Wall Street Beat: Tech Earnings Boost Optimism

Though a pall of uncertainty still hangs over the global economy, a wave of tech vendor quarterly reports this week from bellwethers including Microsoft, IBM, Apple and AT&T have gone a long way to bolster confidence in a continued recovery for the IT sector.

Though in some cases, revenue increases did not quite live up to expectations -- indicating that the rebound in tech sales from the recession is slowing somewhat for some companies -- the overall picture that has emerged indicates a healthy quarter, with reasons to be optimistic for the rest of the year.

Company earnings reports this week have boosted share prices in a number of sectors, including tech, though exchanges are still significantly off their 52-week highs, set at the end of April, due to concerns about European sovereign debt crisis and sluggish growth in the U.S. jobs and housing markets. Despite the worries, tech company sales were strong for the just-ended quarter, causing market watchers to stay optimistic.

For example, Microsoft was under pressure to deliver a strong quarter, since burgeoning PC sales have raised expectations for strong related sales of historic cash-cow products such as the Windows OS and its Office suite. The company did not disappoint, reporting on Thursday record quarterly revenue for the three-month period ending in June, mainly due to OS and Office sales.

Microsoft's quarterly net income was US$4.52 billion, a 48 percent jump from the same period last year, on revenue of $16.04 billion, a 22 percent increase. Both revenue and earnings exceeded analyst expectations. The report was just one of the high points of the week.

"Financial markets in Q2 2010 have been shaken by fears that the Greek debt crisis will metastasize across the European Union (EU) and beyond," noted Forrester chief economist Andrew Bartels in a tech outlook report released Wednesday.

"Nevertheless, Q1 demand data was strong; we continue to expect that the tech recovery will gain strength in the US and around the world, though European IT market growth will be lower than our earlier predictions," Bartels said in the report.

U.S. IT goods and services spending will increase 9.9 percent in 2010 compared to last year, to $564 billion, Forrester predicts. That's more than the company's previous projection, in April, of 8.4 percent. Globally, IT spending will increase 7.8 percent to $1.58 trillion, Forrester said.

This week, several tech vendors also raised forecasts for the year. In its quarterly report, released Monday, IBM raised its earnings guidance for the year to at least $11.25 per share, up $0.05 from its previous guidance. IBM's second-quarter revenue, up 2 percent from 2009 to $23.7 billion, was hit by the weak euro and the divestiture of the company's project lifecycle management business, and came in a little under expectations. However, net profit was up 9 percent from a year earlier, to $3.4 billion.

Stock market superstar Apple on Tuesday reported record quarterly revenue of $15.7 billion for the quarter ended June 27, up from the $9.7 billion in revenue for the third quarter last year. Strong iPhone, Mac and iPad sales also helped net earnings increase to $3.25 billion, up from $1.83 billion for the same period in 2009.

"iPad is off to a terrific start, more people are buying Macs than ever before, and we have amazing new products still to come this year," CEO Steve Jobs said in the report. Several market analysts raised Apple sales forecasts, with iSuppli increasing its iPad estimate from 7.1 million units to 12.9 million for the year.

Also on Tuesday, VMware reported that the market for virtualization technology for businesses continues to look strong, raising its guidance for the year to between $2.7 billion and $2.8 billion, about a 35 percent increase from last year. Net profit for the just-ended quarter was $75 million, more than double the figure from the same period last year. Revenue was $674 million, up from $456 million in 2009.

On the telecom front, AT&T Thursday reported net income of $4 billion for the second quarter of 2010, up almost 26 percent from last year, fueled by strong demand for the iPhone and other smartphones. The revenue picture was not quite as strong, with sales coming in at $30.8 billion, up just 0.6 percent from a year earlier. However, AT&T officials were upbeat about the rest of the year, saying they expect "strong" earnings-per-share growth and an increase in cash flow compared to last year. This is an improvement over its earlier guidance for "stable" earnings per share and flat cash flow.

The financial joy was not spread evenly among all vendors this week. Nokia, the world leader in mobile-phone sales measured in terms of units shipped, is still hampered by a lack of strong offerings for the smartphone market, one of the hottest areas in all of tech. It reported Thursday that sales for the quarter ending in June were €10 billion (US$12.21 billion), up less than 1 percent from a year earlier, while net profit was €227 million, down from €380 million a year earlier.

In the online world, the financial picture remains cloudy for Yahoo, which still must prove that the search deal struck with Microsoft last year is helping it focus on high-growth services. Yahoo said Tuesday that profit in the June quarter jumped to $213 million, up 51 percent over the same period last year and exceeding analyst expectations. However, revenue was $1.60 billion, just a 2 percent increase from last year and under analyst expectations. As companies bounce back from the recession, revenue is often seen as more important than net earnings. While profit can be boosted by cutting expenses, strong sales are ultimately the key to future growth.

Despite one or two disappointments this week, the generally strong sales reports boosted markets. The Nasdaq, home to many large tech vendors, closed Thursday at 2245, up by 2.68 percent, while the broader Dow index gained 1.99 percent to close at 10322.

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