Wall Street Beat: IT earnings boost market confidence

Oracle, Red Hat and Micron earnings set up expectations for a strong earnings season

Oracle, Red Hat and Micron earnings, along with good macroeconomic news, are pumping oxygen into tech stocks after the tragic March 11 earthquake in Japan disrupted markets worldwide.

The Oracle and Red Hat earnings reports this week give credence to forecasts that enterprise software sales will drive IT market growth this year. They also set up expectations for a strong earnings season, which will begin in earnest in a few weeks.

In late afternoon trading Friday the tech-heavy Nasdaq was up by 8.88 points to 2745.18, the S&P 500 was up by 5.21 points to 1314.87 and the Dow was up 56.16 points to 12,226.72. All were heading for their third straight day of gains after a tumultuous few weeks.

Oracle, considered a bellwether for enterprise software, rang up a strong fiscal third quarter, an indication that the rosy software scenario painted by market researchers may indeed come to pass.

Unlike PC market growth, which is expected to slow down after a strong recovery from the Great Recession, corporate software sales are expected to increase in 2011 and keep rising next year. Gartner puts global enterprise software sales growth for 2011 at 7.5 percent, rising to $253.7 billion dollars. That compares with 6.1 percent growth in 2010.

Reporting Thursday after the market closed, Oracle, which now sells hardware in the wake of its acquisition of Sun Microsystems last year, said profit rose 78 percent year-over-year to US$2.1 billion. Revenue for the quarter jumped 37 percent to $8.8 billion.

While those figures appear stellar, the acquisitions that Oracle has made make it difficult to figure out what the company's core, organic growth is (as opposed to growth derived from adding sales of purchased companies to its revenue base). There are no year-on-year comparisons for its hardware business, for example.

To continue growing at its current pace, Oracle may have to keep acquiring companies. But there are fewer and fewer companies that are large enough to make a difference to the vendor's bottom line, once they are absorbed. One good sign: sales of new software licenses, an indicator of new-customer wins and fresh demand, increased during the last quarter by 29 percent to $2.2 billion.

Oracle shares rose by $0.73 to close at $32.14 Thursday. They edged up by $0.58 late afternoon Friday, trading at $32.72.

Red Hat, which also sells to large enterprises, said Wednesday that its fourth quarter revenue increased 25 percent year-over-year to $245 million. Subscription revenue was $773.4 million, up 21 percent. Profit jumped to $33.5 million from $23.4 million.

"With record bookings and billings in the fourth quarter, we are on a run rate to become the first pure-play open source company to achieve a billion dollars in revenues next fiscal year, a milestone achievement for Red Hat and the open source community," said CEO Jim Whitehurst, in a statement. Whitehurst ascribed the strong results in part to sales of virtualization and middleware products to customers who are modernizing their data centers, preparing their infrastructure for cloud computing.

In a good sign for the next quarter, the company said it had experienced its fastest billings growth in 12 quarters. Red Hat shares skyrocketed $7.29, or more than 18 percent, to $47.26 Thursday, then settled down a bit Friday, trading at $46.40 in the afternoon.

Also on Wednesday, DRAM, NAND Flash and NOR Flash memory maker Micron Technology reported that for its second fiscal quarter it generated $72 million in profit on sales of $2.3 billion. The sales figure beat the year-earlier revenue of $2 billion, but profit dropped significantly from $365 million during the same period in 2010.

Price declines hurt Micron's margins, but the company nevertheless did better than analysts expected. It earned $0.07 per share, compared to the $0.03 expected by analysts polled by Thomson Reuters.

Micron CEO Steven Appleton had words of comfort on memory prices during a conference call.

"I will tell you that we do see continued improving pricing environment through the rest of our fiscal year," Appleton said. The comments, and the better-than-expected earnings, helped push Micron shares up by $0.89 to close at $11.50 Thursday. They edged up further Friday afternoon, trading at $11.52.

BlackBerry maker Research In Motion also reported strong financials Thursday. Its fourth-quarter revenue was $5.6 billion, a year-over-year increase of 36 percent. But the company is being punished for a disappointing forecast. Citing costs associated with its PlayBook tablet, RIM said it expects sales between $5.2 billion and $5.6 billion, while analysts had expected revenue of $5.67 billion. Shares plunged Friday, trading at $56.95 just before the closing bell, down by $7.11.

Good economic news helped boost stocks in all sectors Friday. The U.S. Commerce Department said that gross domestic product rose 3.1 percent in the fourth quarter of 2010, higher than prior estimates. The Labor Department said this week that new claims for unemployment benefits declined to a level not seen since before the recession.

All three major U.S, indexes were headed toward gains of at least 3 percent this week, putting them back into positive territory for the year after a steep decline in the wake of the Japan earthquake. Concerns about Middle East strife, and the threat of higher energy prices, also have had negative effects on markets. But computer stocks on the Nasdaq Friday were set to close up more than 3 percent for the year. If tech bellwethers put out strong earnings over the next few weeks, financial news may continue to trump geopolitical strife on the markets.

Tags business issuestelecommunicationMergers / acquisitionsMicronfinancial resultssoftwareRed HatOracle

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Marc Ferranti

IDG News Service

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