Wall Street Beat: Earnings highlight smartphones as key to growth

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With Apple reporting a decline in profit margins and Samsung consolidating its leadership in the mobile device market, earnings results and market research reports this week point to the ever-increasing importance of smartphones as key to growth in tech.

The tech sector could use some good news. With the U.S. government cutting $65 billion in federal spending over the next six months as part of the so-called sequestration budget compromise, IT spending will take a hit, according to a report from market research company Forrester Friday.

Even though consumer and business spending will offset some of the sequestration, most economists forecast that it will shave a half point off of U.S. GDP growth, now expected to be 2 percent or less this year, Forrester pointed out.

“This slightly worse economic outlook has caused us to reduce our forecast for US business and government spending on information technology (IT) goods and services in 2013 to 6.2 percent, from our January 2013 projection of 7.5 percent,” according to Forrester chief economist Andrew Bartels, in the report. Forrester is also lowering its forecast for 2014 IT spending growth to 6.8 percent from 7.2 percent.

“Outside of software, mobile devices are a bright spot in the hardware sector,” Bartels wrote.

Within the mobile sector, smartphones are where the growth is. In the first quarter this year, for the first time ever, smartphones comprised more than half (51.6 percent) of all mobile phones shipped, according to a report from market research firm IDC Thursday.

The worldwide mobile phone market grew 4 percent year over year in the first quarter, to 418.6 million phones, IDC said. In particular, the smartphone market grew 41.6 percent year over year to 216.2 million units.

“Phone users want computers in their pockets. The days where phones are used primarily to make phone calls and send text messages are quickly fading away,” said Kevin Restivo, senior research analyst with IDC, in the report.

The first quarter shipments declined from the fourth quarter of 2012, but the beginning of the year is typically a slow season for mobile phone shipments, IDC added. In any case, smartphones fared better than other mobile phones: The seasonal, sequential decline for all phones was 13.4 percent, but for smartphones the drop was only 5.1 percent, IDC said.

Samsung, reporting first quarter results Friday, was the big winner in another week of bellwether tech earnings, showing off an increase in global smartphone market share as net profit skyrocketed 42 percent year over year to a company record 7.15 trillion won (US$6.4 billion), while overall sales jumped 17 percent to 52.87 trillion won.

The company anticipates more good news ahead, saying that it expects the Galaxy S4, which went on sale Friday in South Korea, to outsell the S3. The phone sports a 4.99-inch screen, quad-core processor and a features including wireless charging.

Samsung remains the undisputed champion in the global smartphone battle. By the end of the first quarter, IDC said, Samsung shipped 70.7 million units, more than the next four vendors combined (which are, in order of market share: Apple, LG Electronics, Huawei and ZTE).

While Samsung’s global smartphone market share increased year over year from 28.8 percent to 32.7 percent, Apple’s share declined from 23 percent to 17.3 percent, IDC said.

Though Apple’s iPad sales increased 65 percent year over year to 19.5 million units, it wasn’t enough to boost profit, which declined for the first time in 10 years.

As Apple’s iPhone shipments slowed, its profit dropped year over year. Reporting results for the quarter ending March 30, Apple Tuesday said profit declined year over year to $9.5 billion from $11.6 billion. Total revenue was $43.6 billion, increasing from $39.19 billion in the year-ago quarter.

The decline in profit and margins raised concerns, however, causing Apple shares to decline $0.67 to $405.46 on Wednesday, though they rose toward the end of the week.

The mobile market as a whole is fueling growth for equipment makers. For example Alcatel-Lucent, reporting results Friday, said its wireless division accounted for the majority of sales, totaling €966 million (US$.13 billion), a 4.9 percent increase year on year. The LTE business experienced record revenue, as network deployments in the U.S. continued.

Though first quarter revenue was up 0.6 percent year on year to €3.2 billion, restructuring charges helped push the company to a loss of €353 million.

The week ended on a down note for tech, which has trailed other sectors in the markets all year. The Nasdaq Computer Index declined .02 percent to 1574.46 points Friday. Amazon shares, which declined by $19.89 to close at $254.81, weighed down the Nasdaq.

Amazon on Thursday said net income for the quarter ending March 31 totaled $82 million, down $130 million year over year, though revenue rose to $16.1 billion from $13.2 billion. The profit drop was due to increased spending and a tough sales environment in Europe.

Tech earnings season continues next week, with Facebook results providing a highlight.

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