Wall Street Beat: Enterprise Spending Boosts Tech

Microsoft, SAP, BMC and other software vendors reported healthy earnings this week, indicating that corporate spending on IT remains strong despite continuing economic worries.

The software results boosted the tech-heavy Nasdaq in late Friday morning trading. The Nasdaq gained 4.29 points, hitting 2511.67, with Microsoft up by US$0.31 to $26.58, Epicor gaining $0.17 to $9.50 and BMC jumping $1.83 to $45.80. SAP, traded on the broader-based New York Stock Exchange, was up $0.45, at $52.07.

After a steep decline at the end of the second quarter, due to concerns about double-dip recession and related issues such as U.S. mortgage foreclosures and high unemployment, markets have regained much of what they lost and the Nasdaq is within striking range of its yearly high, hit in April. Much of the current rally, which started in September, can be ascribed to robust, in some cases record, third-quarter tech earnings.

Despite its headline-grabbing, competitive struggle against Apple and Google in the mobile and search markets, Microsoft growth continued unabated in the quarter ending Sept. 30, with sales up 25 percent year-on-year to $16.2 billion.

Apple's vaunted consumer successes with the iPod, iPhone and iPad have catapulted it past Microsoft in terms of market value (share price multiplied by the number of shares on the market). But Microsoft, reporting earnings Thursday, remains the most profitable U.S. tech vendor: Profit rose 52 percent to $5.41 billion during the last quarter, compared to Apple's earnings of $4.31 billion.

It is doubtful that Microsoft can continue to generate similar profit growth without making significant inroads into mobile communications and search. And, in fact, Microsoft benefited last quarter from deferred sales gained a year ago when business users made advance payments for the just-launched Windows 7. Without the deferred gains, Microsoft profit would have risen by 16 percent.

But it is clear that Microsoft continues to benefit from the wave of corporate software upgrades that gathered force in the wake of the recession.

"We are seeing improved business demand and adoption. Our enterprise agreement rates were strong, reflecting business commitment to Windows 7, Office 2010, and our server and database products," said Kevin Turner, chief operating officer at Microsoft, in a statement.

Strong corporate demand also boosted SAP, Microsoft's rival in the ERP market, for the quarter. SAP said Wednesday that profit after tax was up 12 percent from the same period a year earlier at €501 million (US$694 million) while revenue jumped 20 percent to €3 billion.

"We saw a good mix of revenues among small, midsized and large enterprises, and we had an increase in deal volume," said Werner Brandt, CFO of SAP, in a statement.

Corporate spending also helped a variety of second-tier software vendors. Reporting Thursday, business service management software maker BMC said revenue was $502 million, up 9 percent from the year-earlier quarter, while net earnings were $132 million, compared to $94 million.

Adoption of new software to transition to cloud-based computing services was key to the quarter, BMC said.

"Cloud computing is fundamentally changing the way customers are thinking about IT," said BMC CEO Bob Beauchamp, in a statement.

ERP vendor Epicor also reported a sales increase Thursday. Quarterly revenue increased more than 16 percent from last year to $114.6 million. The company suffered an overall loss, but excluding tax-related and certain other one-time items, the company generated a profit of $7.8 million.

Business process automation specialist Software AG Tuesday reported quarterly sales growth of 29 percent year-on-year to €275.3 million (US$382 million). Net profit rose 20 percent to €45.6 million.

"Software AG expects this earnings trend to continue in the fourth quarter and has therefore raised its fiscal year 2010 outlook for profit growth from the previously announced 10 to 12 percent to between 18 and 20 percent," the company said in a statement.

Chip and hardware manufacturers reported strong results this week as well, but clouds are hanging over the sector. The world's largest contract chip manufacturer, TSMC, said Thursday that profit and sales hits records. Net profit rose 54 percent from the year earlier period to NT$46.94 billion (US$1.52 billion), while sales rose 25 percent to NT$112.25 billion.

The company is showing faith in the market, saying that it has had trouble keeping up with demand and that it plans to increase spending on production equipment. But it faces headwinds. The big issue is that consumer hardware sales already appear to be slowing down after a strong rebound from the recession this year.

With consumer demand slowing, market research firm iSuppli last week said fourth quarter revenue will drop by 0.3 percent compared to the third quarter, the first sequential decline since the market collapse in the fourth quarter of 2008.

The slower growth has already been felt.

"Due to sluggish demand, the memory price has been weaker than expected during the quarter," said memory maker Hynix in a statement when it posted quarterly earnings Thursday. Sales for the quarter dipped by 1 percent from the prior quarter to 3.250 trillion South Korean won (US$2.9 billion), though they were up 53 percent from the year-earlier period.

Smartphones and tablets should continue to help fuel growth, Hynix said. But even in these categories, software can make the difference.

Smartphones based on the Android OS, for example, proved to be a boon to Motorola, which said Thursday that sales for the third quarter totaled $5.8 billion, up 6 percent from the same period in 2009, its first year-over-year sales growth since 2006. The company's net profit increased from $12 million to $109 million. Though Motorola shipped 9.1 million handsets, compared to 13.6 million units for the year-earlier period, there were more Android smartphones in the mix, which helped boost margins.

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