given our significant international exposure, our results may be favorably or unfavorably impacted by currency. As we’ve seen in the last few weeks in particular, currency rates can at times be volatile." Needless to say, CEO Mark Hurd and Lesjak were peppered with currency rate fluctuation questions for the rest of the call. The company line: Currency fluctuations are hard to call and the impact to earnings isn't clear cut due to hedging and other activities.

  • IBM on July 17 said its second quarter sales growth was 13 percent, or 6 percent with constant currency. "We hedge the major cash flows to mitigate the effect of currency volatility as we manage our cash globally," said IBM CFO Mark Loughridge at the time. It's telling that Loughridge only had to field only two questions about currency on Big Blue's conference call. What a difference a month between HP and IBM earnings makes. Loughridge added that "it’s very difficult to analyze the effect of currency on the bottom line." Cowen & Co. analyst Louis Miscioscia on Aug. 21 cut his revenue target on IBM due to a stronger dollar. In the following chart Miscioscia illustrates how Big Blue would be have a mid-single digit growth rate if it weren't for currency gains.

dollar3.png

Of those aforementioned examples, the impact of the weak dollar on Internet companies could be the most notable. After all, Google earned half of its revenue for the trailing 12 months from overseas, Amazon had 47 percent and eBay had 53 percent, according to Lindsay. If the dollar continues to strengthen you're going to hear a lot more about currency rates on those conference calls. The second quarter questions focused mostly on the U.S. economy.

Meanwhile, analysts have focused on currency impacts for old-line technology companies like HP and IBM, but have largely skated past questions for Internet companies. It's possible that Google's third quarter conference call may sound more like HP's with all the hypothetical questions about currency what-ifs.

Here's a look at the currency gravy train for Internet companies:

dollar2.png

Lindsay wrote:

A strengthening dollar is problematic for Google, Amazon and eBay – all three of which receive roughly half of their revenues from overseas – but surprisingly the player with the biggest value exposure is Yahoo! EBay earned 53% of its trailing twelve months of revenue outside the U.S., while Google earned 50%, Amazon 47%. Yahoo! by comparison earned just 30% of its revenues overseas over the same period, and might be expected to have lower currency exposure overall, but this is not the case. The value of Yahoo!'s two large minority investments, Yahoo! Japan and Alibaba, are denominated in Yen and Renminbi respectively - a strengthening dollar diminishes both of their contributions to Yahoo!'s dollar-denominated value per share.

Lindsay in his report focused on three possibilities for Internet companies. A base case where the dollar remains flat relative to other currencies through the end of 2009. A pessimistic scenario where the dollar appreciates against other currencies by 10 percent through 2009. And an optimistic scenario where the dollar slides 5 percent through the end of the year.

Note the pessimistic scenario for Google and the Internet gang may be good for you personally. The stronger dollar means lower oil prices. Here's the summary of the potential impact on Internet company earnings:

dollar1.png

Lindsay notes that the currency impacts on companies are asymmetric--a falling dollar boosts results, but a rising one will deliver a bigger blow to margins. This issue goes well beyond the companies mentioned here. The upcoming quarter may make us all familiar with currency fluctuations.

Topics: Google, Banking, Browser, Enterprise Software, IBM, Social Enterprise

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25 comments
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  • Merchants of chaos strike again

    and they can't resist putting a negative spin on ANY news, even
    items that are contradictory. So, when the dollar declines, it's bad.
    When the dollar stops declining, it's bad.

    Journalists must be some amazingly depressive people to be
    around.
    frgough
    • Ever notice

      [i]Journalists must be some amazingly depressive people to be around.[/i]

      I've often wondered the same thing.

      Have you ever noticed on TV how the depressing news always leads the telecast and seems to last for most of it?
      Badgered
      • "If it bleeds it leads"

        News is treated as drama. An incident of violence or severe damage to property is considered more compelling than a discussion or statement, even if people are more likely to be affected themselves by the topic being considered.

        If people yell at each other, that can make a topic otherwise without panache newsworthy. Another way to qualify for news attention is to personalize a general topic. The connection may or may not be tenuous, but you can hear or read statements like, Because XYZ bank lost money this month, you will lose your job and home and be thrown into the street. Sort of like country music sung by suits.

        News is intended to keep you entertained.
        Anton Philidor
        • Dirty Laundry

          by the Eagles. Most biting musical commentary ever.
          frgough
    • OK I'll bite

      Where do I say that a rising dollar is bad. In fact where do I say the greenback falling is bad. It is what it is. And to point out that all of these tech earnings estimates may have to come down is hardly a reflection that I'm in need of a keg of Prozac.
      Larry Dignan
      • Some parts are missing in this picture

        I would recommend an economist to review this story and come with some background info how this really is going to impact the US. A dollar both below and above its long term average value has certain implications and can cause instability in the market but the question is how does it hang together in the bigger picture? I think the dollar will creep up but remain weak compared to the Euro so the effects remain in place for sometime. Just my two cents.
        [GZ]
      • Where?

        The title does not imply that good news will follow. Writing that past earnings were inflated and that present earnings are likely to decline isn't optimistic.

        Your observations are correct and you didn't intend to send readers to Prozac. But your discussion was a way of saying "... a rising dollar is bad."
        Anton Philidor
        • Not only that

          but I'll bet money that if you dig, you'll find some article by the
          author from some months ago about how the weakening dollar is
          going to send jobs overseas or cause job layoffs or hardships or
          whatnot in the IT industry.
          frgough
      • Amazing

        The pessimism is so ingrained, you don't even recognize it:

        "Technology bellwethers with a big chunk of their businesses
        overseas have benefited from a weak dollar compared to other
        currencies, but the gravy train may be coming to a stop."

        Weak dollar: That means falling dollar.
        "gravy train coming to a stop": that means if the dollar stops
        falling it's going to be bad.

        Now, here's how an optimistic journalist (an apparently non-
        existent breed today) would portray this story:

        Strengthening dollar provides opportunities for U.S. companies
        to expand domestically.

        See? Same story, optimistic take.

        It's not hard, once you recognize the fact you are a pessimist
        and see the world as nothing but an eternal series of soup
        lines and homeless shelters.
        frgough
        • LOL

          I prefer to call it realism. Estimates are likely to come down. Or at the least much of the conference calls will be filled with currency hedging questions.

          Rough crowd today. It's like an optimist dogpile.
          Larry Dignan
          • Of course you do

            pessimists always defend themselves by saying they are just
            being realistic.
            frgough
          • Most people simply don't care...

            "Or at the least much of the conference calls will be filled with currency hedging questions."

            The people on those conference calls are largely irrelevant to the typical person just trying to earn a living and provide for their family.

            Most people want to know what will happen to their paychecks, their utility bills, their rent, and their food costs. That's it.

            If prices go up and wages don't? That's bad.

            Wages go up and prices don't? That's good.

            Which team of elite select billionaires wins the daily pot in the giant casino of international finance is utterly irrelevant to real people.
            bmerc
          • re: Rough Crowd

            [i]Rough crowd today. It's like an optimist dogpile.[/i]

            True.... I guess you're just getting the blunt end of "enough already".
            Badgered
  • The most important aspect of Larry's report

    lie not so much in his description of the fluctuations of the US dollar, which, to paraphrase his response above, are what they are, but rather, in the fact that such nominally US companies as Google, IBM, and Yahoo are, in fact, very much dependent on revenues from operations outside that country. Moreover, much of the research and development on which these companies depend takes place there. We live in a mulitpolar world !...

    Henri
    mhenriday
  • RE: Tech giants may face dollar daze

    It's a silly premise.

    It seems that the aformentioned complanies are relying on approx. 50% of thier business overseas in one way or another, which is smart BECAUSE it doesn't matter to them no if the dollar goes up or down. They make $ either way, one offsets the other.
    e-paladin@...
    • Not necessarily

      International was fueling growth for these guys. It's not like the dollar is appreciating because the U.S. economy is strong (the best of both worlds). Instead the dollar is going up because we look "less worser" than abroad and the european economy heads for a slowdown. For instance, see:

      http://www.bloomberg.com/apps/news?pid=20601110&sid=aRKXQL1KVSQQ

      A rising dollar doesn't necessarily mean advertisers are spending more on GOOG YHOO etc.
      Larry Dignan
      • LOL

        Thanks for proving my original post, LOL.

        The dollar is appreciating, but the U.S. economy still sucks.

        The rising dollar means that business X is going to struggle.

        I can imagine you at a baby shower now.

        "The birth of your new baby will cost you $160,000 over the next
        20 years; you may lose your home."
        frgough
        • LOL.. i hate to agree with him but LOL

          Thats just funny. You have some good points above. To a journalist.. there is always a downside.
          Been_Done_Before
  • Why was Microsoft left out?

    The company's overseas business is expanding rapidly, and provides a large and growing share of the company's revenues.

    People on other continents are snapping up the world's software. ;-)
    Anton Philidor
    • They are too busy paying fines to make a profit

      lol
      Been_Done_Before