Wall Street Beat: Red Hat, 3Com, PC Sector Boosts Tech

Macroeconomic concerns put pressure on stocks in all sectors this week, but acquisitions and financial news continued to stoke investor hopes for an imminent recovery from the recession for IT.

Though not all the news was positive, revenue numbers from Red Hat, 3Com and Palm, Dell's acquisition of services company Perot, and continued improvement in hardware sector surveys fed confidence in the tech sector.

Stocks in major indices fell Thursday as market watchers absorbed news from the National Association of Realtors, which said home sales fell 2.7 percent in August compared with a rise of 7.2 percent in July. A drop in oil prices also raised concerns about economic activity and demand for energy.

Meanwhile tech vendors, while feeling the effects of the recession, have been doing better than expected.

Networking vendor 3Com Thursday morning reported that net income for the quarter ending Aug. 28 fell to US$7.5 million, or $0.02 per share, from $79.8 million a year earlier. Excluding one-time items, earnings were $0.08 per share. Revenue declined 15 percent to $290.5 million.

Though the numbers sound bad, $70 million in earnings from the prior year period came from a one-time occurrence: resolution of a patent dispute. Excluding exceptional items, 3Com actually beat analyst expectations of $0.05-per-share earnings on revenue of $278.2 million, according to a Thomson Reuters poll.

For the current quarter, 3Com forecasts also trump analyst expectations. The company expects earnings of $0.06 to $0.07 a share on revenue of $295 million to $305 million. Analysts were forecasting $0.06 a share on revenue of $286.9 million. 3Com was trading at $5.05, $0.26 up from the day earlier, after the announcement.

On its part, Research In Motion had mixed financial news late Thursday. The company reported that earnings declined by 4 percent for its second fiscal quarter as a legal charge offset sales of BlackBerry devices. Excluding the charge, however, RIM would have earned $588.4 million, or $1.03 per share, on revenue of $3.53 billion, up 37 percent from a year earlier. Analysts had forecast earnings of $1.00 per share on revenue of $3.62 billion.

The real tech-stock success this week was Linux software and services vendor Red Hat, which Wednesday said that for the quarter ending Aug. 30, revenue was $183.6 million, an increase of 12 percent from the year-earlier period.

"IT organizations continue to move ahead with purchases of high value solutions, and Red Hat is capitalizing on this demand as a result of our strong customer relationships and proven value proposition," said CEO Jim Whitehurst in the company's earnings statement. "We continue to be optimistic about Red Hat's future and believe the company is well positioned when the economic and IT spending environment improves,"

Bank of America-Merrill Lynch upgraded its recommendation on the company's stock and Bank of America raised its rating for the company to buy, noting the strong sales during a decline in corporate spending on IT. Red Hat shares were trading at $27.96 Thursday afternoon, up $3.08.

M&A activity has also stirred excitement in tech lately. Acquisitions point to where the action is in tech, as companies jostle to ramp up on hot areas of tech.

Dell Monday announced it would pay $3.9 billion to acquire IT services provider Perot Systems. The move was widely seen as a way for Dell, the number-two PC company behind Hewlett-Packard, to match HP's and IBM's services offerings. HP last year bought service company EDS, and IBM has long been able to offer services to support a wide product portfolio.

The move takes place as analysts revise estimates for PC sales upward. Gartner said Wednesday that the worst may be over for the PC sector. Its latest PC report said that current data show worldwide shipments could hit 285 million units in 2009, a 2 percent decline from 2008 shipments of 291 million, but well above its June forecast, which forecast a 6 percent unit decline in 2009.

"PC demand appears to be running much stronger than we expected back in June, especially in the U.S. and China," said George Shiffler, research director at Gartner. "We think shipments are likely to be growing again in the fourth quarter of 2009 compared to the fourth quarter of 2008."

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