Wall Street Beat: Red Hat, Oracle Cheer IT Investors

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As the first half of 2009 comes to a close, the big question for tech companies is whether the recession will ease up enough to spur spending increases for IT by the end of the year.

Signals continue to be mixed. Companies reporting financial results, including Oracle and Red Hat, as well as a slightly more cheerful hardware report by Gartner, helped spur IT investors this week even as dire signs of the recession continue to pop up.

On the macroeconomic front, the Department of Labor said Thursday that the number of those receiving new unemployment claims for the week ending June 20 rose to 627,000, representing the largest number of initial claims since May. Also Thursday, the Commerce Department said first-quarter GDP (gross domestic product) shrunk 5.5 percent, compared to a forecast last month of 5.7 percent.

Overall, tech seems to be generating more enthusiasm among investors than other sectors of the economy. The tech-heavy Nasdaq hit a seven-year low on March 9, but in the past three months, it has risen 13.4 percent, better than other sectors.

Part of the reason may be that some industry watchers feel tech spending, led by business-savvy IT executives, is poised to rise in the second half of the year.

IT professionals spent years after the dot-com bust wringing every last excess penny out of old technology cost structures. Now, some of the more far-sighted IS managers have put in place plans to implement "transformational" IT projects involving virtualization and cloud computing, according to Bob Dvorak, senior vice president and general manager at Forsythe Technology, which works with Fortune 500 clients.

"The IT people I view as business leaders are looking at this downturn as a catalyst for change," Dvorak said. "Barriers to change are often more political than technical," he noted. With the economy in dire straits, it's easier to push for transformational change in a business rather than "continue down the same old path of cost cutting, which will not give you a new cost curve."

A more obvious need for change -- which the economy has provided -- can lower resistance to projects such as server virtualization, which may mean that various departments end up sharing servers, Dvorak noted.

"IT leaders we have worked with have spent the first half of the year blueprinting projects, and now the faucet is ready to be turned on," he said.

This may be part of the reason that industry watchers are looking past the bad numbers lately, and finding faith in some of the good signs that are starting to spring up.

For example, software bellwether Oracle on Tuesday issued a quarterly report that contained some worrisome figures. Revenue for the quarter ending May 31 was US$6.9 billion, down 5 percent compared to the year-earlier period. Income was $1.9 billion, certainly a nice profit but nevertheless down 7 percent from the year earlier. Most troubling, new software license sales were down 13 percent to $2.7 billion. New software sales are usually taken as a sign of things to come, and a 13 percent drop is typically not seen as good.

But traders pushed Oracle shares to $21.26 Wednesday, up by $2.39.

Part of the reason for cheer was that Oracle did manage to beat expectations, which were battered by a tough first calendar quarter. Excluding one-time charges, Oracle reported $0.46 per share, edging out expectations of analysts, who had been looking for earnings of $0.44 per share, according to a survey done by Thomson Reuters. But tech investors also love the sort of revenue generated by product updates, services and ongoing subscriptions -- a software company that has healthy services and updates income is seen to have a sort of annuity business it can count on in bad times. And Oracle's updates and services business grew by 8 percent to hit $3.1 billion.

Red Hat's subscription business also showed good growth, increasing by 14 percent from last year to hit $148.8 million. Revenue increased 11 percent to $174.4 million, beating analyst estimates of $171.8 million. Income was up to $18.5 million compared to $17.3 million a year earlier.

On the hardware side, Gartner still says worldwide PC shipments in 2009 will decline, but it is now forecasting the drop to be less severe than it had expected. In a forecast issued Thursday, Gartner said PC shipments will drop 6 percent, compared to the 6.6 percent decline it forecast last month and the 9.2 percent drop it forecast in March.

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