In the first quarter, currency fluctuations lifted margins at Apple, clobbered profitability at STMicroelectronics, derailed carefully calibrated operating earnings projections at Infineon and gave executives at wafer foundry TSMC such a fright that they promised firmer pricing schemes.
At the beginning of this decade, the U.S. dollar and the Euro were at parity, and fluctuations in the values of the two currencies were limited and unremarkable. Top executives paid scant attention to the foreign-exchange markets and consigned the strategic steps needed to contain the negative effects of currency fluctuations to financial advisers.
No tech executive whose company operates internationally can afford such complacency any longer.
The fluctuating currency market is affecting more than fiscal results; it is also skewing competitiveness and preoccupying corporate boards as top management confronts one more issue over which it has limited control.
In the first quarter, the pains and gains from the weakening U.S. dollar were unevenly distributed; but across the high-tech sector, executives are wandering into a topsy-turvy currency world that few are equipped to manage. That's concerning, because what happens in the forex markets can be critical to companies' results and to how investors rate them in equity markets.
Currency fluctuation has become a hot-button topic among manufacturers, including chip companies and OEMs that traditionally tally their revenue and operational costs in the now-unstable dollar. Although analysts believe European companies were hardest hit by the dollar's decline in the first quarter, rivals in Asia also felt the squeeze, and reportedly some corrective measures came up short.
"For European companies competing in the United States, the falling dollar and slowing U.S. economy will continue to be a drag on performance," Andreas Zsiga, a Stockholm, Sweden-based analyst with Standard & Poor's, stated in a report. "The region's highly export-oriented aerospace and defense, automotive, forest products and high-tech industries are most exposed, to the detriment of their profitability."
How severe is the dollar's slide? At the beginning of the decade, the dollar was worth 1.0155 euros, according to the U.S. Federal Reserve Bank. On April 30, the dollar had weakened to $1.5568 against the euro. Most of the declines have occurred in only the past six months, with the dollar dropping in value against the euro approximately 10 percent.
Even companies that have benefited from the weaker dollar—primarily U.S.-based tech players—find themselves less able to pinpoint projected earnings or losses, gross margins, revenue and cash flow because currency exchange projections have themselves become less reliable.
Medical equipment manufacturer Boston Scientific Corp. and personal computer/consumer electronics vendor Apple Inc. are in this category. Both had based their first-quarter revenue estimates on dollar exchange rates that dramatically changed during the three-month period, boosting revenue and margins on gains from foreign sales.
At Boston Scientific, "the contribution of foreign exchange in sales growth for the first quarter was approximately $100 million, or positive 5 percent," said chief financial officer Samuel Leno.
Apple, for its part, had expected its gross margin for the quarter would decline 2.7 percent but instead posted a smaller, 1.8 percent drop, "primarily due to the favorable commodity environment, higher revenue and a weaker dollar," said chief financial officer Peter Oppenheimer.
Taiwan Semiconductor Manufacturing Co., the top-ranked supplier of semiconductor wafers, saw the opposite effect on its results—one that company executives fear will extend into the current quarter.
Primarily because the company's sales are denominated in U.S. dollars, gross margin at TSMC fell 4.1 percent during the first quarter, while its operating margin sank almost 6 percent, according to vice president and chief financial officer Lora Ho.
The foundry provider has stated that it expects its second-quarter gross margin to range from 43 to 45 percent, "including approximately a 1.7-percentage-point negative impact from the forecasted appreciation of the New Taiwan dollar."