Wall Street Beat: Earnings point to tough quarter for tech

Microsoft, Google, Advanced Micro Devices, Intel and IBM turn in disappointing results

Some of the biggest names in tech reported quarterly earnings this week, and the resulting picture is not pretty. The main culprit for the weak earnings reported this week is a slump in the PC market, but uncertainty about the global economy is weighing down almost all sectors of IT.

Disappointing, or at best mixed, quarterly results were turned in this week by Microsoft, Google, Advanced Micro Devices, Intel and IBM. Share prices of every one of those vendors declined Friday. The financial results, coupled with the uncertainty about the economy, has shaken confidence in tech. Even shares of the mighty Apple declined Friday by US$22.80 to $609.84.

The Nasdaq Computer Index dropped 41.16 points to 1569.96 Friday afternoon, a day after Google, AMD and Microsoft issued their earnings. While Nasdaq tech stocks are still up about 15 percent for the year, they were up 26 percent for the year a month ago.

Toward the end of the third quarter, moves by the U.S. Federal Reserve and the European Central Bank to prop up economic growth instilled confidence in market watchers. The Fed announced it would launch the so-called "QE3," a third round of "quantitative easing," buying mortgage bonds and possibly other assets until the unemployment picture looks better. For its part, the European Central Bank revealed details of a plan to use a stability fund to buy up short-term European debt. But since then, the reality of weak earnings reports has put a damper on the enthusiasm generated by the banks' actions.

Microsoft's general manager for investor relations, Bill Keofoed, summed up some of the main issues confronting vendors on the company's earnings conference call Thursday: "We saw the overall PC market decline this quarter in advance to the launch of Windows 8 and in part due to competitive pressures and the challenging macroeconomic climate."

In other words, facing economic uncertainty as well as an upcoming flood of new PCs and tablets based on the new Windows OS, users put off purchases. For the quarter ending Sept. 30, Microsoft reported a 22 percent year-over-year decline in profit, to $4.47 billion, and an 8 percent drop in revenue to $16.01 billion. Part of the decline was due to Microsoft's move to defer the reporting of revenue for pre-orders of Windows 8. But there is no doubt that consumers themselves are deferring purchases. For the quarter, the Windows division reported sales of $3.24 billion, a whopping 33 percent drop from the same period in 2011.

However, sales of larger hardware systems by other vendors have also slumped this quarter, signaling hesitation on the part of large companies to make big purchases in the current economic climate. For example, revenue in IBM's systems and technology unit, which includes its hardware business, decreased by 13 percent year over year for the quarter ending Sept. 30. IBM, reporting Tuesday, said it generated $24.7 billion in revenue for the quarter, down 5 percent from the year-earlier period. Profit was flat at $3.8 billion. Sales slumped in the last month of the quarter, noted IBM Chief Financial Officer Mark Loughridge on the company's earnings call. While software did not suffer as much as hardware, there was not much to cheer about. Software revenue was $5.8 billion, down 1 percent year over year, while sales of middleware such as WebSphere, Tivoli and Lotus also dropped 1 percent, to $3.6 billion.

The general decline in hardware sales has affected chip vendors. As expected, AMD Thursday reported that revenue declined due to both weak demand and lower selling prices -- a result of competitive pressure in a tough market. AMD earlier in the week put out preliminary results and Thursday's report confirmed the earlier figures. AMD total sales were $1.27 billion for the third quarter, dropping from $1.69 billion a year earlier, while the company reported a loss of $157 million. That compares with a profit of $97 million a year earlier. The company said it would lay off about 15 percent of its 11,813-employee workforce to cut costs and get back to profitability.

Intel, the world's biggest chip maker, said Tuesday that for the quarter ending in September, revenue dropped to $13.5 billion from $14.2 billion a year earlier. Profit also declined, to $2.97 billion from $3.47 billion.

"Our third-quarter results reflected a continuing tough economic environment," according to a succinct statement from CEO Paul Otellini. He did hold out some hope that ultrabooks, phones and tablets would help revive sales in the next few quarters.

It was also a tough quarter outside of the operating system, PC and chip markets, however.

Google, facing its own set of business issues, said Thursday that net income for the third quarter was $2.18 billion, down from $2.73 billion a year earlier. Revenue was up 45 percent year over year, at $14.10 billion. But subtracting commissions and other fees paid to advertising partners, revenue was $11.33 billion, below the consensus expectation of $11.86 billion from financial analysts polled by Thomson Reuters.

Google faces rising costs as it bulks up its workforce, ramps up R&D and absorbs Motorola Mobility. At the same time, the price of paid clicks -- the money Google charges advertisers when someone clicks on a search ad -- fell 15 percent during the last quarter. Several analysts appear to be willing to give Google more time to absorb Motorola and make the transition to the mobile world.

 "While the mobile transition is taking longer than anticipated, we believe the long-term opportunity is intact," said Canaccord Genuity Internet analyst Michael Graham in a research note.

Earnings season is not yet over. Next week, for example, Apple and Facebook are due to report, and market watchers will be keen to see positive signs.

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Marc Ferranti

IDG News Service
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