Wall Street Beat: Tech Earnings Boost Confidence

As the last full trading week of the year winds down, Oracle, Palm and Research in Motion financial results along with market analyst forecasts for 2010 are giving IT investors some data to mull over as they contemplate prospects for next year.

Despite concerns that economic recovery will be tepid, reminiscent of the "jobless recovery" during U.S. President Jimmy Carter's years in office in the 1970s, tech company stocks are generally performing well, outpacing those in other sectors. The week started with the tech-heavy Nasdaq hitting a high for the year, closing Monday at 2212.

There are shadows on the landscape, to be sure. For example, shares on all major indices pulled back Thursday partly as a result of a government report that the number of new jobless claims rose to 480,000 last week, up 7,000 from the previous week.

Nevertheless, the Nasdaq is up by 46.9 percent from a year ago, while the Dow Jones Composite is up by 16.6 percent and the Standard and Poor's 100 is up by 18.6 percent. Nasdaq telecom stocks are up by 44.4 percent while Nasdaq Computer stocks are up by a whopping 64.4 percent.

Part of the reason for confidence in tech is that market analysts are predicting an uptick in global spending on IT next year -- a result of pent-up demand in both the consumer and corporate markets. IDC earlier this month said global IT spending will increase by 3.2 percent in 2010, returning to the 2008 spending level of about $1.5 trillion.

In addition, tech sales this year have not been as bad as some had feared. Stronger-than-expected third quarter sales in Western Europe, among other things, will end up driving worldwide mobile device sales to end users this year to 1.214 billion units, a 0.67 percent decline from 2008, Gartner said this week. In September, though, Gartner had forecast sales to decline 3.7 percent in 2009. Looking ahead, Gartner forecasts 2010 sales to increase 9 percent from 2009. The problem in this market is that even though unit sales may grow, price competition is having a negative effect of revenue.

"Pressure will remain for manufacturers to sustain and grow margins as ASP [average selling price] continues to decline," said Carolina Milanesi, research director at Gartner, in a report. "Software, services and content will be much bigger drivers than hardware, pushing traditional mobile phone vendors to reinvent themselves to remain at the top of their game."

One trend likely to remain in place next year is the move toward consolidation in the IT arena. Though the recession has hit IT sales this year, many vendors still have full coffers from record profits generated in 2007 and 2008 before the full effects of the downturn hit. These vendors are now in the position to take advantage of the still-subdued share prices to make acquisitions and broaden their product portfolios.

This week, On Semiconductor said it will spend $108 million to acquire California Micro Devices, which among other things makes devices that protect chips. IBM said it has signed a deal to buy Lombardi, a, BPM (business process management) vendor, for an undisclosed amount.

Against this backdrop, Oracle Thursday announced a strong second fiscal quarter, with net income up by 12 percent from a year ago, to $1.5 billion. More importantly, revenue was up 4 percent to 5.9 billion. While profit figures can be manipulated by, for example, cutting costs, sales numbers are hard to fake. It won't be until vendors are regularly reporting sales that exceed 2008 levels that IT investors will truly be able to breathe a sigh of relief.

"We delivered results which were substantially better than we expected on both the top and bottom line," said Oracle CFO Jeff Epstein in a statement. "Our solid top line growth, coupled with disciplined expense management, was key in generating $8.4 billion of free cash flow over the last twelve months."

Research in Motion also reported upbeat news Thursday, for the three months ended Nov. 28, due mainly to strong sales of the BlackBerry. Revenue for the quarter hit $3.9 billion, up 41 percent from $2.78 billion in the same quarter of last year.

Net income for the quarter was $628.4 million, compared to $396.3 million for the same quarter last year.

In a comment that could cheer the hearts of IT investors looking for smartphone sales to help lead tech out of the recession, company co-CEO Jim Balsillie said in a statement: "RIM is experiencing a great start to the holiday buying season and the strong Q3 results and Q4 outlook clearly reflect the strength of our diversified product portfolio."

Palm did not fare as well, though the mobile device maker did reduce its quarterly loss from one year ago. Palm's loss for the three months ended Nov. 27 was $81.9 million, down from its loss of $506 million a year earlier. Sales of its line of new WebOS phones helped the company weather the storm in the latter half of the year, it said. Nevertheless revenue, at $78.1 million for the quarter, was still below year earlier sales of $191.6 million.

"We're still in the early stages of a long race," said Jon Rubinstein, Palm's chairman and chief executive officer, in a statement.

Early reaction to the earnings news was positive. Though Palm shares slipped by $0.35 in after-hours trading after its earnings announcement, Oracle shares hit $23.85, up $0.96 from its close, while RIM shares climbed $7.62 to $71.06.

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