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Wall Street Beat: Earnings, spending forecasts highlight tech sector strength
- — 11 February, 2012 07:21
Recent market research reports and earnings this week from tech bellwethers including Lenovo and Cisco Systems underscore underlying strength in IT even as the global economy continues to experience significant turbulence.
The highest-profile vendor to report earnings this week, Cisco, impressed market watchers by delivering earnings and sales growth. Cisco's financial results suffered last year, with critics claiming that an unfocused product strategy allowed mainly Asian manufacturers to undercut the U.S.-based networking giant by offering low-cost, solid-quality gear, especially in emerging markets.
Cisco promised to make cuts and refocus its product strategy, and its earnings report this week appears to show the moves are starting to work.
"Cisco's overhaul seems to be paying off as it posted better-than-expected Q2 earnings and increased its quarterly dividend," according to a research note from Canaccord Genuity.
Cisco reported that net sales for its second fiscal quarter were up 10.8 percent year over year to US$11.5 billion, while earnings rose 43.5 percent to $2.2 billion.
Cisco is counting on its virtualization and cloud strategies to expand its offerings in the market for data centers, CEO John Chambers said in a conference call.
On the hardware front, Lenovo -- since the third quarter of last year the world's number-two PC maker behind Hewlett-Packard -- said that for its third fiscal quarter, profit rose 54 percent year over year to $153 million, while revenue jumped 44 percent to $8.4 billion. The China-based company ascribed its success in the quarter to strength in its home market and efforts to expand in emerging economies such as Russia and India.
The strong earnings reports were accompanied by a spate of upbeat market research. Research and Markets reported Friday that its latest Business Monitor International United States Consumer Electronics Report estimates that U.S. PC hardware sales for 2011 was $144.1 billion, and that the compound average growth rate for the 2012-2016 period will be about 3.4 percent, a little higher than previous expectations as multimedia and entertainment notebooks remain buoyant.
"In 2011, sales of consumer electronics products such as smartphones and LED-backlit TV sets grew strongly as the recovery gathered traction," the report said.
Meanwhile, though declining to cite specific figures, the Semiconductor Industry Association said on Monday that the global semiconductor market is showing signs of healthy growth. The SIA expects a recovery in global demand after the March 2011 earthquake in Japan disrupted production and supply chains last year.
Figures from a recent survey of IT decision makers conducted by CDW IT Monitor appear to reinforce the sense of optimism. Overall, 80 percent of corporate IT decision-makers polled anticipate an increase in hardware spending in the next six months, an increase of five percentage points since October, CDW said. It added that software demand, as recorded in its survey, rebounded to reach record levels -- producing 10, eight and six percentage point increases in anticipated spending among small, medium and large-size businesses, respectively.
But IT is not out of the woods yet. Global economic growth is still uncertain, especially considering that Europe's financial troubles are far from over. There is still widespread concern that debt in countries like Greece and Italy could cause strain in financial markets that could dampen spending on IT.
"For most companies, this means that 2012 will require them to carefully balance between searching for new revenue with a focus on emerging markets while they preserve margins amid continued high volatility," according to a recent report from the Hackett Group. "Many companies are expecting as much as 25 percent volatility in key areas such as input prices, customer demand, and available talent. This has the potential to drive extreme swings in business projections, which IT must be able to accommodate."
In fact, earnings reports were not uniformly strong this week. For example, even though telecommunication equipment maker Alcatel-Lucent reported its first full-year net profit since the merger of Alcatel and Lucent Technologies in 2006, there were shadows in the report.
The Paris-based company reported a net profit of €1.1 billion (US$1.46 billion) in 2011, compared with a net loss of €334 million in 2010. For the fourth quarter, the company reported net profit of €868 million, compared to a net profit of €340 million a year earlier. However, the profit figure was due to a large degree to cost-cutting rather than sales growth. Revenue fell 12.9 percent year on year to €4.15 billion.
The company will have to boost sales in order to grow. This could be an uphill battle as telecom makers everywhere face a tough market, and the company's revenue in almost all its products fell during the quarter.
By the close of the market Thursday, Nasdaq telecom stocks were up 9.99 percent for the year and computer stocks were up 14.62 percent for the year. Last week, the Nasdaq closed at its highest level in more than 10 years. But Friday, five politicians resigned from the Greek government after European leaders demanded deeper spending cuts, sending markets in Europe and the U.S. into a tailspin. Friday afternoon, the Dow was down 127.53 to 12,762.56, the S&P 500 was down 23.36 to 2903.88 and the Nasdaq was down 11.59 to 1340.37.