Wall Street Beat: IT vendors see return to growth

Market reacts cautiously as uncertainty about demand persists

With quarterly IT sales results pouring in, vendors including IBM, Google, Advanced Micro Devices and Intel appear more confident than ever that the global recession's depressing effects on the tech market are lifting.

Major U.S. market indexes including the tech-heavy Nasdaq dipped Friday, however, as investors absorbed mixed macroeconomic news.

IBM, the second-biggest IT company in the world behind Hewlett-Packard, reported better-than-expected third-quarter results Thursday.

Though revenue dropped 7 percent from a year earlier to $US23.6 billion, it rose 1 percent sequentially from the second quarter and bested the $US23.4 billion consensus forecast of analysts polled by Thomson Reuters.

IBM's diverse portfolio of services and its global footprint helped it weather the economic storm this year. The company reported its third-quarter net earnings rose to $US3.2 billion from $US2.8 billion a year earlier.

More important -- in terms of signs of recovery -- is that Chief Financial Officer Mark Loughridge, in a conference call, forecast a return to revenue growth in the fourth quarter. Revenue increases are often seen as the real signal of growth for any company, since earnings can be boosted by cost cuts.

IBM shares slipped by $US5.80 to $US122.18 in midday trading Friday, however, as investors questioned the extent to which foreign exchange rates factor into the revenue figures.

Google, also reporting results last Thursday, said revenue for the quarter ending in September jumped 7 percent to $US5.94 billion -- the Internet ad giant's fastest sales growth rate so far this year. It said net earnings were $US1.64 billion, a 27 percent jump from last year and on a per-share basis, higher than analyst expectations.

"The worst of the recession is clearly behind us," proclaimed CEO Eric Schmidt in a company statement. Google, which generates more than 90 percent of its revenue from search-related advertising, is widely seen as a barometer for Internet commerce.

Google shares bucked the downward market trend Friday, hitting a 52-week high for the company at $US554.75 in midday trading.

On the hardware components front, AMD said Thursday that revenue fell in the third quarter, but that it expects sales in the last three months of the year to rise "modestly." Revenue in the quarter dropped 21.3 percent to $US1.4 billion from a year ago, but beat the $US1.26 billion expected by analysts.

Analysts have for several months forecast a return to growth for the hardware sector. IDC said Wednesday that global PC shipments in the third quarter did in fact rise 2.3 percent from the same quarter a year earlier, to 78.1 million units -- the first quarter this year in which PC shipments increased compared to 2008. Gartner also said this week that PC shipments rose during the quarter. Though Gartner's estimate of a 0.5 percent year-over-year growth was smaller than IDC's, its figure for total shipments was higher, at 80.3 million units.

"These are good results especially given that PC shipments for the third quarter of 2009 are being compared to a very strong third quarter from 2008," said Mikako Kitagawa, principal analyst at Gartner, in the report.

Rising PC sales are boosting the fortunes of chip companies. Intel on Tuesday reported strong quarterly results and forecasts that beat industry expectations. Intel's revenue of $US9.39 billion was up by $US1.4 billion compared to the prior quarter, though it was lower than the $US10.2 billion in the third quarter last year. Intel forecast fourth-quarter revenue of $US10.1 billion "plus or minus $US400 million," while analysts had been expecting $US9.5 billion.

"The timing of Windows 7 is favorable for the industry due to expected economic improvements and an overdue hardware replacement cycle," Gartner's Kitagawa noted.

Not all vendors are upbeat, however. Nokia on Thursday reported a third-quarter loss of €559 million (US$833 million) mainly due to charges related to its Nokia Siemens networking infrastructure business, which has been losing market share.

Though Nokia now expects global, industrywide mobile-device sales to fall by only 7 percent this year -- compared to its prior forecast of 10 percent -- CEO Olli-Pekka Kallasvuo injected a note of caution in an otherwise upbeat earnings week. "Let's be clear, uncertainty in end-consumer demand remains," said Kallasvuo on a conference call.

That uncertainty spooked investors Friday, as markets tumbled. Though most tech leaders were upbeat this week, news about financial and consumer companies -- including disappointing earnings results from Bank of America and General Electric -- spooked investors. The Dow Jones Industrial Average slumped by 67.9 points to hit 9997.35 in midafternoon trading, while the Nasdaq Composite dipped 13.08 to 2160.21.

IT companies have been riding a wave of optimism recently. Shares of Nasdaq computer companies are as a group up by 38.25 percent from a year ago, when the U.S. financial sector was crumbling. Nasdaq telecom shares are up 32.74 percent from a year ago. Whether this trend continues will depend to a large degree on quarterly results from other tech leaders such as Microsoft, BMC, Yahoo and AT&T in the next few weeks.

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Marc Ferranti

IDG News Service
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