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Wall Street Beat: Economic Concerns Shadow Tech Profits

Earnings reports from dozens of IT and telecommunications companies, including bellwethers like Microsoft, Apple and Nokia, offered good news this week, but tumult in the markets shows that IT investors still have big concerns about lingering weak spots in sales and the continued stability of the economy.

On Jan. 8, the tech-heavy Nasdaq exchange hit the highest point it had seen since September 2008, before Wall Street collapsed as banks went out of business. But even though many tech companies have reported better-than-expected fourth-quarter results in the past two weeks, share prices of computer and telecom companies have slumped.

The Nasdaq slid in the past two weeks from 2318, its 15-month high point, to close at 2179 on Thursday. Even shares of Apple, which had a solid earnings report Monday and launched its long-awaited iPad tablet computer Wednesday, dropped on Thursday.

Doubts about President Obama's plans to limit the scope of the big U.S. banks, concerns about continued mortgage foreclosures and high jobless rates, and the weight of long-term debt on the U.S. have all contributed to concerns about the economy. Reporting better-than-expected results for the end of last year, tech companies are generally expected to help lead the economy out of the recession, but many industry players still expect a long slog ahead.

"When you have a financial crisis like that, it's years of digging out," Bill Gates said Monday in an interview on the TV show "Good Morning America." "We're having a slow recovery and everybody's frustrated by the pace of the recovery. But I don't think the government could change and magically make it speed up a lot," he said.

Even though most market researchers are forecasting a rise in worldwide IT spending this year, there are clouds on the horizon.

Much of the expected increase in spending is a result of changing foreign exchange rates. The spending increases have been made in terms of dollars, which are expected to decrease in value this year, magnifying the results of sales made outside the U.S. Also, much of the increase in spending is expected to come from the consumer side. The uncertain economic outlook is putting a damper on IT spending plans for businesses, market researchers note.

IT budgets will essentially be flat this year, increasing by about 1.3 percent compared with 2009 levels, according to Gartner. While there are some signs of recovery in the 2010 projections, these will not overcome last year's cuts, Gartner said in a recent report.

"2009 was the most challenging year for CIOs in the corporate and public sectors as they faced multiple budget cuts, delayed spending and increased demand for services with reduced resources," said Mark McDonald, group vice president and head of research for Gartner's EXP service.

Though many tech and telecom companies reported earnings that beat expectations this week, profit at some companies came as a result of cost cuts and greater operational efficiency rather than increased sales. While better operating margins are a cause for cheer, companies can grow long term only if revenue rises.

Several bellwether companies that reported higher year-over-year income experienced a sales slump. Some big handset makers fell into this category. While Motorola Thursday reported a small, US$142 million profit, sales for the quarter dropped to $5.7 billion from $7.1 billion a year earlier. Nokia, which also reported earnings Thursday, said fourth-quarter profit rose 65 percent from a year earlier, to €948 million (US$1.3 billion). But, as the average price of phones declined, revenue slumped 5 percent to €12.0 billion.

To be sure, some of the star tech vendors did announce strong results this week. Microsoft Thursday said net income last quarter jumped 60 percent to $6.7 billion, fueled by a healthier PC market. Revenue increased 13 percent to $19 billion.

Apple set the pace by announcing on Monday quarterly profit and revenue that were both higher than the same period in 2008. Apple had net income of $3.38 billion, compared to $2.26 billion a year earlier. Revenue was $15.68 billion, up from $11.88 billion.

Yet shares of Apple and Microsoft closed lower Thursday. Microsoft shares started to trade lower in after-hours trading right after its announcement, after closing at $29.15, down $0.51 for the day. Apple shares declined by $8.59 to close at $199.29, and slid further in after-hours trading. Google, which last week reported a solid quarter, closed Thursday at $534, down from $626 two weeks ago, when it hit its highest point in the past two years.

For a continued, sustained recovery in confidence and tech company shares, it looks like investors may want to see more evidence of rising sales in the weeks and months ahead.

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