Given anemic sales, there remains only one other option for tech companies bent on raising earnings: cut costs. That means there are likely to be more layoffs, coming on top of those recently announced by the likes of Intel ( INTC), Sun ( SUNW), and Applied Micro ( AMCC). Consider it the final nail in the coffin of the once-anticipated second-half rebound.

Aside from the obvious human toll, the specter of staff cuts presents a dilemma from a business planning standpoint. It forces tough strategic decisions on managements that remain largely clueless about the demand outlook.

Firings are bound to slam morale among remaining workers, dragging down productivity. Worse, consider the consequences of cutting into the ranks too deeply. "If they make a bet to cut staff and now they have a plateau and demand resumes again, a lot of guys will be caught short," says Thomas Weisel analyst Kevin Vassily.

Case in point: Applied Materials ( AMAT), which pushed through layoffs in the last downturn shortly before business picked up. As a result, it ran into problems meeting demand when the economy turned. "They probably lost some of their business, on the margin. In a cyclical business, that's a problem," says Vassily.

Do It Now

On the other hand, if a company waits too long to reduce costs, its profits will shrink relative to competitors. Indeed, despite the Applied Materials example, analysts have been speculating that semiconductor capital-equipment companies are overdue for staff cuts.

"Although many cost cuts at chip-equipment companies were made in late 2001/early 2002, we sense that it was not enough" given the weak prognosis for business, wrote Deutsche Bank analyst Timothy Arcuri in a recent research note. At the recent Semicon trade show in San Francisco, executives at equipment suppliers suggested more cost cuts are on the way by fall, including headcount reductions, he said.

Unfortunately, typical staffing dilemmas become even more complicated in arcane tech industries like chip equipment. Because it's tough to find an engineer schooled in the intricacies of semiconductor equipment, companies are understandably reluctant to fire them. When demand picks up again, they don't want to risk being understaffed, because it's so difficult for them to hire trained workers.

But amid a worsening revenue outlook, some companies conclude they have little choice but to lay off workers -- even though they've already endured painful job cuts. In its July conference call, Lam Research ( LRCX) admitted that 200 employees left the company in the most recent quarter, reducing headcount to 2,500. As recently as 2001, the company had a staff of 3,150.

Of course, the same challenges that apply to semiconductor equipment hold true for computer hardware companies with proprietary technologies. For example, Apple ( AAPL) must retain a large staff of engineers familiar with its Mac operating system and power PC chips, while Sun has to do the same for its Solaris and Sparc products. Hewlett-Packard ( HPQ)picked up additional legacy products when it merged with Compaq, which had, in turn, inherited products from Digital and Tandem.

By comparison, Dell ( DELL) doesn't need to employ armies of specialized engineers because it uses Microsoft's operating system and Intel's chips. Its in-house needs remain relatively simple.

But for companies with proprietary goods, deciding on the size and nature of layoffs is complicated and often risky. "If you're a computer systems company, those are the decisions that can make or break the place in the long term," says Barry Jaruzelski, a managing partner in the global technology practice at Booz Allen Hamilton.

Take Apple, which in retrospect made some smart decisions in its darkest hours. When the company's business tanked in the mid-'90s, it took the drastic step of halving its product line under development.

Meanwhile, management was careful to retain the company's talented corps of industrial engineers and designers. "Steve Jobs and Fred Anderson, the CFO, made sure that all those irreplaceable resources were protected, even in very difficult times. They retained all those people who later brought the iMac and eMac and new flat panel screens," says Jaruzelski. "They knew they would be the key to the company coming back. And in two years, Apple was much smaller but profitable at half the size."

The Job Outlook Now

After a round of layoffs at the beginning of the downturn, tech companies had eased up on job cuts. But now, amid worries about a deteriorating revenue outlook, managements are again growing highly conscious of pressure to slash costs. In June, the number of announced layoffs in the computer industry surged to over 25,000, up from around 8,000 the month before, according to Challenger, Gray & Christmas.

The same month, H-P said it would speed up previously announced job cuts of 15,000, while warning that it expected its revenue to fall in the second half of the year.

Technology Job Cuts, 2002
Month Computer Industry
January 6,583
February 4,822
March 1,807
April 8,428
May 8,366
June 25,392
Total 55,398
Source: Challenger, Gray & Christmas.

But aside from H-P -- which was planning to lay off workers anyway, following its merger with Compaq -- a couple of leading tech companies have laid off fewer workers than expected.

On its earnings conference call in mid-July -- the same call in which he admitted the company would slip back into the red next quarter -- Sun Microsystems CEO Scott McNealy sounded downright defensive in justifying his decision to cut only 1,000 employees out of a staff of nearly 40,000.

"I'm sensitive to the fact that many of you think we could take the infrastructure down," he told investors and analysts. But he said Sun is taking a "calculated gamble" by holding the line on deeper job cuts, saying the strategy should work, "assuming the economy doesn't do anything more screwy to us growing forward."

In similar fashion, last month Intel announced layoffs of 4,000 people out of its 85,000-strong staff. That's a sizable cut, to be sure, but considerably less than the 10,000 or so that some rumors had suggested.

Both companies benefit from deep pockets, with respective cash holdings of $2.8 billion and just under $9 billion. By holding the line on layoffs, they may be better-positioned to take advantage of growth when the economy picks up -- after their rivals have downsized.