Wall Street Beat: Tech sales strong in third quarter

But areas of weakness, economic turmoil, create caution among buyers

Against a backdrop of economic uncertainty, a raft of third-quarter earnings reports this week from some of the biggest players in IT showed that while tech sales remain strong overall, there are some weak spots that are stirring concerns among market watchers.

IT buyers are acting cautiously in the face of economic turmoil, according to some market reports. The IT Monitor report produced by CDW this week said that 40 percent of IT decision makers surveyed expect an increase in their overall IT budgets in the next six months, down 8 percentage points year over year and the lowest level since October 2009.

As European leaders prepare to meet this weekend to complete a plan to deal with the sovereign debt crisis in Greece, and with the U.S. economy still crippled by fallout from the collapse of the real estate market, tech investors remain sensitive to any indication of a slowdown in IT sales, even as some vendors, like Microsoft, achieve record results. Even though vendors have so far reported a generally strong third quarter, computer stocks on the tech-heavy Nasdaq are up only about 2 percent for the year.

Microsoft results for the quarter ending Sept. 30, announced after the market closed Thursday, included a 7 percent year-over-year increase in revenue, to US$17.37 billion, and a 6 percent increase in net income, to $5.74 billion. Even so, Microsoft shares did not get much of a boost, rising only $0.07 Friday morning to $27.11.

A tepid 2 percent year-over-year increase in Windows and Windows Live sales, to $4.87 billion, may scare company watchers. Corporate systems fared well, however. Sales for the company's Dynamics ERP business grew 17 percent, while the Server and Tools Division generated a 10 percent increase to $4.25 billion in revenue.

Apple shares declined immediately after its earnings announcement Tuesday, as sales of the iPhone disappointed. Though Apple reported selling a record number of iPads and Macs in the third quarter, it fell short of Wall Street expectations for the iPhone. At 17 million, iPhone sales were down 16 percent from the prior quarter, and below analyst estimates of 20 million to 22 million.

Sales for the quarter ending Sept. 30 were $28.3 billion, up 39 percent year over year, while net profit increased 54 percent to $6.6 billion. However, the company's earnings fell short of analyst expectations for the first time since 2004.

"Apple reported weaker than expected September quarter results, as iPhone sales were below our and consensus estimates. We believe iPhone sales slowed ahead of the iPhone 4S product launch," said Canaccord Genuity analyst T. Michael Walkley in a research note.

IBM started off the week Monday announcing increases in sales and profit, though revenue fell slightly short of analyst expectations. IBM, with its broad portfolio of corporate-focused products, is considered a better barometer of enterprise IT than Apple. Its miss on sales growth aroused speculation that worldwide economic turmoil might dampen the company's fortunes.

IBM quarterly profit rose year-over-year by 7 percent to $3.8 billion, while sales were up 8 percent (or 3 percent taking into account currency fluctuations) to $26.16 billion, an increase of 8 percent. Analysts, however, were expecting $26.26 billion in sales, according to a survey by Thomson Reuters. Bright spots in the quarter included software revenue, up by 13 percent to $5.8 billion; Power System revenue, up by 15 percent; and cloud-oriented technology sales, which doubled that of last year.

Despite concerns over sales, IBM showed confidence, raising earnings expectation for fiscal 2011 to at least $13.35 per share from $13.25.

Facing a soft hardware market, Intel on Tuesday turned in an unexpectedly strong report, showing 24 percent jump in profit to $3.5 billion and a 29 percent rise in sales to $14.2 billion, beating analyst expectations on both counts.

Gains for PC and server chips outweighed trouble for Atom-based chipsets and processors, geared for tablets and smartphones. While PC chip sales rose 22 percent and server chip sales increased by 15 percent, revenue from Atom-based products declined by 32 percent. While Intel's result were a bright spot for the beleaguered PC market, the company needs to make headway against ARM processors in the tablet and smartphone arena in order to produce similar growth in the future.

Other major tech and telecom companies reporting this week included:

-- Acer, which Friday reported a loss as it attempts to maintain PC sales in the face of competition from tablets. The company'sloss for the third quarter totaled NT$1.1 billion (US$36 million), worse than the company's second quarter loss of NT$6.7 billion.

-- Nokia Thursday reported a net loss and a fall in revenue for the third quarter as it struggles to sell more high-end smartphones. Nokia reported sales of €8.98 billion (US$12.33 billion), down 13 percent year on year, and a net loss of €68 million.

-- AT&T said Thursday that revenue was down slightly in the third quarter, compared to a year earlier, but net income rose by about $400 million due to growth in its mobile and broadband divisions.

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Marc Ferranti

IDG News Service

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