Wall Street Beat: Tech lags in wake of mixed results

Salesforce, Intuit and Dell offer mixed financial reports

Computer stocks sagged Friday morning in the wake of continuing economic worries and mixed financial news from hardware and software vendors this week.

In midday trading, the Dow Jones Industrial Average rose 4.61 points to 11,775.34, the S&P 500 declined 1.99 to 1214.14, while the tech-heavy Nasdaq declined 11.18 to 2571.13. Nasdaq computer stocks in aggregate were down by 0.6 percent at midday.

Though the software outlook, as usual, was better than the hardware story this week, software vendor financial reports had some blemishes.

Salesforce's third fiscal quarter results, announced Thursday after the market closed, gave market watchers a mixed message. While revenue growth was impressive, a slowdown in billings and skyrocketing R&D and staffing costs led to a net loss. As the growth leader in SaaS (Software-as-a-Service)-only business applications, Salesforce has become something of a bellwether for the cloud-based enterprise software market.

"Salesforce.com is the first enterprise cloud computing company to exceed a $2.3 billion annual revenue run rate," crowed Salesforce CEO Marc Benioff in the company's financial statement. "And today, we're excited to announce that we expect to reach a $3.0 billion annual revenue run rate during our fiscal year 2013."

Third-quarter revenue increased 36 percent to US$584 million. But weighed down by costs, the company lost $3.8 million, compared to a profit of $21.1 million in the year-earlier period.

Benioff argues that the company is in growth mode and is trying to consolidate its lead in the hosted ERP (enterprise-resource-planning) market, where it outsells all other vendors in providing SaaS-based applications, by accelerating product development and acquiring companies to fill in its product line. Salesforce shares plummeted Friday morning on the financial news, however, trading at $113.62, down by $12.47.

Still, some analysts are taking the long view. "Salesforce's higher revenue growth guidance for 2012 makes the firm the world's fastest-growing business software company, public or private, with revenues greater than $2 billion," said Canaccord Genuity analyst Richard Davis in a research note. "We will take our medicine today, but we have lost none of our conviction that Salesforce.com should be a core holding in any growth portfolio."

Also reporting late Thursday was Intuit, the maker of money management and tax software. It posted a fiscal first-quarter net loss of $64 million, narrowing its year-earlier loss of $70 million.

Sales were up 12 percent to $594 million, largely thanks to $384 million in sales for its small-business unit, a key market segment for business application vendors. The quarter, falling right before the company's big tax season push, is typically a weak one for Intuit. Meanwhile, its forecast for the current quarter, in which the company expects to update its tax software, was in the range of $0.43 to $0.47 earnings per share, on the high end of analysts' expectations, which according to Thomson Reuters was $0.43.

Investors apparently liked Intuit's outlook, trading shares at $52.14 late Friday morning, up by $0.39.

The story for hardware and components this week was more troubling. Dell, reporting Tuesday, said revenue for the quarter that ended Oct. 28 was $15.37 billion, edging down slightly from the $15.4 billion reported for the same quarter last year and below analysts' expectations of $15.6 billion. Profit was $893 million, up from $822 million in the same period last year. Excluding one-time charges, earnings per share were $0.54, beating analyst expectations for $0.47 per share.

The company is essentially giving up some revenue by de-emphasizing consumer products and going for the enterprise market, which offers better margins. This explains why profit is growing faster than sales. In a hardware market where consumer PC sales are generally soft, the strategy theoretically appears sound but investors did not buy it initially. Company shares closed Wednesday at $15.13, down by $0.50, and fell further on Thursday before climbing back up on Friday morning.

On the company's conference call, Dell CFO Brian Gladden addressed the issue of flooding in Thailand, the world's biggest maker of hard drives, which threatens to cause shortages of the components for the next several quarters.

"To the extent that we see higher [drive] prices we'll also see some offsets in other components and we're going to do everything we can to protect our customers. But maybe in some cases we do have to raise our prices," Gladden said.

The Thai flooding will have ripple effects on the hardware market. "The Thailand flooding catastrophe is forecast to reduce hard disk drive (HDD) shipments by 30 percent in the fourth quarter," according to market research company IHS iSuppli, in a research note Thursday. "This will cause PC shipments to fall short of expectations, indirectly exerting a negative impact on the semiconductor market in the first quarter of 2012."

IHS iSuppli cut its forecast for global semiconductor revenue growth this year from 2.9 percent, which it was predicting in September, to 1.2 percent.

The good news is that despite the "worsening economic environment and growing pessimism in the electronics supply chain," better-than-expected third-quarter sales for semiconductors has put the sector on a path to at least marginal growth this year, helped by strong demand from automotive electronics, industrial electronics and wireless equipment segments, iSuppli said.

Stocks were mixed Friday morning as news leaked out that borrowing costs for Italy and Spain declined, an apparent sign that investors are gaining a little more confidence that these countries would not default on sovereign debt. Concerns about European debt overshadowed some good news in the U.S. this week. The Labor Department Thursday said that applications for jobless benefits declined by 5,000 in its latest weekly poll. Also, retail sales rose 0.5 percent in October, according to the Commerce Department.

Though economic concerns have caused market volatility, tech market insiders nevertheless report that at least for the enterprise sector, users are sustaining demand for new applications.

"I don't feel like we're going into a recession," said Saleforce's Benioff on the company's earnings call. "People in Europe have not been sure what's going on with them because of the banking crisis. But at the end of the day, businesses are buying and you can see [that] with our delivery of essentially what I would call strong double-digit, mid-double-digit growth year over year."

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Marc Ferranti

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