Wall Street Beat: Mixed News Roils Tech Sector

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Cisco's financial results captured the essence of what's happening in tech markets these days: Yes, profits and sales for the most part are increasing, but the recovery may not be as strong as hoped for and the second half of the year could be weaker than expected.

As a result of the trepidation about the next few quarters, the boost that tech company financial reports gave to share prices last month has disappeared. The tech sector, which during the first quarter helped boost markets toward recovery, on Thursday led markets to their third straight day of losses. Shares of a clutch of computer and IT-related vendors including Hewlett-Packard, McAfee and Applied Materials hit 52-week lows. Share prices of computer companies on the tech-heavy Nasdaq exchange were down 2.18 percent for the year.

At first glance, Cisco's numbers looked great. Net income for the three-month period ending in July was US$1.9 billion, up 74 percent from a year earlier and slightly edging out analysts' expectations. Revenue was up a healthy 11 percent, to $40 billion, but fell slightly short of expectations.

Normally, the slight miss on revenue would have caused just a minor ripple, but these are not normal times. Market watchers have been giving great weight to sales figures these days. While companies can enhance profit by cutting costs, they ultimately need to increase sales to grow. In uncertain times like these, every small miss by a major company causes major reaction in the markets.

"We are seeing a large number of mixed signals," Chambers said on the company's conference call Wednesday. "The economy continues to be the wild card in people's minds." Cisco closed Thursday at $21.36, down by $2.37 or almost 10 percent.

Also on Wednesday, Gartner issued a revamped forecast of worldwide enterprise IT spending. The good news is that the company expects spending to increase 2.9 percent in 2010 and surpass $2.4 trillion, after a 5.9 percent decline in 2009. The bad news: The forecast has been reduced from the 4.1 percent growth Gartner had predicted earlier this year, said Kenneth Brant, the company's research director.

"The bottom line is that technology providers need to be prepared for the worst case, where commercial IT markets stagnate and governments transition to fiscal austerity programs," Brant said in the report.

The chip sector also produced mixed news this week. Semiconductor Manufacturing International Corp. (SMIC), one of the world's biggest semiconductor foundries, said Tuesday that its second-quarter revenue was up by 8.4 percent from the year-earlier period, to $381.1 million, while net cash flow from operations rose to $167.5 million from $153.3 million.

But chip giant Intel got hit Tuesday with a downgrade by Baird, and had third-quarter estimates cut by several other analyst firms. The problem, said analysts, was that early word from reports from Asia said that August has seen a slow start for PC sales, and inventories of memory chips are accumulating.

Meanwhile, smartphone sales continue to be strong, but competition has dampened prices and therefore revenue for the vendors.

Global mobile-device sales to end users totaled 325.6 million units in the second quarter of 2010, a 13.8 percent increase from the same period in 2009, according to a Gartner report Thursday. Smartphone sales to end users accounted for 19 percent of worldwide mobile-device sales, an increase of 50.5 percent from the second quarter of 2009, Gartner said.

"Although the mobile communication devices market showed double-digit growth this quarter, average selling prices (ASPs) were lower than expected and margins fell," said Carolina Milanesi, research vice president at Gartner, in the report.

Mixed news also weighed down the larger economic picture this week.

Sales of electronics and appliances in the U.S. for September and October will be up 5 percent compared to last year, according to a forecast released Thursday by IBM data guru Michael Haydock. Despite the near-10 percent unemployment rate, "electronics has taken up a bigger part of people's disposable income," Haydock said in an interview. "The idea of being connected is more important and is taking over other things people can spend their money on."

Earlier in the week, however, a report by the U.S. Federal Reserve said household spending continued to be restrained by high unemployment.

By now, it's clear that until the macroeconomic picture clears up, even double-digit growth of vendor earnings will not be enough to ease investors' minds about the tech sector. Be prepared for another quarter of turmoil -- at least.

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