Wall Street Beat: Debt, GDP weigh on tech shares

IT is faring better than other sectors but vendors in the consumer market are getting hit

Though faring better than businesses in other sectors, technology companies have not escaped the market storm stirred up by reports of tepid economic growth and political squabbling over the U.S. deficit.

Tech bellwethers, especially vendors catering to enterprise users and manufacturers of successful mobile devices, on the whole had a great second quarter. For example IBM, Intel, Apple and Microsoft last week reported strong, in some cases, record results for the three-month period ending in June. This has helped the IT sector fare better on the markets than other areas of the economy.

Even IT, however, is not immune to the general erosion of investor confidence. Computer companies on the Nasdaq were up more than 8 percent for the year on Wednesday. But by Thursday's market close the Nasdaq computer companies were less than 5 percent above their level at the start of the year. A breakdown in negotiations in Washington to reach a debt-ceiling compromise by next week and, on Friday, a U.S. government report that the country's gross domestic product had increased a lower-than-expected 1.3 percent in the second quarter, appears to have further shaken investor confidence.

In late-morning trading, the Nasdaq weathered the storm of economic news better than other exchanges, but by noon was down by 2.53 points from its opening level. The Dow was down by 60 points to 12,179 and the S&P was down 3 points to 1,296.

Even if the government cannot reach a compromise on a mix of taxes and spending cuts by its Aug. 2 self-imposed deadline, the U.S. would probably not go into default on all of its payment obligations. Cash flow into the Treasury is greater than the U.S. debt service, so there would in fact be money to pay bondholders, for example.

The Treasury, however, could be directed to make interest payments before payments to Social Security and government workers. Even such a partial default on obligations, however, would have an impact on overall spending and create great uncertainty, raise interest rates and have a significant impact on spending on IT.

"The implications of a default are quite scary," Forrester analyst Andrew Bartels wrote in a blog posting Thursday. "Faith in the creditworthiness of US government securities would be shaken, foreign investors would reduce their buying of US bonds, and interest rates would rise -- not only on US treasuries, but also on US state and local governments. So, too, would interest rates on business and consumer loans."

Uncertainty caused by the political impasse over the debt ceiling in the U.S. caused Forrester to pull its forecast for IT growth, which it would have posted earlier this week. The forecast had projected 7.4 percent growth in the U.S. IT market this year, and 10.4 percent next year. Global growth, in U.S. dollars, was forecast at 10.6 percent this year and 7.6 percent next year.

If the U.S. government does not reach a compromise by next week, Forrester will lower its forecast for 2011 U.S. IT market growth to 5.5 percent this year and about 7 percent next year, while expansion in global markets in local currencies would be about the same. If a compromise is reached, Forrester's projections will be more optimistic, but would depend on how much spending is cut, since the government is the single major purchaser of IT in the U.S.

Meanwhile, tech earnings results this week continue to show the basic pattern that has emerged over the last few quarters: enterprise IT is selling well, while vendors in other sectors are showing mixed results.

SAP, a bellwether ERP maker and therefore considered a barometer for big-business IT spending, on Tuesday said its second-quarter revenue increased by 14 percent to €3.3 billion (US$4.78 billion), fueled by solid software sales around the world. Profit after taxes for the quarter was €588 million ($853 million), a 20 percent increase. SAP also said that for the full year, operating profit should be at the high end of its earlier estimate of €4.45 billion to €4.65 billion.

Cloud-based ERP vendor NetSuite Thursday said second-quarter sales increased 23 percent year over year to $57.8 million, and that its loss narrowed.

Citrix, which provides virtualization, networking and cloud computing technologies to businesses, said that quarterly sales jumped 16 percent to $531 million, while profit increased to $82 million from $48 million.

Outside of enterprise IT, however, results were mixed. For example, though Sprint Thursday said quarterly revenue rose 3.8 percent, its losses widened from a year earlier, from $760 million to $847 million, as it spent heavily to attract consumers in a highly competitive smartphone market.

Consumer electronics giant Sony Thursday said it suffered a net quarterly loss of ¥15.5 billion (US$191 million), compared to a profit of ¥25.7 billion in the same period last year, while sales and operating revenue dropped 10 percent to just under ¥1.5 trillion.

Meanwhile, even if a compromise over the U.S. debt is reached, uncertainty about economic growth and the effect of government spending cuts could continue to dampen shareholder confidence in businesses of all stripes.

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Marc Ferranti

IDG News Service
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