Wall Street Beat: Tech sales stay strong

The quarter proved to be positive, but there are clouds on Microsoft and RIM's horizons

Though there were some concerns about tech company earnings this week as Microsoft, SAP and other bellwethers reported results, the IT sector has helped drive markets to a solid start for the second quarter.

Microsoft shares slipped Friday morning in the wake of the company's earnings announcement after the market closed Thursday. For the quarter ending March 31,Microsoft generated a profit of US$5.23 billion, up 31 percent year-over-year, while sales jumped 13 percent to $16.43 billion. While many vendors would love to have that kind of an increase in income and revenue, there are shadows on the horizon for the software giant.

Windows 7 sales declined by about 4 percent compared to last year's quarter, to $4.4 billion. Microsoft pointed out that PC sales declined during the quarter. Though PC sales may bounce back, the big threat for Microsoft is that tablet sales are eating into its cash cow OS business, based on the personal computer market. The next version of Windows will be based on ARM processors, which go into tablets, but Microsoft will be playing catch up by the time the OS ships.

While many analysts are taking a wait-and-see attitude toward Microsoft's efforts in tablets, Apple continues to make inroads with its iPad. Canalys on Thursday issued a report that said Apple became the world's fourth-largest PC maker during the first quarter, if the iPad is included in the calculation for worldwide PC shipments. PC shipments including tablets were 88.6 million in the first quarter, increasing from 82.8 million year-over-year. Tablet shipments were 6.4 million for the quarter, with Apple commanding a 74 percent market share.

The good news for Microsoft is that sales for its business arm, which puts out ERP applications, increased 21 percent to $.5.2 billion, and revenue for its entertainment and devices division increased by 60 percent to $1.9 billion. That was not enough to appease investors apparently, as Microsoft shares were down by $1.09 Friday morning, trading at $25.66.

SAP meanwhile bounced back Friday morning after seeing its shares slip Thursday. Before the market opened Thursday, SAP announced that for the quarter ending March 31, revenue increased by 21 percent year-over-year to €3 billion (US$4.2 billion at the exchange rate on the last day of the quarter). Profit came in under expectations, however, at €403 million. When using international financial reporting standards (IFRS), the profit growth was a slower-than-expected 4 percent.

SAP shares plunged by $4.74 Thursday to $63.57 after the announcement. There was good news in the earnings announcement, however. While profit was hurt by a jump in operating expenses, including some one-time items, the company's core business appears stable. Software and software-related service sales were up 20 percent to €2.3 billion, while software sales were up 26 percent to €583 million. On Friday morning, investors appeared to start dwelling on the more positive aspects of SAP's announcement, as shares rose by $0.89 to trade at $64.46 in midday trading.

While most analysts point to global demand for mobile devices as a big driver of growth for IT this year, Research In Motion news Thursday suggested the companies will have some problems. RIM slashed its earnings forecast for the quarter ending May 28, citing supply issues and a shift in sales toward lower-margin devices. RIM said it expects earnings per share for the quarter to be in the $1.30 to $1.37 range, down from its earlier forecast of $1.47 to $1.55. RIM shares plummeted by $7.75 Friday morning, trading at $48.84 during midday trading.

Motorola Mobility fared better Friday morning after its earnings announcement Thursday. Motorola reported a loss of $0.27 per share for the quarter, better than the $0.72 loss a year earlier. Net sales rose 22 percent to $3 billion. Both earnings per share and revenue beat analyst forecasts.

"Sustained sell-though for smartphone and tablet products are key for Motorola Mobility," noted Canaccord Genuity in a research note.

The company apparently did not disappoint investors, stating that it shipped 250,000 Xoom tablets the first month the device was available. Motorola was rewarded Friday morning as shares rose by $2.41 to trade $26.42 during midday trading.

Though there were some clouds in this week's tech earnings reports, on the whole vendors have been reporting solid first-quarter sales. At midday, the tech-heavy Nasdaq was at 2874.50, up by 2.07. The exchange is likely to end the day and the month well above the 2789 level of April. Computer stocks on the Nasdaq were up 6.89 percent for the year, on the strength of what has been a strong earnings season overall for tech.

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Marc Ferranti

IDG News Service
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