Toshiba Q2 drops 99 percent on weak chips outlook hazy

Japan's Toshiba posted a 99 percent plunge in quarterly operating profit on Wednesday, dragged down by weakness in its mainstay chip operations, but stuck to its recently revised outlook above expectations.

Weak demand for chips also acted as a drag on Fujitsu Ltd, as well as weakness in its PC sales and hard drives, cancelling out cost cuts in its servers and IT services, and it slashed its annual outlook to below the market consensus.

Both firms are fighting a chronic slump in the chip sector that caused quarterly profit to fall at top memory chip maker Samsung Electronics, while Hynix Semiconductor reported a loss. The entire chip sector faces further cost cuts and consolidation to survive, analysts say.

Toshiba, the world's number two maker of NAND flash memory, said it has yet to make a decision about possible cuts to its plan to spend 367 billion yen (£2.1 billion) on new lines and equipment for its chip business.

Toshiba is still banking on breaking even on its chip business in the October-March second half, based on its assumption that NAND price falls will slow to a 10 percent fall in October-December, and another 5 percent fall in January-March. Prices fell 45 percent in the six months to Sept 30, it said.

"We are braced against a negative spiral" as the financial crisis affects demand in the real economy, Toshiba Corporate Executive Vice President Fumio Muraoka told reporters at a news conference. "We want to watch the holiday season sales before making any changes to our capital spending plans or to our outlook."

A slowdown in the global economy is muting demand for NAND flash memory chips, used in music players such as Apple's iPod and digital cameras, and Toshiba is widely expected to slow aggressive plans to ramp up capacity and catch up with Samsung.

Cash has suddenly become all-important and rating downgrades raise concerns about higher financing costs for itself and its partners.

Last week, Toshiba announced that it would buy $1 billion (£613 million) worth of equipment from troubled joint venture partner SanDisk Corp, shoring up the California-based flash storage card maker.

Toshiba, which also makes nuclear reactors, PCs, mobile phones and LCD TVs, expects to post an operating profit of 150 billion yen in the year to March, down 37 percent.

FUJITSU OUTLOOK GRIM

Rival Fujitsu, which competes with Toshiba in system chips, PCs and mobile phone handsets, slashed its annual outlook by more than 30 percent below expectations on dwindling orders for chips and mobile phone handsets.

Fujitsu, which competes with International Business Machines Corp and Electronic Data Systems Corp, said it now expects to earn an operating profit of 150 billion yen in the year to March, down 27 percent from the previous year and down 32 percent from its previous outlook.

In July-September, Fujitsu, which seeks to rein in losses on its hardware and raise profitability on its IT services, posted an operating profit of 32.7 billion yen, down 20 percent from the same period a year earlier.

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