Wall Street Beat: Tech earnings highlight weakness in social network sector

Twitter and LinkedIn showed signs of slowing growth, but Akamai and Alcatel-Lucent had some positive news

Tech sector earnings this week stirred concerns about growth for social media companies LinkedIn and Twitter but highlighted positive trends for some networking and cloud services companies.

Meanwhile, weak economic growth in emerging markets caused IDC to lower its forecast for global IT spending this year.

Professional social network LinkedIn said Thursday that revenue for the fourth quarter was US$447.2 million, an increase of 47 percent year over year. Increased demand for Talent Solutions, a premium-fee recruitment package, helped boost sales. However net income, dragged down by stock-based compensation expenses, was $3.8 million, a drop of 67 percent year over year.

The company said revenue for the year is likely to total $2.05 billion, less than the $2.16 billion average analyst estimate, according to Thomson Reuters. First-quarter sales forecasts for $455 million to $460 million came up short of analyst expectations by as much as $10 million.

LinkedIn shares were trading at $209.45 Friday afternoon, down by $14.05.

Microblogging site Twitter reported its first earnings statement as a public company on Wednesday, and while sales jumped year over year, the announcement sparked worries about slowing user growth.

The company said revenue for the quarter ending Dec. 31 was $243 million, up 116 percent year over year. Its loss, however, amounted to $511 million, far greater than its loss of $8.71 million a year earlier.

Twitter added 9 million users, or 3.8 percent more, to the service in the last three months of 2013, which was below what analysts were hoping for.

"Twitter may be finding it more difficult to capture a more mainstream audience," according to a Morgan Stanley research note. "Q4 results show signs of slowing user growth and engagement -- potential risks include large internet competitors adding similar functionality to their existing platforms, similar services popular outside the US and Europe gaining traction in developed markets, or users spending less time on Twitter."

Even though the company showed its ad business is doing well, investors are obviously concerned.

Twitter shares plunged Thursday to $50.03, down by $15.94. They recovered somewhat Friday afternoon, trading at $53.96, still significantly lower for the week.

News from the networking and cloud-platform sector was positive this week. Akamai announced fourth-quarter revenue of $436 million, up 15 percent year over year, and net income of $80 million, up 18 percent. Akamai provides cloud services for delivering and optimizing online content and applications, centering around its Intelligent Platform.

"Driven by strong traffic growth in social media, gaming, online video and software download and robust demand in e-commerce over the holiday season, Akamai reported another strong quarter," according to a research note from analysts Greg Miller and Eric Chu at Canaccord Genuity.

Akamai shares closed at $57.18 Thursday, jumping up by almost $10. Shares lost some momentum Friday afternoon, trading at $56.59, but were nevertheless up significantly for the week.

For Alcatel-Lucent, wireless access, including LTE networks, was the star product category in the fourth quarter. Sales related to fixed access and IP transport products also boosted revenue.

The financially struggling company had good news Thursday, reporting a net profit of €134 million (US$182 million), compared to a €1.56 billion loss for the year-earlier period. Sales were €3.93 billion, down 0.1 percent year on year.

Though the company still has to show that it can increase revenue, the profit is a good way to start showing that CEO Michel Combes' Shift plan to turn the company around is having an effect.

Combes took the helm of the financially beleaguered company about a year ago. The Shift plan, announced last June, calls for the company to get rid of US$1 billion in assets and become profitable by next year. The company announced this week that it has received an offer from China Huaxin for its enterprise unit, which makes IP telephony and Ethernet switching equipment. The offer values the unit at €268 million. Alcatel-Lucent will keep a 15 percent stake in the business.

Company shares are traded in Europe and are not included in the U.S. indexes, but its success in LTE and IP products bodes well for those sectors.

Though IT sector earnings reports have been fairly strong over the past few weeks, tech company shares have had a bumpy ride, reflecting overall market volatility. Shares on U.S. exchanges have trended down so far this year. Though major exchanges ended Friday up for the day overall, tech company shares on the Nasdaq are still down by about 2.5 percent for the year. Weak economic growth in emerging markets has been a main concern. This week, IDC said the tech market would also be hit by weakness in emerging markets.

"IT spending will be inhibited by the economic slowdown in emerging markets in 2014," IDC said in a statement. "An inevitable deceleration in the growth of smartphones and tablets" would also have an impact on overall spending, IDC said.

IDC lowered its forecasts for IT market growth in Asia/Pacific, Central and Eastern Europe (CEE), and the Middle East and Africa (MEA), which in turn brought down its forecast for worldwide IT spending growth to 4.6 percent this year in constant currency terms, from the previous forecast of 5 percent.

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Tags business issuesInternet-based applications and servicesalcatel-lucentNetworkingLinkedInfinancial resultstwittersocial mediainternetakamai

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Marc Ferranti

IDG News Service
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