Wall Street Beat: Tech Earnings Stay Strong

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Financial results from Microsoft, SAP, EMC, AT&T, Verizon and other tech vendors this week reinforced optimism that 2011 is shaping up to be a strong year for IT, especially in the enterprise sector.

Microsoft's results for the quarter ending Dec. 31, announced Thursday, could be seen as a microcosm for the tech sector as a whole. Enterprise software is expected to drive IT sales growth this year, as the rate of increase in spending on hardware slows.

Though Microsoft generated US$19.95 billion in revenue, a 5 percent increase from a year earlier and a record for the quarter, profit was down to $6.63 billion from $6.66 billion. Microsoft shares were trading at $27.66 Friday afternoon, down by $1.22 on the news.

Part of the reason for the profit decline was that the year-earlier results were boosted by $1.71 billion in deferred revenue, reflecting pre-order sales of Windows 7, launched in October 2009.

But even after the deferred revenue, and extraordinary gains from the year earlier are taken out, Microsoft Windows revenue still increased only 3 percent year on year, less than company watchers had been expecting. PC sales growth is expected to slow down a bit this year, and this could affect related technology such as desktop operating systems, including Windows.

The good news on the software front is that sales for the Microsoft Business Division, which includes Office, increased 24 percent, boosted by demand for Office 2010, launched in June.

"Business demand for our productivity and infrastructure products and cloud solutions is strong," said Kevin Turner, chief operating officer at Microsoft, in a statement.

Strong sales of business software were reported by other IT bellwethers this week. SAP, for example, announced Wednesday that quarterly revenue rose 27 percent in the fourth quarter to €4 billion (US$5.3 billion).

Dragged down by legal costs related to litigation with Oracle over its former TomorrowNow unit, SAP profit declined by more than 33 percent to €437 million. But aside from the extraordinary legal costs, SAP's business software sales and related services appear to be going strong. The maker of ERP (enterprise resource planning) and analytics applications said software revenue increased 35 percent to €1.51 billion while software and software-related service revenue rose by 28 percent to €3.27 billion.

EMC, another enterprise software stalwart, on Tuesday reported record quarterly results due to strong sales for its storage, security and virtualization products. EMC's consolidated revenue, including that of its VMware unit, rose 19 percent to a record US$4.9 billion. VMware itself on Monday reported that profit roughly doubled and revenue increased 37 percent in the same quarter.

Outside of the enterprise IT sector, results were a bit mixed.

AT&T, for example, on Thursday reported quarterly revenue of $31.4 billion, up 2.1 percent from a year earlier, though profit declined from $2.8 billion to $1.2 billion due to one-time expenses. Revenue derived from its iPhone business helped boost revenue. The big question for AT&T is whether losing its status as exclusive operator for the iPhone will dampen subscriber growth.

Verizon, which will start selling iPhones next month, on Tuesday reported quarterly revenue of $26.4 billion, down from $27.1 billion a year earlier, although net income nearly doubled to $4.6 billion. The revenue number was hurt because the year-earlier figure included sales from discontinued Verizon telephone operations in 14 rural states. Excluding revenue from those rural states, income rose 2.3 percent.

In a sign of continued strength for the mobile sector, Verizon said it added 803,000 wireless retail customers during the quarter.

Nokia, the world's largest maker of mobile phones by shipment volume, reported Thursday that quarterly revenue increased 6 percent year on year to €12.7 billion (US$17.4 billion ), but profit dropped from €948 million to €745 million. The problem is that the company is struggling in the higher-margin smartphone segment and needs to come up with an answer to the iPhone.

Motorola Mobility, in its first quarterly financial report since spinning off from Motorola, underscored how tough the smartphone market is. On a pro forma basis, Motorola Mobility's net income was $80 million, compared with a loss of $204 million a year earlier, and revenue was $3.4 billion, up 21 percent. But the company forecast a net loss of $26 million to $62 million for the current quarter. Motorola, which sells Android devices, said it is already suffering from competition from pre-orders of the Verizon iPhone.

Samsung Electronics, reporting Friday, said sales of its Android-based phones helped quarterly revenue rise 7 percent year on year to 41.87 trillion Korean won (US$37.57 billion) in the fourth quarter, a record quarterly high for sales. The company's net profit increased 13 percent year on year to 3.42 trillion won.

Despite the generally strong earnings reports, markets were down Friday. The decline in the markets was generally ascribed to investor concerns over unrest in Egypt, which has led the government to cut off Internet access in the country. After recent increases in several market indexes, fueled to a large degree by strong tech earnings, a big geopolitical event such as Egyptian unrest is bound to make investors dump shares, take profits and move from equities into safer investments. Nevertheless, computer companies on the tech-heavy Nasdaq are up about 30 percent from a year ago, and 5 percent for the year.

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