Wall Street Beat: Software results temper bad news on PC front

Strong earnings from the likes of Salesforce, SugarCRM and Autodesk offset disappointment in HP and Dell

Disappointing earnings reports this week from Hewlett-Packard and Dell were offset by more encouraging results from software makers, confirming forecasts for general trends in IT spending this year.

As economies around the world continue to recover in a faltering manner from the Great Recession and 2008 collapse of the financial sector, industry watchers expect software, especially enterprise products, to be a bright spot. Hardware is under more pressure than software, because it is easier to put off PC purchases than halt a strategic rollout of software that a company has committed to, analysts say. But natural disasters have exacerbated problems for PC makers.

Salesforce reported Thursday that total revenue for its fourth quarter was US$632 million, an increase of 38 percent year-over-year. Though the business software company lost $4 million in its fourth quarter, compared to a profit of nearly $11 million a year earlier, the dip was attributed to approximately $94 million in stock-based compensation and other one-time expenses. Analysts are therefore focusing on the strong sales. The sales gains and customers wins reported by the company are reassuring market watchers that the days of high-flying growth for the company, which jumped into the cloud-based software arena early on, are not over.

"CRM’s January upside in cash flow, customer wins and the highly approximate 'calculated billings' figure should dismiss fears that 2011 marked the end of the SaaS, platform and social enterprise road for the firm," said Canaccord Genuity technology analyst Richard Davis, who reiterated his "buy" rating and $170 price target on the company.

Salesforce shares jumped $9.89, a whopping 7 percent, to $141.62 in early morning trading Friday.

Autodesk, the maker of 3D design, engineering and entertainment software, also said Thursday that it had a good quarter. The company generated $592 million in sales for its fourth quarter, a 12 percent year-over-year increase. Earnings rose from $61.6 million to $72 million. The results beat analyst expectations, as polled by Thomson Reuters, by 7 million on the sales side and by $0.02 in earnings per share. It was the eighth consecutive quarter that the company exceeded analyst expectations.

Privately held open-source CRM (customer relationship management) vendor SugarCRM, a Salesforce competitor, earlier in the week said that in its fourth quarter, billings jumped by 92 percent year over year. The company, founded in 2004, was net cash positive for the full year 2011, driven by strong 67 percent top-line billings growth. As a private company, SugarCRM is not subject to the same reporting rules of publicly held companies. As a much smaller company than the industry bellwethers, it's also easier to achieve high growth rates. Nevertheless, its growth is in line with analyst forecasts for a solid year for enterprise software.

The big earnings report of the week came from HP. Revenue for the quarter ending Jan. 31 declined 7 percent year over year to $30 billion, while net profit plummeted 44 percent to $1.5 billion. The main culprit for the dramatic drop was a decline in sales of PCs. Sales for the Personal Systems Group (PSG), the world's biggest PC manufacturer, declined 15 percent to $8.9 billion.

A hard-drive shortage due to floods in Thailand that disrupted HP's supply chain played a major role in the troubles in the PSG unit, said CEO Meg Whitman on a conference call Wednesday evening to discuss the earnings. But weak demand for PCs, especially from consumers, also took its toll.

On Tuesday, Dell, the world's number three PC maker, reported a weak quarter, also laying the blame on weak consumer demand and the hard drive shortage. Revenue for the quarter ended Feb. 3 increased just 2 percent to $16 billion, while profit dropped 18 percent to $764 million.

Economic uncertainty, caused to a large degree by the sovereign debt crisis in Europe, particularly Greece, Italy and Spain, is weighing on IT spending forecasts this year. Though European central banks came through this week with a bailout for Greece, concerns remain. Sixty percent of tech CEOs polled by PricewaterhouseCoopers in a survey released Thursday said that the eurozone crisis already had a financial impact on their companies. The poll, which surveyed 115 IT vendors CEOs in 36 countries, reported that 80 percent of the executives think the global economy will either decline or stay the same over the next 12 months. And yet the CEOs are confident.

"The vast majority of technology CEOs (85%) are ‘somewhat’ or ‘very’ confident they can boost their company’s revenues over the next 12 months, and the proportion edges up to 87% when they consider the outlook for the next three years," according to the report.

The reason for the apparent disparity in economic outlook and confidence in ability to boost IT sales, PwC says, is that the vendors have underlying faith in their ability to meet customers demand for innovative products. Various analysts have argued that IT is so essential to corporate business strategy that tech spending will always expand faster than the general economy.

Computer companies on the Nasdaq closed Thursday up almost 16 percent in aggregate for the year. In comparison, the broader Dow Jones Composite is up only 3.55 percent for the year. In Friday morning trading, the tech-heavy Nasdaq was up by 3.33 point to 2960.05 while the Dow was down 7.08 to 12,997.61.

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Marc Ferranti

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