Wall Street Beat: Economy Weighs on Tech

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Though some tech bellwethers have reported relatively strong sales compared to a year ago, concerns about the pace of economic recovery have shaken confidence in the IT sector.

This week, earnings reports from companies including Sprint, Alcatel-Lucent, IT services provider CSC and Internet media group IAC contained some bright spots, but were not as clearly optimistic as financial statements from the likes of IBM, Intel, Apple and Google last month.

The Nasdaq, home to many publicly traded tech companies, on Jan. 8 hit the highest point it had seen since September 2008, right before bank collapses put a crater in the stock market. On Thursday the exchange closed at 2174, down by 144 points from the yearly high, even after an EC announcement about a financial bailout plan for debt-ridden Greece sparked an uptick in the markets earlier in the day.

Though quarterly financial reports indicate that many leading IT vendors are headed toward a 2010 first quarter that should surpass year-ago sales, economic concerns are weighing on investor confidence. A recent spike in mortgage foreclosures compared to year-earlier figures has spread fear that some financial institutions are still at risk.

Financial woes for European countries including Spain, Portugal and Greece have this week raised concern that some of the nations may start missing debt payments. If credit stays tight because of these concerns, it could dampen an expected rise in IT spending this year.

Even as tech vendors report good news, they sometimes sound like they are still fighting economic headwinds.

"Despite the sluggish pace of the worldwide economic recovery, our revenue held firm both sequentially and year-over-year as our margin rates and earnings continue to improve," CSC CEO Michael Laphen said in a company financial statement Wednesday. In the last calendar quarter of 2009, the giant services company matched its year-earlier revenue of US$3.9 billion but raised earnings to $211 million from $161 million, due in part to better margins. Perhaps more importantly, however, Laphen noted that the company on a year-to-date basis is $2.2 billion ahead of last year in new sales.

Alcatel-Lucent officials, reporting results Thursday, said that they sees signs that the telecommunications equipment market is on the road to recovery and could grow by as much as 5 percent this year. However, the company reported fourth-quarter revenue of €3.97 billion (US$5.69 billion), down 19.9 percent on a year earlier. Exceptional items helped the company achieve net profit of €46 million -- but in this climate, all eyes are on actual sales revenue, which is the lifeblood of future growth.

On Wednesday, Sprint Nextel reported that it narrowed its losses, but nevertheless saw a revenue decline in the 2009 fourth quarter. The company said it lost $980 million, better than its $1.6 billion loss a year earlier. But revenue declined to $7.8 billion from $8.4 billion. Perhaps worse, it continued to lose subscribers in its fierce battle with AT&T and Verizon Wireless.

Players in the online sector may have supplied the best news this week, though even here, results were mixed. For the fourth quarter, online media conglomerate IAC posted a loss of a billion dollars, mainly due to a write-down in the value of search site Ask.com. But the company saw a revenue increase of 4.6 percent, to $367.2 million. It was the first time that revenue for the company, which also owns Match.com, grew since the depths of the recession in the third quarter of 2008. The revenue beat analyst expectations of $340 million, according to Thomson Reuters.

Earlier in the week, ComScore released its fourth-quarter report on U.S. retail e-commerce sales, which showed that online retail spending reached $39 billion, up 3 percent compared to a year earlier. Analysts expressed caution, however.

"The fourth quarter, with 3 percent year-over-year growth, helped end what has been a disappointing year for online consumer spending on a more positive note," said ComScore chairman Gian Fulgoni. "As we head into 2010, there is reason for guarded optimism for online retail spending to continue to gain share of consumers' wallets. At the same time, I expect absolute growth to be stymied by continued high unemployment and the deleveraging that is occurring in the economy as consumers exercise their new-found propensity to save."

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