Wall Street Beat: IT Earnings Mixed, but Offer Some Relief

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Earnings season got under way with a vengeance this week, as bellwether companies such as Google, IBM, Intel, Nokia, Advanced Micro Devices, and eBay issued quarterly reports that, while mixed, offered some good news to IT investors trying to keep afloat in the middle of the worst economic crisis since the stock market crash of 1929.

The collapse of Wall Street investment banks coupled with a U.S. economy that will almost certainly be in recession in the last half of the year has taken both the tech-heavy Nasdaq and the broader Dow stock market indexes on a stomach-churning roller coaster ride over the past few weeks, with IT vendor shares hitting five-year lows.

Despite a cautious outlook from vendors, pockets of good news in the earnings reports suggest that macroeconomic problems will not hit IT as dramatically as the dot-com bust, when there were declines in IT spending and sales. While analysts have been predicting a slowdown this year into the first part of 2009, few have forecast an actual decline.

"In a worst case scenario, our research indicates an IT spending increase of 2.3 percent in 2009, down from our earlier projection of 5.8 percent," said analyst Peter Sondergaard in a bulletin on global IT spending issued by Gartner Monday.

On its part, Forrester is so far sticking to its forecast, made in September, that U.S. IT spending will grow at 5.4 percent from last year, and at 6.1 percent next year -- US$572 billion in 2008 and $606 billion in 2009.

In the current economic climate, however, nothing is certain. In a cautionary note issued by Forrester this week, analyst Andrew Bartels said "with the financial crisis now spreading around the world, risks have grown that the U.S. and other major countries will experience a longer and deeper recession than we had expected. If so, the tech market would see several quarters of declines in purchases, not just two or three quarters with little or no growth in late 2008 and the first half 2009."

Against this uncertain background, Google weighed in with an uplifting third-quarter report after the market closed Thursday, posting net income of $1.35 billion, up from $1.25 billion one year earlier, beating analyst expectations. It's a reassuring sign for Net advertising.

"As a leading ad company, Google would be impacted by a severe recession even though there is clear evidence that search advertising has been very economically resilient," said Gartner analyst Mark Mahaney in a research note issued before the earnings report.

Within two hours after the market closed, after-hours trading brought Google shares up by $32.00 to $385.00.

IBM also issued a strong report Thursday, reiterating its preliminary statement last week. IBM third-quarter net income grew by 20 percent to $2.8 billion. In after-hours trading, company shares jumped by $1.95 to $93.47. Analysts over the coming days, however, are sure to pick apart the company's statement that hardware sales and new service contract signings are slowing.

Meanwhile, financially beleaguered AMD gave investors some cheer Thursday, posting a loss of $67 million, or $0.11 per share, narrower than its loss of $396 million last year and better than analysts' predictions of a $0.40 EPS loss. The company's plan to split into a design company and a manufacturing company, with the manufacturer taking on most of the company's debt, has encouraged industry insiders. AMD shares, which have lost about 50 percent of their value this year, gained $0.53, trading at $4.65 in after-market hours.

Intel, the main chip bellwether, Tuesday reported that net income grew 12 percent year-over-year in the third quarter, to $2 billion. But the chipmaker also said sales in the current quarter will range between $10.1 billion and $10.9 billion, which would at best give the company a weak holiday season quarter, and possibly, an actual decline from the third to fourth quarter for the first time since 2000.

In the online commerce arena, eBay Wednesday reported it swung to a profit, generating a third-quarter net income of $492.2 million, up from a net loss of $935.6 million a year earlier. But a weak outlook for the fourth quarter caused eBay shares to drop by $0.36 Thursday to $14.97. For the fourth quarter, eBay expects revenue between $2.02 billion and $2.17 billion, lower than the forecast of $2.44 billion by analysts polled by Thomson Reuters.

The worst big-name IT vendor report this week was from mobile phone giant Nokia, whose third-quarter earnings plunged 28 percent from last year, to €1.09 billion (US$1.5 billion). Mobile phone sales are seen to be especially susceptible to a consumer spending slowdown. Nevertheless, Nokia forecast increasing sales for the rest of the year and 10 percent growth for the industry as a whole.

On Thursday, the tech-heavy Nasdaq index gained 89.38 points, or 5.49 percent, closing at 1717.71. The broader Dow index jumped 401.35 points, or 4.68 percent, to close at 8979.26. While initial reaction to IT earnings reports appears positive, wide swings in the market have been the norm for the past few weeks.

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